<PAGE>
MARKED TO SHOW CHANGES
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1996
REGISTRATION NO. 333-4568
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AMERICAN GENERAL HOSPITALITY
CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
3860 WEST NORTHWEST HIGHWAY
SUITE 300
DALLAS, TEXAS 75220
(214) 904-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
PRINCIPAL EXECUTIVE OFFICES)
STEVEN D. JORNS
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
3860 WEST NORTHWEST HIGHWAY
SUITE 300
DALLAS, TEXAS 75220
(214) 904-2000
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
PETER M. FASS, ESQ. DAVID C. WRIGHT, ESQ.
STEVEN L. LICHTENFELD, ESQ. HUNTON & WILLIAMS
LESLIE H. LOFFMAN, ESQ. 2000 RIVERVIEW TOWER
BATTLE FOWLER LLP 900 SOUTH GAY STREET
75 EAST 55TH STREET KNOXVILLE, TENNESSEE 37902
NEW YORK, NEW YORK 10022 (423) 549-7700
(212) 856-7000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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 statement 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
---------------
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, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
CROSS REFERENCE SHEET PURSUANT TO
RULE 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
----------------------- ---------------------
<S> <C>
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus....... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............... Outside Front Cover Page; Prospectus
Summary; Risk Factors; Policies and
Objectives with Respect to Certain
Activities; Shares Available for Future
Sale
4. Determination of Offering
Price.......................... Outside Front Cover Page; Underwriting
5. Dilution....................... Dilution
6. Selling Security Holders....... Not Applicable
7. Plan of Distribution........... Outside Front Cover Page; Underwriting
8. Use of Proceeds................ Use of Proceeds
9. Selected Financial Data........ Selected Financial Information
10. Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
11. General Information as to
Registrant..................... Prospectus Summary; The Company; The
Initial Hotels; Formation Transactions;
Management; Certain Provisions of Maryland
Law and of the Company's Charter and
Bylaws; Glossary
12. Policy with Respect to Certain
Activities..................... Prospectus Summary; Description of Capital
Stock; Policies and Objectives with
Respect to Certain Activities; Additional
Information
13. Investment Policies of
Registrant..................... Prospectus Summary; The Company; The
Initial Hotels; Policies and Objectives
with Respect to Certain Activities
14. Description of Real Estate..... Prospectus Summary; The Initial Hotels
15. Operating Data................. The Initial Hotels
16. Tax Treatment of Registrant and
Its Security Holders........... Prospectus Summary; Federal Income Tax
Considerations
17. Market Price of and Dividends
on the Registrant's Common
Equity and Related Stockholder
Matters........................ Risk Factors; Distribution Policy;
Principal Stockholders; Description of
Capital Stock; Certain Provisions of
Maryland Law and of the Company's Charter
and Bylaws; Shares Available for Future
Sale; Federal Income Tax Considerations
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
----------------------- ---------------------
<S> <C>
18. Description of Registrant's
Securities............................. Description of Capital Stock; Certain
Provisions of Maryland Law and of the
Company's Charter and Bylaws
19. Legal Proceedings...................... The Initial Hotels -- Legal Proceedings
20. Security Ownership of Certain
Beneficial Owners and Management....... Principal Stockholders
21. Directors and Executive Officers....... Management
22. Executive Compensation................. Management
23. Certain Relationships and Related
Transactions........................... Prospectus Summary; The Initial Hotels;
Management; Certain Relationships and
Transactions
24. Selection, Management and Custody of
Registrant's Investments............... Outside Front Cover Page; Prospectus
Summary; The Company; The Initial Hotels;
Management; AGHI and the Lessee; Policies
and Objectives with Respect to Certain
Activities
25. Policies with Respect to Certain
Transactions........................... Risk Factors; Management; Policies and
Objectives with Respect to Certain
Activities
26. Limitations of Liability............... Description of Capital Stock
27. Financial Statements and Information... Prospectus Summary; Selected Financial
Information; Financial Statements
28. Interests of Named Experts and
Counsel................................ Legal Matters; Experts
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 19, 1996
PROSPECTUS 7,000,000 Shares
AMERICAN GENERAL HOSPITALITY CORPORATION
Common Stock
LOGO
-------
American General Hospitality Corporation (the "Company") has been formed to
own hotel properties and to continue and expand the hotel acquisition,
development, and repositioning operations of American General Hospitality, Inc.
and certain of its affiliates (collectively "AGHI"). The Company's operations
will focus on the ownership of full-service hotels in major metropolitan
markets. Upon completion of this offering (the "Offering"), the Company, which
intends to operate as a self-administered real estate investment trust
("REIT"), will own, through an operating partnership (the "Operating
Partnership"), thirteen hotels containing an aggregate of 3,012 guest rooms in
nine states (the "Initial Hotels"). The Initial Hotels will be leased by the
Company to AGH Leasing, L.P. (the "Lessee"), which is owned in part by certain
executive officers of the Company. See "AGHI and the Lessee."
All the shares of Common Stock, $0.01 par value per share (the "Common
Stock"), offered hereby are being offered by the Company. The Company intends
to make regular quarterly distributions to its stockholders, commencing with a
pro rata distribution with respect to the quarter ending September 30, 1996.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, under the symbol "AGT." Prior
to the Offering, there has been no public market for the Common Stock. It
currently is anticipated that the initial public offering price will be between
$19.00 and $21.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The
Company's Charter will limit the number of shares of Common Stock that may be
owned by any single person or affiliated group. See "Description of Capital
Stock--Restrictions on Transfer."
SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING:
. Conflicts of interest between the Company and certain of its executive
officers who own interests in certain of the Initial Hotels that will be
acquired by the Company and who also own interests in the Lessee and AGHI;
. Dependence on rent payments from the Lessee under the Participating Leases
(as hereinafter defined) for substantially all the Company's income;
. Risks associated with the Company's lack of control over the operations of
the Initial Hotels due to tax restrictions that prevent REITs from
operating hotels;
. Risks associated with the lack of appraisals of the Initial Hotels,
including the possibility that the purchase prices paid by the Company for
the Initial Hotels may exceed the market value of such hotels;
. Risks affecting the hotel industry generally, and the Company's hotels
specifically, including competition, increases in operating costs,
dependence on business travelers and tourism, seasonality, the potential
loss of franchise licenses and the need for future capital expenditures in
excess of budgeted amounts, all of which could adversely affect the
Lessee's ability to make required rent payments;
. Receipt by the Primary Contributors (as hereinafter defined) and certain
of the Company's executive officers of material benefits from the
Formation Transactions (as hereinafter defined);
. Risks affecting the real estate market generally, including economic and
other conditions, relative illiquidity of real estate, increases in taxes
and potential liabilities, including liabilities for unknown or future
environmental problems;
. Risks associated with the fact that certain of the Initial Hotels have
experienced net operating losses in recent years; and
. Risks associated with distributing 95% of estimated Cash Available for
Distribution (as hereinafter defined), including the risk that actual Cash
Available for Distribution will be insufficient to permit the Company to
maintain its proposed initial distribution rate.
-------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- --------------------------------------------------
Total(3) $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses estimated at $2,200,000, which are payable by
the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 1,050,000 additional shares of Common Stock, on the same terms set
forth above, solely to cover over-allotments, if any. See "Underwriting."
If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ , and $ , respectively.
-------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as, and if accepted by them, and
subject to certain conditions. It is expected that certificates for the Common
Stock offered hereby will be available for delivery on or about , 1996 at
the offices of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.
-------
Smith Barney Inc.
Prudential Securities Incorporated
Legg Mason Wood Walker
Incorporated
The Robinson-Humphrey Company, Inc.
, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 1
The Company.............................................................. 1
Risk Factors............................................................. 3
AGHI and the Lessee...................................................... 4
The Initial Hotels....................................................... 5
Growth Strategies........................................................ 7
Formation Transactions................................................... 11
Benefits to the Officers and the Primary Contributors.................... 14
Tax Status............................................................... 15
The Offering............................................................. 15
Distribution Policy...................................................... 16
SUMMARY FINANCIAL INFORMATION............................................. 17
RISK FACTORS.............................................................. 20
Conflicts of Interest.................................................... 20
Dependence on Lessee and Payments Under the Participating Leases......... 21
Lack of Control Over Operations of the Initial Hotels.................... 21
Lack of Appraisals for Initial Hotels; No Assurance as to Value.......... 22
Hotel Industry Risks..................................................... 22
Benefits to Primary Contributors and Officers............................ 23
Contingent Liabilities of Selling Partnerships........................... 23
Risks of Leverage; No Limits on Indebtedness............................. 24
Lack of Operating History or Revenues; History of Losses................. 24
Risk of High Distribution Payout Percentage.............................. 24
Contingent Obligation to Construct Additional Hotel Rooms................ 24
Immediate and Substantial Dilution....................................... 25
Possible Adverse Effects of Shares Available for Future Sale Upon Market
Price of Common Stock................................................... 25
Competition for Management Time.......................................... 25
Real Estate Investment Risks............................................. 25
Tax Risks................................................................ 28
ERISA.................................................................... 29
Risks of Operating Hotels Under Franchise Agreements; Approval for Brand
Conversions............................................................. 30
Potential Anti-Takeover Effect of Certain Provisions of Maryland Law and
of the Company's Charter and Bylaws..................................... 30
No Prior Market for Common Stock......................................... 32
Reliance on Board of Directors and Management............................ 32
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Ability of Board to Change Policies..................................... 32
Adverse Effect of Increase in Market Interest Rates on Price of Common
Stock.................................................................. 32
THE COMPANY.............................................................. 33
General................................................................. 33
Growth Strategies....................................................... 35
Acquisitions............................................................ 35
Development............................................................. 36
Internal Growth......................................................... 37
Financing Strategy...................................................... 39
The Operating Partnership............................................... 40
USE OF PROCEEDS.......................................................... 41
DISTRIBUTION POLICY...................................................... 42
CAPITALIZATION........................................................... 45
DILUTION................................................................. 46
SELECTED FINANCIAL INFORMATION........................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 53
Overview................................................................ 53
Results of Operations of AGH Predecessor Hotels......................... 53
Results of Operations of AGH Acquisition Hotels......................... 55
Results of Operations of the Initial Hotels............................. 57
Liquidity and Capital Resources......................................... 58
Franchise Conversions................................................... 60
Inflation............................................................... 61
Seasonality............................................................. 61
THE HOTEL INDUSTRY....................................................... 62
THE INITIAL HOTELS....................................................... 63
Descriptions of Initial Hotels.......................................... 65
AGH Predecessor Hotels.................................................. 65
AGH Acquisition Hotels.................................................. 67
Ten Percent Hotels...................................................... 71
The Participating Leases................................................ 71
The Management Agreements............................................... 78
Mortgage Indebtedness Remaining Following the Offering.................. 79
Line of Credit.......................................................... 80
Ground Leases........................................................... 80
Franchise Conversions................................................... 81
Franchise Agreements.................................................... 81
Employees............................................................... 83
Environmental Matters................................................... 83
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Options to Purchase and Rights of First Refusal......................... 84
Competition............................................................. 84
Insurance............................................................... 85
Legal Proceedings....................................................... 85
FORMATION TRANSACTIONS................................................... 86
Benefits to the Officers and the Primary Contributors................... 87
Valuation of Interests.................................................. 88
Transfer of Initial Hotels.............................................. 88
MANAGEMENT............................................................... 89
Directors and Executive Officers........................................ 89
Board of Directors and Committees....................................... 90
Executive Compensation.................................................. 91
Employment Agreements................................................... 91
Compensation of Directors............................................... 91
Stock Incentive Plans................................................... 92
Limitation of Liability and Indemnification............................. 95
Indemnification Agreements.............................................. 96
CERTAIN RELATIONSHIPS AND TRANSACTIONS................................... 96
Relationships Among Officers and Directors.............................. 96
Acquisition of Interests in Certain of the Initial Hotels............... 96
Shared Services and Office Space Agreement.............................. 97
Options to Purchase and Rights of First Refusal......................... 97
Employment Agreements and Stock Incentive Plans......................... 97
Purchase of Personal Property........................................... 98
The Participating Leases................................................ 98
The Management Agreements............................................... 98
The Beverage Corporations............................................... 98
AGHI AND THE LESSEE...................................................... 98
PRINCIPAL STOCKHOLDERS................................................... 101
DESCRIPTION OF CAPITAL STOCK............................................. 102
General................................................................. 102
Common Stock............................................................ 102
Preferred Stock......................................................... 102
Power to Issue Additional Shares of Common Stock and Preferred Stock.... 103
Restrictions on Transfer................................................ 103
Transfer Agent and Registrar............................................ 105
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND
BYLAWS.................................................................. 106
<CAPTION>
PAGE
----
<S> <C>
Number of Directors; Classification of the Board of Directors............ 106
Removal; Filling Vacancies............................................... 106
Limitation of Liability and Indemnification.............................. 106
Business Combinations.................................................... 107
Control Share Acquisitions............................................... 108
Amendment to the Charter................................................. 109
Dissolution of the Company............................................... 109
Advance Notice of Director Nominations and New Business.................. 109
Meetings of Stockholders................................................. 109
Operations............................................................... 109
Anti-Takeover Effect of Certain Provisions of Maryland Law and of the
Charter and Bylaws...................................................... 109
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES................ 110
Investment Policies...................................................... 110
Financing................................................................ 111
Conflict of Interest Policies............................................ 111
Policies with Respect to Other Activities................................ 112
Working Capital Reserves................................................. 113
SHARES AVAILABLE FOR FUTURE SALE.......................................... 113
PARTNERSHIP AGREEMENT..................................................... 114
Management............................................................... 114
Transferability of Interests............................................. 114
Capital Contribution..................................................... 115
Exchange Rights.......................................................... 115
Registration Rights...................................................... 115
Operations............................................................... 116
Distributions and Allocations............................................ 116
Term..................................................................... 116
Tax Matters.............................................................. 116
FEDERAL INCOME TAX CONSIDERATIONS......................................... 117
Requirements for Qualification as a REIT................................. 117
Failure to Qualify as a REIT............................................. 124
Taxation of the Company.................................................. 125
Taxation of Stockholders................................................. 126
Statement of Stock Ownership............................................. 129
Tax Aspects of the Operating Partnership................................. 129
Income Taxation of the Operating Partnership and Its Partners............ 131
Other Tax Considerations................................................. 132
UNDERWRITING.............................................................. 136
EXPERTS................................................................... 137
LEGAL MATTERS............................................................. 137
ADDITIONAL INFORMATION.................................................... 138
GLOSSARY.................................................................. 139
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus assumes (i) the
completion of the transactions described in "Formation Transactions," (ii) an
offering price of $20.00 per share, which is the mid-point of the price range
set forth on the cover page of this Prospectus (the "Offering Price"), and
(iii) the Underwriters' over-allotment option is not exercised. Unless the
context requires otherwise, the term "Company," as used herein, includes
American General Hospitality Corporation and its two wholly owned subsidiaries,
AGH GP, Inc. ("AGH GP") and AGH LP, Inc. ("AGH LP"), and American General
Hospitality Operating Partnership, L.P., a Delaware limited partnership (the
"Operating Partnership"). The term "Operating Partnership," unless the context
requires otherwise, includes subsidiaries of the Operating Partnership. See
"Glossary" for the definitions of certain terms used in this Prospectus.
Investors should carefully consider the information set forth under the heading
"Risk Factors."
THE COMPANY
The Company, which intends to operate as a self-administered real estate
investment trust ("REIT"), has been formed to own hotel properties and to
continue and expand the hotel acquisition, development, and repositioning
operations of American General Hospitality, Inc. and certain of its affiliates
(collectively, "AGHI"). Upon completion of the Offering and the Formation
Transactions, the Company will own thirteen hotels containing an aggregate of
3,012 guest rooms, located in nine states (the "Initial Hotels"). AGHI, which
will manage the Initial Hotels, was founded in 1981 by Steven D. Jorns, the
Company's Chairman of the Board, Chief Executive Officer and President. As of
March 31, 1996, AGHI operated and managed 74 hotels in 24 states containing an
aggregate of more than 13,865 guest rooms. According to Hotel & Motel
Management, a leading hotel trade publication, AGHI was the nation's fourth
largest independent hotel management company in 1995, based upon number of
hotels under management. The Company's operations will focus on the ownership
of full-service hotels in major metropolitan markets, including hotels that are
in close proximity to the airports that serve such markets, and, to a lesser
extent, prominent hotels in major tourist areas. The Company expects to
capitalize on AGHI's expertise to achieve revenue growth at the Company's
hotels. Pursuant to the terms of the Management Agreements (as defined below),
and for so long as AGHI is managing hotels owned by the Company, AGHI has
agreed not to own or develop any additional hotel properties. The Company will
not have any economic interest in AGHI's hotel management operations.
The Initial Hotels include eleven full-service hotels and two limited-service
hotels and are diversified by franchise affiliation. For the twelve months
ended March 31, 1996, the Initial Hotels had a weighted average occupancy of
73.0% and a weighted average daily room rate ("ADR") of $70.97. Ten of the
Initial Hotels operate under franchise licenses with nationally recognized
hotel companies, which include one Hilton(R), one Courtyard by Marriott(R), six
Holiday Inns(R), one Hampton Inn(R) and one Days Inn(R).
The Company will seek to achieve revenue growth principally through the
acquisition and subsequent product and brand repositioning of hotels.
Consistent with this strategy, the Company has scheduled approximately $24.6
million (an average of approximately $13,400 per guest room) to be spent on
renovations and refurbishments within one year after the completion of the
Offering at seven Initial Hotels to convert the hotels to leading franchise
brands and reposition such hotels for future revenue growth. Upon completion of
the franchise conversions, the Initial Hotels will consist of one Wyndham
Hotel(R), two DoubleTree Hotels(R), two Crowne Plazas(R), one Hilton(R), one
Courtyard by Marriott, one Holiday Inn Select SM (the premium Holiday Inn
brand), two Holiday Inns, two Hampton Inns and one independent luxury hotel.
There can be no assurance that such brand conversions and hotel repositionings
will occur as planned.
1
<PAGE>
In order to qualify as a REIT, the Company may not operate hotels. As a
result, the current principals of AGHI (including Mr. Jorns and Bruce G. Wiles,
the Company's Executive Vice President) and Kenneth E. Barr, the Company's
Executive Vice President and Chief Financial Officer, have formed AGH Leasing,
L.P. (the "Lessee"), which will lease the Initial Hotels from the Company
pursuant to separate participating leases (the "Participating Leases"). Messrs.
Jorns, Wiles and Barr own collectively an approximate 23.0% interest in the
Lessee. The Participating Leases are designed to allow the Company to achieve
substantial participation in any future growth of revenues generated at the
Initial Hotels. The Lessee, in turn, will enter into separate management
agreements (the "Management Agreements") with AGHI to operate the Initial
Hotels. See "AGHI and the Lessee."
The Initial Hotels have achieved significant growth in occupancy, ADR and
total revenue per available room ("REVPAR") as set forth in the following
chart:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------- ----------------
1993(1) 1994(1) 1995(1) 1995(1) 1996(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Occupancy.............................. 71.6% 71.7% 72.9% 70.6% 70.7%
ADR.................................... $57.65 $62.28 $69.19 $65.97 $73.33
REVPAR................................. $41.26 $44.67 $50.46 $46.56 $51.81
</TABLE>
- --------
(1) For comparison purposes, the total weighted average occupancy, ADR and
REVPAR for all U.S. hotels for each of the years ended December 31, 1993,
1994 and 1995 and for each of the three months ended March 31, 1995 and
1996 were as follows: occupancy: 63.0%, 64.7%, 65.5%, 60.3% and 61.1%,
respectively; ADR: $61.93, $64.24, $67.34, $67.83 and $72.01, respectively;
and REVPAR: $39.01, $41.56, $44.11, $40.93 and $44.02, respectively.
Source: Smith Travel Research, Inc. ("Smith Travel Research"). Smith Travel
Research has not provided any form of consultation, advice or counsel
regarding any aspect of, and is in no way associated with, the Offering.
The Company believes that the growth in occupancy, ADR and REVPAR at the
eight Initial Hotels currently managed and operated by AGHI reflects the
successful repositioning, renovation and marketing strategies of AGHI, as well
as AGHI's superior management and operational capabilities. See "The Initial
Hotels." The Company also attributes the success of the Initial Hotels to the
slowing in recent years of new hotel construction nationally and improving
economic conditions, both of which followed an extended period of unprofitable
industry performance in the late 1980's and early 1990's. The Company believes
these improved lodging market fundamentals have created a favorable environment
for internal growth at the Initial Hotels and for acquisitions. See "The Hotel
Industry."
Management believes that the full-service hotel segment, in particular, has
potential for improved performance as the economy continues to improve, and as
business and leisure travel activity increases. The Company has targeted the
full-service segment of the hotel industry due, in part, to its belief that the
approximate three- to five-year lead time from conception to completion of a
full-service hotel in the markets in which the Company intends to focus
represents a significant barrier to entry that will limit near-term competition
resulting from a new supply of guest rooms. Management also believes that the
full-service segment of the market will continue to offer numerous
opportunities to acquire hotels at attractive multiples of cash flow, and at
discounts to replacement value, including underperforming hotels that may
benefit from new management. The Company believes that a substantial number of
hotels meeting its investment criteria are available at attractive prices in
the markets where AGHI currently operates hotels and in markets that the
Company believes have attractive economic characteristics. The Company believes
its acquisition capabilities will be enhanced by the fact that its initial
capital structure provides significant financial flexibility. Upon completion
of the Offering, the Company will have approximately $19.6 million of
outstanding indebtedness. The Company intends to limit consolidated
indebtedness (measured at the time the debt is incurred) to no more than 45.0%
of the Company's investment in hotels. See "Policies and Objectives with
Respect to Certain Activities--Financing." The Company has obtained a
commitment for a $100 million revolving line of credit (the "Line of Credit"),
the borrowings from which
2
<PAGE>
will be utilized primarily for the acquisition and renovation of additional
hotels and for the renovation of certain Initial Hotels. Upon closing of the
Offering, the Company expects to have approximately $60 million of borrowing
capacity under the Line of Credit. The Company expects that the borrowing
capacity under the Line of Credit will increase to approximately $100 million,
assuming all additional borrowings are used to fund capital improvements to the
Initial Hotels or the acquisition of additional hotels. See "The Initial
Hotels--Line of Credit."
The Company's executive offices are located at 3860 West Northwest Highway,
Suite 300, Dallas, Texas 75220, and its telephone number is (214) 904-2000.
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK INVOLVES VARIOUS RISKS, AND
INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS,"
INCLUDING THE FOLLOWING:
. Conflicts of interest between the Company and certain of its executive
officers who own interests in certain of the Initial Hotels to be
acquired by the Company and who also own interests in the Lessee and
AGHI, all of which could lead to decisions that do not reflect solely the
interests of the Company's stockholders, including (i) the lack of arm's-
length negotiations relating to the purchase of, or the assignment of
contract rights relating to, interests in seven Initial Hotels, including
the risk that the purchase prices may exceed the market values of such
hotels, (ii) the lack of arm's-length negotiations relating to the
Participating Leases and the Management Agreements, (iii) the possible
failure by the Company to enforce the terms and conditions of the
Participating Leases against the Lessee, even when such enforcement would
be in the best interests of the Company, and (iv) the possible adverse
tax consequences to certain executive officers of the Company upon the
subsequent sale by the Company of certain of the Initial Hotels;
. Dependence upon rent payments from the Lessee for substantially all of
the Company's income, including risks related to the ability of the
Lessee to make rent payments that are sufficient to permit the Company to
make initial estimated distributions to its stockholders, the failure or
delay in making rent payments, the failure of the Lessee and AGHI to
effectively operate and manage the Initial Hotels and to meet the
obligations under the franchise agreements, and the limited operating
history of the Lessee as a newly organized entity;
. Risks associated with the Company's lack of control over the operations
of the Initial Hotels due to tax restrictions that prevent REITs from
operating hotels;
. Risks associated with the lack of appraisals of the Initial Hotels,
including the possibility that the purchase prices paid by the Company
for the Initial Hotels may exceed the market value of such hotels;
. Risks affecting the hotel industry generally, and the Company's hotels
specifically, including competition for guests, increases in operating
costs due to inflation and other factors, dependence on business and
commercial travelers and tourism, increases in energy costs and other
travel expenses, seasonality and the need for future capital expenditures
and for replacement of furniture, fixtures and equipment ("FF&E") in
excess of budgeted amounts, all of which could have a material adverse
effect on Cash Available for Distribution (as defined in "Summary
Financial Information");
. Receipt by the Primary Contributors (as defined in "Benefits to the
Officers and the Primary Contributors") and certain of the Company's
executive officers of material benefits from the transactions described
under "Formation Transactions," including, but not limited to, (i)
receipt by the Primary Contributors and the Company's executive officers
of an aggregate of approximately 1,161,401 units of limited partnership
interest ("OP Units") in the Operating Partnership (valued at
approximately $23.2 million, based on the Offering Price), (ii) the
repayment of $3.75 million of indebtedness guaranteed by AGHI, (iii) the
grant to the Company's officers and directors of options to acquire an
aggregate of 400,000 shares of Common
3
<PAGE>
Stock at the Offering Price, (iv) the grant to the Company's executive
officers of stock awards for an aggregate of 50,000 shares of restricted
Common Stock that vest over a four-year period commencing on the date of
grant, (v) the reimbursement to AGHI of approximately $900,000 in direct
out-of-pocket expenses incurred in connection with the acquisition of the
Initial Hotels, (vi) benefits to the Lessee and AGHI under the
Participating Leases and Management Agreements, and (vii) benefits to Mr.
Jorns from the ownership of the Beverage Corporations (as defined in
"Formation Transactions");
. Risks affecting the real estate industry generally, including economic
and other conditions that may adversely affect real estate investments,
including the Initial Hotels, and the Lessee's ability to make rent
payments from the operations of the Initial Hotels, relative illiquidity
of real estate, increases in taxes caused by increased assessed values or
property tax rates, and potential liabilities, including liabilities for
unknown or future environmental problems, all of which could have a
material adverse effect on Cash Available for Distribution;
. Risks associated with the fact that certain of the Initial Hotels
experienced net losses in recent years; accordingly, there can be no
assurance that the Company will not experience net losses in the future;
. Risks associated with distributing 95% of estimated Cash Available for
Distribution, including the risk that actual Cash Available for
Distribution will be insufficient to permit the Company to maintain its
proposed initial distribution rate, and the risk that the planned
renovations at certain of the Initial Hotels may adversely impact hotel
revenues and rent payments due under the Participating Leases, which, in
turn, would have a material adverse impact on Cash Available for
Distribution;
. Tax risks, including taxation of the Company as a corporation if it fails
to qualify as a REIT and taxation of the Operating Partnership as a
corporation if it were deemed not to be a partnership, and the Company's
liability for federal and state taxes on its income in either such event,
which could have a material adverse effect on Cash Available for
Distribution;
. Risks normally associated with debt financing, including the fact that
there is no limitation on the amount of indebtedness that may be incurred
by the Company, except as imposed under the Line of Credit and may be
imposed by future lenders to the Company;
. The risk that sufficient sources of financing will not be available to
fund capital expenditure requirements, including planned renovations and
the Company's obligation under the ground lease for the Fred Harvey
Albuquerque Airport Hotel to construct, at the Company's expense, 100
additional guest rooms if the occupancy at such hotel is 85.0% or greater
for 24 consecutive months;
. Potential loss of franchise licenses relating to the franchised Initial
Hotels, and varying capital requirements of franchisors that may affect
the Company's return on its investment in the Initial Hotels; and
. The restriction on ownership of shares of Common Stock intended to insure
compliance with certain requirements related to continued qualification
of the Company as a REIT, and certain other provisions in the Company's
Charter and Bylaws, all of which may have the effect of inhibiting a
change in control of the Company even when such a change of control could
be beneficial to the Company's stockholders.
AGHI AND THE LESSEE
American General Hospitality, Inc.
AGHI, based in Dallas, Texas, was founded in 1981 by Mr. Jorns, the Company's
Chairman of the Board, Chief Executive Officer and President. AGHI has
experienced significant growth over the last five years as its management
portfolio increased from 39 hotels with more than 5,200 guest rooms under
management at December 31, 1990, to 74 hotels with more than 13,865 guest rooms
under management at March 31, 1996. For the twelve months ended March 31, 1996,
the hotels managed by AGHI generated revenues in excess of $275 million.
According to Hotel & Motel Management, a leading hotel trade publication, AGHI
was the nation's
4
<PAGE>
fourth largest independent hotel management company in 1995 based upon the
number of hotels under management. As of March 31, 1996, AGHI had approximately
6,000 employees. AGHI has been involved in the repositioning of approximately
70 different hotels operated under various national franchise brands. Pursuant
to the terms of the Management Agreements, and for so long as AGHI is managing
hotels for the benefit of the Company, AGHI has agreed to limit its business
activities to managing and operating Company-owned hotels and hotels owned by
third parties. The Company will not have any economic interest in AGHI's hotel
management operations. The Lessee will contract with AGHI to manage the Initial
Hotels under an incentive compensation structure. See "The Initial Hotels--The
Management Agreements." Messrs. Jorns and Wiles, two executive officers of the
Company, own collectively approximately 21.0% of AGHI. The remaining interests
in AGHI are owned by James E. Sowell, Lewis W. Shaw II and Kenneth W. Shaw,
three of the Primary Contributors. See "AGHI and the Lessee."
AGH Leasing, L.P.
The Company will lease each Initial Hotel to the Lessee pursuant to a
separate Participating Lease and, while not legally obligated to do so, expects
to lease additional hotels that may be acquired or developed by the Company to
the Lessee. Messrs. Jorns, Wiles and Barr, all executive officers of the
Company, own collectively approximately 23.0% of the Lessee. See "AGHI and the
Lessee." The remaining interests in the Lessee are owned by Messrs. Sowell,
Shaw and Shaw. Each Participating Lease will have a term of twelve years,
subject to earlier termination upon the occurrence of certain events. Under the
Participating Leases, the Lessee will be obligated to make fixed monthly base
rent payments ("Base Rent") to the Company and quarterly participating rent
payments based on a percentage of revenues ("Participating Rent") to the
Company. The Company has structured the terms of the Participating Leases, the
Management Agreements and the related agreements in an effort to seek to align
the interests of AGHI and the Lessee with the interests of the Company's
stockholders. See "AGHI and the Lessee," "The Initial Hotels--The Participating
Leases" and "--The Management Agreements."
THE INITIAL HOTELS
The thirteen Initial Hotels are diversified by five different national hotel
affiliations, including Hilton, Courtyard by Marriott, Holiday Inn, Hampton Inn
and Days Inn and include eleven full-service hotels, including one hotel with a
conference center, and two limited-service hotels. In addition, the Company
plans to reposition, within one year after the completion of the Offering,
seven of the Initial Hotels (four Holiday Inns, one Days Inn and two
independent hotels) through an upgrade and conversion into hotels that operate
under the Wyndham Hotel, DoubleTree Hotel, Crowne Plaza, Holiday Inn Select and
Hampton Inn brands. The Company believes that following such upgrading and
conversion, these hotels will experience increases in occupancy and room rates
as a result of the new franchisors' national brand recognition, reservation
systems and group sales organization. There can be no assurance that such brand
conversions and repositionings will occur as planned or that, if such brand
conversions and repositionings occur, the affected hotels will experience
occupancy and rate increases. The Company believes that the diversity of its
initial portfolio moderates the potential effects on the Company of regional
economic conditions or local market competition affecting specific hotel
franchises, hotel markets, or price segments within the industry. The hotels
are located primarily in major metropolitan areas at or in close proximity to
commercial airports, interstate highways or local commercial demand generators,
such as regional shopping centers, convention centers or tourist attractions.
The table on the following page sets forth certain information with respect
to the Initial Hotels. The Lessee is obligated to pay to the Company annually
the greater of Base Rent or Participating Rent at each of the Initial Hotels.
5
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED MARCH 31, 1996
--------------------------------------------------------------
PRO
RENOVATIONS FORMA
AND CAPITAL TOTAL PRO PRO FORMA
NUMBER YEAR IMPROVEMENT REVENUE PRO FORMA LESSEE
OF BUILT/ EXPENDITURES, OF THE FORMA PARTICI- NET
GUEST RENO- 1/1/93- INITIAL BASE PATING INCOME
INITIAL HOTELS LOCATION ROOMS VATED(1) 3/31/96(2) HOTELS RENT(3) RENT(3) (LOSS)(4) OCCUPANCY ADR REVPAR(5)
- ---------------- --------------- ------ --------- ------------- ------- ------- -------- --------- --------- ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT FOR ADR AND REVPAR)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn
Dallas DFW
Airport
South(6)....... Irving, TX 409 1974/1995 $ 2,776 $12,070 $ 2,410 $ 4,080 $(102) 77.2% $ 73.54 $ 56.79
Holiday Inn
Dallas DFW
Airport West(6)
............... Bedford, TX 243 1974/1995 4,582 4,881 827 1,440 3 64.9 66.05 42.84
Courtyard by
Marriott-
Meadowlands(6).. Secaucus, NJ 165 1989/1994 1,500 4,525 946 1,593 (108) 77.7 83.42 64.82
Hampton Inn
Richmond
Airport(6)..... Richmond, VA 124 1987/1995 443 1,962 530 866 42 69.9 58.64 40.96
Hilton Hotel-
Toledo(6) ..... Toledo, OH 213 1987/1994 1,069 6,094 832 1,336 159 71.7 61.31 43.96
Holiday Inn New
Orleans
International
Airport(6)(7)(12).. Kenner, LA 304 1973/1994 3,236 8,333 2,099 3,424 (10) 79.5 74.17 58.99
Holiday Inn
Select-
Madison(8)(12).. Madison, WI 227 1987/1995 473 7,845 1,597 2,758 54 78.8 78.91 62.20
Holiday Inn Park
Center
Plaza(8)(12)... San Jose, CA 231 1975/1990 304 7,658 1,091 2,069 94 76.1 80.17 61.03
Fred Harvey
Albuquerque
Airport
Hotel(9)(12)... Albuquerque, NM 266 1972/1994 664 6,190 1,202 1,933 (147) 83.3 53.43 44.53
Le Baron Airport
Hotel(10)(12).. San Jose, CA 327 1973/1995 993 9,199 1,323 2,625 283 69.8 67.69 47.24
Days Inn Ocean
City(6)(11)(12).. Ocean City, MD 162 1989/1994 529 2,365 719 1,221 (157) 48.2 78.75 37.96
Holiday Inn
Mission
Valley(10)(12).. San Diego, CA 318 1970/1995 926 6,662 1,542 2,134 434 68.0 64.80 44.09
Hotel Maison de
Ville(6)....... New Orleans, LA 23 1788/1994 849 1,881 274 423 18 64.7 234.85 151.84
----- ------- ------- ------- ------- -----
Totals/Weighted Averages 3,012 $18,344 $79,665 $15,392 $25,902 $ 563 73.0% $ 70.97 $ 51.77
===== ======= ======= ======= ======= =====
</TABLE>
- -------
(1) Year renovated reflects the calendar year in which management deems that a
significant renovation was completed at that hotel.
(2) Represents total capital expenditures at each hotel from January 1, 1993
through March 31, 1996.
(3) Represents Base Rent and Participating Rent calculated on a pro forma basis
by applying the rent provisions of the Participating Leases to the pro
forma revenues of the Initial Hotels as if January 1, 1995 were the
beginning of the lease year. Under the terms of the Participating Leases,
the Lessee is obligated to pay the greater of Base Rent or Participating
Rent. The departmental revenue thresholds in certain of the Participating
Lease formulas adjust in the future commencing January 1, 1997. See "The
Initial Hotels--The Participating Leases."
(4) After pro forma management fees of approximately $2.1 million payable to
AGHI. Such management fees are subordinate to Participating Lease payments
to the Company. See "Selected Financial Information," "AGHI and the Lessee"
and "The Initial Hotels--The Management Agreements."
(5) REVPAR is determined by dividing total room revenue by total available
rooms for the applicable period.
(6) This hotel is currently operated and managed by AGHI.
(7) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Holiday Inn Select brand.
(8) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Crowne Plaza brand.
(9) This hotel is currently affiliated with Best Western(R). The Company has
plans to reposition this hotel and convert it to a hotel that operates
under the Wyndham Hotel brand.
(10) The Company plans to reposition this hotel and convert it to a hotel that
operates under the DoubleTree Hotel brand.
(11) The Company plans to reposition this hotel and convert it to a hotel that
operates under the Hampton Inn brand.
(12) There can be no assurance that the brand conversion and repositioning of
this hotel will occur as planned.
6
<PAGE>
GROWTH STRATEGIES
The Company will seek to maximize current returns to stockholders through
increases in Cash Available for Distribution and to increase long-term total
returns to stockholders through appreciation in value of the Common Stock. The
Company plans to achieve these objectives through participation in any
increased revenues from the Initial Hotels, pursuant to the Participating Rent
payments under the Participating Leases and by the acquisition and selective
development of additional hotels.
ACQUISITIONS
The Company intends to acquire additional hotels that meet one or more of the
investment criteria outlined below. The Company intends to capitalize on AGHI's
extensive resources and industry contacts available through its hotel
management business, sizable existing management portfolio, and significant
industry and national presence to access acquisition opportunities not readily
available to the market in general. The Company currently has options to
acquire AGHI's interest in two Courtyards by Marriott currently under
development containing an aggregate of 318 guest rooms. See "The Company--
Development." The Company believes that its executive officers' experience in
the hotel industry will enable the Company to acquire, upgrade and convert
hotels in order to capture the growth potential from such acquisitions. The
Company initially will employ five professionals devoted exclusively to hotel
acquisitions.
The Company will seek to acquire additional hotels that meet one or more of
the following investment criteria:
. full-service hotels located in major metropolitan markets, including
hotels that are in close proximity to the airports that serve such
markets, as well as selective prominent hotels in major tourist areas;
. hotels that are underperforming and are candidates for implementation of
market repositioning, franchise conversion and turnaround strategies that
employ the extensive management and marketing experience of AGHI;
. hotels where the Company believes that necessary renovation or
redevelopment can be completed expeditiously and will result in an
immediate improvement in the hotel's revenues and an attractive return on
its renovation or redevelopment investment;
. hotels with sound operating fundamentals that are performing below their
potential because they are owned or controlled by financially distressed
owners or involuntary owners that may have acquired hotels through
foreclosure, including owners that lack the financial resources or the
commitment to make capital improvements appropriate for such hotels;
. hotels in attractive locations that the Company believes would benefit
significantly by changing franchises to a recognized brand affiliation
that is capable of increasing penetration in a particular market;
. nationally franchised hotels in locations with a relatively high demand
for rooms, relatively low supply of competing hotels and high barriers to
entry; and
. portfolios of hotels that exhibit some or all of the other criteria
discussed above, where purchasing several hotels in one transaction
enables the Company to obtain a favorable price, or to purchase
attractive hotels that otherwise would not be available to the Company.
The Company's ability to make acquisitions will depend on its ability to
access debt and equity financing. Initially, the Company expects to fund its
acquisitions by utilizing funds available under its Line of Credit. Funds
available to the Company under the Line of Credit will be limited to the
maximum amount of $100 million and, among other limitations, to 40% of the
value or cost of the hotels which secure such line. See "The Initial Hotels--
Line of Credit." Although as a public company the Company expects to have
available alternative sources of financing, no commitments relating to such
financing exist. Acquisitions entail risks that acquired hotels will fail
7
<PAGE>
to perform in accordance with expectations and that estimates of the cost of
improvements necessary to reposition hotels will prove inaccurate, as well as
general investment risks associated with any new real estate investment. In
addition, future trends in the hotel industry may make future acquisitions
economically impractical. Moreover, there can be no assurance that the Company
will be able to acquire hotels that meet its investment criteria or that any
such hotel's operations can be successfully improved. See "Risk Factors--Real
Estate Investment Risks--General Risks" and "--Acquisition and Development
Risks."
DEVELOPMENT
The Company's executive officers average approximately 17 years of experience
in the development and renovation of hotel properties. Under the direction of
the Company's executive officers, AGHI has developed six hotel properties, with
an aggregate development cost of approximately $60 million, and has completed
redevelopment or repositioning projects at approximately 70 hotel properties,
including both full- and limited-service hotels. The Company anticipates that
most of the additional hotels developed in the future will be in the full-
service commercial sector, including such major brands as Hilton, Marriott's
family of brands, Wyndham Hotel, DoubleTree Hotel, Crowne Plaza, Holiday Inn,
Sheraton and Embassy Suites. Other than in connection with the limited
expansion of existing hotels, the Company may not engage in development
activities without the consent of the lenders under the Line of Credit.
The Company's development activities will be limited by the terms of the Line
of Credit, its ability to access financing as well as future trends in the
hotel industry. Like acquisitions, new project development is also subject to
numerous risks, including risks of construction delays or cost overruns that
may increase project costs. Accordingly, there can be no assurance that the
Company will be able to develop hotels that meet its investment criteria or
that any hotels can be successfully developed. See "Risk Factors--Real Estate
Investment Risks--Acquisition and Development Risks."
INTERNAL GROWTH
The Company believes that, based on the historical operating results of the
Initial Hotels, the strength of the Company's and AGHI's existing management
teams and the structure of the Participating Leases, the Initial Hotels should
provide the Company with the opportunity for significant revenue growth. The
Company believes that it has structured its business relationships with AGHI
and the Lessee to provide incentives to operate and maintain the Initial Hotels
in a manner that will increase revenue and the Company's Cash Available for
Distribution. See "The Initial Hotels--The Participating Leases" and "--The
Management Agreements."
AGHI has extensive experience in managing hotels through all stages of the
lodging industry cycle, including industry downturns. During the late 1980's
and early 1990's, AGHI managed over 140 different hotels for institutional
owners, a substantial number of whom acquired the hotels through foreclosure,
thus enhancing AGHI's extensive turnaround and repositioning experience as well
as its management depth and operating systems. The Company believes there is
significant potential to increase revenues at the Initial Hotels (especially
those not currently managed by AGHI) and increase Participating Lease payments
by employing the following strategies:
. product repositioning through renovation and refurbishment of the hotels;
. brand repositioning through conversion to leading national franchise
affiliations;
. operational repositioning through property-level management and
marketing; and
. use of Participating Leases designed to capture increased revenues
attributable to improved marketing and yield management techniques that
AGHI will employ at the Initial Hotels not previously operated and
managed by AGHI and any additional hotels acquired by the Company after
the completion of the Offering.
8
<PAGE>
Product Repositioning. The Company believes that a regular program of capital
improvements, including replacement and refurbishment of FF&E at the Initial
Hotels, as well as the renovation and redevelopment of certain of the Initial
Hotels, will maintain the competitiveness of the Initial Hotels and increase
revenues. From January 1, 1993 through March 31, 1996, approximately $15.0
million (an average of approximately $9,000 per guest room) was spent on
renovations and capital improvements at the eight Initial Hotels currently
operated and managed by AGHI. The Company expects to employ a repositioning and
conversion strategy in connection with its hotel acquisitions. Consistent with
this strategy, the Company has scheduled approximately $24.6 million (an
average of approximately $13,400 per guest room) to be spent on renovations and
refurbishments within one year after the completion of the Offering at seven of
the Initial Hotels anticipated to undergo brand conversions within one year
after the closing of the Offering (see "Brand Repositioning" below).
As an example of this strategy, AGHI, after its acquisition in May 1992 of an
interest in the Holiday Inn Dallas DFW Airport South and its retention as
manager, commenced an extensive $2.5 million renovation of the hotel, which
included upgrades of all guest rooms and corridors, common areas, meeting
space, and restaurants and the lounge and renovation of the exterior of the
building. At the time of purchase, the hotel had lost its Holiday Inn franchise
due to product deficiencies and was experiencing declining occupancy arising
from poor marketing and insufficient capital improvements. Since the completion
of the initial renovations in 1992, an additional $2.5 million has been spent
to upgrade the hotel. In 1992, occupancy, ADR and REVPAR at the Holiday Inn
Dallas DFW Airport South were 49.1%, $54.18 and $26.61, respectively. By the
twelve months ended March 31, 1996, occupancy at the hotel had increased 57.2%
to 77.2%, ADR at the hotel had increased 35.7% to $73.54 and REVPAR at the
hotel had increased 113.4% to $56.79. There can be no assurance that the
Company will be able to achieve similar results with respect to the Initial
Hotels or hotels acquired in the future.
The Participating Leases require the Company to establish reserves of 4.0% of
total revenue for each of the Initial Hotels (which, on a consolidated pro
forma basis for the twelve months ended March 31, 1996, represented
approximately 5.6% of room revenue), which will be utilized by the Lessee for
the replacement and refurbishment of FF&E and for other capital expenditures
designed to enhance the competitive position of the Initial Hotels.
Brand Repositioning. The Company believes an opportunity exists in certain
major U.S. markets to acquire underperforming hotels that currently operate as
independent hotels or under franchise affiliations that have limited brand
recognition and convert them to stronger, more nationally recognized brand
affiliations, such as Courtyard by Marriott, DoubleTree Hotel, Crowne Plaza,
Holiday Inn, Holiday Inn Select, and Wyndham Hotel brands, in order to improve
the operating performance at these hotels. Seven of the Initial Hotels are
anticipated to undergo brand conversions within one year after the closing of
the Offering. It is expected that the Holiday Inn Park Center Plaza will be
converted from a traditional Holiday Inn to a Crowne Plaza, the Holiday Inn
Select-Madison will be converted to a Crowne Plaza, the Days Inn Ocean City
will be converted to a Hampton Inn, the Le Baron Airport Hotel will be
converted to a DoubleTree Hotel, the Holiday Inn New Orleans International
Airport will be converted from a traditional Holiday Inn to a Holiday Inn
Select, the Holiday Inn Mission Valley will be converted to a DoubleTree Hotel,
and the Fred Harvey Albuquerque Airport Hotel will be converted to a Wyndham
Hotel. These brand conversions are subject to, among other things, final
franchisor and lender approval, and there can be no assurance that such brand
conversions and repositionings will occur as planned. See "Risk Factors--Risks
of Operating Hotels Under Franchise Agreements; Approval for Brand
Conversions."
As an example, AGHI implemented its brand repositioning strategy in
connection with its acquisition of the Courtyard by Marriott-Meadowlands in
December 1993. At the time of its acquisition by AGHI, this hotel's operating
performance was declining due to prior management inefficiencies, deferred
maintenance and a lack of capital to effectively compete in its market. In
response to these conditions, AGHI developed a multi-phase strategy, including
repositioning the former Days Hotel(R) to a Courtyard by Marriott and upgrading
the hotel by
9
<PAGE>
making approximately $530,000 in renovations of guest rooms and public space
and exterior improvements to the hotel. Since the initial renovation was
completed in May 1994, AGHI has invested an additional $845,400 to further
improve the restaurant, lounge, exterior entrances, guest rooms and meeting
facilities. In 1993, occupancy, ADR and REVPAR at the Courtyard by Marriott-
Meadowlands were 74.8%, $65.63 and $49.09, respectively. By the twelve months
ended March 31, 1996, occupancy at the hotel had increased 3.9% to 77.7%, ADR
at the hotel had increased 27.1% to $83.42 and REVPAR at the hotel had
increased 32.0% to $64.82. There can be no assurance that the Company will be
able to achieve similar results with respect to the Initial Hotels or hotels
acquired in the future.
The Company's ability to utilize its repositioning strategies will depend on
its ability to access financing. The Company plans to use funds available under
the Line of Credit to implement its planned conversion and repositioning
strategy at certain of the Initial Hotels. Substantial renovations of hotels
often disrupt the operations of those hotels due to hotel guest rooms and
common areas being out of service for extended periods. See "Risk Factors--
Hotel Industry Risks--Risks of Necessary Operating Costs and Capital
Expenditures; Required Hotel Renovations."
Operational Repositioning. The Company expects to achieve internal growth
through the application of AGHI's operating strategies, which stress
responsiveness and adaptability to changing market conditions to maximize
revenue growth. The Company's objectives include increasing REVPAR through
increases in occupancy and ADR through AGHI's continuing use of (i) interactive
yield management techniques, (ii) highly developed operating systems and
controls, (iii) targeted sales and marketing plans, (iv) proactive financial
management, (v) extensive training programs, and (vi) an incentive-based
compensation structure.
Participating Leases Structure. The Participating Leases are designed to
allow the Company to participate in any increased revenues from the hotels in
which it invests. The Company also believes that by employing AGHI as the
manager of the five Initial Hotels that AGHI does not currently manage, AGHI,
through improved marketing and yield management techniques, will increase the
revenues of these hotels, thereby increasing the rent payable to the Company by
the Lessee under the Participating Leases. The Company and the Lessee relied on
this estimated increase in revenue in establishing the rent payable to the
Company under the Participating Leases relating to these hotels. While the rent
provisions of the Participating Leases are revenue-based, such provisions have
been developed with consideration of the fixed and variable nature of hotel
operating expenses and changes in operating margins typically associated with
increases in revenues. See "The Initial Hotels--The Participating Leases."
In an effort to align the interests of AGHI and the Lessee with the interests
of the Company's stockholders, the Participating Leases, the Management
Agreements and certain related agreements provide for the following:
. the partners of the Lessee have agreed upon consummation of the Offering
to (i) initially capitalize the Lessee with $500,000 in cash and (ii)
pledge 275,000 OP Units having a value of approximately $5.5 million,
based on the Offering Price, to the Company to secure the Lessee's
obligations under the Participating Leases (the "Lessee Pledge");
. until the Lessee's net worth equals the greater of (i) $6.0 million and
(ii) 17.5% of actual rent payments from hotels leased to the Lessee
during the preceding calendar year (the "Lessee Distribution
Restriction"), the Lessee will not pay any distributions to its partners
(except for the purpose of permitting its partners to pay taxes on the
income attributable to them from the operations of the Lessee and except
for distributions relating to interest or dividends received by the
Lessee from cash or securities held by it);
. management fees paid to AGHI by the Lessee will include an incentive fee
of up to 2.0% of gross revenues based upon reaching certain gross revenue
targets at the Initial Hotels;
. management fees payable by the Lessee to AGHI will be subordinated to the
Lessee's rent obligations to the Company under the Participating Leases;
10
<PAGE>
. defaults by the Lessee under each Participating Lease will result in a
cross-default of all other Participating Leases to which the Lessee is a
party allowing the Company to terminate each other lease;
. Messrs. Jorns and Wiles, who are stockholders of AGHI and are also
executive officers of the Company, will agree to use 50.0% of the
dividends (net of tax liability) received by them from AGHI that are
attributable to AGHI's earnings from the management of hotels owned by
the Company (as determined in good faith by such officers) to purchase
additional interests in the Company; and
. the Board of Directors of the Company will establish a Leasing Committee,
consisting entirely of Independent Directors (as defined in "Management--
Board of Directors and Committees"), that will review not less frequently
than annually the Lessee's compliance with the terms of the Participating
Leases and will review and approve the terms of each new Participating
Lease between the Company and the Lessee.
FORMATION TRANSACTIONS
Set forth below is a description of the principal transactions in connection
with the formation of the Company and the acquisition of the Initial Hotels
(the "Formation Transactions"):
. The Company will sell 7,000,000 shares of Common Stock in the Offering.
All of the net proceeds to the Company from the Offering will be
contributed to AGH GP and AGH LP, which, in turn, will contribute such
proceeds, together with certain assets acquired from AGHI's Employee
Retirement and Savings Plan (the "Plan") (as described below), to the
Operating Partnership in exchange for an approximate 74.2% interest in
the Operating Partnership. AGH GP, a wholly owned subsidiary of the
Company, is the sole general partner of the Operating Partnership and
will own a 1.0% interest in the Operating Partnership. AGH LP, also a
wholly owned subsidiary of the Company, will initially own an approximate
73.2% limited partnership interest in the Operating Partnership;
. The Company will acquire directly or indirectly a 100.0% interest in each
of the Initial Hotels for an aggregate of 2,511,106 OP Units, 155,518
shares of Common Stock, approximately $91.1 million in cash, and the
assumption of approximately $53.5 million in mortgage indebtedness (of
which amount approximately $33.9 million will be repaid from the net
proceeds of the Offering), as follows:
. The Operating Partnership will acquire from the Primary Contributors
interests in six of the Initial Hotels (Holiday Inn Dallas DFW Airport
West, Holiday Inn Dallas DFW Airport South, Hotel Maison de Ville,
Hampton Inn Richmond Airport, Courtyard by Marriott-Meadowlands and
Hilton Hotel-Toledo) and the Primary Contributors' contract right to
acquire the Holiday Inn Park Center Plaza in exchange for 1,161,401 OP
Units (valued at approximately $23.2 million, based on the Offering
Price);
. The Company will acquire from the Plan interests in five of the
Initial Hotels (Hampton Inn Richmond Airport, Holiday Inn Dallas DFW
Airport West, Hotel Maison de Ville, Courtyard by Marriott-Meadowlands
and Hilton Hotel-Toledo) in exchange for 155,518 shares of Common
Stock (valued at approximately $3.1 million, based on the Offering
Price), and the Company will, in turn, contribute such interests to
the Operating Partnership in exchange for 155,518 OP Units. The
Company's executive officers collectively own less than a 5.0%
beneficial interest in the Plan;
. The Operating Partnership will acquire, directly or as assignee of the
Primary Contributors' contract rights, interests in eight of the
Initial Hotels from parties that are unaffiliated with the Primary
Contributors in exchange for an aggregate of 1,349,705 OP Units
(valued at approximately $27.0 million, based on the Offering Price)
and approximately $91.1 million in cash.
. The Operating Partnership will reimburse AGHI for approximately $900,000
for direct out-of-pocket expenses incurred in connection with the
acquisition of the Initial Hotels, including legal, environmental and
engineering expenses;
11
<PAGE>
. The Operating Partnership will lease each Initial Hotel to the Lessee for
a term of twelve years pursuant to a Participating Lease, which will
require Base Rent to be paid on a monthly basis and Participating Rent to
be paid on a quarterly basis;
. The Operating Partnership will receive from the Primary Contributors
options to acquire their interests in the two Option Hotels (see "The
Initial Hotels--Options to Purchase and Rights of First Refusal");
. In order for the Company to qualify as a REIT, the Operating Partnership
will sell certain personal property relating to certain of the Initial
Hotels to the Lessee in exchange for one or more five-year amortizing
recourse promissory notes in the aggregate principal amount of $315,000
that will be secured by such personal property (collectively, the "FF&E
Note");
. The Lessee will contract with AGHI to operate the Initial Hotels under
separate Management Agreements providing for the subordination of the
payment of the management fees to the Lessee's obligation to pay rent to
the Operating Partnership under the Participating Leases; and
. In order to facilitate compliance with state and local liquor laws and
regulations, the Lessee will sublease (the "Beverage Subleases") those
areas of the Initial Hotels where alcoholic beverages are served to
special purpose corporations, eleven of which are wholly owned by Mr.
Jorns (collectively, the "Beverage Corporations"). The Beverage
Corporations will pay to the Lessee rent payments equal to 30% of gross
revenues from the sale of food and beverages generated from such areas;
however, pursuant to the Participating Leases, such subleases will not
reduce the Participating Rent payments to the Company, which it is
entitled to receive from such food and beverage sales.
12
<PAGE>
Following the consummation of the Formation Transactions, the structure and
relationship of the Company, the Operating Partnership, the Lessee and AGHI
will be as follows:
[FLOWCHART APPEARS HERE]
- --------
(1) Upon completion of the Formation Transactions, each of Messrs. Jorns, Wiles
and Barr will own less than 1% of the outstanding shares of Common Stock of
the Company and 1.9%, 0.6% and 0.1%, respectively, of the outstanding OP
Units of the Operating Partnership. See "Principal Stockholders."
(2) Messrs. Jorns, Wiles and Barr own, directly or indirectly, 15.43%, 4.89%
and 2.5%, respectively, of the Lessee.
(3) Messrs. Jorns and Wiles own 15.83% and 5.0%, respectively, of AGHI.
13
<PAGE>
BENEFITS TO THE OFFICERS AND THE PRIMARY CONTRIBUTORS
The Primary Contributors are Steven D. Jorns, Bruce G. Wiles, and Kenneth E.
Barr, each of whom is an executive officer of the Company, and James E. Sowell,
Lewis W. Shaw II and Kenneth W. Shaw, each of whom is an affiliate of the
Lessee and AGHI and, where applicable, the term "Primary Contributors" includes
their respective controlled affiliates and associates (including spouses).
As a result of the Formation Transactions, officers of the Company and the
Primary Contributors will receive the following benefits:
. Mr. Jorns will receive 185,206 OP Units, Mr. Wiles will receive 56,672 OP
Units, Mr. Barr will receive 10,000 OP Units, Mr. Sowell will receive
540,553 OP Units, Mr. Lewis W. Shaw II will receive 185,205 OP Units, and
Mr. Kenneth W. Shaw will receive 183,765 OP Units, as consideration for
their interests in six of the Initial Hotels and the assignment of the
contract right to acquire one additional Initial Hotel. The OP Units to
be received by Messrs. Jorns, Wiles, Barr, Sowell, Shaw and Shaw (which
are exchangeable for cash, or at the Company's option for Common Stock,
at any time after one year following the completion of the Offering) will
have a value of approximately $3.7 million, $1.1 million, $200,000, $10.8
million, $3.7 million and $3.7 million, based on the Offering Price,
respectively, and will be more liquid than their interests in the Initial
Hotels once a public trading market for the Common Stock commences. As of
March 31, 1996, the aggregate book value of the interests and rights to
be contributed by such persons was approximately $2.9 million;
. Messrs. Jorns, Wiles, Barr and Russ C. Valentine, an executive officer of
the Company, will be granted options to acquire 225,000, 75,000, 40,000
and 20,000 shares of Common Stock, respectively, at the Offering Price,
which will become exercisable in four equal annual installments
commencing on the date of grant;
. Messrs. Jorns, Wiles, Barr and Valentine will receive stock awards of
30,000, 10,000, 6,000 and 4,000 shares of restricted Common Stock,
respectively, which will vest over a four-year period commencing on the
date of grant;
. The Operating Partnership will reimburse AGHI for approximately $900,000
for direct out-of-pocket expenses incurred in connection with the
acquisition of the Initial Hotels, including legal, environmental and
engineering expenses;
. The Operating Partnership will repay approximately $3.75 million of
indebtedness guaranteed by AGHI;
. Certain tax consequences to the Primary Contributors resulting from the
conveyance of their interests in the Initial Hotels to the Operating
Partnership will be deferred;
. Through its operation of the Initial Hotels pursuant to the Participating
Leases, the Lessee, which is owned by Messrs. Jorns, Wiles, Barr, Sowell,
Shaw and Shaw, will be entitled to all of the cash flow from the Initial
Hotels after the payment of operating expenses, management fees and rent
under the Participating Leases (which cash flow, after establishing a
reserve for tax distributions to its partners, the Lessee will use
annually, until its net worth equals the greater of (i) $6.0 million and
(ii) 17.5% of actual rent payments from hotels leased to the Lessee
during the preceding calendar year, to purchase interests in the
Company). Pursuant to the Management Agreements, AGHI, which is owned by
Messrs. Jorns, Wiles, Sowell, Shaw and Shaw, will receive management fees
from the Lessee, which are subordinate to the rent payments due to the
Company under the Participating Leases, in an amount initially equal to a
base fee of 1.5% of gross revenues plus an incentive fee of up to 2.0% of
gross revenues that will be earned incrementally upon reaching certain
gross revenue targets. See "The Initial Hotels--The Participating Leases"
and "--The Management Agreements;" and
. Through its operation of the areas of eleven of the Initial Hotels that
serve alcoholic beverages, the Beverage Corporations, which are wholly
owned by Mr. Jorns, will be entitled to all cash flow from food
14
<PAGE>
and beverage sales generated from such areas after the payment of rent to
the Lessee equal to 30% of gross revenues from such sales; such
arrangement will not, however, reduce Participating Rent payments to the
Company, which it is entitled to receive from such food and beverage
sales.
TAX STATUS
The Company intends to make an election to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its initial taxable year ending December 31, 1996. If the
Company qualifies for taxation as a REIT, the Company (subject to certain
exceptions) will not be subject to federal income taxation, at the corporate
level, on its taxable income that is distributed to the stockholders of the
Company. A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute at least
95.0% of its annual taxable income. Failure to qualify as a REIT would render
the Company subject to tax (including any applicable minimum tax) on its
taxable income at regular corporate rates, and distributions to the
stockholders in any such year would not be deductible by the Company. Although
the Company does not intend to request a ruling from the Internal Revenue
Service (the "IRS") as to its REIT status, the Company will receive, at the
closing of the Offering, the opinion of its legal counsel that the Company
qualifies for taxation as a REIT, which opinion is based on certain assumptions
and representations and is not binding on the IRS or any court. Even if the
Company qualifies for taxation as a REIT, the Company may be subject to certain
federal, state and local taxes on its income and property. In connection with
the Company's election to be taxed as a REIT, the Company's Charter imposes
restrictions on the transfer of shares of Common Stock. The Company intends to
adopt the calendar year as its taxable year. See "Risk Factors--Tax Risks" and
"--Potential Anti-Takeover Effect of Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws--Ownership Limitation," "Description of
Capital Stock--Restrictions on Transfer," and "Federal Income Tax
Considerations--Taxation of the Company."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by
the Company............ 7,000,000 shares
Common Stock to be
outstanding after the 9,716,624 shares(1)
Offering...............
Use of Proceeds......... To acquire the Initial Hotels, to repay certain
mortgage and other existing indebtedness in connection
with the acquisition of the Initial Hotels, and for
working capital. See "Use of Proceeds."
NYSE symbol............. "AGT"
</TABLE>
- --------
(1) Includes 2,511,106 shares of Common Stock to be issuable one year after the
completion of the Offering upon the exchange of OP Units issued in the
Formation Transactions (other than to AGH GP and AGH LP), 155,518 shares of
Common Stock issued to the Plan in connection with the Formation
Transactions and 50,000 shares of restricted Common Stock that will vest
over a four-year period granted to the Company's executive officers as
stock awards. Excludes 850,000 reserved but unissued shares of Common Stock
under the American General Hospitality Corporation 1996 Incentive Plan (the
"1996 Plan") and 100,000 reserved but unissued shares of Common Stock under
the American General Hospitality Corporation Non-Employee Directors'
Incentive Plan (the "Directors' Plan"). See "Management--Stock Incentive
Plans," "Formation Transactions" and "Partnership Agreement--Exchange
Rights."
15
<PAGE>
DISTRIBUTION POLICY
Subsequent to the Offering, the Company intends to make regular quarterly
distributions to its stockholders. The Company's first distribution, for the
period from the closing of the Offering to September 30, 1996, is expected to
be $ per share of Common Stock, representing a pro rata distribution of the
anticipated regular quarterly distribution of $0.40 per share for a full
quarter, which, on an annualized basis, represents an initial annual
distribution rate of $1.60 per share or 8.0% of the Offering Price. The Company
estimates that approximately 21.0% of the initial annual distribution will
represent a return of capital for federal income tax purposes. Based on the
Company's estimated revenues less expenses for the twelve months ended March
31, 1996, the Company would have been required to distribute approximately $8.6
million, or $1.20 per share, in order to maintain its status as a REIT. This
estimated initial distribution represents 95.0% of estimated Cash Available for
Distribution. The holders of OP Units will be entitled to distributions per OP
Unit which are equal to the distributions payable on a per share basis with
respect to the Common Stock. The Company does not expect to adjust the
estimated distribution rate if the Underwriters' over-allotment option is
exercised. See "Partnership Agreement."
The Company has established the expected initial annual distribution rate
based upon the Company's estimate of Cash Available for Distribution, which has
been derived from the Statements of Estimated Revenues Less Expenses of the
Company for the twelve months ended March 31, 1996. The Company believes that
the estimated revenues less expenses for the twelve months ended March 31, 1996
constitute a reasonable basis for setting the expected initial annual
distribution rate. The Board of Directors, in its sole discretion, will
determine the actual distribution rate based on the Company's actual results of
operations, Cash Available for Distribution, economic conditions, tax
considerations (including those related to REITs) and other factors. See
"Distribution Policy."
16
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth unaudited summary estimated and pro forma
consolidated financial data for the Company, summary historical combined
financial data for the Initial Hotels and pro forma financial data for the
Initial Hotels and Lessee and should be read in conjunction with the financial
statements and notes thereto that are contained elsewhere in this Prospectus.
The estimated revenues less expenses, pro forma and other data is presented as
if the Formation Transactions and the application of the net proceeds of the
Offering had occurred as of January 1, 1995 and therefore incorporate certain
assumptions that are included in the notes to the Statements of Estimated
Revenues Less Expenses and Pro Forma Statements of Operations included
elsewhere in the Prospectus. The pro forma balance sheet data is presented as
if the Formation Transactions and the application of the net proceeds of the
Offering had occurred on March 31, 1996.
AMERICAN GENERAL HOSPITALITY CORPORATION
SUMMARY ESTIMATED AND PRO FORMA CONSOLIDATED FINANCIAL DATA(1)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- -----------------
<S> <C> <C> <C>
ESTIMATED REVENUES LESS EX-
PENSES DATA:
Participating Lease
revenue(2)............... $ 24,811,668 $ 25,902,292 $ 6,527,908
Interest income........... 31,500 31,500 7,875
------------ ------------ ------------
Total revenue........... 24,843,168 25,933,792 6,535,783
------------ ------------ ------------
Depreciation.............. 7,404,199 6,551,900 1,485,224
Amortization.............. 605,410 605,410 151,353
Real estate and personal
property taxes and
property insurance....... 2,165,073 2,165,073 541,268
General and
administrative(3)........ 1,130,000 1,130,000 282,500
Ground lease expense...... 881,217 902,196 193,156
Amortization of unearned
officers'
compensation(4).......... 100,000 100,000 25,000
Interest expense.......... 1,244,637 1,633,962 408,491
------------ ------------ ------------
Total expenses.......... 13,530,536 13,088,541 3,086,992
------------ ------------ ------------
Estimated Revenues Less
Expenses before minority
interest................. 11,312,632 12,845,251 3,448,791
Minority interest(5)...... 2,918,659 3,314,075 889,788
------------ ------------ ------------
Estimated revenues less
expenses applicable to
common stockholders...... $ 8,393,973 $ 9,531,176 $ 2,559,003
============ ============ ============
Estimated revenues less
expenses per common
share.................... $1.16 $1.32 $0.36
============ ============ ============
Weighted average number of
shares of Common Stock
outstanding.............. 7,205,518 7,205,518 7,205,518
============ ============ ============
<CAPTION>
AT MARCH 31, 1996
-----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.............. $ 874,076
Investment in hotel
properties, net.......... 176,206,689
Total assets.............. 180,172,365
Debt...................... 19,352,239
Minority interest in
Operating Partnership.... 41,040,093
Stockholders' equity...... 118,030,033
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- -----------------
<S> <C> <C> <C>
OTHER DATA:
Funds From Operations(6).. $ 13,887,889 $ 14,392,686 $ 3,661,039
Cash Available for
Distribution(7).......... 11,690,738 12,142,695 3,195,403
Net cash provided by
operating activities
(consolidated)(8)........ 19,422,241 20,102,561 5,110,368
Net cash used in investing
activities
(consolidated)(9)........ (3,115,404) (3,186,617) (803,895)
Net cash used in financing
activities
(consolidated)(10)....... (16,056,851) (16,035,288) (4,008,823)
Weighted average number of
shares of Common Stock
and of OP Units
outstanding.............. 9,716,624 9,716,624 9,716,624
</TABLE>
See notes on following page.
17
<PAGE>
INITIAL HOTELS
SUMMARY HISTORICAL COMBINED FINANCIAL DATA (11)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------ -----------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $27,963,802 $30,376,150 $36,829,877 $43,541,206 $53,756,926 $11,857,784 $14,186,415
Food and beverage
revenue............... 13,526,143 13,597,748 15,453,080 16,378,861 17,717,760 4,291,351 4,683,138
Other revenue.......... 2,434,535 2,528,364 4,680,010 3,392,275 4,147,900 971,975 1,163,152
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue.......... 43,924,480 46,502,262 56,962,967 63,312,342 75,622,586 17,121,110 20,032,705
Hotel operating
expenses.............. 32,251,012 35,083,148 40,130,782 44,349,278 51,198,375 11,622,390 13,216,152
Depreciation and
amortization.......... 2,575,564 6,329,770 5,847,629 5,986,460 8,131,244 2,839,488 1,567,020
Interest expense....... 3,802,670 4,819,749 4,667,281 4,771,483 6,307,202 1,411,434 1,705,764
Other expenses......... 1,946,193 617,334 2,543,235 2,996,568 3,132,865 763,398 789,611
----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues over (under)
expenses(12).......... $ 3,349,041 $ (347,739) $ 3,774,040 $ 5,208,553 $ 6,852,900 $ 484,400 $ 2,754,158
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
LESSEE
SUMMARY PRO FORMA FINANCIAL DATA (1)(13)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- ------------------- ------------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $55,330,171 $56,830,028 $14,201,906
Food and beverage
revenue............... 18,191,504 18,335,582 4,732,323
Other revenue.......... 4,363,432 4,499,821 1,163,152
----------- ----------- -----------
Total revenue.......... 77,885,107 79,665,431 20,097,381
Hotel operating
expenses.............. 52,582,000 53,060,887 13,149,844
Depreciation and
amortization.......... 63,000 63,000 15,750
Interest expense....... 31,500 31,500 7,875
Other expenses......... 58,084 44,773 17,981
Participating Lease
expenses(2)........... 24,811,668 25,902,292 6,527,908
----------- ----------- -----------
Revenues over
expenses.............. $ 338,855 $ 562,979 $ 378,023
=========== =========== ===========
</TABLE>
- --------
(1) The estimated and pro forma information do not purport to represent what
the Company's financial position or the Company's and Initial Hotels' and
Lessee's results of operations would actually have been if the
consummation of the Formation Transactions and the Offering had, in fact,
occurred on such dates, or to project the Company's financial position or
the Company's and Initial Hotels' and Lessee's results of operations at
any future date or for any future period.
(2) Represents lease payments from the Lessee to the Operating Partnership
pursuant to the Participating Leases calculated on a pro forma basis by
applying the rent provisions of the Participating Leases to the pro forma
revenues of the Initial Hotels. The departmental revenue thresholds in
certain of the Participating Lease formulas adjust in the future effective
January 1, 1997. See "The Initial Hotels--The Participating Leases."
(3) Represents salaries and wages, professional fees, directors' and officers'
insurance, allocated rent, supplies and other operating expenses to be
paid by the Company. These amounts are based on historical general and
administrative expenses as well as probable 1996 expenses.
(4) Represents amortization of unearned officers' compensation represented by
an aggregate of 50,000 shares of restricted Common Stock issuable to the
Company's executive officers, which shares vest 10% at the date of grant
(5,000 shares at $20.00 per share).
(5) Calculated as 25.8% of estimated revenues less expenses before minority
interest for all periods.
(6) Represents Funds From Operations of the Company. The items added back to
estimated revenues less expenses applicable to common stockholders have
been adjusted by the Company's ownership percentage in the Operating
Partnership of 74.2% for all periods presented. The following table
computes Funds From Operations under the newly adopted National
Association of Real Estate Investment Trusts ("NAREIT") definition. Funds
From Operations consists of net income applicable to common stockholders
(computed in accordance with generally accepted accounting principles)
excluding gains (losses) from debt restructuring and sales of property
(including furniture and equipment) plus real estate related depreciation
and amortization (excluding amortization of deferred financing costs) and
after adjustments for unconsolidated partnerships and joint ventures. The
Company considers Funds From Operations to be an appropriate measure of
the performance of an equity REIT. Funds From Operations should not be
considered as an alternative to net income or other measurements under
generally accepted accounting principles, as an indicator of operating
performance or to cash flows from operating, investing, or financing
activities as a measure of liquidity. Although Funds
18
<PAGE>
From Operations has been computed in accordance with the newly adopted
NAREIT definition, Funds From Operations as presented may not be
comparable to other similarly titled measures used by other REITs. Funds
From Operations does not reflect cash expenditures for capital
improvements or principal amortization of indebtedness on the Initial
Hotels.
<TABLE>
<CAPTION>
PRO FORMA(1) PRO FORMA(1)
PRO FORMA(1) TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Estimated revenues less
expenses applicable to
common stockholders ... $ 8,393,973 $ 9,531,176 $2,559,003
Depreciation ........... 5,493,916 4,861,510 1,102,036
----------- ----------- ----------
Funds From Operations .. $13,887,889 $14,392,686 $3,661,039
=========== =========== ==========
Weighted average number
of shares of Common
Stock outstanding...... 7,205,518 7,205,518 7,205,518
=========== =========== ==========
</TABLE>
(7) Cash Available for Distribution represents Funds From Operations of the
Company plus the Company's ownership percentage in the Operating
Partnership of 74.2% multiplied by the sum of amortization of deferred
financing costs, franchise transfer costs and unearned officers'
compensation. This amount is then reduced by the Company's 74.2% share of
the sum of 4.0% of total revenue for each of the Initial Hotels that is
required to be set aside by the Operating Partnership for refurbishment
and replacement of FF&E, capital expenditures, and other non-routine
items as required by the Participating Leases and the estimated cash used
to pay interest expense related to the $24.6 million cost of planned
renovations and refurbishments at the seven Initial Hotels the Company
plans to convert to leading franchise brands in order to reposition such
hotels for future growth. Estimated Cash Available for Distribution does
not include the effects of any revenue increases expected to result from
capital expenditures at the Initial Hotels.
(8) Represents estimated revenues less expenses plus minority interest,
depreciation, amortization, and amortization of unearned officers'
compensation. There are no pro forma adjustments for changes in working
capital items.
(9) Pro forma cash used in investing activities includes the Operating
Partnership's obligation to make available to the Lessee an amount equal
to 4.0% of total revenue for each of the Initial Hotels for the periodic
replacement or refurbishment of FF&E, capital expenditures, and other
non-routine items as required by the Participating Leases. The Company
intends to cause the Operating Partnership to spend amounts in excess of
such obligated amounts to comply with the reasonable requirements of any
Franchise License and otherwise to the extent that the Company deems such
expenditures to be in the best interest of the Company. See "The Initial
Hotels--The Participating Leases."
(10) Represents estimated initial distributions to be paid based on the
initial annual distribution rate of $1.60 per share and an aggregate of
9,716,624 Common Stock and OP Units outstanding plus the debt service on
the DFW South Loan and the Secaucus Loans (as defined in "The Initial
Hotels--Mortgage Indebtedness Remaining Following the Offering").
(11) The Initial Hotels' financial data is derived by adding selected
financial data of the AGH Predecessor Hotels and the AGH Acquisition
Hotels (as set forth in "Selected Financial Information"). Such financial
data excludes information of the AGH Predecessor Hotels for periods prior
to their acquisition by AGHI. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The AGH Predecessor
Hotels consist of the following four Initial Hotels: the Holiday Inn
Dallas DFW Airport West, Courtyard by Marriott-Meadowlands, Hotel Maison
de Ville, and the Hampton Inn Richmond Airport. The AGH Acquisition
Hotels consist of the following nine Initial Hotels: the Holiday Inn
Dallas DFW Airport South, Hilton Hotel-Toledo, Holiday Inn New Orleans
International Airport, Holiday Inn Park Center Plaza, Holiday Inn Select-
Madison, Holiday Inn Mission Valley, Le Baron Airport Hotel, Days Inn
Ocean City, and Fred Harvey Albuquerque Airport Hotel
(12) Income taxes for the AGH Acquisition Hotels have not been deducted in
calculating revenues over (under) expenses.
(13) Pro forma amounts as if the Operating Partnership recorded depreciation
and amortization and paid real and personal property taxes and property
insurance contemplated by the Participating Leases, and the Formation
Transactions and the Offering occurred on January 1, 1995.
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RISK FACTORS
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus before
purchasing Common Stock in the Offering. This Prospectus contains certain
forward-looking statements. The Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause the
Company's actual results for 1996 and beyond to differ materially from those
expressed in any forward-looking statements made herein.
CONFLICTS OF INTEREST
General
Because of Messrs. Jorns', Wiles' and Barr's ownership in and positions with
the Company, AGHI and the Lessee, there are inherent conflicts of interest in
the Formation Transactions and in the ongoing lease, acquisition, disposition,
operation and management of the Initial Hotels. Accordingly, the interests of
the Company's stockholders may not have been, and in the future may not be,
reflected fully in all decisions made or actions taken or to be taken by
certain officers and directors of the Company. See "The Company," "Formation
Transactions," "Management," "Certain Relationships and Transactions," and
"Policies and Objectives with Respect to Certain Activities--Conflict of
Interest Policies."
No Arm's-Length Bargaining
In particular, the terms of the Participating Leases, the Management
Agreements, the Option Agreements (as defined in "The Initial Hotels--Options
to Purchase and Rights of First Refusal") relating to the Option Hotels (as
defined in "The Company--Development"), the agreements pursuant to which the
Company will acquire interests or contract rights relating to interests in
seven of the Initial Hotels from the Primary Contributors, the agreements
relating to the Lessee's purchase of certain personal property relating to the
Initial Hotels (including the terms of the FF&E Note) and the agreements
relating to the Beverage Subleases were not negotiated on an arm's-length
basis. In the event revenues from the Initial Hotels increase significantly
over prior periods, and operating expenses with respect thereto are less than
historical or projected operating expenses, the Lessee could
disproportionately benefit. In the event incremental increases in expenses at
the Initial Hotels exceed incremental increases in revenues, conflicts of
interest may arise between the Lessee and the Company. See "Certain
Relationships and Transactions--The Participating Leases" and "Policies and
Objectives with Respect to Certain Activities--Conflict of Interest Policies."
The Company will not own any interest in the Lessee. Because Messrs. Jorns,
Wiles and Barr are partners in the Lessee, and each of them is an executive
officer of the Company (Mr. Jorns is also a director of the Company), there is
a conflict of interest with respect to the enforcement and termination of the
Participating Leases. Because of these conflicts, Messrs. Jorns', Wiles' and
Barr's decisions relating to the Company's enforcement of its rights under the
Participating Leases may not solely reflect the interests of the Company's
stockholders. See "AGHI and the Lessee."
Conflicts Relating to Sale of Hotels Subject to Participating Leases
The Company generally will be obligated under the Participating Leases to
pay a lease termination fee to the Lessee if the Company elects to sell an
Initial Hotel and does not replace it with another hotel on terms that would
create a leasehold interest in such hotel with a fair market value equal to
the Lessee's remaining leasehold interest under the Participating Lease to be
terminated. Where applicable, the termination fee is equal to the fair market
value of the Lessee's leasehold interest in the remaining term of the
Participating Lease to be terminated. The payment of a termination fee to the
Lessee, which is owned in part by Messrs. Jorns, Wiles and Barr, may result in
decisions regarding the sale of an Initial Hotel that do not reflect solely
the interests of the Company's stockholders. See "The Initial Hotels--The
Participating Leases."
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Conflicts Relating to Sale of Initial Hotels Previously Owned by Executive
Officers
Certain executive officers of the Company or their affiliates may have
unrealized gain in their interests in certain of the Initial Hotels
transferred to the Company. The sale of such hotels by the Company may cause
adverse tax consequences to such officers or affiliates. Therefore, the
interests of the Company, such officers and affiliates could be different in
connection with the disposition of such hotels. However, decisions with
respect to the disposition of those Initial Hotels will be made by a majority
of the Board of Directors, which majority must include a majority of the
Independent Directors.
Conflicts Relating to Continued Management of Hotels
After completion of the Offering, AGHI, in which Messrs. Jorns and Wiles own
collectively a 21.0% interest, will continue to engage in the management of
hotels for third parties. In addition, there will be no restriction in either
the Participating Leases or the Management Agreements which would limit the
Lessee's or AGHI's ability to lease or manage hotels which may compete with
the Company's hotels. Accordingly, the Lessee's and AGHI's decisions relating
to the operation of any of the Initial Hotels that are in competition with
other hotels leased or managed by either of them may not fully reflect the
interests of the Company's stockholders.
Conflicts Relating to Continued Ownership of Other Hotel Properties
After completion of the Offering, AGHI will continue to own and operate
three hotel properties (including two hotels currently under development). One
of these hotels, a Ramada Limited(R) which is located in Madison, Wisconsin,
was not included as an Initial Hotel because it is being offered for sale for
its land value due to its location in a prime retail area. The other two
hotels, the Option Hotels, are Courtyards by Marriott currently under
development (which were not included as part of the Initial Hotels because
construction has not been completed). In connection with the Formation
Transactions, the Company will acquire two-year options and a right of first
refusal to acquire, subject to the receipt of any necessary third-party
consents, the interests of AGHI in either or both of the Option Hotels upon
their opening. See "The Initial Hotels--Options to Purchase and Rights of
First Refusal."
DEPENDENCE ON LESSEE AND PAYMENTS UNDER THE PARTICIPATING LEASES
The Company's ability to make distributions to its stockholders will depend
solely upon the ability of the Lessee to make rent payments under the
Participating Leases (which will be dependent primarily on AGHI's ability to
generate sufficient revenues from the Initial Hotels in excess of operating
expenses). Any failure or delay by the Lessee in making rent payments would
adversely affect the Company's ability to make anticipated distributions to
its stockholders. Such failure or delay by the Lessee may be caused by
reductions in revenue from the Initial Hotels or in the net operating income
of the Lessee or otherwise. In addition, the Lessee is a newly organized
limited purpose entity, and, except for approximately $500,000 in initial
working capital, has limited assets. Although failure on the part of the
Lessee to materially comply with the terms of a Participating Lease (including
failure to pay rent when due) would give the Company the right to terminate
such lease, repossess the applicable property and enforce the payment
obligations under the lease and the Lessee Pledge, the Company would then be
required to find another lessee to lease such property. There can be no
assurance that the Company would be able to find another lessee or that, if
another lessee were found, the Company would be able to enter into a new lease
on favorable terms.
LACK OF CONTROL OVER OPERATIONS OF THE INITIAL HOTELS
The Company also will be dependent on the ability of the Lessee and AGHI to
operate and manage the Initial Hotels. To maintain its status as a REIT, the
Company will not be able to operate the Initial Hotels or any subsequently
acquired hotels. As a result, the Company will be unable to directly implement
strategic business decisions with respect to the operation and marketing of
its hotels, such as decisions with respect to the setting of room rates,
repositioning of a franchise, food and beverage operations and certain similar
matters.
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LACK OF APPRAISALS FOR THE INITIAL HOTELS; NO ASSURANCE AS TO VALUE
In establishing the purchase prices of the Initial Hotels, no independent
appraisals were obtained. In addition, there were no arm's-length negotiations
with respect to the Company's acquisition of interests or contract rights
relating to seven of the Initial Hotels from the Primary Contributors and
certain of their affiliates. Accordingly, there can be no assurance that the
price paid by the Company for the Initial Hotels, including interests and
contract rights acquired from the Primary Contributors and certain of their
affiliates, does not exceed the value of the hotels and other assets acquired
by the Company.
The valuation of the Company has been determined based upon a capitalization
of the Company's estimated Cash Available for Distribution (as described in
"Summary Financial Data") and the other factors discussed under "Underwriting"
rather than an asset-by-asset valuation based on historical cost or current
market value. This methodology has been used because the Company's management
believes it appropriate to value the Company as an ongoing business rather
than with the view to values that could be obtained from a liquidation of the
Company or of individual assets owned by the Company. There can be no
assurance that revenues generated by the Company's hotels will not decline and
that future Cash Available for Distribution will be sufficient to make
expected distributions to the Company's stockholders. If expected
distributions are not made, the market price of the shares of Common Stock
likely would be adversely affected.
HOTEL INDUSTRY RISKS
Operating Risks
The Initial Hotels will be subject to all operating risks common to the
hotel industry. These risks include, among other things, (i) competition for
guests from other hotels, some of which may have greater marketing and
financial resources than the Company, the Lessee and AGHI; (ii) increases in
operating costs due to inflation and other factors, which increases may not
have been offset in recent years, and may not be offset in the future by
increased room rates; (iii) dependence on business and commercial travelers
and tourism, which business may fluctuate and be seasonal; (iv) increases in
energy costs and other expenses of travel, which may deter travelers; and (v)
adverse effects of general and local economic conditions. These factors could
adversely affect the Lessee's ability to generate revenues and to make rent
payments and therefore the Company's ability to make expected distributions to
its stockholders.
Risks of Necessary Operating Costs and Capital Expenditures; Required Hotel
Renovations
Hotels in general, including the Initial Hotels, require ongoing renovations
and other capital improvements, including periodic replacement or
refurbishment of FF&E. Under the terms of the Participating Leases, the
Company is obligated to establish a reserve to pay the cost of certain capital
expenditures at the Initial Hotels and pay for periodic replacement or
refurbishment of FF&E. The Company will control the use of funds in this
reserve. However, if capital expenditures exceed the Company's expectations,
there can be no assurance that sufficient sources of financing will be
available to fund such expenditures. The additional cost of such expenditures
could have an adverse effect on Cash Available for Distribution. In addition,
the Company may acquire hotels in the future that require significant
renovation. Renovation of hotels involves certain risks, including the
possibility of environmental problems, construction cost overruns and delays,
uncertainties as to market demand or deterioration in market demand after
commencement of renovation and the emergence of unanticipated competition from
other hotels.
The Company plans to undertake substantial renovations at certain of the
Initial Hotels during the one-year period following the closing of the
Offering. Such substantial renovations will likely disrupt the operations of
those hotels due to hotel guest rooms and common areas being taken out of
service for extended periods. Moreover, those renovations may result in lower
occupancy, ADR and hotel revenues at those hotels during the renovation
periods than the historical levels shown in this Prospectus.
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Competition for Investment Opportunities
The Company may be competing for investment opportunities with entities that
have substantially greater financial resources than the Company. These
entities generally may be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
hotel operator or the geographic proximity of its investments. Competition
generally may reduce the number of suitable investment opportunities offered
to the Company and increase the bargaining power of property owners seeking to
sell.
Seasonality of Hotel Industry
The hotel industry is seasonal in nature. Generally, hotel revenue for
business hotels is greater in the second and third quarters of a calendar
year, although this may not be true for hotels in major tourist destinations.
Revenue for hotels in tourist areas generally is substantially greater during
the tourist season than other times of the year. Seasonal variations in
revenue at the Initial Hotels may cause quarterly fluctuations in the
Company's lease revenue. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality."
Investment in Single Industry
The Company's current strategy is to acquire interests only in hotels. As a
result, the Company will be subject to risks inherent in investments in a
single industry. The effects on Cash Available for Distribution resulting from
a downturn in the hotel industry may be more pronounced than if the Company
had diversified its investments.
BENEFITS TO PRIMARY CONTRIBUTORS AND OFFICERS
The Primary Contributors and the Company's officers will receive material
benefits from the Formation Transactions, including, but not limited to, (i)
receipt by the Primary Contributors of an aggregate of approximately 1,161,401
OP Units (valued at approximately $23.2 million based on the Offering Price),
(ii) receipt by Messrs. Jorns, Wiles, Barr and Valentine of stock awards of
30,000, 10,000, 6,000 and 4,000 shares of restricted Common Stock,
respectively, which will vest over a four-year period commencing on the date
of grant and which have a value of $600,000, $200,000, $120,000 and $80,000,
respectively, based on the Offering Price, (iii) repayment of an aggregate of
approximately $3.75 million of indebtedness guaranteed by AGHI, (iv) receipt
by Messrs. Jorns, Wiles, Barr and Valentine of options to acquire 225,000,
75,000, 40,000 and 20,000 shares of Common Stock, respectively, at the
Offering Price, which become exercisable in four equal annual installments,
commencing on the date of grant, (v) deferral of certain tax consequences to
officers of the Company from the conveyance of their interests in the Initial
Hotels to the Operating Partnership, and (vi) reimbursement by the Company of
AGHI for approximately $900,000 in direct out-of-pocket expenses incurred in
connection with the acquisition of the Initial Hotels. In addition, the
Lessee, which is owned by Messrs. Jorns, Wiles, Barr, Sowell, Shaw and Shaw,
will be entitled to all cash flow from the Initial Hotels after payment of
rent under the Participating Leases and other operating expenses. AGHI, the
principals of which include Messrs. Jorns, Wiles, Sowell, Shaw and Shaw, will
be entitled to receive from the Lessee management fees equal to a base fee of
1.5% of the gross revenues at the Initial Hotels plus incentive management
fees of up to 2.0% of gross revenues that will be earned incrementally upon
reaching certain gross revenue targets. The Beverage Corporations, eleven of
which are wholly owned by Mr. Jorns, will be entitled to all cash flow from
food and beverage sales generated from those areas of the Initial Hotels where
alcoholic beverages are served after the payment of rent to the Lessee equal
to 30% of gross revenues from such sales; such arrangement will not, however,
reduce Participating Rent payments to the Company, which it is entitled to
receive from such food and beverage sales. See "Formation Transactions."
CONTINGENT LIABILITIES OF SELLING PARTNERSHIPS
Because the Company is acquiring all the partnership interests in the
entities that own eight of the Initial Hotels, the Company may become liable
for certain liabilities, including contingent liabilities of such selling
entities. There is, therefore, a risk that unforeseen liabilities could exist
for which the Company could be liable and which could adversely affect Cash
Available for Distribution.
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RISKS OF LEVERAGE; NO LIMITS ON INDEBTEDNESS
Upon completion of the Offering and the concurrent completion of the
Formation Transactions, the Company will have outstanding indebtedness of
approximately $19.6 million encumbering two of the Initial Hotels. Neither the
Company's Bylaws nor its Charter will limit the amount of indebtedness the
Company may incur. The Company intends to limit consolidated indebtedness
(measured at the time the debt is incurred) to no more than 45.0% of the
Company's investment in hotels. See "Policies and Objectives with Respect to
Certain Activities--Financing." The Company has received a commitment for the
Line of Credit to fund the acquisition of additional hotels, renovations and
capital improvements to hotels and working capital. The Line of Credit will be
limited to the maximum principal amount of $100 million and, among other
limitations, to 40.0% of the value or cost of the hotels which secure such
line. The Line of Credit initially will be secured by a first mortgage lien on
eleven of the Initial Hotels. Other hotels acquired in the future may be added
as security for the Line of Credit. The Line of Credit will require lender
approval of certain Company actions, including new hotel development,
franchise conversions relating to the hotels which secure the Line of Credit,
and approval of lessees for such hotels. Subject to the limitations described
above and other limitations contained in the Line of Credit, the Company may
borrow additional amounts from the same or other lenders in the future, or may
issue corporate debt securities in public or private offerings. Certain of
such additional borrowings may be secured by hotels owned by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and "Policies and Objectives
with Respect to Certain Activities--Financing" and "The Initial Hotels--Line
of Credit."
There can be no assurances that the Company will be able to meet its debt
service obligations and, to the extent that it cannot, the Company risks the
loss of some or all of its assets, including the Initial Hotels, to
foreclosure. Economic conditions could result in higher interest rates, which
could increase debt service requirements on variable rate debt, such as the
Line of Credit, and could reduce the amount of Cash Available for
Distribution. Adverse economic conditions could cause the terms on which
borrowings become available to be unfavorable. In such circumstances, if the
Company is in need of capital to repay indebtedness in accordance with its
terms or otherwise, it could be required to liquidate one or more investments
in hotel properties that at times may result in a financial loss to the
Company.
LACK OF OPERATING HISTORY OR REVENUES; HISTORY OF LOSSES
The Company has been recently organized and has no operating history. There
can be no assurance that the Company will be able to generate sufficient Cash
Available for Distribution to make anticipated distributions to its
stockholders. The Company also will be subject to the risks generally
associated with the formation of any new business. Certain of the Initial
Hotels experienced net losses in recent years. Accordingly, there can be no
assurance that the Company will not experience net losses in the future.
RISK OF HIGH DISTRIBUTION PAYOUT PERCENTAGE
The Company's estimated annual distribution rate to stockholders is 95.0% of
the Company's estimated Cash Available for Distribution for the twelve months
ended March 31, 1996. See "Distribution Policy." Should actual Cash Available
for Distribution be less than estimated Cash Available for Distribution, the
Company may not be able to achieve and maintain its proposed initial
distribution rate.
CONTINGENT OBLIGATION TO CONSTRUCT ADDITIONAL HOTEL ROOMS
Pursuant to the terms of the ground lease relating to the Fred Harvey
Albuquerque Airport Hotel, the Company will be required, at its expense, to
build 100 additional guest rooms if the occupancy rate at the hotel is 85.0%
or greater for 24 consecutive months. The Company could be required to build
the additional rooms even if the Company does not deem such capital
expenditure to be in its economic interest and even if financing is not
available or is available only on unattractive terms, in order to complete
such construction. In addition, construction of the additional guest rooms
would require the consent of the lenders under the Line of Credit. Failure to
construct the additional rooms could result in a default under such ground
lease. For the twelve months ended March 31, 1996, the occupancy rate at the
hotel was 83.3%.
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IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock in the Offering will experience
immediate dilution of $3.91 per share in the net tangible book value per share
of Common Stock from the Offering Price. See "Dilution."
POSSIBLE ADVERSE EFFECTS OF SHARES AVAILABLE FOR FUTURE SALE UPON MARKET PRICE
OF COMMON STOCK
Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect the prevailing market price for the
Common Stock. The Operating Partnership, in connection with the Formation
Transactions, will issue to persons other than the Company an aggregate of
2,511,106 OP Units, and the Company will issue 155,518 shares of restricted
Common Stock. These OP Units may be exchanged for cash based on their fair
market value or, at the Company's option, for shares of Common Stock on a one-
for-one basis. In certain circumstances, the Company may not be able to
exercise its option to satisfy such partners' exchange rights with Common
Stock because of tax or securities law limitations. An exercise of exchange
rights in such circumstances could adversely affect the Operating
Partnership's liquidity because it would then be required to satisfy such
rights with cash. The Exchange Agreement (as defined in "Partnership
Agreement--Exchange Rights") prohibits the exchange of OP Units for a period
of one year following the closing of the Offering. In addition, the officers
and directors of the Company, the Primary Contributors and the Plan have
agreed, subject to certain limited exceptions, not to offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock (or any securities
convertible into or exercisable for shares of Common Stock) for a one-year
period after the date of this Prospectus (the "Lock-up Period") without the
prior written consent of the Company and Smith Barney Inc. See "Underwriting."
The Registration Rights Agreement (as defined in "Partnership Agreement--
Registration Rights") requires the Company to register all restricted shares
of Common Stock under the Act, including shares issuable upon the exchange of
OP Units. As a result, at the conclusion of the one-year restriction period
and the Lock-up Period, all shares of Common Stock issued in connection with
the Formation Transactions or acquired upon exchange of OP Units may be sold
in the public market. In addition, 850,000 shares of Common Stock (exclusive
of stock awards to be issued under the 1996 Plan as described below) will be
reserved for issuance pursuant to the 1996 Plan and 100,000 shares also will
be reserved for issuance to non-employee directors pursuant to the Directors'
Plan. Stock awards equal to an aggregate of 50,000 shares of restricted Common
Stock that will vest over a four-year period and options to purchase 400,000
shares of Common Stock at the Offering Price will be granted to the Company's
executive officers under the 1996 Plan and the Company's directors under the
Directors' Plan in connection with the Formation Transactions. See
"Management--Stock Incentive Plans."
COMPETITION FOR MANAGEMENT TIME
Messrs. Jorns, Wiles, Barr and Valentine will be employed as executive
officers of the Company and will continue to be employed and compensated by
AGHI and will necessarily be subject to competing demands on their time. See
"--Conflicts of Interest" and "Management--Employment Agreements."
REAL ESTATE INVESTMENT RISKS
General Risks
The Company's investments will be subject to varying degrees of risk
generally incident to the ownership of real property. The underlying value of
the Company's hotel investments and the Company's income and ability to make
distributions to its stockholders is dependent upon the ability of the Lessee
and AGHI to operate the Initial Hotels in a manner sufficient to maintain or
increase revenues and to generate sufficient revenue in excess of operating
expenses to make rent payments under the Participating Leases. Income from the
Initial Hotels may be adversely affected by changes in national economic
conditions, changes in local market conditions due to changes in general or
local economic conditions and neighborhood characteristics, changes in
interest rates and in the availability, cost and terms of mortgage funds, the
impact of present or future environmental legislation and compliance with
environmental laws, the ongoing need for capital improvements, particularly in
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older structures, changes in real estate tax rates and other operating
expenses, adverse changes in governmental rules and fiscal policies, civil
unrest, acts of God, including earthquakes and other natural disasters (which
may result in uninsured losses), acts of war, adverse changes in zoning laws,
and other factors which are beyond the control of the Company.
Dependence on Particular Regions
The Initial Hotels are located throughout the United States, but 21.6% and
18.5% of the total number of the hotel guest rooms of the Initial Hotels
(representing 21.3% and 18.1% of the Company's estimated Participating Rent
revenues for the twelve months ended March 31, 1996) are located at the
Dallas/Fort Worth Airport and in the San Jose area, respectively. The
Company's cash flow, ability to make proposed distributions to its
stockholders and the value of the Common Stock will be affected by, to a large
degree, economic conditions and the demand for hotel rooms in the Dallas/Fort
Worth and San Jose markets in which these four Initial Hotels are located.
Value and Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the Company
to vary its portfolio in response to changes in economic and other conditions
will be limited. Because management believes it is appropriate to value the
Company as an ongoing business rather than through liquidation values of the
Company or the Initial Hotels, the valuation of the Company has been
determined primarily based upon a capitalization of the Company's estimated
Cash Available for Distribution and other factors discussed under
"Underwriting," rather than on the basis of each property's cost or appraised
value. See "Underwriting." If the Company must sell an investment, there can
be no assurance that the Company will be able to dispose of it in the time
period it desires or that the sale price of any investment will recoup or
exceed the amount of the Company's investment.
Property Taxes and Casualty Insurance
Each Initial Hotel is subject to real and personal property taxes. Under the
Participating Leases, the Company is required to pay real and personal
property taxes. The real and personal property taxes on hotel properties in
which the Company invests may increase or decrease as property tax rates
change and as the properties are assessed or reassessed by taxing authorities.
Each Initial Hotel will be covered by casualty insurance, which, pursuant to
the Participating Leases, must be paid by the Company, the rates for which may
increase or decrease depending on claims experience. The increase in property
taxes or casualty insurance premiums could adversely affect the Company's
ability to make expected distributions to its stockholders.
Consents of Lessors Required for Sale and Renovation of Certain Initial
Hotels
The Fred Harvey Albuquerque Airport Hotel, the Courtyard by Marriott-
Meadowlands, the Le Baron Airport Hotel and the Hilton Hotel-Toledo are each
subject to ground leases, and the Hotel Maison de Ville is subject to a space
lease for its restaurant facilities and certain of its guest rooms, each with
third-party lessors. Any proposed sale of such hotels by the Company or any
proposed assignment of the Company's leasehold interest in the ground leases
and the space lease, as well as the subletting to the Lessee and the proposed
renovation of the Fred Harvey Albuquerque Airport Hotel and the Le Baron
Airport Hotel, may require the consent of the respective third-party lessors.
There can be no assurance that the Company will be able to obtain such
requisite consents. As a result, the Company may not be able to sell, assign,
transfer or convey its interest in these Initial Hotels in the future or
commence the proposed renovations at the Le Baron Airport Hotel and the Fred
Harvey Albuquerque Airport Hotel absent the consent of such third-party
lessors, even if such transactions or renovations may be in the best interests
of the stockholders of the Company.
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Environmental Matters
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of future legislation. Under various federal,
state and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
property. Such laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of such hazardous or toxic
substances. In addition, the presence of hazardous or toxic substances, or the
failure to remediate such property properly, may adversely affect the owner's
ability to borrow by using such real property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may also
be liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not such facility is or ever was
owned or operated by such person. Certain environmental laws and common law
principles could be used to impose liability for releases of hazardous
materials, including asbestos-containing materials ("ACMs"), into the
environment, and third parties may seek recovery from owners or operators of
real properties for personal injury associated with exposure to released ACMs
or other hazardous materials.
Environmental laws also may impose restrictions on the manner in which a
property may be used or transferred or in which businesses may be operated, and
these restrictions may require expenditures. In connection with the ownership
of the Initial Hotels, the Company or the Lessee may be potentially liable for
any such costs. The cost of defending against claims of liability or
remediating contaminated property and the cost of complying with environmental
laws could materially adversely affect the Company's results of operations and
financial condition. Phase I environmental site assessments ("ESAs") have been
conducted at all of the Initial Hotels by a qualified independent environmental
engineer. The purpose of Phase I ESAs is to identify potential sources of
contamination for which the Initial Hotels may be responsible and to assess the
status of environmental regulatory compliance. The ESAs have not revealed any
environmental liability or compliance concerns that the Company believes would
have a material adverse effect on the Company's business, assets, results of
operations or liquidity, nor is the Company aware of any material environmental
liability or concerns. Nevertheless, it is possible that these ESAs did not
reveal all environmental liabilities or compliance concerns or that material
environmental liabilities or compliance concerns exist of which the Company is
currently unaware.
Compliance with Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990, as amended (the "ADA"),
all public accommodations are required to meet certain federal requirements
related to access and use by disabled persons. A determination that the Company
is not in compliance with the ADA could result in imposition of fines or an
award of damages to private litigants. If the Company were required to make
modifications to its hotels to comply with the ADA, the Company's ability to
make expected distributions to its stockholders could be adversely affected.
Uninsured and Underinsured Losses
Each Participating Lease requires comprehensive insurance to be maintained on
each of the Initial Hotels, including liability, fire and extended coverage.
Management believes such specified coverage is of the type and amount
customarily obtained for or by an owner of hotels. Leases for subsequently
acquired hotels will contain similar provisions. However, there are certain
types of losses, generally of a catastrophic nature, such as those caused by
earthquakes and floods, that may be uninsurable or not economically insurable.
The Company's Board of Directors and management will use their discretion in
determining amounts, coverage limits and deductibility provisions of insurance,
with a view to maintaining appropriate insurance coverage on the Company's
investments at a reasonable cost and on suitable terms. This may result in
insurance coverage that, in the event of a substantial loss, would not be
sufficient to pay the full current market value or current replacement cost of
the Company's lost investment. Inflation, changes in building codes and
ordinances, environmental considerations and other factors also might make it
infeasible to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the insurance
proceeds received by the Company might not be adequate to restore its economic
position with respect to such property.
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Acquisition and Development Risks
The Company intends to pursue acquisitions of additional hotels and, under
appropriate circumstances, may pursue development opportunities. Acquisitions
entail risks that investments will fail to perform in accordance with
expectations and that estimates of the cost of improvements necessary to
market and acquire hotels will prove inaccurate, as well as general investment
risks associated with any new real estate investment. New project development
is subject to numerous risks, including risks of construction delays or cost
overruns that may increase project costs, new project commencement risks such
as receipt of zoning, occupancy and other required governmental approvals and
permits and the incurrence of development costs in connection with projects
that are not pursued to completion. In addition, the Line of Credit will
provide that the lenders thereunder must consent to any development activities
by the Company other than development in connection with the limited expansion
of existing hotels. The fact that the Company must distribute 95.0% of REIT
taxable income in order to maintain its qualification as a REIT may limit the
Company's ability to rely upon lease income from the Initial Hotels or
subsequently acquired hotels to finance acquisitions or new developments. As a
result, if debt or equity financing were not available on acceptable terms,
further acquisitions or development activities might be curtailed or Cash
Available for Distribution might be adversely affected.
TAX RISKS
Failure to Qualify as a REIT
The Company intends to operate so as to qualify as a REIT for federal income
tax purposes commencing with its taxable year ending December 31, 1996.
A REIT generally is not taxed at the corporate level on income it currently
distributes to its stockholders, as long as it distributes at least 95.0% of
its REIT taxable income. Although the Company believes that it will be
organized and will operate in such a manner so as to qualify as a REIT, no
assurance can be given that the Company will be organized or will be able to
operate in a manner so as to qualify as a REIT or remain so qualified.
Qualification as a REIT involves the application of highly technical and
complex Code provisions for which there are only limited judicial or
administrative interpretations. The determination of various factual matters
and circumstances not entirely within the Company's control may affect its
ability to qualify and to continue to qualify as a REIT. The complexity of
these provisions and of the applicable income tax regulations that have been
promulgated under the Code is greater in the case of a REIT that holds its
assets through a partnership, such as the Company. Moreover, no assurance can
be given that legislation, new regulations, administrative interpretations or
court decisions will not change the tax laws with respect to qualification as
a REIT or the federal income tax consequences of such qualification. The
Company will rely on the opinion of Battle Fowler LLP, counsel to the Company
("Counsel"), to the effect that, based on various assumptions relating to the
organization and operation of the Company and representations made by the
Company as to certain factual matters, the Company's proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT. Such legal opinion will not be binding on the IRS. See
"Federal Income Tax Considerations."
If the Company fails to qualify as a REIT in any taxable year, the Company
will not be allowed a deduction for distributions to its stockholders in
computing its taxable income and will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
the applicable corporate rate. In addition, unless it were entitled to relief
under certain statutory provisions, the Company would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This disqualification would reduce the funds of the
Company available for investment or distribution to stockholders because of
the additional tax liability of the Company for the year or years involved.
If the Company were to fail to qualify as a REIT, it no longer would be
subject to the distribution requirements of the Code and, to the extent that
distributions to stockholders would have been made in anticipation of the
Company's qualifying as a REIT, the Company might be required to borrow funds
or to liquidate certain of its assets to pay the applicable corporate income
tax. Although the Company currently intends
28
<PAGE>
to operate in a manner designed to qualify as a REIT, it is possible that
future economic, market, legal, tax or other considerations may cause the
Company's Board of Directors to decide to revoke the REIT election. See
"Federal Income Tax Considerations."
Adverse Effects of REIT Minimum Distribution Requirements
To obtain the favorable tax treatment accorded to REITs under the Code, the
Company generally will be required each year to distribute to its stockholders
at least 95% of its REIT taxable income. The Company will be subject to income
tax on any undistributed REIT taxable income and net capital gain, and to a
4.0% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the
sum of (i) 85.0% of its ordinary income for the calendar year, (ii) 95.0% of
its capital gain net income for such year, and (iii) 100.0% of its
undistributed income from prior years.
The Company intends to make distributions to its stockholders to comply with
the distribution provisions of the Code and to avoid federal income taxes and
the nondeductible 4.0% excise tax. The Company's income will consist primarily
of the Company's share of the income of the Operating Partnership, and the
Company's cash flow will consist primarily of its share of distributions from
the Operating Partnership. Differences in timing between the receipt of income
and the payment of expenses in arriving at taxable income (of the Company or
the Operating Partnership) and the effect of nondeductible capital
expenditures, the creation of reserves or required debt amortization payments
could require the Company to borrow funds through the Operating Partnership on
a short-term or long-term basis to meet the distribution requirements that are
necessary to continue to qualify as a REIT. In such circumstances, the Company
might need to borrow funds to avoid adverse tax consequences even if
management believes that the then prevailing market conditions generally are
not favorable for such borrowings or that such borrowings are not advisable in
the absence of such tax considerations.
Distributions by the Operating Partnership will be determined by its sole
general partner, a wholly owned subsidiary of the Company, through the
Company's Board of Directors and will be dependent on a number of factors,
including the amount of Cash Available for Distribution, the Operating
Partnership's financial condition, any decision by the Board of Directors to
reinvest funds rather than to distribute such funds, the Operating
Partnership's capital expenditure requirements, the annual distribution
requirements under the REIT provisions of the Code and such other factors as
the Board of Directors deems relevant. There is no assurance that the Company
will be able to continue to satisfy the annual distribution requirement so as
to qualify as a REIT. See "Federal Income Tax Considerations--Requirements for
Qualification as a REIT--Annual Distribution Requirements."
Consequences of Failure to Qualify as Partnerships
The Operating Partnership will receive an opinion of Counsel stating that,
assuming that the Operating Partnership and each Subsidiary Partnership (as
defined in "The Company--The Operating Partnership") is being operated in
accordance with its respective organizational documents, the Operating
Partnership and each of the Subsidiary Partnerships will be treated as a
partnership, and not as a corporation, for federal income tax purposes. Such
opinion is not binding on the IRS. If the IRS were to challenge successfully
the status of the Operating Partnership or any Subsidiary Partnership as a
partnership for federal income tax purposes, the Operating Partnership or the
affected Subsidiary Partnership would be taxable as a corporation. In such
event, the Company would cease to qualify as a REIT for federal income tax
purposes. The imposition of a corporate tax on the Operating Partnership or
any of the Subsidiary Partnerships, with a concomitant loss of REIT status of
the Company, would reduce substantially the amount of Cash Available for
Distribution. See "Federal Income Tax Considerations--Tax Aspects of the
Operating Partnership."
ERISA
Depending upon the particular circumstances of the plan, an investment in
Common Stock may be an appropriate investment for an ERISA Plan, a Qualified
Plan or an IRA. In deciding whether to purchase Common
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<PAGE>
Stock, a fiduciary of an ERISA Plan, in consultation with its advisors, should
carefully consider its fiduciary responsibilities under ERISA, the prohibited
transaction rules of ERISA and the Code, and the effect of the "plan asset"
regulations issued by the U.S. Department of Labor.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS; APPROVAL FOR BRAND
CONVERSIONS
Ten of the Initial Hotels are subject to franchise agreements. In addition,
hotels in which the Company invests subsequently may be operated pursuant to
franchise agreements. The continuation of such franchise agreements is subject
to specified operating standards and other terms and conditions. Franchisors
typically inspect licensed properties periodically to confirm adherence to
operating standards. Action or inaction on the part of any of the Company, the
Lessee or AGHI could result in a breach of such standards or other terms and
conditions of the Franchise Licenses and could result in the loss or
cancellation of a franchise license. It is possible that a franchisor could
condition the continuation of a franchise license on the completion of capital
improvements which the Board of Directors determines are too expensive or
otherwise unwarranted in light of general economic conditions or the operating
results or prospects of the affected hotel. In that event, the Board of
Directors may elect to allow the franchise license to lapse. In any case, if a
franchise is terminated, the Company and the Lessee may seek to obtain a
suitable replacement franchise or to operate the Initial Hotel independent of
a franchise license. The loss of a franchise license could have a material
adverse effect upon the operations or the underlying value of the hotel
covered by the franchise because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the
franchisor.
The Company intends to convert seven of the Initial Hotels that operate
under franchise brands into hotels that operate under different franchise
brands. While the Company has obtained preliminary franchisor approval for
such conversions, completion of such conversions is dependent upon, among
other things, entering into definitive franchise agreements with the new
franchisors. Failure to effect such conversions could have a material adverse
effect on the Company's results of operations.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS
Certain provisions of Maryland law and of the Company's Charter and Bylaws
may have the effect of discouraging a third party from making an acquisition
proposal for the Company and could delay, defer or prevent a transaction or a
change in control of the Company under circumstances that could give the
holders of Common Stock the opportunity to realize a premium over the then
prevailing market prices of the Common Stock. Such provisions include the
following:
Ownership Limitation
In order for the Company to maintain its qualification as a REIT under the
Code, not more than 50.0% in value of the outstanding shares of stock of the
Company may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) at any time during the last
half of the Company's taxable year (other than the first year for which the
election to be treated as a REIT has been made). Furthermore, if any
stockholder or group of stockholders of the Lessee owns, actually or
constructively, 10.0% or more in value of the stock of the Company, the Lessee
could become a Related Party Tenant (as defined in "Federal Income Tax
Consequences--Requirements for Qualification as a REIT--Income Tests") of the
Company, which would result in loss of REIT status for the Company. For the
purpose of preserving the Company's REIT qualification, the Company's Charter
prohibits direct or indirect ownership (taking into account applicable
ownership provisions of the Code) of more than 9.8% of any class of the
Company's outstanding stock by any person (the "Ownership Limitation"),
subject to an exception that permits mutual funds and certain other entities
to own as much as 15.0% of any class of the Company's stock in appropriate
circumstances (the "Look-Through Ownership Limitation"). Generally, the stock
owned by affiliated owners will be aggregated for purposes of the Ownership
Limitation. The Ownership Limitation could have the effect of delaying,
deferring or preventing a transaction or a change in control of the Company in
which holders of some, or a majority, of the Common
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<PAGE>
Stock might receive a premium for their Common Stock over the then prevailing
market price or which such holders might believe to be otherwise in their best
interests. See "Description of Capital Stock--Restrictions on Transfer" and
"Federal Income Tax Considerations--Requirements for Qualification as a REIT."
Preferred Stock
The Charter authorizes the Board of Directors to issue up to 20,000,000
shares of preferred stock, $0.01 par value per share (the "Preferred Stock"),
and to establish the preferences, rights, voting powers and other terms of any
shares issued. See "Description of Capital Stock--Preferred Stock." Although
the Board of Directors has no current intention to issue shares of Preferred
Stock in the foreseeable future, it could establish a class or a series of
Preferred Stock that could, depending on the terms of such class or series,
delay, defer or prevent a transaction or a change in control of the Company
that might involve a premium price for the Common Stock or otherwise be in the
best interest of the stockholders. No Preferred Stock will be issued or
outstanding as of the closing of the Offering.
Staggered Board
The Board of Directors will be divided into three classes of directors. The
initial terms of the first, second and third classes will expire in 1997, 1998
and 1999, respectively. Directors of each class will be chosen for three-year
terms upon the expiration of the current class terms, and, beginning in 1997
and each year thereafter, one class of directors will be elected by the
stockholders. Subject to the rights of any holder of any shares of Preferred
Stock then outstanding, a director may be removed, with or without cause, by
the affirmative vote of 75.0% of the votes entitled to be cast for the
election of directors, which super-majority vote may have the effect of
delaying, deferring or preventing a change of control of the Company. The
staggered terms of directors may reduce the possibility of a tender offer or
an attempt to change control of the Company even though a tender offer or
change in control might be in the best interests of the stockholders. See
"Certain Provisions of Maryland Law and of the Company's Charter and Bylaws--
Number of Directors; Classification of the Board of Directors."
Partial Exemption from Maryland Business Combination Law
Under the Maryland General Corporation Law, as may be amended from time to
time (the "MGCL"), certain "business combinations" (including certain
issuances of equity securities) between a Maryland corporation such as the
Company and any person who owns 10.0% or more of the voting power of the
corporation's shares (an "Interested Shareholder") or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Shareholder became an Interested Shareholder. Thereafter, any such business
combination must be approved by two super-majority votes unless, among other
conditions, the holders of shares of Common Stock receive a minimum price (as
defined in the MGCL) for their stock and the consideration is received in cash
or in the same form as previously paid by the Interested Shareholder for its
shares. As permitted by the MGCL, the Charter contains an exemption for any
"business combination" involving Messrs. Jorns, Wiles, Barr, Sowell, Shaw and
Shaw and persons affiliated with them. Accordingly, the five-year prohibition
and the super-majority vote requirements described above will not apply to
"business combinations" between any such persons and the Company. As a result,
Messrs. Jorns, Wiles, Barr, Sowell, Shaw and Shaw may be able to enter into
"business combinations" with the Company, which may or may not be in the best
interests of the other stockholders, without compliance by the Company with
the super-majority vote requirements and other provisions of the statute. See
"Certain Provisions of Maryland Law and of the Company's Charter and Bylaws--
Business Combinations."
Maryland Control Share Acquisition Statute
In addition to certain provisions of the Charter, the Maryland control share
acquisition statutes may have the effect of discouraging a third party from
making an acquisition proposal for the Company. The MGCL provides that
"control shares" of a Maryland corporation acquired in a "control share
acquisition" have no
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<PAGE>
voting rights except to the extent approved by a vote of two-thirds of the
votes eligible under the statute to be cast on the matter. "Control shares"
are voting shares of stock, which, if aggregated with all other such shares of
stock previously acquired by the acquiror or in respect of which the acquiror
is able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority, or (iii) a majority of all voting power. Control
shares do not include shares that the acquiring person is then entitled to
vote as a result of having previously obtained shareholder approval. A
"control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
If voting rights are not approved at a meeting of stockholders then, subject
to certain conditions and limitations, the issuer may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for control shares are approved at
a stockholders' meeting and the acquiror becomes entitled to vote a majority
of the shares of stock entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition.
The Company's Bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any persons of shares of stock
of the Company. There can be no assurance that such provision will not be
amended or eliminated at any point in the future. If the foregoing exemption
in the Company's Bylaws is rescinded, the control share acquisition statute
could have the effect of delaying, deferring, preventing or otherwise
discouraging offers to acquire the Company and of increasing the difficulty of
consummating any such offer.
NO PRIOR MARKET FOR COMMON STOCK
Prior to the Offering, there has been no public market for the Common Stock.
The Common Stock has been approved for listing on the New York Stock Exchange,
Inc. ("NYSE"), subject to official notice of issuance. See "Underwriting." The
Offering Price may not be indicative of the market price for the Common Stock
after the Offering, and there can be no assurance that an active public market
for the Common Stock will develop or continue after the Offering. See
"Underwriting" for a discussion of factors to be considered in establishing
the initial public offering price. There also can be no assurances that, upon
listing, the Company will continue to meet the criteria for continued listing
of the Common Stock on the NYSE.
RELIANCE ON BOARD OF DIRECTORS AND MANAGEMENT
Stockholders will have no right or power to take part in the management of
the Company except through the exercise of voting rights on certain specified
matters. The Board of Directors will be responsible for directing the
management of the business and affairs of the Company. The Company will rely
upon the services and expertise of its management for strategic business
direction.
ABILITY OF BOARD TO CHANGE POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, financing, growth, operations, debt capitalization and
distributions, will be determined by its Board of Directors. The Board of
Directors may amend or revise these and other policies from time to time
without a vote of the stockholders of the Company. See "Policies and
Objectives with Respect to Certain Activities."
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that may influence the price of the Common Stock in
public trading markets will be the annual yield from distributions by the
Company on the Common Stock as compared to yields on certain financial
instruments. Thus, an increase in market interest rates will result in higher
yields on certain financial instruments, which could adversely affect the
market price of the Common Stock.
32
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THE COMPANY
GENERAL
The Company, which intends to operate as a REIT, has been formed to own
hotel properties and to continue and expand the hotel acquisition, development
and repositioning operations of AGHI. Upon completion of the Offering and the
Formation Transactions, the Company will own thirteen hotels containing an
aggregate of 3,012 guest rooms, located in nine states. AGHI, which will
manage the Initial Hotels, was founded in 1981 by Mr. Jorns, the Company's
Chairman of the Board, Chief Executive Officer and President. As of March 31,
1996, AGHI operated and managed 74 hotels in 24 states containing an aggregate
of more than 13,865 guest rooms. According to Hotel & Motel Management, a
leading hotel trade publication, AGHI was the nation's fourth largest
independent hotel management company in 1995, based upon number of hotels
under management. The Company's operations will focus on the ownership of
full-service hotels in major metropolitan markets, including hotels that are
in close proximity to the airports that serve such markets, and, to a lesser
extent, prominent hotels in major tourist areas. The Company expects to
capitalize on AGHI's expertise to achieve revenue growth at the Company's
hotels. Pursuant to the terms of the Management Agreements, and for so long as
AGHI is managing hotels owned by the Company, AGHI has agreed not to own or
develop any additional hotel properties. The Company will not have any
economic interest in AGHI's hotel management operations.
The Initial Hotels include eleven full-service hotels and two limited-
service hotels, and are diversified by franchise affiliation. For the twelve
months ended March 31, 1996, the Initial Hotels had a weighted average
occupancy of 73.0% and an ADR of $70.97. Ten of the Initial Hotels operate
under franchise licenses with nationally recognized hotel companies, which
include one Hilton, one Courtyard by Marriott, six Holiday Inns, one Hampton
Inn and one Days Inn. Six of the Initial Hotels are located in close proximity
to major airports, including two Holiday Inns in Dallas/Fort Worth, a Holiday
Inn in New Orleans, a Hampton Inn in Richmond, and independent hotels in San
Jose and Albuquerque. One Initial Hotel, a Days Inn, is located in the major
tourist area of Ocean City, Maryland. The remaining six Initial Hotels are
located in major metropolitan markets, including a Hilton in Toledo, Ohio, a
Courtyard by Marriott in Secaucus, New Jersey (immediately adjacent to New
York City), a Holiday Inn in San Diego, California, a Holiday Inn in San Jose,
California, a Holiday Inn Select in Madison, Wisconsin, and a prestigious
independent hotel affiliated with the Small Luxury Hotels located in the
French Quarter section of New Orleans, Louisiana. Certain of the Initial
Hotels, including the Holiday Inn Select in Madison, Wisconsin, and the
Holiday Inn Dallas DFW Airport South in Irving, Texas, have garnered
prestigious awards, including Holiday Inn's Torchbearer (awarded to those
hotels that are deemed to be leaders in the community, based on their
involvement in community and civic affairs), Modernization (awarded to those
hotels that complete the most effective total renovation projects), Quality
Excellence (awarded to those hotels that, based upon a quality indexing
system, noticeably exceed guest expectations), and Hotel of the Year (as
determined by a panel of three members of Holiday Inn Worldwide senior
management) awards.
The Company will seek to achieve revenue growth principally through the
acquisition and subsequent product and brand repositioning of hotels.
Consistent with this strategy, the Company has scheduled approximately $24.6
million (an average of approximately $13,400 per guest room) to be spent on
renovations and refurbishments within one year after the completion of the
Offering at seven of the Initial Hotels to convert the hotels to leading
franchise brands and reposition such hotels for future revenue growth. Upon
completion of the franchise conversions, the Initial Hotels will consist of
one Wyndham Hotel, two DoubleTree Hotels, two Crowne Plazas, one Hilton, one
Courtyard by Marriott, one Holiday Inn Select (the premium Holiday Inn brand),
two Holiday Inns, two Hampton Inns and one luxury independent hotel. There can
be no assurance that such brand conversions and hotel repositionings will
occur as planned.
The Company intends to capitalize on the comprehensive hotel acquisition,
development, and operations experience of the Company's senior management
team, including Mr. Jorns, the founder of AGHI, the Company's Chairman of the
Board, Chief Executive Officer and President, Mr. Wiles, the Company's
Executive Vice President, Mr. Barr, the Company's Executive Vice President and
Chief Financial Officer, and
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Mr. Valentine, the Company's Senior Vice President--Acquisitions. These four
executive officers have an average of over 25 years of experience in the real
estate and lodging industries and the finance and accounting fields. The
Company believes that AGHI's extensive hotel operations and the significant
industry relationships of the Company's senior management team will provide
the Company with a competitive advantage in identifying opportunities for
strategic acquisitions of hotel properties before they are widely marketed for
sale.
In order to qualify as a REIT, the Company may not operate hotels. As a
result, the current principals of AGHI (including Messrs. Jorns and Wiles) and
Mr. Barr have formed the Lessee, which will lease the Initial Hotels from the
Company pursuant to separate Participating Leases. The Participating Leases
are designed to allow the Company to achieve substantial participation in any
future growth of revenues generated at the Initial Hotels. Messrs. Jorns,
Wiles and Barr own collectively an approximate 23.0% interest in the Lessee.
The Lessee, in turn, will enter into separate Management Agreements with AGHI
to operate the Initial Hotels. The terms of the Participating Leases, the
Management Agreements and related agreements have been structured to align the
interests of the Lessee and AGHI with the interests of the Company's
stockholders. See "The Initial Hotels--The Participating Leases" and "--The
Management Agreements."
The Company attributes the success of the Initial Hotels to the slowing in
recent years of new hotel construction nationally and improving economic
conditions, both of which followed an extended period of unprofitable industry
performance in the late 1980's and early 1990's. According to Smith Travel
Research, for 1994 and 1995, occupancy rates for the U.S. lodging industry
were 64.7% and 65.5% respectively, reflecting a 2.9% increase in guest room
demand from 1994 to 1995 and a 1.7% increase in guest room supply during the
same period. The Company believes these improved lodging market fundamentals
have created a favorable environment for internal growth at the Initial Hotels
and for acquisitions. The following table compares occupancy, ADR, and REVPAR
at the Initial Hotels with comparable data for all midscale and lower upscale
U.S. hotels as well as all U.S. hotels for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Occupancy
Initial Hotels(1).................. 71.6% 71.7% 72.9% 70.6% 70.7%
All Midscale Hotels(2)............. 63.0 64.1 64.6 59.5 59.6
All Lower Upscale(2)............... 67.3 69.9 70.2 67.8 68.3
All U.S. Hotels(2)................. 63.0 64.7 65.5 60.3 61.1
ADR(3)
Initial Hotels(1).................. $57.65 $62.28 $69.19 $65.97 $73.33
All Midscale Hotels(2)............. 54.55 56.23 58.97 57.37 60.68
All Lower Upscale(2)............... 71.98 74.72 78.81 78.74 83.67
All U.S. Hotels(2)................. 61.93 64.24 67.34 67.83 72.01
REVPAR(4)
Initial Hotels(1).................. $41.26 $44.67 $50.46 $46.56 $51.81
All Midscale Hotels(2)............. 34.36 36.04 38.08 34.13 36.19
All Lower Upscale(2)............... 48.44 52.21 55.36 53.39 57.18
All U.S. Hotels(2)................. 39.01 41.56 44.11 40.93 44.02
</TABLE>
- --------
(1) The occupancy, ADR and REVPAR calculations for the Initial Hotels are
derived from room revenue that is included in the audited financial data
relating to each of the Initial Hotels for each of the periods indicated
except for the following hotels for which information is audited only from
the date of acquisition of such hotel by AGHI (such date is set forth in
parentheses): the Hotel Maison de Ville (August 1994), the Holiday Inn
Dallas DFW Airport West (June 1995), the Hampton Inn Richmond Airport
(December 1994) and the Courtyard by Marriott-Meadowlands (December 1993).
The occupancy, ADR and REVPAR information for the periods prior to the
date of acquisition of the hotels have been provided to management by the
prior owners of such hotels.
(2) Source: Smith Travel Research. Smith Travel Research has not provided any
form of consultation, advice or counsel regarding any aspect of, and is in
no way associated with, the Offering. The "Midscale" category
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includes 22 hotel chains designated by Smith Travel Research as "Midscale"
hotels. The "Lower Upscale" category includes 17 hotel chains designated by
Smith Travel Research as "Lower Upscale" hotels. Eight of the franchise
brands of the Initial Hotels are currently within the "Midscale" category.
The Company expects that upon completion of its subsequent product and brand
repositioning program, six of the franchise brands of the Initial Hotels
will be within the "Lower Upscale" category.
(3) Determined by dividing total room revenue by total rooms sold.
(4) Determined by dividing total room revenue by total available rooms.
Management believes that the full-service hotel segment, in particular, has
potential for improved performance as the economy continues to improve and as
business and leisure travel activity increases. The Company has targeted the
full-service segment of the hotel industry due, in part, to its belief that the
approximate three- to five-year lead time from conception to completion of a
full-service hotel in the markets in which the Company intends to focus
represents a significant barrier to entry that will limit competition resulting
from a new supply of guest rooms. Management also believes that the full-
service segment of the market will continue to offer numerous opportunities to
acquire hotels at attractive multiples of cash flow, and at discounts to
replacement value, including underperforming hotels that may benefit from new
management. The Company believes that a substantial number of hotels meeting
its investment criteria are available at attractive prices in the markets where
AGHI currently operates hotels and in markets which the Company believes have
attractive economic characteristics. The Company believes its acquisition
capabilities will be enhanced by the fact that its initial capital structure
provides significant financial flexibility. Upon completion of the Offering,
the Company will have approximately $19.6 million of outstanding indebtedness.
The Company intends to limit consolidated indebtedness (measured at the time
the debt is incurred) to no more than 45.0% of the Company's investment in
hotels. See "Policies and Objectives with Respect to Certain Activities--
Financing." The Company has obtained a commitment for the $100 million Line of
Credit. See "The Initial Hotels--Line of Credit."
GROWTH STRATEGIES
The Company will seek to maximize current returns to stockholders through
increases in Cash Available for Distribution and to increase long-term total
returns to stockholders through appreciation in value of the Common Stock. The
Company plans to achieve these objectives through participation in any
increased revenues from the Initial Hotels, pursuant to the Participating Rent
payments under the Participating Leases and by the acquisition and selective
development of additional hotels.
ACQUISITIONS
The Company intends to acquire additional hotels that meet one or more of the
investment criteria outlined below. The Company intends to capitalize on AGHI's
extensive resources and industry contacts available through its hotel
management business, sizable existing management portfolio, and significant
industry and national presence to access acquisition opportunities not readily
available to the market in general. The Company currently has options to
acquire AGHI's interest in two Courtyards by Marriott currently under
development containing an aggregate of 318 guest rooms. See "Development"
below. The Company believes that its executive officers' experience in the
hotel industry will enable the Company to acquire, upgrade and convert hotels
in order to capture the growth potential from such acquisitions. The Company
initially will employ five professionals devoted exclusively to hotel
acquisitions.
The Company will seek to acquire additional hotels that meet one or more of
the following investment criteria:
. full-service hotels located in major metropolitan markets, including
hotels that are in close proximity to the airports that serve such
markets, as well as selective prominent hotels in major tourist areas;
35
<PAGE>
. hotels that are underperforming and are candidates for implementation of
market repositioning, franchise conversion and turnaround strategies that
employ the extensive management and marketing experience of AGHI;
. hotels where the Company believes that necessary renovation or
redevelopment can be completed expeditiously and will result in an
immediate improvement in the hotel's revenues and an attractive return on
its renovation or redevelopment investment;
. hotels with sound operating fundamentals that are performing below their
potential because they are owned or controlled by financially distressed
owners or involuntary owners that may have acquired hotels through
foreclosure, including owners that lack the financial resources or the
commitment to make capital improvements appropriate for such hotels;
. hotels in attractive locations that the Company believes would benefit
significantly by changing franchises to a recognized brand affiliation
that is capable of increasing penetration in a particular market;
. nationally franchised hotels in locations with a relatively high demand
for rooms, relatively low supply of competing hotels and high barriers to
entry; and
. portfolios of hotels that exhibit some or all of the other criteria
discussed above, where purchasing several hotels in one transaction
enables the Company to obtain a favorable price, or to purchase
attractive hotels that otherwise would not be available to the Company.
The Company's ability to make acquisitions will depend on its ability to
access debt and equity financing. Initially, the Company expects to fund its
acquisitions by utilizing funds available under its Line of Credit. Funds
available to the Company under the Line of Credit will be limited to the
maximum principal amount of $100 million and, among other limitations, to
40.0% of the value or cost of the hotels that secure such line. Although as a
public company the Company expects to have available alternative sources of
financing, no commitments relating to such financing exist. Acquisitions
entail risks that acquired hotels will fail to perform in accordance with
expectations and that estimates of the cost of improvements necessary to
reposition hotels will prove inaccurate, as well as general investment risks
associated with any new real estate investment. In addition, future trends in
the hotel industry may make future acquisitions economically impractical.
Moreover, there can be no assurance that the Company will be able to acquire
hotels that meet its investment criteria or that any such hotels' operations
can be successfully improved. See "Risk Factors--Real Estate Investment
Risks--General Risks" and "--Acquisition and Development Risks."
DEVELOPMENT
The Company's executive officers average approximately 17 years of
experience in the development and renovation of hotel properties. Under the
direction of the Company's executive officers, AGHI has developed six hotel
properties, with an aggregate development cost of approximately $60.0 million,
and has completed redevelopment or repositioning projects at approximately 70
hotel properties, including both full- and limited-service hotels. Presently,
AGHI has two hotels under development, including a 167-room Courtyard by
Marriott in Boise, Idaho that is scheduled for completion in the fourth
quarter of 1996, and a 151-room Courtyard by Marriott in Durham, North
Carolina that is scheduled for completion in the first quarter of 1997. The
Company has an option and a right of first refusal to purchase AGHI's interest
in these option hotels (the "Option Hotels") for a two-year period following
the opening of each such hotel. See "The Initial Hotels--Options to Purchase
and Rights of First Refusal." The Company anticipates that most of the
additional hotels developed in the future will be in the full-service
commercial sector, including such major brands as Hilton, Marriott's family of
brands, Wyndham Hotel, DoubleTree Hotel, Crowne Plaza, Holiday Inn,
Sheraton(R) and Embassy Suites(R). Other than in connection with the limited
expansion of existing hotels, the Company may not engage in development
activities without the consent of the lenders under the Line of Credit.
The Company's development activities will be limited by the terms of the
Line of Credit and its ability to access financing as well as future trends in
the hotel industry. Like acquisitions, new project development is also
36
<PAGE>
subject to numerous risks, including risks of construction delays or cost
overruns that may increase project costs. Accordingly, there can be no
assurance that the Company will be able to develop hotels that meet its
investment criteria or that any hotels can be successfully developed. See "Risk
Factors--Real Estate Investment Risks--Acquisition and Development Risks."
INTERNAL GROWTH
The Company believes that, based on the historical operating results of the
Initial Hotels, the strength of the Company's and AGHI's existing management
teams and the structure of the Participating Leases, the Initial Hotels should
provide the Company with the opportunity for significant revenue growth. The
Company believes that it has structured its business relationships with AGHI
and the Lessee to provide incentives to operate and maintain the Initial Hotels
in a manner that will increase revenue and the Company's Cash Available for
Distribution. See "The Initial Hotels--The Participating Leases" and "--The
Management Agreements."
AGHI has extensive experience in managing hotels through all stages of the
lodging industry cycle, including industry downturns. During the late 1980's
and early 1990's, AGHI managed over 140 different hotels for institutional
owners, a substantial number of whom acquired the hotels through foreclosure,
thus enhancing AGHI's extensive turnaround and repositioning experience as well
as its management depth and operating systems. The Company believes there is
significant potential to increase revenues at the Initial Hotels (especially
those not currently managed by AGHI), and increase Participating Lease payments
by employing the following strategies:
. product repositioning through renovation and refurbishment of the hotels;
. brand repositioning through conversion to leading national franchise
affiliations;
. operational repositioning through property-level management and
marketing; and
. use of Participating Leases designed to capture increased revenues
attributable to improved marketing and yield management techniques that
AGHI will employ at the Initial Hotels not previously operated and
managed by AGHI and any additional hotels acquired by the Company after
the completion of the Offering.
Product Repositioning. The Company believes that a regular program of capital
improvements, including replacement and refurbishment of FF&E at the Initial
Hotels, as well as the renovation and redevelopment of certain of the Initial
Hotels, will maintain the competitiveness of the Initial Hotels and increase
revenues. From January 1, 1993 through March 31, 1996, approximately $15.0
million (an average of approximately $9,000 per guest room) was spent on
renovations and capital improvements at the eight Initial Hotels currently
operated and managed by AGHI. The Company expects to employ a repositioning and
conversion strategy in connection with its hotel acquisitions. Consistent with
this strategy, the Company has scheduled approximately $24.6 million (an
average of approximately $13,400 per guest room) to be spent on renovations and
refurbishments within one year after the completion of the Offering at seven of
the Initial Hotels anticipated to undergo brand conversions within one year
after the closing of the Offering (see "Brand Repositioning" below).
As an example of this strategy, AGHI, after its acquisition in May 1992 of an
interest in the Holiday Inn Dallas DFW Airport South and its retention as
manager, commenced an extensive $2.5 million renovation of the hotel, which
included upgrades of all guest rooms and corridors, common areas, meeting space
and restaurants and the lounge and renovation of the exterior of the building.
At the time of purchase, the hotel had lost its Holiday Inn franchise due to
product deficiencies and was experiencing declining occupancy arising from poor
marketing and insufficient capital improvements. Since the completion of the
initial renovations in 1992, an additional $2.5 million has been spent to
upgrade the hotel. In 1992, occupancy, ADR and REVPAR at the Holiday Inn Dallas
DFW Airport South were 49.1%, $54.18 and $26.61, respectively. By the twelve
months ended March 31, 1996, occupancy at the hotel had increased 57.2% to
77.2%, ADR at the hotel had increased 35.7% to $73.54 and REVPAR at the hotel
had increased 113.4% to $56.79. There can be no assurance that the Company will
be able to achieve similar results with respect to the Initial Hotels or hotels
acquired in the future.
37
<PAGE>
The Participating Leases require the Company to establish reserves of 4.0% of
total revenue for each of the Initial Hotels (which, on a consolidated pro
forma basis for the twelve months ended March 31, 1996, represented
approximately 5.6% of room revenue), which will be utilized by the Lessee for
the replacement and refurbishment of FF&E and for other capital expenditures
designed to enhance the competitive position of the Initial Hotels. The Company
and the Lessee will agree on the use of funds in this reserve and the Company
will have the right to approve the Lessee's annual and long-term capital
expenditure budgets. While the Company expects its reserves to be adequate to
fund recurring capital needs (including periodic renovations), the Company may
use Cash Available for Distribution in excess of distributions paid (subject to
federal income tax restrictions on the Company's ability to retain earnings) or
funds drawn under the Line of Credit to fund additional capital improvements as
necessary, including major renovations at the Company's hotels.
Brand Repositioning. The Company believes an opportunity exists in certain
major U.S. markets to acquire underperforming hotels that currently operate as
independent hotels or under franchise affiliations that have limited brand
recognition and convert them to stronger, more nationally recognized brand
affiliations, such as Courtyard by Marriott, Crowne Plaza, DoubleTree Hotel,
Holiday Inn, Holiday Inn Select, and Wyndham Hotel brands, in order to improve
the operating performance at these hotels. Seven of the Initial Hotels are
anticipated to undergo brand conversions within one year after the closing of
the Offering. It is expected that the Holiday Inn Park Center Plaza will be
converted from a traditional Holiday Inn to a Crowne Plaza, the Holiday Inn
Select-Madison will be converted to a Crowne Plaza, the Days Inn Ocean City
will be converted to a Hampton Inn, the Le Baron Airport Hotel will be
converted to a DoubleTree Hotel, the Holiday Inn New Orleans International
Airport will be converted from a traditional Holiday Inn to a Holiday Inn
Select, the Holiday Inn Mission Valley will be converted to a DoubleTree Hotel,
and the Fred Harvey Albuquerque Airport Hotel will be converted to a Wyndham
Hotel. These brand conversions are subject to, among other things, final
franchisor and lender approval, and there can be no assurance that such brand
conversions and repositioning will occur as planned. See "Risk Factors--Risks
of Operating Hotels Under Franchise Agreements; Approval for Brand
Conversions."
As an example, AGHI implemented its brand repositioning strategy in
connection with its acquisition of the Courtyard by Marriott-Meadowlands in
December 1993. At the time of its acquisition by AGHI, this hotel's operating
performance was declining due to prior management inefficiencies, deferred
maintenance and a lack of capital to effectively compete in its market. In
response to these conditions, AGHI developed a multi-phase strategy, including
repositioning the former Days Hotel to a Courtyard by Marriott and upgrading
the hotel by making approximately $530,000 in renovations of guest rooms and
public space and exterior improvements to the hotel. Since the initial
renovation was completed in May 1994, AGHI has invested an additional $845,400
to further improve the restaurant, lounge, exterior entrances, guest rooms and
meeting facilities. In 1993, occupancy, ADR and REVPAR at the Courtyard by
Marriott-Meadowlands were 74.8%, $65.63 and $49.09, respectively. By the twelve
months ended March 31, 1996, occupancy at the hotel had increased 3.9% to
77.7%, ADR at the hotel had increased 27.1% to $83.42 and REVPAR at the hotel
had increased 32.0% to $64.82. There can be no assurance that the Company will
be able to achieve similar results with respect to the Initial Hotels or hotels
acquired in the future.
The Company's ability to utilize its repositioning strategies will depend on
its ability to access financing. The Company plans to use funds available under
the Line of Credit to implement its planned conversion and repositioning
strategy at certain of the Initial Hotels. Substantial renovations of hotels
often disrupt the operations of those hotels due to hotel guest rooms and
common areas being out of service for extended periods. See "Risk Factors--
Hotel Industry Risks--Risks of Necessary Operating Costs and Capital
Expenditures; Required Hotel Renovations."
Operational Repositioning. The Company expects to achieve internal growth
through the application of AGHI's operating strategies, which stress
responsiveness and adaptability to changing market conditions to maximize
revenue growth. The Company's objectives include increasing REVPAR through
increases in occupancy and ADR through AGHI's continuing use of (i) interactive
yield management techniques, (ii) highly
38
<PAGE>
developed operating systems and controls, (iii) targeted sales and marketing
plans, (iv) proactive financial management, (v) extensive training programs,
and (vi) an incentive-based compensation structure.
Participating Leases Structure. The Participating Leases are designed to
allow the Company to participate in any increased revenues from the hotels in
which it invests. The Company also believes that by employing AGHI as the
manager of the five Initial Hotels that AGHI does not currently manage, AGHI,
through improved marketing and yield management techniques, will increase the
revenues of these hotels, thereby increasing the rent payable to the Company
by the Lessee under the Participating Leases. The Company and the Lessee
relied on this estimated increase in revenue in establishing the rent payable
to the Company under the Participating Leases relating to these hotels. While
the rent provisions of the Participating Leases are revenue-based, such
provisions have been developed with consideration of the fixed and variable
nature of hotel operating expenses and changes in operating margins typically
associated with increases in revenues. See "The Initial Hotels--The
Participating Leases."
In an effort to align the interests of AGHI and the Lessee with the
interests of the Company's stockholders, the Participating Leases, the
Management Agreements and certain related agreements provide for the
following:
. the partners of the Lessee have agreed upon consummation of the Offering
to (i) initially capitalize the Lessee with $500,000 in cash and (ii)
pursuant to the Lessee Pledge, pledge 275,000 OP Units having a value of
approximately $5.5 million, based on the Offering Price, to the Company
to secure the Lessee's obligations under the Participating Leases;
. until the Lessee's net worth equals the greater of (i) $6.0 million or
(ii) 17.5% of actual rent payments from hotels leased to the Lessee
during the preceding calendar year, the Lessee will not pay any
distributions to its partners (except for the purpose of permitting its
partners to pay taxes on the income attributable to them from the
operations of the Lessee and except for distributions relating to
interest or dividends received by the Lessee from cash or securities held
by it);
. management fees paid to AGHI by the Lessee will include an incentive fee
of up to 2.0% of gross revenues based upon reaching certain gross revenue
targets at the Initial Hotels;
. management fees payable by the Lessee to AGHI will be subordinated to
the Lessee's rent obligations to the Company under the Participating
Leases;
. defaults by the Lessee under each Participating Lease will result in a
cross-default of all other Participating Leases to which the Lessee is a
party allowing the Company to terminate each other lease;
. Messrs. Jorns and Wiles, who are stockholders of AGHI and are also
executive officers of the Company, will agree to use 50% of the dividends
(net of tax liability) received by them from AGHI that are attributable
to AGHI's earnings from the management of hotels owned by the Company (as
determined in good faith by such officers) to purchase additional
interests in the Company; and
. the Board of Directors of the Company will establish a Leasing Committee,
consisting entirely of Independent Directors, that will review not less
frequently than annually the Lessee's compliance with the terms of the
Participating Leases and will review and approve the terms of each new
Participating Lease between the Company and the Lessee.
FINANCING STRATEGY
Upon completion of this Offering, the Company will have approximately $19.6
million of outstanding indebtedness. While its organizational documents
contain no limitation on the amount of debt it may incur, the Company, subject
to the discretion of the Board of Directors, intends to limit consolidated
indebtedness (measured at the time the debt is incurred) to not more than
45.0% of the Company's investment in hotels (calculated in the manner set
forth under "Policies and Objectives with Respect to Certain Activities--
Financing"). The Company may from time to time re-evaluate its debt limitation
policy in light of then current economic conditions, relative costs of debt
and equity capital, market values of its hotels, acquisition and expansion
opportunities and other factors.
39
<PAGE>
As a publicly owned hotel REIT, the Company believes that it will have
improved access to a wide variety of financing sources to fund acquisitions,
such as the ability to issue several types of public and private debt, equity
and hybrid securities, as well as the ability to utilize OP Units as
acquisition consideration. The Company has received a commitment for the Line
of Credit that will be limited to the maximum principal amount of $100 million
and, among other limitations, to 40.0% of the value or cost of the hotels
which secure such line. The Line of Credit initially will be secured by a
first mortgage lien on eleven of the Initial Hotels. Subject to the
limitations described above and other limitations contained in the Line of
Credit, the Company may borrow additional amounts from the same or other
lenders in the future or may issue corporate debt securities in public or
private offerings. Certain of such additional borrowings may be secured by
hotels owned by the Company. Upon the closing of the Offering, the Company
expects to have approximately $60 million of borrowing capacity available
under the Line of Credit. The Company expects that its borrowing capacity
under the Line of Credit will increase to $100 million, assuming all
additional borrowings are used to fund capital improvements to the Initial
Hotels or the acquisition of additional hotels. See "The Initial Hotels--Line
of Credit."
THE OPERATING PARTNERSHIP
Upon completion of the Offering, the Company will acquire an approximately
74.2% interest in the Operating Partnership, a recently formed Delaware
limited partnership. The Company will hold its interest in the Operating
Partnership through two wholly owned subsidiaries, AGH GP and AGH LP. AGH GP
will be the sole general partner of the Operating Partnership and will own a
1.0% general partnership interest in the Operating Partnership. Through AGH
GP, the Company will control the Operating Partnership and its assets. AGH LP
will be one of the Operating Partnership's limited partners (the "Limited
Partners") and will own an approximately 73.2% limited partnership interest in
the Operating Partnership. Other initial limited partners will be the Primary
Contributors and other holders of interests in the Initial Hotels who have
elected to receive OP Units in exchange for all or a portion of their
interests in the Initial Hotels. In their capacity as such, the Limited
Partners will have no authority to transact business for, or participate in
the management, activities or decisions of, the Operating Partnership. The
Operating Partnership will own, directly or through one or more subsidiary
partnerships or limited liability companies (the "Subsidiary Partnerships"),
all of the Initial Hotels and will lease such hotels to the Lessee. The
Operating Partnership will own, directly or indirectly, a 99.9% interest in
each Subsidiary Partnership.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after payment of
estimated expenses incurred in connection with the Offering, are estimated to
be approximately $128.0 million. The Company will contribute the net proceeds
to the Operating Partnership, which, in turn, will use the net proceeds of the
Offering as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Acquisition of the Initial Hotels, including closing
costs of $420...................................... $ 91,056
Repayment of existing mortgage indebtedness,
including associated prepayment penalties.......... 34,804
Working capital, Line of Credit fees, franchise
transfer costs and other expenses.................. 2,140
--------
Total uses of proceeds(1)......................... $128,000
========
</TABLE>
- --------
(1) Includes approximately $900 that will be used to reimburse AGHI for direct
out-of-pocket expenses incurred in connection with the acquisition of the
Initial Hotels, including legal, environmental and engineering expenses.
If the Underwriters' over-allotment option is exercised in full, the Company
intends to use the additional net proceeds of approximately $19.5 million to
fund planned renovations to certain Initial Hotels as described herein, for
the acquisition of additional hotels to be identified in the future and for
working capital.
Mortgage indebtedness to be repaid with the net proceeds of the Offering is
as follows (dollars in thousands):
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
PREPAYMENT AS OF
PROPERTY INTEREST RATE MATURITY DATE PENALTY MARCH 31, 1996
- -------- ------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C>
Holiday Inn Dallas DFW
West Airport........... 9.8% June 2000 $450 $ 8,496
Hotel Maison de Ville... 9.3 August 1999 1,548
Hampton Inn Richmond
Airport................ 9.8 December 1999 442 4,782
Holiday Inn Select-
Madison................ 8.5 September 1996 4,070
Hilton Hotel-Toledo..... 8.8 June 1997 7,575
Holiday Inn New Orleans
International Airport.. 8.6 June 1998 7,441
---- -------
Total................. $892 $33,912
==== =======
</TABLE>
Of the indebtedness to be repaid with the net proceeds of the Offering,
approximately $16.5 million was incurred within the twelve months prior to the
date of this Prospectus of which amount (i) approximately $9.0 million was
utilized for the acquisition and refurbishment of the Holiday Inn Dallas DFW
Airport West and (ii) approximately $7.5 million was utilized in connection
with the acquisition of the Hilton Hotel-Toledo.
Currently, the Company does not have any agreement or understanding to
purchase any specific hotel other than the Initial Hotels, although
discussions with various prospective sellers of hotels have been initiated.
The Company will receive options to acquire AGHI's interests in two Courtyards
by Marriott currently under development. See "The Initial Hotels--Options to
Purchase and Rights of First Refusal."
Pending the uses described above, the net proceeds will be invested in
interest-bearing accounts and short-term, interest-bearing securities, which
are consistent with the Company's intention to qualify for taxation as a REIT.
Such investments may include, for example, government and government agency
securities, certificates of deposit, interest-bearing bank deposits and
mortgage loan participations.
41
<PAGE>
DISTRIBUTION POLICY
Subsequent to the Offering, the Company intends to make regular quarterly
distributions to its stockholders. The Company's first distribution, for the
period from the closing of the Offering to September 30, 1996, is expected to
be $ per share of Common Stock, representing a pro rata distribution of the
anticipated regular quarterly distribution of $0.40 per share for a full
quarter, which, on an annualized basis, will represent an initial annual
distribution rate of $1.60 per share, or 8.0% of the Offering Price. Based on
the Company's estimated revenues less expenses for the twelve months ended
March 31, 1996, the estimated initial annual distribution per share represents
95.0% of estimated Cash Available for Distribution. Holders of OP Units will
receive equal distributions on a per unit basis. The Company does not expect
to adjust the estimated distribution rate if the Underwriters' over-allotment
option is exercised. See "Partnership Agreement."
The Company has established the expected initial annual distribution rate
based upon the Company's estimate of Cash Available for Distribution, which
has been derived from the statement of estimated revenues less expenses of the
Company for the twelve months ended March 31, 1996. The Company believes the
estimated revenues less expenses for the twelve months ended March 31, 1996
constitutes a reasonable basis for setting the expected annual initial
distribution rate. The Board of Directors, in its sole discretion, will
determine the actual distribution rate based on the Company's actual results
of operations, Cash Available for Distribution, economic conditions, tax
considerations (including those related to REITs) and other factors.
The following table sets forth certain financial information for the twelve
months ended March 31, 1996, which has been used to establish the expected
initial annual distribution per share.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31, 1996
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Estimated revenues less expenses....................... $ 9,531
Add back non-cash items:
Pro forma depreciation(1) ............................. 4,862
-------
Pro forma Funds From Operations(2)..................... 14,393
Adjustments:
Pro forma amortization(1).............................. 449
Pro forma amortization of unearned officers'
compensation(1)....................................... 74
Estimated cash used to pay interest expenses related to
certain capital expenditures(3)....................... (409)
Estimated cash used in investing activities(4)......... (2,364)
-------
Estimated Cash Available for Distribution(1)(5)........ $12,143
=======
Aggregate expected initial annual distribution on
Common Stock(6)....................................... $11,529
Expected initial annual distribution per share of
Common Stock.......................................... $ 1.60
Expected payout ratio based on estimated Cash Available
for Distribution(7)................................... 95.0%
</TABLE>
- --------
(1) Amounts are adjusted to reflect the Company's ownership percentage in the
Operating Partnership of 74.2%.
(2) Funds From Operations, as defined by NAREIT, represents net income
applicable to common stockholders (computed in accordance with generally
accepted accounting principles), excluding gains (losses) from debt
restructuring and sales of property (including furniture and equipment),
plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs), and after adjustments for
unconsolidated partnerships and joint ventures. Funds From Operations does
not represent cash generated from operating activities in accordance with
generally accepted accounting principles, is not necessarily indicative of
cash flow available to fund cash needs and should not be considered as an
alternative to net income as an indication of performance or to cash flow
as a measure of liquidity. Although Funds From Operations has been
computed in accordance with the newly adopted NAREIT definition, Funds
From Operations as presented may not be comparable to other similarly
titled measures used by other REITs. Funds From Operations does not
reflect cash expenditures for capital improvements or principal
amortization of indebtedness on the Initial Hotels.
42
<PAGE>
(3) Represents the estimated interest expense (adjusted to reflect the
Company's ownership percentage in the Operating Partnership of 74.2%) that
will be incurred during the twelve months following the closing of the
Offering in order to fund the $24.6 million cost of planned renovations
and refurbishments at the seven Initial Hotels the Company plans to
convert to leading franchise brands in order to reposition such hotels for
future growth. Estimated interest expense is computed based upon
management's estimate of the timing of the expenditures relating to the
scheduled renovations and refurbishments multiplied by an assumed interest
rate applicable to borrowings under the Company's Line of Credit (7.4% as
of June 14, 1996). Estimated Cash Available for Distribution does not
include the effects of any revenue increases expected to result from
capital expenditures at the Initial Hotels.
(4) Represents the Company's obligation under the Participating Leases
(adjusted to reflect the Company's ownership percentage in the Operating
Partnership of 74.2%) to reserve and pay for capital improvements
(including the replacement or refurbishment of FF&E) on a pro forma basis
for the twelve months ended March 31, 1996. Such reserves were equal to
4.0% of total revenue for each of the Initial Hotels (which, on a
consolidated pro forma basis, represented approximately 5.6% of room
revenue). See "The Initial Hotels--The Participating Leases." Based on
management's experience, and considering the amounts expended on
renovations and capital improvements at the Initial Hotels since 1993, the
Company believes the amounts reserved under the Participating Leases will
be sufficient to fund reasonably foreseeable capital improvements and
replacements and refurbishments of FF&E. However, the Company may find it
necessary or desirable to spend amounts in excess of the obligated amounts
and may make additional borrowings or use undistributed Cash Available for
Distribution to fund such expenditures. See "Risk Factors--Hotel Industry
Risks--Risks of Necessary Operating Costs and Capital Expenditures;
Required Hotel Renovations" and "The Initial Hotels."
(5) Estimated Cash Available for Distribution has been reduced by
approximately $18,000, which represents the pro forma interest expense
attributable to aggregate indebtedness of $488,690 that will be incurred
by the Company in order to pay principal amortization on the DFW South
Loan and the Secaucus Loans (as defined in "The Initial Hotels--Mortgage
Indebtedness Remaining Following the Offering").
(6) Based on 7,205,518 shares of Common Stock outstanding upon completion of
the Formation Transactions multiplied by the expected initial annual
distribution rate of $1.60 per share. Excludes an aggregate of 2,511,106
shares issuable after one year following the closing of the Offering upon
the exchange of the OP Units issued in the Formation Transactions.
(7) Represents the anticipated initial aggregate annual distribution divided
by estimated Cash Available for Distribution. The expected payout ratio
based upon pro forma estimated Funds From Operations is approximately
80.1%.
The Company anticipates maintaining its expected initial annual distribution
rate unless actual results of operations, economic conditions or other factors
differ from the estimated revenues less expenses for the twelve months ended
March 31, 1996. The Company's actual Cash Available for Distribution will be
affected by a number of factors, including changes in occupancy or ADR at the
Initial Hotels.
The Company anticipates that Cash Available for Distribution will exceed
earnings and profits due to non-cash expenses, primarily depreciation and
amortization, to be incurred by the Company. Distributions by the Company to
the extent of its current or accumulated earnings and profits for federal
income tax purposes, other than capital gain distributions, will be taxable to
stockholders as ordinary dividend income. Any distributions designated by the
Company as capital gain dividends generally will give rise to capital gain tax
treatment for stockholders. Distributions in excess of the Company's current
or accumulated earnings and profits generally will be treated as a non-taxable
reduction of a stockholder's basis in the Common Stock to the extent thereof,
and thereafter as capital gain. Distributions treated as a non-taxable
reduction in basis will have the effect of deferring taxation until the sale
of a stockholder's Common Stock or future distributions in excess of the
stockholder's basis in the Common Stock. Based upon the total estimated Cash
Available for Distribution set forth in the table above, the Company believes
that approximately 21.0% of the Company's expected initial annual distribution
would represent a return of capital for federal income tax purposes. If actual
Cash Available for Distribution or taxable income varies from these amounts,
the percentage of distributions that represents a return of capital may be
materially different.
43
<PAGE>
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its stockholders of at least 95% of its net taxable
income (excluding net capital gains). Based on the Company's estimated
revenues less expenses for the twelve months ended March 31, 1996, the Company
would have been required to distribute approximately $8.6 million, or $1.20
per share, in order to maintain its status as a REIT. Under certain
circumstances, the Company may be required to make distributions in excess of
Cash Available for Distribution in order to meet such distribution
requirements. In such event, the Company would seek to borrow the amount of
the deficiency or sell assets to obtain the cash necessary to make
distributions to retain its qualification as a REIT for federal income tax
purposes.
The Board of Directors, in its sole discretion, will determine the actual
distribution rate based on a number of factors, including the amount of Cash
Available for Distribution, the Company's financial condition, capital
expenditure requirements for the Company's hotels, the annual distribution
requirements under the REIT provisions of the Code and such other factors as
the Board of Directors deems relevant. For a discussion of the tax treatment
of distributions to holders of Common Stock, see "Federal Income Tax
Considerations."
44
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the AGH
Predecessor Hotels and the pro forma capitalization of the Company as of March
31, 1996, assuming completion of the Offering and Formation Transactions and
the use of the proceeds from the Offering as described in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
AGH
PREDECESSOR
HOTELS COMPANY
HISTORICAL PRO FORMA
----------- ------------
<S> <C> <C>
Long-term debt, net of current portion............. $19,583,931 $ 18,863,549(1)
Minority interest in Operating Partnership......... 41,040,093
Stockholders' equity:
Preferred Stock, $0.01 par value per share,
20,000,000 shares authorized, no shares issued
and outstanding ................................
Common Stock, $0.01 par value per share,
100,000,000 shares authorized, 7,205,518 shares
issued and outstanding, as adjusted(2).......... 72,055
Additional paid-in capital....................... 118,957,978
Unearned officers' compensation.................. (1,000,000)
Retained earnings................................ 4,198,306
----------- ------------
Total stockholders' equity....................... 4,198,306 118,030,033
----------- ------------
Total Capitalization........................... $23,782,237 $177,933,675
=========== ============
</TABLE>
- --------
(1) Reflects the Company's long-term debt collateralized by the Holiday Inn
Dallas DFW Airport South and the Courtyard by Marriott-Meadowlands, net of
the current portion of such debt of $488,690. The debt encumbering the
Holiday Inn Dallas DFW Airport South is not prepayable prior to February
1, 1998. The ground lease encumbering the Courtyard by Marriott-
Meadowlands contains provisions that prohibit the Company from including
such hotel as part of the collateral securing the Line of Credit. See "The
Initial Hotels--Mortgage Indebtedness Remaining Following the Offering."
(2) Includes 7,000,000 shares sold in the Offering, 155,518 shares of Common
Stock issued to the Plan in connection with the Formation Transactions and
50,000 shares of restricted Common Stock granted to the Company's
executive officers as stock awards. Excludes 2,511,106 shares issuable one
year after the closing of the Offering upon the exchange of OP Units
issued in connection with the Formation Transactions, 850,000 reserved but
unissued shares of Common Stock under the 1996 Plan and 100,000 reserved
but unissued shares of Common Stock under the Directors' Plan. See
"Management--Stock Incentive Plans," "Formation Transactions" and
"Partnership Agreement--Exchange Rights."
45
<PAGE>
DILUTION
The initial price per share to the public of Common Stock offered hereby
exceeds the net tangible book value per share. Therefore, the holders of OP
Units issued in the Formation Transactions will realize an immediate increase
in the net tangible book value of their OP Units while purchasers of Common
Stock in the Offering will realize an immediate and substantial dilution of
the net tangible book value of their shares. Net pro forma tangible book value
per share is determined by subtracting total liabilities from total tangible
assets and dividing the remainder by the number of shares of Common Stock and
OP Units that will be outstanding after the Offering. The following table
illustrates the dilution per share to purchasers of Common Stock sold in the
Offering, based on the Offering Price.
<TABLE>
<S> <C> <C>
Historical net tangible book value (1).......................... $ 1.08
Historical AGH Acquisition Hotels net tangible book value (2)...
Increase in net tangible book value attributable to payments by
purchasers of shares in the Offering........................... 15.01
------
Pro forma net tangible book value after the Formation
Transactions (3)............................................... 16.09
Dilution per share purchased in the Offering.................... 3.91
------
Offering Price (4).............................................. $20.00
======
</TABLE>
- --------
(1) Historical net tangible book value prior to the Offering is determined by
subtracting total liabilities assumed from total tangible assets purchased
of the AGH Predecessor Hotels ($2.9 million) divided by the total shares
of Common Stock (155,518) and OP Units (2,511,106) issued in the exchange
for the net assets of the AGH Predecessor Hotels and AGH Acquisition
Hotels in the Formation Transactions.
(2) The OP Units issued in connection with the acquisition of the AGH
Acquisition Hotels were included in the total OP Units above since no
equity will be contributed in connection with such acquisitions.
(3) Based on the total pro forma net tangible book value of the Company
($156.3 million) divided by the total shares of Common Stock and OP Units
outstanding after the Formation Transactions (9,716,624).
(4) Before deducting underwriting discount and estimated expenses of the
Offering.
The following table sets forth the number of shares of Common Stock to be
sold by the Company in the Offering, the total contributions to be paid to the
Company by purchasers of the shares sold in the Offering, the number of shares
of Common Stock and OP Units to be issued in the Formation Transactions, the
stock awards granted to the Company's executive officers and the tangible book
value per share and per OP Unit based on total contributions (determined as if
the consummation of the Formation Transactions occurred on December 31, 1995).
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
ISSUED BY THE COMPANY AND TANGIBLE BOOK
OP UNITS ISSUED BY THE TOTAL CONTRIBUTIONS VALUE
OPERATING PARTNERSHIP TO THE COMPANY PER SHARE/OP UNIT
---------------------------------------------------- -----------------
NUMBER PERCENT AMOUNT PERCENT
-------------- ------------------------- -------
<S> <C> <C> <C> <C> <C>
Shares of Common Stock
sold by the Company in
the Offering........... 7,000,000 72.0% $140,000,000 105.9% $20.00(1)
Shares of Common Stock
(155,518) and OP Units
(2,511,106) issued in
the Formation
Transactions........... 2,666,624 27.5 4,198,306 3.2 $ 1.42(2)
Stock awards............ 50,000 .5
Other................... (12,000,000)(3) (9.1)
-------------- ---------- ------------ -----
Total................... 9,716,624 100.0% $132,198,306 100.0%
============== ========== ============ =====
</TABLE>
- --------
(1) Based on the Offering Price before deducting expenses of the Offering.
(2) Based on the book value of assets to be contributed to the Operating
Partnership in the Formation Transactions.
(3) Represents the expenses of the Offering, net of the effects of the
Formation Transactions.
46
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth (1) selected estimated and pro forma
consolidated financial data for the Company as of and for the year ended
December 31, 1995, the twelve months ended March 31, 1996 and the three months
ended March 31, 1996, (2) selected historical combined financial data for the
Initial Hotels for each of the years in the five-year period ended December
31, 1995 and the three months ended March 31, 1995 and 1996 and pro forma
financial data for the Initial Hotels and Lessee for the year ended December
31, 1995, the twelve months ended March 31, 1996 and the three months ended
March 31, 1996, (3) selected historical combined financial data for the AGH
Predecessor Hotels for each of the years in the three-year period ended
December 31, 1995, and the three months ended March 31, 1995 and 1996 and (4)
selected historical combined financial data for the AGH Acquisition Hotels for
each of the years in the five-year period ended December 31, 1995 and the
three months ended March 31, 1995 and 1996. The selected historical combined
financial data of the AGH Predecessor Hotels for the periods presented
(excluding the historical financial data for the three months ended March 31,
1995 and 1996) and the selected historical combined financial data of the AGH
Acquisition Hotels for each of the years in the three-year period ended
December 31, 1995 have been derived from the historical combined financial
statements and notes thereto of the AGH Predecessor Hotels and the AGH
Acquisition Hotels audited by Coopers & Lybrand L.L.P., independent
accountants, whose reports with respect thereto are included elsewhere in this
Prospectus. The selected historical combined financial data of the AGH
Predecessor Hotels for the three months ended March 31, 1995 and 1996 and the
AGH Acquisition Hotels for each of the years in the two-year period ended
December 31, 1992 and the three months ended March 31, 1995 and 1996 have been
derived from unaudited combined internal statements of operations of the AGH
Predecessor Hotels and the AGH Acquisition Hotels. In the opinion of
management, the unaudited combined financial data include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial information set forth therein.
The statements of estimated revenues less expenses, pro forma and other data
are presented as if the Formation Transactions and the application of the net
proceeds of the Offering had occurred as of January 1, 1995 and therefore
incorporate certain assumptions that are included in the Notes to the
Statements of Estimated Revenues Less Expenses and Pro Forma Statements of
Operations included elsewhere in this Prospectus. The pro forma operating data
for the Initial Hotels and Lessee is presented to reflect the pro forma
operations of the Lessee for the period presented, whose operations are the
source of the Lessee's Participating Lease payments to the Company. The pro
forma balance sheet data is presented as if the Formation Transactions and the
application of the net proceeds of the Offering had occurred on March 31,
1996.
The estimated and pro forma information do not purport to represent what the
Company's financial position or the Company's or the Initial Hotels' and
Lessee's results of operations would have been if the Formation Transactions
and the Offering had, in fact, occurred on such dates, or to project the
Company's, or the Initial Hotels' and Lessee's financial position or results
of operations at any future date or for any future period.
The historical financial information includes the operations of the AGH
Predecessor Hotels for the periods owned by affiliates of AGHI. The Courtyard
by Marriott-Meadowlands was acquired in December 1993; the Hotel Maison de
Ville was acquired in August 1994; the Hampton Inn Richmond Airport was
acquired in December 1994; and the Holiday Inn Dallas DFW Airport West was
acquired in June 1995. Complete historical financial information for each of
the AGH Predecessor Hotels prior to their respective acquisition dates is
unavailable. The historical financial information for the AGH Acquisition
Hotels does not include information related to the Days Inn Ocean City for
each of the years in the two-year period ended December 31, 1992 and the
Holiday Inn Mission Valley for the year ended December 31, 1991. Historical
financial information for these AGH Acquisition Hotels for these periods is
unavailable. Therefore, historical financial information for the AGH
Predecessor Hotels and the Initial Hotels and Lessee does not include
information for the above hotels prior to the dates previously described.
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and all of the financial statements and notes thereto included
elsewhere in this Prospectus.
47
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
SELECTED ESTIMATED AND PRO FORMA CONSOLIDATED FINANCIAL DATA(1)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
ESTIMATED REVENUES LESS
EXPENSES DATA:
Participating Lease
revenue(2).................. $ 24,811,668 $25,902,292 $6,527,908
Interest income.............. 31,500 31,500 7,875
------------ ----------- ----------
Total revenue.............. 24,843,168 25,933,792 6,535,783
Depreciation................. 7,404,199 6,551,900 1,485,224
Amortization................. 605,410 605,410 151,353
Real estate and personal
property taxes and property
insurance................... 2,165,073 2,165,073 541,268
General and
administrative(3)........... 1,130,000 1,130,000 282,500
Ground lease expense......... 881,217 902,196 193,156
Amortization of unearned
officers' compensation(4)... 100,000 100,000 25,000
Interest expense............. 1,244,637 1,633,962 408,491
------------ ----------- ----------
Total expenses............. 13,530,536 13,088,541 3,086,992
------------ ----------- ----------
Estimated revenues less
expenses before minority
interest.................... 11,312,632 12,845,251 3,448,791
Minority interest(5)......... 2,918,659 3,314,075 889,788
------------ ----------- ----------
Estimated revenues less
expenses applicable to
common shareholders......... $ 8,393,973 $ 9,531,176 $2,559,003
============ =========== ==========
Estimated revenues less
expenses per common share... $ 1.16 $ 1.32 $ 0.36
============ =========== ==========
Weighted average number of
shares of Common Stock
outstanding................. 7,205,518 7,205,518 7,205,518
============ =========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-----------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 874,076
Investment in hotel properties, net......................... 176,206,689
Total assets................................................ 180,172,365
Debt........................................................ 19,352,239
Minority interest in Operating Partnership.................. 41,040,093
Stockholders' equity........................................ 118,030,033
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
OTHER DATA:
Funds From Operations(6)..... $ 13,887,889 $ 14,392,686 $ 3,661,039
Cash Available for
Distribution(7)............. 11,690,738 12,142,695 3,195,403
Net cash provided by
operating activities
(consolidated)(8)........... 19,422,241 20,102,561 5,110,368
Net cash used in investing
activities
(consolidated)(9)........... (3,115,404) (3,186,617) (803,895)
Net cash used in financing
activities
(consolidated)(10).......... (16,056,851) (16,035,288) (4,008,823)
Weighted average number of
shares of Common Stock and
OP Units outstanding........ 9,716,624 9,716,624 9,716,624
</TABLE>
See notes on page 51.
48
<PAGE>
INITIAL HOTELS
SELECTED HISTORICAL COMBINED FINANCIAL DATA(11)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------ -----------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $27,963,802 $30,376,150 $36,829,877 $43,541,206 $53,756,926 $11,857,784 $14,186,415
Food and beverage
revenue............... 13,526,143 13,597,748 15,453,080 16,378,861 17,717,760 4,291,351 4,683,138
Other revenue.......... 2,434,535 2,528,364 4,680,010 3,392,275 4,147,900 971,975 1,163,152
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue.......... 43,924,480 46,502,262 56,962,967 63,312,342 75,622,586 17,121,110 20,032,705
Hotel operating
expenses.............. 32,251,012 35,083,148 40,130,782 44,349,278 51,198,375 11,622,390 13,216,152
Depreciation and
amortization.......... 2,575,564 6,329,770 5,847,629 5,986,460 8,131,244 2,839,488 1,567,020
Interest expense....... 3,802,670 4,819,749 4,667,281 4,771,483 6,307,202 1,411,434 1,705,764
Other expenses......... 1,946,193 617,334 2,543,235 2,996,568 3,132,865 763,398 789,611
----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues over (under)
expenses(12).......... $ 3,349,041 $ (347,739) $ 3,774,040 $ 5,208,553 $ 6,852,900 $ 484,400 $ 2,745,158
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
LESSEE
SELECTED PRO FORMA FINANCIAL DATA (1)(13)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- ------------------- ------------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $55,330,171 $56,830,028 $14,201,906
Food and beverage
revenue............... 18,191,504 18,335,582 4,732,323
Other revenue.......... 4,363,432 4,499,821 1,163,152
----------- ----------- -----------
Total revenue.......... 77,885,107 79,665,431 20,097,381
Hotel operating
expenses.............. 52,582,000 53,060,887 13,149,844
Depreciation and
amortization.......... 63,000 63,000 15,750
Interest expense....... 31,500 31,500 7,875
Other expenses......... 58,084 44,773 17,981
Participating Lease
expenses(2)........... 24,811,668 25,902,292 6,527,908
----------- ----------- -----------
Revenues over
expenses.............. $ 338,855 $ 562,979 $ 378,023
=========== =========== ===========
</TABLE>
INITIAL HOTELS
SELECTED HISTORICAL OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
AGH PREDECESSOR
HOTELS(14)
Occupancy............. 77.5% 74.6% 74.3% 71.1% 72.1% 73.3% 64.2%
ADR................... $54.93 $64.84 $57.09 $62.10 $73.26 $67.01 $81.10
REVPAR................ $63.61 $44.96 $42.42 $44.14 $52.84 $49.10 $52.09
AGH ACQUISITION
HOTELS(15)
Occupancy............. 70.7% 68.6% 71.0% 71.9% 73.1% 70.0% 72.1%
ADR................... $54.93 $64.84 $57.78 $62.32 $68.30 $65.73 $71.77
REVPAR................ $38.86 $44.50 $41.01 $44.79 $49.93 $45.99 $51.75
INITIAL HOTELS
Occupancy............. 71.3% 69.1% 71.6% 71.7% 72.9% 70.6% 70.7%
ADR................... $57.19 $64.44 $57.65 $62.28 $69.19 $65.97 $73.33
REVPAR................ $40.75 $44.53 $41.26 $44.67 $50.46 $46.56 $51.81
</TABLE>
See notes on page 51.
49
<PAGE>
AGH PREDECESSOR HOTELS
SELECTED HISTORICAL COMBINED FINANCIAL DATA(16)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ------------------------
1993 1994 1995 1995 1996
-------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $ 17,941 $3,431,654 $ 9,020,479 $1,625,360 $2,624,614
Food and beverage reve-
nue................... 6,158 552,697 1,293,238 215,333 509,331
Other revenue.......... 1,448 223,211 568,415 102,367 173,450
-------- ---------- ----------- ---------- ----------
Total revenue.......... 25,547 4,207,562 10,882,132 1,943,060 3,307,395
Hotel operating ex-
penses................ 8,741 3,173,721 7,565,824 1,314,194 2,253,656
Depreciation and amor-
tization.............. 46,982 364,513 2,480,054 1,041,418 304,936
Interest expense....... 430,535 1,572,244 255,552 457,146
Other expenses......... 831 525,287 754,193 123,827 163,058
-------- ---------- ----------- ---------- ----------
Net income (loss)...... $(31,007) $ (286,494) $(1,490,183) $ (791,931) $ 128,599
======== ========== =========== ========== ==========
</TABLE>
AGH ACQUISITION HOTELS
SELECTED HISTORICAL COMBINED FINANCIAL DATA(15)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------ -----------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Room revenue........... $27,963,802 $30,376,150 $36,811,936 $40,109,552 $44,736,447 $10,232,424 $11,561,801
Food and beverage
revenue............... 13,526,143 13,597,748 15,446,922 15,826,164 16,424,522 4,076,018 4,173,807
Other revenue.......... 2,434,535 2,528,364 4,678,562 3,169,064 3,579,485 869,608 989,702
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue.......... 43,924,480 46,502,262 56,937,420 59,104,780 64,740,454 15,178,050 16,725,310
Hotel operating
expenses.............. 32,251,012 35,083,148 40,122,041 41,175,557 43,632,551 10,308,196 10,962,496
Depreciation and
amortization.......... 2,575,564 6,329,770 5,800,647 5,621,947 5,651,190 1,798,070 1,262,084
Interest expense....... 3,802,670 4,819,749 4,667,281 4,340,948 4,734,958 1,155,882 1,248,618
Other expenses......... 1,946,193 617,334 2,542,404 2,471,281 2,378,672 639,571 635,553
----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues over (under)
expenses.............. $ 3,349,041 $ (347,739) $ 3,805,047 $ 5,495,047 $ 8,343,083 $ 1,276,331 $ 2,616,559
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes on following page.
50
<PAGE>
SELECTED FINANCIAL INFORMATION FOOTNOTES
(1) The estimated and pro forma information do not purport to represent what
the Company's financial position or the Company's or the Initial Hotels'
and Lessee's results of operations would actually have been if the
consummation of the Formation Transactions and the Offering had, in fact,
occurred on such dates, or to project the Company's financial position or
the Company's and Initial Hotels' and Lessee's results of operations at
any future date or for any future period.
(2) Represents lease payments from the Lessee to the Operating Partnership
pursuant to the Participating Leases calculated on a pro forma basis by
applying the rent provisions of the Participating Leases to the
historical revenues of the Initial Hotels. The departmental revenue
thresholds in certain of the Participating Lease formulas adjust in the
future beginning January 1, 1997. See "The Initial Hotels--The
Participating Leases."
(3) Represents salaries and wages, professional fees, directors' and
officers' insurance, allocated rent, supplies and other and other
operating expenses to be paid by the Company. These amounts are based on
historical general and administrative expenses as well as probable 1996
expenses.
(4) Represents amortization of unearned officers' compensation, represented
by an aggregate of 50,000 shares of restricted Common Stock issuable to
executive officers, which shares vest 10.0% at the date of grant (5,000
shares at $20.00 per share).
(5) Calculated as 25.8% of estimated revenues less expenses before minority
interest for all periods.
(6) Represents Funds From Operations of the Company. The items added back to
estimated revenues less expenses applicable to common stockholders have
been adjusted by the Company's ownership percentage in the Operating
Partnership of 74.2% for all periods presented. The following table
computes Funds From Operations under the newly adopted NAREIT definition.
Funds From Operations consists of net income applicable to common
stockholders (computed in accordance with generally accepted accounting
principles) excluding gains (losses) from debt restructuring and sales of
property (including furniture and equipment) plus real estate related
depreciation and amortization (excluding amortization of deferred
financing costs) and after adjustments for unconsolidated partnerships
and joint ventures. The Company considers Funds From Operations to be an
appropriate measure of the performance of an equity REIT. Funds From
Operations should not be considered as an alternative to net income or
other measurements under generally accepted accounting principles, as an
indicator of operating performance or to cash flows from operating,
investing, or financing activities as a measure of liquidity. Although
Funds From Operations has been calculated in accordance with the newly
adopted NAREIT definition, Funds From Operations as presented may not be
comparable to other similarly titled measures used by other REITs. Funds
From Operations does not reflect cash expenditures for capital
improvements or principal amortization of indebtedness on the Initial
Hotels.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
TWELVE THREE
PRO FORMA MONTHS MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995(1) MARCH 31, 1996(1) MARCH 31, 1996(1)
-------------------- ----------------- -----------------
<S> <C> <C> <C>
Estimated revenues less
expenses applicable to
common stockholders ... $ 8,393,973 $ 9,531,176 $2,559,003
Depreciation............ 5,493,916 4,861,510 1,102,036
----------- ----------- ----------
Funds From Operations... $13,887,889 $14,392,686 $3,661,039
=========== =========== ==========
Weighted average number
of shares of Common
Stock outstanding...... 7,205,518 7,205,518 7,205,518
=========== =========== ==========
</TABLE>
51
<PAGE>
(7) Cash Available for Distribution represents Funds From Operations of the
Company plus the Company's ownership percentage in the Operating
Partnership of 74.2% multiplied by the sum of amortization of deferred
financing costs, franchise transfer costs and unearned officers'
compensation. This amount is then reduced by the Company's 74.2% share of
the sum of 4.0% of total revenue for each of the Initial Hotels that is
required to be set aside by the Operating Partnership for refurbishment
and replacement of FF&E, capital expenditures, and other non-routine
items as required by the Participating Leases and the estimated cash used
to pay interest expense related to the $24.6 million cost of planned
renovations and refurbishments at the seven Initial Hotels the Company
plans to convert to leading franchise brands in order to reposition such
hotels for future revenue growth. Estimated Cash Available for
Distribution does not include the effects of any revenue increases
expected to result from capital expenditures of the Initial Hotels.
(8) Represents estimated revenues less expenses plus minority interest,
depreciation, amortization, and amortization of unearned officers'
compensation. There are no pro forma adjustments for changes in working
capital items.
(9) Pro forma cash used in investing activities includes the Operating
Partnership's obligation to make available to the Lessee an amount equal
to 4.0% of total revenue for each of the Initial Hotels for the periodic
replacement or refurbishment of FF&E, capital expenditures, and other
non-routine items as required by the Participating Leases. The Company
intends to cause the Operating Partnership to spend amounts in excess of
such obligated amounts to comply with the reasonable requirements of any
Franchise License and otherwise to the extent that the Company deems such
expenditures to be in the best interest of the Company. See "The Initial
Hotels--The Participating Leases."
(10) Represents estimated initial distributions to be paid based on the
initial annual distribution rate of $1.60 per share and an aggregate of
9,716,624 shares of Common Stock and OP Units outstanding plus the debt
service on the DFW South Loan and the Secaucus Loans (as defined in "The
Initial Hotels--Mortgage Indebtedness Remaining Following the Offering").
(11) The Initial Hotels' financial data is derived by adding selected
financial data of the AGH Predecessor Hotels and the AGH Acquisition
Hotels. Such financial data exclude information regarding the AGH
Predecessor Hotels for periods prior to their acquisition by AGHI. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(12) Income taxes for the AGH Acquisition Hotels have not been deducted in
calculating revenue over (under) expenses.
(13) Pro forma amounts as if the Operating Partnership recorded depreciation
and amortization and paid real and personal property taxes and property
insurance contemplated by the Participating Leases, and the Formation
Transactions and the Offering occurred on January 1, 1995.
(14) Includes information from each AGH Predecessor Hotel for all periods
presented except that no information was available for the Holiday Inn
Dallas DFW Airport West, the Hampton Inn Richmond Airport, and the Hotel
Maison de Ville for the periods ended December 31, 1991 and 1992.
Information with respect to the periods before their respective dates of
acquisitions by affiliates of AGHI is based on information furnished to
management by the prior owners of the hotels.
(15) Includes information from each AGH Acquisition Hotel for all periods
presented except that no information was available for the Days Inn Ocean
City for the periods ended December 31, 1991 and 1992 and for the Holiday
Inn Mission Valley for the period ended December 31 1991. Information
with respect to the AGH Acquisition Hotels was obtained from the owners
of the AGH Acquisition Hotels and includes information for all periods.
(16) Information is for the periods owned by AGHI.
52
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Upon consummation of the Offering and the Formation Transactions, the
Company will own an approximate 74.2% interest in the Initial Hotels through
its interest in the Operating Partnership. In order for the Company to qualify
as a REIT, neither the Company nor the Operating Partnership can operate
hotels; therefore, the Operating Partnership will lease the Initial Hotels to
the Lessee. The principal source of revenue for the Operating Partnership and
the Company will be lease payments paid by the Lessee under the Participating
Leases. Participating Rent will be based upon the Initial Hotels' gross
revenues. The Lessee's ability to make payments to the Company under the
Participating Leases will be dependent on the Lessee's and AGHI's ability to
generate cash flow from the operations of the Initial Hotels.
The accompanying discussion and analysis of financial condition and results
of operations is based on the combined historical financial statements of the
AGH Predecessor Hotels and the AGH Acquisition Hotels that are included
elsewhere in this Prospectus. The AGH Predecessor Hotels' financial statements
include the results of operations of the following hotels since their dates of
acquisition by AGHI: Courtyard by Marriott-Meadowlands (December 1993), Hotel
Maison de Ville (August 1994), Hampton Inn Richmond Airport (December 1994)
and Holiday Inn Dallas DFW Airport West (June 1995). The AGH Acquisition
Hotels' financial statements include the results of operations of the
following hotels for all periods presented: Holiday Inn Dallas DFW Airport
South, Hilton Hotel-Toledo, Holiday Inn New Orleans International Airport,
Holiday Inn Park Center Plaza, Holiday Inn Select-Madison, Holiday Inn Mission
Valley, Le Baron Airport Hotel, Days Inn Ocean City and Fred Harvey
Albuquerque Airport Hotel. The four AGH Predecessor Hotels were combined into
one set of financial statements since they will be acquired by the Company and
are presently controlled by shareholders of AGHI. The nine AGH Acquisition
Hotels were combined into one set of financial statements since they will be
acquired by the Company primarily from parties unaffiliated with AGHI. The
Holiday Inn Dallas DFW Airport South Hotel is included in the AGH Acquisition
Hotels since AGHI owns only a minority non-controlling interest in such hotel.
The Hilton Hotel-Toledo is included in the AGH Acquisition Hotels since AGHI
purchased the hotel subsequent to March 31, 1996.
Estimated Revenues Less Expenses of the Company
On an estimated basis for the twelve months ended March 31, 1996, the
Company would have had $25,902,292 in revenue from the Participating Leases,
calculated by applying the rent provisions of the Participating Leases to the
estimated revenues of the Initial Hotels, and $31,500 in interest income from
the FF&E Note issued by the Lessee. Pro forma expenses would have been
$16,402,616. Depreciation expense would have been $6,551,900, which represents
depreciation of the AGH Predecessor Hotels' historical carryover cost basis
plus depreciation of the AGH Acquisition Hotels' new cost basis. General and
administrative expenses would have been $1,130,000 representing salaries and
wages of $561,000, professional fees of $125,000, directors' and officers'
insurance expense of $90,000 and other expenses of $354,000. Interest expense
would have been $1,633,962 on three notes totalling approximately $19.3
million related to the Holiday Inn Dallas DFW Airport South and the Courtyard
by Marriott-Meadowlands. The notes mature between December 2000 and February
2001 and bear interest at fixed rates ranging from 7.50% to 8.75%.
RESULTS OF OPERATIONS OF THE AGH PREDECESSOR HOTELS
As previously described, the year-to-year comparisons of the results of
operations of the AGH Predecessor Hotels are significantly impacted by the
hotel acquisitions. Net losses incurred for each of the three years ended
December 31, 1993, 1994 and 1995 were primarily a result of depreciation and
expenses incurred due to renovations at the hotels. The AGH Predecessor Hotels
generated net cash from operating activities of $147,616, $217,282 and
$790,304 for each of the three years ended December 31, 1993, 1994 and 1995,
respectively.
53
<PAGE>
Comparison of the three months ended March 31, 1996 to the three months ended
March 31, 1995
Room revenue increased to $2,624,614 from $1,625,360, an increase of
$999,254 or 61.5%, principally resulting from: (i) an increase of $950,688 in
revenue due to the acquisition of the Holiday Inn Dallas DFW Airport West in
June 1995, (ii) an increase in the Courtyard by Marriott-Meadowlands' room
revenues of $74,391 due to an increase in ADR to $88.32 from $80.79, and (iii)
a decrease in the Hotel Maison de Ville's room revenues of $25,694 because of
a decrease in occupancy of 7.4%, which was partially offset by ADR improvement
of 3.4% or $8.14 to $249.86.
Food and beverage revenue increased to $509,331 from $215,333, an increase
of $293,998 or 136.5%. The increase is due primarily to the acquisition of the
Holiday Inn Dallas DFW Airport West, which produced food and beverage revenues
in the first quarter of 1996 of $284,825. Increased occupancy at the Courtyard
by Marriott-Meadowlands accounted for the remainder of the increase in food
and beverage revenues.
Other revenue, which includes telephone revenues, interest income and
miscellaneous income, increased to $173,450 from $102,367, an increase of
$71,083 or 69.4%. Of the increase, $67,188 was due to the acquisition of the
Holiday Inn Dallas DFW Airport West discussed above.
Hotel operating expenses increased to $2,253,656 from $1,314,194, an
increase of $939,462 or 71.5%. The increase was due, in part, to the
acquisition of the Holiday Inn Dallas DFW Airport West, which had expenses of
$955,182 in 1996. Hotel operating expenses as a percentage of total revenue
increased from 67.6% in 1995 to 68.1% in 1996. The increase is primarily
attributable to the acquisition of the Holiday Inn Dallas DFW Airport West,
which incurred operating expenses as a percentage of total revenue for 1996 of
73.3%. This percentage is higher than the other hotels due to certain
transitional expenses incurred by the hotel.
Depreciation and amortization decreased to $304,936 from $1,041,418, a
decrease of $736,482 or 70.7%. The decrease is related to the accelerated
depreciation on FF&E that was replaced during the recent renovations at two of
the AGH Predecessor Hotels.
Interest and other expenses increased to $620,204 from $379,379, an increase
of $240,825 or 63.5%. The acquisition of the Holiday Inn Dallas DFW Airport
West in June 1995 and the interest expense related to the mortgage
indebtedness incurred in connection with the acquisition accounted for nearly
all of the increase.
Comparison of year ended December 31, 1995 to year ended December 31, 1994
Room revenue increased to $9,020,479 from $3,431,654, an increase of
$5,588,825 or 162.9%, principally resulting from: (i) an increase of
approximately $2,056,000 in revenue due to the acquisition of the Holiday Inn
Dallas DFW West in June 1995; approximately $1,850,000 in revenue from the
Hampton Inn Richmond Airport since its acquisition in late December 1994; and
approximately $955,000 in revenues from the Hotel Maison de Ville since its
acquisition in August 1994; (ii) an increase in the Courtyard by Marriott-
Meadowlands' ADR to $81.77 from $73.37; and (iii) an improvement in the
Courtyard by Marriott-Meadowlands' occupancy percentage to 77.8% from 70.1%.
The increases in both ADR and occupancy were due primarily to the
repositioning strategy implemented when the Courtyard by Marriott-Meadowlands
was converted from a Days Hotel in 1994.
Food and beverage revenue increased to $1,293,238 from $552,697, an increase
of $740,541, or 134.0% due primarily to activity at two of the three
acquisitions described above. Other revenue increased to $568,415 from
$223,211, or 154.7%, due to the activity at the three acquisitions described
above.
Hotel operating expenses increased to $7,565,824 from $3,173,721, an
increase of $4,392,103 or 138.4%. The acquisition of the Hotel Maison de Ville
(acquired August 1994), the Hampton Inn Richmond Airport (acquired December
1994) and the Holiday Inn Dallas DFW Airport West (acquired June 1995)
accounted for $968,511, $1,066,733 and $1,932,980 of the expense increase,
respectively. The remainder of the increase is related to the conversion of
the Courtyard by Marriott-Meadowlands from a Days Hotel. The hotel experienced
an increase in revenues of approximately $750,000 following the franchise
repositioning and consequently had an increase in operating expenses. Hotel
operating expenses as a percentage of total revenue decreased from
54
<PAGE>
75.4% in 1994 to 69.5% in 1995. The decrease is primarily attributable to the
inclusion of only the Courtyard by Marriott-Meadowlands and the Hotel Maison de
Ville in the 1994 operating results, which at the time were being transitioned
to the AGH Predecessor Hotels' management. Consequently, hotel operating
expenses as a percentage of total revenue were higher for these hotels in 1994
than in 1995.
Depreciation and amortization increased to $2,480,054 from $364,513, an
increase of $2,115,541 due in part to the following: (i) depreciation on the
assets of the three acquisitions described above, (ii) depreciation on
approximately $1,300,000 and approximately $2,200,000 of FF&E renovations and
additions during 1994 and 1995, respectively, and (iii) accelerated
depreciation on the FF&E replaced during the renovations.
Interest and other expenses increased to $2,326,437 from $955,822, an
increase of $1,370,615. The acquisitions in 1995 and 1994 increased debt by
approximately $8,300,000 and approximately $6,100,000, respectively. Related
interest expense increased by $1,141,709 due to the additional indebtedness
outstanding.
Comparison of year ended December 31, 1994 to year ended December 31, 1993
Room revenue increased to $3,431,654 from $17,941, an increase of $3,413,713,
principally resulting from (i) an increase of approximately $3,072,000 in
revenue from the Courtyard by Marriott-Meadowlands following its acquisition on
December 30, 1993 and (ii) approximately $342,000 in revenue attributable to
the acquisition of the Hotel Maison de Ville in August 1994. The only room
revenue reported for 1993 for the AGH Predecessor Hotels was $17,941 from the
acquisition of the Courtyard by Marriott-Meadowlands on December 30, 1993.
Food and beverage revenue increased to $552,697 from $6,158, a change of
$546,539, due primarily to the late 1993 acquisition of the Courtyard by
Marriott-Meadowlands compared to a full year's food and beverage revenue in
1994 and the acquisition of the Hotel Maison de Ville in August 1994. Other
revenue increased to $223,211 from $1,448, an increase of $221,763, due
primarily to the acquisitions described above.
Hotel operating expenses increased to $3,173,721 from $8,741, an increase of
$3,164,980. The expenses from 1993 include only two days of operations for the
Courtyard by Marriott-Meadowlands. Hotel operating expenses as a percentage of
total revenue were 75.4% in 1994.
Depreciation and amortization, interest and other expenses increased to
$1,320,335 from $47,813, representing an increase of $1,272,522, attributable
to depreciation of assets acquired in the hotel acquisitions described above.
RESULTS OF OPERATIONS OF AGH ACQUISITION HOTELS
The following table sets forth certain combined historical financial
information for the AGH Acquisition Hotels as a percentage of combined AGH
Acquisition Hotels' revenues for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Room revenue................ 64.7% 67.9% 69.1% 67.4% 69.1%
Food and beverage revenue... 27.1% 26.8% 25.4% 26.9% 25.0%
Other revenue............... 8.2% 5.3% 5.5% 5.7% 5.9%
------- ------- ------- --------- ---------
Total revenue............. 100.0% 100.0% 100.0% 100.0% 100.0%
Hotel operating expenses.... 70.5% 69.7% 67.4% 67.9% 65.5%
Depreciation and amortiza-
tion....................... 10.2% 9.5% 8.7% 11.8% 7.5%
Interest expense............ 8.2% 7.3% 7.3% 7.6% 7.5%
Other expenses.............. 4.4% 4.2% 3.7% 4.3% 3.9%
------- ------- ------- --------- ---------
Revenues over expenses...... 6.7% 9.3% 12.9% 8.4% 15.6%
======= ======= ======= ========= =========
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
KEY FACTORS
Occupancy ................... 71.0% 71.9% 73.1% 70.0% 72.1%
ADR.......................... $ 57.78 $ 62.32 $ 68.30 $65.73 $71.77
REVPAR....................... $ 41.01 $ 44.79 $ 49.93 $45.99 $51.75
</TABLE>
No assurance can be given that the trends reflected in this data will
continue or that occupancy, ADR and REVPAR will not decrease due to changes in
national or local economic or hospitality industry conditions.
Comparison of the three months ended March 31, 1996 to the three months ended
March 31, 1995
Room revenue improved to $11,561,801 from $10,232,424, an increase of
$1,329,377 or 13.0%. The change was attributable to the overall occupancy
growth to 72.1% from 70.0% and the overall improvement of ADR to $71.77 from
$65.73. Additionally, the two Initial Hotels located in San Jose, California,
experienced REVPAR growth of 37.2% and 58.4%, respectively, primarily due to
improved hotel industry fundamentals in San Jose.
Food and beverage revenue increased to $4,173,807 from $4,076,018, an
increase of $97,789 or 2.4%, primarily because of the overall occupancy
percentage growth of 2.7%. Other revenue, which includes telephone revenue,
increased to $989,702 from $869,608, an increase of $120,094 or 13.8%, also
due to the overall increase in occupancy.
Hotel operating expenses increased to $10,962,496 from $10,308,196, an
increase of $654,300 or 6.3%. The majority of the increase, $408,465, related
to the Holiday Inn Park Center Plaza and the Le Baron Airport Hotel due to
higher labor and variable costs at such hotels related to the rise in
occupancy in the first quarter of 1996. Hotel operating expenses as a
percentage of total revenue decreased from 67.9% in 1995 to 65.5% in 1996. The
decrease is primarily attributable to the overall increase in ADR at the AGH
Acquisition Hotels. Revenue increases resulting from rate improvements
generally do not result in increases in certain variable costs; consequently,
operating expenses are lower when expressed as a percentage of revenue.
Depreciation and amortization decreased to $1,222,556 from $1,729,152, a
decrease of $506,596 primarily due to accelerated depreciation in 1995 for
FF&E replaced during the renovations at the Holiday Inn Dallas DFW Airport
South.
Interest and other expenses increased to $1,511,214 from $1,397,421, an
increase of $113,793 or 8.1% primarily attributable to the refinancing of the
Holiday Inn Dallas DFW Airport South. As part of the refinancing, the owners
of the Holiday Inn Dallas DFW Airport South received distributions of
approximately $7,740,000.
Comparison of year ended December 31, 1995 to year ended December 31, 1994
Room revenue increased to $44,736,447 from $40,109,552, an increase of
$4,626,895 or 11.5%, principally as a result of a 9.6% increase in overall ADR
to $68.30 from $62.32 and an improvement in overall occupancy to 73.1% from
71.9%. The increases in ADR and occupancy are primarily attributable to the
completion of renovations at the Initial Hotels in 1994 and 1995.
Additionally, the two Initial Hotels located in San Jose, California,
experienced REVPAR growth of 23.5% and 20.3%, respectively, primarily due to
improved hotel industry fundamentals in San Jose.
Food and beverage revenue improved to $16,424,522 from $15,826,164, an
increase of $598,358 or 3.8%, and other revenue increased to $3,579,485 from
$3,169,064, an increase of $410,421 or 13.0% principally as a result of the
increase in overall occupancy.
Hotel operating expenses increased to $43,632,551 from $41,175,557, an
increase of $2,456,994 or 6.0%; however, as a percentage of total revenue,
expenses decreased to 67.4% from 69.7%. Advertising costs and
56
<PAGE>
utilities decreased as a percentage of total revenues and maintenance expense
decreased as a percentage of total revenues due to the completion of
renovations at the hotels.
Interest and other expenses increased to $5,632,372 from $5,161,116, an
increase of $471,256 or 9.1%, primarily attributable to increased variable
interest rates of certain debt during 1995.
Comparison of year ended December 31, 1994 to year ended December 31, 1993
Room revenue increased to $40,109,552 from $36,811,936, an increase of
$3,297,616 or 9.0%, principally as a result of a 2.7% overall improvement in
ADR to $62.32 from $57.78 and a .09% increase in overall occupancy. The
increases in ADR and occupancy were primarily due to improving market
conditions in Irving, Texas, Toledo, Ohio, Albuquerque, New Mexico, and San
Jose, California.
Food and beverage revenue increased to $15,826,164 from $15,446,922, an
increase of $379,242 or 2.5%. Other revenue decreased to $3,169,064 from
$4,678,562, a decline of $1,509,498 or 32.3%. In 1993, other revenue included
$1,814,609 of proceeds from a settlement payment relating to a default on the
lease of the Holiday Inn New Orleans International Airport Hotel in 1992.
Excluding this item, other revenue increased $305,111 or 6.5% attributable to
the overall increased occupancy percentage.
Hotel operating expenses rose to $41,175,557 from $40,122,041, an increase
of $1,053,516 or 2.6%. The increase was consistent with the increase in
overall occupancy.
Interest and other expenses decreased to $5,161,116 from $5,576,836, a
decrease of $415,720 or 7.5%, primarily attributable to a decrease in interest
expense due to a lower weighted average balance of indebtedness in 1994. In
1994, the AGH Acquisition Hotels made net principal repayments on indebtedness
of $2,459,985.
RESULTS OF OPERATIONS OF THE INITIAL HOTELS
The following table sets forth certain combined historical financial
information for the Initial Hotels as a percentage of the Initial Hotels'
total revenue for the periods indicated. The changes in room revenue, food and
beverage revenue, hotel operating expenses, and revenues over expenses for the
Initial Hotels resulted primarily from changes at the AGH Predecessor Hotels
and the AGH Acquisition Hotels, as previously discussed.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Room revenue................ 64.7% 68.8% 71.1% 69.3% 70.8%
Food and beverage revenue... 27.1 25.9 23.4 25.1 23.4
Other revenue............... 8.2 5.3 5.5 5.6 5.8
------- ------- ------- --------- ---------
Total revenue............. 100.0% 100.0% 100.0% 100.0% 100.0%
Hotel operating expenses.... 70.5 70.0 67.7 67.9 66.0
Depreciation................ 10.3 9.5 10.8 16.6 7.8
Interest expense............ 8.2 7.5 8.3 8.2 8.5
Other expenses.............. 4.4 4.8 4.1 4.5 4.0
------- ------- ------- --------- ---------
Revenues over expenses...... 6.6% 8.2% 9.1% 2.8% 13.7%
======= ======= ======= ========= =========
KEY FACTORS
Occupancy................... 71.6% 71.7% 72.9% 70.6% 70.7%
ADR......................... $57.65 $62.28 $69.19 $65.97 $73.33
REVPAR...................... $41.26 $44.67 $50.46 $46.56 $51.81
</TABLE>
57
<PAGE>
Comparison of the three months ended March 31, 1996 to the three months ended
March 31, 1995
Room revenue increased to $14,186,415 from $11,857,784, an increase of
$2,328,631 or 19.6%. Food and beverage revenues rose to $4,683,138 from
$4,291,351, an increase of $391,787 or 9.1%. Hotel operating expenses
increased to $13,216,152 from $11,622,390, an increase of $1,593,762 or 13.7%.
Accordingly, revenues over expenses increased to $2,754,158 from $484,400, an
increase of $2,269,758.
Comparison of year ended December 31, 1995 to year ended December 31, 1994
Room revenue increased to $53,756,926 from $43,541,206, an increase of
$10,215,720 or 23.5%. Food and beverage revenue increased to $17,717,760 from
$16,378,861, an increase of $1,338,899 or 8.2%. Hotel operating expenses
increased to $51,198,374 from $44,349,278, an increase of $6,849,096 or 15.4%.
As a result, revenues over expenses increased by $1,644,347 or 31.6%.
Comparison of year ended December 31, 1994 to year ended December 31, 1993
Room revenue increased to $43,541,206 from $36,829,877, an increase of
$6,711,329 or 18.2%. Food and beverage revenue increased to $16,378,861 from
$15,453,080, an increase of $925,781 or 6.0%. Hotel operating expenses
increased to $44,349,278 from $40,130,781, an increase of $4,218,497 or 10.5%.
As a result, revenues over expenses increased by $1,434,513 or 38.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to stockholders, will be its share of the Operating
Partnership's cash flow from the Participating Leases. The Lessee's
obligations under the Participating Leases are initially secured by the pledge
of 275,000 OP Units. The Lessee's ability to make rent payments under the
Participating Leases and the Company's liquidity, including its ability to
make distributions to stockholders, will be dependent on the ability of the
Lessee and AGHI to generate sufficient cash flow from the Initial Hotels.
Upon consummation of the Offering and application of the net proceeds, the
Company will have approximately $19.6 million of outstanding indebtedness. In
addition, the Company intends to acquire additional hotels and may incur
additional indebtedness to make such acquisitions or to meet distribution
requirements imposed on it under the Code to the extent that working capital
and cash flow from the Company's investments are insufficient to make such
distributions. The Company intends to limit consolidated indebtedness
(measured at the time the debt is incurred) to no more than 45.0% of the
Company's investment in hotels.
The Company has obtained a commitment for the $100 million Line of Credit,
which the Company will use to fund the acquisition of additional hotels, make
renovations and capital improvements to hotels and for working capital
requirements. The Line of Credit will be collateralized by, among other
things, first mortgage liens on all of the Initial Hotels (other than the
Holiday Inn Dallas DFW Airport South and Courtyard by Marriott-Meadowlands)
and, in certain circumstances, a mortgage lien on any subsequently acquired
hotels. While the Line of Credit permits borrowings up to $100 million, the
Company's aggregate advances under the Line of Credit are limited to the
lesser of (i) 40% of the aggregate appraised value of the Initial Hotels and
any other hotels securing the Line of Credit after giving effect to the
Company's use of proceeds from any indebtedness towards hotel acquisitions and
certain renovations and capital improvements, (ii) 40% of the aggregate
purchase price of the Initial Hotels and any other hotels securing the Line of
Credit after giving effect to the Company's use of proceeds from any such
indebtedness for hotel acquisitions and certain renovations and capital
improvements, and (iii) the combined trailing twelve months EBITDA (generally
defined as net income of the Company before interest expense, taxes,
depreciation and amortization to the extent each reduces net income) generated
by the Initial Hotels and any other hotels securing the Line of Credit,
multiplied by 5.0. Upon the closing of the Offering, the Company expects to
have approximately $60 million of borrowing capacity available under the Line
of Credit. The Company expects that its borrowing capacity under the Line of
Credit will increase to approximately $100 million, assuming all additional
borrowings are used to fund capital improvements to the Initial Hotels or the
acquisition of additional hotels. Outside of the Line of Credit, the Company
and its
58
<PAGE>
subsidiaries may not incur any additional debt or recourse obligations. The
Line of Credit will have an initial term of three years. Borrowings under the
Line of Credit will bear interest at 30-day, 60-day or 90-day LIBOR (the
"London Interbank Offered Rate"), at the option of the Company, plus 1.85% per
annum, payable monthly in arrears. Economic conditions could result in higher
interest rates, which could increase debt service requirements on borrowings
under the Line of Credit and which could reduce the amount of Cash Available
for Distribution. In addition, the Line of Credit provides that the lenders
must consent to any development activities by the Company other than
development in connection with the limited expansion of existing hotels. Also,
the Line of Credit lenders must approve the lessee and the franchise brand of
any hotel securing the Line of Credit in the future. See "The Initial Hotels--
Line of Credit."
The Company will invest in additional hotel properties only as suitable
opportunities arise, and the Company will not undertake investments unless
adequate sources of financing are available. It is expected that future
investments in hotel properties will be financed, in whole or in part, with the
balance of the proceeds from the Offering, if any, proceeds from additional
issuances of Common Stock, borrowings under the Line of Credit or from the
issuance of other debt or equity securities.
Approximately $18.3 million was spent on capital improvements at the Initial
Hotels during the period January 1, 1993 to March 31, 1996, as described in the
following table. The majority of the improvements are considered by the Company
to be revenue producing, as routine maintenance items are recorded as hotel
operating expenses.
<TABLE>
<CAPTION>
HOTEL DESCRIPTION COST
----- ----------- ----
<S> <C> <C>
Holiday Inn Dallas DFW
Airport South.......... Holidome cosmetic upgrades; guest room and $ 2,776,000
corridor carpets; significant renovations
to meeting rooms, conference and banquet
facilities; guest room and guest bathroom
improvements.
Holiday Inn Dallas DFW
Airport West........... Extensive upgrades to guest rooms, public 4,582,000
areas, food and beverage outlets, and
meeting room facilities.
Courtyard by Marriott-
Meadowlands............ Expenditures to convert the hotel from a 1,500,000
Days Hotel; additional guest room upgrades;
reconstruction of the restaurant and lounge
areas.
Hampton Inn Richmond
Airport................ Guest room soft goods and carpet upgrades; 443,000
public area carpeting; and a new front
office system.
Hilton Hotel-Toledo..... Cosmetic upgrades for guest rooms; carpet 1,069,000
for corridors; renovation of meeting
facilities, lobby and the restaurant.
Holiday Inn New Orleans
International Airport.. Renovation of the building exterior, public 3,236,000
areas, meeting rooms, restaurant, and the
Holidome area.
Holiday Inn Select- Improvements to convert to the Holiday Inn 473,000
Madison................ Select brand, including upgraded amenities
and cosmetic packages for the rooms.
Holiday Inn Park Center 304,000
Plaza.................. Renovations to the lobby and meeting areas.
Fred Harvey Albuquerque
Airport Hotel.......... Renovation of the restaurant, lobby, front 664,000
desk, gift shop and meeting rooms;
installation of a fire sprinkler system.
</TABLE>
Continued on next page.
59
<PAGE>
<TABLE>
<CAPTION>
HOTEL DESCRIPTION COST
----- ----------- ----
<S> <C> <C>
Le Baron Airport Hotel.. Renovations to two floors of guest rooms $ 993,000
and bathrooms; ballroom carpet; and
miscellaneous equipment.
Days Inn Ocean City..... Total guest room cosmetic upgrades and 529,000
public area renovations.
Holiday Inn Mission Improvements to the public areas including 926,000
Valley................. the lobby, front desk, restaurant, lounge
and meeting rooms; upgrade of 100 guest
rooms.
Hotel Maison de Ville... Extensive renovation to the cottages and 849,000
guest rooms, including refurbishment of
antique furniture; improvements to the
lobby area and garden court areas.
-----------
Total...................................... $18,344,000
===========
</TABLE>
The Participating Leases require the Company to establish annual minimum
reserves equal to 4.0% of total revenue for each of the Initial Hotels (which,
for the twelve months ended March 31, 1996, represented approximately 5.6% of
room revenue), which reserves will be utilized by the Lessee for the
replacement and refurbishment of FF&E, and other capital expenditures to
enhance the competitive position of the Initial Hotels. The Company and the
Lessee will agree on the use of funds in this reserve, and the Company will
have the right to approve the Lessee's long-term capital expenditure budgets.
Based on the experience of AGHI in operating the AGHI Predecessor Hotels, the
Company believes that such amount will be sufficient to fund required
expenditures for the term of the Participating Leases. The Company anticipates
entering into a similar arrangement with respect to future hotel properties in
which it invests. While the Company expects its reserve to be adequate to fund
recurring capital needs (including periodic renovations), the Company may use
Cash Available for Distribution in excess of distributions paid (subject to
federal income tax restrictions on the Company's ability to retain earnings)
or funds drawn under the Line of Credit or other borrowings to fund additional
capital improvements, as necessary, including major renovations at the
Company's hotels.
Net cash provided by operating activities for the year ended December 31,
1995 was $790,304, an increase from $217,282 for the year ended December 31,
1994. The increase is primarily due to an increase in operating income of
approximately $1.0 million which was partially offset by a net decrease in
cash from changes in working capital items.
Net cash used in investing activities for the year ended December 31, 1995
was $10,364,977, an increase from $8,992,154 for the year ended December 31,
1994. The increase was mainly due to renovations and hotel acquisitions as
described above.
Net cash used in financing activities for the year ended December 31, 1995
was $9,817,215, an increase from $8,646,822 for the year ended December 31,
1994. The increase was mainly due to borrowings associated with the previously
described acquisitions, which increase was partially offset by lower capital
contributions received in 1995.
FRANCHISE CONVERSIONS
The Company expects to spend up to approximately $24.6 million on additional
capital improvements during the twelve months following the completion of the
Offering in connection with the planned renovation and conversion of the
Holiday Inn Select-Madison, the Holiday Inn Park Center Plaza, the Fred Harvey
Albuquerque Airport Hotel, the Le Baron Airport Hotel, the Days Inn Ocean
City, the Holiday Inn Mission
60
<PAGE>
Valley, and the Holiday Inn New Orleans International Airport to new franchise
brands. In certain circumstances, such renovations and improvements are being
completed in connection with franchisor requirements. The following table
describes such renovations and improvements.
<TABLE>
<CAPTION>
DESCRIPTION OF
HOTEL RENOVATION/IMPROVEMENT ANTICIPATED COST
----- --------------------------------- ----------------
<S> <C> <C>
Holiday Inn Select-
Madison.................. Upgrade guest rooms and public $ 1,714,000
areas in connection with
conversion to Crowne Plaza brand.
Holiday Inn Park Center
Plaza.................... Upgrade guest rooms and public 4,667,000
areas and convert ninth floor to
Club level in connection with
conversion to Crowne Plaza brand.
Fred Harvey Albuquerque
Airport Hotel............ Upgrade guest rooms and public 5,017,000
areas and convert meeting space
to additional guest rooms in
connection with conversion to
Wyndham Hotel brand.
Le Baron Airport Hotel.... Upgrade public areas and guest 6,500,000
rooms and convert ninth floor to
concierge floor in connection
with conversion to
DoubleTree Hotel brand.
Days Inn Ocean City....... Upgrade guest rooms and public 1,905,000
areas in connection with
conversion to Hampton Inn brand.
Holiday Inn Mission
Valley................... Upgrade guest rooms and public 2,505,000
areas in connection with
conversion to DoubleTree Hotel
brand.
Holiday Inn New Orleans
International Airport.... Upgrade guest rooms and public 2,295,000
areas in connection with
conversion to Holiday Inn Select
brand.
-----------
Total............................ $24,603,000
===========
</TABLE>
There can be no assurance that the Company will be able to complete the
scheduled capital improvements within the twelve months following the
completion of the Offering or that the anticipated costs for the capital
improvements will not exceed the amounts budgeted for that purpose. The
Company intends to use borrowings under the Line of Credit to fund these
expenditures.
INFLATION
Operators of hotels, in general, possess the ability to adjust room rates
quickly. Competitive pressures may, however, limit the Lessee's ability to
raise room rates in the face of inflation. Since 1987, industry-wide annual
increases in ADR have failed to keep pace with inflation.
SEASONALITY
The hotel industry is seasonal in nature. Generally, hotel revenue is
greater in the second and third quarters of a calendar year, although this may
not be true for hotels in major tourist destinations. Revenue for hotels in
tourist areas generally is substantially greater during the tourist season
than other times of the year. Seasonal variations in revenue at the Initial
Hotels may cause quarterly fluctuations in the Company's lease revenue.
61
<PAGE>
THE HOTEL INDUSTRY
According to Smith Travel Research, the United States lodging industry is
currently experiencing a significant recovery from an extended period of
unprofitable performance in the late 1980's and early 1990's. The Company
believes that this broad industry recovery will contribute to growth in
occupancy, room rates and revenue at the Initial Hotels (and hotels
subsequently acquired by the Company) which, in turn, will result in increases
in the Company's Cash Available for Distribution.
According to Smith Travel Research, the hotel industry experienced an
extended period of unprofitable performance from 1986 to 1991. The industry
downturn resulted from a dramatic increase in the supply of hotel rooms that
significantly outpaced growth in demand. The growth in supply, which resulted
from the development of new hotels, was supported by the availability of
financing from banks, savings and loans, insurance companies, high yield bonds
and various tax incentives. According to Smith Travel Research, and as
demonstrated in the chart below, total room supply in the United States
increased by 32.0%, or approximately 750,000 rooms, from 1980 to 1991. Of this
increase, approximately 567,000 rooms were added between 1985 and 1991. In all
but two of these years (1988 and 1989), increases in supply substantially
exceeded growth in demand. In some years, demand remained flat or even
declined. As a result of the extended supply/demand imbalance, overall hotel
occupancy rates dropped steadily from 70.6% in 1980 to a 20-year low of 60.9%
in 1991. The graph set forth below illustrates the relationship between supply,
demand and occupancy. Increases in demand in excess of increases in supply
necessarily result in higher occupancy.
Percentage Change in United States Hotel Room Supply vs. Demand
(1980-1995)
[LOGO OF BAR GRAPH APPEARS HERE]
62
<PAGE>
The hotel industry began its recovery in 1992. New hotel construction
declined considerably as lenders who previously supported development focused
on restructurings and foreclosures of existing hotel loans. With minimal new
capital available for hotel construction, the growth in room supply declined
from a high of 4.2% in 1988 to 1.7% in 1995, and has averaged approximately
1.8% since 1992. By contrast, room demand has increased with the improving
economy, and average occupancy and room rates have moved steadily upward.
According to Smith Travel Research, overall hotel occupancy increased from
60.9% in 1991 to 65.5% in 1995. Average room rate growth increased from 1.4%
in 1992 to 4.8% in 1995.
While the hotel industry's recovery has been broad-based, the Company
believes that the greatest continuing growth in occupancy and room rates will
occur in the full-service segment of the industry due to the relative lack of
current new construction of full-service hotels and the lead time required for
new full-service hotels to be developed and opened. Accordingly, the Company
intends to focus its acquisition and selected development activities primarily
on full-service hotels. The Company also believes the hotel industry's
difficulties in the 1980's and changes in tax and banking laws have produced a
more responsible relationship between hotel developers and financing sources.
As a result, the Company believes that future additions to full-service hotel
supply will be more demand-driven, minimizing the overbuilding in key markets
that characterized supply growth in the late 1980's, and increasing the
prospect for continued growth of revenues in the hotel industry for the
foreseeable future.
THE INITIAL HOTELS
The thirteen Initial Hotels are diversified by five different national hotel
affiliations, including Hilton, Courtyard by Marriott, Holiday Inn, Hampton
Inn and Days Inn and include eleven full-service hotels, including one hotel
with a conference center, and two limited-service hotels. In addition, the
Company plans to reposition, within one year after the completion of the
Offering, seven of the Initial Hotels (four Holiday Inns, one Days Inn and two
independent hotels), through an upgrade and conversion into hotels that
operate under the Wyndham Hotel, DoubleTree Hotel, Crowne Plaza, Holiday Inn
Select and Hampton Inn brands. The Company believes that following such
upgrading and conversion, these hotels will experience increases in occupancy
and room rates as a result of the new franchisors' national brand recognition,
reservation systems and group sales organization. There can be no assurance,
however, that such brand conversions and repositionings will occur as planned
or that, if such brand conversions and repositionings occur, the affected
hotels will experience occupancy and rate increases. The Company believes that
the diversity of its initial portfolio moderates the potential effects on the
Company of regional economic conditions or local market competition affecting
specific hotel franchises, hotel markets, or price segments within the
industry. The hotels are located primarily in major metropolitan areas at or
in close proximity to commercial airports, interstate highways and local
commercial demand generators such as regional shopping centers, convention
centers, and tourist attractions.
The following table sets forth certain information with respect to the
Initial Hotels. The chart summarizes the historical performance of the Initial
Hotels for each of the three years ended December 31, 1995 and for the three
months ended March 31, 1995 and 1996. This information is provided for all
Initial Hotels, including those not owned or managed by AGHI or its affiliates
prior to the Offering, for the full three-year period. The operating
performance of the Holiday Inn Dallas DFW Airport West and the Hampton Inn
Richmond Airport was impacted during 1995 by extensive and ongoing renovations
at those hotels.
63
<PAGE>
<TABLE>
<CAPTION>
RENOVATION AND THREE MONTHS ENDED
CAPITAL YEAR ENDED DECEMBER 31, MARCH 31,
YEAR NUMBER OF IMPROVEMENT ----------------------------------------- ------------------------
INITIAL OPENED/ GUEST EXPENDITURES % % %
HOTEL/LOCATION(1) RENOVATED(2) ROOMS 1/1/93-3/31/96 1993 1994 CHANGE 1995 CHANGE 1995 1996 CHANGE
----------------- ------------ --------- -------------- ------- ------- ------ ------- ------ ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn
Dallas DFW
Airport South(3)
Irving, Texas... 1974/1995 409 $ 2,776
Occupancy....... 76.0% 76.7% 0.9% 76.9% 0.3% 75.9% 77.3% 1.8%
ADR............. $ 51.82 $ 63.19 22.0% $ 71.26 12.8% $ 70.76 $ 79.89 12.9%
REVPAR.......... $ 39.39 $ 48.44 23.0% $ 54.78 13.1% $ 53.70 $ 61.74 15.0%
Holiday Inn
Dallas DFW
Airport West(3)
Bedford, Texas.. 1974/1995 243 4,582
Occupancy....... 74.2% 70.0% (5.7%) 69.4% (0.8%) 80.1% 62.1% (22.5%)
ADR............. $ 46.37 $ 48.85 5.3% $ 60.08 23.0% $ 48.32 $ 69.58 44.0%
REVPAR.......... $ 34.41 $ 34.19 (0.6%) $ 41.70 22.0% $ 38.72 $ 43.23 11.6%
Courtyard by
Marriott-
Meadowlands(3)
Secaucus, New
Jersey.......... 1989/1994 165 1,500
Occupancy....... 74.8% 70.1% (6.3%) 77.8% 10.9% 68.2% 68.0% (0.3%)
ADR............. $ 65.63 $ 73.37 11.8% $ 81.77 11.4% $ 80.79 $ 88.32 9.3%
REVPAR.......... $ 49.09 $ 51.44 4.8% $ 63.58 23.6% $ 55.08 $ 60.04 9.0%
Hampton Inn
Richmond
Airport(3)
Richmond,
Virginia........ 1987/1995 124 443
Occupancy....... 75.9% 76.3% 0.6% 70.8% (7.2%) 66.6% 62.7% (5.9%)
ADR............. $ 46.71 $ 50.84 8.8% $ 57.69 13.5% $ 55.07 $ 59.13 7.4%
REVPAR.......... $ 35.45 $ 38.81 9.5% $ 40.86 5.3% $ 36.69 $ 37.08 1.1%
Hilton Hotel-
Toledo(3)
Toledo, Ohio.... 1987/1994 213 1,069
Occupancy....... 66.7% 72.5% 8.8% 72.8% 0.3% 69.2% 65.0% (6.1%)
ADR............. $ 52.29 $ 54.59 4.4% $ 59.98 9.9% $ 57.66 $ 63.42 10.0%
REVPAR.......... $ 34.87 $ 39.59 13.6% $ 43.65 10.2% $ 39.93 $ 41.23 3.3%
Holiday Inn New
Orleans
International
Airport(3)(4)(9)
Kenner,
Louisiana....... 1973/1994 304 3,236
Occupancy....... 80.8% 79.2% (1.9%) 81.2% 2.5% 85.1% 78.2% (8.0%)
ADR............. $ 60.61 $ 61.49 1.5% $ 72.83 18.5% $ 73.70 $ 79.23 7.5%
REVPAR.......... $ 48.94 $ 48.71 (0.5%) $ 59.16 21.5% $ 62.69 $ 61.99 (1.1%)
Holiday Inn
Select-
Madison(5)(9)
Madison, Wisconsin.. 1987/1995 227 473
Occupancy....... 79.6% 78.7% (1.2%) 79.3% 0.8% 77.8% 75.7% (2.7%)
ADR............. $ 74.47 $ 78.25 5.1% $ 78.46 0.3% $ 77.42 $ 79.25 2.4%
REVPAR.......... $ 59.31 $ 61.60 3.9% $ 62.26 1.1% $ 60.20 $ 59.97 (0.4%)
Holiday Inn Park
Center
Plaza(5)(9)
San Jose,
California...... 1975/1990 231 304
Occupancy....... 58.4% 62.2% 6.4% 72.1% 16.0% 65.0% 81.1% 24.8%
ADR............. $ 72.47 $ 73.41 1.3% $ 78.16 6.5% $ 77.61 $ 85.32 9.9%
REVPAR.......... $ 42.35 $ 45.66 7.8% $ 56.38 23.5% $ 50.46 $ 69.22 37.2%
Fred Harvey
Albuquerque
Airport
Hotel(6)(9)
Albuquerque, New
Mexico.......... 1972/1994 266 664
Occupancy....... 85.2% 83.5% (2.0%) 83.7% 0.2% 80.7% 79.3% (1.7%)
ADR............. $ 48.11 $ 53.23 10.6% $ 53.24 0.0% $ 51.89 $ 52.65 1.5%
REVPAR.......... $ 40.98 $ 44.44 8.4% $ 44.55 0.2% $ 41.85 $ 41.75 (0.2%)
Le Baron Airport
Hotel(7)(9)
San Jose,
California...... 1973/1995 327 993
Occupancy....... 64.3% 66.2% 3.0% 65.2% (1.4%) 61.2% 79.5% 30.0%
ADR............. $ 47.85 $ 52.77 10.3% $ 64.40 22.0% $ 59.03 $ 71.93 21.9%
REVPAR.......... $ 30.76 $ 34.93 13.5% $ 42.01 20.3% $ 36.12 $ 57.21 58.4%
Days Inn Ocean
City(3)(8)(9)
Ocean City,
Maryland........ 1989/1994 162 529
Occupancy....... 45.9% 45.8% (0.3%) 49.3% 7.6% 31.2% 26.6% (14.6%)
ADR............. $ 64.72 $ 70.91 9.6% $ 76.10 7.3% $ 36.99 $ 49.22 33.0%
REVPAR.......... $ 29.71 $ 32.47 9.3% $ 37.50 15.5% $ 11.53 $ 13.10 13.6%
Holiday Inn
Mission
Valley(7)(9)
San Diego,
California...... 1970/1995 318 926
Occupancy....... 68.6% 69.8% 1.7% 68.5% (1.9%) 66.3% 64.5% (2.7%)
ADR............. $ 61.09 $ 62.94 3.0% $ 65.17 3.5% $ 63.31 $ 61.72 (2.5%)
REVPAR.......... $ 41.94 $ 43.94 4.8% $ 44.63 1.6% $ 41.98 $ 39.81 (5.2%)
Hotel Maison de
Ville(3)
New Orleans,
Louisiana....... 1788/1994 23 849
Occupancy....... 64.1% 61.7% (3.8%) 66.5% 7.8% 75.1% 67.7% (9.8%)
ADR............. $188.18 $201.80 7.2% $232.97 15.4% $241.72 $249.86 3.4%
REVPAR.......... $120.65 $124.50 3.2% $154.91 24.4% $181.43 $169.16 (6.8%)
----- -------
Totals .......... 3,012 $18,344
===== =======
Weighted
Averages:
Occupancy....... 71.6% 71.7% 0.2% 72.9% 1.7% 70.6% 70.7% 0.1%
ADR............. $ 57.65 $ 62.28 8.0% $ 69.19 11.1% $ 65.97 $ 73.33 11.2%
REVPAR.......... $ 41.26 $ 44.67 8.3% $ 50.46 13.0% $ 46.56 $ 51.81 11.3%
</TABLE>
See notes on following page.
64
<PAGE>
- --------
(1) The occupancy, ADR and REVPAR calculations for the Initial Hotels are
derived from room revenue included in the audited financial data relating
to each of the Initial Hotels for each of the periods indicated except for
the following hotels, for which information is audited only from the date
of acquisition of such hotel by AGHI (such date is set forth in
parentheses): Hotel Maison de Ville (August 1994), Holiday Inn Dallas DFW
Airport West (June 1995), Hampton Inn Richmond Airport (December 1994) and
Courtyard by Marriott-Meadowlands (December 1993). The occupancy, ADR and
REVPAR calculations for the periods prior to the date of acquisition of
the hotels have been provided to management by the prior owners of such
hotels.
(2) Year renovated reflects the calendar year in which management deems that a
significant renovation was completed at the hotel.
(3) This hotel is currently operated and managed by AGHI. The following sets
forth the date AGHI began managing each such hotel: the Holiday Inn New
Orleans International Airport (February 1995), the Courtyard by Marriott-
Meadowlands (February 1993), the Hilton Hotel-Toledo (February 1993), the
Holiday Inn Dallas DFW Airport South (December 1991), the Holiday Inn
Dallas DFW Airport West (June 1995), the Hampton Inn Richmond Airport
(November 1993), the Hotel Maison de Ville (August 1992) and the Days Inn
Ocean City (February 1993).
(4) The Company plans to reposition this hotel to operate as a Holiday Inn
Select.
(5) The Company plans to reposition this hotel to operate as a Crowne Plaza.
(6) This hotel also has an affiliation with Best Western. The Company plans to
reposition this hotel to operate as a Wyndham Hotel.
(7) The Company plans to reposition this hotel to operate as a DoubleTree
Hotel.
(8) The Company plans to reposition this hotel to operate as a Hampton Inn.
(9) There can be no assurance that the brand conversion and repositioning of
this hotel will occur as planned.
DESCRIPTIONS OF INITIAL HOTELS
Eleven of the Initial Hotels are full-service hotels with an aggregate of
2,726 guest rooms, which target both business and leisure travelers, including
meetings and groups, who prefer a full range of facilities, services and
amenities. After completion of the Company's planned repositionings, the
Company's full-service Initial Hotels will include one Courtyard by Marriott,
one Hilton, two Holiday Inns, one Wyndham Hotel, two DoubleTree Hotels, two
Crowne Plazas, one Holiday Inn Select and one independent hotel. Full-service
hotels generally offer a full range of meeting and conference facilities and
banquet space. Facilities typically include restaurants and lounge areas, gift
shops and recreational facilities, including swimming pools. Full-service
hotels generally provide a significant array of guest services, including room
service, valet services and laundry. As a result, full-service hotels often
generate significant revenue from sources other than guest room revenue.
Two of the Initial Hotels are limited-service hotels with an aggregate of
286 guest rooms, which target both business and leisure travelers. After
completion of the Company's planned repositionings, the Company's limited-
service hotels will consist of two Hampton Inns. Limited-service hotels have
limited or no meeting space. Hotels operating in this market segment generally
seek to minimize operational costs by offering only those basic services
required by travelers; thus, guest room revenues account for substantially all
of the revenues generated by these hotels. Because they cater to both business
and leisure travelers and therefore maintain relatively consistent occupancy
on weekdays and weekends, limited-service hotels often achieve occupancy rates
higher than full-service hotels.
Set forth below is a description of the Company's Initial Hotels.
AGH PREDECESSOR HOTELS
Holiday Inn Dallas DFW Airport West--Bedford, Texas
The Holiday Inn Dallas DFW Airport West is located in Bedford, a suburban
community west of the Dallas/Fort Worth International Airport. Originally
constructed in 1972 with an addition in 1987, the hotel
65
<PAGE>
contains 243 guest rooms and features approximately 5,190 square feet of
meeting facilities, a restaurant and a theme lounge.
Upon AGHI's acquisition of the hotel in June 1995, AGHI immediately
implemented a significant capital improvement program that included renovations
to the exterior of the building, guest rooms, meeting facilities, food and
beverage outlets and the remaining public space. AGHI also changed the hotel's
guest mix by replacing the lower-rated contract demand business (principally
airline flight crews) with higher rate corporate business.
In 1994, occupancy, ADR and REVPAR at the Holiday Inn Dallas DFW Airport West
were 70.0%, $48.85 and $34.19, respectively. By the twelve months ended March
31, 1996, occupancy at the hotel had decreased 7.3% to 64.9%, due to the change
in focus from the contract demand business to the higher-rated corporate
business in order to increase ADR and REVPAR. Also, by the twelve months ended
March 31, 1996, ADR at the hotel had increased 35.2% to $66.05 and REVPAR at
the hotel increased 25.3% to $42.84. The Company is acquiring the hotel, which
has been managed by AGHI since June 1995, from a partnership owned by
affiliates of AGHI and certain investors not affiliated with AGHI.
Courtyard by Marriott-Meadowlands--Secaucus, New Jersey
The Courtyard by Marriott-Meadowlands is located within the Harmon Meadow
mixed-use development across the Hudson River from New York City. The hotel
opened in April 1989 and is situated between two nationally-recognized
restaurants. It contains 165 guest rooms and its features include meeting
facilities, a restaurant, lounge and fitness facilities.
AGHI acquired the Courtyard by Marriott-Meadowlands in December 1993. At the
time of its acquisition by AGHI, this hotel faced declining operating
performance due to prior management inefficiencies, deferred maintenance and a
lack of capital to effectively compete in its market. In response to these
conditions, AGHI developed a multi-phase strategy, including repositioning the
former Days Hotel to a Courtyard by Marriott and upgrading the hotel by making
approximately $530,000 in renovations to guest rooms and public space and
exterior improvements to the hotel. Since May 1994, AGHI has invested an
additional $845,400 to further improve the restaurant, lounge, exterior
entrances, guest rooms and meeting facilities.
In 1993, occupancy, ADR and REVPAR at the Courtyard by Marriott-Meadowlands
were 74.8%, $65.63 and $49.09, respectively. By the twelve months ended March
31, 1996, occupancy at the hotel had increased 3.9% to 77.7%, ADR at the hotel
had increased 27.1% to $83.42 and REVPAR at the hotel had increased 32.0% to
$64.82. The Company is acquiring the hotel, which has been managed by AGHI
since February 1993, from a partnership owned by affiliates of AGHI. See "The
Initial Hotels--Ground Leases."
Hampton Inn Richmond Airport--Richmond, Virginia
The Hampton Inn Richmond Airport is located in an established industrial and
commercial area adjacent to Richmond International Airport. Constructed in
1988, the hotel contains 124 rooms and features hospitality suites, a swimming
pool and complimentary breakfast service. AGHI acquired the hotel in December
1994, after which it implemented a $376,000 capital improvement program which
included the renovation of guest rooms and public areas.
In 1994, occupancy, ADR and REVPAR at the Hampton Inn Richmond Airport were
76.3%, $50.84 and $38.81, respectively. By the twelve months ended March 31,
1996, occupancy at the hotel had decreased 8.5% to 69.9% due to renovations at
the hotel and the change in focus from lower-rated discount business to higher-
rated corporate group business in order to increase ADR and REVPAR. Also by the
twelve months ended March 31, 1996, ADR at the hotel had increased 15.3% to
$58.64, and REVPAR at the hotel increased 5.5% to $40.96. The Company is
acquiring the hotel, which has been managed by AGHI since November 1993, from a
partnership owned by affiliates of AGHI.
66
<PAGE>
Hotel Maison de Ville--New Orleans, Louisiana
The Hotel Maison de Ville is situated in a landmark location in the heart of
the French Quarter in New Orleans at the intersection of Bourbon and Rue
Toulouse streets and has had such notable live-ins as John James Audubon and
Tennessee Williams. Originally built in 1788, the 23-room hotel consists of
seven cottages, two suites and fourteen guest rooms. The hotel's features
include an award-winning bistro and outdoor pool. The hotel was acquired by
affiliates of AGHI in August 1994.
After the hotel was acquired, AGHI instituted renovations totaling $650,000
designed to restore the hotel's authentic style. In 1993, occupancy, ADR and
REVPAR at the Hotel Maison de Ville were 64.1%, $188.18 and $120.65,
respectively. By the twelve months ended March 31, 1996, occupancy at the hotel
had increased 0.8% to 64.7%, ADR at the hotel had increased 24.8% to $234.85
and REVPAR at the hotel had increased 25.9% to $151.84. The restaurant
facilities, three guest rooms and an accounting office at the hotel are subject
to a space lease with a third party lessor; such lease expires in 2014 and
requires annual minimum rent of $42,000 (increasing to an annual minimum rent
of $51,000 in the final year of the lease). The Company is acquiring the hotel,
which has been managed by AGHI since August 1992, from a partnership owned by
affiliates of AGHI and certain investors not affiliated with AGHI.
AGH ACQUISITION HOTELS
Hilton Hotel-Toledo--Toledo, Ohio
The Hilton Hotel-Toledo is located on the campus of the Medical College of
Ohio in Toledo, Ohio. The hotel was developed in 1987, and consistent upgrading
of the property has allowed the hotel to maintain a facility that, the Company
believes, is among the finest in Northwest Ohio. The 213-room hotel is
connected to the Medical College of Ohio at Toledo's Eleanor N. Dana Conference
Center, which has approximately 13,000 square feet of conference space, and its
Morse Health & Fitness Center, both of which may be used by the hotel's guests.
The Morse Health & Fitness Center has over 33,000 square feet of state-of-the-
art fitness equipment, basketball and racquet ball courts and an indoor running
track, and is staffed by fitness professionals. AGHI is the exclusive supplier
of food and beverage services for the Eleanor N. Dana Conference Center. See
"The Initial Hotels--Ground Leases." The Company plans to invest approximately
$340,000 in capital improvements at the hotel during the twelve months
following the closing of the Offering.
In 1993, occupancy, ADR and REVPAR at the Hilton Hotel-Toledo were 66.7%,
$52.29 and $34.87, respectively. By the twelve months ended March 31, 1996,
occupancy at the hotel had increased 7.5% to 71.7%, ADR at the hotel had
increased 17.2% to $61.31 and REVPAR at the hotel had increased 26.1% to
$43.96. The Company is acquiring the hotel, which has been managed by AGHI
since February 1993, from a partnership owned by affiliates of AGHI and certain
investors not affiliated with AGHI.
Holiday Inn Dallas DFW Airport South--Irving, Texas
The Holiday Inn Dallas DFW Airport South is located near the south entrance
of the Dallas/Fort Worth International Airport in Irving, Texas. The main
building was constructed in 1974 with a guest-room tower added in 1983. The
Holidome(R) facility, a vacation hotel with additional facilities primarily for
children and youth, contains 409 rooms and features an approximately 13,000
square foot conference center, a fitness facility, a theme lounge, multiple
food outlets, indoor and outdoor pools and a "Kids Corner." The Company
believes that the hotel is currently the largest Holiday Inn in the
southwestern United States.
AGHI, after its retention as manager of the Holiday Inn Dallas DFW Airport
South in December 1991 and its acquisition of an interest in the hotel in May
1992, commenced an extensive $2.5 million renovation of the hotel, which
included upgrades of all guest rooms and corridors, common areas, meeting
space, restaurants and the lounge and renovation of the exterior of the
building. At the time of purchase, the hotel had lost its Holiday Inn franchise
due to product deficiencies and was experiencing declining occupancy arising
from poor marketing
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and insufficient capital improvements. Since AGHI's completion of the initial
renovations in 1992, an additional $2.5 million has been spent to upgrade the
hotel.
In 1992, occupancy, ADR and REVPAR at the Holiday Inn Dallas DFW Airport
South were 49.1%, $54.18 and $26.61, respectively. By the twelve months ended
March 31, 1996, occupancy at the hotel had increased 57.2% to 77.2%, ADR at the
hotel had increased 35.7% to $73.54 and REVPAR at the hotel had increased
113.4% to $56.79. The Company is acquiring the hotel, which has been managed by
AGHI since December 1991, from a partnership owned by affiliates of AGHI and
certain investors not affiliated with AGHI.
The Holiday Inn Dallas DFW Airport South constitutes more than 10% of the
aggregate historical cost basis of the Initial Hotels. The aggregate tax bases
of depreciable real and personal property of the hotel for federal income tax
purposes were approximately $3.3 million and $1.0 million, respectively, as of
December 31, 1995. Depreciation is computed for federal income tax purposes
using the straight-line method over a 39-year life for the real property and
declining balance methods over lives which range from five to seven years for
the personal property.
The 1994 realty tax rate for the Holiday Inn Dallas DFW Airport South was
$46.08 per $1,000 of assessed value. The total annual tax at this rate for the
twelve months ended March 31, 1996 was approximately $315,000.
Holiday Inn New Orleans International Airport--Kenner, Louisiana
The Holiday Inn New Orleans International Airport is located in suburban
Kenner, approximately one-half mile from the entrance to the New Orleans
International Airport. The Holidome facility is the closest Holiday Inn to the
New Orleans International Airport. The hotel contains 304 rooms and features
approximately 5,000 square feet of meeting and banquet space, as well as
fitness facilities, a restaurant, a lounge, and a business center. The hotel
underwent a $1.6 million capital improvement program during 1993 and 1994 which
included the renovation of the exterior of the building, food and beverage
facilities, guest rooms, meeting rooms and public space.
AGHI began its operation of the hotel in February 1995. In 1994, occupancy,
ADR and REVPAR at the Holiday Inn New Orleans International Airport were 79.2%,
$61.49 and $48.71, respectively. By the twelve months ended March 31, 1996,
occupancy at the hotel had increased 0.4% to 79.5%, ADR at the hotel had
increased 20.6% to $74.17 and REVPAR at the hotel had increased 21.1% to
$58.99. Within the twelve months following its acquisition of the hotel, the
Company plans approximately $2.3 million in capital expenditures and
renovations in order to reposition the hotel under the Holiday Inn Select
brand. There can be no assurance that such brand conversion will occur. The
Company is acquiring the hotel, which has been managed by AGHI since February
1995, from a limited liability company not affiliated with AGHI.
The Holiday Inn New Orleans International Airport constitutes more than 10%
of the aggregate historical cost basis of the Initial Hotels. The aggregate tax
bases of depreciable real and personal property of the hotel for federal income
tax purposes were approximately $7.4 million and $200,000, respectively, as of
December 31, 1995. Depreciation is computed for federal income tax purposes
using the straight-line method over a 39-year life for the real property and
declining balance methods over lives which range from five to seven years for
the personal property.
The 1995 realty tax rate for the Holiday Inn New Orleans International
Airport was $97.66 per $1,000 of assessed value. The total annual tax at this
rate for the twelve months ended March 31, 1996 was approximately $133,000.
Days Inn Ocean City--Ocean City, Maryland
The Days Inn Ocean City is located on the area's primary commercial
boulevard, one block north of the Ocean City Convention Center and two blocks
west of the Atlantic Ocean beaches, and serves both the leisure
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and conventions markets. The seven-story hotel was built in 1989. It contains
162 rooms and features approximately 3,600 square feet of meeting space and an
indoor pool. A $529,000 capital-improvement program was completed at the hotel
in 1995 which included renovation of the guest rooms, meeting facilities and
public space. The Company intends to invest approximately $1.9 million to
convert and upgrade the hotel to operate under the Hampton Inn brand within
the twelve months following the acquisition of the hotel. There can be no
assurance that such brand conversion will occur.
In 1993, occupancy, ADR and REVPAR at the Days Inn Ocean City were 45.9%,
$64.72 and $29.71, respectively. By the twelve months ended March 31, 1996,
occupancy at the hotel had increased 5.0% to 48.2%, ADR at the hotel had
increased 21.7% to $78.75 and REVPAR at the hotel had increased 27.8% to
$37.96. The Company is acquiring the hotel, which has been managed by AGHI
since February 1993, from a partnership not affiliated with AGHI.
Holiday Inn Select--Madison, Wisconsin
The Holiday Inn Select-Madison is located adjacent to a large regional
shopping center in Madison, Wisconsin. The hotel has been consistently
upgraded since its opening in 1987 and management believes it is in excellent
physical condition. The hotel contains 227 rooms, including 36 suites, in a
mid-rise building designed around a central atrium containing an enclosed
pool, popular restaurant, lobby bar, and lounge. In 1995, the hotel was
designated as a premium-quality "Select" hotel by Holiday Inn Worldwide and
was chosen as the top property out of Holiday Inn's domestic hotels in terms
of product quality and guest satisfaction for which it received the "Hotel of
the Year" award. The hotel has also received several Holiday Inn Torchbearer
and Quality Excellence awards.
Within the twelve months following the acquisition of the hotel, the Company
intends to convert the Holiday Inn Select-Madison to a Crowne Plaza hotel and
has budgeted approximately $1.7 million for capital expenditures and
renovations in order to reposition the hotel within its market. The Company
anticipates that the franchise change, combined with product and service
enhancements and adoption of Crowne Plaza operating standards, will enable
AGHI to further improve the hotel's revenues through higher guest-room rates
commensurate with the improved quality. There can be no assurance that such
brand conversion and improved operating results will occur. The Company is
acquiring the hotel, which is currently not managed by AGHI, from a
partnership not affiliated with AGHI.
The Holiday Inn Select-Madison constitutes more than 10% of the aggregate
historical cost basis of the Initial Hotels. The aggregate tax bases of
depreciable real and personal property of the Holiday Inn Select-Madison for
federal income tax purposes were approximately $5.2 million and $0.4 million,
respectively, as of December 31, 1995. Depreciation is computed for federal
income tax purposes using the straight-line method over a 19-year life for the
real property and declining balance methods over lives which range from three
to ten years for the personal property.
The 1995 realty tax rate for the Holiday Inn Select-Madison was $32.98 per
$1,000 of assessed value. The total annual tax at this rate for the twelve
months ended March 31, 1996 was approximately $255,000.
Holiday Inn Park Center Plaza--San Jose, California
The Holiday Inn Park Center Plaza is located adjacent to the McEnery
Convention Center in downtown San Jose and is within two blocks of the new
world headquarters of Adobe Software and within two miles of San Jose Arena
and San Jose State University. The high-rise hotel and three-level garage were
built in 1975 and underwent an extensive renovation in 1990, including the
public space, guest rooms, food and beverage outlets, and meeting facilities.
The hotel contains 231 rooms and features a fitness facility, outdoor pool,
restaurant and lounge, and over 8,000 square feet of meeting space.
Within the twelve months following the acquisition, the Company intends to
complete an extensive $4.7 million dollar renovation program to convert the
facility from a traditional Holiday Inn into a Crowne Plaza
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hotel. The Company anticipates that the renovation and franchise change will
enable the hotel to increase its ADR, which, according to Smith Travel
Research, currently trails the competition in the downtown market by almost
$25.00. There can be no assurance that such brand conversion and improved
operating results will occur. The Company is acquiring the hotel, which is
currently not managed by AGHI, from a partnership not affiliated with AGHI.
Fred Harvey Albuquerque Airport Hotel--Albuquerque, New Mexico
The Fred Harvey Albuquerque Airport Hotel is located at the entrance to the
Albuquerque International Airport and is within three miles of the University
of New Mexico and the Albuquerque Convention Center. The 14-story high-rise
hotel opened in 1972 and is currently affiliated with Best Western. It
contains 266 rooms and features two restaurants, a lounge, fitness facilities,
an outdoor pool, tennis courts and approximately 8,000 square feet of meeting
space.
The Company intends to complete an extensive $5.0 million dollar renovation
program of the hotel during the twelve months after its acquisition, including
the conversion of the second floor, which is currently used for meeting rooms
and administrative offices, to guest rooms, thereby increasing the number of
guest rooms available to 278. The Company also intends to convert and upgrade
the hotel to operate under the Wyndham Hotel brand within one year of the
completion of the Offering. There can be no assurance that such brand
conversion will occur. The Company is acquiring the hotel, which is currently
not managed by AGHI, from a partnership not affiliated with AGHI. See "The
Initial Hotels--Ground Leases."
Le Baron Airport Hotel--San Jose, California
The Le Baron Airport Hotel is located approximately one mile from the San
Jose International Airport and two miles from downtown San Jose. The hotel was
developed in 1974 and has 327 guest rooms in a nine-story tower. The hotel
contains approximately 21,000 square feet of meeting and banquet space, two
restaurants, a cocktail lounge, an outdoor pool and a fitness center.
The Company has budgeted $6.5 million to complete an extensive renovation
program to upgrade the entire hotel and reposition the facility as a
DoubleTree Hotel within the twelve months following the acquisition of the
hotel. The renovations will include the conversion of currently underutilized
space to an additional 33 guest rooms. The Company believes that the
renovation, the increase in the number of guest rooms, the conversion to the
DoubleTree Hotel brand, and the expected improvements in operational
efficiencies will produce substantial increases in revenue. There can be no
assurance that such brand conversion and improved operating results will
occur. The Company is acquiring the hotel, which is currently not managed by
AGHI, from a partnership not affiliated with AGHI. See "The Initial Hotels--
Ground Leases."
The Le Baron Airport Hotel constitutes more than 10% of the aggregate
historical cost basis of the Initial Hotels. The aggregate tax bases of
depreciable real and personal property of the hotel for federal income tax
purposes were approximately $7.3 million and $3.0 million, respectively, as of
December 31, 1995. Depreciation is computed for federal income tax purposes
using the straight-line method over a 31.5 year life for the real property and
declining balance methods over lives which range from five to seven years for
the personal property.
The 1995 realty tax rate for the Le Baron Airport Hotel was $10.62 per
$1,000 of assessed value. The total annual tax at this rate for the twelve
months ended March 31, 1996 was approximately $126,400.
Holiday Inn Mission Valley--San Diego, California
The Holiday Inn Mission Valley is located approximately one mile from Old
Town, approximately three miles from Jack Murphy Stadium and the San Diego
Zoo, approximately four miles from Sea World, and within
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driving distance of the San Diego central business district and the San Diego
International Airport. The hotel was built in 1975 and was expanded in 1986.
The hotel contains 318 guest rooms and features over 6,000 square feet of
meeting space, a heated outdoor pool and spa, restaurant, lounge and fitness
facilities.
Within the twelve months following its acquisition, the Company plans $2.5
million in capital expenditures and renovations in order to reposition the
hotel under the DoubleTree Hotel brand. There can be no assurance that such
brand conversion will occur. The Company is acquiring the hotel, which is
currently not managed by AGHI, from certain investors not affiliated with
AGHI.
The Holiday Inn Mission Valley constitutes more than 10.0% of the aggregate
historical cost basis of the Initial Hotels. The aggregate tax bases of
depreciable real and personal property of the hotel for federal income tax
purposes were approximately $9.2 million and $3.7 million, respectively, as of
December 31, 1995. Depreciation is computed for federal income tax purposes
using the straight-line method over a 39-year life for the real property and
declining balance methods over lives which range from five to seven years for
the personal property.
The 1995 realty tax rate for the Holiday Inn Mission Valley was $22.26 per
$1,000 of assessed value. The total annual tax at this rate for the twelve
months ended March 31, 1996 was approximately $111,800.
TEN PERCENT HOTELS
The following table compares occupancy, ADR, and REVPAR at each of the five
Initial Hotels that constitutes more than 10% of the aggregate historical cost
basis of the Initial Hotels:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OCCUPANCY
Holiday Inn Dallas DFW
Airport South.......... 63.4% 49.1% 76.0% 76.7% 76.9% 75.9% 77.3%
Holiday Inn New Orleans
International Airport.. 78.6 81.8 80.8 79.2 81.2 85.1 78.2
Holiday Inn Select-
Madison................ 73.9 76.8 79.6 78.7 79.3 77.8 75.7
Le Baron Airport Hotel.. 76.0 68.4 64.3 66.2 65.2 61.2 79.5
Holiday Inn Mission
Valley................. * 58.0 68.6 69.8 68.5 66.3 64.5
ADR
Holiday Inn Dallas DFW
Airport South.......... $48.53 $54.18 $51.82 $63.19 $71.26 $70.76 $79.89
Holiday Inn New Orleans
International Airport.. 57.07 57.48 60.61 61.49 72.83 73.70 79.23
Holiday Inn Select-
Madison................ 70.27 72.41 74.47 78.25 78.46 77.42 79.25
Le Baron Airport Hotel.. 53.83 49.97 47.85 52.77 64.40 59.03 71.93
Holiday Inn Mission
Valley................. * 60.69 61.09 62.94 65.17 63.31 61.72
REVPAR
Holiday Inn Dallas DFW
Airport South.......... $30.78 $26.61 $39.39 $48.44 $54.78 $53.70 $61.74
Holiday Inn New Orleans
International Airport.. 44.87 47.03 48.94 48.71 59.16 62.69 61.99
Holiday Inn Select-
Madison................ 51.96 55.62 59.31 61.60 62.26 60.20 59.97
Le Baron Airport Hotel.. 40.88 34.17 30.76 34.93 42.01 36.12 57.21
Holiday Inn Mission
Valley................. * 35.19 41.94 43.94 44.63 41.98 39.81
</TABLE>
- --------
*Applicable occupancy, ADR and REVPAR data is not available.
THE PARTICIPATING LEASES
In order for the Company to qualify as a REIT, neither the Company nor the
Operating Partnership may operate hotels or related properties. The Operating
Partnership will lease each Initial Hotel to the Lessee for a term of twelve
years pursuant to separate Participating Leases that provide for rent equal to
the greater of Base Rent or Participating Rent. In addition, the Company and
the Lessee will enter into a Lease Master Agreement
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(the "Lease Master Agreement"), which will set forth the terms of the Lessee
Pledge and certain other matters. Each Participating Lease with the Lessee
contains terms substantially similar to those described below. The following
summary is qualified in its entirety by the Participating Leases and the Lease
Master Agreement, the forms of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
Participating Lease Terms. Each Participating Lease will have a term of
twelve years, subject to earlier termination upon the occurrence of certain
contingencies described in the Participating Lease (including, particularly,
the provisions described herein under "Damage to Initial Hotels,"
"Condemnation of Initial Hotels," and "Termination of Participating Leases on
Disposition of the Initial Hotels").
Base Rent; Participating Rent; Additional Charges. Each Participating Lease
requires the Lessee to pay (i) fixed monthly Base Rent, (ii) on a quarterly
basis, the excess of Participating Rent over Base Rent, with Participating
Rent based on certain percentages of room revenue, food and beverage revenue
and telephone and other revenue at each Initial Hotel, and (iii) certain other
amounts, including interest accrued on any late payments or charges
("Additional Charges"). Commencing in January 1997, Base Rent and
Participating Rent departmental thresholds (departmental revenue on which the
rent percentage is based) will be increased annually by a percentage equal to
the percentage increase in the CPI (as defined in "Glossary") (CPI percentage
increase plus 0.75% in the case of the Participating Rent departmental revenue
thresholds) compared to the prior year. At six of the Initial Hotels, the
franchise agreements for the hotels require increases in the franchise royalty
rates in future years and the Participating Leases for those Initial Hotels
provide that the room revenue threshold will be increased to a higher level
effective in the year of the franchise royalty rate increase. At seven of the
Initial Hotels, the Company plans to undertake substantial renovations during
the twelve months following the closing of the Offering in connection with
upgrading and converting those Initial Hotels to new franchise brands. At six
of these hotels, the renovations are expected to significantly negatively
affect the operating margins at these Initial Hotels during the renovation
period. As a result, as set forth in the table below, the Participating Rent
formulas in the Participating Leases for these Initial Hotels contain
Participating Rent thresholds that adjust effective January 1, 1997 and, in
one case, adjusts again effective January 1, 1998, to take into account the
impact of such renovations and will increase by the percentage increase in CPI
plus 0.75% thereafter. In addition, Base Rent relating to these six hotels
will adjust effective January 1, 1997 and will increase by the percentage
increase in CPI thereafter. See the footnotes to the chart on the following
page. Following completion of the planned renovations, the Participating Rent
thresholds for those Participating Leases will increase thereafter based upon
increases in the CPI in the same manner as in the other Participating Leases.
Base Rent is required to be paid monthly in arrears on the first day of each
calendar month, and Participating Rent is payable quarterly in arrears on the
tenth day of each calendar quarter and will be calculated based on the year-
to-date departmental receipts as of the end of the preceding calendar quarter,
and a prorated amount of each of the applicable departmental revenue
thresholds determined based on the calendar quarter, or portion thereof, of
the fiscal year for which the calculation is being made, and crediting against
such amount the total Participating Rent previously paid for such fiscal year
and the cumulative Base Rent paid for such fiscal year as of the end of the
preceding month. A final adjustment of the Participating Rent for each fiscal
year will be made, based on audited statements of revenue for each Hotel.
The table below sets forth (i) the annual Base Rent, (ii) Participating Rent
formulas and (iii) the pro forma rent that would have been paid for each
Initial Hotel pursuant to the terms of the Participating Leases based on the
historical revenues for the twelve months ended March 31, 1996, as if the
Company had owned the Initial Hotels and the Participating Leases were in
effect during such twelve-month period and April 1, 1995 was the beginning of
the lease year. For each Initial Hotel, pro forma Participating Rent is
greater than Base Rent.
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<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31, 1996
----------------------------------
(DOLLARS IN THOUSANDS)
PRO FORMA
LEASE PARTICIPATING RENT
EXPIRATION ------------------------
DATE BASE RENT PARTICIPATING PRO FORMA TELEPHONE
(MONTH/ (DOLLARS IN RENT FORMULA TOTAL AND
INITIAL HOTELS YEAR) THOUSANDS) (DOLLARS IN THOUSANDS) REVENUE ROOM F&B OTHER
-------------- ---------- ----------- --------------------------------- --------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn Dallas DFW
Airport South(1)
--Irving, Texas........ 6/08 $ 2,410 Rooms: 25.0% of first $4,650; $12,070 $ 3,550 $ 466 $ 64
60.0% of next $2,950; 70.0%
thereafter; F&B: 10.0% of first
$2,280; 30.0% thereafter;
Telephone and Other: 12.5%
Holiday Inn Dallas DFW
Airport West
--Bedford, Texas....... 6/08 827 Rooms: 25.0% of first $2,650; 4,881 1,332 47 61
60.0% of next $825; 70.0%
thereafter; F&B: 5.0% of first
$905; 10.0% thereafter; Telephone
and Other: 22.5%
Courtyard by Marriott-
Meadowlands(2)
--Secaucus, New 6/08 946 Rooms: 20.0% of first $2,150; 4,525 1,519 0 74
Jersey................. 60.0% of next $1,315; 70.0%
thereafter; Telephone and Other:
25.0%
Hampton Inn Richmond
Airport 6/08 530 Rooms: 30.0% of first $1,155; 1,962 832 0 34
--Richmond, Virginia... 70.0% thereafter; Telephone and
Other: 30.0%
Hilton Hotel-Toledo
Toledo, Ohio........... 6/08 832 Rooms: 15.0% of first $2,400; 6,094 1,014 258 64
60.0% of next $650; 70.0%
thereafter; F&B: 7.5% of first
$1,800; 22.5% thereafter;
Telephone and Other: 20.0%
Holiday Inn New Orleans
International Airport
--Kenner, Louisiana.... 6/08 2,099 Rooms: 25.0% of first $3,050; 8,333 3,163 143 118
65.0% of next $2,350; 75.0%
thereafter; F&B: 7.5% of first
$930; 20.0% thereafter; Telephone
and Other: 25.0%
Holiday Inn Select-
Madison(3)(4) 6/08 1,597 Rooms: 25.0% of first $2,250; 7,845 2,390 283 85
--Madison, Wisconsin... 60.0% of next $1,950; 70.0%
thereafter; F&B: 10.0% of first
$1,900; 20.0% thereafter;
Telephone and Other: 25.0%
Holiday Inn Park Center
Plaza(5)(6)
--San Jose, 6/08 1,091 Rooms: 20.0% of first $3,600; 7,658 1,785 131 153
California............. 65.0% of next $1,050; 75.0%
thereafter; F&B: 5.0% of first
$1,350; 10.0% thereafter;
Telephone and Other: 30.0%
Fred Harvey Albuquerque
Airport Hotel(7)
--Albuquerque, New
Mexico................. 6/08 1,202 Rooms: 25.0% of first $2,560; 6,190 1,760 99 74
60.0% of next $1,060; 70.0%
thereafter; F&B: 5.0% of first
$1,190; 10.0% thereafter;
Telephone and Other: 25.0%
Le Baron Airport
Hotel(8)(9)--San Jose, 6/08 1,323 Rooms: 20.0% of first $3,100; 9,199 2,210 184 231
California............. 60.0% of next $1,975; 70.0%
thereafter; F&B: 5.0% of first
$2,320; 10.0% thereafter;
Telephone and Other: 30.0%
Days Inn Ocean City(10)
--Ocean City, 6/08 719 Rooms: 30.0% of first $1,025; 2,365 1,183 0 38
Maryland............... 70.0% thereafter; Telephone and
Other: 30.0%
Holiday Inn Mission
Valley(11)(12)
--San Diego, 6/08 1,542 Rooms: 25.0% of first $3,570; 6,662 1,963 73 98
California............. 65.0% of next $900; 75.0%
thereafter; F&B: 5.0% of first
$845; 10.0% thereafter; Telephone
and Other: 25.0%
Hotel Maison de
Ville(13)
--New Orleans, 6/08 274 Rooms: 15.0% of first $890; 60.0% 1,881 379 32 12
Louisiana.............. of next $210; 70.0% thereafter;
F&B: 5.0% of first $430; 10.0%
thereafter; Telephone and Other:
15.0%
------- ------- ------- ------ ------
Totals.................. $15,392 $79,665 $23,080 $1,716 $1,106
======= ======= ======= ====== ======
</TABLE>
See notes on following page.
73
<PAGE>
- --------
(dollars in thousands)
(1) Room revenue departmental Participating Rent thresholds will increase by
2.0% effective January 1, 1997 and by an additional 2.0% effective January
1, 1998.
(2) If food and beverage revenue exceeds $1,000, Participating Rent will
include 5.0% of total food and beverage revenue.
(3) Room revenue departmental Participating Rent thresholds will increase by
3.0% effective January 1, 2000.
(4) Effective January 1, 1997, the Participating Rent formula adjusts to the
following: Rooms: 25.0% of first $2,500; 60.0% of next $2,400; 70.0%
thereafter; F&B: 10.0% of first $2,000; 20.0% thereafter; Telephone and
Other: 30%. Base Rent will reset effective January 1, 1997 to $1,750 and
increase annually by the percentage increase in CPI thereafter.
(5) Effective January 1, 1997, the Participating Rent formula adjusts to the
following: Rooms: 20.0% of first $3,875; 65.0% of next $1,300; 75.0%
thereafter; F&B: 5.0% of first $1,625; 10.0% thereafter; Telephone and
Other: 30.0%. Base Rent will reset effective January 1, 1997 to $1,400 and
increase annually by the percentage increase in CPI thereafter.
(6) Room revenue departmental Participating Rent thresholds will increase by
2.0% effective January 1, 1999 and by an additional 2.0% effective January
1, 2000.
(7) Effective January 1, 1997, the Participating Rent formula adjusts to the
following: Rooms: 25.0% of first $3,350; 60.0% of next $1,400; 70.0%
thereafter; F&B: 5.0% of first $1,350; 10.0% thereafter; Telephone and
Other: 25.0%. Base Rent will reset effective January 1, 1997 to $1,450 and
increase annually by the percentage increase in CPI thereafter.
(8) Effective January 1, 1997, the Participating Rent formula adjusts to the
following: Rooms: 20.0% of first $3,350; 60.0% of next $2,800; 70.0%
thereafter; F&B: 5.0% of first $1,850; 15.0% thereafter; Telephone and
Other: 30.0%. Effective January 1, 1998, the Participating Rent formula
adjusts to the following: Rooms: 20.0% of first $3,950; 60.0% of next
$3,100; 70.0% thereafter; F&B: 5.0% of first $1,950; 15.0% thereafter;
Telephone and Other: 30.0%. Base Rent will reset effective January 1, 1997
to $2,100 and increase annually by the percentage increase in CPI
thereafter.
(9) Room revenue departmental Participating Rent thresholds will increase by
4.0% effective January 1, 1999.
(10) Effective January 1, 1997 the Participating Rent formula adjusts to the
following: Rooms: 30.0% of first $1,400; 70.0% thereafter; Telephone and
Other: 30.0%. Base Rent will reset effective January 1, 1997 to $800 and
increase annually by the percentage increase in CPI thereafter.
(11) Effective January 1, 1997 the Participating Rent formula adjusts to the
following: Rooms: 25.0% of first $3,825; 65.0% of next $950; 75.0%
thereafter; F&B: 5.0% of first $1,000; 10.0% thereafter; Telephone and
other: 25.0%. Base Rent will reset effective January 1, 1997 to $1,800
and increase annually by the percentage increase in CPI thereafter.
(12) Room revenue departmental Participating Rent thresholds will increase by
3.0% effective January 1, 1999.
(13) Room revenue departmental Participating Rent thresholds will increase by
4.0% effective January 1, 1997.
Other than real estate and personal property taxes and assessments, rent
payable under the ground leases, casualty insurance, including loss of income
insurance, capital impositions and capital replacements and refurbishments
(determined in accordance with generally accepted accounting principles),
which are obligations of the Company, the Participating Leases require the
Lessee to pay rent, liability insurance (see "Insurance and Property Taxes and
Assessments"), all costs and expenses and all utility and other charges
incurred in the operation of the Initial Hotels. The Participating Leases also
provide for rent reductions and abatements in the event of damage or
destruction or a partial taking of any Initial Hotel as described under
"Damage to Initial Hotels" and "Condemnation of Initial Hotels."
Lessee Capitalization; Lessee Pledge. The partners of the Lessee have agreed
upon consummation of the Offering to (i) initially capitalize the Lessee with
$500,000 in cash and (ii) pursuant to the Lessee Pledge, pledge 275,000 OP
Units having a value of approximately $5.5 million based on the Offering Price
to the Operating Partnership to secure the Lessee's obligations under the
Participating Leases. OP Units subject to the Lessee Pledge may be released
therefrom without duplication, (a) on a one-for-one basis as the Lessee
acquires OP Units or shares of Common Stock or (b) upon the contribution to
the Lessee of cash or an increase in undistributed
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earnings in an amount equal to the then current market value of the OP Units
to be released from the Lessee Pledge.
Distribution Restrictions. Pursuant to the Lessee Distribution Restriction,
the Lessee will not pay any distributions to its partners (except for the
purpose of permitting its partners to pay taxes on the income attributable to
them from the Lessee while it is a limited partnership and except for
distributions relating to interest or dividends received by the Lessee from
cash or securities held by it) or make any other distributions to affiliates
of the Lessee, other than limited amounts relating to Lessee overhead or
pursuant to the Management Agreements, until the Lessee's net worth equals the
greater of (i) $6 million or (ii) 17.5% of actual rent payments from hotels
leased to the Lessee during the preceding calendar year (annualized for 1996).
During the period of the Lessee Distribution Restriction, the Lessee will be
required, subject to compliance with applicable securities laws, to purchase
annually Common Stock on the open market or, if any such purchase would
violate the ownership limitations in the Company's Charter, at the option of
the Operating Partnership, OP Units, in an amount equal to the Lessee's cash
flow attributable to the Participating Leases for the preceding fiscal year
(after establishing a reserve for partner tax distributions). For purposes of
calculating the Lessee Distribution Restriction, annual rent payments will be
determined on a calendar year basis and will be annualized for any partial
calendar year. Such amount will establish, in part, the threshold for the
Lessee Distribution Restriction for the following calendar year. If the
Lessee's net worth exceeds the Lessee Distribution Restriction, the Lessee may
make distributions to its partners, provided that, after such distribution,
the Lessee's net worth equals or exceeds the Lessee Distribution Restriction
and provided that at such time there exists no Event of Default (as defined in
the Participating Leases) under the Participating Leases. All interests
acquired by the Lessee may not be sold or transferred for a period of two
years after their acquisition (other than to partners in the Lessee) unless,
following such transfer, the Lessee Distribution Restriction is satisfied.
Subordination of Management Fees. The Lessee will engage AGHI to operate the
Initial Hotels pursuant to the Management Agreements. See "--The Management
Agreements." The Participating Leases provide that effective upon written
notice by the Company of any monetary Event of Default under the Participating
Leases or a default under the FF&E Note, and during the continuance thereof,
no management fees will be made to AGHI with respect to any Initial Hotel. Any
deferred management fee will accrue without interest until any such default
has been cured. In addition, each Management Agreement which the Lessee enters
into must provide that AGHI will repay to the Company any payments made to it
by the Lessee while any such default has occurred and is continuing.
Maintenance and Improvements. The Participating Leases obligate the Company
to establish annually a reserve for capital improvements at each Initial Hotel
(including the periodic replacement or refurbishment of FF&E). The aggregate
amount of such reserves will equal 4.0% of total revenue for each Initial
Hotel (which, on a consolidated pro forma basis for the twelve months ended
March 31, 1996, represented approximately 5.6% of room revenue). Any
unexpended amounts will remain the property of the Company upon termination of
the Participating Leases. Otherwise, the Lessee will be required, at its
expense, to maintain the Initial Hotels in good order and repair, except for
ordinary wear and tear, and to make non-structural, foreseen and unforeseen,
and ordinary and extraordinary, repairs (other than capital repairs) which may
be necessary and appropriate to keep the Initial Hotels in good order and
repair.
The Lessee will not be obligated to bear the cost of any capital
improvements or capital repairs to the Initial Hotels. With the consent of the
Company, however, the Lessee, at its expense, may make capital additions,
modifications or improvements to the Initial Hotels, provided that such action
does not significantly alter their character or purposes and maintains or
enhances the value of the Initial Hotels. All such alterations, replacements
and improvements shall be subject to all the terms and provisions of the
Participating Leases and will become the property of the Company upon
termination of the Participating Leases. The Company will own substantially
all personal property (other than inventory) not affixed to, or deemed a part
of, the real estate or improvements at the Initial Hotels, except to the
extent that ownership of such personal property would cause any portion of the
rents under the Participating Leases not to qualify as "rents from real
property" for REIT income test purposes. See "Federal Income Tax
Considerations--Requirements for Qualification as a REIT--Income Tests" and
"Certain Relationships and Transactions--Sale of Personal Property."
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Insurance and Property Taxes and Assessments. The Company is responsible for
paying for (i) real estate and personal property taxes and assessments at the
Initial Hotels (except to the extent that personal property associated with
the Initial Hotels is owned by the Lessee), (ii) casualty insurance on the
Initial Hotels and (iii) business interruption insurance covering the Base
Rent and Participating Rent. The aggregate real estate and personal property
tax obligations for the Initial Hotels during the twelve months ended March
31, 1996 were approximately $2.2 million. The Lessee is required to pay or
reimburse the Company for all liability insurance on the Initial Hotels, with
extended coverage, including comprehensive general public liability, workers'
compensation and other insurance appropriate and customary for properties
similar to the Initial Hotels and naming the Company as an additional named
insured.
Events of Default. Events of Default under the Participating Leases and the
Lease Master Agreement include, among others, the following:
(i) the failure by the Lessee to pay Base or Participating Rent when due
and the continuation of such failure for a period of ten days after receipt
by the Lessee of notice from the Company;
(ii) the failure by the Lessee to observe or perform any other term of a
Participating Lease or the Lease Master Agreement and the continuation of
such failure for a period of 30 days after receipt by the Lessee of notice
from the Company thereof, unless the Lessee is diligently proceeding to
cure, in which case the cure period will be extended to 180 days;
(iii) if the Lessee shall generally not be paying its debts as they
become due or file a petition for relief or reorganization or arrangement
or any other petition in bankruptcy, for liquidation or to take advantage
of any bankruptcy or insolvency law of any jurisdiction, make a general
assignment for the benefit of its creditors, consent to the appointment of
a custodian, receiver, trustee or other similar officer with respect to it
or any substantial part of its assets, be adjudicated insolvent or take
corporate action for the purpose of any of the foregoing;
(iv) if the Lessee is liquidated or dissolved or commences proceedings to
effect the same, or ceases to do business or sells all or substantially all
of its assets;
(v) if the Lessee voluntarily discontinues operations of an Initial Hotel
for more than three days, except as a result of damage, destruction,
condemnation or force majeure; or
(vi) if an event of default beyond applicable cure periods occurs under
the Franchise License with respect to any Initial Hotel as a result of any
action or failure to act by the Lessee or its agents (including AGHI).
In addition, a default of the type described above will result in a cross-
default of all other Participating Leases to which the Lessee is a party.
Indemnification. Under each of the Participating Leases, the Lessee will
indemnify, and will be obligated to hold harmless, the Company from and
against all liabilities, costs and expenses (including reasonable attorneys'
fees and expenses) incurred by, imposed upon or asserted against the Company
on account of, among other things, (i) any accident or injury to persons or
property on or about the Initial Hotels, including claims under liquor
liability, "dram shop" or similar laws; (ii) any misuse by the Lessee or any
of its agents of the leased property; (iii) any environmental liability
(except to the extent such liability results from a pre-existing condition)
(see "Environmental Matters" below); (iv) taxes and assessments in respect of
the Initial Hotels (other than real estate and personal property taxes and
assessments (other than on property owned by the Lessee) and income taxes of
the Company on income attributable to the Initial Hotels and capital
impositions); (v) any breach of the Participating Leases by the Lessee; or
(vi) any breach of any subleases related to the Initial Hotels, provided,
however, that such indemnification will not be construed to require the Lessee
to indemnify the Company against the Company's own negligent acts or omissions
or willful misconduct.
Assignment and Subleasing. The Lessee will not be permitted to sublet all or
any part of the Initial Hotels or assign its interest under any of the
Participating Leases, other than to an affiliate of the Lessee, without the
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prior written consent of the Company. The Company has generally agreed to
consent to any sublease of any portion of any Initial Hotel that sells
alcoholic beverages to the Beverage Corporations or of a retail portion of any
Initial Hotel (provided such sublease will not cause any portion of the Rents
to fail to qualify as "rents from real property" for REIT income qualification
test purposes). See "Sublease" below. No assignment or subletting will release
the Lessee from any of its obligations under the Participating Leases.
Damage to Initial Hotels. In the event of damage to or destruction of any
Initial Hotel covered by insurance which then renders the hotel unsuitable for
its intended use and occupancy the Company may elect not to repair, rebuild or
restore the hotel and terminate the Participating Lease on the terms and
provisions set forth in the Participating Lease, and the Company generally
shall be entitled to retain any proceeds of insurance related to such damage
or destruction.
In the event that damage to or destruction of an Initial Hotel which is
covered by insurance does not render such hotel unsuitable for its intended
use and occupancy as a hotel, the Company or, at the Company's option, the
Lessee, generally will be obligated to repair or restore such hotel. In the
event of material damage to or destruction of any Initial Hotel which is not
covered by insurance, the Company may either repair, rebuild or restore the
hotel (at the Company's expense) to substantially the same condition as
existed immediately prior to such damage or terminate the Participating Lease
on the terms and conditions set forth in the Participating Lease. In the event
of non-material damage to an Initial Hotel, the Company is required to repair,
rebuild or restore the hotel at its expense. During any period required for
repair or restoration of any damaged or destroyed Initial Hotel, rent will be
equitably abated.
Condemnation of Initial Hotels. In the event of a total condemnation of an
Initial Hotel, the relevant Participating Lease will terminate with respect to
such hotel as of the date of taking, and the Company and the Lessee will be
entitled to their shares of any condemnation award in accordance with the
provisions of the Participating Lease. In the event of a partial taking which
does not render the hotel unsuitable for the Lessee's use, the Lessee shall
restore the untaken portion of the hotel to a complete architectural unit, and
the Company shall contribute to the cost of such restoration that part of the
condemnation award required for such restoration.
Termination of Participating Leases on Disposition of the Initial Hotels. In
the event the Company enters into an agreement to sell or otherwise transfer
an Initial Hotel, or in the event of material damage to an Initial Hotel which
the Company elects not to repair, rebuild or restore, the Company will have
the right to terminate the Participating Lease with respect to such hotel upon
30 days' prior written notice upon either (i) paying the Lessee the fair
market value of the Lessee's leasehold interest in the remaining term of the
Participating Lease to be terminated or (ii) offering to lease to the Lessee a
substitute hotel on terms that would create a leasehold interest in such hotel
with a fair market value equal to or exceeding the fair market value of the
Lessee's remaining leasehold interest under the Participating Lease to be
terminated.
Termination of Participating Leases upon Change in Tax Laws. In the event
that changes in federal income tax laws allow the Company or a subsidiary or
affiliate to directly operate hotels, the Company will have the right to
terminate all, but not less than all, Participating Leases with the Lessee, in
which event the Company will pay the Lessee the fair market value of the
remaining term of the Participating Leases.
Franchise Licenses. The Company has agreed that the Lessee will be the
licensee under each of the Franchise Licenses on the Initial Hotels. Holiday
Inn, Promus (on behalf of Hampton Inn), Marriott, and Hilton have agreed that
upon the occurrence of certain events of default by the Lessee under a
Franchise License, such franchisors will temporarily transfer the Franchise
License for the hotel to an operator designated by the Company and acceptable
to such franchisor to allow the new operator time to apply for a new Franchise
License. The Company intends to seek similar temporary operational rights with
respect to new Franchise Licenses that are expected to be entered into with
Wyndham, DoubleTree Hotel and Crowne Plaza. There can be no assurance the
Company will receive such temporary operational rights in any new Franchise
Licenses with such franchisors. See "Franchise Agreements."
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Sublease. In order to facilitate compliance with state and local liquor laws
and regulations, in connection with the acquisition of the Initial Hotels, the
Lessee has agreed to sublease those areas of the Initial Hotels that comprise
the restaurant and other areas where alcoholic beverages are served to the
Beverage Corporations. In accordance with the terms of the Beverage Subleases,
each Beverage Corporation is obligated to pay to the Lessee rent payments
equal to 30% of each such corporation's annual gross revenues generated from
the sale of food and beverages generated from such areas; however, pursuant to
the Participating Leases, such subleases will not reduce the Participating
Rent payments to the Company, which it is entitled to receive from such food
and beverage sales.
Other Lease Covenants. The Lessee has agreed that during the term of the
Participating Leases it will maintain a ratio of total debt to Consolidated
Net Worth (as determined in the Participating Leases) of less than or equal to
50.0%, exclusive of capitalized leases and the FF&E Note. In the event the
Lessee is required to pledge any of its assets to the Company's lenders in
connection with a Company hotel financing, and such assets are subsequently
sold in a foreclosure proceeding, the Lessee will be entitled to be reimbursed
by the Company for the fair market value of such assets.
Inventory. The initial standard inventory of goods and supplies required in
the operation of the hotels will be purchased at the Lessee's expense and
owned by the Lessee. Any inventory used by the Lessee in the operation of each
Initial Hotel shall, upon termination of its Participating Lease, be purchased
by the Company or its designee for its fair market value.
Approval of Managers by Company. The Company will have the right to approve
(which approval will not be unreasonably withheld) the engagement by the
Lessee of any operator of an Initial Hotel other than AGHI or an affiliate of
AGHI. The Company has the right to approve the payment of management fees to
AGHI under the Management Agreements in excess of 3.5% of the gross revenues
at a particular hotel.
THE MANAGEMENT AGREEMENTS
The Lessee will engage AGHI to operate the Initial Hotels pursuant to the
Management Agreements. The following is a summary of the Management Agreements
and certain related agreements:
Management Agreement Terms. The Management Agreements will have initial
twelve-year terms. In the event of the extension or renewal of the term of the
applicable Participating Lease, the Management Agreement will be similarly
extended or renewed.
Management Fees. Each Management Agreement with AGHI requires the Lessee to
pay AGHI a monthly base fee equal to 1.5% of gross revenues, plus an incentive
fee of up to 2.0% of gross revenues. AGHI will be entitled to receive an
incentive fee equal to 0.025% of annual gross revenues for each 0.1% increase
in annual gross revenues over the gross revenues for the preceding twelve-
month period up to the maximum incentive fee. Such incentive fee shall be
payable quarterly and shall be adjusted at the end of each calendar year to
reflect actual results. Every four years the basis upon which the incentive
fee is calculated shall be renegotiated between the Lessee and AGHI. The
payment of the management fees to AGHI by the Lessee is subordinate to the
Lessee's obligations to the Company under the Participating Leases. The
management fees payable during 1996 and 1997, respectively, will be earned
only to the extent that the Lessee's income during each such year from hotels
leased from the Company exceeds the sum of rent payable under the
Participating Leases plus, Lessee overhead expense plus $50,000. Each
Management Agreement requires AGHI to repay to the Lessee within 60 days after
the end of each such year any management fees previously paid but not earned
by AGHI under the Management Agreements. In addition, the Lessee has agreed to
reimburse AGHI at cost for all expenses incurred in supervising capital
improvements to be performed at the hotels out of the capital expenditure
reserve funded by the Company under the Participating Leases. AGHI will be
reimbursed, at the rate of $1,500 per month for each full-service hotel and
$1,000 per month for each limited-service hotel, for accounting and financial
services performed by AGHI that will be funded by the Lessee under the
Participating Leases. See "The Initial Hotels--The Participating Leases--
Subordination of Management Fees."
Termination of Participating Lease. In the event of a termination of a
Participating Lease for an Initial Hotel, the Management Agreement for such
hotel also will terminate.
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Obligation to Purchase Common Stock. Messrs. Jorns and Wiles, who are
stockholders of AGHI and are also executive officers of the Company, will
agree to use 50.0% of the dividends (net of the tax liability attributed to
such dividends) received by them from AGHI that are attributable to AGHI's
earnings from the management of hotels owned by the Company (as determined in
good faith by such officers) to purchase, subject to compliance with
applicable securities laws, annually in the open market, during each of the
twelve years following the closing of the Offering, additional shares of
Common Stock, or, if any such purchase would violate the ownership limitations
in the Company's Charter, at the option of the Operating Partnership, OP
Units.
Certain Transfer Restrictions. The stockholders of AGHI have agreed, for so
long as more than 50.0% of the initial Management Agreements remain in place,
to grant to the Lessee or its designee a right of first refusal to acquire,
under certain circumstances, any stock of AGHI that is proposed to be sold in
a Change of Control Transaction (as defined below). The Lessee has agreed to
assign this right to the Company or its designee. This right will be
subordinate to a right of first refusal in favor of AGHI and the existing
stockholders of AGHI set forth in AGHI's existing stockholders' agreement. For
this purpose, a Change in Control Transaction shall mean a sale of stock in
AGHI that will result in the ability of a person (other than a current
stockholder of AGHI) and his or its controlled Affiliates to elect at least a
majority of the Board of Directors of AGHI. A Change in Control Transaction
does not include (i) an underwritten public offering of common stock of AGHI,
(ii) the transfer of stock to a spouse of an AGHI stockholder, (iii) the
transfer of stock to a trust for the benefit of the spouse and/or children of
an AGHI stockholder, or (iv) the transfer of stock to any corporation or other
entity which a stockholder controls at least 50.0% of the voting interests.
The stockholders of AGHI have also agreed to grant to the Lessee or its
designee, for so long as more than 50.0% of the initial Management Agreements
remain in place, a right of first offer to acquire such stockholders'
interests in AGHI prior to any proposed merger or business combination
transaction involving AGHI that would result in the stockholders of AGHI or
their affiliates holding less than 25.0% of the interests in the surviving
entity. The Lessee has agreed to assign this right to the Company or its
designee.
MORTGAGE INDEBTEDNESS REMAINING FOLLOWING THE OFFERING
A portion of the proceeds of the Offering will be utilized to repay all
mortgage indebtedness which encumbers the Initial Hotels other than the
indebtedness encumbering Holiday Inn Dallas DFW Airport South and the
Courtyard by Marriott-Meadowlands. See "Use of Proceeds."
Following the closing of the Offering, the Holiday Inn Dallas DFW South will
continue to be subject to nonrecourse mortgage indebtedness in the outstanding
principal amount as of March 31, 1996 of $14.2 million (the "DFW South Loan").
The DFW South Loan was entered into on January 30, 1996, bears interest at the
rate of 8.75% per annum and is payable in equal monthly installments of
principal and interest of approximately $125,930 each. The DFW South Loan
matures on January 1, 2011 at which time a balloon payment in the amount of
approximately $6,120,000 will be due and payable. The loan may not be prepaid
in whole or in part until after February 1, 1998 and after such date may only
be prepaid in whole with payment of a yield maintenance premium generally
equal to the discounted present value of all interest payments due between the
prepayment date and maturity of the loan.
Following the closing of the Offering, Courtyard by Marriott-Meadowlands
will continue to be subject to a nonrecourse mortgage indebtedness that
secures two notes in the outstanding principal amounts as of March 31, 1996 of
$4.6 million and $508,500 respectively (the "Secaucus Loans"). The $4.6
million portion of the Secaucus Loans, which was entered into on December 30,
1993, bears interest at a rate of 7.5% per annum and is payable in equal
monthly installments of principal and interest of approximately $39,300 each.
This portion of the Secaucus Loans matures on January 1, 2001 at which time a
balloon payment in the amount of approximately $3,985,000 will be due and
payable.
The $508,500 portion of the Secaucus Loans was entered into on January 11,
1996, bears interest at a rate of 7.89% per annum and is payable in equal
monthly installments of principal and interest of approximately $14,750 that
will fully amortize the loan as of January 1, 2001.
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LINE OF CREDIT
Neither the Company's Bylaws nor its Charter will limit the amount of
indebtedness the Company may incur. To ensure that the Company has sufficient
liquidity to conduct its operations, including funding the acquisition of
additional hotels, making renovations and capital improvements to hotels and
for working capital requirements, the Company has obtained a commitment for
the $100 million Line of Credit. The Line of Credit will be secured by, among
other things, first mortgage liens on all of the Initial Hotels, other than
Holiday Inn Dallas DFW Airport South and Courtyard by Marriott-Meadowlands,
and, in certain circumstances (subject to lender approval under the Line of
Credit), a mortgage lien on any subsequently acquired hotel. While the Company
has maximum borrowing capacity of up to $100 million under the Line of Credit,
the Company's aggregate advances under the Line of Credit are limited to the
lesser of (i) 40% of the aggregate appraised value of the Initial Hotels and
any other hotel securing the Line of Credit after giving effect to the
Company's use of proceeds from any indebtedness towards hotel acquisitions and
certain renovations and capital improvements, (ii) 40% of the aggregate
purchase price of the Initial Hotels and any other hotel acquisitions securing
the Line of Credit after giving effect to the Company's use of proceeds from
any indebtedness towards hotel acquisitions and certain renovations and
capital improvements, and (iii) the combined trailing twelve months EBITDA
(generally defined as net income of the Company before interest expense,
taxes, depreciation and amortization to the extent each reduces net income)
generated by the Initial Hotels and any other hotels securing the Line of
Credit, multiplied by 5.0. In addition, the Line of Credit provides that the
lenders must consent to any development activities by the Company other than
development in connection with the limited expansion of existing hotels. Also,
the Line of Credit lenders must approve the lessee and the franchise brand of
any hotel securing the Line of Credit in the future. Upon the closing of the
Offering, the Company expects to have approximately $60 million of borrowing
capacity available under the Line of Credit. The Company expects that the
borrowing capacity under the Line of Credit will increase to approximately
$100 million, assuming all additional borrowings are used to fund capital
improvements to the Initial Hotels or the acquisition of additional hotels.
Outside of the Line of Credit, the Company and its subsidiaries may not incur
any additional debt or recourse obligations, other than the debt for Holiday
Inn Dallas DFW Airport South and Courtyard by Marriott-Meadowlands. The Line
of Credit will have an initial term of three years that is subject to
extension under certain circumstances for an additional one-year term.
Borrowings under the Line of Credit will bear interest at 30-day, 60-day or
90-day LIBOR, at the option of the Company, plus 1.85% per annum, payable
monthly in arrears. Economic conditions could result in higher interest rates,
which could increase debt service requirements on borrowings under the Line of
Credit and which could reduce the amount of Cash Available for Distribution.
See "Risk Factors--Risks of Leverage; No Limits on Indebtedness."
GROUND LEASES
Four of the Initial Hotels are subject to ground leases with third parties
with respect to the land underlying each such hotel. The ground leases are
triple net leases which require the tenant to pay all expenses of owning and
operating the hotel, including real estate taxes and structural maintenance
and repair.
The Courtyard by Marriott-Meadowlands is subject to a ground lease with
respect to approximately 0.37 acres. The ground lease terminates in March
2036, with two ten-year options to renew. The lease requires a fixed rent
payment equal to $150,000 per year, subject to a 25.0% increase every five
years thereafter beginning in 2001 and a percentage rent payment equal to 3.0%
of gross room revenues.
The Fred Harvey Albuquerque Airport Hotel is subject to a ground lease with
respect to approximately 10 acres. The ground lease terminates in December
2013, with two five-year options to renew. The lease requires a fixed rent
payment equal to $19,180 per year subject to annual consumer price index
adjustment and a percentage rent payment equal to 5.0% of gross room revenues,
3.0% of gross receipts from the sale of alcoholic beverages, 2.0% of gross
receipts from the sale of food and non-alcoholic beverages and 1.0% of gross
receipts from the sale of other merchandise or services. The lease also
provides the landlord with the right, subject to certain conditions, to
require the Company, at its expense, to construct 100 additional hotel rooms
if the occupancy rate at the hotel is 85.0% or more for 24 consecutive months
and to approve any significant renovations scheduled at the hotel. The
occupancy rate at the Fred Harvey Albuquerque Airport Hotel for the twelve
months ended March 31, 1996 was 83.3%. See "Risk Factors--Contingent
Obligation to Construct Additional Hotel Rooms."
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The Hilton Hotel-Toledo is subject to a ground lease with respect to
approximately 8.8 acres. The ground lease terminates in June 2026, with four
successive renewal options, each for a ten-year term. The lease requires
annual rent payments equal to $25,000, increasing to $50,000 or $75,000 if
annual gross room revenues exceed $3.5 million or $4.5 million, respectively.
The Le Baron Airport Hotel is subject to a ground sublease with respect to
approximately 5.3 acres, which in turn is subject to a ground lease covering a
larger tract of land. The sublease terminates in 2022, with one 30-year option
to renew. The sublease requires the greater of a fixed minimum annual rent of
$75,945 (increasing to an annual minimum rent of $100,000 if the option is
exercised) or, in the aggregate, 4.0% of gross room revenues, 2.0% of gross
food receipts, and 3.0% of gross bar and miscellaneous operations receipts.
The sublease also provides the sublessor with the right to approve any
significant renovations scheduled at the hotel.
FRANCHISE CONVERSIONS
The Company expects to spend up to $24.6 million on additional capital
improvements during the twelve months following the completion of the
Offering, in connection with the planned renovation and conversion of the
Holiday Inn Select-Madison, the Holiday Inn Park Center Plaza, the Fred Harvey
Albuquerque Airport Hotel, the Le Baron Airport Hotel, the Days Inn Ocean
City, the Holiday Inn Mission Valley and the Holiday Inn New Orleans
International Airport to new franchise brands. In certain circumstances such
renovations and improvements are being completed in connection with franchisor
requirements. A description of the renovations and improvements that are
anticipated to occur at each such hotel and their anticipated costs are set
forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Franchise Conversions."
FRANCHISE AGREEMENTS
Ten of the Initial Hotels are operated under Franchise Licenses with
nationally recognized hotel companies. The Company anticipates that most of
the additional hotels in which it invests will be operated under Franchise
Licenses. The Company believes that the public's perception of quality
associated with a franchisor is an important feature in the operation of a
hotel. Franchisors provide a variety of benefits for franchisees, which
include national advertising, publicity, and other marketing programs designed
to increase brand awareness, training of personnel, continuous review of
quality standards, and centralized reservation systems.
The Franchise Licenses generally specify certain management, operating,
recordkeeping, accounting, reporting, and marketing standards and procedures
with which the Lessee must comply. The Franchise Licenses obligate the Lessee
to comply with each franchisor's standards and requirements with respect to
training of operational personnel, safety, maintaining specified insurance,
the types of services and products ancillary to guest room services that may
be provided by the Lessee, display of signage, and the type, quality, and age
of FF&E included in guest rooms, lobbies, and other common areas.
The Franchise Licenses will provide for termination at each franchisor's
option upon the occurrence of certain events, including the Lessee's failure
to pay royalties and fees or perform its other covenants under the respective
license agreement, bankruptcy, abandonment of the franchise, commission of a
felony, assignment of the license without the consent of the franchisor, or
failure to comply with applicable law in the operation of the relevant Initial
Hotel. Certain of the Franchise Licenses require that the Company guarantee
the payment of franchise fees, liquidated damages and termination fees on
behalf of the Lessee. The Lessee will not be entitled to terminate the
Franchise Licenses unless it receives the prior written consent of the
Company. The Franchise Licenses will not renew automatically upon expiration.
The Lessee will be responsible for making all payments under the Franchise
Licenses to the franchisors. Under the franchise agreements, the Lessee will
pay franchise royalty fees from 2.0% to 5.0% of room revenue.
HILTON(R), HILTON INN(R), AND THE STYLIZED H(R) ARE REGISTERED TRADEMARKS OF
HILTON HOTELS CORPORATION ("HILTON HOTELS"). NEITHER HILTON INNS, INC. NOR
HILTON HOTELS NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS OR
EMPLOYEES
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(COLLECTIVELY, THE "HILTON ENTITIES") SHALL IN ANY WAY BE DEEMED AN ISSUER OR
UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY NOR HAS ANY OF THE
HILTON ENTITIES ENDORSED OR APPROVED THE OFFERING. THE HILTON ENTITIES HAVE
NOT ASSUMED, AND SHALL NOT HAVE, ANY LIABILITY OR RESPONSIBILITY FOR ANY
FINANCIAL STATEMENTS OR OTHER FINANCIAL INFORMATION CONTAINED HEREIN OR ANY
PROSPECTUS OR ANY WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER
HEREOF. A GRANT OF A HILTON FRANCHISE LICENSE FOR CERTAIN OF THE INITIAL
HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY ANY OF THE HILTON ENTITIES (OR ANY OF THEIR
AFFILIATES, SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE OPERATING
PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
COURTYARD BY MARRIOTT(R) IS A REGISTERED TRADEMARK OF MARRIOTT
INTERNATIONAL, INC., WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF
THE FINANCIAL RESULTS OF THE INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. A
GRANT OF A COURTYARD BY MARRIOTT FRANCHISE LICENSE FOR CERTAIN OF THE INITIAL
HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY MARRIOTT INTERNATIONAL, INC. (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE OPERATING
PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
HOLIDAY INN(R) AND CROWNE PLAZA(R) ARE REGISTERED TRADEMARKS OF AND HOLIDAY
INN SELECT SM IS A REGISTERED SERVICE MARK OF, HOLIDAY INNS FRANCHISING, INC.
("HOLIDAY INNS"). HOLIDAY INNS HAS NOT ENDORSED OR APPROVED THE OFFERING OR
ANY OF THE FINANCIAL RESULTS OF THE INITIAL HOTELS SET FORTH IN THIS
PROSPECTUS NOR DOES HOLIDAY INNS HAVE ANY INTEREST IN THE COMPANY, THE LESSEE,
OR THE COMMON STOCK OFFERED HEREBY, EXCEPT AS A FRANCHISOR. A GRANT OF A
HOLIDAY INN, HOLIDAY INN SELECT, OR CROWNE PLAZA FRANCHISE LICENSE FOR CERTAIN
OF THE INITIAL HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY HOLIDAY INNS (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE OPERATING
PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
HAMPTON INN(R) IS A REGISTERED TRADEMARK OF PROMUS HOTELS, INC. NEITHER
PROMUS HOTELS, INC., ITS PARENT, SUBSIDIARIES, DIVISIONS NOR AFFILIATES HAVE
ENDORSED OR APPROVED THE OFFERING. A GRANT OF A HAMPTON INN LICENSE FOR THE
HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY PROMUS HOTELS, INC. (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF AMERICAN GENERAL HOSPITALITY
CORPORATION, AMERICAN GENERAL HOSPITALITY OPERATING PARTNERSHIP, L.P., OR THE
COMMON STOCK OFFERED HEREBY.
WYNDHAM HOTEL(R) IS A REGISTERED TRADEMARK OF WYNDHAM HOTEL COMPANY, WHICH
HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF
THE INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A WYNDHAM HOTEL
FRANCHISE LICENSE FOR CERTAIN OF THE INITIAL HOTELS IS NOT INTENDED AS, AND
SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY
WYNDHAM HOTEL COMPANY (OR ANY OF ITS AFFILIATES, SUBSIDIARIES, OR DIVISIONS)
OF THE COMPANY, THE OPERATING PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK
OFFERED HEREBY.
DAYS INN(R), RAMADA(R) AND RAMADA LIMITED(R) ARE REGISTERED TRADEMARKS OF
HFS INCORPORATED, WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF
THE FINANCIAL RESULTS OF THE INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. A
GRANT OF A
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DAYS INN OR A RAMADA FRANCHISE LICENSE FOR CERTAIN OF THE INITIAL HOTELS IS
NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED
APPROVAL OR ENDORSEMENT BY HFS INCORPORATED (OR ANY OF ITS AFFILIATES,
SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE OPERATING PARTNERSHIP, THE
LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
DOUBLETREE HOTEL(R) IS A REGISTERED TRADEMARK OF DOUBLETREE WHICH HAS NOT
ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE
INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A (FRANCHISE/LICENSE)
FOR CERTAIN OF THE INITIAL HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY DOUBLETREE
(OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE
OPERATING PARTNERSHIP OR THE COMMON STOCK OFFERED HEREBY.
SMALL LUXURY HOTELS(R) IS A REGISTERED TRADEMARK OF SMALL LUXURY HOTELS OF
THE WORLD LIMITED, WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF
THE FINANCIAL RESULTS OF THE INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. A
GRANT OF A SMALL LUXURY HOTELS AFFILIATION LICENSE FOR CERTAIN OF THE INITIAL
HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY SMALL LUXURY HOTELS OF THE WORLD LIMITED
(OR ANY OF ITS AFFILIATES, SUBSIDIARIES, OR DIVISIONS) OF THE COMPANY, THE
OPERATING PARTNERSHIP, THE LESSEE, OR THE COMMON STOCK OFFERED HEREBY.
All other trademarks appearing in this Prospectus are the property of their
respective holders.
EMPLOYEES
The Company will be self-administered and will employ Messrs. Jorns, Wiles,
Barr, Valentine and five additional individuals as well as appropriate support
personnel to manage its operations.
ENVIRONMENTAL MATTERS
Under various federal, state, and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person who arranges for (or transports for) the disposal or treatment of a
hazardous or toxic substance at a property owned by another may be liable for
the costs of removal or remediation of such substance released into the
environment at that property. The costs of remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to promptly remediate such substances, may adversely affect the
owner's ability to sell such real estate or to borrow using such real estate
as collateral. In connection with the ownership and operation of the Initial
Hotels, the Company, the Operating Partnership, or the Lessee, as the case may
be, may be potentially liable for such costs.
Phase I ESAs have been performed on all of the Initial Hotels by a qualified
independent environmental engineer. The purpose of the Phase I ESAs is to
identify potential sources of contamination for which the Initial Hotels may
be responsible and to assess the status of environmental regulatory
compliance. The Phase I ESAs include historical reviews of the Initial Hotels,
reviews of certain public records, preliminary investigations of the sites and
surrounding properties, screening for the presence of ACMs, polychlorinated
biphenyls ("PCBs"), underground storage tanks, and the preparation and
issuance of a written report. The Phase I ESAs do not include invasive
procedures, such as soil sampling or ground water analysis.
The ESAs have not revealed any environmental liability or compliance
concerns that the Company believes would have a material adverse effect on the
Company's business, assets, results of operation, or liquidity, nor is
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the Company aware of any material environmental liability or concerns.
Nevertheless, it is possible that the Phase I ESAs did not reveal all
environmental liabilities or compliance concerns or that material
environmental liabilities or compliance concerns exist of which the Company is
currently unaware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability
or (ii) the current environmental condition of the Initial Hotels will not be
affected by the condition of the properties in the vicinity of the Initial
Hotels (such as the presence of leaking underground storage tanks) or by third
parties unrelated to the Operating Partnership or the Company.
In reliance upon the Phase I ESAs, the Company believes the Initial Hotels
are in compliance in all material respects with all federal, state and local
ordinances and regulations regarding hazardous or toxic substances and other
environmental matters. Neither the Company nor, to the knowledge of the
Company, any of the current owners of the Initial Hotels has been notified by
any governmental authority of any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental substances in
connection with any of its hotels.
OPTIONS TO PURCHASE AND RIGHTS OF FIRST REFUSAL
Pursuant to the option agreements relating to the Option Hotels (the "Option
Agreements"), the Company will have the option and right of first refusal to
acquire AGHI's (i) 50.0% partnership interest in the Boise, Idaho Option Hotel
and (ii) 16.7% partnership interest in the Durham, North Carolina Option
Hotel. The Option Agreements provide that for a period of two years after the
opening of each such hotel, the Company will have the right to purchase AGHI's
interests in each such hotel at a price equal to AGHI's percentage interest in
such hotel times 110.0% of the cost of developing such hotel (including
mortgage debt) for the first year; during the second year of such options, the
purchase price will be increased by any percentage increase in the CPI. The
purchase price will be payable (i) by taking title to AGHI's interest in such
hotel subject to a pro rata portion of the applicable owning partnership's
debt and (ii) by paying the balance of such purchase price in cash or OP
Units, at the option of AGHI. AGHI may sell its interests in the Option Hotels
free and clear of these options prior to the expiration of the two-year
option, period provided that it gives notice to the Company and extends to the
Company a right of first refusal to acquire such interests on the same terms
as that of the proposed sale. The exercise of the option or right of first
refusal may require approval of the partners in the partnerships which own the
Option Hotels that are not affiliated with AGHI, including the approvals of
such partners of a Participating Lease relating to such Option Hotels. AGHI
will not seek such approval until after the Company has exercised its option
or rights of first refusal, and there can be no assurance that such approval
will be granted.
COMPETITION
The hotel industry is highly competitive. Each of the Initial Hotels is
located in a developed area that includes other hotel properties. The number
of competitive hotel properties in a particular area could have a material
adverse effect on occupancy, ADR and REVPAR of the Initial Hotels or at hotel
properties acquired in the future.
The Company may be competing for investment opportunities with entities that
have substantially greater financial resources than the Company. These
entities may generally be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
hotel operator or the geographic proximity of its investments. Competition may
generally reduce the number of suitable investment opportunities offered to
the Company and increase the bargaining power of property owners seeking to
sell. Further, the Company believes competition from entities organized for
purposes substantially similar to the Company's objectives could increase
significantly if the Company is successful. There will be no restriction in
the Participating Leases or the Management Agreements on the Lessee's or
AGHI's ability to lease or manage hotels which may compete with the Company's
hotels. Although not currently anticipated, AGHI and the Lessee may manage or
lease (but may not acquire or develop) hotels that compete with the Company's
hotels.
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INSURANCE
The Company will carry comprehensive liability, fire, extended coverage and
business interruption insurance with respect to the Initial Hotels, with
policy specifications, insured limits and deductibles customarily carried for
similar hotels. The Company will carry similar insurance with respect to any
other hotels developed or acquired in the future. There are, however, certain
types of losses (such as losses arising from wars, certain losses arising from
hurricanes, and losses arising from other acts of nature) that are not
generally insured because they are either uninsurable or not economically
insurable. Should an uninsured loss or a loss in excess of insured limits
occur, the Company could lose its capital invested in the affected hotel, as
well as the anticipated future revenues from such hotel, and would continue to
be obligated on any mortgage indebtedness or other obligations related to the
hotel. Any such loss could adversely affect the business of the Company.
Management of the Company believes the Initial Hotels are adequately insured
in accordance with industry practices.
LEGAL PROCEEDINGS
Neither the Company nor the Operating Partnership is currently involved in
any material litigation nor, to the Company's knowledge, is any material
litigation currently threatened against the Company or the Operating
Partnership. AGHI and the Lessee have advised the Company that they currently
are not involved in any material litigation, other than routine litigation
arising in the ordinary course of business, substantially all of which is
expected to be covered by liability insurance. Certain of the current owners
of the Initial Hotels have represented to the Operating Partnership that there
is no material litigation threatened against or affecting the Initial Hotels.
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FORMATION TRANSACTIONS
Set forth below is a description of the principal transactions in connection
with the formation of the Company and the acquisition of the Initial Hotels:
. The Company will sell 7,000,000 shares of Common Stock in the Offering.
All of the net proceeds to the Company from the Offering will be
contributed to AGH GP and AGH LP, which, in turn, will contribute such
proceeds, together with certain other assets acquired from the Plan (as
described below), to the Operating Partnership in exchange for an
approximate 74.2% interest in the Operating Partnership. AGH GP, a wholly
owned subsidiary of the Company, is the sole general partner of the
Operating Partnership and will own a 1.0% interest in the Operating
Partnership. AGH LP, also a wholly owned subsidiary of the Company, will
initially own an approximate 73.2% limited partnership interest in the
Operating Partnership;
. The Company will acquire directly or indirectly a 100.0% interest in each
of the Initial Hotels for an aggregate of 2,511,106 OP Units, 155,518
shares of Common Stock, approximately $91.1 million in cash, and the
assumption of approximately $53.5 million in mortgage indebtedness (of
which amount, approximately $33.9 million will be repaid from the net
proceeds of the Offering), as follows:
. The Operating Partnership will acquire from the Primary Contributors
interests in six of the Initial Hotels (Holiday Inn Dallas DFW
Airport West, Holiday Inn Dallas DFW Airport South, Hotel Maison de
Ville, Hampton Inn Richmond Airport, Courtyard by Marriott-
Meadowlands and Hilton Hotel-Toledo) and the Primary Contributors'
contract right to acquire the Holiday Inn Park Center Plaza in
exchange for 1,161,401 OP Units (valued at approximately $23.2
million, based on the Offering Price);
. The Company will acquire from the Plan interests in five of the
Initial Hotels (Hampton Inn Richmond Airport, Holiday Inn Dallas DFW
Airport West, Hotel Maison de Ville, Courtyard by Marriott-
Meadowlands and Hilton Hotel-Toledo) in exchange for 155,518 shares
of Common Stock (valued at approximately $3.1 million, based on the
Offering Price), and the Company will, in turn, contribute such
interests to the Operating Partnership in exchange for 155,518 OP
Units. The Company's executive officers collectively own less than a
5.0% beneficial interest in the Plan;
. The Operating Partnership will acquire, directly or as assignee of
the Primary Contributors' contract rights, interests in eight of the
Initial Hotels from parties that are unaffiliated with the Primary
Contributors in exchange for an aggregate 1,349,705 OP Units (valued
at approximately $27.0 million, based on the Offering Price) and
approximately $91.1 million in cash.
. The Operating Partnership will reimburse AGHI for approximately $900,000
in direct out-of-pocket expenses incurred in connection with the
acquisition of the Initial Hotels, including legal, environmental and
engineering expenses;
. The Operating Partnership will lease each Initial Hotel to the Lessee for
a term of twelve years pursuant to a Participating Lease, which will
require Base Rent to be paid on a monthly basis and Participating Rent to
be paid on a quarterly basis;
. The Operating Partnership will receive from the Primary Contributors
options to acquire their interests in the two Option Hotels (see "The
Initial Hotels--Options to Purchase and Rights of First Refusal");
. In order for the Company to qualify as a REIT, the Operating Partnership
will sell certain personal property relating to certain of the Initial
Hotels to the Lessee in exchange for the FF&E Note in the aggregate
principal amount of $315,000 that will be secured by such personal
property;
. The Lessee will contract with AGHI to operate the Initial Hotels under
separate Management Agreements providing for the subordination of the
payment of the management fees to the Lessee's obligation to pay rent to
the Operating Partnership under the Participating Leases; and
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. In order to facilitate compliance with state and local liquor laws and
regulations, the Lessee will sublease, pursuant to the Beverage
Subleases, those areas of the Initial Hotels where alcoholic beverages
are served to the Beverage Corporations.
BENEFITS TO THE OFFICERS AND THE PRIMARY CONTRIBUTORS
As a result of the Formation Transactions, officers of the Company and the
Primary Contributors will receive the following benefits:
. Mr. Jorns will receive 185,206 OP Units, Mr. Wiles will receive 56,672 OP
Units, Mr. Barr will receive 10,000 OP Units, Mr. Sowell will receive
540,553 OP Units, Mr. Lewis W. Shaw will receive 185,205 OP Units, and
Mr. Kenneth W. Shaw will receive 183,765 OP Units, as consideration for
their interests in six of the Initial Hotels and the assignment of the
contract right in respect of one additional Initial Hotel. The OP Units
to be received by Messrs. Jorns, Wiles, Barr, Sowell, Shaw and Shaw
(which are exchangeable for cash, or at the Company's option for Common
Stock, at any time after one year following the completion of the
Offering) will have a value of approximately $3.7 million, $1.1 million,
$200,000, $10.8 million, $3.7 million and $3.7 million, based on the
Offering Price, respectively, and will be more liquid than their
interests in the Initial Hotels once a public trading market for the
Common Stock commences. As of March 31, 1996, the aggregate book value of
the interests and rights to be contributed by such persons was
approximately $3.4 million;
. Messrs. Jorns, Wiles, Barr and Valentine will be granted options to
acquire 225,000, 75,000, 40,000 and 20,000 shares of Common Stock,
respectively, at the Offering Price, which become exercisable in four
equal annual installments commencing on the date of grant;
. Messrs. Jorns, Wiles, Barr and Valentine will receive stock awards of
30,000, 10,000, 6,000 and 4,000 shares of restricted Common Stock,
respectively, which will vest over a four-year period commencing on the
date of grant;
. The Operating Partnership will reimburse AGHI for approximately $900,000
for direct out-of-pocket expenses incurred in connection with the
acquisition of the Initial Hotels, including legal, environmental and
engineering expenses;
. The Operating Partnership will repay approximately $3.75 million of
indebtedness guaranteed by AGHI;
. Certain tax consequences to the Primary Contributors resulting from the
conveyance of their interests in the Initial Hotels to the Operating
Partnership, will be deferred;
. Through its operation of the Initial Hotels pursuant to the Participating
Leases, the Lessee, which is owned by Messrs. Jorns, Wiles, Barr, Sowell,
Shaw and Shaw, will be entitled to all of the cash flow from the Initial
Hotels after the payment of operating expenses, management fees and rent
under the Participating Leases (which cash flow, after establishing a
reserve for tax distributions to its partners, the Lessee will use
annually, until its net worth equals the greater of (i) $6.0 million or
(ii) 17.5% of actual rent payments from hotels leased to the Lessee
during the preceding calendar year, to purchase interests in the
Company). Pursuant to the Management Agreements, AGHI, which is owned by
Messrs. Jorns, Wiles, Sowell, Shaw and Shaw, will receive management fees
from the Lessee in an amount initially equal to a base fee of 1.5% of
gross revenues plus an incentive fee of up to 2.0% of gross revenues that
will be earned incrementally upon reaching certain gross revenue targets.
The management fees payable to AGHI will be subordinate to the rent
payments due to the Company under the Participating Leases. All unpaid
fees will be deferred without interest until such time that all rent is
paid by the Lessee to the Company; and
. Through its operations of the areas of eleven of the Initial Hotels that
serve alcoholic beverages, the Beverage Corporations, which are wholly
owned by Mr. Jorns, will be entitled to all cash flow from
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food and beverage sales generated from such areas after the payment of
rent to the Lessee equal to 30% of gross revenues from such sales; such
arrangement will not, however, reduce Participating Rent payments to the
Company, which it is entitled to receive from such food and beverage
sales.
VALUATION OF INTERESTS
The valuation of the Company has been determined primarily based upon a
capitalization of the Company's estimated Cash Available for Distribution and
other factors discussed in "Underwriting," rather than on the basis of each
hotel's cost or appraised value.
The purchase prices for the interests to be acquired by the Company from
parties unaffiliated with the Primary Contributors were determined pursuant to
arm's-length negotiations. The allocation of consideration among the Primary
Contributors was determined through negotiation and through the Company's
determination of the percentage of estimated adjusted cash flow that is
required to pay the Company's stockholders a specified initial annual
distribution rate, which rate is based upon prevailing market conditions. The
allocation of consideration among the Primary Contributors, in certain
instances, also was affected by performance-oriented structures contained in
the applicable contributing partnership agreements and reallocations of
benefits to be derived among certain of the contributing partners unrelated to
capitalization rates or market values of the Initial Hotels.
TRANSFER OF INITIAL HOTELS
The Company's interest in the Initial Hotels will be acquired pursuant to
various agreements, the forms of which will be filed as exhibits to the
Registration Statement, of which this Prospectus forms a part. These
acquisitions are subject to all of the terms and conditions of such
agreements. The Company will assume all obligations relating to the Initial
Hotels that may arise after the transfer.
The agreements effecting the transfer of the assets or direct or indirect
interest of the partners and other holders of equity in the entities selling
the Initial Hotels will contain representations and warranties from each such
person concerning title to the interests being transferred and the absence of
liens or other encumbrances thereon. Certain of the Primary Contributors
(collectively, the "Indemnitors") have agreed to make additional
representations with respect to the Company and the Initial Hotels concerning
the operation of such Initial Hotels, environmental matters and other
representations and warranties customarily found in similar documents and also
have agreed to indemnify the Company against breaches of such representations
and warranties. These representations and warranties will survive the closing
of the Offering for a period of one year.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Upon the effective date of this Prospectus, the Board of Directors will
consist of five members, four of whom will be Independent Directors (as defined
in "Policies and Objectives with Respect to Certain Activities--Conflict of
Interest Policies--Charter and Bylaw Provisions"). The Board of Directors will
be divided into three classes serving staggered three-year terms. Initially,
the Company will have four executive officers and five other officers and
support personnel and appropriate support staff. Certain information regarding
the directors, proposed directors and executive officers of the Company is set
forth below.
<TABLE>
<CAPTION>
CLASS/TERM
NAME POSITION AGE EXPIRATION
---- -------- --- --------------
<S> <C> <C> <C>
Steven D. Jorns......... Chairman of the Board, Chief Executive
Officer, and President 47 Class I/1997
Bruce G. Wiles.......... Executive Vice President 44 --
Kenneth E. Barr......... Executive Vice President, Chief Financial
Officer, Secretary and Treasurer 47 --
Russ C. Valentine....... Senior Vice President--Acquisitions 51 --
H. Cabot Lodge III...... Proposed Independent Director 40 Class II/1998
James R. Worms.......... Proposed Independent Director 50 Class II/1999
James McCurry........... Proposed Independent Director 47 Class III/1999
Kent R. Hance........... Proposed Independent Director 54 Class III/1998
</TABLE>
Steven D. Jorns is the founder of and has served since its formation in 1981
as Chairman of the Board, Chief Executive Officer and President of AGHI. Prior
to forming AGHI, Mr. Jorns spent seven years with an affiliate of General
Growth Companies overseeing that company's hotel portfolio. Prior to that, Mr.
Jorns was associated with Hospitality Motor Inns, a division of Standard Oil of
Ohio, and held marketing positions with Holiday Inns, Inc. Mr. Jorns is a
graduate of Oklahoma State University with a degree in Hotel and Restaurant
Administration. He has been honored by that University as one of its
distinguished alumni. He has served on the Hotel and Restaurant Advisory Boards
for two universities and was selected by Lodging Hospitality Magazine as a
"Rising Star" of the Industry in 1992.
Bruce G. Wiles has served since 1989 as an Executive Vice President of AGHI,
where he is responsible for AGHI's acquisition and development activities. Mr.
Wiles has more than fourteen years of experience in the hospitality industry.
Prior to joining AGHI in 1989, Mr. Wiles was a Senior Vice President for
Integra, a Dallas-based, New York Stock Exchange hotel management and
restaurant company. At Integra, his duties included evaluating hotel
acquisitions and overseeing real estate development, as well as the acquisition
and negotiation of all real estate based financing. Prior to joining Integra in
1986, Mr. Wiles was a founder and President of Bruce G. Wiles and Associates,
Ltd., a real estate development and brokerage concern, which specialized in
hospitality and development transactions. Mr. Wiles previously served as
President of R.W. Pulley and Associates, Ltd., a large Honolulu-based real
estate syndicator and developer of condominiums and commercial space. Mr. Wiles
was also previously associated with KPMG Peat Marwick and Grant Thornton,
serving the real estate development and lending industries. Mr. Wiles graduated
Summa Cum Laude from Georgetown University and became a Certified Public
Accountant in 1973.
Kenneth E. Barr has served since 1994 as a Senior Vice President of AGHI,
where he directs the Accounting and Finance Department. At AGHI, Mr. Barr is
responsible for financial management and controllership functions, including
financial reporting, internal audits, treasury activities, and training
functions. Prior to joining AGHI, Mr. Barr held a senior financial position
with Richfield Hotel Management, Inc., a national hotel management company.
Prior to joining Richfield Hotel Management, Inc. in 1991, Mr. Barr served as a
partner in charge of the audit practice of Laventhol & Horwath in Dallas and
was also a member of that firm's National Audit Advisory Board. Mr. Barr holds
a Bachelor of Business Administration from the University of Oklahoma. He is a
Certified Public Accountant in Texas, Oklahoma and Puerto Rico.
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Russ C. Valentine has served since 1990 as a Senior Vice President--
Acquisitions of AGHI. Prior to joining AGHI, Mr. Valentine was a Principal
with Laventhol & Horwath, in charge of the firm's Dallas and Southwest Real
Estate and Hospitality Consulting Practice. Prior to joining Laventhol &
Horwath in January 1983, Mr. Valentine was a Senior Vice President--
Acquisitions for Prime Financial Partnership, L.P., a real estate and
development company listed on the American Stock Exchange. Mr. Valentine's
responsibilities with Prime Financial included acquisition, negotiation and
financing of hotel and other real estate investments. Mr. Valentine received
his Master of Business Administration degree from the School of Hotel,
Restaurant and Institutional Management at Michigan State University. He also
earned a Master of Arts degree from Wayne State University and a Bachelor of
Arts degree from Louisiana State University.
H. Cabot Lodge III is a co-founder and has served since October 1995 as
Chairman of the Board of Superconducting Core Technologies, Inc., a wireless
telecommunications equipment manufacturer. Prior to September 1995, when he
joined Superconducting Core Technologies, Inc. on a full-time basis, he was a
Managing Director and Executive Vice President of W.P. Carey & Co., a New York
real estate investment bank that specializes in long term net-leases with
corporations and manages in excess of $1.5 billion in assets, nine real estate
public limited partnerships and three real estate investment trusts. Mr. Lodge
is also a principal of Carmel Lodge, LLC, a New York based merchant bank. Mr.
Lodge earned a Bachelor of Arts degree from Harvard College and a Masters of
Business Administration degree from the Harvard Business School. He is a
member of the Board of Directors of TelAmerica Media, Inc., Carey
Institutional Properties, and Corporate Property Associates 12.
James R. Worms has served since August 1995 as a managing director of
William E. Simon & Sons Realty, a private real estate investment firm and
merchant bank. Prior to joining William E. Simon & Sons Realty, Mr. Worms was
employed since March 1987 by Salomon Brothers Inc, an international investment
banking firm, most recently as a managing director. Mr. Worms received a
Bachelor of Arts degree from the University of California, Los Angeles, a
Masters of Business Administration from the University of California at Los
Angeles' Anderson School of Business, and a Juris Doctor degree from the
Hastings College of Law.
James McCurry has served since September 1994 as Chairman of the Board of
NeoStar Retail Group, Inc., a specialty retailer of consumer software whose
shares are quoted on the Nasdaq National Market System. Mr. McCurry is a
former partner of Bain & Company, an international management consulting firm.
Mr. McCurry received a Masters of Business Administration with High
Distinction from Harvard Business School and a Bachelor of Arts with High
Honors from the University of Florida. He is a member of the Board of
Directors of Pacific Sunwear of California, Inc.
Kent R. Hance has been since 1994 a law partner in the firm Hance,
Scarborough, Woodward & Weisbart, L.L.P., Dallas, Texas, and from 1991 to 1994
he was a law partner in the firm of Hance and Gamble. From 1985 to 1987, Mr.
Hance was a law partner with Boyd, Viegal and Hance. Mr. Hance served as a
member of the Texas Railroad Commission from 1987 until 1991 and as its
Chairman from 1989 until 1991. From 1979 to 1985, he served as a member of the
United States Congress. Mr. Hance served as a State Senator in the State of
Texas from 1975 to 1979 and was a professor of business law at Texas Tech
University from 1969 to 1973. Mr. Hance earned a Bachelor of Business
Administration degree from Texas Tech University and a Juris Doctor degree
from the University of Texas Law School.
BOARD OF DIRECTORS AND COMMITTEES
The Company will be managed by a five-member Board of Directors, a majority
of whom will be Independent Directors. The four Independent Directors will
become directors of the Company as of the effective date of this Prospectus.
The Board of Directors will initially have an Audit Committee, a Compensation
Committee and a Leasing Committee.
Audit Committee. Promptly following the completion of the Offering, the
Board of Directors will establish an Audit Committee that will consist
entirely of Independent Directors. The Audit Committee will make
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recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees, and review the
adequacy of the Company's internal accounting controls.
Compensation Committee. The Board of Directors will establish a Compensation
Committee to determine compensation of the Company's executive officers and
administer the 1996 Plan. The members of the Compensation Committee will
consist entirely of Independent Directors.
Leasing Committee. The Board of Directors will establish a Leasing Committee
that will review not less frequently than annually the Lessee's compliance
with the terms of the Participating Leases and will review and approve the
terms of any new leases between the Company and the Lessee. The Leasing
Committee will consist entirely of Independent Directors.
The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated
by the Board of Directors.
EXECUTIVE COMPENSATION
The Company was incorporated as a Maryland corporation on April 12, 1996.
Accordingly, the Company did not pay any cash compensation to its executive
officers for the year ended December 31, 1995.
EMPLOYMENT AGREEMENTS
The Company will enter into an employment agreement with Mr. Jorns, pursuant
to which Mr. Jorns will serve as Chairman of the Board, Chief Executive
Officer and President of the Company for a term of five years at an initial
annual base compensation of $100,000, subject to any increases in base
compensation approved by the Compensation Committee. In addition, the Company
will enter into employment agreements with Messrs. Wiles, Barr and Valentine,
pursuant to which Mr. Wiles will serve as Executive Vice President, Mr. Barr
will serve as Executive Vice President and Chief Financial Officer and Mr.
Valentine will serve as Senior Vice President--Acquisitions, each for a term
of five years, at an annual base compensation of $90,000, $80,000 and $60,000,
respectively, subject to any increases in base compensation approved by the
Compensation Committee. In addition to base salary, each such Executive
Officer is entitled under his employment agreement to receive annual
performance-based compensation as determined by the Compensation Committee.
Upon termination of an officer's employment agreement other than for cause, or
by such officer for "good reason" (as such term is defined in each officer's
employment agreement), each of such officers will be entitled to receive
severance benefits in an amount equal to the greater of (i) the aggregate of
all compensation due such officer during the balance of the term of the
employment agreement or (ii) 1.99 times the "base amount" as determined in the
Code. In addition, such employment agreements provide for the grant of the
options and the stock awards described under "--Stock Incentive Plans--The
1996 Plan" below.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company will be paid an annual
fee of $17,000. In addition, each such director will be paid $750 for
attendance at each meeting of the Company's Board of Directors and $500 for
attendance at each meeting of a committee of the Company's Board of which such
director is a member. The annual retainer fee will be paid to such directors
50.0% in cash and 50.0% in shares of Common Stock. Meeting fees will be paid
in cash. Directors who are employees of the Company will not receive any fees
for their service on the Board of Directors or a committee thereof. In
addition, the Company will reimburse directors for their out-of-pocket
expenses incurred in connection with their service on the Board of Directors.
Upon the effectiveness of the Registration Statement, each non-employee
director will be granted nonqualified options to purchase 10,000 shares of
Common Stock at the Offering Price that will vest in three annual installments
commencing on the date of grant. Any non-employee director who ceases to be a
director
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will forfeit the right to receive any options not previously vested. See "--
Stock Incentive Plans--The Directors' Plan."
STOCK INCENTIVE PLANS
The Board of Directors will adopt, and the Company's stockholders will
approve, the 1996 Plan and the Directors' Plan for the purposes of (i)
attracting and retaining employees, directors, and other service providers
with ability and initiative, (ii) providing incentives to those deemed
important to the success of the Company and related entities, and (iii)
aligning the interests of these individuals with the interests of the Company
and its stockholders through opportunities for increased stock ownership.
The 1996 Plan
Administration. The 1996 Plan will be administered by the Compensation
Committee. The Compensation Committee may delegate certain of its authority to
administer the 1996 Plan. The Compensation Committee may not, however,
delegate its authority with respect to grants and awards to individuals
subject to Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As used in this summary, the term "Administrator" means the
Compensation Committee or its delegate, as appropriate.
Eligibility. Each employee of the Company or of an affiliate of the Company
or any other person whose efforts contribute to the Company's performance,
(other than employees of the Lessee and AGHI who are not also employees of the
Company), including an employee who is a member of the Board, but excluding
non-employee directors of the Company, is eligible to participate in the 1996
Plan. The Administrator will select the individuals who will participate in
the 1996 Plan ("Participants") but no person may participate in the 1996 Plan
while he is a member of the Compensation Committee. The Administrator may,
from time to time, grant stock options, stock awards, incentive awards, or
performance shares to Participants.
Options. Options granted under the 1996 Plan may be incentive stock options
("ISOs") or nonqualified stock options. An option entitles a Participant to
purchase shares of Common Stock from the Company at the option price. The
option price may be paid in cash, with shares of Common Stock, or with a
combination of cash and Common Stock. The option price will be fixed by the
Administrator at the time the option is granted, but the price cannot be less
than 100.0% for existing employees (85.0% in connection with the hiring of new
employees) of the shares' fair market value on the date of grant. The exercise
price of an ISO may not be less than 100.0% of the shares' fair market value
on the date of grant, 110.0% of the fair market value in the case of an ISO
granted to a ten percent stockholder of the Company or of certain affiliates
of the Company. Options may be exercised at such times and subject to such
conditions as may be prescribed by the Administrator but the maximum term of
an option is ten years in the case of an ISO or five years in the case of an
ISO granted to a ten percent stockholder.
ISOs may only be granted to employees of the Company or an affiliate;
however, no employee may be granted ISOs (under the 1996 Plan or any other
plan of the Company or an affiliate) that are first exercisable in a calendar
year for Common Stock having an aggregate fair market value (determined as of
the date the option is granted) exceeding $100,000. In addition, no
Participant may be granted options in any calendar year for more than 250,000
shares of Common Stock.
Stock Awards. Participants also may be awarded shares of Common Stock
pursuant to a stock award. A Participant's rights in a stock award may be
nontransferable or forfeitable or both unless certain conditions prescribed by
the Administrator are satisfied. These conditions may include, for example, a
requirement that the Participant continue employment with the Company for a
specified period or that the Company or the Participant achieve stated,
performance-related objectives. The objectives may be stated with reference to
the fair market value of the Common Stock or the Company's, a subsidiary's, or
an operating unit's return on equity, earnings per share, total earnings,
earnings growth, return on capital, Funds From Operations or return on assets.
A stock award that is not immediately vested and nonforfeitable will be
restricted, in whole or in part, for a period of at
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least three years; provided, however, that the period shall be at least one
year in the case of a stock award that is subject to objectives based on one
or more of the foregoing performance criteria. The maximum number of shares of
Common Stock that may be issued in respect of stock awards granted under the
1996 Plan cannot exceed 50,000 shares of Common Stock.
Incentive Awards. Incentive awards also may be granted under the 1996 Plan.
An incentive award is an opportunity to earn a bonus, payable in cash, upon
attainment of stated performance objectives. The objectives may be stated with
reference to the fair market value of the Common Stock or on the Company's, a
subsidiary's, or an operating unit's return on equity, earnings per share,
total earnings, earnings growth, return on capital, Funds From Operations or
return on assets. The period in which performance will be measured will be at
least one year. No Participant may receive an incentive award payment in any
calendar year that exceeds the lesser of (i) 100.0% of the Participant's base
salary (prior to any salary reduction or deferral election) as of the date of
grant of the incentive award or (ii) $250,000.
Performance Share Awards. The 1996 Plan also provides for the award of
performance shares. A performance share award entitles the Participant to
receive a payment equal to the fair market value of a specified number of
shares of Common Stock if certain standards are met. The Administrator will
prescribe the requirements that must be satisfied before a performance share
award is earned. These conditions may include, for example, a requirement that
the Participant continue employment with the Company for a specified period or
that the Company or the Participant achieve stated, performance-related
objectives. The objectives may be stated with reference to the fair market
value of the Common Stock or on the Company's, a subsidiary's, or an operating
unit's return on equity, earnings per share, total earnings, earnings growth,
return on capital, Funds From Operations or return on assets. To the extent
that performance shares are earned, the obligation may be settled in cash, in
Common Stock, or by a combination of the two. No Participant may be granted
performance shares for more than 12,500 shares of Common Stock in any calendar
year.
Share Authorization. All awards made under the 1996 Plan will be evidenced
by written agreements between the Company and the Participant. A maximum of
900,000 shares of Common Stock may be issued under the 1996 Plan. The share
limitation and the terms of outstanding awards shall be adjusted, as the
Compensation Committee deems appropriate, in the event of a stock dividend,
stock split, combination, reclassification, recapitalization or other similar
event.
Termination and Amendment. No option or stock award may be granted and no
performance shares may be awarded under the 1996 Plan more than ten years
after the earlier of (i) the date that the 1996 Plan is adopted by the Board
or (ii) the date that it is approved by the Company's stockholders. The Board
may amend or terminate the 1996 Plan at any time, but, except as set forth in
the immediately preceding paragraph, an amendment will not become effective
without stockholder approval if the amendment materially (i) increases the
number of shares of Common Stock that may be issued under the 1996 Plan (other
than an adjustment as described above), (ii) changes the eligibility
requirements, or (iii) increases the benefits that may be provided under the
1996 Plan.
Initial Awards. The Board of Directors will approve prior to the Offering
the grant of ISOs and nonqualified options to Messrs. Jorns, Wiles, Barr and
Valentine to purchase up to 225,000, 75,000, 40,000 and 20,000 shares of
Common Stock, respectively. The options granted to Messrs. Jorns, Wiles, Barr
and Valentine will become exercisable in four equal annual installments,
commencing on the date of grant, subject to continued employment through the
applicable vesting date. Both the ISOs and the nonqualified options will be
exercisable for ten years from the date of grant at the fair market value of
the Common Stock on the date of grant. The options will be ISOs to the extent
permitted under the ISO "$100,000 limitation" described above. In addition,
Messrs. Jorns, Wiles, Barr and Valentine will be granted restricted stock
awards with respect to 30,000, 10,000, 6,000 and 4,000 shares of Common Stock,
respectively. The awards vest, subject to continued employment, through the
applicable vesting date, pursuant to a schedule beginning on the date of grant
as follows: 10.0% on the date of grant, 20.0% on each of the first and second
anniversaries and 25.0% on each of the third and fourth
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anniversaries of the date of grant. Prior to vesting, such officers will be
entitled to vote and receive dividends with respect to such restricted shares
of Common Stock.
Transferability. Under the 1996 Plan, Participants may be permitted to
transfer non-qualified stock options to certain family members or trusts for
the benefit of family members, provided the Participant does not receive any
consideration for the transfer. In addition, nonqualified options, incentive
awards and awards of Performance Shares may be transferable to the extent
permitted under Rule 16b-3 promulgated under the Exchange Act.
Certain Federal Income Tax Consequences Relating to Options. In general, a
Participant will not recognize taxable income upon the grant or exercise of an
ISO. However, upon the exercise of an ISO, the excess of the fair market value
of the shares received on the date of exercise over the exercise price of the
shares will be treated as an adjustment to alternative minimum taxable income.
When a Participant disposes of shares acquired by exercise of an ISO, the
Participant's gain (the difference between the sale proceeds and the price
paid by the Participant for the shares) upon the disposition will be taxed as
capital gain, provided the Participant (i) does not dispose of the shares
within two years after the date of grant nor within one year after the date of
exercise, and (ii) exercises the option while an employee of the Company or of
an affiliate of the Company or within three months after termination of
employment for reasons other than death or disability. If the first condition
is not met, the Participant generally will realize ordinary income in the year
of the disqualifying disposition. If the second condition is not met, the
Participant generally will recognize ordinary income upon exercise of the
option.
In general, a Participant who receives a nonqualified stock option will
recognize no income at the time of the grant of the option. Upon exercise of a
nonqualified stock option, a Participant will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date
of exercise over the exercise price of the option. Special timing rules may
apply to a Participant who is subject to Section 16(a) of the Exchange Act.
The employer (either the Company or its affiliate) will be entitled to claim
a federal income tax deduction on account of the exercise of a nonqualified
option. The amount of the deduction will be equal to the ordinary income
recognized by the Participant. The employer will not be entitled to a federal
income tax deduction on account of the grant of any option or the exercise of
an ISO. The employer may claim a federal income tax deduction on account of
certain disqualifying dispositions of Common Stock acquired upon the exercise
of an ISO.
Section 162(m) of the Code places a limitation of $1,000,000 on the amount
of compensation payable to each of the named executive officers that the
Company may deduct for federal income tax purposes. The limit does not apply
to certain performance-based compensation paid under a plan that meets the
requirements of the Code and regulations promulgated thereunder. While the
1996 Plan generally complies with the requirements for performance-based
compensation, options granted at less than 100% of fair market value and stock
awards granted under the 1996 Plan will not satisfy those requirements.
The Directors' Plan
Share Authorization. A maximum of 100,000 shares of Common Stock may be
issued under the Directors' Plan. The share limitation and terms of
outstanding awards shall be adjusted, as the Compensation Committee deems
appropriate, in the event of a stock dividend, stock split, combination,
reclassification, recapitalization or other similar event.
Eligibility. The Directors' Plan provides for the grant of options to
purchase Common Stock and the award of shares of Common Stock to each eligible
director of the Company. No director who is an employee of the Company is
eligible to participate in the Directors' Plan.
Options. The Directors' Plan provides that each eligible director who is a
member of the Board of Directors as of the date that the registration
statement relating to the Offering is declared effective by the SEC will be
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awarded nonqualified options to purchase 10,000 shares of Common Stock on that
date (each such director, a "Founding Director"). Each eligible director who
is not a Founding Director (a "Non-Founding Director") will receive
nonqualified options to purchase 10,000 shares of Common Stock on the date of
the meeting of the Company's stockholders at which the Non-Founding Director
is first elected to the Board of Directors. The options granted to Founding
Directors upon effectiveness of the registration statement relating to the
Offering will have an exercise price equal to the initial public offering
price and will vest in three annual installments (with respect to 3,333, 3,333
and 3,334 shares, respectively) beginning on the date of grant, subject to the
Director's continuous service through such vesting date. The exercise price of
options under future grants will be 100% of the fair market value of the
Common Stock on the date of grant and will vest in the same manner. The
exercise price may be paid in cash, cash equivalents acceptable to the
Compensation Committee, Common Stock or a combination thereof. Options granted
under the Directors' Plan are exercisable for ten years from the date of
grant. Upon termination of service as a director, options which have not
vested are forfeited and vested options may be exercised until they expire.
Certain Federal Income Tax Consequences Relating to Options. Generally, an
eligible director does not recognize any taxable income, and the Company is
not entitled to a deduction upon the grant of an option. Upon the exercise of
an option, the eligible director recognizes ordinary income equal to the
excess of the fair market value of the shares acquired over the option
exercise price, if any. Special rules may apply as a result of Section 16 of
the Exchange Act. The Company is generally entitled to a deduction equal to
the compensation taxable to the eligible director as ordinary income. Eligible
directors may be subject to backup withholding requirements for federal income
tax.
Share Awards. The Directors' Plan also provides for the annual award of
shares of Common Stock to each eligible director ("Director Share Awards").
The number of shares so awarded will be the number of whole share that has a
fair market value most nearly equal to $8,500 (i.e., 50.0% of the annual
retainer fee otherwise payable to the director). No more than 20,000 shares
will be awarded as Director Share Awards during the term of the Directors'
Plan. See "--Compensation of Directors." Such shares will vest immediately
upon grant and will be nonforfeitable. Director Share Awards will be made to
each Founding Director on the date that the registration statement relating to
the Offering is declared effective by the Commission and to each Non-Founding
Director on the date of the meeting of the Company's stockholders at which the
Non-Founding Director is first elected to the Board. Thereafter, Director
Share Awards will be made at the first meeting of the Board of Directors
following the annual meeting of the Company's stockholders.
Amendment and Termination. The Directors' Plan provides that the Board may
amend or terminate the Plan, but the terms of the Plan relating to the amount,
price and timing of awards under the Plan may not be amended more than once
every six months other than to comport with changes in the Code, or the rules
and regulations thereunder. An amendment will not become effective without
stockholder approval if the amendment materially (i) increases the number of
shares that may be issued under the Directors' Plan, (ii) changes the
eligibility requirements, or (iii) increases the benefits that may be provided
under the Directors' Plan. No options may be granted nor Director Shares
Awards made under the Directors' Plan after December 31, 2006.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision which eliminates such liability to the
maximum extent permitted by the MGCL.
The Charter of the Company obligates it, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to any person (or the estate of
any person) who is or was a party to, or is threatened to be made a party to,
any threatened, pending or completed action, suit or proceeding whether or not
by or in the right of the Company, and whether civil,
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criminal, administrative, investigative or otherwise, by reason of the fact
that such person is or was a director or officer of the Company, or is or was
serving at the request of the Company as a director, officer, trustee,
partner, member, agent or employee of another corporation, partnership,
limited liability company, association, joint venture, trust or other
enterprise. The Charter also permits the Company to indemnify and advance
expenses to any person who served a predecessor of the Company in any of the
capacities described above and to any employee or agent of the Company or a
predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (a) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services, or (c)
in the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In addition, the MGCL requires the Company, as a
condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company as authorized by the
Bylaws and (b) a written statement by or on his behalf to repay the amount
paid or reimbursed by the Company if it shall ultimately be determined that
the standard of conduct was not met.
INDEMNIFICATION AGREEMENTS
The Company will enter into indemnification agreements with each of its
executive officers and directors. The indemnification agreements will require,
among other matters, that the Company indemnify its executive officers and
directors to the fullest extent permitted by law and advance to the executive
officers and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under the
agreements, the Company must also indemnify and advance all expenses incurred
by executive officers and directors seeking to enforce their rights under the
indemnification agreements and may cover executive officers and directors
under the Company's directors' and officers' liability insurance. Although the
form of indemnification agreement offers substantially the same scope of
coverage afforded by law, it provides greater assurance to directors and
executive officers that indemnification will be available, because, as a
contract, it cannot be modified unilaterally in the future by the Board of
Directors or the stockholders to eliminate the rights it provides.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
RELATIONSHIPS AMONG OFFICERS AND DIRECTORS
Mr. Jorns is an executive officer, director and securityholder of each of
the Company, the Lessee, AGHI and the Beverage Corporations. Mr. Wiles is an
executive officer and stockholder of the Company and is an executive officer,
director and securityholder of each of the Lessee and AGHI. Mr. Barr is an
executive officer and stockholder of the Company, an executive officer and
securityholder of the Lessee and an executive officer of AGHI. Mr. Valentine
is an executive officer and stockholder of the Company and is an executive
officer of AGHI.
ACQUISITION OF INTERESTS IN CERTAIN OF THE INITIAL HOTELS
One or more of Messrs. Jorns, Wiles and Barr and their respective affiliates
own equity interests or contract rights relating to certain of the Initial
Hotels. Such persons and affiliates will receive an aggregate of 251,878
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OP Units in exchange for such interests in these Initial Hotels. Upon exercise
of their rights to exchange such OP Units (which rights are not exercisable
until one year after the closing of the Offering), such persons and entities
may receive cash in the amount of approximately $5.0 million based on the
Offering Price or, at the Company's option, an aggregate of 251,878 shares of
Common Stock. See "Partnership Agreement--Exchange Rights." In addition, the
Operating Partnership will reimburse AGHI for approximately $900,000 in direct
out-of-pocket expenses incurred in connection with the acquisition of the
Initial Hotels. Also, the Operating Partnership will repay approximately $3.75
million of indebtedness guaranteed by AGHI. For a discussion of the
consideration to be received by Messrs. Jorns, Wiles and Barr and their
affiliates in connection with the Operating Partnership's acquisition of the
Initial Hotels and the formation of the Company, see "Formation Transactions."
SHARED SERVICES AND OFFICE SPACE AGREEMENT
Effective upon completion of the Offering, the Company will enter into a
sublease and services agreement with AGHI pursuant to which AGHI will provide
the Company with office space and limited support personnel for the Company's
headquarters at 3860 West Northwest Highway, Dallas, Texas 75220 for an annual
fee of approximately $103,000.
OPTIONS TO PURCHASE AND RIGHTS OF FIRST REFUSAL
Pursuant to the Option Agreements, the Company will have the option and
right of first refusal to acquire AGHI's (i) 50.0% partnership interest in the
Boise, Idaho Option Hotel, and (ii) 16.7% partnership interest in the Durham,
North Carolina Option Hotel. The Option Agreements provide that for a period
of two years after the opening of each such hotel, the Company will have the
right to purchase AGHI's interests in each such hotel at a price equal to
AGHI's percentage interest in such hotel times 110% of the cost of developing
such hotel (including mortgage debt) for the first year; during the second
year of such option, the purchase price will be increased by any percentage
increase in the CPI. The purchase price will be payable (i) by taking title to
AGHI's interest in such hotels subject to a pro rata portion of the applicable
owning partnership's debt and (ii) by paying the balance of such purchase
price in cash or OP Units, at the option of AGHI. AGHI may sell its interests
in the Option Hotels free and clear of these options prior to the expiration
of the two-year option period, provided that it gives notice to the Company
and extends to the Company a right of first refusal to acquire such interests
on the same terms as that of the proposed sale. The exercise of the option or
right of first refusal may require approval of the partners in the
partnerships which own the Option Hotels that are not affiliated with AGHI,
including the approval by such partners of a Participating Lease relating to
such Option Hotels. AGHI will not seek such approval until after the Company
has exercised its option or right of first refusal, and there can be no
assurance that such approval will be granted.
EMPLOYMENT AGREEMENTS AND STOCK INCENTIVE PLANS
The Company will enter into an employment agreement with Mr. Jorns, pursuant
to which Mr. Jorns will serve as Chairman, Chief Executive Officer, and
President of the Company for a term of five years at an initial annual base
compensation of $100,000, subject to any increases in base compensation
approved by the Compensation Committee. In addition, the Company will enter
into employment agreements with Messrs. Wiles, Barr and Valentine, pursuant to
which Mr. Wiles will serve as Executive Vice President, Mr. Barr will serve as
Executive Vice President and Chief Financial Officer and Mr. Valentine will
serve as Senior Vice President--Acquisitions, each for a term of five years,
at an annual base compensation of $90,000, $80,000 and $60,000, respectively,
subject to any increases in base compensation approved by the Compensation
Committee. In addition to base salary, each such executive officer is entitled
under his employment agreement to receive annual performance-based
compensation as determined by the Compensation Committee. Upon termination of
such employment agreements other than for cause, or by such officer for "good
reason" (as such term is defined in each officer's employment agreement), each
of such officers will be entitled to receive severance benefits in an amount
equal to the greater of (i) the aggregate of all compensation due such officer
during the balance of the term of the employment agreement or (ii) 1.99 times
the "base amount" as determined in the Code. In addition,
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such employment agreements provide for the grant of options to Messrs. Jorns,
Wiles, Barr and Valentine to purchase up to 225,000, 75,000, 40,000 and 20,000
shares of Common Stock, respectively, which will become exercisable in four
equal annual installments, commencing on the date of the grant. The employment
agreements also provide for the grant of stock awards to Messrs. Jorns, Wiles,
Barr and Valentine with respect to 30,000, 10,000, 6,000 and 4,000 shares of
restricted Common Stock, respectively, which vest over a four-year period
commencing on the date of grant. See "Management--Stock Incentive Plans--The
1996 Plan."
PURCHASE OF PERSONAL PROPERTY
In order for the Company to qualify as a REIT, the Operating Partnership
will sell certain personal property relating to certain of the Initial Hotels
to the Lessee for $315,000, which amount will be paid by issuing the FF&E Note
to the Operating Partnership. The FF&E Note is recourse to the Lessee and
bears interest at the rate of 10.0% per annum and requires the payment of
quarterly installments of principal and interest of approximately $20,000 that
will fully amortize the FF&E Note over a five-year period.
THE PARTICIPATING LEASES
The Company and the Lessee will enter into the Participating Leases, each
with a term of twelve years, relating to the Initial Hotels. The Company
anticipates that a similar Participating Lease will be entered into with
respect to any additional hotel properties acquired by the Company in the
future. See "The Initial Hotels--The Participating Leases." Pursuant to the
terms of the Participating Leases, the Lessee is required to pay the greater
of Base Rent or Percentage Rent and certain other additional charges and is
entitled to all profits from the operation of the Initial Hotels after the
payment of operating and other expenses. See "Selected Financial Information--
The Lessee." In addition, the Company will enter into a Lease Master Agreement
which will set forth the terms of the Lessee Pledge and certain other matters.
THE MANAGEMENT AGREEMENTS
The Lessee and AGHI will enter into the Management Agreements, each with a
term of twelve years, relating to the management of the Initial Hotels. The
Company anticipates that a similar Management Agreement will be entered into
with respect to any hotel properties leased by the Company to the Lessee in
the future. Pursuant to the Management Agreements, AGHI is entitled to receive
a base fee of 1.5% of gross revenues, plus an incentive fee of up to 2.0% of
gross revenues based on the hotels achieving certain increases in revenue. The
payment of management fees to AGHI by the Lessee is subordinate to the
Lessee's obligations to the Company under the Participating Leases. See "The
Initial Hotels--The Management Agreements."
THE BEVERAGE CORPORATIONS
In order to facilitate compliance with state and local liquor laws and
regulations, in connection with the acquisition of the Initial Hotels, the
Lessee has agreed to sublease those areas of the Initial Hotels that comprise
the restaurant and other areas where alcoholic beverages are served to the
Beverage Corporations, eleven of which are wholly owned by Mr. Jorns. In
accordance with the terms of the Beverage Subleases, each Beverage Corporation
is obligated to pay to the Lessee rent payments equal to 30% of each such
corporation's annual gross revenues generated from the sale of food and
beverages generated from such areas; however, pursuant to the Participating
Leases, such subleases will not reduce the Participating Rent payments to the
Company, which it is entitled to receive from such food and beverage sales.
AGHI AND THE LESSEE
American General Hospitality, Inc.
AGHI, based in Dallas, Texas, was founded in 1981 by Mr. Jorns, the
Company's Chairman of the Board, Chief Executive Officer and President. AGHI
has experienced significant growth over the last five years as its management
portfolio increased from 39 hotels with more than 5,200 guest rooms under
management at December 31, 1990, to 74 hotels with more than 13,865 guest
rooms under management at March 31, 1996. For the twelve months ended March
31, 1996, the hotels managed by AGHI generated revenues in excess of $275
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million. According to Hotel & Motel Management, a leading hotel trade
publication, AGHI was the nation's fourth largest independent hotel management
company in 1995, based upon number of hotels under management. AGHI has a
national presence, with operating experience in 40 states, involving 212
different hotels. AGHI has developed six hotels from the ground up and is
currently developing two other hotels for which the Company has limited
purchase options. See "The Initial Hotels--Options to Purchase and Rights of
First Refusal." These hotels include four Hampton Inns, two Courtyards by
Marriott, one Holiday Inn, and one Embassy Suites. AGHI has in the past
acquired fifteen hotels, containing a total of 2,638 guest rooms, under
various franchises and affiliations, including Hilton, Courtyard by Marriott,
Embassy Suites, Holiday Inn, Hampton Inn, and Days Hotel as well as the
prestigious Small Luxury Hotels(R) affiliation. In addition, AGHI has been
involved in the repositioning and redevelopment of approximately 70 hotels
that operated under various national franchise brands. The operations of AGHI
are fully integrated with capabilities in all phases of acquisition,
development, and management of hotel properties. As of March 31, 1996, AGHI
had approximately 6,000 employees.
The Company believes that it will benefit significantly from the hotel
management experience of AGHI. AGHI will manage all of the Initial Hotels and
is expected to be retained by the Lessee as manager of any additional hotels
acquired by the Company and leased to the Lessee. Management expects that the
Company also will benefit from AGHI's significant historical operating
experience during various economic cycles.
AGHI has significant relationships with major hotel franchisors including
Hilton, Marriott, Wyndham Hotels, DoubleTree Hotels, Holiday Inn, Sheraton,
Promus Hotels(R), Radisson(R), the Choice Hotels family of brands and the HFS
Incorporated family of brands. The Company believes that these relationships
will enhance the Company's ability to evaluate hotel brand affiliations
without restrictive ties to any one franchisor's brands. Pursuant to the terms
of the Management Agreements, and for so long as AGHI is managing hotels for
the benefit of the Company, AGHI has agreed to limit its business activities
to managing and operating Company-owned hotels and hotels owned by third
parties. See "The Initial Hotels--The Management Agreements." Except for two
hotels currently under development, for which the Company has purchase options
on AGHI's interests in such hotels, and one hotel which is currently held for
sale, AGHI's activities will be limited to managing and operating Company-
owned hotels and hotels owned by third parties. See "The Initial Hotels--
Options to Purchase and Rights of First Refusal."
The Lessee will contract with AGHI to manage the Initial Hotels under an
incentive compensation structure (as described below). Messrs. Jorns and
Wiles, two executive officers of the Company, own collectively approximately
21.0% of AGHI. The remaining interests in AGHI are owned by Messrs. Sowell
(47.5%), Shaw and Shaw (collectively, 31.5%).
AGH Leasing, L.P.
The Company will lease each Initial Hotel to the Lessee pursuant to a
separate Participating Lease and, while not legally obligated to do so,
expects to lease additional hotels that may be acquired or developed by the
Company to the Lessee. Messrs. Jorns, Wiles and Barr, all executive officers
of the Company, own collectively approximately 23.0% of the Lessee. The
remaining interests in the Lessee are owned by Messrs. Sowell, Shaw and Shaw.
Each Participating Lease will have a term of twelve years, subject to earlier
termination upon the occurrence of certain events. Under the Participating
Leases, the Lessee will be obligated to make fixed monthly Base Rent payments
to the Company and quarterly Participating Rent payments to the Company. See
"The Initial Hotels--The Participating Leases--Lessee Capitalization; Lessee
Pledge."
The Lessee is also required to provide to the Company monthly financial and
operating information about each of the Initial Hotels, quarterly unaudited
and annual audited financial statements of the Lessee, and any other
information material to the Lessee's continuing ability to perform its
obligations under the Participating Leases. The Company will include this
information in its periodic reports filed with the Securities and Exchange
Commission (the "Commission") under the Exchange Act.
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Certain Terms of the Participating Leases, the Management Agreements and
Certain Related Agreements
In an effort to align the interests of AGHI and the Lessee with the
interests of the Company's stockholders, the Participating Leases, the
Management Agreements and certain related agreements provide for the
following:
. the partners of the Lessee have agreed upon consummation of the Offering
to (i) initially capitalize the Lessee with $500,000 in cash and (ii)
pursuant to the Lessee Pledge, pledge 275,000 OP Units having a value of
approximately $5.5 million, based on the Offering Price, to the Company
to secure the Lessee's obligations under the Participating Leases; OP
Units subject to the Lessee Pledge may be released therefrom without
duplication (a) on a one-for-one basis as the Lessee acquires OP Units or
shares of Common Stock or (b) upon the contribution to the Lessee of cash
or an increase in undistributed earnings in an amount equal to the then
current market value of the OP Units released from the Lessee Pledge;
. until the Lessee's net worth equals the Lessee Distribution Restriction
(the greater of (i) $6.0 million and (ii) 17.5% of actual rent payments
from hotels leased to the Lessee during the preceding calendar year
(annualized for 1996), the Lessee will not pay any distributions to its
partners (except for the purpose of permitting its partners to pay taxes
on the income attributable to them from the operations of the Lessee
while it is a limited partnership and except for distributions relating
to interest or dividends received by the Lessee from cash or securities
held by it) and will be required during this period, subject to
compliance with applicable securities laws, to use its cash flow
attributable to the Participating Leases (after establishing a reserve
for partner tax distributions) to purchase interests in the Company,
which interests may not be sold or transferred for a period of two years
after their acquisition (other than to partners in the Lessee if,
following such transfer, the Lessee Distribution Restriction is
satisfied);
. management fees paid to AGHI by the Lessee under the Management
Agreements will be performance based with a base fee equal to 1.5% of
gross revenues plus an incentive fee of up to 2.0% of gross revenues that
will be earned incrementally upon reaching certain gross revenue targets;
. base and incentive management fees payable by the Lessee to AGHI will be
subordinated to the Lessee's rent obligations to the Company under the
Participating Leases;
. monetary and certain other defaults by the Lessee under each
Participating Lease will result in a cross-default of all other
Participating Leases to which the Lessee is a party;
. Messrs. Jorns and Wiles, who are stockholders of AGHI and are also
executive officers of the Company, will agree to use 50% of the dividends
(net of the tax liability attributed to such dividends) received by them
from AGHI that are attributable to AGHI's earnings from the management of
hotels owned by the Company (as determined in good faith by such
officers) to purchase, subject to compliance with applicable securities
laws, additional interests in the Company during each of the twelve years
following the closing of the Offering;
. each Participating Lease provides that the failure on the part of the
Lessee to materially comply with the terms of a Participating Lease would
give the Company the right to terminate such lease, repossess the
applicable hotel and enforce the payment obligations under the lease;
. AGHI will establish bonus eligibility criteria for its officers and
employees that are keyed to the amount of incentive fees AGHI earns under
the Management Agreements; in addition, subject to applicable securities
laws limitations, 25.0% of such bonuses, if earned, will be paid by AGHI
to its senior executives in interests in the Company; and
. the Board of Directors will establish a Leasing Committee, consisting
entirely of Independent Directors, that will review not less frequently
than annually the Lessee's compliance with the terms of the Participating
Leases and will review and approve the terms of each new Participating
Lease between the Company and the Lessee.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock immediately following completion of the
Formation Transactions by (i) each director of the Company, (ii) each
executive officer of the Company, (iii) by all directors and executive
officers of the Company as a group, and (iv) by persons who own more than 5.0%
of the shares of Common Stock. Except as otherwise described below, all shares
are owned directly and the indicated person has sole voting and investment
power. The number of shares of Common Stock includes the number of shares of
Common Stock that such person could receive if he or it exchanged his or its
OP Units for shares of Common Stock under certain circumstances.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS(1)
------------------------ --------------------- ----------
<S> <C> <C>
Kenneth E. Barr(2) .......................................... 24,090 *
Corporate Property Associates 4, L.P.(3)..................... 428,551 5.61%
Corporate Property Associates 8, L.P.(4)..................... 495,389 6.43%
Kent R. Hance(5)............................................. 3,333 *
Steven D. Jorns(6) .......................................... 262,666 3.53%
H. Cabot Lodge III(5) ....................................... 3,333 *
James McCurry(5) ............................................ 3,333 *
James E. Sowell(7) .......................................... 540,553 6.98%
Russ C. Valentine(8) ........................................ 10,089 *
Bruce G. Wiles(9) ........................................... 84,342 1.16%
James R. Worms(5) ........................................... 3,333 *
Executive officers and directors as a group (8 persons) ..... 394,519 5.23%
</TABLE>
- --------
* Represents less than 1.0% of the class.
(1) Assumes that all OP Units held by each named person are exchanged for
shares of Common Stock. The total number of shares outstanding used in
calculating the percentage assumes that none of the OP Units held by other
persons are exchanged for shares of Common Stock. Pursuant to the Exchange
Agreement, OP Units are not exchangeable for shares of Common Stock until
the first anniversary date of the closing of the Offering.
(2) Includes options to purchase 8,000 shares of Common Stock at the Offering
Price, which will become exercisable upon the date of grant and 6,000
shares of restricted Common Stock that constitute stock awards. Includes
90 shares of Common Stock held by the Plan and attributable to Mr. Barr.
Includes 10,000 OP Units to be issued to Mr. Barr in the Formation
Transactions.
(3) The business address of Corporate Property Associates 4, L.P. is c/o W.P.
Carey & Co., Inc., 50 Rockefeller Plaza, New York, New York 10029.
(4) The business address of Corporate Property Associates 8, L.P. is c/o W.P.
Carey & Co., Inc., 50 Rockefeller Plaza, New York, New York 10029.
(5) Includes options to purchase 3,333 shares of Common Stock at the Offering
Price, which will become exercisable upon the date of grant.
(6) Includes options to purchase 45,000 shares of Common Stock at the Offering
Price, which will become exercisable upon the date of grant and 30,000
shares of restricted Common Stock that constitute stock awards. Includes
158,063 OP Units to be issued to Mr. Jorns in the Formation Transactions,
27,143 OP Units to be issued to Mr. Jorns' wife in the Formation
Transactions and 2,460 shares of Common Stock held by the Plan and
attributable to Mr. Jorns.
(7) The business address of Mr. Sowell is at The Jim Sowell Company, 3131
McKinney Avenue, Suite 200, Dallas, Texas 75204. Includes 540,553 OP Units
to be issued to Mr. Sowell in the Formation Transactions.
(8) Includes options to purchase 4,000 shares of Common Stock at the Offering
Price, which will become exercisable upon the date of grant and 4,000
shares of restricted Common Stock that constitute stock awards. Includes
2,089 shares of Common Stock held by the Plan and attributable to Mr.
Valentine.
(9) Includes options to purchase 15,000 shares of Common Stock at the Offering
Price, which will become exercisable upon the date of grant and 10,000
shares of restricted Common Stock that constitute stock awards. Includes
2,670 shares of Common Stock held by the Plan and attributable to Mr.
Wiles. Includes 56,672 OP Units to be issued to Mr. Wiles in the Formation
Transactions.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of (i) the stock of the Company and (ii)
certain provisions of Maryland law and of the Charter and Bylaws of the
Company is subject to and qualified in its entirety by reference to Maryland
law described herein, and to the Charter and Bylaws of the Company which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
GENERAL
Under its Charter, the Company will have the authority to issue 100,000,000
shares of Common Stock, $0.01 par value per share, and 20,000,000 shares of
Preferred Stock $0.01 par value per share. No shares of Preferred Stock are
outstanding or will be outstanding immediately after consummation of the
Offering. Under Maryland law, stockholders generally are not liable for a
corporation's debts or obligations.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other class
or series of stock, holders of shares of Common Stock are entitled to receive
dividends on such stock if, as and when authorized and declared by the Board
of Directors of the Company out of assets legally available therefor and to
share ratably in the assets of the Company legally available for distribution
to its stockholders in the event of its liquidation, dissolution or winding up
after payment of or adequate provision for all known debts and liabilities of
the Company.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
directors and, except as provided with respect to any other class or series of
stock, the holders of such shares will possess the exclusive voting power.
There is no cumulative voting in the election of directors, which means that
the holders of a majority of the outstanding shares of Common Stock can elect
all of the directors then standing for election and the holders of the
remaining shares will not be able to elect any directors.
Holders of shares of Common Stock have no preference, conversion, exchange,
sinking fund, or redemption rights and have no preemptive rights to subscribe
for any securities of the Company. Shares of Common Stock will have equal
dividend, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be
cast on the matter) is set forth in the corporation's charter. The Charter
provides that, with the exception of certain amendments to the Charter, the
affirmative vote of holders of shares entitled to cast a majority of all votes
entitled to be cast on such matters will be sufficient to approve the
aforementioned transactions.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of classes of stock and to
establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
PREFERRED STOCK
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Stock and to reclassify any previously classified but
unissued shares of any series, as authorized by the Board of Directors. Prior
to issuance of shares of each series, the Board is required by the MGCL and
the Charter of the Company to set, subject to the provisions of the Charter
regarding restriction on transfer of stock, the terms, preferences,
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conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such series. Thus, the Board could authorize the issuance
of shares of Preferred Stock with terms and conditions which could have the
effect of delaying, deferring or preventing a transaction or a change in
control of the Company that might involve a premium price for holders of
Common Stock or otherwise be in their best interest. As of the date hereof, no
shares of Preferred Stock are outstanding and the Company has no present plans
to issue any Preferred Stock.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock
and to classify or reclassify unissued shares of Common Stock or Preferred
Stock and thereafter to cause the Company to issue such classified or
reclassified shares of stock will provide the Company with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other needs which might arise. The additional classes or series of
Preferred Stock, as well as the Common Stock, will be available for issuance
without further action by the Company's stockholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded.
Although the Board of Directors has no intention at the present time of doing
so, it could authorize the Company to issue a class or series that could,
depending upon the terms of such class or series, delay, defer or prevent a
transaction or a change of control of the Company that might involve a premium
price for holders of Common Stock or otherwise be in their best interest.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of stock.
Specifically, not more than 50.0% in value of the Company's outstanding shares
of stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year, and the Company must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of twelve months or during
a proportionate part of a shorter taxable year. Those two requirements do not
apply until after the first taxable year for which the Company makes an
election to be taxed as a REIT. See "Federal Income Tax Considerations--
Requirements for Qualification as a REIT." In addition, the Company must meet
certain requirements regarding the nature of its gross income in order to
qualify as a REIT. One such requirement is that at least 75.0% of the
Company's gross income for each calendar year must consist of rents from real
property and income from certain other real property investments. The rents
received by the Operating Partnership and the Subsidiary Partnerships from the
Lessee will not qualify as rents from real property, which could result in
loss of REIT status for the Company, if the Company owns, actually or
constructively, 10.0% or more of the ownership interests in the Lessee, within
the meaning of section 856(d)(2)(B) of the Code. See "Federal Income Tax
Considerations--Requirements for Qualification as a REIT--Income Tests."
Because the Board of Directors believes it is essential for the Company to
continue to qualify as a REIT, the Charter, subject to certain exceptions
described below, will provide pursuant to the Ownership Limitation that no
person may own, or be deemed to own by virtue of the attribution provisions of
the Code, more than 9.8% of either (i) the outstanding shares of any class of
Common Stock or (ii) the outstanding shares of any class or series of
Preferred Stock (subject to the Look-Through Ownership Limitation applicable
to certain stockholders, as described below). Any transfer of Common Stock or
Preferred Stock that would (i) result in any person owning, directly or
indirectly, Common Stock or Preferred Stock in excess of the Ownership
Limitation (or the Look-Through Ownership Limitation, if applicable), (ii)
result in Common Stock and Preferred Stock being owned by fewer than 100
persons (determined without reference to any rules or attribution), (iii)
result in the Company being "closely held" within the meaning of section
856(h) of the Code, or (iv) cause the Company to own, actually or
constructively, 9.9% or more of the ownership interests in a tenant of the
Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code, will be void
ab initio, and the intended transferee will acquire no rights in such shares
of Common Stock or Preferred Stock.
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Certain types of entities, such as pension trusts qualifying under section
401(a) of the Code, mutual funds qualifying as regulated investment companies
under section 851 of the Code, and corporations, will be looked through for
purposes of the "closely held" test in section 856(h) of the Code. The Charter
will allow such an entity under the Look-Through Ownership Limitation to own
up to 15.0% of the shares of any class or series of the Company's stock,
provided that such ownership does not cause any beneficial owner of such
entity to exceed the Ownership Limitation or otherwise result in a violation
of the tests described in clauses (ii), (iii) and (iv) of the preceding
paragraph.
Subject to certain exceptions described below, any purported transfer of
Common Stock or Preferred Stock that would (i) result in any person owning,
directly or indirectly, shares of Common Stock or Preferred Stock in excess of
the Ownership Limitation (or the Look-Through Ownership Limitation, if
applicable), (ii) result in the shares of Common Stock and Preferred Stock
being owned by fewer than 100 persons (determined without reference to any
rules of attribution), (iii) result in the Company being "closely held" within
the meaning of section 856(h) of the Code, or (iv) cause the Company to own,
actually or constructively, 10.0% or more of the ownership interests in a
tenant of the Company's, the Operating Partnership's or a Subsidiary
Partnership's real property, within the meaning of section 856(d)(2)(B) of the
Code, will be designated as "Shares-in-Trust" and will be transferred
automatically to a trust (a "Trust"), effective on the day before the
purported transfer of such shares of Common Stock or Preferred Stock. The
record holder of the shares of Common Stock or Preferred Stock that are
designated as Shares-in-Trust (the "Prohibited Owner") will be required to
submit such number of shares of Common Stock or Preferred Stock to the Company
for registration in the name of the trustee of the Trust (the "Trustee"). The
Trustee will be designated by the Company but will not be affiliated with the
Company. The beneficiary of the Trust (the "Beneficiary") will be one or more
charitable organizations named by the Company.
Shares-in-Trust will remain issued and outstanding shares of Common Stock or
Preferred Stock and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Trustee will receive all
dividends and distributions on the Shares-in-Trust and will hold such
dividends or distributions in trust for the benefit of the Beneficiary. The
Trustee will vote all Shares-in-Trust. The Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires
such Shares-in-Trust without such acquisition resulting in another transfer to
another Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares become
Shares-in-Trust. Any vote taken by a Prohibited Owner prior to the Company's
discovery that the Shares-in-Trust were held in trust will be rescinded as
void ab initio and recast by the Trustee, in its sole and absolute discretion;
provided, however, that if the Company has already taken irreversible
corporate action based on such vote, then the Trustee shall not have the
authority to rescind and recast such vote. The Prohibited Owner generally will
receive from the Trustee the lesser of (i) the price per share such Prohibited
Owner paid for the shares of Common Stock or Preferred Stock that were
designated as Shares-in-Trust (or, in the case of a gift or devise, the Market
Price (as defined below) per share on the date of such transfer) or (ii) the
price per share received by the Trustee from the sale of such Shares-in-Trust.
Any amounts received by the Trustee in excess of the amounts to be paid to the
Prohibited Owner will be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in
the case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. Subject to the Trustee's ability to
designate a permitted transferee, the Company will have the right to accept
such offer for a period of 90 days after the later of (i) the date of the
purported transfer which resulted in the creation of such Shares-in-Trust or
(ii) the date the Company determines in good faith that a transfer resulting
in such Shares-in-Trust occurred.
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"Market Price" on any date shall mean the average of the Closing Price for
the five consecutive Trading Days ending on such date. The "Closing Price" on
any date shall mean the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the NYSE or, if the shares of Common Stock or Preferred Stock are
not listed or admitted to trading on the NYSE, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the shares of Common Stock
or Preferred Stock are listed or admitted to trading or, if the shares of
Common Stock or Preferred Stock are not listed or admitted to trading on any
national securities exchange, the last quoted price, or if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal other
automated quotations system that may then be in use or, if the shares of
Common Stock or Preferred Stock are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the shares of Common Stock or Preferred Stock
selected by the Board of Directors. "Trading Day" shall mean a day on which
the principal national securities exchange on which the shares of Common Stock
or Preferred Stock are listed or admitted to trading is open for the
transaction of business or, if the shares of Common Stock or Preferred Stock
are not listed or admitted to trading on any national securities exchange,
shall mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
Any person who acquires or attempts to acquire Common Stock or Preferred
Stock in violation of the foregoing restrictions, or any person who owned
shares of Common Stock or Preferred Stock that were transferred to a Trust,
will be required (i) to give immediately written notice to the Company of such
event and (ii) to provide to the Company such other information as the Company
may request in order to determine the effect, if any, of such transfer on the
Company's status as a REIT.
All persons who own, directly or indirectly, more than 5.0% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common Stock or Preferred Stock must, within 30 days
after January 1 of each year, provide to the Company a written statement or
affidavit stating (i) the name and address of such direct or indirect owner,
(ii) the number of shares of Common Stock and Preferred Stock owned directly
or indirectly, and (iii) a description of how such shares are held. In
addition, each direct or indirect stockholder shall provide to the Company
such additional information as the Company may request in order to determine
the effect, if any, of such ownership the Company's status as a REIT and to
ensure compliance with the Ownership Limitation.
The Ownership Limitation or the Look-Through Ownership Limitation, as
applicable, generally will not apply to the acquisition of shares of Common
Stock or Preferred Stock by an underwriter that participates in a public
offering of such shares. In addition, the Board of Directors, upon such
conditions as the Board of Directors may direct, may exempt a person from the
Ownership Limitation or the Look-Through Ownership Limitation, as applicable,
under certain circumstances.
All certificates representing shares of Common Stock or Preferred Stock will
bear a legend referring to the restrictions described above.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority, of shares of Common Stock might receive a premium from their shares
of Common Stock over the then prevailing market price or which such holders
might believe to be otherwise in their best interest.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S
CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and the
Company's Charter and Bylaws does not purport to be complete and is subject to
and qualified in its entirety by reference to Maryland law and the Company's
Charter and Bylaws, copies of which are exhibits to the Registration Statement
of which this Prospectus is a part. See "Additional Information."
NUMBER OF DIRECTORS; CLASSIFICATION OF THE BOARD OF DIRECTORS
The Charter and Bylaws will provide that the number of directors will
consist of not less than three nor more than fifteen persons, as determined by
the affirmative vote of a majority of the members of the entire Board of
Directors. At all times, a majority of the directors shall be Independent
Directors, except that upon the death, removal, incapacity or resignation of
an Independent Director, such requirement shall not be applicable for 60 days.
Upon the effective date of the Registration Statement of which this Prospectus
is a part, there will be five directors, four of whom will be Independent
Directors. The holders of Common Stock shall be entitled to vote on the
election or removal of directors, with each share entitled to one vote. Any
vacancy will be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the remaining directors, except that
a vacancy resulting from an increase in the number of directors must be filled
by a majority of the entire Board of Directors.
Pursuant to the Charter, effective subsequent to the Closing, the Board of
Directors will be divided into three classes of directors. The initial terms
of the first, second and third classes will expire in 1997, 1998 and 1999,
respectively. As the term of each class expires, directors in that class will
be elected by the stockholders of the Company for a term of three years and
until their successors are duly elected and qualify. Classification of the
Board of Directors is intended to assure the continuity and stability of the
Company's business strategies and policies as determined by the Board of
Directors. Because holders of Common Stock will have no right to cumulative
voting in the election of directors, at each annual meeting of stockholders,
the holders of a majority of the shares of Common Stock will be able to elect
all of the successors of the class of directors whose terms expire at that
meeting.
The classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult, which
could delay, defer, discourage or prevent an attempt by a third party to
obtain control of the Company or other transaction, even though such an
attempt or other transaction might be beneficial to the Company and its
stockholders. At least two annual meetings of stockholders, instead of one,
will generally be required to effect a change in a majority of the Board of
Directors. Thus, the classified board provision could increase the likelihood
that incumbent directors will retain their positions. See "Risk Factors--
Potential Anti-Takeover Effect of Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws."
REMOVAL; FILLING VACANCIES
The Bylaws provide that, unless the Board of Directors otherwise determines,
any vacancies will be filled by the affirmative vote of a majority of the
remaining directors, though less than a quorum. Any directors so elected shall
hold office until the next annual meeting of stockholders. The Charter
provides that directors may be removed, with or without cause, only by the
affirmative vote of the holders of at least 75.0% of votes entitled to be cast
in the election of the directors. This provision, when coupled with the
provision of the Bylaws authorizing the Board of Directors to fill vacant
directorships, could temporarily prevent any stockholder from enlarging the
Board of Directors and filling the new directorships with such shareholder's
own nominees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting
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from (a) actual receipt of an improper benefit or profit in money, property or
services or (b) active and deliberate dishonesty established by a final
judgment as being material to the cause of action. The Charter of the Company
contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
The Charter obligates the Company, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to any person (or the estate of
any person) who is or was a party to, or is threatened to be made a party to,
and threatened, pending or completed action, suit or proceeding whether or not
by or in the right of the Company, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or officer of the Company, or is or was serving at
the request of the Company as a director, officer, trustee, partner, member,
agent or employee of another corporation, partnership, limited liability
company, association, joint venture, trust or other enterprise. The Charter
also permits the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities described above
and to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a Maryland corporation (unless its charter provides
otherwise, which the Company's Charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a Maryland corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In addition, the MGCL requires the Company,
as a condition to advancing expenses, to obtain (a) a written affirmation by
the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the Company as authorized by the
Bylaws and (b) a written statement by or on his behalf to repay the amount
paid or reimbursed by the Company if it shall ultimately be determined that
the standard of conduct was not met. Indemnification under the provisions of
the MGCL is not deemed exclusive of any other rights, by indemnification or
otherwise, to which an officer or director may be entitled under the Company's
Charter or Bylaws, or under resolutions of stockholders or directors, contract
or otherwise. It is the position of the Commission that indemnification of
directors and officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act.
The Company also intends to purchase and maintain insurance on behalf of all
of its directors and executive officers against liability asserted against or
incurred by them in their official capacities with the Company, whether or not
the Company is required or has the power to indemnify them against the same
liability.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10.0% or more of the voting
power of such corporation's shares or an affiliate of such corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10.0% or more of the voting power of the then-outstanding
voting shares of such corporation (an "Interested Shareholder") or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Shareholder became an Interested Shareholder. Thereafter,
any such business combination must be recommended by the board of directors of
such corporation and approved by the affirmative vote of at least (a) 80.0% of
the votes entitled to be cast by holders of outstanding voting shares of such
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corporation and (b) two-thirds of the votes entitled to be cast by holders of
voting shares of such corporation other than shares held by the Interested
Shareholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the corporation's stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by
the Interested Shareholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
board of directors of the corporation prior to the time that the Interested
Shareholder becomes an Interested Shareholder. Pursuant to the statute, the
Charter contains an exemption from these provisions of the MGCL for any
business combination with certain officers, directors and Primary Contributors
of the Company, including Messrs. Jorns, Wiles, Barr, Sowell, Shaw and Shaw,
and all present or future affiliates or associates of, or any other person
acting in concert or as a group with, any of the foregoing persons and any
other business combination which may arise in connection with the Formation
Transactions generally. As a result, Messrs. Jorns, Wiles, Barr, Sowell, Shaw
and Shaw and any such associate, affiliate or other person may be able to
enter into a business combination with the Company, which may not be in the
best interest of the stockholders, without compliance by the Company with
super-majority vote requirements or other provisions of the statute.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares owned by the acquiror, by officers or by directors
who are employees of the corporation. "Control Shares" are voting shares
which, if aggregated with all other such shares previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority, or (iii)
a majority or more of all voting power. Control Shares do not include shares
the acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context
of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange, if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws
of the corporation.
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The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's Common Stock or Preferred Stock. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
AMENDMENT TO THE CHARTER
The Charter of the Company may be amended by the affirmative vote of holders
of shares entitled to cast a majority of all votes entitled to be cast on such
an amendment; provided, however, (i) no term or provision of the Charter may
be added, amended or repealed in any respect that would, in the determination
of the Board of Directors, cause the Company not to qualify as a REIT under
the Code, (ii) certain provisions of the Charter, including provisions
relating to the classification of directors, the removal of directors,
Independent Directors, preemptive rights of holders of stock and the
indemnification and limitation of liability of officers and directors may not
be amended or repealed and (iii) provisions imposing cumulative voting in the
election of directors may not be added to the Charter, unless, in each such
case, in addition to any vote of the holders of the Preferred Stock required
by the terms of any then outstanding Preferred Stock, such action is approved
by the affirmative vote of the holders of not less than two-thirds of all the
votes entitled to be cast on the matter.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
the holders of not less than a majority of all of the votes entitled to be
cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual meeting
of stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(i) pursuant to the Company's notice of the meeting, (ii) by the Board of
Directors or (iii) by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and
(b) with respect to special meetings of stockholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of stockholders and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to the Company's notice of the
meeting, (ii) by the Board of Directors or (iii) provided that the Board of
Directors has determined that directors shall be elected at such meeting, by a
stockholder who is entitled to vote at the meeting and has complied with the
advance notice provisions set forth in the Bylaws.
MEETINGS OF STOCKHOLDERS
The Company's Bylaws provide that annual meetings of stockholders shall be
held on a date and at the time set by the Board of Directors during the month
of May each year (commencing in May 1997). Special meetings of the
stockholders may be called by (i) the President of the Company, (ii) the Chief
Executive Officer or (iii) the Board of Directors. Under the MGCL and the
Bylaws of the Company, special meetings must be called by the Secretary of the
Company upon the written request of the holders of shares entitled to cast not
less than a majority of all votes entitled to be cast at the meeting.
OPERATIONS
The Company is generally prohibited by the Charter from holding any assets
or engaging in any activity that would cause the Company to fail to qualify as
a REIT.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER
AND BYLAWS
The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Charter on classification of the Board of Directors and
removal of directors and the advance notice provisions of the Bylaws could
delay, defer or prevent
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a transaction or a change in control of the Company that might involve a
premium price for holders of Common Stock or otherwise be in their best
interest.
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investment, financing, conflicts of interest and certain other activities. The
policies with respect to these activities have been determined by the Board of
Directors of the Company and may be amended or revised from time to time at
the discretion of the Board of Directors without a vote of the stockholders of
the Company, except that (i) changes in certain policies with respect to
conflicts of interest must be consistent with legal requirements and (ii)
certain policies with respect to competition are imposed pursuant to contracts
that cannot be amended without the consent of all parties thereto.
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate
In addition to the Initial Hotels, the Company intends to acquire equity
interests in hotels and related properties throughout the United States and,
on a limited basis, elsewhere in North America. Additional acquisitions could
be made directly or by the Operating Partnership or other entities controlled
by the Company, if any exist. The Company's investment objective is to
maximize current returns to stockholders through increases in Cash Available
for Distribution and to increase long-term returns to stockholders through
appreciation in the value of the Common Stock. The Company intends to achieve
these objectives by participating in increased profits from the Initial Hotels
pursuant to the Participating Leases and by the selective acquisition and
development of hotel properties.
Although the Company presently anticipates that additional investments in
hotel properties will be made through the Operating Partnership, additional
investments may be made directly by the Company or other entities controlled
by the Company, if any exist. Such investments may be financed, in whole or in
part, with excess cash flow, borrowings or subsequent issuances of shares of
Common Stock or other securities issued by the Company or by entities
controlled by the Company.
Investments in Other Entities
The Company also may participate with other entities in property ownership,
through joint ventures or other types of co-ownership. Equity investments may
be subject to existing mortgage financing and other indebtedness that may have
priority over the equity interests in the Company.
Investments in Real Estate Mortgages and Securities of Other Issuers
While the Company will emphasize equity hotel investments, it may, in its
discretion, invest in mortgage and other real estate interests, including
securities of REITs and other issuers. Subject to compliance with applicable
REIT asset test requirements (see "Federal Income Tax Considerations--
Requirements for Qualification as a REIT--Asset Tests"), the Company will have
no limit on the amount or percentage of assets represented by one investment
or investment type. The Company does not presently intend to invest in
securities of REITs or other issuers. The Company also does not presently
intend to trade or underwrite securities or to make investments for the
purpose of exercising control over other issuers. The Company may invest in
participating or convertible mortgages if it concludes that by doing so it may
benefit from the cash flow or any appreciation in the value of the subject
property. Such mortgages are similar to equity participations, because they
permit the lender to either participate in increasing revenues from the
property or convert some or all of the mortgage to equity.
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FINANCING
The Company intends to make additional investments in hotel properties and
may incur indebtedness to make such investments or to meet the distribution
requirements imposed by the REIT provisions of the Code, to the extent that
cash flow from the Company's investments and working capital is insufficient
to fund such investments or distributions.
To ensure that the Company has sufficient liquidity to conduct its
operations, including making investments in additional hotel properties and
funding its anticipated distribution obligations and financing costs, the
Company has obtained a commitment for the $100 million Line of Credit. The
Company may seek to increase the size of the Line of Credit or to arrange
other borrowing to fund investments in additional hotel properties or for
other purposes. The Line of Credit will be secured by first mortgage liens on
eleven of the Initial Hotels and, in certain circumstances, a mortgage lien on
subsequently acquired hotels. Upon completion of the Offering, the Company
will have approximately $19.6 million of outstanding fixed rate indebtedness.
The Company intends to limit consolidated indebtedness (measured at the time
the debt is incurred) to no more than 45.0% of the Company's investment in
hotels (valued at cost on a consolidated basis, except for those hotels
identified in the Company's financial statements that have a predecessor
carryover cost basis that will be valued at fair market value as of the
closing of the Offering, and after giving effect to the Company's use of
proceeds from any indebtedness).
Borrowings may be incurred through the Operating Partnership or the Company.
Indebtedness incurred by the Company may be in the form of bank borrowings,
secured and unsecured, and publicly and privately placed debt instruments.
Indebtedness incurred by the Operating Partnership may be in the form of
purchase money obligations to the sellers of properties, publicly or privately
placed debt instruments, financing from banks, institutional investors or
other lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interests in the property owned by the Operating
Partnership. Such indebtedness may be recourse to all or any part of the
property of the Company or the Operating Partnership, or may be limited to the
particular property to which the indebtedness relates. The proceeds from any
borrowings by the Company or the Operating Partnership may be used for the
payment of distributions or dividends, working capital, to refinance existing
indebtedness or to finance acquisitions, expansions, additions or renovations
of hotel properties. See "Federal Income Tax Considerations--Requirements for
Qualification as a REIT--Annual Distribution Requirements."
If the Board of Directors determines to raise additional equity capital, the
Board will have the authority, without stockholder approval, to issue
additional shares of Common Stock or Preferred Shares in any manner (and on
such terms and for such consideration) as it deems appropriate, including in
exchange for property. Existing stockholders have no preemptive right to
purchase shares issued in any such offering, and any such issuance might cause
a dilution of a stockholder's investment in the Company.
The Company may make investments other than as previously described,
although it does not currently intend to do so. See "Federal Income Tax
Considerations--Requirements for Qualification as a REIT--Asset Tests."
CONFLICT OF INTEREST POLICIES
The Company will adopt certain policies and enter into certain agreements
designed to minimize potential conflicts of interest. The Company's Board of
Directors is subject to certain provisions of Maryland law, which are designed
to eliminate or minimize certain potential conflicts of interest. However,
there can be no assurance that these policies will always be successful in
eliminating the influence of such conflicts, and if they are not successful,
decisions could be made that might fail to reflect fully the interests of all
stockholders.
Charter and Bylaw Provisions
The Company's Charter, with limited exceptions, requires that a majority of
the Company's Board of Directors be comprised of persons who are not officers
or employees of the Company, affiliates of officers or
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employees of the Company or affiliates of any advisor to the Company under an
advisory agreement, any lessee or contract manager of any hotel of the
Company, any of its subsidiaries, or any partnership which is an affiliate of
the Company (each such person, an "Independent Director"). The Charter
provides that such provisions relating to Independent Directors may not be
amended, altered, changed or repealed without the affirmative vote of all of
the Independent Directors and the affirmative vote of the holders of not less
than two-thirds of the votes entitled to be cast on such a matter. In
addition, the Company's Bylaws will provide that any action pertaining to any
transaction in which the Company is purchasing, selling, leasing or mortgaging
any real estate asset, making a joint venture investment or engaging in any
other transaction in which an advisor, director or officer of the Company, any
affiliated lessee or affiliated contract manager of any property of the
Company or any affiliate of the foregoing, has any direct or indirect interest
other than as a result of such person's status as a director, officer or
stockholder of the Company, must be approved by the affirmative vote of a
majority of the Independent Directors even if the Independent Directors
constitute less than a quorum.
The Operating Partnership
A conflict of interest may arise between the Company, as a general and
limited partner of the Operating Partnership, and the other Limited Partners
of the Operating Partnership, which may include affiliates of AGHI and the
Lessee, due to the differing potential tax liability to the Company and the
other Limited Partners from the subsequent sale of certain Initial Hotels by
the Operating Partnership resulting from the differing tax bases of the
Company and such affiliates in such hotels. In an effort to address this and
other potential conflicts of interest, the Company's Bylaws will provide that
the Company's decision with respect to the subsequent sale of an Initial Hotel
purchased from a Primary Contributor or their affiliates must be made by the
Independent Directors. The Partnership Agreement of the Operating Partnership
gives AGH GP, as general partner of the Operating Partnership, full, complete
and exclusive discretion in managing and controlling the business of the
Operating Partnership and in making all decisions affecting the business and
assets of the Operating Partnership.
Options to Purchase and Rights of First Refusal
Pursuant to the Option Agreements, the Company will have an option and right
of first refusal to acquire the Option Hotels. The Independent Directors will
determine whether the Company should exercise its right to acquire either
Option Hotel under the Option Agreements. See "Certain Relationships and
Transactions--Options to Purchase and Rights of First Refusal."
Provisions of the MGCL
Pursuant to the MGCL (the jurisdiction under which the Company is
incorporated), each director of the Company is required to discharge his
duties in good faith, in a manner he reasonably believes to be in the best
interest of the Company and with the care that an ordinarily prudent person in
a like position would exercise under similar circumstances. In addition, under
the MGCL, a contract or other transaction between the Company and a director
or between the Company and any other corporation or other entity in which a
director of the Company is a director or has a material financial interest is
not void or voidable solely on the grounds of such interest, the presence of
the director at the meeting at which the contract or transaction is approved
or the director's vote in favor thereof if (a) the transaction or contract is
approved or ratified, after disclosure of the common directorship or interest,
by the affirmative vote of a majority of disinterested directors, even if the
disinterested directors constitute less than a quorum, or by a majority of the
votes cast by disinterested stockholders, or (b) the transaction or contract
is fair and reasonable to the Company.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has the authority to offer shares of stock or other securities
and to repurchase or otherwise reacquire its shares or any other securities
and may engage in such activities in the future. As described under "Shares
Available for Future Sale," the Company may (but is not obligated to) issue
shares of Common Stock to holders of OP Units upon exercise of the Exchange
Rights (as defined below). The Company has not issued
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shares of Common Stock, interests or any other securities to date, except in
connection with the formation of the Company. The Company has not engaged in
trading, underwriting or agency distribution or sale of securities of other
issuers, nor has the Company invested in the securities of other issuers other
than the Operating Partnership for the purpose of exercising control over such
issuers. The Company has not made any loans to third parties, although it
expects to make certain loans to the Lessee (see "Formation Transactions"),
and it may in the future make loans to third parties, including, without
limitation, to joint ventures in which it participates. The Company intends to
make investments in such a way that it will not be treated as an investment
company under the Investment Company Act of 1940, as amended.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves in amounts that the Board
of Directors determines to be adequate to meet normal contingencies in
connection with the operation of the Company's business and investments.
SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering and the Formation Transactions,
7,205,518 shares of Common Stock will be issued and outstanding, 2,511,106
shares of Common Stock will be reserved for potential issuance upon exchange
of 2,511,106 OP Units and an additional 1,000,000 shares of Common Stock will
be reserved for grants of options and stock awards to officers and directors
of the Company pursuant to the 1996 Plan and the Directors' Plan (the "Company
Options"). All of the Common Stock issued in the Offering will be freely
tradeable by persons, other than affiliates of the Company, without
restriction under the Securities Act, subject to certain limitations on
ownership to be set forth in the Charter. See "Description of Capital Stock--
Restrictions on Transfer." The 155,518 shares of Common Stock to be issued in
the Formation Transactions, the 2,511,106 shares of Common Stock available for
issuance upon exchange of OP Units issued in connection with the Formation
Transactions, and the 50,000 shares of restricted Common Stock granted to the
Company's executive officers as Stock Awards that will vest over a four-year
period and the Company Options (collectively, "Restricted Shares") will be
"restricted" securities under the meaning of Rule 144 under the Securities Act
and may be sold only pursuant to an effective registration statement under the
Securities Act or an applicable exemption, including an exemption under Rule
144 under the Securities Act.
In general, under Rule 144 as currently in effect, if two years have elapsed
since the later of the date of acquisition of Restricted Shares from the
Company or the date of acquisition of Restricted Shares from any "affiliate"
of the Company, as that term is defined under the Securities Act, the acquiror
or subsequent holder is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1.0% of
the then outstanding Common Stock or the average weekly trading volume of
Common Stock on all exchanges and reported through the automated quotation
system of a registered securities association during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain restrictions on the manner of
sales, notice requirements and the availability of current public information
about the Company. If three years have elapsed since the date of acquisition
of Restricted Shares from the Company or from an "affiliate" of the Company,
and the acquiror or subsequent holder thereof is deemed not to have been an
affiliate of the Company at any time during the 90 days preceding a sale, such
person would be entitled to sell such Common Stock in the public market under
Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
Certain holders of Common Stock and OP Units issued in connection with the
Formation Transactions have agreed with the Underwriters not to sell, offer or
contract to sell, grant any option for the sale of, or otherwise dispose of or
transfer any Common Stock or OP Units or any securities convertible into or
exchangeable or exercisable for Common Stock or OP Units, for one year after
the date of this Prospectus, without the prior written consent of Smith Barney
Inc., as the representative of the Underwriters, and the Company. The Company
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has agreed to file a registration statement with the Commission with respect
to sales of Common Stock received upon exchange of OP Units within 90 days
after the expiration of the one-year period following completion of this
Offering. The Company will be obligated to maintain the effectiveness of such
registration statement until a date to be agreed upon or until such time as
all of the shares registered pursuant to such registration statement (i) have
been disposed of pursuant to such registration statement, (ii) have been
otherwise distributed pursuant to Rule 144, or (iii) have been otherwise
transferred in a transaction resulting in the transferee receiving Common
Stock no longer deemed to be "restricted securities." The existence of such
agreements by the Company may adversely affect the terms upon which the
Company can obtain additional equity financing in the future.
Prior to the date of this Prospectus, there has been no public market for
the Common Stock. Trading of the Shares of Common Stock on the NYSE is
expected to commence following the completion of the Offering. No prediction
can be made as to the effect, if any, that future market sales of Restricted
Shares or the availability of such Restricted Shares for sale will have on the
market price of the Common Stock prevailing from time to time. Nevertheless,
sales of substantial amounts of Restricted Shares in the public market (or the
perception that such sales could occur) might adversely affect prevailing
market prices for the Common Stock. See "Risk Factors--No Prior Market for
Common Stock."
PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, and the descriptions of
certain provisions thereof set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Partnership Agreement, which has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
MANAGEMENT
The Operating Partnership has been organized as a Delaware limited
partnership pursuant to the terms of the partnership agreement that will
include AGH GP, as general partner, AGH LP, as an initial limited partner, and
certain of the Primary Contributions and other persons unaffiliated with the
Primary Contributors, as additional limited partners (the "Partnership
Agreement"). Pursuant to the Partnership Agreement, AGH GP, as the sole
general partner of the Operating Partnership (the "General Partner"), will
have full, exclusive and complete responsibility and discretion in the
management and control of the Operating Partnership, and the Limited Partners
in their capacity as such will have no authority to transact business for, or
participate in the management activities or decisions of, the Operating
Partnership. However, any amendment to the Partnership Agreement, other than
amendments that (i) add to the obligations of the General Partners, (ii)
reflect the admission or withdrawal of partners, (iii) set forth the rights or
preferences of additional partnership interests issued by the Operating
Partnership, (iv) reflect a change that does not adversely affect Limited
Partners, and (v) are necessary to satisfy legal requirements, requires the
consent of Limited Partners holding more than 50.0% of the OP Units held by
such Limited Partners. The consent of each adversely affected partner is
required for any amendment that would affect a Limited Partner's liability or
right to receive distributions or that would dissolve the Operating
Partnership prior to December 31, 2046 (other than as a result of certain
mergers or consolidations).
TRANSFERABILITY OF INTERESTS
Subject to limited exceptions, AGH GP and AGH LP may not voluntarily
withdraw from the Operating Partnership or transfer or assign their interests
in the Operating Partnership unless the transaction in which such withdrawal
or transfer occurs results in the Limited Partners' receiving property in an
amount equal to the amount they would have received had they exercised their
Exchange Rights immediately prior to such transaction, or unless the
successors to AGH GP and AGH LP contribute substantially all of their assets
to the Operating Partnership in return for an interest in the Operating
Partnership. With certain exceptions, the Limited Partners may transfer their
OP Units, in whole or in part, without the consent of the General Partner.
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CAPITAL CONTRIBUTION
The Company, through AGH GP and AGH LP, will contribute to the Operating
Partnership the net proceeds of the Offering, in consideration of which AGH GP
will receive an approximate 1.0% general partnership interest and AGH LP will
receive an approximate 73.2% limited partnership interest in the Operating
Partnership. The Partnership Agreement provides that if the Operating
Partnership requires additional funds at any time or from time to time in
excess of funds available to the Operating Partnership from borrowing or
capital contributions, the Company may borrow such funds from a financial
institution or other lender and lend such funds to the Operating Partnership
on the same terms and conditions as are applicable to the Company's borrowing
of such funds. Under the Partnership Agreement, the Company generally is
obligated to contribute, through AGH GP and AGH LP, the proceeds of any stock
offering as additional capital to the Operating Partnership. Moreover, the
Company is authorized, through AGH GP and AGH LP, to cause the Operating
Partnership to issue partnership interests for less than fair market value if
the Company has concluded in good faith that such issuance is in the best
interests of the Company and the Operating Partnership. If the Company so
contributes additional capital to the Operating Partnership, AGH GP and AGH LP
will receive additional OP Units, and their percentage interests in the
Operating Partnership will be increased on a proportionate basis based upon
the amount of such additional capital contributions and the value of the
Operating Partnership at the time of such contributions. Conversely, the
percentage interests of the Limited Partners, other than AGH LP, will be
decreased on a proportionate basis in the event of additional capital
contributions by the Company.
EXCHANGE RIGHTS
Pursuant to the Exchange Rights Agreement among the Company, the Operating
Partnership and the Limited Partners other than AGH LP (the "Exchange
Agreement"), such Limited Partners will receive rights (the "Exchange Rights")
that will enable them to cause the Operating Partnership to exchange each OP
Unit for cash equal to the value of a share of Common Stock (or, at the
Company's election, the Company may purchase each OP Unit offered for exchange
for one share of Common Stock). The Company may not satisfy a Limited
Partner's Exchange Right by delivery of Common Stock, if and to the extent
that the delivery of Common Stock upon exercise of such rights would (i) be
prohibited under the Charter, (ii) otherwise jeopardize the REIT status of the
Company, or (iii) cause the acquisition of shares of Common Stock by such
exchanging Limited Partner to be "integrated" with any other distribution of
shares of Common Stock for purposes of complying with the Securities Act. The
Exchange Rights may be exercised at any time after one year following the
closing of the Offering, provided that a Limited Partner may not exercise the
Exchange Rights for less than 1,000 OP Units or, if such Limited Partner holds
less than 1,000 OP Units, for all of the OP Units held by such Limited
Partner. Prior to the expiration of such one-year period, the Exchange Rights
may be exercised (but only for cash) by a lender to whom any OP Units may have
been pledged, provided that such pledge was permissible in light of the one-
year lock-up agreements described in "Shares Available for Future Sale." The
aggregate number of shares of Common Stock initially issuable upon exercise of
the Exchange Rights will be 2,511,106. The number of shares of Common Stock
issuable upon exercise of the Exchange Rights will be adjusted upon the
occurrence of share splits, mergers, consolidations or similar pro rata share
transactions, which otherwise would have the effect of diluting the ownership
interests of the Limited Partners or the stockholders of the Company. See
"Shares Available for Future Sale."
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement among the Company and the
Limited Partners other than AGH LP (the "Registration Rights Agreement"), the
Limited Partners have, or will have, certain rights to require the
registration for resale of the shares of Common Stock held by them or received
by them upon exchange of their OP Units. Such rights include the right to
include such shares in a registration statement that the Company intends to
file during the 1997 calendar year. The Company is required to bear the costs
of such registration statements exclusive of underwriting discounts,
commissions and certain other costs attributable to, and to be borne by, the
selling stockholders.
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OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT, to avoid any federal income or excise tax
liability imposed under the Code and to ensure that the Operating Partnership
will not be classified as a "publicly traded partnership" for purposes of
section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, the Operating Partnership will pay all
administrative costs and expenses of the Company, AGH GP and AGH LP (the
"Company Expenses"), and the Company Expenses will be treated as expenses of
the Operating Partnership. The Company Expenses generally will include (i) all
expenses relating to the formation of the Company and the Operating
Partnership, (ii) all expenses relating to the public offering and
registration of securities by the Company, (iii) all expenses associated with
the preparation and filing of any periodic reports by the Company under
federal, state or local laws or regulations, (iv) all expenses associated with
compliance by the Company, AGH GP and AGH LP with laws, rules and regulations
promulgated by any regulatory body and (v) all other operating or
administrative costs of AGH GP incurred in the ordinary course of its business
on behalf of the Operating Partnership. The Company Expenses, however, will
not include any administrative and operating costs and expenses incurred by
the Company that are attributable to hotel properties or partnership interests
in a Subsidiary Partnership that are owned by the Company directly rather than
through the Operating Partnership. The Company will not own any of the Initial
Hotels directly.
DISTRIBUTIONS AND ALLOCATIONS
The Partnership Agreement provides that the Operating Partnership will
distribute cash from operations (including net sale or refinancing proceeds,
but excluding net proceeds from the sale of the Operating Partnership's
property in connection with the liquidation of the Operating Partnership) on a
quarterly (or, at the election of the General Partner, more frequent) basis,
in amounts determined by the General Partner in its sole discretion, to the
partners in accordance with their respective percentage interests in the
Operating Partnership. Upon liquidation of the Operating Partnership, after
payment of, or adequate provision for, debts and obligations of the Operating
Partnership, including any partner loans, any remaining assets of the
Operating Partnership will be distributed to all partners with positive
capital accounts in accordance with their respective positive capital account
balances.
Profit and loss of the Operating Partnership for each fiscal year of the
Operating Partnership generally will be allocated among the partners in
accordance with their respective interests in the Operating Partnership.
Taxable income and loss will be allocated in the same manner, subject to
compliance with the provisions of Code sections 704(b) and 704(c) and Treasury
Regulations promulgated thereunder.
TERM
The Operating Partnership will continue until December 31, 2046, or until
sooner dissolved upon (i) the withdrawal of the General Partner (unless a
majority of remaining partners elect to continue the business of the Operating
Partnership), (ii) the election by the General Partner to dissolve the
Operating Partnership (which election, prior to December 31, 2046, requires
the consent of a majority of the Limited Partners other than AGH LP), (iii)
the entry of a decree of judicial dissolution of the Operating Partnership,
(iv) the sale of all or substantially all the assets and properties of the
Operating Partnership, or (v) the bankruptcy or insolvency of AGH GP, unless
all of the remaining partners elect to continue the business of the Operating
Partnership.
TAX MATTERS
Pursuant to the Partnership Agreement, the General Partner will be the tax
matters partner of the Operating Partnership and, as such, will have authority
to handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
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FEDERAL INCOME TAX CONSIDERATIONS
The Company intends to operate in such a manner so as to meet the Code
requirements for qualification as a REIT for federal income tax purposes.
However, no assurance can be given that such requirements will be met or that
the Company will be so qualified at any time. Based on various assumptions
relating to the organization and operation of the Company and the Operating
Partnership and factual representations made by the Company and the Operating
Partnership as to certain factual matters, including matters related to the
organization and operation of the Company, the Operating Partnership and the
Subsidiary Partnerships, in the opinion of Counsel, Battle Fowler LLP, the
Company will qualify to be taxed as a REIT under the Code commencing with its
taxable year ending December 31, 1996 and the Operating Partnership and the
Subsidiary Partnerships will be treated as partnerships for federal income tax
purposes. Counsel will not review the Company's operating results and no
assurance can be given that the Company's actual operating results will meet
the REIT requirements on a continuing basis.
The opinions described herein represent Counsel's best legal judgment as to
the most likely outcome of an issue if the matter were litigated. Opinions of
counsel have no binding effect or official status of any kind, and in the
absence of a ruling from the IRS, there can be no assurance that the IRS will
not challenge the conclusion or propriety of any of Counsel's opinions. The
Company does not intend to apply for a ruling from the IRS that it qualifies
as a REIT.
The following summary includes a discussion of the material federal income
tax considerations associated with an investment in the Common Stock being
sold in the Offering. The summary should not be construed as tax advice. The
provisions governing treatment as a REIT are highly technical and complex, and
this summary is qualified in its entirety by the applicable Code provisions,
the rules and regulations promulgated thereunder and administrative and
judicial interpretations thereof. Moreover, this summary does not deal with
all tax aspects that might be relevant to a particular prospective stockholder
in light of his personal circumstances and it does not deal with particular
types of stockholders that are subject to special treatment under the Code,
such as tax-exempt organizations, insurance companies, financial institutions
or broker-dealers, and (with the exception of the general discussion below)
foreign corporations and persons who are not citizens or residents of the
United States.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND SALE OF COMMON STOCK, OF
THE COMPANY'S ELECTION TO BE TAXED AS A REIT AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
REQUIREMENTS FOR QUALIFICATION AS A REIT
In General. Under the Code, a trust, corporation or unincorporated
association meeting certain requirements (see "--Structural Requirements") may
elect to be treated as a REIT for purposes of federal income taxation. If a
valid election is made, then, subject to certain conditions, the Company's
income which is distributed to its stockholders will be taxed to such
stockholders without being subject to tax at the Company level. This
substantially eliminates the "double taxation" (taxation at both the corporate
and stockholder levels) that typically results from the use of corporate
investment vehicles. However, the Company will be taxed at regular corporate
rates on any of its income that is not distributed to the stockholders. (See
"--Taxation of the Company.") Once made, the election to be taxed as a REIT
continues in effect until voluntarily revoked or automatically terminated by
the Company's failure to qualify as a REIT for a taxable year. If the
Company's election to be treated as a REIT is terminated automatically or is
voluntarily revoked, the Company will not be eligible to elect such status
until the fifth taxable year after the first taxable year for which the
Company's election was terminated. However, in the event such election is
terminated automatically, the four-year prohibition on a subsequent election
to be taxed as a REIT is not applicable if (i) the Company did not willfully
fail to file a timely return with respect to the termination taxable year,
(ii) the inclusion of any incorrect information in such return was not due to
fraud with intent to evade tax, and (iii) the Company establishes that its
failure to meet the requirements was due to reasonable cause and not to
willful neglect.
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The Company will make an election to be treated as a REIT commencing with
its taxable year ending December 31, 1996.
Structural Requirements. To be eligible to be taxed as a REIT, the Company
must satisfy certain structural and organizational requirements. Among the
requirements are the following: (i) the shares of Common Stock must be
transferable, (ii) the shares of Common Stock must be held by 100 or more
persons during at least 335 days of a taxable year of twelve months (or during
a proportionate part of a taxable year of less than twelve months) (the "100-
person requirement"), and (iii) no more than 50% of the value of the
outstanding shares of Common Stock may be owned, directly or indirectly, by
five or fewer individuals at any time during the last half of each taxable
year (the "five or fewer" requirement). The requirements of (ii) and (iii) are
not applicable to the first taxable year for which the Company makes an
election to be treated as a REIT. However, the Company anticipates that it
will issue a sufficient amount of Common Stock with sufficient diversity of
ownership to satisfy requirements (ii) and (iii). The Company expects, and
intends to take all necessary measures within its control to ensure, that the
beneficial ownership of the Company will at all times be held by 100 or more
persons. In addition, the Company's Charter contains certain restrictions on
the ownership and transfer of the Company's stock which are designed to help
ensure that the Company will be able to satisfy the "five or fewer"
requirement. If the Company were to fail to satisfy the "five or fewer"
requirement, the Company's status as a REIT would terminate, and the Company
would not be able to prevent such termination. See "--Failure to Qualify as a
REIT" and "Description of Capital Stock--Restrictions on Transfer."
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
that subsidiary is disregarded for federal income tax purposes, and all
assets, liabilities and items of income, deduction and credit of the
subsidiary are treated as assets, liabilities and such items of the REIT
itself. A "qualified REIT subsidiary" is a corporation all of the stock of
which has been owned by the REIT from the commencement of such corporation's
existence. After the completion of the Offering, the Company will have two
wholly owned subsidiary corporations, AGH GP and AGH LP. AGH GP and AGH LP
will be formed as "qualified REIT subsidiaries." The Company also may have
additional corporate subsidiaries in the future.
Income Tests. In order to qualify and to continue to qualify as a REIT, the
Company must satisfy three income tests for each taxable year. First, at least
75% of the Company's annual gross income (excluding annual gross income from
certain sales of property held primarily for sale) must be derived directly or
indirectly from investments relating to real property or mortgages on real
property or certain temporary investments. Second, at least 95% of the
Company's annual gross income (excluding gross income from certain sales of
property held primarily for sale in the ordinary course of business) must be
derived directly or indirectly from any of the sources qualifying for the 75%
test and from dividends, interest, and gain from the sale or disposition of
stock or securities. Third, subject to certain exceptions in the year in which
the Company is liquidated, (i) short-term gains from sales of stock or
securities, (ii) gains from sales of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business and (iii) gains from the sale or other taxable disposition of real
property (including interests in real property and mortgages on real property)
held for less than four years (other than from involuntary conversions and
foreclosure property) must represent in the aggregate less than 30% of the
Company's annual gross income. In applying these tests, because the Company is
a partner in the Operating Partnership, which is in turn a partner, either
directly or indirectly, in the Subsidiary Partnerships, the Company will be
treated as realizing its proportionate share of the income and loss of these
respective partnerships, as well as the character of such income or loss, and
other partnership items, as if the Company owned its proportionate share of
the assets owned by these partnerships directly.
Substantially all of the income received by the Company is expected to be
rental income from the Rents. In order to qualify as "rents from real
property" for purposes of satisfying the 75% and 95% gross income tests,
several conditions must be satisfied. First, the amount of rent must not be
based in whole or in part on the income or profits of any person, although
rents generally will qualify if they are based on a fixed percentage of
receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" if the Company or an owner of 10% or more of the
Company, directly or constructively, owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property
leased in connection with a lease of real property is greater than 15% of the
total rent received under the lease, the portion of rent attributable to such
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personal property will not qualify as "rents from real property." Finally, the
Company generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" from whom the Company derives no income. However, the "independent
contractor" requirement does not apply to the extent the services rendered by
the Company are customarily furnished or rendered in connection with the rental
of the real property (i.e., services which are not considered rendered to the
occupant of the property). Pursuant to the Participating Leases, the Lessee
will lease from the Operating Partnership the land, buildings, improvements,
furnishings, and equipment comprising the Initial Hotels for a term of twelve
years. The Participating Leases provide that the Lessee will be obligated to
pay to the Operating Partnership (i) the greater of Base Rent or Participating
Rent and (ii) Additional Charges. Participating Rent is calculated by
multiplying fixed percentages by various revenue categories for each of the
Initial Hotels. Generally, both Base Rent and the thresholds in the
Participating Rent formulas will be adjusted for inflation. Base Rent accrues
and is required to be paid monthly. Participating Rent is payable quarterly,
with a yearly adjustment based on actual results.
In order for Base Rent, Participating Rent, and Additional Charges to
constitute "rents from real property," the Participating Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Participating Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including: (i) the
intent of the parties, (ii) the form of the agreement, (iii) the degree of
control over the property that is retained by the property owner (e.g., whether
the lessee has substantial control over the operation of the property or
whether the lessee was required simply to use its best efforts to perform its
obligations under the agreement), and (iv) the extent to which the property
owner retains the risk of loss with respect to the property (e.g., whether the
lessee bears the risk of increases in operating expenses or the risk of damage
to the property) or the potential for economic gain (e.g., appreciation) with
respect to the property.
In addition, Code section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a
lease of property if the contract is properly treated as such, taking into
account all relevant factors, including whether or not: (i) the service
recipient is in physical possession of the property, (ii) the service recipient
controls the property, (iii) the service recipient has a significant economic
or possessory interest in the property (e.g., the property's use is likely to
be dedicated to the service recipient for a substantial portion of the useful
life of the property, the recipient shares the risk that the property will
decline in value, the recipient shares in any appreciation in the value of the
property, the recipient shares in increases in the property's operating costs,
or the recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities related to the service recipient, and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination of whether a
service contract should be treated as a lease is inherently factual, the
presence or absence of any single factor may not be dispositive in every case.
Battle Fowler LLP is of the opinion that the Participating Leases will be
treated as true leases for federal income tax purposes. Such opinion is based,
in part, on the following facts: (i) the Operating Partnership or a Subsidiary
Partnership, as applicable, and the Lessee intend for their relationship to be
that of a lessor and lessee and such relationship will be documented by lease
agreements, (ii) the Lessee will have the right to exclusive possession and use
and quiet enjoyment of the Initial Hotels during the term of the Participating
Leases, (iii) the Lessee will bear the cost of, and be responsible for, day-to-
day maintenance and repair of the Initial Hotels and generally will control how
the Initial Hotels are operated and maintained, (iv) the Lessee will bear all
of the costs and expenses of operating the Initial Hotels (including the cost
of any inventory used in their operation) during the term of the Participating
Leases (other than real estate and personal property taxes, casualty insurance
and capital improvements (determined in accordance with generally accepted
accounting principles)), (v) the Lessee will benefit from any savings in the
costs of operating the Initial Hotels during the term of the
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Participating Leases, (vi) the Lessee will indemnify the Company against all
liabilities imposed upon or asserted against the Company during the term of the
Participating Leases by reason of, among other things, (A) accident, injury to
or death of persons, or loss of or damage to property occurring at the Initial
Hotels or (B) the Lessee's use, management, maintenance or repair of the
Initial Hotels, (vii) the Lessee is obligated to pay substantial fixed rent for
the period of use of the Initial Hotels, and (viii) the Lessee stands to incur
substantial losses (or reap substantial gains) depending on how successfully it
operates the Initial Hotels.
Investors should be aware that there are no controlling Treasury Regulations,
published rulings, or judicial decisions involving leases with terms
substantially the same as the Participating Leases that discuss whether such
leases constitute true leases for federal income tax purposes. Therefore, the
opinion of Battle Fowler LLP with respect to the relationship between the
Operating Partnership or a Subsidiary Partnership, as applicable, and the
Lessee is based upon all of the facts and circumstances and upon rulings and
judicial decisions involving situations that are considered to be analogous.
Opinions of counsel are not binding upon the IRS or any court, and there can be
no complete assurance that the IRS will not assert successfully a contrary
position. If the Participating Leases are recharacterized as service contracts
or partnership agreements, rather than true leases, part or all of the payments
that the Operating Partnership and the Subsidiary Partnerships receive from the
Lessee would not be considered rent or would not otherwise satisfy the various
requirements for qualification as "rents from real property." In that case, the
Company likely would not be able to satisfy either the 75% or 95% gross income
tests and, as a result, would lose its REIT status.
As noted above, the Rents attributable to personal property leased in
connection with the lease of the real property comprising an Initial Hotel must
not be greater than 15% of the Rents received under the Participating Lease.
The Rents attributable to the personal property in an Initial Hotel is the
amount that bears the same ratio to total rent for the taxable year as the
average of the adjusted bases of the personal property in the Initial Hotel at
the beginning and at the end of the taxable year bears to the average of the
aggregate adjusted bases of both the real and personal property comprising the
Initial Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio"). With respect to each Initial Hotel (or interest
therein) that the Operating Partnership acquires in exchange for OP Units, the
initial adjusted bases of both the real and personal property comprising such
hotel generally will be the same as the adjusted bases of such property in the
hands of the previous owner. With respect to each Initial Hotel (or interest
therein) that the Operating Partnership acquires for cash, the aggregate
initial adjusted bases of the real and personal property generally will be
allocated among real and personal property based on relative fair market
values. The Company has obtained appraisals of the personal property for each
Initial Hotel that the Operating Partnership will acquire for cash. The
Participating Leases provide that the Adjusted Basis Ratio for each Initial
Hotel shall not exceed 15%. The Participating Leases further provide that the
Lessee will cooperate in good faith and use its best efforts to prevent the
Adjusted Basis Ratio for any Initial Hotel from exceeding 15%, which
cooperation includes the purchase by Lessee at fair market value of enough
personal property at such Initial Hotel so that the Adjusted Basis Ratio for
such Initial Hotel is less than 15%. In the event that the amount of personal
property relating to certain of the Initial Hotels will result in an Adjusted
Basis Ratio in excess of 15% and therefore would cause a portion of the Rents
received attributable to such Initial Hotels to not qualify as rents from real
property, the Operating Partnership will sell a portion of such personal
property relating to such Initial Hotels to the Lessee in exchange for the FF&E
Note. In addition, the Participating Leases provide that if future renovations
and refurbishments to an Initial Hotel would cause the Adjusted Basis Ratio for
such Initial Hotel to exceed 15%, the Operating Partnership and/or a Subsidiary
Partnership, if applicable, has the right to sell as much personal property to
the Lessee as necessary so that the Adjusted Basis Ratio does not exceed 15%
for such Initial Hotel. The interest income derived from the FF&E Note will be
qualifying income for the 95% gross income test but not for the 75% gross
income test. Finally, amounts in the Company's reserve for capital expenditures
may not be expended to acquire additional personal property for an Initial
Hotel to the extent that such acquisition would cause the Adjusted Basis Ratio
for that Initial Hotel to exceed 15%. The Company does not expect the Adjusted
Basis Ratio for any Initial Hotel to exceed 15% and therefore expects that the
portion of rents received attributable to personal property will be received
attributable to personal property will be treated as rents from real property.
However, there can be no
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assurance that the IRS would not assert that the personal property acquired by
the Operating Partnership or a Subsidiary Partnership had a value in excess of
the appraised value, or that a court would not uphold such assertion. If such
a challenge were successfully asserted, a portion of the rents received under
the Participating Leases would not qualify as rents from real property.
However, the Company does not expect such an amount, if any, when combined
with any other nonqualifying income for the 95% or 75% gross income tests, to
exceed 5% of the Company's annual gross income, which would cause the Company
to lose its status as a REIT.
As noted earlier, in order to be treated as "rents from real property," the
Participating Rent must not be based in whole or in part on the income or
profits of any person. The Participating Rent, however, will qualify as "rents
from real property" if it is based on percentages of receipts or sales and the
percentages (i) are fixed at the time the Participating Leases are entered
into, (ii) are not renegotiated during the term of the Participating Leases in
a manner that has the effect of basing Participating Rent on income or
profits, and (iii) conform with normal business practice. More generally, the
Participating Rent will not qualify as "rents from real property" if,
considering the Participating Leases and all the surrounding circumstances,
the arrangement does not conform with normal business practice, but is in
reality used as a means of basing the Participating Rent on income or profits.
Since the Participating Rent is based on fixed percentages of the gross
revenues from the Initial Hotels that are established in the Participating
Leases, and the Company has represented that the percentages (i) will not be
renegotiated during the terms of the Participating Leases in a manner that has
the effect of basing the Participating Rent on income or profits and (ii)
conform with normal business practice, the Participating Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company has represented that, with respect to other hotel
properties that it acquires in the future, if any, it will not charge rent for
any property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage of gross
revenues, as described above).
As noted above, rent received from a Related Party Tenant does not qualify
as "rents from real property." Thus, the Company must not own, actually or
constructively, 10% or more of the Lessee. Applicable constructive ownership
rules generally provide that, if 10% or more in value of the stock of the
Company is owned, directly or indirectly, by or for any person, the Company is
considered as owning the stock owned, directly or indirectly, by or for such
person. The Limited Partners of the Operating Partnership may acquire Common
Stock (at the Company's option) by exercising their Exchange Rights. In
addition, during the period of the Lessee Distribution Restriction, the Lessee
will be required, subject to compliance with applicable securities laws, to
purchase annually Common Stock on the open market or, if any such purchases
would violate the ownership limitation in the Company's Charter, at the option
of the Operating Partnership, OP Units from the Operating Partnership, in an
amount equal to the Lessee's cash flow attributable to the Participating
Leases for the preceding fiscal year (after establishing a reserve for partner
tax distributions). In addition, Messrs. Jorns and Wiles are required to use
50% of the dividends received by them from AGHI that are attributable to
AGHI's earnings from the management of hotels owned by the Company to purchase
annually in the open market shares of Common Stock. The Exchange Agreement
provides that the Company may not satisfy an exchanging Limited Partner's
Exchange Right by delivery of Common Stock, if and to the extent the delivery
of Common Stock upon the exercise of such rights would cause the Company to
own, actually or constructively, 10% or more of the ownership interest in a
tenant of the Company's, the Operating Partnership's or a Subsidiary
Partnership's real property, within the meaning of section 856(d)(2)(B) of the
Code. The Charter likewise will prohibit a shareholder of the Company from
owning Common Stock that would cause the Company to own, actually or
constructively, 10% or more of the ownership interests in a tenant of the
Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code. Thus, the
Company should never own, actually or constructively, 10% of more of the
Lessee. However, because the Code's constructive ownership rules for purposes
of the Related Party Tenant rules are broad and it is not possible to monitor
continually direct and indirect transfers of Common Stock, no absolute
assurance can be given that such transfers or other events of which the
Company has no knowledge will not cause the Company to own constructively 10%
or more of the Lessee at some future date.
A fourth requirement noted above for qualification of the Rents as "rents
from real property" is that the Company cannot furnish or render noncustomary
services to the tenants of the Initial Hotels, or manage or
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operate the Initial Hotels, other than through an independent contractor who
is adequately compensated and from whom the Company itself does not derive or
receive any income. Provided that the Participating Leases are respected as
true leases, the Company should satisfy this requirement, because AGHI,
pursuant to the Management Agreements, will be performing services to such
tenants for the Lessee, which will lease the Initial Hotels from the Operating
Partnership. Neither the Company, the Operating Partnership nor any Subsidiary
Partnership will furnish or provide any services to a tenant, and none of such
entities will contract with any other person to provide any such services. The
Company has represented that if the Company decides to render noncustomary
services to tenants in the future, it will do so through an independent
contractor from which it will not receive any income.
If a portion of the Rents from a particular hotel property does not qualify
as "rents from real property" because the amount attributable to personal
property exceeds 15% of the total Rents for a taxable year, the portion of the
Rents that is attributable to personal property will not be qualifying income
for purposes of either the 75% or 95% gross income tests. A portion of the
Rent paid to the Company by the Lessee will be allocable to the Franchise
Licenses. Appraisals obtained by the Company indicate that the Franchise
Licenses represent less than 1.0% of the total value of the Company's assets.
Because the Company does not expect the total amount of Rents attributable to
personal property plus any other non-qualifying income it receives (including
any amounts attributable to the Franchise Licenses) to exceed 5% of its annual
gross income, the Company's REIT status should not be affected. If, however,
the Rents do not qualify as "rents from real property" because either (i) the
Participating Rent is considered based on income or profits of the Lessee,
(ii) the Company owns, actually or constructively, 10% or more of the Lessee,
or (iii) the Company furnishes noncustomary services to the tenants of the
Initial Hotels, or manages or operates the Initial Hotels, other than through
a qualifying independent contractor, none of the Rents would qualify as "rents
from real property." In that case, the Company likely would lose its REIT
status because it would be unable to satisfy either the 75% or 95% gross
income tests.
In addition to the Rents, the Lessee is required to pay to the Operating
Partnership Additional Charges. To the extent that Additional Charges
represent either (i) reimbursements of amounts that the Lessee is obligated to
pay to third parties or (ii) penalties for nonpayment or late payment of such
amounts, Additional Changes should qualify as "rents from real property." To
the extent, however, that Additional Charges represent interest that is
accrued on the late payment of the Rents or Additional Charges, Additional
Charges would not qualify as "rents from real property," but instead would be
treated as interest that qualifies for the 95% gross income test.
Based on the foregoing, the Rents and the Additional Charges should qualify
as "rents from real property" for purposes of the 75% and 95% gross income
tests, except to the extent that the Additional Charges represent interest
that is accrued on the late payment of the Rents or the Additional Charges
(which will be qualifying gross income for the 95% test but not the 75% test).
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales. Furthermore, interest from a loan that is based on the
residual cash proceeds from sale of the property securing the loan will be
treated as gain from the sale of the secured property.
It is possible that, from time to time, the Company, the Operating
Partnership or a Subsidiary Partnership will enter into hedging transactions
with respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms. If the Company, the Operating
Partnership or a Subsidiary Partnership enters into an interest rate swap or
cap contract to hedge any variable rate indebtedness incurred to acquire or
carry real estate assets, any periodic income or gain from the disposition of
such contract should be qualifying income for purposes of the 95% gross income
test, but not for the 75% gross income test. Furthermore, any such contract
would be considered a "security" for purposes of applying the 30% gross income
test. To the extent that the Company, the Operating Partnership or a
Subsidiary Partnership hedges with other types of financial
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instruments or in other situations, it may not be entirely clear how the
income from those transactions will be treated for purposes of the various
income tests that apply to REITs under the Code. The Company intends to
structure any hedging transactions in a manner that does not jeopardize its
status as a REIT.
If the sum of the income realized by the Company (whether directly or
through its interest in the Operating Partnership or the Subsidiary
Partnerships) which does not satisfy the requirements of the 75% and the 95%
gross income tests (collectively, "Non-Qualifying Income"), exceeds 5% of the
Company's gross income for any taxable year, the Company's status as a REIT
would be jeopardized. The Company has represented that the amount of its Non-
Qualifying Income will not exceed 5% of the Company's annual gross income for
any taxable year.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may still qualify as a REIT for such year if
the Company's failure to meet such tests was due to reasonable cause and not
to willful neglect, the Company attaches a schedule of the sources of its
income to its return, and any incorrect information on the schedule was not
supplied fraudulently with the intent to evade tax. It is not possible to
specify the circumstances under which the Company may be entitled to the
benefit of these relief provisions. Even if these relief provisions apply, a
100% tax is imposed on the net income attributable to the greater of the
amount by which the Company failed the 75% test or the 95% test. Failure to
comply with the 30% gross income test is not excusable; therefore, if the
Company fails to meet the requirements of the 30% gross income test, its
status as a REIT automatically terminates regardless of the reason for such
failure.
Asset Tests. At the close of each quarter of its taxable year, the Company
also must satisfy two tests relating to the nature and diversification of its
assets. First, at least 75% of the value of the Company's total assets must be
represented by real estate assets (including its allocable share of real
estate assets held by the Operating Partnership and by any partnerships in
which the Operating Partnership or a qualified REIT subsidiary owns an
interest, stock or debt instruments held for not more than one year purchased
with the proceeds of an issuance of stock or long-term (at least five years)
debt of the Company), cash, cash items and government securities. Second, no
more than 25% of the Company's total assets may be represented by securities
other than those that can satisfy the 75% asset test described in the
preceding sentence. Of the investments included in the 25% asset class, the
value of any one issuer's securities (excluding shares in qualified REIT
subsidiaries such as AGH GP and AGH LP or another REIT and excluding
partnership interests such as those in the Operating Partnership and in any
Subsidiary Partnerships) owned by the Company may not exceed 5% of the value
of the Company's total assets, and the Company may not own more than 10% of
any one issuer's outstanding voting securities (excluding securities of a
qualified REIT subsidiary or another REIT and excluding partnership
interests). The Company has represented that, as of the date of the Offering,
(i) at least 75% of the value of its total assets will be represented by real
estate assets, cash and cash items (including receivables), and government
securities and (ii) it will not own any securities that do not satisfy the 75%
asset requirement. In addition, the Company has represented that it will not
acquire or dispose, or cause the Operating Partnership or a Subsidiary
Partnership to acquire or dispose, of assets in the future in a way that would
cause it to violate either asset requirement. The Company may form additional
qualified REIT subsidiaries in order to operate hotels in Texas. See "--Other
Tax Considerations--State and Local Taxes."
Annual Distribution Requirements. In order to qualify as a REIT, the Company
must distribute to the holders of shares of Common Stock an amount at least
equal to (A) the sum of 95% of (i) the Company's "real estate investment trust
taxable income" (computed without regard to the deduction for dividends paid
and excluding any net capital gain) plus (ii) the excess of the net income, if
any, from foreclosure property over the tax on such income, minus (B) the
excess of the sum of certain items of non-cash income (income attributable to
leveled stepped rents, original issue discount on purchase money debt, or a
like-kind exchange that is later determined to be taxable over 5% of the
amount determined under clause (i) above). Such distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid on or before the first regular distribution date after such declaration.
The amount distributed must not be preferential--i.e., each holder of shares
of Common Stock must
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receive the same distribution per share. A REIT may have more than one class
of stock, as long as distributions within each class are pro rata and non-
preferential. Such distributions are taxable to holders of Common Stock (other
than tax-exempt entities or nontaxable persons, as discussed below) in the
year in which paid, even though such distributions reduce the Company's
taxable income for the year in which declared. To the extent that the Company
does not distribute all of its net capital gain or distributes at least 95%,
but less than 100%, of its "real estate investment trust taxable income," it
will be subject to tax thereon at regular corporate tax rates. Finally, as
discussed below, the Company may be subject to an excise tax if it fails to
meet certain other distribution requirements.
The Company expects, and intends to take measures within its control, to
make quarterly distributions to the holders of shares of Common Stock in an
amount sufficient to satisfy the requirements of the annual distribution test.
In this regard, the Partnership Agreement authorizes AGH GP, as general
partner, to take such steps as are necessary to distribute to the partners of
the Operating Partnership an amount sufficient to permit the Company to meet
the annual distribution requirements. However, it is possible that the
Company, from time to time, may not have sufficient cash or other liquid
assets to meet the 95% distribution requirement, or to distribute such greater
amount as may be necessary to avoid income and excise taxation, due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company, or if the amount
of nondeductible expenses, such as principal amortization or capital
expenditures exceeds the amount of noncash deductions, such as depreciation.
In the event that such timing differences occur, the Company may find it
necessary to cause the Operating Partnership to arrange for borrowings or
liquidate some of its investments in order to meet the annual distribution
requirement, or attempt to declare a consent dividend, which is a hypothetical
distribution to holders of shares of Common Stock out of the earnings and
profits of the Company. The effect of such a consent dividend (which, in
conjunction with dividends actually paid, must not be preferential to those
holders who agree to such treatment) would be that such holders would be
treated for federal income tax purposes as if they had received such amount in
cash and they then had immediately contributed such amount back to the Company
as additional paid-in capital. This would result in taxable income to those
holders without the receipt of any actual cash distribution but would also
increase their tax basis in their shares of Common Stock by the amount of the
taxable income recognized.
If the Company fails to meet the 95% distribution test due to an adjustment
to the Company's income by reason of a judicial decision or by agreement with
the IRS, the Company may pay a "deficiency dividend" to holders of shares of
Common Stock in the taxable year of the adjustment, which dividend would
relate back to the year being adjusted. In such case, the Company also would
be required to pay interest plus a penalty to the IRS. However, a deficiency
dividend cannot be used to meet the 95% distribution test if the failure to
meet such test was due to the Company's failure to distribute sufficient
amounts to the holders of shares of Common Stock.
In addition, if the IRS successfully challenged the Company's deduction of
all or a portion of the salary and bonus it pays to officers who are also
holders of shares of Common Stock, such payments could be recharacterized as
dividend distributions to such employees in their capacity as stockholders. If
such distributions were viewed as preferential distributions, they would not
count toward the 95% distribution test.
FAILURE TO QUALIFY AS A REIT
The Company's treatment as a REIT for federal income tax purposes will be
terminated automatically if the Company fails to meet the requirements
described above and any available relief provisions do not apply. In such
event, the Company will be subject to tax (including any applicable minimum
tax) on its taxable income at regular corporate rates, and distributions to
holders of shares of Common Stock will not be deductible by the Company. All
distributions to holders of shares of Common Stock will be taxable as ordinary
income to the extent of current and accumulated earnings and profits of the
Company and distributions in excess thereof will be treated first as a tax
free return of capital (to the extent of a holder's tax basis in his shares of
Common Stock) and then as gain realized from the sale of shares of Common
Stock. Corporate stockholders will be eligible for the dividends received
deduction to the extent that distributions are made out of earnings and
profits. As noted
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above, the Company will not be eligible to elect REIT status again until the
beginning of the fifth taxable year after the year during which the Company's
qualification was terminated, unless the Company meets certain relief
requirements. Failure to qualify for even one year could result in the Company
incurring substantial indebtedness (to the extent borrowings are feasible) or
liquidating substantial investments in order to pay the resulting corporate
income taxes.
TAXATION OF THE COMPANY
In General. For any taxable year in which the Company qualifies as a REIT,
it will generally not be subject to federal income tax on that portion of its
REIT taxable income which is distributed to stockholders (except income or
gain with respect to foreclosure property, which will be taxed at the highest
corporate rate--currently 35%). If the Company were to fail to qualify as a
REIT, it would be taxed at rates applicable to corporations on all its income,
whether or not distributed to holders of shares of Common Stock. Even if it
qualifies as a REIT, the Company will be taxed on the portion of its REIT
taxable income which it does not distribute to the holders of shares of Common
Stock, such as taxable income retained as reserves.
100 Percent Tax. The Company will be subject to a 100% tax on (i) the
greater of the net income attributable to the amount by which it fails the 75%
income test or the 95% income test; and (ii) any net income derived from a
"prohibited transaction" (i.e., the sale of "dealer" property by the Company).
The imposition of any such tax on the Company would reduce the amount of cash
available for distribution to holders of shares of Common Stock.
A "dealer" is one who holds property primarily for sale to customers in the
ordinary course of its trade or business. All inventory required in the
operation of the Initial Hotels will be owned by the Lessee under the terms of
the Participating Leases. Accordingly, the Company believes no asset owned by
the Company, the Operating Partnership or a Subsidiary Partnership is held for
sale to customers and that a sale of any such asset will not be in the
ordinary course of business of the Company, the Operating Partnership or a
Subsidiary Partnership. Whether property is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those
related to a particular property. Nevertheless, the Company will attempt to
comply with the terms of safe harbor provisions in the Code prescribing when
asset sales will not be characterized as prohibited transactions. Complete
assurance cannot be given, however, that the Company can comply with the safe
harbor provisions of the Code or avoid owning property that may be
characterized as property held primarily for sale to customers in the ordinary
course of a trade or business. Because a determination of "dealer status" is
necessarily dependent upon facts which will occur in the future, Counsel
cannot render an opinion on this issue.
Tax on Net Income from Foreclosure Property. The Company will be subject to
a tax at the highest rate applicable to corporations (currently 35%) on any
"net income from foreclosure property." "Foreclosure property" is property
acquired by the Company as a result of a foreclosure proceeding or by
otherwise reducing such property to ownership by agreement or process of law.
"Net income from foreclosure property" is the gross income derived during the
taxable year from foreclosure property, less applicable deductions, but only
to the extent such income does not qualify under the 75% income test and 95%
income test. As a result of the rules with respect to foreclosure property, if
the Lessee defaults on its obligations under a Participating Lease for an
Initial Hotel, the Company terminates the Participating Lease, and the Company
is unable to find a replacement lessee for such Initial Hotel within 90 days
of such foreclosure, gross income from hotel operations conducted by the
Company from such Initial Hotel would cease to qualify for the 75% and 95%
gross income tests and, thus, the Company would fail to qualify as a REIT.
However, although it is unclear under the Code, if the hotel operations were
conducted by an independent contractor, it may be possible for the Initial
Hotel to cease to be foreclosure property two years after such foreclosure,
(which period could be extended an additional four years).
Alternative Minimum Tax. The Company will be subject to the alternative
minimum tax on items of tax preference allocable to it. Code Section 59(d)
authorizes the Treasury to issue regulations allocating items of tax
preference between a REIT and its stockholders. Such regulations have not yet
been issued; however, the Company does not anticipate any significant items of
tax preference.
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Excise Tax. In addition to the tax on any undistributed income, the Company
would also be subject to a 4% excise tax on the amount if any by which (i) the
sum of (A) 85% of its REIT taxable income for a calendar year, (B) 95% of any
net capital gain for such year and (C) any undistributed amounts (for purpose
of avoiding this excise tax) from prior years, exceeds (ii) the amount
actually distributed by the Company to holders of shares of Common Stock
during the calendar year (or declared as a dividend during the calendar year,
if distributed during the following January) as ordinary income dividends. The
imposition of any excise tax on the Company would reduce the amount of cash
available for distribution to holders of shares of Common Stock. The Company
intends to take all necessary measures within its control to avoid imposition
of the excise tax.
Tax on Built-In Gain of Certain Assets. If a C corporation elects to be
taxed as a REIT, or if assets of a C corporation are transferred to a REIT in
a transaction in which the REIT has a carryover basis in the assets acquired,
such C corporation generally will be treated as if it sold all of its assets
to such REIT at their respective fair market values and liquidated immediately
thereafter, recognizing and paying tax on all gain. However, under such
circumstances under present law, the REIT is permitted to make an election
under which the C corporation will not recognize gain and instead the REIT
will be required to recognize gain and pay any tax thereon only if it disposes
of such assets during the subsequent 10-year period (the "10-Year Rule"). The
Company intends to make the appropriate election to obtain the above-described
tax consequences. Thus, if the Company acquires any asset from a C corporation
as a result of a merger or other nontaxable exchange, and the Company
recognizes gain on the disposition of such asset during the 10-year period
following acquisition of the asset, then such gain will be subject to tax at
the highest regular corporate rate to the extent the Built-In Gain (the excess
of (a) the fair market value of such asset as of the date of acquisition over
(b) the Company's adjusted basis in such asset as of such date) on the sale of
such asset exceeds any Built-In Loss arising from the disposition during the
same taxable year of any other assets acquired in the same transaction, where
Built-In Loss equals the excess of (x) the Company's adjusted basis in such
other assets as of the date of acquisition over (y) the fair market value of
such other assets as of such date.
It should be noted that President Clinton has proposed that the 10-Year Rule
be repealed, and the Treasury Department has stated that it would recommend to
Congress that such repeal be effective for C corporations electing REIT status
or for carryover basis transactions for taxable years beginning on or after
January 1, 1997.
TAXATION OF STOCKHOLDERS
TAXABLE U.S. STOCKHOLDERS
Dividend Income. Distributions from the Company (other than distributions
designated as capital gains dividends) will be taxable to holders of shares of
Common Stock which are not tax-exempt entities as ordinary income to the
extent of the current or accumulated earnings and profits of the Company.
Distributions from the Company which are designated (by notice to stockholders
within 30 days after the close of the Company's tax year or with its annual
report) as capital gains dividends by the Company will be taxed as long-term
capital gains to taxable holders of shares of Common Stock to the extent that
they do not exceed the Company's actual net capital gain for the taxable year.
Holders of shares of Common Stock that are corporations may be required to
treat up to 20% of any such capital gains dividends as ordinary income. Such
distributions, whether characterized as ordinary income or as capital gain,
are not eligible for the 70% dividends received deduction for corporations
(which President Clinton has proposed be decreased to 50%, effective for
dividends received or accrued after January 31, 1996).
Distributions from the Company to holders which are not designated as
capital gains dividends and which are in excess of the Company's current or
accumulated earnings and profits are treated as a return of capital to such
holders and reduce the tax basis of a holder's shares of Common Stock (but not
below zero). Any such distribution in excess of the tax basis is taxable to
any such holder that is not a tax-exempt entity as a gain realized from the
sale of the shares of Common Stock, taxable as described below.
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The declaration by the Company of a consent dividend would result in taxable
income to consenting holders of shares of Common Stock (other than tax-exempt
entities) without any corresponding cash distributions. See "--Requirements
for Qualification as a REIT--Annual Distribution Requirements."
Portfolio Income. Dividends paid to holders of shares of Common Stock will
be treated as portfolio income. Such income therefore will not be subject to
reduction by losses from passive activities (i.e., any interest in a rental
activity or in a trade or business in which the holder does not materially
participate, such as certain interests held as a limited partner) of any
holder who is subject to the passive activity loss rules. Such distributions
will, however, be considered investment income which may be offset by certain
investment expense deductions.
No Flow-Through of Losses. Holders of shares of Common Stock will not be
permitted to deduct any net operating losses or capital losses of the Company.
Sale of Shares. A holder of shares of Common Stock who sells shares will
recognize taxable gain or loss equal to the difference between (i) the amount
of cash and the fair market value of any property received on such sale or
other disposition and (ii) the holder's adjusted basis in such shares. Gain or
loss recognized by a holder of shares of Common Stock who is not a dealer in
securities and whose shares have been held for more than one year will
generally be taxable as long-term capital gain or loss.
Back-up Withholding. Distributions from the Company will ordinarily not be
subject to withholding of federal income taxes, except as discussed under
"Foreign Stockholders." Withholding of income tax at a rate of 31% may be
required, however, by reason of a failure of a holder of shares of Common
Stock to supply the Company or its agent with the holder's taxpayer
identification number. Such "backup" withholding also may apply to a holder of
shares of Common Stock who is otherwise exempt from backup withholding
(including a nonresident alien of the United States and, generally, a foreign
entity) if such holder fails to properly document his status as an exempt
recipient of distributions. Each holder will therefore be asked to provide and
certify his correct taxpayer identification number or to certify that he is an
exempt recipient.
TAX-EXEMPT STOCKHOLDERS
Non-taxability of Dividend Income. In general, a holder of shares of Common
Stock which is a tax-exempt entity will not be subject to tax on distributions
from the Company. The IRS has ruled that amounts distributed as dividends by a
qualified REIT do not constitute unrelated business taxable income ("UBTI")
when received by certain tax-exempt entities. Thus, distributions paid to a
holder of shares of Common Stock which is a tax-exempt entity and gain on the
sale of shares of Common Stock by a tax-exempt entity (other than those tax-
exempt entities described below) will not be treated as UBTI, even if the
Company incurs indebtedness in connection with the acquisition of real
property (through its percentage ownership of the Operating Partnership and
the Subsidiary Partnerships) provided that the tax-exempt entity has not
financed the acquisition of its shares of Common Stock of the Company.
For tax-exempt entities which are social clubs, voluntary employee
beneficiary associations, supplemental unemployment benefit trusts, and
qualified group legal services plans exempt from federal income taxation under
Code Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income
from an investment in the Company will constitute UBTI unless the organization
is able to properly deduct amounts set aside or placed in reserve for certain
purposes so as to offset the UBTI generated by its investment in the Company.
Such prospective investors should consult their own tax advisors concerning
these "set aside" and reserve requirements.
In the case of a "qualified trust" (generally, a pension or profit-sharing
trust) holding shares in a REIT, the beneficiaries of such a trust are treated
as holding shares in the REIT in proportion to their actuarial interests in
the qualified trust, instead of treating the qualified trust as a single
individual (the "look through exception"). A qualified trust that holds more
than 10% of the shares of a REIT is required to treat a percentage of REIT
dividends as UBTI if the REIT incurs debt to acquire or improve real property.
This rule applies, however, only
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if (i) the qualification of the REIT depends upon the application of the "look
through" exception (described above) to the restriction on REIT shareholdings
by five or fewer individuals, including qualified trusts (see "Description of
Capital Stock--Restrictions on Transfer"), and (ii) the REIT is "predominantly
held" by qualified trusts, i.e., if either (x) a single qualified trust held
more than 25% by value of the interests in the REIT or (y) one or more
qualified trusts, each owning more than 10% by value, held in the aggregate
more than 50% of the interests in the REIT. The percentage of any dividend
paid (or treated as paid) to such a qualified trust that is treated as UBTI is
equal to the amount of modified gross income (gross income less directly
connected expenses) from the unrelated trade or business of the REIT (treating
the REIT as if it were a qualified trust), divided by the total modified gross
income of the REIT. A de minimis exception applies where the percentage is
less than 5%. Because the Company expects the shares of Common Stock to be
widely held, this new provision should not result in UBTI to any tax-exempt
entity.
FOREIGN STOCKHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships, foreign estates
and foreign trusts (collectively, "Foreign Investors") are complex, and no
attempt will be made herein to provide more than a summary of such rules.
Prospective Foreign Investors should consult their own tax advisors to
determine the impact of federal, state and local income tax laws on an
investment in the shares of Common Stock, including any reporting
requirements, as well as the tax treatment of such an investment under their
home country laws.
Foreign Investors which are not engaged in the conduct of a business in the
United States and who purchase shares of Common Stock will generally not be
considered as engaged in the conduct of a trade or business in the United
States by reason of ownership of such shares. The taxation of distributions by
the Company to Foreign Investors will depend upon whether such distributions
are attributable to operating income or are attributable to sales or exchanges
by the Company of its United States Real Property Interests ("USRPIs"). USRPIs
are generally direct interests in real property located in the United States
and interests in domestic corporations in which the fair market value of its
USRPIs exceeds a certain percentage.
The Company anticipates that a substantial portion of the distributions to
holders of shares of Common Stock will be attributable to receipt of Rent by
the Company. To the extent that such distributions do not exceed the current
or accumulated earnings and profits of the Company, they will be treated as
dividends and will be subject to a withholding tax equal to 30% of the gross
amount of the dividend, which tax will be withheld and remitted to the IRS by
the Company. Such 30% rate may be reduced by United States income tax treaties
in effect with the country of residence of the Foreign Investor; however, a
Foreign Investor must furnish a completed IRS Form 1001 to the Company to
secure such a reduction. Distributions in excess of the Company's earnings and
profits will be treated as a nontaxable return of capital to a Foreign
Investor to the extent of the basis of his shares of Common Stock, and any
excess amount will be treated as an amount received in exchange for the sale
of his shares of Common Stock and treated under the rules described below for
the sale of Common Stock.
Distributions which are attributable to net capital gains realized from the
disposition of USRPIs (i.e., the Initial Hotels) by the Company will be taxed
as though the Foreign Investors were engaged in a trade or business in the
United States and the distributions were gains effectively connected with such
trade or business. Thus, a Foreign Investor would be entitled to offset its
gross income by allowable deductions and would pay tax on the resulting
taxable income at the graduated rates applicable to United States citizens or
residents. For both individuals and corporations, the Company must withhold a
tax equal to 35% of all dividends that could be designated by the Company as
capital gain dividends. To the extent that such withholding exceeds the actual
tax owed by the Foreign Investor, a Foreign Investor may claim a refund from
the IRS.
The Company or any nominee (e.g., a broker holding shares in street name)
may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the
disposition of USRPIs. A domestic person (a "nominee") who holds shares of
Common Stock on
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behalf of a Foreign Investor will bear the burden of withholding, provided
that the Company has properly designated the appropriate portion of a
distribution as a capital gain dividend.
It is anticipated that the shares owned directly or indirectly by Foreign
Investors will be less than 50% in value of the shares of Common Stock and
therefore the Company will be a "domestically controlled REIT." Accordingly,
shares of Common Stock held by Foreign Investors in the United States will not
be considered USRPIs and gains on sales of such shares will not be taxed to
such Foreign Investors as long as the seller is not otherwise considered to be
engaged in a trade or business in the United States. (The same rule applies to
gains attributable to distributions in excess of the Foreign Investor's cost
for its shares, discussed above.) Similarly, a foreign corporation not
otherwise subject to United States tax which distributes shares of Common
Stock to its stockholders will not be taxed under this rule.
The IRS is authorized to impose annual reporting requirements on certain
United States and foreign persons directly holding USRPIs. The required
reports are in addition to any necessary income tax returns, and do not
displace existing reporting requirements imposed on Foreign Investors by the
Agricultural Foreign Investment Disclosure Act of 1978 and the International
Investment Survey Act of 1976. As of the date of this Prospectus, the IRS has
not exercised its authority to impose reporting under this provision.
Furthermore, because shares in a domestically controlled REIT do not
constitute a USRPI, such reporting requirements are not expected to apply to a
Foreign Investor in the Company. However, the Company is required to file an
information return with the IRS setting forth the name, address and taxpayer
identification number of the payee of distributions from the Company (whether
the payee is a nominee or is the actual beneficial owner).
STATEMENT OF STOCK OWNERSHIP
The Company is required to demand annual written statements from the record
holders of designated percentages of its shares of Common Stock disclosing the
actual owners of the shares of Common Stock. The Company must also maintain,
within the Internal Revenue District in which it is required to file its
federal income tax return, permanent records showing the information it has
received as to the actual ownership of such shares of Common Stock and a list
of those persons failing or refusing to comply with such demand.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable solely to the Company's investment in the Operating
Partnership and the Subsidiary Partnerships. The discussion does not cover
state or local tax laws or any federal tax laws other than income tax laws.
Classification as a Partnership. A substantial portion the Company's real
estate investments will be made through the Subsidiary Partnerships, certain
of which will hold interests in other partnerships. In general, partnerships
are "pass-through" entities which are not subject to federal income tax.
Instead, partners are allocated their proportionate shares of the items of
income, gain, loss, deduction and credit of a partnership, and are subject to
tax thereon, without regard to whether the partners receive cash distributions
from the partnership. The Company will be entitled to include in its REIT
taxable income its distributive share of the income of any partnership
(including the Operating Partnership) in which it has an interest and to
deduct its distributive share of the losses of any partnership (including the
Operating Partnership) in which it has an interest only if each such
partnership is classified for federal income tax purposes as a partnership
rather than as an association taxable as a corporation.
An organization formed as a partnership will be treated as a partnership for
federal income tax purposes rather than as a corporation only if it has no
more than two of the following four corporate characteristics: continuity of
life, centralization of management, limited liability and free transferability
of interests. However, a "publicly traded partnership" (i.e., a partnership in
which interests are traded on an established securities market or are readily
tradable on a secondary market or the substantial equivalent thereof) will be
treated as a corporation unless at least 90% of the gross income of such
partnership, for each taxable year the partnership is a publicly
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traded partnership, consists of "qualifying income." "Qualifying income"
includes income from real property rents, gain from the sale or other
disposition of real property, interest and dividends.
The IRS has issued final regulations providing limited safe harbors from the
definition of a publicly traded partnership. Pursuant to one of those safe
harbors (the "Private Placement Exclusion"), interests in a partnership will
not be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all of the partnership interests are issued in a
transaction that is not required to be registered under the Securities Act and
(ii) the partnership does not have more than 100 partners at any time during
the taxable year (taking into account as a partner each person who indirectly
owns an interest in the partnership through a partnership, grantor trust, or S
corporation (a "flow-through entity"), but only if (a) substantially all the
value of the beneficial owner's interest in the flow-through entity is
attributable to the flow-through entity's interest (direct or indirect) in the
partnership, and (b) a principal purpose of the use of the tiered arrangement
is to permit the partnership to satisfy the 100-partner limitation).
All of the partnership interests in the Operating Partnership and the
Subsidiary Partnerships will be issued in transactions that are not required
to be registered under the Securities Act. In addition, upon the closing of
the Offering, in the aggregate, the Operating Partnership and the Subsidiary
Partnerships will not have more than 100 partners (even taking into account
indirect ownership of such partnerships through partnerships, grantor trusts,
and S corporations). Thus, the Operating Partnership and each Subsidiary
Partnership should satisfy the Private Placement Exclusion.
None of the Operating Partnership and the Subsidiary Partnerships has
requested and none intends to request, a ruling from the IRS that it will be
classified as a partnership for federal income tax purposes. Instead, at the
closing of the Offering, Battle Fowler LLP will deliver its opinion that,
based on the provisions of the partnership agreement of the Operating
Partnership and each Subsidiary Partnership, certain factual assumptions, and
certain representations described in the opinion, the Operating Partnership
and each Subsidiary Partnership will not possess more than two corporate
characteristics and thus will be treated for federal income tax purposes as a
partnership and not as an association taxable as a corporation or as a
publicly traded partnership. Unlike a tax ruling, an opinion of counsel is not
binding upon the IRS, and no assurance can be given that the IRS will not
challenge the status of the Operating Partnership and each Subsidiary
Partnership as a partnership for federal income tax purposes. If such
challenge were sustained by a court, the Operating Partnership and each
Subsidiary Partnership would be treated as a corporation for federal income
tax purposes, as described below. In addition, the opinion of Battle Fowler
LLP is based on existing law, which is to a great extent the result of
administrative and judicial interpretation. No assurance can be given that
administrative or judicial changes would not modify the conclusions expressed
in the opinion.
If for any reason any of the partnerships in which the Company has an
interest were taxable as a corporation rather than as a partnership for
federal income tax purposes, the Company would not be able to satisfy the
asset requirements for REIT status. See "--Requirements for Qualification as a
REIT--Asset Tests." In addition, any change in the partnership status of such
entities for tax purposes might be treated as a taxable event in which case
the Company might incur a tax liability without any related cash distribution.
See "--Income Taxation of the Operating Partnership and Its Partners--Basis in
Operating Partnership Interest." Further, items of income and deduction of
such partnerships would not pass through to its partners (including the
Company), and such partners would be treated as stockholders for tax purposes.
The partnerships in which the Company has an interest would be required to pay
income tax at corporate tax rates on their net income, and distributions to
their partners would constitute dividends that would not be deductible in
computing the relevant entities' taxable income.
Under a regulatory "anti-abuse" rule (the "Anti-Abuse Rule"), the IRS may
(i) recast a transaction involving the use of a partnership to reflect the
underlying economic arrangement under the partnership provisions of the Code
(the "Partnership Provisions"), or (ii) prevent the use of a partnership to
circumvent the intended purpose of a Code provision. The Anti-Abuse Rule
contains an example in which a corporation that elects to be treated as a REIT
contributes substantially all of the proceeds from a public offering to a
partnership
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in exchange for a general partnership interest. The example concludes that the
use of the partnership is not inconsistent with the intent of the Partnership
Provisions and, thus, cannot be recast by the IRS. However, the Exchange
Rights do not conform in all respects to the redemption rights contained in
the foregoing example. Moreover, the Anti-Abuse Rule is extraordinarily broad
in scope and is applied based on an analysis of all of the facts and
circumstances. As a result, there can be no assurance that the IRS will not
attempt to apply the Anti-Abuse Rule to the Company. If the conditions of the
Anti-Abuse Rule are met, the IRS is authorized to take appropriate enforcement
action, including disregarding the Operating Partnership for federal income
tax purposes or treating one or more of the partners as nonpartners. Any such
action potentially could jeopardize the Company's status as a REIT.
INCOME TAXATION OF THE OPERATING PARTNERSHIP AND ITS PARTNERS
Operating Partnership Allocations. As noted above, the Company must include
in its REIT taxable income its distributive share of the income and losses of
any partnership in which it has any interest. Although the provisions of a
partnership agreement generally will determine the allocation of income and
losses among partners, such allocations will be disregarded for tax purposes
under Section 704(b) of the Code if they do not have "substantial economic
effect" or otherwise do not comply with the provisions of Section 704(b) of
the Code and Treasury Regulations.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners in respect of such item. The allocations of taxable income and loss
of partnerships in which the Company has an interest are intended to comply
with the requirements of Section 704(b) of the Code and Treasury Regulations.
Tax Allocations in Respect of Contributed Properties. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal
income tax purposes in a manner such that the contributing partner benefits
from, or is charged with, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of such
unrealized gain or unrealized loss generally is equal to the difference
between the fair market value of the contributed property and the adjusted tax
basis of such property at the time of contribution (the "Book-Tax
Difference").
The Treasury Department has issued final and temporary regulations under
Section 704(c) of the Code (the "Regulations") which give partnerships great
flexibility in ensuring that a partner contributing property to a partnership
receives the tax burdens and benefits of any precontribution gain or loss
attributable to the contributed property. The Regulations permit partnerships
to use any "reasonable method" of accounting for Book-Tax Differences. The
Regulations specifically describe three reasonable methods, including (i) the
"traditional method" under current law, (ii) the traditional method with the
use of "curative allocations" which would permit distortions caused by a Book-
Tax Difference to be rectified on an annual basis and (iii) the "remedial
allocation method" which is similar to the traditional method with "curative
allocations." The Partnership Agreement permits AGH GP, as general partner, to
select one of these methods to account for Book-Tax Differences in connection
with the contribution of the Initial Hotels and the limited partnership
interests in the Subsidiary Partnerships to the Operating Partnership in
exchange for OP Units.
Basis in Operating Partnership Interest. The Company's adjusted tax basis in
each of the partnerships in which it has an interest generally (i) will be
equal to the amount of cash and the basis of any other property contributed to
such partnership by the Company, (ii) will be increased by (a) its allocable
share of such partnership's income and (b) its allocable share of any
indebtedness of such partnership and (iii) will be reduced, but not below
zero, by the Company's allocable share of (a) such partnership's loss and (b)
the amount of cash and the fair market value of any property distributed to
the Company, and by constructive distributions resulting from a reduction in
the Company's share of indebtedness of such partnership.
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If the Company's allocable share of the loss (or portion thereof) of any
partnership in which it has an interest would reduce the adjusted tax basis of
the Company's partnership interest in such partnership below zero, the
recognition of such loss will be deferred until such time as the recognition
of such loss (or portion thereof) would not reduce the Company's adjusted tax
basis below zero. To the extent that distributions from a partnership to the
Company, or any decrease in the Company's share of the nonrecourse
indebtedness of a partnership (each such decrease being considered a
constructive cash distribution to the partners), would reduce the Company's
adjusted tax basis below zero, such distributions (including such constructive
distributions) would constitute taxable income to the Company. Such
distributions and constructive distributions normally would be characterized
as long-term capital gain if the Company's interest in such partnership has
been held for longer than the long-term capital gain holding period (currently
one year).
Depreciation Deductions Available to the Operating Partnership. Certain
assets owned by the Operating Partnership consist of property contributed to
it by its partners. In general, when property is contributed in a tax-free
transaction under Section 721 of the Code, the transferee-partnership is
treated in the same manner as the contributing partner for purposes of
computing depreciation. The effect of this rule is to continue the historic
basis, placed in service dates and depreciation methods with respect to
property contributed to a partnership. This general rule would apply for any
properties the Operating Partnership acquires by reason of the deemed
termination for tax purposes of any of the Subsidiary Partnerships or to the
extent that the Operating Partnership receives an adjustment under Section
743(b) of the Code by reason of the acquisition of any interests in a
Subsidiary Partnership that did not terminate for tax purposes.
As described above (see "--Income Taxation of the Operating Partnership and
Its Partners--Tax Allocations in Respect of Contributed Properties"), the
Treasury Department has recently issued Regulations which give partnerships
flexibility in ensuring that a partner contributing property to a partnership
receives the tax benefits and burdens of any precontribution gain or loss
attributable to the contributed property.
As described previously, AGH GP, as general partner, may select any
permissible method to account for Book-Tax Differences in connection with the
contribution of the Initial Hotels and the limited partnership interests in
the Subsidiary Partnerships to the Operating Partnership in exchange for OP
Units. The use of certain of these methods may result in the Company being
allocated lower depreciation deductions than if a different method were used.
The resulting higher taxable income and earnings and profits of the Company,
as determined for federal income tax purposes, should decrease the portion of
distributions by the Company which may be treated as a return of capital. See
"--Requirements for Qualification as a REIT--Annual Distribution
Requirements." The Company may adopt a different method to account for Book-
Tax Differences for property contributed to the Operating Partnership or a
Subsidiary Partnership after the Formation Transactions.
OTHER TAX CONSIDERATIONS
State and Local Taxes. The tax treatment of the Company and holders of
shares of Common Stock in states having taxing jurisdiction over them may
differ from the federal income tax treatment. Accordingly, only a very limited
discussion of state taxation of the Company, the shares of Common Stock or the
holders of shares of Common Stock is provided herein, and no representation is
made as to the tax status of the Company (other than with respect to the Texas
franchise tax, as discussed below), the shares of Common Stock or the holders
of shares of Common Stock in such states. However, holders of shares of Common
Stock should note that certain states impose a withholding obligation on
partnerships carrying on a trade or business in a state having partners who
are not resident in such state. The Partnership Agreement contains a provision
which permits the Operating Partnership to withhold a portion of a non-
resident partner's distribution (e.g., a distribution to the Company) and to
pay such withheld amount to the taxing state as agent for the non-resident
partner. Most (but not all) states follow the Code in their taxation of REITs.
In such states, the Company should generally not be liable for tax and should
be able to file a claim for refund and obtain any withheld amount from the
taxing state. However, due to the time value of money, the requirement of the
Operating Partnership to withhold on distributions to the Company will reduce
the yield on an investment in shares of Common Stock. Each holder of
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shares of Common Stock should consult his own tax advisor as to the status of
the shares of Common Stock under the respective state tax laws applicable to
him.
In particular, Texas imposes a franchise tax upon corporations that do
business in Texas. The Company will be organized as a Maryland corporation and
anticipates that it will have an office in Texas. AGH LP will be organized as
a Nevada corporation and anticipates that it will not have any contacts with
Texas other than ownership of its limited partnership interest in the
Operating Partnership. The Operating Partnership will be registered in Texas
as a foreign limited partnership qualified to transact business in Texas.
The Texas franchise tax is imposed on a corporation doing business in Texas
with respect to the corporation's net "taxable capital" (generally, financial
accounting net worth, with certain adjustments) and its net "taxable earned
surplus" (generally, a corporation's federal taxable income, with certain
adjustments) apportioned to Texas. A corporation's taxable capital and taxable
earned surplus are apportioned to Texas based on a fraction, the numerator of
which is the corporation's gross receipts from business transacted in Texas,
and the denominator of which is the corporation's gross receipts from its
entire business, with the amount and timing of such gross receipts being
generally determined in accordance with generally accepted accounting
principles (in the case of "taxable capital") and the Code (in the case of
taxable earned surplus). For purposes of determining the source of gross
receipts, dividends and interest received by a corporation are generally
apportioned based upon the state of incorporation of a corporate payor or a
corporate debtor, respectively. A similar rule applies to receipts by a
corporation from a limited liability company. Thus, interest and dividends
received by a corporation from another corporation or distributions and
interest received by a corporation from a limited liability company will not
be treated as gross receipts from business transacted in Texas unless the
payor is incorporated or organized, respectively, in Texas. To calculate the
tax on net taxable capital, receipts reflecting the corporation's share of net
profits from a partnership are apportioned to Texas if the partnership's
principal place of business (the location of its day-to-day operations) is in
Texas; however, if the corporation's share of the gross receipts from the
partnership is treated as revenue of the corporation under generally accepted
accounting principles, then the receipts of the partnership are apportioned
based on normal apportionment rules as if the receipts were received directly
by the corporation. For purposes of the tax on net taxable earned surplus,
receipts are apportioned as though the corporation directly received the
receipts from the underlying activities of the partnership. The franchise tax
on "net taxable capital" ("taxable capital" apportioned to Texas) is imposed
at the rate of .25% of a corporation's net taxable capital. The franchise tax
rate on "net taxable earned surplus" ("taxable earned surplus" apportioned to
Texas) is 4.5%. The Texas franchise tax is generally equal to the greater of
the tax on "net taxable capital" and the tax on "net taxable earned surplus."
The Texas franchise tax is not applied on a consolidated group basis. In
addition, with respect to REITs organized as corporations, the Comptroller of
Public Accounts (the "Comptroller") has taken the position administratively
that the tax on net taxable earned surplus is determined based upon the income
of such corporation prior to reduction for the dividends-paid deduction
available to REITs. Any Texas franchise tax that the Company is required to
pay will reduce the Cash Available for Distribution by the Company to its
stockholders.
The Comptroller has issued a rule providing that a corporation is not
considered to be doing business in Texas for purposes of the Texas franchise
tax imposed on net taxable capital solely by virtue of its ownership of an
interest as a limited partner in a limited partnership that does business in
Texas. The same rule provides, however, that a corporation is considered to be
doing business in Texas if it owns an interest as a general partner in a
partnership that does business in Texas. A parallel rule for purposes of the
tax on net taxable earned surplus, by negative implication, incorporates the
taxable capital nexus standards, including the limited partner exception. The
Comptroller has verified these results in private determinations. The
Comptroller also has expressed informally its view that a corporation is not
considered to be doing business in Texas for Texas franchise tax purposes
merely because the corporation owns stock in another corporation that does
business in Texas.
In accordance with these pronouncements by the Comptroller, AGH GP will be
treated as doing business in Texas because it will be the general partner of
the Operating Partnership, and the Operating Partnership will be doing
business in Texas. Accordingly, AGH GP will be subject to the Texas franchise
tax. The Company will be treated as doing business in Texas because it will
have an office in Texas. Accordingly, the Company will be
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subject to the Texas franchise tax. However, the Company anticipates that its
only source of gross receipts for Texas franchise tax purposes will be
dividends from its two wholly owned qualified REIT subsidiaries, AGH GP and
AGH LP, which are both Nevada corporations. Since dividends are sourced to the
state of incorporation of a corporate payor for gross receipts apportionment
purposes (although dividends received from another member of a consolidated
group are not taken into account as a gross receipt or earned surplus for
purposes of computing the franchise tax on net taxable earned surplus), the
Company does not anticipate that any significant portion of its "taxable
capital" or "taxable earned surplus" will be apportioned to Texas. As a
result, the Company's Texas franchise tax liability is not expected to be
substantial. Further, based on the pronouncements by the Comptroller, AGH LP
will not be treated as doing business in Texas merely as a result of its
status as a limited partner of the Operating Partnership. As long as AGH LP is
not otherwise doing business in Texas, AGH LP should not be subject to the
Texas franchise tax. Finally, two limited liability companies that have been
formed to be general partners of the Subsidiary Partnerships likewise will be
subject to the Texas franchise tax under the foregoing rules because they are
treated like corporations for Texas franchise tax purposes and they have
taxable nexus with Texas by virtue of being general partners in two Subsidiary
Partnerships that own real property in Texas. However, since these limited
liability companies only own 1.0% general partnership interests, the Texas
franchise tax due from these entities will not be substantial. Two other
limited liability companies have been formed, one of which will own a hotel
located outside of Texas and the other of which will be the general partner in
a limited partnership owning a hotel located outside of Texas. Thus, while
these limited liability companies will be conducting activities that will
create taxable nexus with Texas, these companies will generate all of their
gross receipts from non-Texas sources and thus will not be required to pay a
material amount of Texas franchise tax.
There can be no assurance that the Comptroller will agree that AGH LP is not
or, in the future, will not be doing business in Texas for Texas franchise tax
purposes. First, the Comptroller could revoke the pronouncements described
above and contend that the activities of AGH LP will constitute the doing of
business in Texas. Second, the Comptroller could contend that (i) some
activity of AGH LP other than its ownership of a limited partnership interest
in the Operating Partnership will constitute the doing of business in Texas,
despite the avoidance of contacts with the State of Texas, or (ii) in light of
the overall structure of the Company, AGH LP and AGH GP, the pronouncements
otherwise are inapplicable. The Company intends to seek a private
determination from the Comptroller that verifies the foregoing Texas franchise
tax consequences of this structure.
The Operating Partnership and the Subsidiary Partnerships (other than the
Subsidiary Partnership organized as a limited liability company) will not be
subject to the Texas franchise tax under the laws in existence as of the date
of this Prospectus. There can be no assurance, however, that the Texas
legislature, which will not meet again in regular session until 1997, will not
in the future expand the scope of the Texas franchise tax to apply to limited
partnerships such as the Operating Partnership and the Subsidiary Partnerships
organized as limited partnerships under state law.
Coopers & Lybrand L.L.P., special tax consultant to the Company ("Special
Tax Consultant"), has reviewed the discussion in this section with respect to
Texas franchise tax matters and is of the opinion that it accurately
summarizes the Texas franchise tax matters expressly described herein. The
Special Tax Consultant expresses no opinion on any other federal or state tax
considerations affecting the Company or a holder of Common Stock, including,
but not limited to, other Texas franchise tax matters not specifically
discussed above.
Possible Legislative or Other Actions Affecting Tax Consequences; Possible
Adverse Tax Legislation. Prospective stockholders should recognize that the
present federal income tax treatment of an investment in the Company may be
modified by legislative, judicial or administrative action at any time and
that any such action may affect investments and commitments previously made.
The rules dealing with federal income taxation are constantly under
legislative and administrative review, resulting in revisions of regulations
and revised interpretations of established concepts as well as statutory
changes. Revisions in federal tax laws and interpretations thereof could
adversely affect the tax consequences of an investment in the Company.
Current Texas franchise tax law applies only to corporations and limited
liability companies. Thus, partnerships engaged in business in Texas,
including the Subsidiary Partnerships that own property in Texas,
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presently fall outside the jurisdiction of the Texas franchise tax. The
corporate general partners in those partnerships, however, are subject to
Texas franchise tax. It is expected that Texas legislators and/or the
Comptroller will propose or recommend, as the case may be, statutory
amendments to expand the application of the Texas franchise tax to include
certain non-corporate businesses, specifically including partnerships, in the
franchise tax base. It cannot be predicted whether such proposals will be
adopted by the legislature. If such proposals are enacted, Subsidiary
Partnerships that own property in Texas would be subjected to the then
applicable Texas franchise tax.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement, dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
the number of shares of Common Stock set forth opposite the name of such
Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Smith Barney Inc. ....................................................
Prudential Securities Incorporated....................................
Legg Mason Wood Walker, Incorporated..................................
The Robinson-Humphrey Company, Inc. ..................................
---------
Total............................................................... 7,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the Underwriters' over-allotment
option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Prudential Securities
Incorporated, Legg Mason Wood Walker, Incorporated and The Robinson-Humphrey
Company, Inc. are acting as representatives (the "Representatives"), propose
to offer part of the shares directly to the public at the public offering
price set forth on the cover page of this Prospectus and to offer part of the
shares to certain dealers at a price which represents a concession not in
excess of $ per share under the public offering price. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. After the initial public offering, the
public offering price, concessions and reallowances to dealers may be changed
by the Underwriters. The Representatives have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 1,050,000 additional
shares of Common Stock at the price to the public set forth on the cover page
of this Prospectus minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, in connection with the Offering.
The Company will pay an advisory fee equal to 0.75% of the gross proceeds of
the Offering (including any exercise of the Underwriters' over-allotment
option) to Smith Barney Inc. for advisory services in connection with the
evaluation, analysis and structuring of the Company's formation and the
Offering.
The Company and its officers and directors have agreed that, for a period of
one year from the date of this Prospectus, they will not, without the prior
written consent of Smith Barney Inc., sell, offer to sell, solicit an offer to
buy, contract to sell, grant any option to purchase or otherwise transfer or
dispose ("Transfer") of any shares of Common Stock or any other securities
convertible into, or exercisable or exchangeable for, shares of Common Stock.
Messrs. Sowell, Shaw and Shaw have agreed that, for a period of one year from
the date of this Prospectus, they will not, without the prior written consent
of Smith Barney Inc., Transfer any OP Units or any shares of Common Stock
issuable upon exchange of such OP Units.
136
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the shares of Common Stock
included in the Offering will be determined by negotiation between the Company
and the Representatives. Among the factors considered in making such
determination are the history of and prospects for the Company's business and
the industry in which it competes, an assessment of the Company's management,
the prospects for growth of the Company's revenues and earnings, the current
state of the economy in the United States and the current level of economic
activity in the industry in which the Company competes and in related or
comparable industries, and currently prevailing conditions in the securities
markets, including current market valuations of the publicly traded companies
which the Company and the Representatives believe to be comparable to the
Company. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering or at or above the initial public offering price.
At the request of the Company, the Underwriters have reserved up to 350,000
shares of Common Stock for sale at the public offering price to certain
employees of the Company, their business affiliates and related parties who
have expressed an interest in purchasing shares. Such purchases will be made
under the same terms and conditions as will be initially offered by the
Underwriters in the public offering.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities that may be incurred in connection with the Offering,
including liabilities under the Securities Act.
The Common Stock has been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "AGT." In order to meet one of
the requirements for listing the Common Stock on the NYSE, the Underwriters
have undertaken to sell lots of 100 or more shares to a minimum of 2,000
beneficial holders.
EXPERTS
The Consolidated Balance Sheet of American General Hospitality Corporation
as of April 12, 1996; the Balance Sheet of AGH Leasing, L.P. as of May 29,
1996; the Combined Financial Statements of the AGH Predecessor Hotels as of
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 and the related financial statement schedule and the
Combined Financial Statements of the AGH Acquisition Hotels as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995 and the related financial statement schedule included in this Prospectus
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their reports thereon included elsewhere herein and in the
Registration Statement. Such Balance Sheets, Combined Financial Statements and
financial statement schedules are included in reliance upon such reports given
on their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Battle Fowler LLP, New York, New York. In addition,
the description of federal income tax consequences contained in the section of
the Prospectus entitled "Federal Income Tax Considerations" is based on the
opinion of Battle Fowler LLP, New York, New York. The description of Texas
franchise tax matters contained in the section of the Prospectus entitled
"Federal Income Tax Considerations-Other Tax Considerations," is based on the
opinion of Coopers & Lybrand L.L.P., Dallas, Texas. Calhoun & Stacy P.L.L.C.,
Dallas, Texas has also advised the Company on certain matters relating to the
acquisition of the Initial Hotels. The validity of the shares of Common Stock
offered hereby will be passed upon for the Underwriters by Hunton & Williams.
Battle Fowler LLP and Hunton & Williams will rely on Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland as to certain matters of Maryland law.
The Company will be required to file reports and other information with the
Commission pursuant to the Exchange Act in addition to any other legal or NYSE
requirements. The Company intends to furnish its stockholders with annual
reports containing consolidated financial statements audited by its
independent certified
137
<PAGE>
public accountants and with quarterly reports containing unaudited condensed
consolidated financial statements for each of the first three quarters of each
fiscal year.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 (of which this Prospectus is a part) under the Securities Act with
respect to the securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain portions
of which have been omitted as permitted by the rules and regulations of the
Securities and Exchange Commission. Statements contained in this Prospectus as
to the content of any contract or other document are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference and the exhibits
and schedules hereto. For further information regarding the Company and the
shares of Common Stock offered hereby, reference is hereby made to the
Registration Statement and such exhibits and schedules.
The Registration Statement and the exhibits and schedules forming a part
thereof filed by the Company with the Commission can be inspected and copies
obtained from the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
138
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms have
the meanings set forth below for the purposes of this Prospectus.
"1996 Plan" means the American General Hospitality Corporation 1996 Incentive
Plan.
"ACMs" means asbestos-containing materials.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Additional Charges" means certain amounts of money, including interest
accrued on any late payments or charges, that the Lessee will be obligated to
pay to the Company in addition to Base Rent or Participating Rent, pursuant to
the Participating Leases.
"Adjusted Basis Ratio" means, for each Initial Hotel, the ratio that the
average of the adjusted bases of the personal property in the Initial Hotel at
the beginning and at the end of a taxable year bears to the average of the
aggregate adjusted bases of both the real and personal property comprising the
Initial Hotel at the beginning and at the end of a taxable year.
"ADR" means average daily room rate.
"AGH Acquisition Hotels" means the following nine Initial Hotels that will be
acquired primarily from persons unaffiliated with AGHI: the Holiday Inn Dallas
DFW Airport South, Hilton Hotel-Toledo, Holiday Inn New Orleans International
Airport, Holiday Inn Park Center Plaza, Holiday Inn Select-Madison, Holiday Inn
Mission Valley, Le Baron Airport Hotel, Days Inn Ocean City, and Fred Harvey
Albuquerque Airport Hotel.
"AGH GP" means AGH GP, Inc., a Nevada corporation and wholly owned subsidiary
of the Company, which will be the sole general partner of the Operating
Partnership.
"AGH LP" means AGH LP, Inc., a Nevada corporation and wholly owned subsidiary
of the Company, which will be a Limited Partner of the Operating Partnership.
"AGH Predecessor Hotels" means the following four Initial Hotels that will be
acquired primarily from partnerships controlled by shareholders of AGHI: the
Holiday Inn Dallas DFW Airport West, Courtyard by Marriott-Meadowlands, Hotel
Maison de Ville, and the Hampton Inn Richmond Airport.
"AGHI" means American General Hospitality, Inc., which will operate the
Initial Hotels pursuant to the Management Agreements, and certain of its
affiliates.
"Anti-Abuse Rule" means the regulations issued by the United States Treasury
Department under the Partnership Provisions that would authorize the IRS, in
certain "abusive" transactions involving partnerships, to disregard the form of
a transaction and recast it for federal tax purposes as it deems appropriate.
"Base Rent" means the fixed obligation of the Lessee to pay a sum certain in
monthly rent under each of the Participating Leases.
"Beverage Corporations" means those corporations wholly owned by Steven D.
Jorns that will sublease from the Lessee the portion of eleven of the Initial
Hotels that sell alcoholic beverages.
"Beverage Subleases" means those subleases between the Lessee and the
Beverage Corporations relating to the sublease of the areas at the Initial
Hotels where alcoholic beverages are sold.
"Board of Directors" means the Board of Directors of the Company.
"Bylaws" means the Bylaws of the Company.
139
<PAGE>
"Cash Available for Distribution" means Funds From Operations adjusted for
certain non-cash items, less reserves for capital expenditures.
"Charter"means the charter of the Company filed for record with the State
Department of Assessments and Taxation of Maryland, as may be amended from
time to time.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the shares of Common Stock, $0.01 par value per share,
of the Company.
"Company" means American General Hospitality Corporation, a Maryland
corporation, which was incorporated on April 12, 1996, together with AGH GP,
AGH LP, and the Operating Partnership, and any subsidiaries thereof.
"Company Expenses" means all administrative costs and expenses of the
Company, AGH GP, and AGH LP.
"Comptroller" means the office of the Texas State Comptroller of Public
Accounts.
"Counsel" means Battle Fowler LLP.
"CPI" means the United States Consumer Price Index, All Urban Consumers,
U.S. City Average, All Items (1982 - 84 = 100).
"DFW South Loan" means the non-recourse mortgage on Holiday Inn Dallas DFW
Airport South in the outstanding principal amount as of March 31, 1996 of
approximately $14.2 million.
"Director Share Awards" means the annual award of shares of Common Stock to
each eligible director under the Directors' Plan.
"Directors' Plan" means the American General Hospitality Corporation Non-
Employee Directors' Incentive Plan.
"ESAs" means phase I environmental site assessments.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agreement" means that Exchange Rights Agreement among the Company,
the Operating Partnership and the Limited Partners, other than AGH LP, other
persons or parties thereto.
"Exchange Rights" means, pursuant to the Partnership Agreement, the rights
of the Limited Partners, other than AGH LP, to cause the Operating Partnership
to exchange each OP Unit in exchange for cash or, at the Company's election,
shares of Common Stock.
"F&B" means food and beverage.
"FF&E" means furniture, fixtures and equipment.
"FF&E Note" means collectively the one or more five-year amortizing recourse
promissory notes in the aggregate principal amount of $315,000 issued by the
Lessee to the Operating Partnership in connection with the sale by the
Operating Partnership of certain personal property relating to certain of the
Initial Hotels.
"Foreign Investors" means nonresident alien individuals, foreign
corporations, foreign partnerships and foreign trusts and estates.
140
<PAGE>
"Formation Transactions" means the principal transactions in connection with
the formation of the Company and the acquisition of the Initial Hotels.
"Franchise Licenses" means those franchise licenses relating to the
franchised Initial Hotels.
"Funds From Operations" means income (loss) before minority interest
(computed in accordance with generally accepted accounting principles),
excluding gains (losses) from debt restructuring and sales of property, plus
real estate related depreciation and amortization (excluding amortization of
financing costs), and after adjustments for unconsolidated partnerships and
joint ventures.
"General Partner" means AGH GP, Inc., a Nevada corporation.
"Independent Directors" means a director of the Company who is not an
officer or employee of the Company, any affiliate of an officer or employee or
any affiliate of any advisor to the Company under an advisory agreement, any
lessee of any property of the Company, any subsidiary of the Company or any
partnership which is an affiliate of, the Company.
"Initial Hotels" means the thirteen hotels that the Company will own upon
the completion of the Offering.
"IRS" means the U.S. Internal Revenue Service.
"ISOs" means incentive stock options.
"Lease Master Agreement" means the agreement between the Operating
Partnership and the Lessee which will set forth the terms of the Lessee's
required capitalization and certain other matters.
"Lessee" means AGH Leasing, L.P., which will lease the Initial Hotels from
the Operating Partnership pursuant to the Participating Leases.
"Limited Partners" means the limited partners of the Operating Partnership.
"Line of Credit" means the $100 million line of credit for which the Company
has obtained a commitment.
"Lock-up Period" means the one-year period after the effective date of this
Prospectus.
"Look-Through Ownership Limitation" means the ownership of as much as 15.0%
of any class of the Company's stock by mutual funds and certain other
entities.
"Management Agreements" means the agreements between AGHI and the Lessee to
operate the Initial Hotels.
"MGCL" means the Maryland General Corporation Law, as may be amended from
time to time.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the offering which is the subject of the Prospectus.
"Offering Price" means the mid-point of the price range set forth on the
cover page of this Prospectus of $20.00 per share.
"OP Units" means units of limited partnership interest in the Operating
Partnership.
141
<PAGE>
"Operating Partnership" means American General Hospitality Operating
Partnership, L.P., a limited partnership organized under the laws of Delaware.
Unless the context requires otherwise, Operating Partnership includes any
subsidiaries of the Operating Partnership.
"Option Hotels" means the Courtyard by Marriott currently under development
in Boise, Idaho and the Courtyard by Marriott currently under development in
Durham, North Carolina.
"Ownership Limitation" means the ownership of more than 9.9% of any class of
the Company's outstanding stock by any person.
"Participating Leases" means the operating leases between the Lessee and the
Operating Partnership pursuant to which the Lessee will lease the Initial
Hotels from the Operating Partnership.
"Participating Rent" means rent based on percentages of room revenue, food
and beverage revenue and telephone and other revenue payable by the Lessee
pursuant to the Participating Leases.
"Partnership Agreement" means the partnership agreement relating to the
Operating Partnership.
"Partnership Provisions" means the partnership provisions of the Code.
"PCBs" means polychlorinated biphenyls.
"Plan" means AGHI's Retirement Savings Plan.
"Preferred Stock" means the shares of Preferred Stock, $0.01 par value per
share, of the Company.
"Primary Contributors" means Steven D. Jorns, Bruce G. Wiles, Kenneth E.
Barr, James E. Sowell, Lewis W. Shaw II, and Kenneth W. Shaw (who are the
principals of AGHI and/or the Lessee) and where applicable includes their
respective controlled affiliates and associates (including spouses).
"Registration Rights Agreement" means the Registration Rights Agreement
among the Company and the Limited Partners other than AGH LP and the Plan.
"REIT" means real estate investment trust as defined in Section 856 of the
Code.
"Related Party Tenant" under the Code means, the Company or an owner of
10.0% or more of the Company, which directly or constructively, owns 10.0% or
more of a tenant.
"Rents" means, collectively, Base Rent and Participating Rent.
"REVPAR" means average total revenue per available room and is determined by
dividing room revenue by available rooms for the applicable period.
"Secaucus Loans" means the two promissory notes secured by a non-recourse
mortgage on the Courtyard by Marriott-Meadowlands hotel that were in the
outstanding principal amount as of March 31, 1996 of approximately $4.6
million and $508,000, respectively, and which will remain outstanding after
the Offering and the acquisition of the Courtyard by Marriott-Meadowlands by
the Company.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary Partnerships" means one or more subsidiary partnerships, joint
ventures and limited liability companies through which the Operating
Partnership owns Initial Hotels.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
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<PAGE>
"UBTI" means unrelated business taxable income.
"Underwriters" means the underwriters named in the Prospectus relating to the
Offering.
"Weighted Average Daily Room Rate" means the total guest room revenue derived
from all of the Initial Hotels divided by the total number of guest rooms sold
at all of the Initial Hotels.
"Weighted Average Occupancy" means the total number of guest rooms sold at
all of the Initial Hotels divided by the total number of guest rooms available
at all of the Initial Hotels.
143
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
American General Hospitality Corporation
Statements of Estimated Revenues Less Expenses for the Year Ended
December 31, 1995, the Twelve Months Ended March 31, 1996 and the Three
Months Ended March 31, 1996 (unaudited)................................ F-2
Pro Forma Consolidated Balance Sheet as of March 31, 1996 (unaudited)... F-6
Report of Independent Accountants....................................... F-10
Consolidated Balance Sheet as of April 12, 1996 (date of inception)..... F-11
Notes to Consolidated Balance Sheet..................................... F-12
AGH Leasing, L.P.
Pro Forma Balance Sheet as of May 29, 1996 (unaudited).................. F-14
Report of Independent Accountants....................................... F-15
Balance Sheet as of May 29, 1996 (date of inception).................... F-16
Notes to Balance Sheet.................................................. F-17
Initial Hotels and Lessee
Pro Forma Combined Statements of Operations for the Year Ended December
31, 1995, the Twelve Months Ended March 31, 1996 and the Three Months
Ended March 31, 1996 (unaudited)....................................... F-18
Notes to Combined Statements of Operations.............................. F-21
AGH Predecessor Hotels
Report of Independent Accountants....................................... F-23
Combined Balance Sheets as of December 30, 1994, December 29, 1995
(audited) and March 31, 1996 (unaudited)............................... F-24
Combined Statements of Operations for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1995
and 1996 (unaudited)................................................... F-25
Combined Statements of Equity for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1996
(unaudited)............................................................ F-26
Combined Statements of Cash Flows for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1995
and 1996 (unaudited)................................................... F-27
Notes to Combined Financial Statements.................................. F-28
Schedule III--Real Estate and Accumulated Depreciation.................. F-33
AGH Acquisition Hotels
Report of Independent Accountants....................................... F-34
Combined Balance Sheets as of December 31, 1994 and 1995 (audited) and
March 31, 1996 (unaudited)............................................. F-35
Combined Statements of Operations for each of the Three Years in the
Period Ended December 31, 1995 (audited) and the Three Months Ended
March 31, 1995 and 1996 (unaudited).................................... F-36
Combined Statements of Equity for each of the Three Years in the Period
Ended December 31, 1995 (audited) and the Three Months Ended March 31,
1996 (unaudited)....................................................... F-37
Combined Statements of Cash Flows for each of the Three Years in the
Period Ended December 31, 1995 (audited) and the Three Months Ended
March 31, 1995 and 1996 (unaudited).................................... F-38
Notes to Combined Financial Statements.................................. F-39
Schedule III--Real Estate and Accumulated Depreciation.................. F-45
</TABLE>
F-1
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995, THE TWELVE MONTHS ENDED MARCH 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
The following unaudited Statements of Estimated Revenues Less Expenses of
the Company for the year ended December 31, 1995, the twelve months ended
March 31, 1996, and the three months ended March 31, 1996 are presented as if
the consummation of the Formation Transactions and the application of the net
proceeds of the Offering as set forth under the caption "Use of Proceeds" had
occurred on January 1, 1995 and all of the Initial Hotels had been leased
pursuant to the Participating Leases. Such estimated information is based in
part upon the Combined Statements of Operations of the AGH Predecessor Hotels
(unaudited financial information for the Holiday Inn Dallas DFW Airport West
hotel for the period prior to its acquisition in June 1995 was obtained from
the prior owners), the AGH Acquisition Hotels and the Pro Forma Combined
Statements of Operations of the Initial Hotels and Lessee. Such information
should be read in conjunction with the Financial Statements included in this
Prospectus. In management's opinion, all adjustments necessary to reflect the
effects of the Formation Transactions and the Offering have been made.
The following unaudited Statements of Estimated Revenues Less Expenses are
not necessarily indicative of what the results of operations of the Company
would have been assuming such transactions had been completed on January 1,
1995, nor does it purport to represent the results of operations for future
periods.
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Estimated Revenues Less
Expenses Data:
Participating Lease
revenue (A)............. $24,811,668 $25,902,292 $6,527,908
Interest income (B)...... 31,500 31,500 7,875
----------- ----------- ----------
Total revenue............ 24,843,168 25,933,792 6,535,783
----------- ----------- ----------
Depreciation (C)......... 7,404,199 6,551,900 1,485,224
Amortization (D)......... 605,410 605,410 151,353
Real estate and personal
property taxes and
property insurance (E).. 2,165,073 2,165,073 541,268
General and
administrative (F)...... 1,130,000 1,130,000 282,500
Ground lease expense
(E)..................... 881,217 902,196 193,156
Amortization of unearned
officers' compensation
(G)..................... 100,000 100,000 25,000
Interest expense (H)..... 1,244,637 1,633,962 408,491
----------- ----------- ----------
Total expenses......... 13,530,536 13,088,541 3,086,992
----------- ----------- ----------
Estimated revenues less
expenses before minority
interest.................. 11,312,632 12,845,251 3,448,791
Minority interest (I)...... 2,918,659 3,314,075 889,788
----------- ----------- ----------
Estimated revenues less
expenses applicable to
common shareholders....... $ 8,393,973 $ 9,531,176 $2,559,003
=========== =========== ==========
Estimated revenues less
expenses per common
share..................... $ 1.16 $ 1.32 $ 0.36
=========== =========== ==========
Weighted average number of
shares of Common Stock
outstanding............... 7,205,518 7,205,518 7,205,518
=========== =========== ==========
</TABLE>
See Notes to Statements of Estimated Revenues Less Expenses.
F-2
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES
(A) Represents lease payments from the Lessee to the Operating Partnership
pursuant to the Participating Leases calculated on a pro forma basis by
applying the rent provisions of the Participating Leases to the pro forma
revenues of the Initial Hotels. The departmental revenue thresholds in certain
of the Participating Lease formulas adjust in the future beginning January 1,
1997. See "The Initial Hotels--The Participating Leases."
The Participating Lease revenue is comprised of the following:
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Base rent...................... $15,392,000 $15,392,000 $3,848,000
Excess of Participating Rent
over Base Rent................ 9,419,668 10,510,292 2,679,908
----------- ----------- ----------
Total Participating Lease
revenue..................... $24,811,668 $25,902,292 $6,527,908
=========== =========== ==========
</TABLE>
(B) Represents interest income on the advance to Lessee for the purchase of
certain furniture, fixtures and equipment from the Company ($315,000). The
advance to Lessee is due over five years and bears interest at 10% per annum.
(C) Represents depreciation on the Initial Hotels. Estimated depreciation is
computed based upon estimated useful lives of 39 years for buildings and
improvements and 5 years for furniture, fixtures and equipment. These
estimated useful lives are based on management's knowledge of the properties
and the hotel industry in general.
The AGH Predecessor Hotels estimated depreciation expense is computed as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Historical depreciation
expense...................... $2,409,211 $1,661,334 $ 288,688
Holiday Inn Dallas DFW Airport
West depreciation expense for
the period prior to
acquisition.................. 208,844 104,422
Estimated depreciation expense
for increase in basis of the
Hotel Maison de Ville and
closing costs on the AGH
Predecessor Hotels........... 20,196 20,196 5,049
---------- ---------- ----------
$2,638,251 $1,785,952 $ 293,737
========== ========== ==========
</TABLE>
Additionally, the estimated depreciation expense for the AGH Acquisition
Hotels includes an annual depreciation on furniture, fixtures and equipment of
$1,312,120 and on buildings and improvements of $3,453,828.
F-3
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES--(CONTINUED)
At March 31, 1996, the Company's pro forma investment in hotel properties,
at cost, consists of the following:
<TABLE>
<CAPTION>
AGH AGH
PREDECESSOR ACQUISITION
HOTELS HOTELS TOTAL
----------- ------------ ------------
<S> <C> <C> <C>
Land..................................... $ 1,496,515 $ 11,311,000 $ 12,807,515
Building and improvements................ 18,665,021 134,699,284 153,364,305
Furniture, fixtures and equipment........ 3,474,271 6,560,598 10,034,869
----------- ------------ ------------
$23,635,807 $152,570,882 $176,206,689
=========== ============ ============
</TABLE>
(D) Represents amortization of expected deferred loan costs related to the
Line of Credit and amortization of franchise transfer costs. Deferred loan
costs of $2,185,000 are amortized utilizing a method which approximates the
interest method over four years which is the anticipated term of the Line of
Credit. Franchise transfer costs of $591,600 are amortized over the term of
the related franchise agreements which approximates 10 years.
(E) Represents amounts to be paid by the Operating Partnership. Such amounts
were derived from the historical amounts paid with respect to the Initial
Hotels adjusted for the Holiday Inn Dallas DFW Airport West hotel inclusion
for the full year and probable real estate and personal property tax
increases. Four AGH Acquisition Hotels (Holiday Inn Park Plaza, LeBaron
Airport Hotel, Holiday Inn Mission Valley and Hilton Hotel- Toledo) are
located in states which require tax reassessments based primarily on the price
as specified in a sale to an unrelated third party. The estimated adjustment
column below is based on the purchase price multiplied by the applicable tax
rates less the amounts included in the historical financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------
HISTORICAL
-----------------------
AGH AGH
PREDECESSOR ACQUISITION ESTIMATED
HOTELS HOTELS ADJUSTMENTS COMBINED
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Real estate and personal
property taxes................. $344,036 $1,222,750 $287,318 $1,854,104
Property insurance.............. 45,919 258,508 6,542 310,969
-------- ---------- -------- ----------
Total real estate and personal
property taxes and
insurance.................... $389,955 $1,481,258 $293,860 $2,165,073
======== ========== ======== ==========
Ground lease expense............ $334,024 $ 547,193 $ 881,217
======== ========== ==========
<CAPTION>
TWELVE MONTHS ENDED MARCH 31, 1996
----------------------------------------------
HISTORICAL
-----------------------
AGH AGH
PREDECESSOR ACQUISITION ESTIMATED
HOTELS HOTELS ADJUSTMENTS COMBINED
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Real estate and personal
property taxes................. $389,919 $1,201,152 $263,033 $1,854,104
Property insurance.............. 48,981 255,031 6,957 310,969
-------- ---------- -------- ----------
Total real estate and personal
property taxes and
insurance.................... $438,900 $1,456,183 $269,990 $2,165,073
======== ========== ======== ==========
Ground lease expense............ $327,711 $ 574,485 $ 902,196
======== ========== ==========
</TABLE>
F-4
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------------------
HISTORICAL
-----------------------
AGH AGH
PREDECESSOR ACQUISITION ESTIMATED
HOTELS HOTELS ADJUSTMENTS COMBINED
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Real estate and personal property
taxes........................... $101,461 $315,363 $46,702 $ 463,526
Property insurance............... 12,677 57,594 7,471 77,742
-------- -------- ------- ---------
Total real estate and personal
property taxes and insurance.. $114,138 $372,957 $54,173 $ 541,268
======== ======== ======= =========
Ground lease expense............. $ 43,812 $149,344 $ 193,156
======== ======== =========
</TABLE>
(F) Represents general and administrative expenses to be paid by the
Operating Partnership. These amounts are based on historical general and
administrative expenses as well as probable 1996 expenses:
<TABLE>
<S> <C>
Salaries and wages............................................ $ 561,000
Professional fees............................................. 125,000
Directors' and officers' insurance............................ 90,000
Allocated rent, supplies and other............................ 103,000
Other operating expenses...................................... 251,000
----------
$1,130,000
==========
</TABLE>
(G) Represents amortization of unearned officers' compensation represented
by an aggregate of 50,000 shares of restricted Common Stock issuable to
executive officers which shares vest 10% at the date of grant (5,000 shares at
$20.00 per share).
(H) Represents interest expense on the following debt:
(1) Debt assumed by the Operating Partnership of approximately $14.2
million in connection with the acquisition of the Holiday Inn Dallas DFW
Airport South hotel. Principal payments are based on a 20 year amortization
and interest is due monthly. The debt matures on February 1, 2011 and bears
interest at a fixed rate of 8.75%.
(2) Two notes assumed by the Operating Partnership totalling
approximately $5.3 million collateralized by the Courtyard by Marriott-
Meadowlands. Principal payments on the debt instruments are based on a 25
year and 5 year amortization, respectively, and interest is due monthly.
The debt matures on December 1, 2000 and January 1, 2001, respectively, and
bears interest at fixed rates of 7.5% and 7.89%, respectively.
(I) Calculated as approximately 25.8% of income before minority interest.
F-5
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
The following Pro Forma Consolidated Balance Sheet is presented as if the
consummation of the Formation Transactions and the application of the net
proceeds of the Offering as set forth under the caption "Use of Proceeds" had
occurred on March 31, 1996. The pro forma adjustments have been marked with a
number to identify the correlating debits and credits. Such pro forma
information is based in part upon the combined balance sheets of the AGH
Predecessor Hotels and the AGH Acquisition Hotels. Such information should be
read in conjunction with the Financial Statements included in this Prospectus.
In management's opinion, all adjustments necessary to reflect the effects of
the Formation Transactions and the Offering have been made.
The following Pro Forma Consolidated Balance Sheet is not necessarily
indicative of what the financial position of the Company would have been
assuming such transactions had been completed on March 31, 1996, nor does it
purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
AGH
AGH PREDECESSOR ACQUISITION PRO FORMA
HOTELS(A) HOTELS(B) ADJUSTMENTS PRO FORMA
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Investment in hotel
properties, net........ $ 22,848,146 $ 66,595,969 $ 86,762,574 (C) $176,206,689
Cash and cash
equivalents............ 1,240,272 7,625,737 (7,991,933)(D) 874,076
Accounts receivable,
net.................... 392,552 2,521,992 (2,914,544)(E)
Deferred expenses, net.. 375,912 520,636 1,880,052 (F) 2,776,600
Other assets............ 258,122 1,253,608 (1,511,730)(E)
Advances to Lessee...... 315,000 (G) 315,000
------------ ------------ ------------ ------------
Total assets........ $ 25,115,004 $ 78,517,942 $ 76,539,419 $180,172,365
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt.................... $19,972,015 $54,390,363 $(55,010,139)(H) 19,352,239
Accounts payable, trade,
accrued expenses and
other liabilities...... 944,683 6,823,690 (6,018,373)(I) 1,750,000
Minority interest in
Operating Partnership.. 41,040,093 (J) 41,040,093
------------ ------------ ------------ ------------
Total liabilities... 20,916,698 61,214,053 (19,988,419) 62,142,332
------------ ------------ ------------ ------------
Stockholders' equity:
Preferred stock.......
Common stock.......... 72,055 (K) 72,055
Additional paid-in
capital.............. 118,957,978 (L) 118,957,978
Unearned officers'
compensation......... (1,000,000)(M) (1,000,000)
Retained earnings..... 4,198,306 17,303,889 (21,502,195)(N)
------------ ------------ ------------ ------------
Total stockholders'
equity............. 4,198,306 17,303,889 96,527,838 118,030,033
------------ ------------ ------------ ------------
Total liabilities
and stockholders'
equity............. $ 25,115,004 $ 78,517,942 $ 76,539,419 $180,172,365
============ ============ ============ ============
</TABLE>
See Notes to Pro Forma Consolidated Balance Sheet.
F-6
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Reflects the AGH Predecessor Hotels' historical combined balance sheet
at March 31, 1996.
(B) Reflects the AGH Acquisition Hotels' historical combined balance sheet
at March 31, 1996.
(C) Increase represents the following:
Purchase of the following AGH Acquisition Hotels, including estimated
closing costs (the purchase of the AGH Acquisition Hotels included only the
land, building and improvements and furniture, fixtures and equipment):
<TABLE>
<S> <C>
Purchase of AGH Acquisition Hotels, including closing
costs:
Holiday Inn Dallas DFW Airport South.................. $ 25,256,000
Holiday Inn Park Center Plaza ........................ 12,970,200
Fred Harvey Albuquerque Airport Hotel................. 9,490,300
Holiday Inn Select-Madison............................ 21,581,300
Holiday Inn New Orleans International Airport......... 26,033,200
Holiday Inn Mission Valley............................ 19,632,500
Le Baron Airport Hotel................................ 19,737,500
Hilton Hotel-Toledo................................... 10,308,082
Days Inn Ocean City................................... 7,636,800
Sale of certain furniture, fixtures and equipment to
Lessee............................................... (315,000)
Purchase of furniture, fixtures and equipment
previously under operating leases.................... 240,000
Remove historical cost basis of the AGH Acquisition
Hotels................................................. (66,595,969)
------------
Total increase in the AGH Acquisition Hotels.......... 85,974,913
------------
Purchase of AGH Predecessor Hotels, including estimated
closing costs:
Basis increase resulting from the cash purchase of an
interest in the Hotel Maison de Ville................ 287,061
Real estate closing and other costs related to the
acquisition of the AGH Predecessor Hotels............ 500,600
------------
Total increase in the AGH Predecessor Hotels.......... 787,661
------------
Total pro forma adjustment............................ $ 86,762,574(1)
============
</TABLE>
The acquisitions of the AGH Acquisition Hotels have been accounted for as
"purchases." The interests of the Primary Contributors and other minority
partners receiving OP Units in exchange for their interests in the AGH
Predecessor Hotels have been recorded at their historical cost basis. The
Primary Contributors received 1,161,401 OP Units for their interests in the
AGH Predecessor Hotels and certain other assets. The minority partners
received 1,349,705 OP Units and $287,061 cash for their interests in the AGH
Predecessor Hotels. The cash paid to the minority partners of $287,061 has
been accounted for as a "purchase", resulting in an increase in the Company's
basis in the hotel.
The estimated cost of approximately $24.6 million in capital improvements
related to the anticipated improvements and renovations of certain of the
Initial Hotels which will be made over the next twelve months is not included
in the Pro Forma Consolidated Balance Sheet. The capital improvements are
anticipated to be allocated to furniture, fixtures and equipment (30%) and
buildings and improvements (70%), which will be depreciated over 5 years and
39 years, respectively. This depreciation is not included in the Statements of
Estimated Revenues Less Expenses.
F-7
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
(D) Net decrease represents the following:
<TABLE>
<CAPTION>
AGH PREDECESSOR AGH ACQUISITION
HOTELS HOTELS OFFERING TOTAL
--------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Gross proceeds of the
Offering............... $140,000,000 $140,000,000 (2)
Underwriters' discount.. (9,800,000) (9,800,000)(2)
Other expected expenses
of the Offering........ (2,200,000) (2,200,000)(2)
Payments to acquire the
Initial Hotels
including closing
costs.................. $ (787,661) $ (90,268,008) (91,055,669)(1)
Payment to purchase
furniture, fixtures and
equipment previously
under operating
leases................. (240,000) (240,000)(1)
Payment of AGH
Predecessor Hotels'
historical debt........ (14,825,570) (14,825,570)(3)
Payment of prepayment
penalties on debt of
the AGH Predecessor
Hotels................. (892,022) (892,022)(4)
Payment of AGH
Acquisition Hotels debt
assumed................ (19,086,063) (19,086,063)(1)
Payment of anticipated
loan costs related to
the Line of Credit..... (435,000) (435,000)(5)
Payment of franchise
transfer costs......... (591,600) (591,600)(6)
Cash and cash
equivalents not being
purchased.............. (1,240,272) (7,625,737) (8,866,009)(7)
--------------- --------------- ------------ ------------
$ (17,745,525) $ (117,219,808) $126,973,400 $ (7,991,933)
=============== =============== ============ ============
</TABLE>
(E) Decrease reflects the following assets which are not being purchased by
the Company:
<TABLE>
<CAPTION>
AGH AGH
PREDECESSOR ACQUISITION
HOTELS HOTELS TOTAL
----------- ----------- ------------
<S> <C> <C> <C>
Accounts receivable, net............. $(392,552) $(2,521,992) $ (2,914,544)
Other assets......................... (258,122) (1,253,608) (1,511,730)
--------- ----------- ------------
$(650,674) $(3,775,600) $ (4,426,274)(7)
========= =========== ============
</TABLE>
(F) Net increase represents the following:
<TABLE>
<S> <C>
Deferred loan costs related to debt of the AGH
Predecessor Hotels which will be repaid with a portion
of the proceeds of the Offering......................... $ (375,912)(7)
Deferred loan costs related to debt of the AGH
Acquisition Hotels which will not be assumed by the
Company................................................. (520,636)(7)
Deferred loan costs related to the Line of Credit........ 2,185,000 (5)
Franchise transfer costs................................. 591,600 (6)
----------
$1,880,052
==========
</TABLE>
Deferred loan costs related to the Line of Credit consist of attorney fees,
appraisal costs, surveys, etc. to be paid from the proceeds of the Offering
($435,000), fees payable upon initial borrowings under the Line of Credit
($1,250,000), an unused line fee payable at the end of the year ($250,000) and
a fee payable at the date the Company exercises its option to extend the term
of the Line of Credit ($250,000).
F-8
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
(G) Increase represents advances for the purchase of furniture, fixtures and
equipment from the Company after the purchase of the AGH Acquisition Hotels
($315,000).(1) The advances bear interest at 10% and are due over five years.
(H) Decrease reflects the following:
<TABLE>
<S> <C>
Payment of AGH Predecessor Hotels' debt................ $(14,825,570)(3)
Payment of AGH Acquisition Hotels' debt................ (19,086,063)(1)
Debt of the AGH Acquisition Hotels not assumed......... (21,098,506)(1)
------------
$(55,010,139)
============
(I) Net increase reflects the following:
Accounts payable, trade, accrued expenses and other
liabilities which are not being purchased by the
Company:
AGH Predecessor Hotels............................... $ (944,683)(7)
AGH Acquisition Hotels............................... (6,823,690)(7)
Line of credit fees payable............................ 1,750,000 (5)
------------
$ (6,018,373)
============
(J) Represents the recognition of minority interest in the Operating
Partnership that will not be owned by the Company (25.8%).(1)
(K) Represents the $0.01 par value of the Common Stock.(8)
(L) Represents the following proposed transactions:
Gross proceeds of the Offering......................... $140,000,000 (2)
Underwriters' discount and other estimated expenses of
the Offering.......................................... (12,000,000)(2)
Par value of Common Stock.............................. (72,055)(8)
Prepayment penalties on debt of the AGH Predecessor
Hotels ............................................... (892,022)(4)
Unearned officers' compensation........................ 1,000,000 (9)
Reclassification of retained earnings of the AGH
Predecessor Hotels to additional paid-in capital...... 4,198,306 (1)
Net assets of the AGH Predecessor Hotels which are not
being purchased by the Company........................ (1,322,175)(7)
Net assets of the AGH Acquisition Hotels which are not
being purchased by the Company........................ (5,098,283)(7)
Minority interest in Operating Partnership............. (6,855,793)(1)
------------
$118,957,978
============
</TABLE>
(M) Represents the value of common shares issued to officers ($1,000,000)
which vest 10% in the first year.(9)
(N) Represents reclassification of retained earnings of the AGH Predecessor
Hotels to Common Stock and the elimination of historical retained earnings of
the AGH Acquisition Hotels.(1)
F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited the accompanying balance sheet of American General
Hospitality Corporation as of April 12, 1996 (date of inception). This balance
sheet is the responsibility of the Company's management. Our responsibility is
to express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of American General Hospitality
Corporation as of April 12, 1996 in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
April 12, 1996
F-10
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
CONDENSED BALANCE SHEET
APRIL 12, 1996
ASSETS
<TABLE>
<S> <C>
Cash.................................................................... $100
----
$100
====
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
Commitments and contingencies
Preferred stock, $.01 par value per share, 20,000,000 shares autho-
rized, no shares issued or outstanding...............................
Common stock, $.01 par value per share, 100,000,000 shares authorized,
100 shares issued and outstanding.................................... $100
====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-11
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET
1. ORGANIZATION AND PROPOSED INITIAL PUBLIC OFFERING
Organization--American General Hospitality Corporation (the "Company") was
formed on April 12, 1996 as a Maryland corporation which intends to qualify as
a real estate investment trust ("REIT"). The Company has been formed to
acquire equity interests in 13 hotels (the "Initial Hotels"). Four of the
Initial Hotels (the "AGH Predecessor Hotels") will be acquired primarily from
limited partnerships controlled by the shareholders of American General
Hospitality, Inc. (the "AGHI Affiliates"). The remaining nine Initial Hotels
(the "AGH Acquisition Hotels") will be acquired primarily from parties
unaffiliated with the Company through contracts with the sellers acquired from
an AGHI affiliate.
Upon completion of the proposed initial public offering described below, the
Company will acquire an approximate 74.2% equity interest in American General
Hospitality Operating Partnership, L.P. (the "Operating Partnership"). A
wholly owned subsidiary of the Company will be the sole general partner of the
Operating Partnership. The Operating Partnership will own the Initial Hotels
and will lease them to AGH Leasing, L.P. (the "Lessee"), which is owned, in
part, by certain officers of the Company, under operating leases
("Participating Leases") which provide for rent based on the revenues of the
Initial Hotels. The Lessee has entered into management agreements pursuant to
which all of the Initial Hotels will be managed by American General
Hospitality, Inc. ("AGHI").
Proposed Initial Public Offering--The Company has filed a registration
statement with the Securities and Exchange Commission pursuant to which the
Company expects to offer 7,000,000 shares of its common stock to the public
(the "Offering"). The Company expects to qualify as a REIT under sections 856-
860 of the Internal Revenue Code. Upon consummation of the Offering, the
Company will contribute all of the net proceeds of the Offering to AGH GP,
Inc. ("General Partner") and AGH LP, Inc. ("Limited Partner"), which, in turn,
will contribute such proceeds to the Operating Partnership in exchange for an
approximate 74.2% equity interest in the Operating Partnership. The General
Partner, a wholly owned subsidiary of the Company, will own a 1.0% interest in
the Operating Partnership. The Limited Partner, also a wholly owned subsidiary
of the Company, will initially own an approximately 73.2% limited partnership
interest in the Operating Partnership.
The Company will acquire directly or indirectly a 100% interest in each of
the Initial Hotels for an aggregate of 2,511,106 of units of limited
partnership interest ("OP Units") (1,161,401 OP Units to the Primary
Contributors, which consist of the principals of AGHI and the Lessee and
certain of their respective affiliates, and 1,349,705 OP Units to parties
unaffiliated with the Primary Contributors); 155,518 shares of Common Stock to
the AGHI Employee Retirement and Savings Plan (the "Plan"), which the
Company's executive officers own less than a 5.0% beneficial interest in the
Plan); and approximately $91.1 million in cash to parties unaffiliated with
the Primary Contributors, which will be subject to approximately $53.5 million
in mortgage indebtedness of which approximately $33.9 million will be repaid
from the net proceeds of the Offering). The Operating Partnership will
reimburse AGHI for approximately $900,000 for direct out-of-pocket expenses
incurred in connection with the acquisition of the Initial Hotels, including
legal, environmental and engineering expenses. In addition, the Operating
Partnership will sell certain personal property relating to certain of the
Initial Hotels to the Lessee in exchange for one or more five-year recourse
promissory notes in the aggregate principal amount of $315,000 that will be
secured by such personal property.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Distributions--The Company intends to make regular quarterly distributions
to stockholders which are dependent upon receipt of distributions from the
Operating Partnership.
3. DESCRIPTION OF CAPITAL STOCK
The total number of shares of all classes of stock that the Company has
authority to issue consists of 100,000,000 shares of Common Stock, $.01 par
value per share, and 20,000,000 shares of Preferred Stock, $.01
F-12
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
par value per share, undesignated as to class, series or terms. No shares of
Preferred Stock are outstanding or will be outstanding immediately after
consummation of the Offering.
Common Stock--The holders of Common Stock are entitled to one vote per share
on all matters voted on by shareholders, including elections of directors.
Subject to any preferential rights of any outstanding series of Preferred
Stock, the holders of Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors from funds available
therefrom, and upon liquidation are entitled to receive a pro rata share of all
assets of the Company available for distribution to such holders.
Preferred Stock--The Board of Directors is authorized to provide for the
issuance of shares of Preferred Stock in one or more series, to establish the
number of shares in each series and to fix the designation, powers, preferences
and rights of each such series and the qualifications, limitations or
restrictions thereof. Because the Board of Directors has the power to establish
the preferences and rights of each class or series of Preferred Stock, the
Board of Directors may afford the holders of any series or class of Preferred
Stock preferences, powers and rights, voting or otherwise, senior to the rights
of holders of Common Stock. The issuance of Preferred Stock could have the
effect of delaying or preventing a change in control of the Company. The
Company has no present intention to issue shares of Preferred Stock.
4. EMPLOYEE BENEFITS
The Board of Directors will adopt, subject to stockholder approval prior to
the Offering, the American General Hospitality Corporation 1996 Incentive Plan
(the "1996 Plan") and the American General Hospitality Corporation Non-Employee
Directors' Incentive Plan (the "Directors' Plan").
The 1996 Plan--Each employee of the Company or of an affiliate of the Company
(other than employees of the Lessee and AGHI who are not also employees of the
Company), or any other person whose efforts contribute to the Company's
performance is eligible to participate in the 1996 Plan. The Compensation
Committee of the Board of Directors may grant stock options, stock awards,
incentive awards or performance shares to participants. Under the 1996 Plan the
total number of shares available for grant is 900,000 shares of Common Stock of
which not more than 50,000 shares may be granted as stock awards.
The Directors' Plan--A maximum of 100,000 shares of Common Stock may be
issued under the Directors' Plan. The Directors' Plan provides that each
director will be awarded nonqualified options to purchase 10,000 shares of
Common Stock at the fair market value at the date of grant.
Following consummation of the Offering, the Company intends to grant to the
Company's officers and directors options to acquire an aggregate 400,000 shares
of Common Stock at the Offering Price and stock awards representing 50,000
shares of restricted Common Stock.
Employment Agreements--The Company will enter into an employment agreement
with Mr. Steven D. Jorns, the Company's Chairman of the Board, President and
Chief Executive Officer for a term of five years at an initial annual base
compensation of $100,000, subject to any increases in base compensation
approved by the Compensation Committee. In addition, the Company will enter
into employment agreements with three other executive officers each for a term
of five years at an aggregate annual base compensation of $230,000.
F-13
<PAGE>
AGH LEASING, L.P.
PRO FORMA BALANCE SHEET
MAY 29, 1996
<TABLE>
<S> <C>
ASSETS
Furniture, fixtures and equipment.................................. $315,000(A)
Cash and cash equivalents.......................................... 500,000(B)
--------
Total assets................................................... $815,000
========
LIABILITIES AND EQUITY
Advances from Operating Partnership................................ $315,000(A)
Equity............................................................. 500,000(B)
--------
Total liabilities and equity................................... $815,000
========
</TABLE>
- --------
(A) Upon consummation of the Offering, the Lessee will purchase $315,000 of
furniture, fixtures, and equipment from the Company in exchange for a note
payable of $315,000 which will be due over five years and will bear
interest at 10% per annum.
(B) Reflects the cash contribution of $500,000 from the partners upon
consummation of the Offering.
F-14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
AGH Leasing, L.P.
We have audited the accompanying balance sheet of AGH Leasing, L.P. (The
"Partnership") as of May 29, 1996 (date of inception). This balance sheet is
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of AGH Leasing, L.P. as of May 29,
1996 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
May 29, 1996
F-15
<PAGE>
AGH LEASING, L.P.
BALANCE SHEET
MAY 29, 1996
<TABLE>
<S> <C>
ASSETS
Cash.................................................................... $100
----
$100
====
LIABILITIES AND EQUITY
Commitments and contingencies...........................................
Equity.................................................................. $100
====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-16
<PAGE>
AGH LEASING, L.P.
NOTES TO BALANCE SHEET
1. ORGANIZATION AND PROPOSED INITIAL PUBLIC OFFERING
Organization--AGH Leasing, L.P. (the "Lessee"), was formed on May 29, 1996
as a Delaware limited partnership. Upon completion of the proposed initial
public offering described below, American General Hospitality Corporation (the
"Company") will acquire an approximate 74.2% equity interest in American
General Hospitality Operating Partnership, L.P. (the "Operating Partnership").
In order for the Company to qualify as a real estate investment trust
("REIT"), neither the Company nor the Operating Partnership can operate
hotels; therefore, the Operating Partnership, which will own 13 hotels (the
"Initial Hotels"), and will lease the Initial Hotels to the Lessee under
operating leases ("Participating Leases") which provide for rent based on the
revenues of the Initial Hotels.
The financial statements of the Lessee will include the results of
operations of the hotels leased from the Operating Partnership due to the
Lessee's control over the operations of the hotels during the 12 year term of
the Participating Leases. The Lessee has complete discretion in establishing
room rates and all rates for hotel goods and services. Likewise, all operating
expenses of the hotels are under the control of the Lessee. The Lessee has the
right to manage or to enter into management contracts with other parties to
manage the hotels. If the Lessee elects to enter into management contracts
with parties other than American General Hospitality, Inc. ("AGHI"), the
Lessee must obtain the prior written consent of the Operating Partnership,
which consent may not be unreasonably withheld. The Lessee, with the written
consent of the Operating Partnership, has entered into management agreements
pursuant to which all of the Initial Hotels will be managed by AGHI. The
Lessee is owned in part by certain executive officers of the Company and AGHI.
Proposed Initial Public Offering--The Company, which intends to qualify as a
REIT, has filed a registration statement with the Securities and Exchange
Commission pursuant to which the Company expects to offer 7,000,000 shares of
its common stock to the public (the "Offering"). The Company expects to
qualify as a REIT under sections 856-860 of the Internal Revenue Code. Upon
consummation of the Offering, the Company will contribute all of the net
proceeds of the Offering to the Operating Partnership in exchange for an
approximate 74.2% equity interest in the Operating Partnership. The Operating
Partnership will use such funds to purchase certain of the Initial Hotels,
repay debt and other obligations of the Initial Hotels, and for working
capital.
2. EQUITY
Each partner contributed a pro-rata cash contribution based on his
respective partnership interest.
The partners of the Lessee have agreed upon consummation of the Offering to
(i) initially capitalize the Lessee with $500,000 in cash and (ii) pledge
275,000 units in the Operating Partnership ("OP Units") having a value of
approximately $5.5 million based on the Offering Price to the Operating
Partnership to collateralize the Lessee's obligations under the Participating
Leases.
Until the Lessee's net worth equals the greater of (i) $6 million and (ii)
17.5% of actual rent payments from hotels leased to the Lessee during the
preceding calender year, the Lessee will not pay distributions to its partners
or make any other distributions to affiliates of the Lessee other than
pursuant to the management agreements with AGHI and for limited amounts
related to Lessee overhead (except for the purpose of permitting its partners
to pay taxes on the income attributable to them from the Lessee while it is a
limited partnership and except for distributions relating to interest or
dividends received by the Lessee from cash or securities held by it) and will
be required during this period, subject to compliance with applicable
securities laws, to purchase annually Common Stock on the open market or, if
any such purchase would violate the ownership limitations in the Company's
Charter, at the option of the Company, OP Units from the Operating
Partnership, in an amount equal to the Lessee's cash flow attributable to the
Participating Leases for the preceding fiscal year (after establishing a
reserve for partner tax distributions).
F-17
<PAGE>
INITIAL HOTELS AND LESSEE
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995, THE TWELVE MONTHS ENDED MARCH 31, 1996
ANDTHE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
The following unaudited Pro Forma Combined Statements of Operations are
presented as if the consummation of the Formation Transactions and the
application of the net proceeds of the Offering as set forth under the caption
"Use of Proceeds" had occurred on January 1, 1995, and all of the Initial
Hotels had been leased by the Lessee pursuant to the Participating Leases.
Such pro forma information is based in part upon the combined statements of
operations of the AGH Predecessor Hotels (unaudited financial information for
the Holiday Inn Dallas DFW Airport West hotel for the period prior to its
acquisition in June 1995 was obtained from the prior owner) and AGH
Acquisition Hotels. Such information should be read in conjunction with the
Financial Statements included in this Prospectus. In management's opinion, all
adjustments necessary to reflect the effects of the Formation Transactions and
the Offering have been made.
The following unaudited Pro Forma Combined Statements of Operations are not
necessarily indicative of what results of operations of the Initial Hotels and
Lessee would have been assuming such transactions had been completed on
January 1, 1995, nor does it purport to represent the results of operations
for future periods.
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
AGH PREDECESSOR HOTELS AGH ACQUISITION
---------------------------------------------------- ----------------------------------------
PRIOR TO PRO FORMA PRO FORMA PRO FORMA
HISTORICAL ACQUISITION ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA COMBINED
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
(A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room revenue...... $ 9,020,479 $ 1,532,369 $ 16,391 (B) $10,569,239 $44,736,447 $ 24,485 (B) $44,760,932 $55,330,171
Food and beverage
revenue.......... 1,293,238 420,569 1,713,807 16,424,522 53,175 (B) 16,477,697 18,191,504
Other revenue..... 568,415 92,884 81,592 (B) 742,891 3,579,485 41,056 (B) 3,620,541 4,363,432
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
Total revenue... 10,882,132 2,045,822 97,983 13,025,937 64,740,454 118,716 64,859,170 77,885,107
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
Expenses:
Property
operating costs
and expenses..... 3,928,801 743,827 (22,614)(C) 4,650,014 25,325,087 (350,847)(C) 24,974,240 29,624,254
General and
administrative... 1,270,163 157,452 (8,675)(C) 1,418,940 5,780,741 (179,593)(C) 5,601,148 7,020,088
Advertising and
promotion........ 663,285 97,924 761,209 3,874,160 (10,283)(D) 3,863,877 4,625,086
Repairs and
maintenance...... 478,552 104,843 583,395 2,719,954 (7,182)(D) 2,712,772 3,296,167
Utilities......... 509,142 91,129 600,271 2,945,878 2,945,878 3,546,149
Management fees... 383,607 61,199 7,709 (E) 452,515 1,285,385 615,018 (E) 1,900,403 2,352,918
Franchise costs... 332,274 83,718 415,992 1,701,346 1,701,346 2,117,338
Depreciation...... 2,409,211 126,676 (2,535,887)(F) 5,498,602 (5,435,602)(F) 63,000 63,000
Amortization...... 70,843 (70,843)(G) 152,588 (152,588)(G)
Real estate and
personal
property taxes,
and property
insurance........ 389,955 37,406 (427,361)(H) 1,481,258 (1,481,258)(H)
Interest
expense.......... 1,572,244 (1,572,244)(I) 4,734,958 (4,703,458) 31,500 31,500
Other expense..... 364,238 (360,011)(J) 4,227 897,414 (843,557)(J) 53,857 58,084
Participating
Lease expenses... 4,195,780 (K) 4,195,780 20,615,888 (K) 20,615,888 24,811,668
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
Total expenses.. 12,372,315 1,504,174 (794,146) 13,082,343 56,397,371 8,066,538 64,463,909 77,546,252
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
Revenues over
(under)
expenses....... $(1,490,183) $ 541,648 $ 892,129 $ (56,406) $ 8,343,083 $ (7,947,822) $ 395,261 $ 338,855
=========== =========== =========== =========== =========== ============ =========== ===========
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
F-18
<PAGE>
INITIAL HOTELS AND LESSEE
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
AGH AGH
PREDECESSOR PRIOR TO PRO FORMA ACQUISITION PRO FORMA PRO FORMA
HOTELS ACQUISITION ADJUSTMENTS PRO FORMA HOTELS ADJUSTMENTS PRO FORMA COMBINED
----------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
(A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room revenue...... $10,019,733 $692,473 $ 24,678 (B) $10,736,884 $46,065,824 $ 27,320 (B) $46,093,144 $56,830,028
Food and beverage
revenue.......... 1,587,236 166,659 1,753,895 16,522,311 59,376 (B) 16,581,687 18,335,582
Other income...... 639,498 37,778 81,592 (B) 758,868 3,699,579 41,374 (B) 3,740,953 4,499,821
----------- -------- ----------- ----------- ----------- ------------ ----------- -----------
Total revenue... 12,246,467 896,910 106,270 13,249,647 66,287,714 128,070 66,415,784 79,665,431
----------- -------- ----------- ----------- ----------- ------------ ----------- -----------
Expenses:
Property
operating costs
and expenses..... 4,454,876 315,602 (29,068)(C) 4,741,410 25,738,591 (354,125)(C) 25,384,466 30,125,876
General and
administrative... 1,409,498 72,488 (9,555)(C) 1,472,431 5,864,772 (178,685)(C) 5,686,087 7,158,518
Advertising and
promotion........ 719,942 41,034 760,976 3,954,203 (10,283)(D) 3,943,920 4,704,896
Repairs and
maintenance...... 518,315 40,656 558,971 2,760,199 (7,182)(D) 2,753,017 3,311,988
Utilities......... 588,889 26,410 615,299 2,920,854 2,920,854 3,536,153
Management fees... 430,939 26,744 (61,287) (E) 396,396 1,308,331 358,477 (E) 1,666,808 2,063,204
Franchise costs... 382,827 37,524 420,351 1,739,901 1,739,901 2,160,252
Depreciation...... 1,661,334 50,670 (1,712,004)(F) 4,992,005 (4,929,005)(F) 63,000 63,000
Amortization...... 82,238 (82,238)(G) 123,198 (123,198)(G)
Real estate and
personal
property taxes,
and property
insurance........ 438,900 7,123 (446,023)(H) 1,456,183 (1,456,183)(H)
Interest
expense.......... 1,773,838 (1,773,838)(I) 4,827,694 (4,796,194)(I) 31,500 31,500
Other expense..... 354,524 (346,517)(J) 8,007 918,472 (881,706) 36,766 44,773
Participating
Lease expenses... 4,321,394 (K) 4,321,394 21,580,898 (K) 21,580,898 25,902,292
----------- -------- ----------- ----------- ----------- ------------ ----------- -----------
Total expenses.. 12,816,120 618,251 (139,136) 13,295,235 56,604,403 9,202,814 65,807,217 79,102,452
----------- -------- ----------- ----------- ----------- ------------ ----------- -----------
Revenues over
(under)
expenses....... $ (569,653) $278,659 $ 245,406 $ (45,588) $ 9,683,311 $ (9,074,744) $ 608,567 $ 562,979
=========== ======== =========== =========== =========== ============ =========== ===========
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
F-19
<PAGE>
INITIAL HOTELS AND LESSEE
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
AGH AGH
PREDECESSOR PRO FORMA ACQUISITION PRO FORMA PRO FORMA
HOTELS ADJUSTMENTS PRO FORMA HOTELS ADJUSTMENTS PRO FORMA COMBINED
----------- ----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room revenue........... $2,624,614 $ 8,287 (B) $2,632,901 $11,561,801 $ 7,204 (B) $11,569,005 $14,201,906
Food and beverage
revenue............... 509,331 509,331 4,173,807 49,185 (B) 4,222,992 4,732,323
Other income........... 173,450 (B) 173,450 989,702 (B) 989,702 1,163,152
---------- --------- ---------- ----------- ----------- ----------- -----------
Total revenue........ 3,307,395 8,287 3,315,682 16,725,310 56,389 16,781,699 20,097,381
---------- --------- ---------- ----------- ----------- ----------- -----------
Expenses:
Property operating
costs and expenses.... 1,201,571 (7,313)(C) 1,194,258 6,380,431 (90,513)(C) 6,289,918 7,484,176
General and
administrative........ 371,977 (2,495)(C) 369,482 1,421,240 (45,252)(C) 1,375,988 1,745,470
Advertising and
promotion............. 178,207 178,207 1,146,405 (2,396)(D) 1,144,009 1,322,216
Repairs and
maintenance........... 130,247 130,247 712,728 (1,795)(D) 710,933 841,180
Utilities.............. 155,844 155,844 653,974 653,974 809,818
Management fees........ 115,115 (16,091) (E) 99,024 332,666 99,547 (E) 432,213 531,237
Franchise costs........ 100,695 100,695 315,052 315,052 415,747
Depreciation........... 288,688 (288,688)(F) 1,222,556 (1,206,806)(F) 15,750 15,750
Amortization........... 16,248 (16,248)(G) 39,528 (39,528)(G)
Real estate and
personal property
taxes, and property
insurance............. 114,138 (114,138)(H) 372,957 (372,957)(H)
Interest expense....... 457,146 (457,146)(I) 1,248,618 (1,240,743)(I) 7,875 7,875
Other expense.......... 48,920 (44,840)(J) 4.080 262,596 (248,695)(J) 13,901 17,981
Participating Lease
expenses.............. 1,047,441 (K) 1,047,441 5,480,467 (K) 5,480,467 6,527,908
---------- --------- ---------- ----------- ----------- ----------- -----------
Total expenses....... 3,178,796 100,482 3,279,278 14,108,751 2,331,329 16,440,080 19,719,358
---------- --------- ---------- ----------- ----------- ----------- -----------
Revenues over (under)
expenses............ $ 128,599 $ (92,195) $ 36,404 $ 2,616,559 $(2,274,940) $ 341,619 $ 378,023
========== ========= ========== =========== =========== =========== ===========
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
F-20
<PAGE>
INITIAL HOTELS AND LESSEE
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The pro forma combined statements of operations of the Lessee include the
results of operations of the hotels leased from the Operating Partnership due
to the Lessee's control over the operations of the hotels during the twelve-
year term of the Participating Leases. The Lessee has complete discretion in
establishing room rates and all rates for hotel goods and services. Likewise,
all operating expenses of the hotels are under the control of the Lessee. The
Lessee has the right to manage or to enter into management contracts with
other parties to manage the hotels. If the Lessee elects to enter into
management contracts with parties other than American General Hospitality,
Inc. ("AGHI"), the Lessee must obtain the prior written consent of the
Operating Partnership, which consent may not be unreasonably withheld. The
Lessee, with the written consent of the Company, has entered into management
agreements pursuant to which all of the Initial Hotels will be managed by
AGHI.
(A) Represents the historical results of operations of the Holiday Inn
Dallas DFW Airport West prior to acquisition by the AGH Predecessor Hotels in
June 1995.
(B) Represents adjustments for certain room and food and beverage revenues
that were treated as complimentary in the historical statement of operations.
Also includes adjustments to telephone commissions to conform the Initials
Hotels' commission structure to the structure under new contracts AGHI will
have with its telecommunications providers.
(C) Reflects the elimination of expenses which are not expected to be
incurred by the Lessee. The expenses consist primarily of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Property Operating Costs and
Expenses:
Certain changes in employee
benefits.................... $(155,002) $(158,332) $(41,090)
Operating lease expense...... (218,459) (224,861) (56,736)
--------- --------- --------
$(373,461) $(383,193) $(97,826)
========= ========= ========
General and Administrative
expenses:
Certain changes in employee
benefits.................... $ (24,431) $ (23,523) $ (6,462)
Operating lease expense...... (19,837) (20,717) (5,285)
Owner related expenses....... (144,000) (144,000) (36,000)
--------- --------- --------
$(188,268) $(188,240) $(47,747)
========= ========= ========
</TABLE>
The pro forma adjustment for certain changes in employee benefits represents
changes in employee benefits at two hotels to conform to the benefits provided
by AGHI. The pro forma adjustment to operating lease expense results from the
pay-off of certain operating leases of the hotels at closing. The pro forma
adjustment for owner related expenses represents the elimination of various
charges from the owners at one of the hotels, which related to personal
expenditures.
(D) Represents changes in employee benefits at one hotel to conform to the
benefits provided by AGHI.
(E) Represents the elimination of historical management fees, and the
addition of new management fees to be incurred under the Management
Agreements. The new management fees consist of a base fee of 1.5% of total
revenue and an incentive fee of up to 2.0% of total revenue. The incentive
fee, if applicable, is equal to 0.025% of annual total revenue for each 0.1%
increase in annual total revenues over the total revenues for the preceding
twelve month period up to the maximum incentive fee.
(F) Reflects the elimination of historical depreciation which is to be
recorded by the Operating Partnership and the addition of the depreciation
related to the $315,000 of furniture, fixtures and equipment purchased by the
Lessee from the Operating Partnership. The furniture, fixtures and equipment
will be depreciated over an estimated useful life of 5 years.
(G) Net decrease reflects the elimination of deferred loan costs
amortization.
(H) Reflects the elimination of real estate and personal property taxes, and
property insurance which is to be paid by the Operating Partnership.
F-21
<PAGE>
INITIAL HOTELS AND LESSEE
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(I) Reflects elimination of historical debt interest expense. Any future
interest expense related to debt will be paid by the Operating Partnership.
The addition to interest expense relates to an advance made by the Operating
Partnership to the Lessee for the FF&E purchase. The advance of $315,000 bears
interest at 10% and is due over five years.
(J) Represents ground lease expense to be paid by the Operating Partnership
and the elimination of operating lease expense resulting from the pay-off of
certain operating leases of the hotels at closing.
(K) Represents lease payments to the Operating Partnership from the Lessee
pursuant to the Participating Leases calculated on a pro forma basis by
applying the rent provisions of the Participating Leases to the pro forma
revenues of the Initial Hotels. The departmental revenue thresholds in certain
of the Participating Lease formulas adjust in the future beginning January 1,
1997. See "The Initial Hotels--the Participating Leases."
The Participating Lease expense is comprised of the following:
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Base Rent..................... $15,329,000 $15,329,000 $3,848,000
Excess of Participating Rent
over Base Rent............... 9,419,668 10,510,292 2,679,908
----------- ----------- ----------
Total Participating Lease
expense.................... $24,811,668 $25,902,292 $6,527,908
=========== =========== ==========
</TABLE>
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited the accompanying combined balance sheets of the AGH
Predecessor Hotels (described in Note 1) as of December 30, 1994 and December
29, 1995 and the related combined statements of operations, equity and cash
flows for the period from December 30, 1993 through December 31, 1993 and the
years ended December 30, 1994 and December 29, 1995. These combined financial
statements are the responsibility of 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 combined financial position of the AGH
Predecessor Hotels as of December 30, 1994 and December 29, 1995 and the
combined results of their operations and their cash flows for the period from
December 30, 1993 through December 31, 1993 and the years ended December 30,
1994 and December 29, 1995 in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 29, 1996
F-23
<PAGE>
AGH PREDECESSOR HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, MARCH 31,
1994 1995 1996
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investment in hotel properties, at cost:
Land.................................. $ 680,000 $ 1,496,515 $ 1,496,515
Buildings and improvements............ 11,162,793 18,427,855 19,111,550
Furniture, fixtures and equipment..... 3,028,860 3,439,484 3,474,271
----------- ----------- -----------
14,871,653 23,363,854 24,082,336
Less accumulated depreciation........... (409,067) (945,502) (1,234,190)
----------- ----------- -----------
Net investment in hotel properties...... 14,462,586 22,418,352 22,848,146
Cash and cash equivalents............... 615,066 857,608 845,258
Restricted cash......................... 130,386 441,445 395,014
Accounts receivable, net................ 109,719 281,169 392,552
Inventories............................. 41,407 55,611 59,889
Prepaid expenses........................ 44,400 166,463 108,907
Deferred expenses....................... 50,212 370,046 375,912
Other assets............................ 9,000 85,410 89,326
----------- ----------- -----------
Total assets........................ $15,462,776 $24,676,104 $25,115,004
=========== =========== ===========
LIABILITIES AND EQUITY
Debt.................................... $11,016,322 $19,277,646 $19,972,015
Accounts payable, trade................. 199,312 560,862 364,519
Accrued expenses and other liabilities.. 419,643 832,889 580,164
----------- ----------- -----------
Total liabilities................... 11,635,277 20,671,397 20,916,698
----------- ----------- -----------
Commitments and contingencies (Note 4)
Capital................................. 4,145,000 5,812,391 5,877,391
Accumulated deficit..................... (317,501) (1,807,684) (1,679,085)
----------- ----------- -----------
Total equity........................ 3,827,499 4,004,707 4,198,306
----------- ----------- -----------
Total liabilities and equity........ $15,462,776 $24,676,104 $25,115,004
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-24
<PAGE>
AGH PREDECESSOR HOTELS
COMBINED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 30, 1993 THROUGH DECEMBER 31, 1993,
THE YEARS ENDED DECEMBER 30, 1994 AND DECEMBER 29, 1995 AND
THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1993 1994 1995 1995 1996
-------- ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Room revenue.......... $ 17,941 $3,431,654 $ 9,020,479 $1,625,360 $2,624,614
Food and beverage
revenue.............. 6,158 552,697 1,293,238 215,333 509,331
Other revenue......... 1,448 223,211 568,415 102,367 173,450
-------- ---------- ------------ ---------- ----------
Total revenue....... 25,547 4,207,562 10,882,132 1,943,060 3,307,395
-------- ---------- ------------ ---------- ----------
Expenses:
Property operating
costs and expenses... 2,907 1,070,415 2,610,089 456,990 750,262
Food and beverage
costs and expenses... 1,115 503,537 1,318,712 218,506 451,309
General and
administrative....... 1,922 561,140 1,270,163 232,642 371,977
Advertising and
promotion............ 966 308,497 663,285 121,550 178,207
Repairs and
maintenance.......... 809 195,279 478,552 90,484 130,247
Utilities............. 217,496 509,142 76,097 155,844
Management fees....... 1,022 162,151 383,607 67,783 115,115
Franchise costs....... 155,206 332,274 50,142 100,695
Depreciation.......... 46,982 362,085 2,409,211 1,036,565 288,688
Amortization.......... 2,428 70,843 4,853 16,248
Real estate and
personal property
taxes, and property
insurance............ 831 177,717 389,955 65,193 114,138
Interest expense...... 430,535 1,572,244 255,552 457,146
Other expense......... 347,570 364,238 58,634 48,920
-------- ---------- ------------ ---------- ----------
Total expenses...... 56,554 4,494,056 12,372,315 2,734,991 3,178,796
-------- ---------- ------------ ---------- ----------
Net income (loss)... $(31,007) $ (286,494) $ (1,490,183) $ (791,931) $ 128,599
======== ========== ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-25
<PAGE>
AGH PREDECESSOR HOTELS
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
EQUITY
-----------
<S> <C>
Balance, December 30, 1993
Net loss........................................................ $ (31,007)
Capital contributions........................................... 1,600,000
-----------
Balance, December 31, 1993........................................ 1,568,993
Net loss........................................................ (286,494)
Capital contributions........................................... 3,086,000
Distributions................................................... (541,000)
-----------
Balance, December 30, 1994........................................ 3,827,499
Net loss........................................................ (1,490,183)
Capital contributions........................................... 1,863,118
Distributions................................................... (195,727)
-----------
Balance, December 29, 1995........................................ 4,004,707
Net income (unaudited).......................................... 128,599
Capital contributions (unaudited)............................... 65,000
-----------
Balance, March 31, 1996 (unaudited)............................... $ 4,198,306
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-26
<PAGE>
AGH PREDECESSOR HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 30, 1993 THROUGH DECEMBER 31, 1993,
THE YEARS ENDED DECEMBER 30, 1994 AND DECEMBER 29, 1995 AND THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------------------- ---------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating
activities:
Net income (loss)...... $ (31,007) $ (286,494) $ (1,490,183) $ (791,931) $ 128,599
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation.......... 46,982 362,085 2,409,211 1,036,565 288,688
Amortization.......... 2,428 70,843 4,853 16,248
Changes in assets and
liabilities:
Restricted cash..... (130,386) (311,059) (70,228) 46,431
Accounts receiv-
able............... (8,120) (101,599) (171,450) (16,135) (111,383)
Inventories......... (8,275) (33,132) (14,204) 9,294 (4,278)
Prepaid expenses.... (15,770) (28,630) (122,063) (19,770) 57,556
Other assets........ (9,000) (76,410) (93,916) (3,916)
Franchise
agreements......... (170,500)
Organization costs.. (13,139) (108,677) (10,873) (9,764)
Accounts payable,
trade.............. 440 198,872 361,550 (27,096) (196,343)
Accrued expenses and
other liabilities.. 163,366 256,277 413,246 (73,794) (252,725)
----------- ----------- ------------ ---------- ---------
Net cash provided by
(used in) operating
activities......... 147,616 217,282 790,304 (53,031) (40,887)
----------- ----------- ------------ ---------- ---------
Cash flows from
investing activities:
Improvements and
additions to hotel
properties........... (1,294,387) (2,199,840) (280,728) (718,482)
Acquisition of hotel
properties, net of
cash acquired........ (5,879,500) (7,697,767) (8,165,137)
----------- ----------- ------------ ---------- ---------
Net cash used in
investing
activities......... (5,879,500) (8,992,154) (10,364,977) (280,728) (718,482)
----------- ----------- ------------ ---------- ---------
Cash flows from
financing activities:
Proceeds from
borrowings............ 4,875,000 6,350,000 10,357,250 266,576 713,498
Principal payments on
borrowings............ (208,678) (2,095,926) (147,445) (19,129)
Payments for deferred
loan costs............ (39,500) (111,500) (25,000) (12,350)
Capital contributions.. 1,600,000 3,086,000 1,863,118 5,000 65,000
Distributions paid..... (541,000) (195,727) (35,300)
----------- ----------- ------------ ---------- ---------
Net cash provided by
financing
activities......... 6,475,000 8,646,822 9,817,215 63,831 747,019
----------- ----------- ------------ ---------- ---------
Net change in cash and
cash equivalents....... 743,116 (128,050) 242,542 (269,928) (12,350)
Cash and cash
equivalents at
beginning of periods... 743,116 615,066 615,066 857,608
----------- ----------- ------------ ---------- ---------
Cash and cash
equivalents at end of
periods................ $ 743,116 $ 615,066 $ 857,608 $ 345,138 $ 845,258
=========== =========== ============ ========== =========
Supplemental disclosures
of cash flow
information:
Cash paid during the
year for interest..... $ 430,535 $ 1,572,244 $ 255,552 $ 457,146
=========== ============ ========== =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-27
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC OFFERING
Organization--American General Hospitality Corporation (the "Company"), a
newly organized Maryland corporation which intends to qualify as a real estate
investment trust ("REIT"), has been formed to acquire equity interests in 13
hotels (the "Initial Hotels"). Four of the Initial Hotels (the "AGH
Predecessor Hotels") will be acquired primarily from limited partnerships
controlled by the shareholders of American General Hospitality, Inc. (the
"AGHI Affiliates"). The remaining nine Initial Hotels (the "AGH Acquisition
Hotels") will be acquired primarily from parties controlled by persons
unaffiliated with AGHI.
Upon completion of the proposed initial public offering described below, the
Company will acquire a 74.2% equity interest in American General Hospitality
Operating Partnership, L.P. (the "Operating Partnership"). A wholly owned
subsidiary of the Company will be the sole general partner of the Operating
Partnership. The Operating Partnership will own the Initial Hotels and will
lease them to AGH Leasing, L.P. (the "Lessee") under operating leases
("Participating Leases") which provide for rent based on the revenues of the
Initial Hotels. The Lessee has entered into management agreements pursuant to
which all of the Initial Hotels will be managed by American General
Hospitality, Inc. ("AGHI").
Basis of Presentation--The accompanying combined financial statements of the
AGH Predecessor Hotels have been presented on a combined basis due to common
ownership and management and because the entities are expected to be the
subject of a business combination with the Company upon consummation of the
proposed initial public offering.
The AGH Predecessor Hotels consist of the 165 room Courtyard by Marriott-
Meadowlands located in Secaucus, New Jersey (purchased land, buildings and
improvements, and furniture, fixtures and equipment for cash in December 1993
for approximately $5.9 million), the 23 room Hotel Maison de Ville located in
New Orleans, Louisiana (purchased land, buildings and improvements, and
furniture, fixtures and equipment for cash in August 1994 for approximately
$2.5 million), the 124 room Hampton Inn Richmond Airport located in Richmond,
Virginia (purchased land, buildings and improvements, and furniture, fixtures
and equipment for cash in December 1994 for approximately $5.1 million) and
the 243 room Holiday Inn Dallas DFW Airport West located in Bedford, Texas
(purchased land, buildings and improvements, and furniture, fixtures and
equipment for cash in June 1995 for approximately $8.0 million).
The acquisition of each AGH Predecessor Hotel has been accounted for as a
purchase and accordingly, the results of operations for each AGH Predecessor
Hotel has been included in the combined statements of operations since the
respective dates of acquisition.
Proposed Initial Public Offering--The Company expects to file a registration
statement with the Securities and Exchange Commission (the "SEC") pursuant to
which the Company expects to offer 7,000,000 shares of its common stock to the
public (the "Offering"). The Company expects to qualify as a REIT under
sections 856-860 of the Internal Revenue Code of 1986, as amended (the
"Code"). Upon consummation of the Offering, the Company will contribute all of
the net proceeds of the Offering to the Operating Partnership in exchange for
an approximate 74.2% equity interest in the Operating Partnership. The
Operating Partnership will use such funds to purchase certain of the Initial
Hotels, repay debt and other obligations of the Initial Hotels, and for
working capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Hotel Properties--Hotel properties are stated at the lower of
cost or net realizable value and are depreciated using the straight-line
method over estimated useful lives of 39 years for building and improvements
and 5 to 7 years for furniture, fixtures and equipment.
F-28
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Management of the AGHI Affiliates review the carrying value of each property
to determine if circumstances exist indicating an impairment in the carrying
value of the investment of the hotel property or that depreciation periods
should be modified. If facts or circumstances support the possibility of
impairment, management of the AGHI Affiliates will prepare a projection of the
undiscounted future cash flows, without interest charges, of the specific
hotel property and determine if the investment in hotel property is
recoverable based on the undiscounted future cash flows. Management of the
AGHI Affiliates does not believe that there are any factors or circumstances
indicating impairment of any of its investment in hotel properties.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and the related accumulated depreciation are removed
from the accounts and the gain or loss is included in operations.
Cash and Cash Equivalents--All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Restricted Cash--Restricted cash consists primarily of amounts held in
escrow for capital and property tax reserves.
Inventories--Inventories, consisting primarily of food and beverage items,
are stated at the lower of cost (generally, first-in, first-out) or market.
Deferred Expenses--Deferred expenses primarily consist of deferred loan
costs, franchise fees and organization costs. Amortization of deferred loan
cost is computed using the effective yield method based upon the terms of the
loan agreements. Amortization of franchise fees is computed using the
straight-line method based upon the terms of the agreements. Amortization of
organization costs is computed using the straight-line method over five years.
Accumulated amortization at December 29, 1995 is $73,271.
Income Taxes--The AGH Predecessor Hotels are owned by Texas limited
partnerships which are not taxable entities. The results of operations are
included in the tax returns of the partners. The partnerships' tax returns and
the amount of allocable income or loss are subject to examination by federal
and state taxing authorities. If such examinations result in changes to income
or loss, the tax liability of the partners could be changed accordingly. The
Company proposes to qualify as a REIT under the Code, and will therefore not
be subject to corporate income taxes. Accordingly, the combined statements of
operations contain no provision for federal income taxes.
Revenue Recognition--Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.
Use of Estimates--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.
Concentration of Credit Risk--Management of the AGHI Affiliates places cash
deposits at a major bank. At December 31, 1995, bank account balances exceeded
federal depository insurance limits by approximately $600,000. Management
believes credit risk related to these deposits is minimal.
F-29
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Recently Issued Statement of Financial Accounting Standards--The AGH
Predecessor Hotels adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" during the year ended December 29, 1995.
The adoption of SFAS No. 121 had no material effect on the AGH Predecessor
Hotels' financial statements.
Interim Financial Information -- The unaudited interim financial statements
as of March 31, 1996 and for the three months ended March 31, 1995 and 1996
have been prepared pursuant to the rules and regulations of the SEC. The notes
to the interim financial statements included herein are intended to highlight
significant changes to the notes to the December 31, 1996 financial statements
and present interim disclosures required by the SEC. The accompanying interim
financial statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the interim financial statements. All
such adjustments are of a normal and recurring nature.
3. DEBT
Debt at December 30, 1994 and December 29, 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
First mortgage notes payable in various monthly
installments including interest at rates ranging from
LIBOR plus 4.25% (5.44% at December 29, 1995) to
prime plus 1% (8.5% at December 29, 1995) maturing at
various dates from August 1999 through December
2001................................................. $10,916,322 $17,666,294
Product improvement plan note payable in various
monthly installments including interest at LIBOR plus
4.25%................................................ 1,511,352
Note payable to AGHI.................................. 100,000 100,000
----------- -----------
$11,016,322 $19,277,646
=========== ===========
</TABLE>
All debt is collateralized by the investment in hotel properties.
Aggregate annual principal payments for the AGHI Affiliates' debt at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1996.......................................................... $ 605,506
1997.......................................................... 656,503
1998.......................................................... 687,677
1999.......................................................... 2,094,750
2000 and thereafter........................................... 15,233,210
-----------
$19,277,646
===========
</TABLE>
4. COMMITMENTS
Management fees represent amounts paid to AGHI based upon percentages of
gross revenue ranging from 3% to 4%.
Franchise costs represent the annual expense for franchise royalties and
reservation services under the terms of hotel franchise agreements expiring in
2005 (Holiday Inn), 2007 (Hampton Inn), and 2013 (Courtyard by Marriott).
Franchise costs are based upon varying percentages of gross room revenue
ranging from 4% to 5%. No franchise costs were incurred for the Hotel Maison
de Ville.
F-30
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Each hotel, except for the Hotel Maison de Ville, is required to remit
varying percentages of gross room revenue ranging from 1.5% to 4% to the
various franchisors for sales and advertising expenses incurred to promote the
hotel at the national level. Additional sales and advertising costs are
incurred at the local property level.
The AGHI Affiliates lease the Courtyard by Marriott-Meadowlands hotel land,
under a noncancellable operating lease agreement which expires in 2036. The
AGHI Affiliates have the option to extend the lease for an additional twenty
years upon the same terms. The lease provides for contingent rental payments
based on 3% of gross room revenues which for the years ended December 30, 1994
and December 29, 1995 approximated 65% of the aggregate rental expense under
the operating lease. Additionally, certain equipment is leased under
noncancellable operating lease agreements expiring at varying intervals
through August 1996. Minimum future rental payments required under operating
leases as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1996.......................................................... $ 163,842
1997.......................................................... 175,300
1998.......................................................... 187,800
1999.......................................................... 187,800
2000 and thereafter........................................... 14,432,340
-----------
$15,147,082
===========
</TABLE>
Rental expense was $311,007 and $360,011 for the years ended December 30,
1994 and December 29, 1995, respectively.
As a result of the Offering and the resulting prepayment of debt, a portion
of the proceeds of the Offering will be utilized to pay prepayment penalties
on two notes payable totalling $892,022 based on an estimated pay off date of
June 30, 1996.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the AGHI Affiliates report the carrying amount of
cash and cash equivalents, restricted cash, accounts payable, accrued expenses
and other liabilities at cost which approximates fair value due to the short
maturity of these instruments. The carrying amount of the AGHI Affiliate's
debt approximates fair value due to the AGHI Affiliates ability to obtain such
borrowings at comparable interest rates.
6. PRO FORMA INFORMATION (UNAUDITED)
Due to the impact of the acquisitions discussed in Note 1, the historical
results of operations may not be indicative of future results of operations.
The following unaudited pro forma condensed combined statements of operations
for the years ended December 30, 1994 and December 29, 1995 are presented as
if the hotel acquisitions described in Note 1 occurred on January 1, 1994.
The unaudited pro forma condensed combined statements of operations do not
purport to represent what actual results of operations would have been if the
acquisitions had occurred on such date or to project results
F-31
<PAGE>
AGH PREDECESSOR HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
for any future period. The following unaudited pro forma information does not
include pro forma adjustments related to the proposed initial public offering
and related transactions.
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Total revenue.................................. $11,171,889 $12,927,954
Hotel operating expenses....................... 8,257,439 8,905,916
Depreciation................................... 1,198,055 2,618,055
Interest....................................... 2,543,215 1,973,765
Other corporate expenses....................... 761,015 791,599
----------- -----------
Net loss....................................... $(1,587,835) $(1,361,381)
=========== ===========
</TABLE>
7. SUBSEQUENT EVENT
As discussed in Note 1, the four AGH Predecessor Hotels will be acquired
subsequent to March 29, 1996. The Company and the Operating Partnership will
exchange shares of Common Stock and OP Units for interests in the selling
entities and certain net assets will be transferred at historical cost basis.
In addition, the hotels will be refinanced upon acquisition and post-
acquisition debt will be different than the historical debt reflected in the
accompanying financial statements. Furthermore, all management agreements will
be terminated and new management agreements will be implemented. The combined
financial statements do not reflect any of the transactions in connection with
the Offering and related transactions.
The AGH Predecessor Hotels repaid in full the December 29, 1995 outstanding
debt of $100,000 and the accounts payable of $195,000 to AGHI.
F-32
<PAGE>
AGH PREDECESSOR HOTELS
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 29, 1995
<TABLE>
<CAPTION>
COST CAPITALIZED GROSS AMOUNTS AT
SUBSEQUENT TO WHICH CARRIED
INITIAL COST ACQUISITION AT CLOSE OF PERIOD ACCUMULATED
----------------------- ----------------- ----------------------------------- DEPRECIATION
BUILDING BUILDING BUILDING BUILDINGS
AND AND AND AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL IMPROVEMENTS
----------- ------------ ---------- ------------ ---- ------------ ---------- ------------ ----------- ------------
(A) (B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Courtyard by
Marriott
Meadowlands
Secaucus, NJ.... $ 4,767,446 $ 4,780,496 $ 238,936 $ 5,019,432 $ 5,019,432 $246,400
Hampton Inn
Richmond Airport
Richmond, VA.... 4,795,400 $ 505,000 3,590,369 244,933 $ 505,000 3,835,302 4,340,302 98,566
Holiday Inn Dal-
las DFW Airport
West
Bedford, TX..... 8,161,352 816,515 6,532,118 852,292 816,515 7,384,410 8,200,925 96,464
Hotel Maison de
Ville
New Orleans,
LA.............. 1,553,448 175,000 1,641,777 546,934 175,000 2,188,711 2,363,711 64,977
----------- ---------- ----------- ---------- ---------- ----------- ----------- --------
$19,277,646 $1,496,515 $16,544,760 $1,883,095 $1,496,515 $18,427,855 $19,924,370 $506,407
=========== ========== =========== ========== ========== =========== =========== ========
<CAPTION>
NET LIFE
BOOK VALUE UPON WHICH
BUILDINGS DEPRECIATION
AND DATE OF DATE OF IN STATEMENT
DESCRIPTION IMPROVEMENTS CONSTRUCTION ACQUISITION IS COMPUTED
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Courtyard by
Marriott
Meadowlands
Secaucus, NJ.... $ 4,773,032 1989 12/30/93 40 YRS
Hampton Inn
Richmond Airport
Richmond, VA.... 4,241,736 1972 12/29/94 40 YRS
Holiday Inn Dal-
las DFW Airport
West
Bedford, TX..... 8,104,461 1974 6/7/95 40 YRS
Hotel Maison de
Ville
New Orleans,
LA.............. 2,298,734 1788 8/8/94 40 YRS
------------
$19,417,963
============
</TABLE>
(a) Reconciliation of land and buildings and improvements:
<TABLE>
<S> <C>
Balance at January 1, 1994... $ 4,780,496
Additions during the year
1994:
Improvements................ 7,062,297
-----------
Balance at December 30,
1994......................... 11,842,793
Additions during the year
1995: 8,081,577
-----------
Balance at December 29,
1995......................... $19,924,370
===========
</TABLE>
(b) Reconciliation of Accumulated Depreciation:
<TABLE>
<S> <C>
Balance at beginning of year Jan-
uary 1, 1994..................... $ 46,982
Depreciation for the year 1994: 185,174
--------
Balance at December 30, 1994..... 232,156
Depreciation for the year 1995: 274,251
--------
Balance at December 29, 1995..... $506,407
========
</TABLE>
F-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors American General Hospitality Corporation
We have audited the accompanying combined balance sheets of the AGH
Acquisition Hotels (described in Note 1) as of December 31, 1994 and 1995 and
the related combined statements of operations, equity and cash flows for each
of the three years in the period ended December 31, 1995. These combined
financial statements are the responsibility of 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.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of the AGH Acquisition Hotels.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the AGH
Acquisition Hotels as of December 31, 1994 and 1995, and the combined results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
April 8, 1996
F-34
<PAGE>
AGH ACQUISITION HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Investments in hotel properties, at
cost:
Land and land improvement.......... $ 9,174,723 $ 9,174,723 $ 9,174,723
Buildings and improvements......... 70,574,085 73,047,848 73,218,749
Furniture, fixtures and equipment.. 21,948,731 21,999,984 22,267,228
------------ ------------ -----------
101,697,539 104,222,555 104,660,700
Less accumulated depreciation........ (33,171,163) (36,842,175) (38,064,731)
------------ ------------ -----------
Net investment in hotel properties... 68,526,376 67,380,380 66,595,969
Cash and cash equivalents............ 2,514,782 4,247,740 5,245,341
Restricted cash...................... 1,006,323 1,454,731 2,380,396
Accounts receivable, net............. 1,917,888 1,677,438 2,521,992
Inventories.......................... 571,883 735,266 624,557
Prepaid expenses..................... 379,842 477,443 518,929
Deferred expenses.................... 462,933 558,706 520,636
Other assets......................... 661,774 90,669 110,122
------------ ------------ -----------
Total assets..................... $ 76,041,801 $ 76,622,373 $78,517,942
============ ============ ===========
LIABILITIES AND EQUITY
Debt................................. $ 46,013,273 $ 43,861,547 $51,827,466
Capital lease obligation............. 2,862,995 2,625,082 2,562,897
Accounts payable, trade.............. 884,218 768,251 1,135,404
Payable to affiliates................ 2,145,068 2,231,449 2,173,403
Accrued expenses and other liabili-
ties................................ 3,819,118 3,847,515 3,514,883
------------ ------------ -----------
Total liabilities................ 55,724,672 53,333,844 61,214,053
------------ ------------ -----------
Commitments and contingencies (Note
4)..................................
Capital.............................. 11,960,065 6,588,382 (2,012,817)
Retained earnings.................... 8,357,064 16,700,147 19,316,706
------------ ------------ -----------
Total equity..................... 20,317,129 23,288,529 17,303,889
------------ ------------ -----------
Total liabilities and equity..... $ 76,041,801 $ 76,622,373 $78,517,942
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-35
<PAGE>
AGH ACQUISITION HOTELS
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Room revenue.......... $36,811,936 $40,109,552 $44,736,447 $10,232,424 $11,561,801
Food and beverage rev-
enue................. 15,446,922 15,826,164 16,424,522 4,076,018 4,173,807
Other revenue......... 4,678,562 3,169,064 3,579,485 869,608 989,702
----------- ----------- ----------- ----------- -----------
Total revenue....... 56,937,420 59,104,780 64,740,454 15,178,050 16,725,310
----------- ----------- ----------- ----------- -----------
Expenses:
Property operating
costs and expenses... 11,639,735 11,611,249 12,583,203 2,898,122 3,232,127
Food and beverage
costs and expenses... 12,023,204 12,331,905 12,741,884 3,068,805 3,148,304
General and adminis-
trative.............. 4,877,037 5,398,014 5,780,741 1,337,209 1,421,240
Advertising and promo-
tion................. 3,735,277 3,822,370 3,874,160 1,066,362 1,146,405
Repairs and mainte-
nance................ 2,744,397 2,564,251 2,719,954 672,483 712,728
Utilities............. 2,898,837 3,021,303 2,945,878 678,998 653,974
Management fees....... 799,987 933,961 1,285,385 309,720 332,666
Franchise costs....... 1,403,567 1,492,504 1,701,346 276,497 315,052
Depreciation.......... 5,550,188 5,344,060 5,498,602 1,729,152 1,222,556
Amortization.......... 250,459 277,887 152,588 68,918 39,528
Real estate and
personal property
taxes, and
property insurance... 1,632,849 1,651,113 1,481,258 398,032 372,957
Interest expense...... 4,667,281 4,340,948 4,734,958 1,155,882 1,248,618
Other expense......... 909,555 820,168 897,414 241,539 262,596
----------- ----------- ----------- ----------- -----------
Total expenses...... 53,132,373 53,609,733 56,397,371 13,901,719 14,108,751
----------- ----------- ----------- ----------- -----------
Revenues over ex-
penses............. $ 3,805,047 $ 5,495,047 $ 8,343,083 $ 1,276,331 $ 2,616,559
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-36
<PAGE>
AGH ACQUISITION HOTELS
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
EQUITY
-----------
<S> <C>
Balance, December 31, 1992......................................... $19,706,810
Revenues over expenses........................................... 3,805,047
Distributions.................................................... (3,743,317)
-----------
Balance, December 31, 1993......................................... 19,768,540
Revenues over expenses........................................... 5,495,047
Capital contributions............................................ 1,803,806
Distributions.................................................... (6,750,264)
-----------
Balance, December 31, 1994......................................... 20,317,129
Revenues over expenses........................................... 8,343,083
Capital contributions............................................ 1,486,050
Distributions.................................................... (6,857,733)
-----------
Balance, December 31, 1995......................................... 23,288,529
Net income (unaudited)........................................... 2,616,559
Capital contributions (unaudited)................................ 404,221
Distributions (unaudited)........................................ (9,005,420)
-----------
Balance, March 31, 1996 (unaudited)................................ $17,303,889
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-37
<PAGE>
AGH ACQUISITION HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating
activities:
Revenues over
expenses............. $ 3,805,047 $ 5,495,047 $ 8,343,083 $1,276,331 $2,616,559
Adjustments to
reconcile revenues
over expenses
to net cash provided
by operating
activities:
Depreciation......... 5,550,188 5,344,060 5,498,602 1,729,152 1,222,556
Amortization......... 250,459 277,887 152,588 68,918 39,528
Changes in assets and
liabilities:
Restricted cash...... (501,015) 128,081 (448,408) (1,274,883) (925,665)
Accounts receivable.. 208,742 393,847 240,450 (60,067) (844,554)
Inventories.......... 17,473 17,928 (163,383) 26,161 110,709
Prepaid expenses..... (84,011) (53,658) (97,601) (224,638) (41,486)
Other assets......... (511,774) 1,546,499 571,105 514,939 (19,453)
Franchise
agreements.......... (78,804) (4,000)
Organization costs... (135,928) (3,239)
Accounts payable,
trade............... (311,030) 141,223 (115,967) 115,377 367,153
Payable to
affiliates.......... 129,927 66,559 86,381 55,577 (58,046)
Accrued expenses and
other liablilities.. 881,626 357,616 28,397 (287,973) (332,632)
----------- ----------- ----------- ---------- ----------
Net cash provided by
operating
activities......... 9,220,900 13,711,089 14,092,008 1,938,894 2,134,669
----------- ----------- ----------- ---------- ----------
Cash flows from invest-
ing activities:
Improvements and
additions to hotel
properties........... (1,274,727) (4,903,592) (4,352,606) (972,147) (438,145)
----------- ----------- ----------- ---------- ----------
Cash flows from financ-
ing activities:
Proceeds from
borrowings........... 493,713 202,287 638,538 561,111 14,316,797
Principal payments on
borrowings........... (4,374,090) (2,662,272) (2,790,264) (445,592) (6,350,878)
Payments on capital
lease obligation..... (206,194) (221,486) (237,913) (57,893) (62,185)
Payments for deferred
loan costs........... (189,152) (245,122) (13,342) (1,458)
Capital
contributions........ 1,803,806 1,486,050 654,515 404,221
Distributions paid.... (3,743,317) (6,750,264) (6,857,733) (1,270,136) (9,005,420)
----------- ----------- ----------- ---------- ----------
Net cash used in
financing
activities......... (7,829,888) (7,817,081) (8,006,444) (571,337) (698,923)
----------- ----------- ----------- ---------- ----------
Net change in cash and
cash equivalents....... 116,285 990,416 1,732,958 395,410 997,601
Cash and cash
equivalents at
beginning of period.... 1,408,081 1,524,366 2,514,782 2,514,782 4,247,740
----------- ----------- ----------- ---------- ----------
Cash and cash
equivalents at end of
period................. $ 1,524,366 $ 2,514,782 $ 4,247,740 $2,910,192 $5,245,341
=========== =========== =========== ========== ==========
Supplemental disclosures of cash
flow information:
Cash paid during the
year for interest.... $ 4,793,349 $ 4,275,522 $ 4,590,280 $1,221,248 $1,402,999
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-38
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization--American General Hospitality Corporation (the "Company"), a
newly organized Maryland corporation which intends to qualify as a real estate
investment trust ("REIT"), has been formed to acquire equity interests in 13
hotels (the "Initial Hotels"). Four of the Initial Hotels (the "AGH
Predecessor Hotels") will be acquired primarily from limited partnerships
controlled by the shareholders of American General Hospitality, Inc. (the
"AGHI Affiliates"). The remaining nine Initial Hotels (the "AGH Acquisition
Hotels") will be acquired primarily from parties controlled by persons
unaffiliated with AGHI.
Upon completion of the proposed initial public offering described below, the
Company will acquire a 74.2% equity interest in American General Hospitality
Operating Partnership, L.P. (the "Operating Partnership"). A wholly owned
subsidiary of the Company will be the sole general partner of the Operating
Partnership. The Operating Partnership will own the Initial Hotels and will
lease them to AGH Leasing, L.P. (the "Lessee") under operating leases
("Participating Leases") which provide for rent based on the revenues of the
Initial Hotels. The Lessee has entered into management agreements pursuant to
which all of the Initial Hotels will be managed by American General
Hospitality, Inc. ("AGHI").
Basis of Presentation--The accompanying combined financial statements of the
AGH Acquisition Hotels have been presented on a combined basis due to
anticipated common ownership and management since each of the entities are
expected to be the subject of a business combination with the Company upon
consummation of the proposed initial public offering. The AGH Acquisition
Hotels consist of the following:
<TABLE>
<CAPTION>
PROPERTY NAME LOCATION NO. OF ROOMS
------------- -------- ------------
<S> <C> <C>
Holiday Inn Dallas DFW Airport South Irving, Texas 409
Hilton Hotel-Toledo Toledo, Ohio 213
Holiday Inn New Orleans International
Airport Kenner, Louisiana 304
Holiday Inn Park Center Plaza San Jose, California 231
Holiday Inn Select-Madison Madison, Wisconsin 227
Holiday Inn Mission Valley San Diego, California 318
Le Baron Airport Hotel San Jose, California 327
Days Inn Ocean City Ocean City, Maryland 162
Fred Harvey Albuquerque Airport Hotel Albuquerque, New Mexico 266
</TABLE>
Two hotels are owned by entities that conduct business as taxable
corporations and were managed so that income taxes were the responsibility of
the owners. The remaining hotels are owned by various partnerships for income
tax purposes. These financial statements have been prepared to show the
operations and financial position of the combined AGH Acquisition Hotels,
substantially all of whose assets and operations will be acquired by the
Company. The Company intends to qualify as a REIT and will not pay any federal
income taxes, therefore the financial statements have been presented on a
pretax basis.
Proposed Initial Public Offering--The Company has filed its registration
statement with the Securities and Exchange Commission (the "SEC") pursuant to
which the Company expects to offer 7,000,000 shares of its common stock to the
public (the "Offering"). The Company expects to qualify as a REIT under
sections 856-860 of the Internal Revenue Code of 1986, as amended (the
"Code"). Upon consummation of the Offering, the Company will contribute all of
the net proceeds of the Offering to the Operating Partnership in exchange for
an approximate 74.2% equity interest in the Operating Partnership. The
Operating Partnership will use such funds to purchase certain of the Initial
Hotels, repay debt and other obligations of the Initial Hotels, and for
working capital.
F-39
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Hotel Properties--Hotel properties are stated at the lower of
cost or net realizable value and are depreciated using the straight-line
method over estimated useful lives ranging from 31 to 40 years for building
and improvements and 5 to 7 years for furniture, fixtures and equipment.
The respective owners of the AGH Acquisition Hotels review the carrying
value of each property to determine if circumstances exist indicating an
impairment in the carrying value of the investment of the hotel property or
that depreciation periods should be modified. If facts or circumstances
support the possibility of impairment, the respective owners of the AGH
Acquisition Hotels will prepare a projection of the undiscounted future cash
flows, without interest charges, of the specific hotel property and determine
if the investment in hotel property is recoverable based on the undiscounted
future cash flows. The respective owners of the AGH Acquisition Hotels do not
believe that there are any factors or circumstances indicating impairment of
any of its investment in hotel properties.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and the related accumulated depreciation are removed
from the accounts and the gain or loss is included in operations.
Cash and Cash Equivalents--All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Restricted Cash--Restricted cash consists primarily of amounts held in
escrow for capital and property tax reserves.
Inventories--Inventories consist primarily of food and beverage items;
china; glass and silver; and linen and are stated at the lower of cost
(generally, first-in, first-out) or market.
Deferred Expenses--Deferred expenses primarily consist of deferred loan
costs, franchise fees, and organization costs. Amortization of deferred loan
cost is computed using the effective yield method based upon the terms of the
loan agreements. Amortization of franchise fees is computed using the
straight-line method based upon the terms of the agreements. Amortization of
organization costs is computed using the straight-line method over five years.
Accumulated amortization at December 31, 1994 and 1995 is $892,441 and
$1,045,029, respectively.
Income Taxes--Seven of the nine hotels are included in various limited
partnerships which are not taxable entities. The results of operations are
included in the tax returns of the partners. The partnerships' tax returns and
the amount of allocable income or loss are subject to examination by federal
and state taxing authorities. If such examinations result in changes to income
or loss, the tax liability of the partners could be changed accordingly. The
Company proposes to qualify as a REIT under the Code and will therefore not be
subject to corporate income taxes. Accordingly, the combined statements of
operations contain no provision for federal income taxes.
Revenue Recognition--Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.
Use of Estimates--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.
F-40
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk--The AGH Acquisition Hotels place cash deposits
at major banks. At December 31, 1995, bank account balances exceeded federal
depository insurance limits by approximately $2.5 million. Management believes
credit risk related to these deposits is minimal.
Significant Customer--The owner of the Hilton Hotel-Toledo is a major
customer of the Hilton Hotel- Toledo. In 1995, 20% of the hotel's room revenue
was attributed to other businesses of the owner.
Recently Issued Statement of Financial Accounting Standards--The AGH
Acquisition Hotels adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" during the year ended December 31, 1995.
The adoption of SFAS No. 121 had no material effect on the AGH Acquisition
Hotels' financial statements.
Interim Financial Information--The unaudited interim financial statements as
of March 31, 1996 and for the three months ended March 31, 1995 and 1994 have
been prepared pursuant to the rules and regulations of the SEC. The notes to
the interim financial statements included herein are intended to highlight
significant changes to the notes to the December 31, 1995 financial statements
and present interim disclosures required by the SEC. The accompanying interim
financial statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the interim financial statements. All
such adjustments are of a normal and recurring nature.
3. DEBT
Debt at December 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
First mortgage notes payable in various monthly
installments including interest at fixed rates
ranging from 8.5% to 10% maturing at various dates
through October 1, 2004.............................. $18,028,545 $15,959,484
First mortgage notes payable in various monthly
installments including interest at the commercial
paper rate (5.81% at December 31, 1995) plus 4.75%
maturing at July 15, 1997............................ 5,655,275 5,915,904
First mortgage notes payable in quarterly installments
including interest at the prime rate (8.5% at
December 31, 1995) maturing at October 30, 1999...... 7,692,000 7,575,000
First mortgage note payable in monthly installments
including interest at the federal funds rate (6% at
December 31, 1995) plus 2.5% maturing at July 10,
1997................................................. 10,695,513 10,319,709
Product improvement plan loans payable in various
monthly installments including interest at rates
ranging from the bank reference rate (7.8% at
December 31, 1995) plus .5% to 12% maturing at
various dates through April 1, 2001.................. 3,825,000 4,091,450
Other non-current debt................................ 116,940
----------- -----------
$46,013,273 $43,861,547
=========== ===========
</TABLE>
All debt is collateralized by the investments in hotel properties.
F-41
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate annual principal payments for the AGHI Acquisition Hotels debt at
December 30, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1996.......................................................... $13,408,767
1997.......................................................... 11,420,835
1998.......................................................... 8,220,838
1999.......................................................... 1,209,019
2000 and thereafter........................................... 9,602,088
-----------
Total..................................................... $43,861,547
===========
</TABLE>
In December 1993, the partnership which owns the Holiday Inn New Orleans
International Airport hotel received $1,814,609 as a full pay-off from a
default on the lease of the hotel in 1992 which resulted in the default of the
mortgage. The $1,814,609 proceeds were transferred to the lender and applied
as a reduction of the principal balance on the nonrecourse mortgage loan to
cure the default. The payoff of $1,814,609 is recognized as other revenue. The
partnership has agreed that the $1,814,609 received in connection with the
promissory note payoff will be netted from funds they may be entitled to
receive in the future in connection with their bankruptcy claims against the
lessee.
4. LEASES
The Fred Harvey Albuquerque Airport Hotel has a noncancellable capital
building lease expiring in December 2013 and a noncancellable operating land
lease that also expires in December 2013; both leases include two five-year
options to renew the leases. The Le Baron Airport Hotel has a noncancellable
operating land lease expiring in July 2002, with one option to renew for an
additional 30 years. The Hilton Hotel-Toledo has a noncancellable operating
land lease that expires in December 2026, with four successive options to
renew the lease. Additionally, certain equipment is leased under
noncancellable lease agreements expiring at varying intervals through April
1998. The Fred Harvey Albuquerque Airport Hotel and the Le Baron Airport Hotel
land leases provide for contingent rental payments based on varying
percentages of revenues which for the years ended December 31, 1994 and 1995
approximated 50% of the aggregate rental expense under the operating leases.
Additionally, the Fred Harvey Albuquerque Airport Hotel land lease requires
the owner to add a new rooms building with at least 100 more guest rooms if
the average occupancy at the hotel is 85% or greater for 24 consecutive
months.
Leased capital assets included in buildings and improvements at December 31,
1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Building and improvements....................... $ 4,620,000 $ 4,620,000
Accumulated depreciation........................ (3,323,102) (3,424,155)
----------- -----------
$ 1,296,898 $ 1,195,845
=========== ===========
</TABLE>
F-42
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Minimum future rental payments required under these capital leases (together
with the present value of net minimum lease payments) and operating leases
that have an initial term or remaining noncancellable lease terms in excess of
one year at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
---- ---------- ----------
<S> <C> <C>
1996.................................................. $ 438,236 $ 409,014
1997.................................................. 438,236 299,327
1998.................................................. 438,236 228,613
1999.................................................. 438,236 216,331
2000 and thereafter................................... 2,674,704 3,707,785
---------- ----------
Total minimum lease payment........................... 4,427,648 $4,861,070
==========
Less imputed interest................................. 1,802,566
----------
Present value of net minimum lease payments........... $2,625,082
==========
</TABLE>
Rental expense was $584,924, $676,531, and $705,943 for the years ended
December 31, 1993, 1994, and 1995, respectively.
5. COMMITMENTS
Management fees represent amounts paid to affiliated parties based upon
percentages of gross revenue ranging from 1.5% to 3.0%.
Franchise costs represent the annual expense for franchise royalties and
reservation services under the terms of hotel franchise agreements expiring in
various years ranging from 1998 to 2007. Franchise costs are based upon
varying percentages of gross room revenue ranging from 1.8% to 6.5%.
Each hotel is required to remit varying percentages of gross room revenue
ranging from 1.5% to 4% to the various franchisors for sales and advertising
expenses incurred to promote the hotel at the national level. Additional sales
and advertising costs are incurred at the local property level.
As a result of the Offering and the resulting prepayment of debt, a selling
partnership will pay prepayment penalties on one note payable totalling
approximately $504,000 based on an estimated pay off date of June 30, 1996.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the AGH Acquisition Hotels report the carrying amount
of cash and cash equivalents, restricted cash, accounts payable, accrued
expenses and other liabilities at cost which approximates fair value due to
the short maturity of these instruments. The carrying amount of the AGH
Acquisition Hotels' debt approximates fair value due to the AGH Acquisition
Hotels' ability to obtain such borrowings at comparable interest rates.
7. RELATED PARTY TRANSACTIONS
During 1993, 1994, and 1995, the owner of the Fred Harvey Albuquerque
Airport Hotel paid for all accounts payable, payroll and other miscellaneous
payments for the hotel. The hotel's outstanding payable to the owner for these
payments, included in accounts payable, was $118,512 and $204,893 at December
31, 1994 and 1995, respectively. In addition, an affiliate of the Fred Harvey
Albuquerque Airport Hotel made payments for the hotel in 1992, totalling
$389,000, which are still outstanding and included in accounts payable as of
December 31, 1995.
F-43
<PAGE>
AGH ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Holiday Inn Park Center Plaza paid an annual management fee to an
officer of the entity owning the hotel for the years ending December 31, 1993,
1994 and 1995 of $60,000, $90,000 and $70,000, respectively.
An oral agreement for purchasing and management/financial services exists
between the Le Baron Airport Hotel and an affiliate of the owner. Fees (based
on 2% of gross revenues) paid to the affiliate for the years ending December
31, 1993, 1994 and 1995 are $139,947, $156,041 and $161,009, respectively.
As of December 31, 1995, the Holiday Inn Mission Valley hotel has a $312,500
receivable from its owners.
8. SUBSEQUENT EVENTS
On January 30, 1996, the Holiday Inn Dallas DFW Airport South hotel entered
into a long-term mortgage indebtedness agreement with a financial institution,
for proceeds of $14,250,000 at a fixed interest rate of 8.75% that matures on
February 1, 2011. Proceeds from the loan were used to repay the outstanding
debt of $5,915,904 and for distributions to the owners.
As discussed in Note 1, the nine AGH Acquisition Hotels will be acquired by
the Company subsequent to April 8, 1996. The acquisitions will be accounted
for by the Company under the purchase method of accounting. Accordingly, the
cost basis of the hotels will change to reflect the acquisition prices of the
hotels by the Company. In addition, with the exception of the Holiday Inn
Dallas DFW Airport South, the hotels will be refinanced upon acquisition and
postacquisition debt will be different than the historical debt reflected in
the accompanying financial statements. All management agreements will be
terminated concurrently with the sales of the hotels to the Company. The
combined financial statements do not reflect any of the transactions in
connection with the acquisitions of the nine hotels by the Company.
F-44
<PAGE>
AGH ACQUISITION HOTELS
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
COST CAPITALIZED GROSS AMOUNTS AT
SUBSEQUENT TO WHICH CARRIED
INITIAL COST ACQUISITION AT CLOSE OF PERIOD ACCUMULATED
----------------------- --------------------- ----------------------------------- DEPRECIATION
BUILDING BUILDING BUILDING BUILDING
AND AND AND AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL IMPROVEMENTS
----------- ------------ ---------- ------------ -------- ------------ ---------- ------------ ----------- ------------
(A) (B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn
Dallas DFW
Airport South
Irving, TX...... $5,915,904 $ 500,000 $ 2,810,500 $461,129 $ 1,144,140 $ 961,129 $ 3,954,640 $ 4,915,769 $ 360,051
Holiday Inn Park
Center Plaza San
Jose, CA........ 4,768,192 236,463 2,356,705 6,392,404 236,463 8,749,109 8,985,572 3,662,314
Fred Harvey Al-
buquerque
Airport Hotel
Albuquerque,
NM.............. 7,995,562 1,655,118 9,650,680 9,650,680 302,770
Holiday Inn Se-
lect-Madison
Madison, WI..... 4,231,600 2,615,614 7,050,569 2,215,924 2,615,614 9,266,493 11,882,107 3,802,233
Holiday Inn New
Orleans
International
Airport
Kenner, LA...... 7,440,696 2,567,967 12,179,629 3,390,411 2,567,967 15,570,040 18,138,007 1,847,633
Days Inn Ocean
City
Ocean City, MD.. 500,000 4,230,000 524,000 500,000 4,754,000 5,254,000 438,194
Le Baron Airport
Hotel
San Jose, CA.... 3,163,996 7,000,000 270,716 7,270,716 7,270,716 4,777,777
Holiday Inn Mis-
sion Valley
San Diego, CA... 10,766,159 2,293,550 5,354,094 1,697,161 2,293,550 7,051,255 9,344,805 782,460
Hilton Hotel-To-
ledo
Toledo, OH...... 7,575,000 6,753,093 27,822 6,780,915 6,780,915 580,558
----------- ---------- ----------- -------- ----------- ---------- ----------- ----------- -----------
$43,861,547 $8,713,594 $55,730,152 $461,129 $17,317,696 $9,174,723 $73,047,848 $82,222,571 $16,553,990
=========== ========== =========== ======== =========== ========== =========== =========== ===========
<CAPTION>
NET LIFE
BOOK VALUE UPON WHICH
BUILDING DEPRECIATION
AND DATE OF DATE OF IN STATEMENT
DESCRIPTION IMPROVEMENTS CONSTRUCTION ACQUISITION IS COMPUTED
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Holiday Inn
Dallas DFW
Airport South
Irving, TX...... $ 4,555,718 1974 1993 40 YRS
Holiday Inn Park
Center Plaza San
Jose, CA........ 5,323,258 1975 1975 40 YRS
Fred Harvey Al-
buquerque
Airport Hotel
Albuquerque,
NM.............. 9,347,910 1972 1988 27 YRS
Holiday Inn Se-
lect-Madison
Madison, WI..... 8,079,874 1987 1987 40 YRS
Holiday Inn New
Orleans
International
Airport
Kenner, LA...... 16,290,374 1973 1988 40 YRS
Days Inn Ocean
City
Ocean City, MD.. 4,815,806 1989 1992 40 YRS
Le Baron Airport
Hotel
San Jose, CA.... 2,492,939 1974 1974 40 YRS
Holiday Inn Mis-
sion Valley
San Diego, CA... 8,562,345 1970 1991 40 YRS
Hilton Hotel-To-
ledo
Toledo, OH...... 6,200,357 1987 1993 40 YRS
------------
$65,668,581
============
</TABLE>
(a) Reconciliation of Land and Buildings and Improvements:
<TABLE>
<S> <C>
Balance at January 1, 1994... $76,600,731
Additions during the year
1994:
Improvements................ 3,148,077
-----------
Balance at December 31,
1994......................... 79,748,808
Additions during the year
1995........................ 2,473,763
-----------
Balance at December 31,
1995......................... $82,222,571
===========
</TABLE>
(b) Reconciliation of Accumulated Depreciation:
<TABLE>
<S> <C>
Balance at January 1, 1994.... $12,044,953
Depreciation for the year
1994......................... 2,250,929
-----------
Balance at December 31, 1994.. 14,295,882
Depreciation for the year
1995......................... 2,258,108
-----------
Balance at December 31, 1995.. $16,553,990
===========
</TABLE>
F-45
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AU-
THORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUAL-
IFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 20
The Company.............................................................. 33
Use of Proceeds.......................................................... 41
Distribution Policy...................................................... 42
Capitalization........................................................... 45
Dilution................................................................. 46
Selected Financial Information........................................... 47
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 53
The Hotel Industry....................................................... 62
The Initial Hotels....................................................... 63
Formation Transactions................................................... 86
Management............................................................... 89
Certain Relationships and Transactions................................... 96
AGHI and the Lessee...................................................... 98
Principal Stockholders................................................... 101
Description of Capital Stock............................................. 102
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws.................................................................. 106
Policies and Objectives with Respect to Certain Activities............... 110
Shares Available for Future Sale......................................... 113
Partnership Agreement.................................................... 114
Federal Income Tax Considerations........................................ 117
Underwriting............................................................. 136
Experts.................................................................. 137
Legal Matters............................................................ 137
Additional Information................................................... 138
Glossary................................................................. 139
Index to Financial Statements............................................ F-1
</TABLE>
-----------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7,000,000 Shares
[LOGO OF AMERICAN GENERAL HOSPITALITY CORPORATION APPEARS HERE]
Common Stock
-----------
PROSPECTUS
, 1996
-----------
Smith Barney Inc.
Prudential Securities Incorporated
----------------------------------
Legg Mason Wood Walker
Incorporated
The Robinson-Humphrey Company, Inc.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the share of
Common Stock.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 60,458
NASD filing fee................................................ 18,033
NYSE listing fee............................................... 91,600
Printing, engraving and mailing expenses....................... 350,000
Accountant's fees and expenses................................. 350,000
Blue Sky fees and expenses..................................... 50,000
Legal fees..................................................... 800,000
Transfer agent's fees.......................................... 15,000
Miscellaneous expenses......................................... 464,909
----------
Total........................................................ $2,200,000
==========
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES
See response to Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
The Company sold 15.83, 5.00, 47.51, 15.83 and 15.83 shares of Common Stock
to Messrs. Jorns, Wiles, Sowell, Shaw and Shaw, respectively, on April 12,
1996 for an aggregate price of $100. The Company also has agreed to issue
155,518 shares (subject to adjustment in certain circumstances) of Common
Stock to the Plan, valued at approximately $3.1 million, based on the Offering
Price, in exchange for its interests in five of the Initial Hotels. The shares
were purchased for investment purposes only, and not with a view to any
resale, fractionalization or distribution thereof, and for the purpose of
organizing the Company. The shares have been or will be issued by the Company
in reliance on the exemption provided by Section 4(2) of the Securities Act of
1933, as amended. The shares sold by the Company on April 12, 1996 will be
redeemed by the Company for $100 upon closing of the Offering.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision which eliminates such liability to the
maximum extent permitted by Maryland law.
The Charter of the Company obligates it, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to any person (or the estate of
any person) who is or was a party to, or is threatened to be made a party to,
any threatened, pending or completed action, suit or proceeding whether or not
by or in the right of the Company, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or
II-1
<PAGE>
officer of the Company, or is or was serving at the request of the Company as
a director, officer, trustee, partner, member, agent or employee of another
corporation, partnership, limited liability company, association, joint
venture, trust or other enterprise. The Charter also permits the Company to
indemnify and advance expenses to any person who served a predecessor of the
Company in any of the capacities described above and to any employee or agent
of the Company or a predecessor of the Company.
The MGCL requires a Maryland corporation (unless its charter provides
otherwise, which the Company's Charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any Maryland proceeding to which he is made a party by reason of his service
in that capacity. The MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In addition, the MGCL requires the Company,
as a condition to advancing expenses, to obtain (a) a written affirmation by
the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the Company as authorized by the
Bylaws and (b) a written statement by or on his behalf to repay the amount
paid or reimbursed by the Company if it shall ultimately be determined that
the standard of conduct was not met.
The Company intends to purchase director and officer liability insurance for
the purpose of providing a source of funds to pay any indemnification
described above.
The Underwriting Agreement will contain certain provisions pursuant to which
certain officers, directors and controlling persons may be entitled to be
indemnified by the underwriters named therein.
ITEM 34. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
None.
II-2
<PAGE>
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(A) INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
American General Hospitality Corporation
Statements of Estimated Revenues Less Expenses for the Year Ended
December 31, 1995, the Twelve Months Ended March 31, 1996 and the Three
Months Ended March 31, 1996 (unaudited)................................ F-2
Pro Forma Consolidated Balance Sheet as of March 31, 1996 (unaudited)... F-6
Report of Independent Accountants....................................... F-10
Consolidated Balance Sheet as of April 12, 1996 (date of inception)..... F-11
Notes to Consolidated Balance Sheet..................................... F-12
AGH Leasing, L.P.
Pro Forma Balance Sheet as of May 29, 1996 (unaudited).................. F-14
Report of Independent Accountants....................................... F-15
Balance Sheet as of May 29, 1996 (date of inception).................... F-16
Notes to Balance Sheet.................................................. F-17
Initial Hotels and Lessee
Pro Forma Combined Statements of Operations for the Year Ended December
31, 1995, the Twelve Months Ended March 31, 1996 and the Three Months
Ended March 31, 1996 (unaudited)....................................... F-18
Notes to Combined Statements of Operations.............................. F-21
AGH Predecessor Hotels
Report of Independent Accountants....................................... F-23
Combined Balance Sheets as of December 30, 1994, December 29, 1995
(audited) and March 31, 1996 (unaudited)............................... F-24
Combined Statements of Operations for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1995
and 1996 (unaudited)................................................... F-25
Combined Statements of Equity for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1996
(unaudited)............................................................ F-26
Combined Statements of Cash Flows for the Period from December 30, 1993
through December 31, 1993, the Years Ended December 30, 1994 and
December 29, 1995 (audited) and the Three Months Ended March 31, 1995
and 1996 (unaudited)................................................... F-27
Notes to Combined Financial Statements.................................. F-28
Schedule III--Real Estate and Accumulated Depreciation.................. F-33
AGH Acquisition Hotels
Report of Independent Accountants....................................... F-34
Combined Balance Sheets as of December 31, 1994 and 1995 (audited) and
March 31, 1996 (unaudited)............................................. F-35
Combined Statements of Operations for each of the Three Years in the
Period Ended December 31, 1995 (audited) and the Three Months Ended
March 31, 1995 and 1996 (unaudited).................................... F-36
Combined Statements of Equity for each of the Three Years in the Period
Ended December 31, 1995 (audited) and the Three Months Ended March 31,
1996 (unaudited)....................................................... F-37
Combined Statements of Cash Flows for each of the Three Years in the
Period Ended December 31, 1995 (audited) and the Three Months Ended
March 31, 1995 and 1996 (unaudited).................................... F-38
Notes to Combined Financial Statements.................................. F-39
Schedule III--Real Estate and Accumulated Depreciation.................. F-45
</TABLE>
II-3
<PAGE>
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
+1.1 --Form of Underwriting Agreement
*3.1 --Articles of Incorporation of the Registrant
**3.2 --Form of Articles of Amendment and Restatement of the Registrant
*3.3 --Bylaws of the Registrant
+4.1 --Form of Common Stock Certificate for the Registrant
+5.1 --Opinion of Battle Fowler LLP
+8.1 --Opinion of Battle Fowler LLP, as to Tax Matters
--Opinion of Coopers & Lybrand L.L.P., as to Texas Franchise Tax
+8.2 Matters
*10.1 --American General Hospitality Partnership, L.P. Limited Partnership
Formation Agreement
*10.2 --Form of Amended and Restated Agreement of Limited Partnership of
American General Hospitality Operating Partnership, L.P.
--Form of Participating Lease between the Registrant and AGH Leasing,
**10.3 L.P.
--Form of Lease Master Agreement between the Registrant and AGH
**10.4 Leasing, L.P.
**10.5 --Form of Management Agreement between AGH Leasing, L.P. and American
General
Hospitality, Inc.
--Form of Supplemental Representations, Warranties and Indemnity
+10.6 Agreement
*10.7 --Form of Exchange Rights Agreement
*10.8 --Form of Registration Rights Agreement
**10.9 --Form of Lock-up Agreement
**10.10 --Commitment Letter for Line of Credit
*10.11 --Form of American General Hospitality Corporation 1996 Incentive Plan
--Form of American General Hospitality Corporation Non-Employee
*10.12 Directors' Incentive Plan
--Form of Employment Agreement between the Registrant and Steven D.
*10.13 Jorns
--Form of Employment Agreement between the Registrant and Bruce G.
*10.14 Wiles
--Form of Employment Agreement between the Registrant and Kenneth E.
*10.15 Barr
--Form of Employment Agreement between the Registrant and Russ C.
*10.16 Valentine
**10.17 --Form of Shared Services Office Space Agreement
**10.18 --Form of Option Agreement and Right of First Offer/Refusal between
1815 Hotel Associates Limited Partnership and American General
Hospitality Operating Partnership, L.P. (with respect to the
Durham, North Carolina Option Hotel)
**10.19 --Form of Indemnification Agreement between the Registrant and its
executive officers and directors
*10.20 --Omnibus Option Agreement (OP Units) for Holiday Inn Dallas DFW
Airport South
*10.21 --Omnibus Option Agreement (Cash) for Holiday Inn Dallas DFW Airport
South
*10.22 --Contribution Agreement (GP) for Holiday Inn Dallas DFW Airport South
*10.23 --Contribution Agreement (Primary Contributors) for Holiday Inn Dallas
DFW Airport South; Holiday Inn Dallas DFW Airport West; Courtyard
by Marriott-Meadowlands; Hampton Inn Richmond Airport; and Hilton
Hotel-Toledo
*10.24 --Option Agreement for Holiday Inn Dallas DFW Airport West
*10.25 --Contribution Agreement for Holiday Inn New Orleans International
Airport
*10.26 --Sale and Contribution Agreement for Holiday Inn Select-Madison
*10.27 --Purchase and Sale Agreement for Holiday Inn Park Center Plaza
*10.28 --Hotel Purchase Agreement for Fred Harvey Albuquerque Airport Hotel
*10.29 --Hotel Purchase Agreement for Le Baron Airport Hotel
*10.30 --Real Estate Sale Agreement for Days Inn Ocean City
*10.31 --Purchase and Sale Agreement and Escrow Instructions for Holiday Inn
Mission Valley
*10.32 --Omnibus Option Agreement (OP Units) for Hotel Maison de Ville
*10.33 --Omnibus Option Agreement (Cash) for Hotel Maison de Ville
*10.34 --Option Agreement for Hotel Maison de Ville
*10.35 --Option Agreement (the Plan) for Holiday Inn Dallas DFW Airport
South; Holiday Inn Dallas DFW Airport West; Courtyard by Marriott-
Meadowlands; Hampton Inn Richmond Airport;
and Hotel Maison de Ville
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
**10.36 --Form of Option Agreement and Right of First Offer/Refusal between
Broadway Morrison Limited Partnership and American General
Hospitality Operating Partnership, L.P. (with respect to the
Boise, Idaho Option Hotel)
+21.1 --Subsidiaries of the Company
+23.1 --Consent of Battle Fowler LLP (included in Exhibits 5.1 and 8.1
hereto)
+23.2 --Consent of Coopers & Lybrand L.L.P. giving opinion on Texas
Franchise Tax Matters (included in Exhibit 8.2 hereto)
**23.3 --Consent of Coopers & Lybrand L.L.P.
*24.1 --Powers of Attorney (included on signature page hereto)
**27.1 --Financial Data Schedule
*99.1 --Consent of H. Cabot Lodge III
*99.2 --Consent of James R. Worms
*99.3 --Consent of James McCurry
**99.4 --Consent of Kent R. Hance
</TABLE>
- --------
* Previously filed.
** Filed herewith.
+ To be filed by amendment.
ITEM 36. UNDERTAKINGS
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 provisions referred to in Item 33 of this
Registration Statement, 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 as to 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.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement.
(2) For purpose of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus 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;
notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or
high end of the estimated offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in "Calculation of
Registration Fee" table in the effective registration statement.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS AMENDMENT NO. 2
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED IN THE CITY OF DALLAS, STATE OF TEXAS ON JUNE 19,
1996.
AMERICAN GENERAL HOSPITALITY CORPORATION
a Maryland corporation (Registrant)
/s/ Steven D. Jorns
By: _________________________________
STEVEN D. JORNS
Chairman of the Board, Chief
Executive Officer, and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES INDICATED ON JUNE 19, 1996.
SIGNATURE TITLE DATE
/s/ Steven D. Jorns Chairman of the
- ------------------------------------- Board, Chief June 19, 1996
STEVEN D. JORNS Executive Officer,
and President
/s/ Kenneth E. Barr Executive Vice
- ------------------------------------- President, Chief June 19, 1996
KENNETH E. BARR Financial Officer,
and Principal
Accounting Officer
II-6
<PAGE>
NARRATIVE DESCRIPTION OF CHART ON P. 14 OF THE REGISTRATION
STATEMENT FOR AMERICAN GENERAL HOSPITALITY CORPORATION
The following is a description of the structure and relationship between
American General Hospitality Corporation (the "Company"), American General
Hospitality Operating Partnership, L.P. (the "Operating Partnership"), AGH
Leasing, L.P., (the "Lessee") and American General Hospitality, Inc. ("AGHI").
The Company has a one-hundred percent (100%) ownership interest in each
of AGH GP, Inc. ("GP") and AGH LP, Inc. ("LP"). GP, in turn, is the sole general
partner of, and holds a one percent (1.0%) interest in, the Operating
Partnership and LP is one of the limited partners of, and holds in Operating
Partnership a seventy-three point two percent (73.2%) interest in, the Operating
Partnership. The remaining interests in the Operating Partnership are as
follows: (a) the "Primary Contributors" hold, in the aggregate, an eleven point
nine percent (11.9%) interest, and (b) "Others" hold, in the aggregate, an
a thirteen point nine percent (13.9%) interest in the Operating Partnership.
The Operating Partnership owns, either directly or indirectly, the
Initial Hotels (the "Hotels").
The Lessee is the entity that will contract with AGHI to manage the
Hotels, according to the terms of the Management Agreements.
Footnotes to the Chart:
- ----------------------
Footnote (1) appears next to the Operating Partnership and reads:
(1) Upon completion of the Formation Transactions, each of Messrs.
Jorns, Wiles and Barr will own less than 1% of the outstanding
shares of Common Stock of the Company and 1.9%, 0.6% and 0.1%,
respectively, of the outstanding OP Units of the Operating
Partnership. See "Principal Stockholders."
<PAGE>
Footnote (2) appears next to the Lessee and reads:
(2) Messrs. Jorns, Wiles and Barr own, directly or indirectly,
15.43%, 4.89% and 2.5%, respectively, of the Lessee.\
Footnote (3) appears next to AGHI and reads:
(3) Messrs. Jorns and Wiles own 15.83% and 5.0%, respectively, of
AGHI.
<PAGE>
NARRATIVE DESCRIPTION OF PROSPECTUS PHOTOS FOR
AMERICAN GENERAL HOSPITALITY CORPORATION (THE "COMPANY")
Front Cover
- -----------
In the upper left hand corner, occupying a space approximately 2" by 2",
is the text "AMERICAN GENERAL HOSPITALITY CORPORATION" and the Company's symbol.
In addition, three small photos (each approximately 2" by 2") appear on
the cover, each depicting a different hotel scene. These photos appear slightly
left of center and are in a vertical column with about 1" space between the
photos. The top photo depicts a scene from the Hotel Maison de Ville in New
Orleans, Louisiana, the center photo is of the Holiday Inn Park Center Plaza in
San Jose, California and the bottom photo is of the Holiday Inn Select in
Madison, Wisconsin. Typed beneath each photo is name of the hotel and location
depicted.
Occupying the background right hand portion of the prospectus cover is a
photo of the courtyard of Hotel Maison de Ville in New Orleans, Louisiana. The
photo depicts a brick fountain located on the hotel's premises. This photo
covers a little more than the full right side of the page.
A marble background occupies the left hand portion of the prospectus cover
page.
- --------------------------------------------------------------------------------
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. IN
CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
Interior of Prospectus
- ----------------------
The text "AMERICAN GENERAL HOSPITALITY CORPORATION" and the Company's
symbol appear in the upper left hand corner. In addition, there are photos of
the following hotels with the name and location of the hotel listed under each
photo:
(1) one photo of the Courtyard by Marriott - Meadowlands in Secaucus, New
Jersey;
(2) three photos of the Wyndham Hotel located at the Albuquerque Airport in New
Mexico (currently the Fred Harvey Albuquerque Airport Hotel); one photo
contains the word "existing" in the upper left hand corner, the other photo
contains the word "proposed" in the upper left hand corner with footnote
"(1)" next to it (the footnote reads "Artist's rendering of the hotel upon
completion of the Company's scheduled upgrade and conversion program") and
the third is a larger version of the first (the current Fred Harvey
Albuquerque Airport Hotel);
<PAGE>
(3) three photos of the Holiday Inn Dallas DFW Airport West located in
Bedford, Texas; one photo is of the outside of the hotel and the other two
depict the lounge/bar area in the hotel;
(4) two sketches of the Crown Plaza in San Jose, California (currently the
Holiday Inn Park Center Plaza); one contains the word "proposed" in the
upper left hand corner with footnote "(1)" next to it (the footnote reads
"Artist's rendering of the hotel upon completion of the Company's
scheduled upgrade and conversion program") and the other contains the word
"existing" in the upper left hand corner of the photo;
(5) a photo entitled "Bistro: Hotel Maison de Ville" depicting the dining area
in the Hotel Maison de Ville;
(6) one photo of the Hilton Hotel & Conference Center on Toledo, Ohio;
(7) two sketches of the DoubleTree Hotel located at the San Jose Airport in
California (currently Le Baron Airport Hotel); one contains the word
"proposed" with footnote "(1)" next to it (the footnote reads "Artist's
rendering of the hotel upon completion of the Company's scheduled upgrade
and conversion program") and the other contains the word "existing" in the
upper left hand corner of the photo;
(8) one photo of the Holiday Inn Dallas Airport South in Texas;
(9) one photo of the Hampton Inn located at the Richmond Airport in Virginia;
and
(10) one photo of the Days Inn located in Ocean City, Maryland;
In addition to the photographs and sketches, there is a bar chart on
the interior prospectus cover. This chart contains the heading of "REVPAR" with
an asterisk next to it. The two bars (one light colored and one dark colored)
represent "Initial Hotels" (dark colored bar) and "All U.S. Hotels" (light
colored bar). Two asterisks appear next to "All U.S. Hotels." The following
language appears below the chart:
"* Although revenue per available room is not determined in accordance
with generally accepted accounting principles, the Company believes
this measure is useful for comparing operating performance within the
lodging industry.
** Industry source: Smith Travel Research, Inc."
<PAGE>
The chart covers three years (1993, 1994 and 1995) and compares the
revenue per available room for the Initial Hotels and All U.S. Hotels. The
following are the approximate dollar figures for each year, as depicted by the
bar chart:
Initial Hotels All U.S. Hotels
1993 $40.00 $39.00
1994 $44.00 $42.00
1995 $50.50 $43.50
<PAGE>
DESCRIPTIVE NARRATIVE FOR "SUPPLY" AND "DEMAND" BARS AND "PERCENT OCCUPANCY"
LINE ON THE BAR/LINE GRAPH ENTITLED
"PERCENTAGE CHANGE IN UNITED STATES HOTEL ROOM SUPPLY VS. DEMAND (1980-1995)"
The following is a list of figures depicted by the bar/line graph. The line
overlap on the graph depicts the hotel room percent occupancy for the years
1980-1995. The bars on the graph depict the percentage changes in hotel room
supply and demand for the year 1980-1995.
<TABLE>
<CAPTION>
Year: Percent Occupancy: Room Supply: Room Demand:
- ----- ------------------ ------------ ------------
<S> <C> <C> <C>
1980 70.6% 0.8% -1.0%
1981 67.9% 1.5% -2.4%
1982 66.7% 0.7% -1.2%
1983 64.4% 1.2% -2.3%
1984 64.0% 1.5% 0.9%
1985 63.2% 2.8% 1.5%
1986 62.5% 3.3% 2.1%
1987 61.9% 3.8% 2.8%
1988 62.3% 4.2% 4.9%
1989 63.2% 3.6% 5.1%
1990 62.4% 3.4% 2.1%
1991 60.9% 2.5% 0.1%
1992 62.1% 1.3% 3.3%
1993 63.0% 2.3% 3.7%
1994 64.7% 1.4% 4.1%
1995 65.4% 1.6% 2.9%
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
+1.1 --Form of Underwriting Agreement
*3.1 --Articles of Incorporation of the Registrant
**3.2 --Form of Articles of Amendment and Restatement of the
Registrant
*3.3 --Bylaws of the Registrant
+4.1 --Form of Common Stock Certificate for the Registrant
+5.1 --Opinion of Battle Fowler LLP
+8.1 --Opinion of Battle Fowler LLP, as to Tax Matters
+8.2 --Opinion of Coopers & Lybrand L.L.P., as to Texas
Franchise Tax Matters
*10.1 --American General Hospitality Partnership, L.P.
Limited Partnership Formation Agreement
*10.2 --Form of Amended and Restated Agreement of Limited
Partnership of American General Hospitality
Operating Partnership, L.P.
**10.3 --Form of Participating Lease between the Registrant
and AGH Leasing, L.P.
**10.4 --Form of Lease Master Agreement between the Registrant
and AGH Leasing, L.P.
**10.5 --Form of Management Agreement between AGH Leasing,
L.P. and American General
Hospitality, Inc.
+10.6 --Form of Supplemental Representations, Warranties and
Indemnity Agreement
*10.7 --Form of Exchange Rights Agreement
*10.8 --Form of Registration Rights Agreement
**10.9 --Form of Lock-up Agreement
**10.10 --Commitment Letter for Line of Credit
*10.11 --Form of American General Hospitality Corporation 1996
Incentive Plan
*10.12 --Form of American General Hospitality Corporation Non-
Employee Directors' Incentive Plan
*10.13 --Form of Employment Agreement between the Registrant
and Steven D. Jorns
*10.14 --Form of Employment Agreement between the Registrant
and Bruce G. Wiles
*10.15 --Form of Employment Agreement between the Registrant
and Kenneth E. Barr
*10.16 --Form of Employment Agreement between the Registrant
and Russ C. Valentine
**10.17 --Form of Shared Services Office Space Agreement
**10.18 --Form of Option Agreement and Right of First
Offer/Refusal between 1815 Hotel Associates Limited
Partnership and American General Hospitality
Operating Partnership, L.P. (with respect to the
Durham, North Carolina Option Hotel)
**10.19 --Form of Indemnification Agreement between the
Registrant and its executive officers and directors
*10.20 --Omnibus Option Agreement (OP Units) for Holiday Inn
Dallas DFW Airport South
*10.21 --Omnibus Option Agreement (Cash) for Holiday Inn
Dallas DFW Airport South
*10.22 --Contribution Agreement (GP) for Holiday Inn Dallas
DFW Airport South
*10.23 --Contribution Agreement (Primary Contributors) for
Holiday Inn Dallas DFW Airport South; Holiday Inn
Dallas DFW Airport West; Courtyard by Marriott-
Meadowlands; Hampton Inn Richmond Airport; and
Hilton Hotel-Toledo
*10.24 --Option Agreement for Holiday Inn Dallas DFW Airport
West
*10.25 --Contribution Agreement for Holiday Inn New Orleans
International Airport
*10.26 --Sale and Contribution Agreement for Holiday Inn
Select-Madison
*10.27 --Purchase and Sale Agreement for Holiday Inn Park
Center Plaza
*10.28 --Hotel Purchase Agreement for Fred Harvey Albuquerque
Airport Hotel
*10.29 --Hotel Purchase Agreement for Le Baron Airport Hotel
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
*10.30 --Real Estate Sale Agreement for Days Inn Ocean City
*10.31 --Purchase and Sale Agreement and Escrow Instructions
for Holiday Inn Mission Valley
*10.32 --Omnibus Option Agreement (OP Units) for Hotel Maison
de Ville
*10.33 --Omnibus Option Agreement (Cash) for Hotel Maison de
Ville
*10.34 --Option Agreement for Hotel Maison de Ville
*10.35 --Option Agreement (the Plan) for Holiday Inn Dallas
DFW Airport South; Holiday Inn Dallas DFW Airport
West; Courtyard by Marriott-Meadowlands; Hampton Inn
Richmond Airport; and Hotel Maison de Ville
**10.36 --Form of Option Agreement and Right of First
Offer/Refusal between Broadway Morrison Limited
Partnership and American General Hospitality
Operating Partnership, L.P. (with respect to the
Boise, Idaho Option Hotel)
+21.1 --Subsidiaries of the Company
+23.1 --Consent of Battle Fowler LLP (included in Exhibits
5.1 and 8.1 hereto)
+23.2 --Consent of Coopers & Lybrand L.L.P. giving opinion on
Texas Franchise Tax Matters (included in Exhibit 8.2
hereto)
**23.3 --Consent of Coopers & Lybrand L.L.P.
*24.1 --Powers of Attorney (included on signature page hereto)
**27.1 --Financial Data Schedule
*99.1 --Consent of H. Cabot Lodge III
*99.2 --Consent of James R. Worms
*99.3 --Consent of James McCurry
**99.4 --Consent of Kent R. Hance
</TABLE>
- --------
* Previously filed.
** Filed herewith.
+ To be filed by amendment.
<PAGE>
EXHIBIT 3.2
FORM OF
AMERICAN GENERAL HOSPITALITY CORPORATION
ARTICLES OF AMENDMENT AND RESTATEMENT
AMERICAN GENERAL HOSPITALITY CORPORATION, a Maryland corporation,
having its principal office in the State of Maryland c/o Ballard Spahr Andrews &
Ingersoll, 300 East Lombard Street, Baltimore, Maryland 21202, Attention: Tracy
A. Bacigalupo, Esq. (hereafter referred to as the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation of Maryland (the
"Department") that:
FIRST: The Corporation desires to and does hereby amend and restate
its charter as currently in effect and as hereinafter provided. The provisions
set forth in these Articles of Amendment and Restatement are all of the
provisions of the charter of the Corporation as currently in effect.
SECOND: The following provisions are all the provisions of the
charter currently in effect and as hereinafter amended:
ARTICLE I
The undersigned, Tracy A. Bacigalupo, whose address is c/o Ballard
Spahr Andrews & Ingersoll, 300 East Lombard Street, Baltimore, Maryland 21202,
being at least eighteen (18) years of age, does hereby form a corporation under
the general laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation (hereinafter, the "Corporation") is
AMERICAN GENERAL HOSPITALITY CORPORATION
ARTICLE III
PURPOSES
The purpose for which the Corporation is formed is to engage in any
lawful act or activity for which corporations may be organized under the general
laws of the State of Maryland now or hereafter in force. Subject to, and not in
limitation of the
<PAGE>
authority of the preceding sentence, the Corporation intends to engage in
business as a real estate investment trust (a "REIT") qualifying as such under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or
any successor statute (the "Code").
ARTICLE IV
PRINCIPAL OFFICE IN MARYLAND
AND RESIDENT AGENT
The address of the principal office of the Corporation in the State of
Maryland is 300 East Lombard Street, Baltimore, Maryland 21202, Attention: Tracy
A. Bacigalupo, Esq. The name of the resident agent of the Corporation in the
State of Maryland is Tracy A. Bacigalupo, c/o Ballard Spahr Andrews & Ingersoll,
300 East Lombard Street, Baltimore, Maryland 21202.
ARTICLE V
SHARES OF STOCK
SECTION 1. AUTHORIZED SHARES OF STOCK
Authorized Shares. The total number of shares of stock of all classes
that the Corporation has authority to issue is 120,000,000 shares, consisting of
(i) 20,000,000 shares of Preferred Stock, $0.01 par value per share
(the "Preferred Stock"), which may be issued in one or more classes as
described in Section 3 of this Article V; and
(ii) 100,000,000 shares of Common Stock, $0.01 par value per share
(the "Common Stock").
Each class of the Preferred Stock and the Common Stock shall constitute a
separate class of stock of the Corporation.
SECTION 2. REIT-RELATED RESTRICTIONS AND LIMITATIONS ON THE EQUITY STOCK
The Corporation shall seek to elect and maintain status as a REIT under the
Code. Until such time as Article V shall have been amended in accordance with
Section 2(E) of this Article V in order to terminate the REIT status of the
Corporation, it shall be the duty of the Board of Directors to use commercially
reasonable efforts to ensure that the Corporation satisfies the requirements for
qualification as a REIT under the Code, including, but not limited to, the
ownership of its outstanding
-2-
<PAGE>
stock, the nature of its assets, the sources of its income, and the amount and
timing of its distributions to the Corporation's stockholders (the
"Stockholders").
A. Restrictions on Transfer.
------------------------
1. Definitions. For purposes of this Article V, the following terms shall
-----------
have the following meanings set forth below:
"American General Hospitality Operating Partnership Agreement" shall mean
the First Amended and Restated Agreement of Limited Partnership of the Operating
Partnership, as it may be amended or restated from time to time.
"Beneficial Ownership" shall mean ownership of shares of Equity Stock by a
Person who would be treated as an owner of such shares of Equity Stock either
directly or indirectly through the application of Section 544 of the Code, as
modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner,"
"Beneficially Owns," "Beneficially Own," and "Beneficially Owned" shall have
correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the
Corporation as the beneficiary or beneficiaries of such Trust, in accordance
with the provisions of Section 2(B)(1) of Article V hereof.
"Board of Directors" shall mean the Board of Directors of the Corporation.
"Constructive Ownership" shall mean ownership of shares of Equity Stock by
a Person who would be treated as an owner of such shares of Equity Stock either
directly or indirectly through the application of Section 318 of the Code, as
modified by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns," and "Constructively Owned" shall have correlative
meanings.
"Equity Stock" shall mean Preferred Stock and Common Stock of the
Corporation. The term "Equity Stock" shall include all shares of Preferred
Stock and Common Stock of the Corporation that are held as Shares-in-Trust in
accordance with the provisions of Section 2(B) of Article V hereof.
"Initial Public Offering" means the sale of shares of Common Stock pursuant
to the Corporation's first effective registration statement for such shares of
Common Stock filed under the Securities Act of 1933, as amended.
-3-
<PAGE>
"Look-Through Entity" shall mean an entity (i) that is looked through for
purposes of the "closely held" test in Section 856(h) of the Code and (ii) each
beneficial owner of which would satisfy the Ownership Limit if such beneficial
owner owned directly its proportionate share of the shares of Equity Stock that
are held by the Look-Through Entity, which, by way of example, could include (i)
a pension trust that qualifies for look-through treatment under Section
856(h)(3) of the Code, (ii) an entity that qualifies as a regulated investment
company under Section 851 of the Code, or (iii) a corporation.
"Look-Through Ownership Limit" shall mean 15% of the number of outstanding
shares of any class of Equity Stock.
"Market Price" on any date shall mean the average of the Closing Price for
the five consecutive Trading Days ending on such date. The "Closing Price" on
any date shall mean the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the shares of Equity Stock are not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the shares of
Equity Stock are listed or admitted to trading or, if the shares of Equity Stock
are not listed or admitted to trading on any national securities exchange, the
last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System or, if such
system is no longer in use, the principal other automated quotations system that
may then be in use or, if the shares of Equity Stock are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the shares of Equity Stock selected
by the Board of Directors.
"Non-Transfer Event" shall mean an event, other than a purported Transfer,
that would cause any Person to Beneficially Own or Constructively Own shares of
Equity Stock in excess of the Ownership Limit or Look-Through Ownership Limit,
as applicable, including, but not limited to, the granting of any option or
entering into any agreement for the sale, transfer or other disposition of
shares of Equity Stock or the sale, transfer, assignment or other disposition of
any securities or rights convertible into or exchangeable for shares of Equity
Stock.
-4-
<PAGE>
"Operating Partnership" shall mean American General Hospitality Operating
Partnership, L.P., a Delaware limited partnership.
"Ownership Limit" shall mean 9.8% of the number of outstanding shares of
any class of Equity Stock.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 2(B)(5) of Article V
hereof.
"Person" shall mean an individual, corporation, partnership, estate, trust,
a portion of a trust permanently set aside for or to be used exclusively for the
purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock company
or other entity and also includes a "group" as that term is used for purposes of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
"Prohibited Owner" shall mean, with respect to any purported Transfer or
Non-Transfer Event, any Person who, but for the provisions of Section 2(A)(3) of
Article V hereof, would own record title to shares of Equity Stock.
"Restriction Termination Date" shall mean the first day after the date of
the Initial Public Offering on which this Article V has been amended in
accordance with Section 2(E) of this Article V in order to terminate the REIT
status of the Corporation.
"Shares-in-Trust" shall mean any shares of Equity Stock designated Shares-
in-Trust pursuant to Section 2(A)(3) of Article V hereof.
"Trading Day" shall mean a day on which the principal national securities
exchange on which the shares of Equity Stock are listed or admitted to trading
is open for the transaction of business or, if the shares of Equity Stock are
not listed or admitted to trading on any national securities exchange, shall
mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
"Transfer" (as a noun) shall mean any sale, transfer, gift, assignment,
devise or other disposition of shares of Equity Stock, whether voluntary or
involuntary, whether of record, constructively or beneficially and whether by
operation of law or otherwise. "Transfer" (as a verb) shall have the
correlative meaning.
-5-
<PAGE>
"Trust" shall mean any separate trust created pursuant to Section 2(A)(3)
of Article V hereof and administered in accordance with the terms of Section
2(B) of Article V hereof, for the exclusive benefit of any Beneficiary.
"Trustee" shall mean any Person or entity unaffiliated with both the
Corporation and any Prohibited Owner, such Trustee to be designated by the
Corporation to act as trustee of any Trust, or any successor trustee thereof.
2. Restriction on Transfers.
------------------------
a. Subject to Section 2(A)(8) of Article V hereof, and except as provided
in Section 2(A)(7) of Article V hereof, from the date of the Initial Public
Offering and prior to the Restriction Termination Date, (i) no Person shall
Beneficially Own or Constructively Own outstanding shares of Equity Stock in
excess of the Ownership Limit; provided, however, a Look-Through Entity may
Beneficially Own or Constructively Own outstanding shares of Equity Stock in an
amount not to exceed the Look-Through Ownership Limit, and (ii) any Transfer
that, if effective, would result in any Person Beneficially Owning or
Constructively Owning shares of Equity Stock in excess of the Ownership Limit or
the Look-Through Ownership Limit, as applicable, shall be void ab initio as to
-- ------
the Transfer of that number of shares of Equity Stock which would be otherwise
Beneficially Owned or Constructively Owned by such Person in excess of the
Ownership Limit or the Look-Through Ownership Limit, as applicable, and the
intended transferee shall acquire no rights in such excess shares of Equity
Stock.
b. Subject to Section 2(A)(8) of Article V hereof, and except as provided
in Section 2(A)(7) of Article V hereof, from the date of the Initial Public
Offering and prior to the Restriction Termination Date, any Transfer that, if
effective, would result in shares of Equity Stock being beneficially owned by
fewer than 100 Persons (determined without reference to any rules of
attribution) shall be void ab initio as to the Transfer of that number of shares
-- ------
which would be otherwise beneficially owned (determined without reference to any
rules of attribution) by the transferee, and the intended transferee shall
acquire no rights in such shares of Equity Stock.
c. From the date of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer of shares of Equity Stock that, if
effective, would result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer
-- ------
of that number of shares of Equity Stock which would cause the Corporation to be
"closely held" within the meaning of Section 856(h) of the Code, and the
intended transferee shall acquire no rights in such shares of Equity Stock.
-6-
<PAGE>
d. From the date of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer of shares of Equity Stock that, if
effective, would cause the Corporation to Constructively Own 9.9% or more of the
ownership interests in a tenant of the real property of the Corporation, the
Operating Partnership or any direct or indirect subsidiary (including, without
limitation, partnerships and limited liability companies) of the Corporation or
the Operating Partnership (a "Subsidiary"), within the meaning of Section
856(d)(2)(B) of the Code, shall be void ab initio as to the Transfer of that
-- ------
number of shares of Equity Stock which would cause the Corporation to
Constructively Own 9.9% or more of the ownership interests in a tenant of the
Corporation's, the Operating Partnership's or a Subsidiary's real property,
within the meaning of Section 856(d)(2)(B) of the Code, and the intended
transferee shall acquire no rights in such excess shares of Equity Stock.
3. Transfer to Trust.
-----------------
a. If, notwithstanding the other provisions contained in this Section
2(A) of Article V, at any time after the Initial Public Offering and prior to
the Restriction Termination Date, there is a purported Transfer or Non-Transfer
Event such that any Person would either Beneficially Own or Constructively Own
shares of Equity Stock in excess of the Ownership Limit (or, in the case of a
Look-Through Entity, either Beneficially Own or Constructively Own shares of
Equity Stock in excess of the Look-Through Ownership Limit), then, (i) except as
otherwise provided in Section 2(A)(7) of Article V hereof, the purported
transferee shall acquire no right or interest (or, in the case of a Non-Transfer
Event, the Person holding record title to the shares of Equity Stock
Beneficially Owned or Constructively Owned by such Beneficial Owner or
Constructive Owner, shall cease to own any right or interest) in such number of
shares of Equity Stock which would cause such Beneficial Owner or Constructive
Owner to Beneficially Own or Constructively Own shares of Equity Stock in excess
of the Ownership Limit or the Look-Through Ownership Limit, as applicable, (ii)
such number of shares of Equity Stock in excess of the Ownership Limit or the
Look-Through Ownership Limit, as applicable (rounded up to the nearest whole
share) shall be designated Shares-in-Trust and, in accordance with the
provisions of Section 2(B) of Article V hereof, transferred automatically and by
operation of law to the Trust to be held in accordance with that Section 2(B) of
Article V, and (iii) the Prohibited Owner shall submit such number of shares of
Equity Stock to the Corporation for registration in the name of the Trustee.
Such transfer to a Trust and the designation of shares as Shares-in-Trust shall
be effective as of the close of business on the business day prior to the date
of the Transfer or Non-Transfer Event, as the case may be.
-7-
<PAGE>
b. If, notwithstanding the other provisions contained in this Section 2(A)
of Article V, at any time after the Initial Public Offering and prior to the
Restriction Termination Date, there is a purported Transfer or Non-Transfer
Event that, if effective, would (i) result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution), (ii) result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code, or (iii) cause the Corporation
to Constructively Own 10% or more of the ownership interests in a tenant of the
Corporation's, the Operating Partnership's or a Subsidiary's real property,
within the meaning of Section 856(d)(2)(B) of the Code, then (x) the purported
transferee shall not acquire any right or interest (or, in the case of a Non-
Transfer Event, the Person holding record title of the shares of Equity Stock
with respect to which such Non-Transfer Event occurred, shall cease to own any
right or interest) in such number of shares of Equity Stock, the ownership of
which by such purported transferee or record holder would (A) result in the
shares of Equity Stock being beneficially owned by fewer than 100 Persons
(determined without reference to any rules of attribution), (B) result in the
Corporation being "closely held" within the meaning of Section 856(h) of the
Code, or (C) cause the Corporation to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's, the Operating
Partnership's or a Subsidiary's real property, within the meaning of Section
856(d)(2)(B) of the Code, (y) such number of shares of Equity Stock (rounded up
to the nearest whole share) shall be designated Shares-in-Trust and, in
accordance with the provisions of Section 2(B) of Article V hereof, transferred
automatically and by operation of law to the Trust to be held in accordance with
that Section 2(B) of Article V, and (z) the Prohibited Owner shall submit such
number of shares of Equity Stock to the Corporation for registration in the name
of the Trustee. Such transfer to a Trust and the designation of shares as
Shares-in-Trust shall be effective as of the close of business on the business
day prior to the date of the Transfer or Non-Transfer Event, as the case may be.
4. Remedies For Breach. If the Corporation, or its designees, shall at
-------------------
any time determine in good faith that a Transfer has taken place in violation of
Section 2(A)(2) of Article V hereof or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership or Constructive Ownership of any
shares of Equity Stock in violation of Section 2(A)(2) of Article V hereof, the
Corporation shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer or acquisition, including, but not limited
to, refusing to give effect to such Transfer on the books of the Corporation or
instituting proceedings to enjoin such Transfer or acquisition.
-8-
<PAGE>
5. Notice of Restricted Transfer. Any Person who acquires or attempts to
-----------------------------
acquire shares of Equity Stock in violation of Section 2(A)(2) of Article V
hereof, or any Person who owned shares of Equity Stock that were transferred to
the Trust pursuant to the provisions of Section 2(A)(3) of Article V hereof,
shall immediately give written notice to the Corporation of such event and shall
provide to the Corporation such other information as the Corporation may request
in order to determine the effect, if any, of such Transfer or Non-Transfer
Event, as the case may be, on the Corporation's status as a REIT.
6. Owners Required to Provide Information. From the date of the Initial
--------------------------------------
Public Offering and prior to the Restriction Termination Date:
a. Every Beneficial Owner or Constructive Owner of more than 5%, or such
lower percentages as required pursuant to regulations under the Code (currently
Regulation (S)1.857-8(d)), of the outstanding shares of all classes of stock of
the Corporation shall, within 30 days after January 1 of each year, provide to
the Corporation a written statement or affidavit stating the name and address of
such Beneficial Owner or Constructive Owner, the number of shares of Equity
Stock Beneficially Owned or Constructively Owned, and a description of how such
shares are held. Each such Beneficial Owner or Constructive Owner shall provide
to the Corporation such additional information as the Corporation may request in
order to determine the effect, if any, of such Beneficial Ownership or
Constructive Ownership on the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit or the Look-Through Ownership Limit, as
applicable.
b. Each Person who is a Beneficial Owner or Constructive Owner of shares
of Equity Stock and each Person (including the stockholder of record) who is
holding shares of Equity Stock for a Beneficial Owner or Constructive Owner
shall provide to the Corporation a written statement or affidavit stating such
information as the Corporation may request in order to determine the
Corporation's status as a REIT and to ensure compliance with the Ownership Limit
or the Look-Through Ownership Limit, as applicable.
7. Exception. The Ownership Limit or the Look-Through Ownership Limit, as
---------
applicable, shall not apply to the acquisition of shares of Equity Stock by an
underwriter that participates in a public offering of such shares for a period
of 90 days following the purchase by such underwriter of such shares provided
that the restrictions contained in Section 2(A)(2) of Article V hereof will not
be violated following the distribution by such underwriter of such shares. In
addition, the Board of Directors, in its sole discretion and upon receipt of a
ruling from the Internal Revenue Service or an opinion of counsel, in
-9-
<PAGE>
either case in form and substance satisfactory to the Board of Directors as it
may deem necessary or desirable in order to maintain the Corporation's status as
a REIT, may exempt a Person from the Ownership Limit or the Look-Through
Ownership Limit, if (i) such Person is not (A) an individual for purposes of
Code Section 542(a)(2), as modified by Code Section 856(h) or (B) treated as the
owner of such stock for purposes of Code Section 542(a)(2), as modified by Code
Section 856(h) and the Board of Directors obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain that no
Person's Beneficial or Constructive Ownership of such shares of Equity Stock
will violate Section 2(A)(2)(b), 2(A)(2)(c) or 2(A)(2)(d) of Article V hereof,
(ii) such Person does not and represents that it will not Constructively Own
shares of Equity Stock to the extent that such Constructive Ownership of Equity
Stock would result in the Corporation being "closely held" within the meaning of
Section 856(h) of the Code, or otherwise failing to qualify as a REIT
(including, but not limited to, Beneficial or Constructive Ownership that would
result in the Corporation Constructively Owning an interest in a tenant of the
Corporation (or a tenant of any entity owned or controlled by the Corporation)
that would cause the Corporation, the Operating Partnership or a Subsidiary to
Constructively Own more than a 9.9% interest in such tenant), and the Board of
Directors obtains such representations and undertakings from such Person as are
reasonably necessary to ascertain this fact, and (iii) such Person agrees that
any violation or attempted violation of such representations or undertakings (or
other action which is contrary to the restrictions contained in Sections 2(A)(2)
through 2(A)(6) of this Article V) will result in such shares of Equity Stock
being designated as Shares-in-Trust in accordance with the provisions of Section
2(A)(3) of Article V hereof.
8. New York Stock Exchange Transactions. Notwithstanding any provision
------------------------------------
contained herein to the contrary, nothing in these Articles of Amendment and
Restatement shall preclude the settlement of any transaction entered into
through the facilities of the New York Stock Exchange, Inc. The fact that the
settlement of any transaction occurs shall not negate the effect of any
other provision of this Article V and any transferee in such a transaction shall
be subject to all of the provisions and limitations set forth in this Article.
B. Shares-in-Trust.
---------------
1. Trust. Any shares of Equity Stock transferred to a Trust and
-----
designated Shares-in-Trust pursuant to Section 2(A)(3) of Article V hereof shall
be held for the exclusive benefit of the Beneficiary. The Corporation shall
name a Beneficiary for each Trust within five days after the establishment
thereof. Any transfer to a Trust, and subsequent designation of shares of
Equity Stock as Shares-in-Trust, pursuant to Section 2(A)(3) of
-10-
<PAGE>
Article V hereof shall be effective as of the close of business on the business
day prior to the date of the Transfer or Non-Transfer Event that results in the
transfer to the Trust. Shares-in-Trust shall remain issued and outstanding
shares of Equity Stock of the Corporation and shall be entitled to the same
rights and privileges on identical terms and conditions as are all other issued
and outstanding shares of Equity Stock of the same class and series. When
transferred to a Permitted Transferee in accordance with the provisions of
Section 2(B)(5) of Article V hereof, such Shares-in-Trust shall cease to be
designated as Shares-in-Trust.
2. Dividend Rights. The Trust, as record holder of Shares-in-Trust, shall
---------------
be entitled to receive all dividends and distributions as may be authorized by
the Board of Directors on such shares of Equity Stock and shall hold such
dividends or distributions in trust for the benefit of the Beneficiary. The
Prohibited Owner with respect to Shares-in-Trust shall repay to the Trust the
amount of any dividends or distributions received by it that (i) are
attributable to any shares of Equity Stock designated Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend or distribution
paid to a Prohibited Owner, including, if necessary, withholding any portion of
future dividends or distributions payable on shares of Equity Stock Beneficially
Owned or Constructively Owned by the Person who, but for the provisions of
Section 2(A)(3) of Article V hereof, would Constructively Own or Beneficially
Own the Shares-in-Trust; and, as soon as reasonably practicable following the
Corporation's receipt or withholding thereof, paying over to the Trust for the
benefit of the Beneficiary the dividends so received or withheld, as the case
may be.
3. Rights Upon Liquidation. In the event of any voluntary or involuntary
-----------------------
liquidation, dissolution or winding-up of, or any distribution of the assets of,
the Corporation, each holder of Shares-in-Trust shall be entitled to receive,
ratably with each other holder of shares of Equity Stock of the same class or
series, that portion of the assets of the Corporation which is available for
distribution to the holders of such class or series of shares of Equity Stock.
The Trust shall distribute to the Prohibited Owner the amounts received upon
such liquidation, dissolution, or winding-up, or distribution; provided,
--------
however, that the Prohibited Owner shall not be entitled to receive amounts
- -------
pursuant to this Section 2(B)(3) of Article V in excess of, in the case of a
purported Transfer in which the Prohibited Owner gave value for shares of Equity
Stock and which Transfer resulted in the transfer of the shares to the Trust,
the price per share, if any, such Prohibited Owner paid for the shares of Equity
Stock and, in the case of a Non-Transfer Event or Transfer
-11-
<PAGE>
in which the Prohibited Owner did not give value for such shares (e.g., if the
----
shares were received through a gift or devise) and which Non-Transfer Event or
Transfer, as the case may be, resulted in the transfer of shares to the Trust,
the price per share equal to the Market Price on the date of such Non-Transfer
Event or Transfer. Any remaining amount in such Trust shall be distributed to
the Beneficiary.
4. Voting Rights. The Trustee shall be entitled to vote all Shares-in-
-------------
Trust. Any vote by a Prohibited Owner as a holder of shares of Equity Stock
prior to the discovery by the Corporation that the shares of Equity Stock are
Shares-in-Trust shall, subject to applicable law, be rescinded and be void ab
--
initio with respect to such Shares-in-Trust and be recast by the Trustee, in its
- ------
sole and absolute discretion; provided, however, that if the Corporation has
already taken irreversible corporate action based on such vote, then the Trustee
shall not have the authority to rescind and recast such vote. The Prohibited
Owner shall be deemed to have given, as of the close of business on the business
day prior to the date of the purported Transfer or Non-Transfer Event that
results in the transfer to the Trust of shares of Equity Stock under Section
2(A)(3) of Article V hereof, an irrevocable proxy to the Trustee to vote the
Shares-in-Trust in the manner in which the Trustee, in its sole and absolute
discretion, desires.
5. Designation of Permitted Transferee. The Trustee shall have the
-----------------------------------
exclusive and absolute right to designate a Permitted Transferee of any and all
Shares-in-Trust. In an orderly fashion so as not to materially adversely affect
the Market Price of the Shares-in-Trust, the Trustee shall designate any Person
as Permitted Transferee, provided, however, that (i) the Permitted Transferee so
-------- -------
designated purchases for valuable consideration (whether in a public or private
sale) the Shares-in-Trust and (ii) the Permitted Transferee so designated may
acquire such Shares-in-Trust without such acquisition resulting in a transfer to
a Trust and the redesignation of such shares of Equity Stock so acquired as
Shares-in-Trust under Section 2(A)(3) of Article V hereof. Upon the designation
by the Trustee of a Permitted Transferee in accordance with the provisions of
this Section 2(B)(5) of Article V, the Trustee shall (i) cause to be transferred
to the Permitted Transferee that number of Shares-in-Trust acquired by the
Permitted Transferee, (ii) cause to be recorded on the books of the Corporation
that the Permitted Transferee is the holder of record of such number of shares
of Equity Stock, (iii) cause the Shares-in-Trust to be canceled, and (iv)
distribute to the Beneficiary any and all amounts held with respect to the
Shares-in-Trust after making the payment to the Prohibited Owner pursuant to
Section 2(B)(6) of Article V hereof.
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6. Compensation to Record Holder of Shares of Equity Stock that Become
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Shares-in-Trust. Any Prohibited Owner shall be entitled (following discovery of
- ---------------
the Shares-in-Trust and subsequent designation of the Permitted Transferee in
accordance with Section 2(B)(5) of Article V hereof or following the acceptance
of the offer to purchase such shares in accordance with Section 2(B)(7) of
Article V hereof) to receive from the Trustee following the sale or other
disposition of such Shares-in-Trust the lesser of (i) in the case of (a) a
purported Transfer in which the Prohibited Owner gave value for shares of Equity
Stock and which Transfer resulted in the transfer of the shares to the Trust,
the price per share, if any, such Prohibited Owner paid for the shares of Equity
Stock, or (b) a Non-Transfer Event or Transfer in which the Prohibited Owner did
not give value for such shares (e.g., if the shares were received through a gift
----
or devise) and which Non-Transfer Event or Transfer, as the case may be,
resulted in the transfer of shares to the Trust, the price per share equal to
the Market Price on the date of such Non-Transfer Event or Transfer, and (ii)
the price per share received by the Trustee from the sale or other disposition
of
such Shares-in-Trust in accordance with Section 2(B)(5) or 2(B)(6) of Article V
hereof. Any amounts received by the Trustee in respect of such Shares-in-Trust
and in excess of such amounts to be paid the Prohibited Owner pursuant to this
Section 2(B)(6) shall be distributed to the Beneficiary in accordance with the
provisions of Section 2(B)(5) of Article V hereof. Each Beneficiary and
Prohibited Owner waive any and all claims that they may have against the Trustee
and the Trust arising out of the disposition of Shares-in-Trust, except for
claims arising out of the gross negligence or willful misconduct of, or any
failure to make payments in accordance with this Section 2(B), by such Trustee
or the Corporation.
7. Purchase Right in Shares-in-Trust. Shares-in-Trust shall be deemed to
---------------------------------
have been offered for sale to the Corporation, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction that
created such Shares-in-Trust (or, in the case of devise, gift or Non-Transfer
Event, the Market Price at the time of such devise, gift or Non-Transfer Event)
and (ii) the Market Price on the date the Corporation, or its designee, accepts
such offer. Subject to Section 2(B)(6) of Article V hereof, the Corporation
shall have the right to accept such offer for a period of ninety days after the
later of (i) the date of the Non-Transfer Event or purported Transfer which
resulted in such Shares-in-Trust and (ii) the date the Corporation determines in
good faith that a Transfer or Non-Transfer Event resulting in Shares-in-Trust
has occurred, if the Corporation does not receive a notice of such Transfer or
Non-Transfer Event pursuant to Section 2(A)(5) of Article V hereof.
C. Remedies Not Limited. Subject to Section 2(A)(8) of Article V hereof,
--------------------
nothing contained in this Article V shall limit the authority of the
Corporation to take such other
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<PAGE>
action as it deems necessary or advisable to protect the Corporation and the
interests of its stockholders by preservation of the Corporation's status as a
REIT and to ensure compliance with the Ownership Limit or the Look-Through
Ownership Limit, as applicable.
D. Legend. Each certificate for shares of Equity Stock shall
------
substantially bear the following legend:
"The shares of [Common or Preferred] Stock represented by this certificate
are subject to restrictions on transfer for the purpose of the
Corporation's maintenance of its status as a real estate investment trust
under the Internal Revenue Code of 1986, as amended (the "Code"). No
Person may (i) Beneficially Own or Constructively Own shares of Equity
Stock in excess of 9.8% of the number of outstanding shares of any class of
Equity Stock (or, in the case of a Look-Through Entity, in excess of 15% of
the number of outstanding shares of any class of Equity Stock), (ii)
beneficially own shares of Equity Stock that would result in the shares of
Equity Stock being beneficially owned by fewer than 100 Persons (determined
without reference to any rules of attribution), (iii) Beneficially Own
shares of Equity Stock that would result in the Corporation being "closely
held" under Section 856(h) of the Code, or (iv) Constructively Own shares
of Equity Stock that would cause the Corporation to Constructively Own more
than 9.9% or more of the ownership interests in a tenant of the
Corporation's, the Operating Partnership's or a Subsidiary's real property,
within the meaning of Section 856(d)(2)(B) of the Code. Any Person who
attempts to Beneficially Own or Constructively Own shares of Equity Stock
in excess of the above limitations must immediately notify the Corporation
in writing. If the restrictions above are violated, the shares of Equity
Stock represented hereby will be transferred automatically and by operation
of law to a Trust and shall be designated Shares-in-Trust. All capitalized
terms in this legend have the meanings defined in the Corporation's
charter, as the same may be further amended from time to time, a copy of
which, including the restrictions on transfer, will be sent without charge
to each Stockholder who so requests."
Instead of the foregoing legend, the certificate may state that the
Corporation will furnish a full statement about certain restrictions on
transferability on request and without charge.
E. Amendment. Notwithstanding any other provisions of the charter or the
---------
Bylaws of the Corporation (and notwithstanding that some lesser percentage may
be specified by law, the charter
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<PAGE>
or the Bylaws of the Corporation), the provisions of this Article V shall not be
amended, altered, changed or repealed without the affirmative vote of all of the
Independent Directors and the holders of not less than two-thirds of the
outstanding shares of stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class.
SECTION 3. PREFERRED STOCK.
A. Authority to Designate and Fix Rights and Restrictions of Preferred
-------------------------------------------------------------------
Stock. The Board of Directors may classify any unissued shares of Preferred
- -----
Stock in one or more separately designated classes (hereinafter a "class").
Prior to issuance of classified shares of any class of Preferred Stock, the
Board of Directors shall:
1. designate such class in order to distinguish it from all other then-
outstanding classes of Preferred Stock;
2. set the number of shares of Preferred Stock to be included in such
class;
3. subject to the provisions of Sections 2 and 5 of this Article V, and to
the express limitations, if any, of any other classes of which shares are
outstanding at the time, set or change the preferences, conversion or other
rights, voting powers, restrictions (including, without limitation, any
restriction not inconsistent with law on the transferability of the shares
of such class), limitations as to dividends or other distributions,
qualifications and terms and conditions of the redemption of the shares of
such class, provided that all shares of any class shall be alike in every
particular, except that shares of such class issued at different times may
accumulate dividends from different dates; and
4. cause the Corporation to file Articles Supplementary with the State
Department of Assessments and Taxation of Maryland (the "SDAT").
Any of the terms of any class of stock set or changed pursuant to this Section 3
may be made dependent upon facts or events ascertainable outside the charter
(including determinations by the Board of Directors or other facts or events
within the control of the Corporation) and may vary among holders thereof,
provided that the manner in which such facts, events or variations shall operate
upon the terms of such class of stock is clearly and expressly set forth in the
Articles Supplementary filed with the SDAT.
B. Amendment of Terms. Subject to the provisions of Sections 2 and 5 of
------------------
this Article V and to the express
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<PAGE>
limitations, if any, of any class of Preferred Stock of which shares are
outstanding at the time, by resolution the Board of Directors may:
1. increase or decrease (but not below the number of shares of Preferred
Stock of such class then outstanding) the number of shares of Preferred
Stock of any class; and
2. alter the designation of, or classify or reclassify, any unissued
shares of Preferred Stock of any class from time to time by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications, or terms or conditions of redemption of such class.
C. Permissible Distributions. Unless otherwise determined by the Board of
-------------------------
Directors, in determining whether a distribution (other than upon liquidation,
dissolution or winding-up of the Corporation), by dividend, redemption or other
acquisition of shares or otherwise, is permitted under the Maryland General
Corporation Law as may be amended from time to time (the "MGCL"), amounts that
would be needed, if the Corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of holders of
shares of any class or series of stock whose preferential rights upon
dissolution are superior to those receiving the distribution shall not be added
to the Corporation's total liabilities.
SECTION 4. COMMON STOCK.
Subject to the provisions of Sections 2 and 5 of this Article V, the Common
Stock shall have the following preferences, rights, powers, restrictions,
limitations and qualifications, and such others as may be afforded by law:
A. Voting Rights. Except as may otherwise be required by law, and subject
-------------
to action, if any, by the Board of Directors, pursuant to Section 3 of this
Article V, granting to the holders of one or more classes of Preferred Stock
exclusive voting powers with respect to specified matters, each holder of Common
Stock shall have one vote in respect of each share of Common Stock held of
record on all matters to be voted upon by the Stockholders.
B. Dividend Rights. After provision(s) with respect to preferential
---------------
dividends on any then-outstanding classes of Preferred Stock, if any, fixed by
the Board of Directors pursuant to Section 3 of this Article V, shall have been
satisfied, and after satisfaction of any other requirements, if any, including
with respect to redemption rights and preferences, in any such classes of
Preferred Stock, then and thereafter the holders of Common Stock shall be
entitled to receive, ratably in proportion to the number of shares of Common
Stock held by them, such
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<PAGE>
dividends as may be authorized from time to time by the Board of Directors out
of assets legally available therefor.
C. Liquidation Rights. In the event of the voluntary or involuntary
------------------
liquidation, dissolution or winding-up of the Corporation, after distribution in
full of the preferential amounts, if any, fixed pursuant to Section 3 of this
Article V, to be distributed to the holders of any then-outstanding Preferred
Stock, and subject to the right, if any, of the holders of any outstanding
Preferred Stock to participate further in any liquidating distributions, all of
the assets of the Corporation, if any, remaining, of whatever kind available for
distribution to Stockholders after the foregoing distributions have been made
shall be distributed to the holders of the Common Stock, ratably in proportion
to the number of shares of Common Stock held by them.
D. Reclassification of Common Stock. The Board of Directors may
--------------------------------
reclassify any unissued shares of Common Stock from time to time as one or more
classes or series of stock.
SECTION 5. GENERAL PROVISIONS.
A. Interpretation and Ambiguities. The Board shall have the power to
------------------------------
interpret and to construe the provisions of this Article V, and in the case of
an ambiguity in the application of any of the provisions of this Article V,
including any definition contained in Section 1(A), the Board shall have the
power to determine the application of the provisions of this Article V with
respect to any situation based on the facts known to it, and any such
interpretation, construction or determination shall be final and binding on all
interested parties, including the Stockholders.
B. Severability. If any provision of this Article V or any application of
------------
any such provision is determined to be void, invalid or unenforceable by any
court having jurisdiction over the issue, the validity and enforceability of the
remaining provisions shall not be affected and other applications of such
provision shall be affected only to the extent necessary to comply with the
determination of such court.
ARTICLE VI
THE BOARD OF DIRECTORS
SECTION 1. AUTHORIZED NUMBER AND INITIAL DIRECTORS.
The business and affairs of the Corporation shall be managed under the
direction of the Board of Directors. The authorized number of directors of the
Corporation initially shall consist of
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<PAGE>
not less than three, the minimum number required by the MGCL, and not more than
15 persons, which number may be increased or decreased pursuant to the Bylaws of
the Corporation.
SECTION 2. CLASSIFIED BOARD.
The directors of the Corporation (other than any directors who may be
elected by holders of Preferred Stock as may be provided from time to time by
the Board of Directors) shall be and are hereby divided into three Classes,
designated "Class I," "Class II" and "Class III," respectively. The number of
directors in each such c`lass shall be as nearly equal in number as possible.
Each director shall serve for a term ending on the date of the third Annual
Meeting of Stockholders following the Annual Meeting at which such director was
elected, provided, however, that each initial director in Class I shall serve
for a term ending on the date of the Annual Meeting held in 1997; each initial
director in Class II shall serve for a term ending on the date of the Annual
Meeting held in 1998; and each initial director in Class III shall serve for a
term ending on the date of the Annual Meeting held in 1999.
SECTION 3. GENERAL TERM OF OFFICE.
Notwithstanding the provisions of Section 2 of this Article VI, each
director shall serve until such director's successor is elected and qualified or
until such director's death, retirement, resignation or removal.
SECTION 4. REMOVAL OF DIRECTORS.
Subject to the rights of the holders of any class or series of Preferred
Stock then outstanding, a director may be removed, with or without cause, by the
affirmative vote of at least 75% of the votes entitled to be cast for the
election of directors at an annual meeting or at a special meeting of the
stockholders called for the purpose of removing such director.
SECTION 5. INDEPENDENT DIRECTORS.
A. Notwithstanding anything herein to the contrary, at all times (except
during a period not to exceed 60 days following the death, resignation,
incapacity or removal from office of a director prior to expiration of the
director's term of office), a majority of the Board of Directors shall be
comprised of persons (each such person an "Independent Director") who are not
officers or employees of the Corporation or the Operating Partnership or
Affiliates (as hereinafter defined) of (i) any officers or employees of the
Corporation or the Operating Partnership or of any advisor to the Corporation or
the Operating Partnership under an advisory agreement, (ii) any lessee or
contract manager of any property of the Corporation or the Operating Partnership
or their
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<PAGE>
respective subsidiaries, (iii) any subsidiary of the Corporation or the
Operating Partnership, or (iv) any Person that is an Affiliate of the
Corporation or the Operating Partnership.
B. For purposes of this Section 5, "Affiliate" of a Person shall mean (i)
any Person that, directly or indirectly, controls or is controlled by or is
under the common control with such other Person, (ii) any Person that owns,
beneficially, directly or indirectly, five percent or more of the outstanding
stock of such other Person, or (iii) any officer, director, employee, partner or
trustee of such other Person or of any or of any Person controlling, controlled
by or under common control with such Person (excluding directors and Persons
serving in similar capacities who are not otherwise an Affiliate of such
Person). The term "Person" means and includes any natural person, corporation,
partnership, association, trust, limited liability company or any other legal
entity. For purposes of this definition, "control" (including the correlative
meanings of the terms "controlled by" and "under common control with"), as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such Person, through the ownership of voting securities, partnership interests
or other equity interests.
C. Notwithstanding anything herein to the contrary, no term or provision
of this Section 5 of Article VI may be added, amended or repealed in any respect
without the affirmative vote of all the Independent Directors.
SECTION 6. BOARD AUTHORIZATION OF STOCK ISSUANCES.
The Board of Directors of the Corporation may authorize the issuance from
time to time of shares of stock of any class, whether now or hereafter
authorized, or securities convertible into shares of any class or series,
whether now or hereafter authorized, for such consideration as the Board of
Directors may deem advisable, subject to such restrictions or limitations, if
any, as may be set forth in the charter.
SECTION 7. CERTAIN OTHER DETERMINATIONS BY THE BOARD OF DIRECTORS.
The determination as to any of the following matters, made in good faith by
or pursuant to the direction of the Board of Directors consistent with the
charter and in the absence of actual receipt of an improper benefit in money,
property or services or active and deliberate dishonesty established by a court,
shall be final and conclusive and shall be binding upon the Corporation and
every holder of shares of its stock: the amount of the net income of the
Corporation for any period and the amount of assets at any time legally
available for the
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<PAGE>
payment of dividends, redemption of shares or the payment of other distributions
on shares; the amount of paid-in surplus, net assets, other surplus, annual or
other net profit, net assets in excess of capital, undivided profits or excess
of profits over losses on sales of assets; the amount, purpose, time of
creation, increase or decrease, alteration or cancellation of any reserves or
charges and the propriety thereof (whether or not any obligation or liability
for which such reserves or charges shall have been created shall have been paid
or discharged); the fair value, or any sale, bid or asked price to be applied in
determining the fair value, of any asset owned or held by the Corporation; and
any matters relating to the acquisition, holding and disposition of any assets,
of the Corporation.
SECTION 8. RESERVED POWERS OF THE BOARD OF DIRECTORS.
The enumeration and definition of particular powers of the Board of
Directors included in this Article VI shall in no way be limited or restricted
by reference to or inference from the terms of any other clause of this or any
other provision of the charter of the Corporation, or construed or deemed by
inference or otherwise in any manner to exclude or limit the powers conferred
upon the Board of Directors under the general laws of the State of Maryland as
now or hereafter in force.
ARTICLE VII
PROVISIONS FOR DEFINING, LIMITING AND REGULATING
CERTAIN POWERS OF THE CORPORATION AND OF THE
STOCKHOLDERS AND DIRECTORS
SECTION 1. NO PREEMPTIVE RIGHTS.
Except as may be provided by the Board of Directors in authorizing the
issuance of Preferred Stock pursuant to Section 3 of Article V, no holder of
shares of stock of the Corporation, shall, as such holder, have any preemptive
right to purchase or subscribe for any additional shares of the Corporation or
any other security of the Corporation which it may issue or sell.
SECTION 2. ADVISOR AGREEMENTS.
Subject to such approval of Stockholders and other conditions, if any, as
may be required by applicable statute, rule or regulation, the Board of
Directors may authorize the execution and performance by the Corporation of one
or more agreements with any Person (as defined in Article VI Section 5(B))
whereby, subject to the supervision of the Board of Directors, any such other
person, corporation, association, company, trust, partnership (limited or
general) or other organization shall render or make available to the Corporation
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<PAGE>
managerial, investment, advisory and/or related services, office space and other
services and facilities (including, if deemed advisable by the Board of
Directors, the management or supervision of the investments of the Corporation)
upon such terms and conditions as may be provided in such agreement or
agreements (including, if deemed fair and equitable by the Board of Directors,
the compensation payable thereunder by the Corporation).
SECTION 3. OTHER ACTIVITIES OF MANAGEMENT.
Certain of the officers and directors of the Corporation and their
affiliates are continuously engaged in acquiring, developing, constructing,
operating and managing real property. By virtue of these activities,
opportunities to acquire, develop and own properties will become available to
the officers and directors of the Corporation and their affiliates in the
future. Any of the officers and directors of the Corporation and their
affiliates may continue to engage in such activities, independently or with
others, and the officers and directors of the Corporation and their affiliates
shall have no obligation to make any such business opportunities available to
the Corporation. The Corporation shall have no interest in any such business
opportunities other than business opportunities which the officers and directors
of the Corporation and their affiliates, in their sole discretion, have made
available to the Corporation and in which the Corporation has invested.
SECTION 4. REIT QUALIFICATION.
The Board of Directors shall use commercially reasonable efforts to cause
the Corporation and its Stockholders to qualify for U.S. federal income tax
treatment in accordance with the provisions of the Code applicable to a REIT.
In furtherance of the foregoing, the Board of Directors shall use commercially
reasonable efforts to take such actions as are necessary, and may take such
actions as in its sole judgment and discretion are desirable, to preserve the
status of the Corporation as a REIT, provided, however, that if Article V has
been amended in accordance with Section 2(E) of Article V in order to terminate
the REIT status of the Corporation, the Board of Directors shall revoke or
otherwise terminate the Corporation's REIT election pursuant to Section 856(g)
of the Code.
SECTION 5. STOCKHOLDER VOTING REQUIREMENTS.
A. Notwithstanding any provision of law to the contrary, except as
otherwise specifically provided herein, the affirmative vote of holders of
shares entitled to cast a majority of all votes entitled to be cast on any
matter or act requiring approval of the Stockholders of the Corporation shall be
sufficient, valid
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<PAGE>
and effective, after due authorization, approval or advice by the Board of
Directors, to approve and authorize such matter or act.
B. Pursuant to Section 3-603(e)(1)(iii) of the MGCL, the Corporation
expressly elects not to be governed by the provisions of Section 3-602 of the
MGCL with respect to any Business Combination (as defined in Section 3-601 of
the MGCL) with any or all of Steven D. Jorns, Bruce G. Wiles, Kenneth E. Barr,
James E. Sowell, Lewis W. Shaw and Kenneth W. Shaw and all present or future
Affiliates (as defined in Article VI Section S) or Associates (as such term is
defined in Rule 12b-2 promulgated under the Securities and Exchange Act of 1934,
as amended) of, or any other person acting in concert or as a group with, any of
the foregoing persons and any other Business Combination which may arise in
connection with the Formation Transactions (as such term is defined in the
Corporation's Registration Statement on Form S-11 (Registration No. 333-4568),
generally.
ARTICLE VIII
INDEMNIFICATION, ADVANCE OF EXPENSES
AND LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
SECTION 1. INDEMNIFICATION AND ADVANCE OF EXPENSES.
A. Mandatory Indemnification and Advance of Expenses. To the fullest
-------------------------------------------------
extent permitted by Maryland law in effect from time to time, the Corporation
shall indemnify and, without requiring a preliminary determination of the
ultimate entitlement to indemnification, shall pay on behalf of or reimburse
reasonable expenses in advance of final disposition of a proceeding any person
(or the estate of any person) who is or was a party to, or is threatened to be
made a party to, any threatened, pending or completed action, suit or
proceeding, whether or not by or in the right of the Corporation, and whether
civil, criminal, administrative, investigative or otherwise, by reason of the
fact that such person is or was a director or officer of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
trustee, partner, member, agent or employee of another corporation, partnership,
limited liability company, association, joint venture, trust or other
enterprise. To the fullest extent permitted by Maryland law, the
indemnification provided herein shall include reasonable expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement. The
Corporation may, with the approval of its Board of Directors, provide such
indemnification and advancement of expenses as set forth in the first sentence
of this Section 1(A) of this Article VIII to a person who served a predecessor
of the Corporation in any of the capacities described in the first sentence of
this Section 1(A) of this Article VIII and to agents and employees of the
Corporation and any predecessor Corporation.
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<PAGE>
B. Insurance. The Corporation may, to the fullest extent permitted by
---------
law, purchase and maintain insurance on behalf of any such person against any
liability which may be asserted against such person, as described in Section
1(A) of this Article VIII, and on any obligation of the Corporation to indemnify
or advance expenses pursuant to the charter or Bylaws of the Corporation or any
resolution of the Board of Directors or contract to which the Corporation is a
party.
C. Non-Exclusivity. The rights provided herein shall not be deemed to
---------------
limit the right of the Corporation to indemnify or advance expenses to any other
person to the fullest extent permitted by law, nor shall it be deemed exclusive
of any other rights to which any person seeking indemnification or advances of
expenses from the Corporation may be entitled under any agreement, the Bylaws of
the Corporation, a resolution of Stockholders or the Board of Directors, or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office.
SECTION 2. LIMITATION OF LIABILITY.
To the maximum extent that Maryland law in effect from time to time permits
limitation of the liability of directors and officers, no director or officer of
the Corporation shall be liable to the Corporation or its Stockholders for money
damages.
SECTION 3. EFFECT OF AMENDMENT.
Neither the amendment nor repeal of this Article VIII, nor the adoption or
amendment of any other provision of the charter or the Bylaws of the Corporation
inconsistent with this Article VIII, shall apply to or affect in any respect the
applicability of the provisions of this Article VIII with respect to any act or
failure to act which occurred prior to such amendment, repeal or adoption.
ARTICLE IX
AMENDMENTS
A. Right to Amend Articles. Subject to the provisions hereof, the
-----------------------
Corporation reserves the right at any time, and from time to time, to amend,
alter, repeal, or rescind any provision contained herein, including but not
limited to the provisions setting forth the terms or the contract and other
rights of the issued and outstanding stock of the Corporation of any class or
series, in the manner now or hereafter prescribed by law, and other provisions
authorized by the laws of the State of Maryland at the time in force may be
added or inserted, in the manner now or hereafter prescribed by law; and all
contract or other rights,
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preferences and privileges of whatsoever nature conferred upon Stockholders,
directors, officers, employees or any other persons whomsoever by and pursuant
to the charter of the Corporation, in its present form or as hereafter amended,
are granted subject to this reservation.
B. Certain Amendments Requiring Special Stockholder Vote. Any provision
-----------------------------------------------------
of the charter of the Corporation to the contrary notwithstanding:
1. no term or provision of the charter of the Corporation may be
added, amended or repealed in any respect that would, in the determination
of the Board of Directors, cause the Corporation not to qualify as a REIT
under the Code;
2. Article VI, Section 2 (classification of directors), Section 4
(removal of directors), Section 5 (independent directors); Article VII,
Section 1 (no preemptive rights); Article VIII (indemnification, advance of
expenses and limitation of liability of officers); and this Article IX
(amendments) shall not be amended or repealed; and
3. no provisions imposing cumulative voting in the election of
directors may be added to the charter of the Corporation;
unless in each such case, in addition to any vote of the holders of the
Preferred Stock required by the terms of then-outstanding Preferred Stock, such
action is approved by the affirmative vote of the holders of not less than two-
thirds of all of the votes entitled to be cast on the matter.
THIRD: The amendment to and restatement of the charter of the Corporation
as hereinabove set forth have been duly advised by the Board of Directors of the
Corporation by unanimous written consent and authorized and approved by the sole
Stockholder of the Corporation by written consent.
FOURTH: The current address of the principal office of the Corporation
within the State of Maryland is c/o Ballard Spahr Andrews & Ingersoll, 300 East
Lombard Street, Baltimore, Maryland 21202, Attention: Tracy A. Bacigalupo, Esq.
FIFTH: The name and address of the Corporation's current resident agent is
Tracy A. Bacigalupo, whose address is c/o Ballard Spahr Andrews & Ingersoll, 300
East Lombard Street, Baltimore, Maryland 21202.
SIXTH: The number of directors of the Corporation is currently five and
the names of the directors currently in office
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are as follows: Steven J. Jorns, H. Cabot Lodge III, James R. Worms, James
McCurry and Kent R. Hance.
SEVENTH:
(a) The total number of shares of stock of all classes which the
Corporation had authority to issue immediately prior to this amendment
was 1,000 shares of stock, no par value per share.
(b) The total number of shares of all classes of stock which the
Corporation has authority to issue pursuant to the foregoing amendment
and restatement of the charter is 120,000,000, consisting of the
following:
(1) 100,000,000 shares of Common Stock, $0.01 par value per
share (the "Common Stock"); and
(2) 20,000,000 shares of Preferred Stock, $0.01 par value per
share (the "Preferred Stock").
(c) The aggregate par value of all authorized shares of stock
having par value is $1,200,000.
-25-
<PAGE>
IN WITNESS WHEREOF, American General Hospitality Corporation has caused
these Articles of Amendment and Restatement to be signed in its name and on its
behalf by the Chairman of the Board, Chief Executive Officer and President and
attested to by its Secretary on this ____ day of ________, 1996, and its
Chairman of the Board, Chief Executive Officer and President acknowledges that
these Articles of Amendment and Restatement are the corporate act and deed of
the Corporation and, under the penalties for perjury, that the matters and facts
set forth herein are true in all material respects to the best of his knowledge,
information and belief.
ATTEST: AMERICAN GENERAL HOSPITALITY CORPORATION
By: By: (Seal)
--------------------------- -----------------------------------------
, Secretary Steven D. Jorns, Chairman of the Board,
---------------- Chief Executive Officer and President
-26-
<PAGE>
EXHIBIT 10.3
LEASE AGREEMENT
DATED AS OF _________, 1996
BETWEEN
[HOTEL OWNER]
AS LESSOR
AND
AGH LEASING, L.P.
AS LESSEE
[HOTEL]
<PAGE>
TABLE OF CONTENTS
-----------------
SECTION PAGE
ARTICLE I ................................................................ 1
1.1 Leased Property................................................. 1
---------------
1.2 Term ........................................................... 2
----
1.3 Initial Transaction ............................................ 3
-------------------
ARTICLE II ............................................................... 3
Definitions ......................................................... 3
ARTICLE III .............................................................. 16
3.1 Rent ........................................................... 16
----
3.2 Confirmation of Participating Rent ............................. 21
----------------------------------
3.3 Additional Charges ............................................. 22
------------------
3.4 No Set Off ..................................................... 22
----------
3.5 Annual Budget .................................................. 22
-------------
3.6 Books and Records .............................................. 24
-----------------
3.7 [Intentionally omitted.] ....................................... 24
3.8 ................................................................ 24
3.9 Allocation of Revenues ......................................... 25
----------------------
ARTICLE IV ............................................................... 25
4.1 Payment of Impositions ......................................... 25
----------------------
4.2 Notice and Accrual of Impositions .............................. 26
---------------------------------
4.3 Adjustment of Impositions ...................................... 27
-------------------------
4.4 Utility Charges ................................................ 27
---------------
4.5 Franchise Fees ................................................. 27
--------------
ARTICLE V ................................................................ 27
5.1 No Termination, Abatement, etc ................................. 27
------------------------------
ARTICLE VI ............................................................... 28
6.1 Ownership of the Leased Property ............................... 28
--------------------------------
6.2 Lessee's Personal Property ..................................... 28
--------------------------
6.3 Lessor's Lien .................................................. 29
-------------
ARTICLE VII .............................................................. 29
7.1 Condition of the Leased Property ............................... 29
--------------------------------
7.2 Use of the Leased Property ..................................... 30
--------------------------
7.3 Lessor to Grant Easements, etc. ................................ 31
-------------------------------
ARTICLE VIII ............................................................. 31
8.1 Compliance with Legal and Insurance Requirements,
-------------------------------------------------
etc .......................................................... 31
---
8.2 Legal Requirements Covenants ................................... 31
----------------------------
8.3 Environmental Covenants ........................................ 32
-----------------------
ARTICLE IX ............................................................... 34
9.1 Maintenance and Repair ......................................... 34
---------------------
-i-
<PAGE>
ARTICLE X ............................................................... 36
10.1 Alterations ................................................... 36
-----------
10.2 Salvage ....................................................... 37
-------
10.3 Lessor Alterations ............................................ 37
------------------
ARTICLE XI ............................................................... 37
Liens ............................................................... 37
ARTICLE XII .............................................................. 38
Permitted Contests .................................................. 38
ARTICLE XIII ............................................................. 39
13.1 General Insurance Requirements ................................ 39
------------------------------
13.2 Replacement Cost .............................................. 41
----------------
13.3 (Intentionally omitted) ....................................... 41
13.4 Waiver of Subrogation ......................................... 41
--------------------
13.5 Form Satisfactory, etc. ....................................... 42
----------------------
13.6 Increase in Limits ............................................ 42
------------------
13.7 Blanket Policy ................................................ 42
--------------
13.8 Separate Insurance ............................................ 43
------------------
13.9 Reports On Insurance Claims ................................... 43
---------------------------
ARTICLE XIV .............................................................. 43
14.1 Insurance Proceeds ............................................ 43
------------------
14.2 Reconstruction in the Event of Damage or
----------------------------------------
Destruction Covered by Insurance ............................. 44
--------------------------------
14.3 Reconstruction in the Event of Damage or
----------------------------------------
Destruction Not Covered by Insurance ......................... 44
------------------------------------
14.4 Lessee's Property and Business Interruption
-------------------------------------------
Insurance .................................................... 44
---------
14.5 Abatement of Rent ............................................. 44
-----------------
14.6 Damage Near End of Term ....................................... 45
-----------------------
ARTICLE XV ............................................................... 45
15.1 Definitions ................................................... 45
-----------
15.2 Parties' Rights and Obligations ............................... 45
-------------------------------
15.3 Total Taking .................................................. 45
------------
15.4 Allocation of Award ........................................... 46
-------------------
15.5 Partial Taking ................................................ 46
--------------
15.6 Temporary Taking .............................................. 46
----------------
ARTICLE XVI .............................................................. 47
16.1 Events of Default ............................................. 47
-----------------
16.2 ............................................................... 49
16.4 Waiver ........................................................ 50
------
16.5 Application of Funds .......................................... 51
--------------------
ARTICLE XVII ............................................................. 51
Lessor's Right to Cure Lessee's Default ............................. 51
-ii-
<PAGE>
ARTICLE XVIII ............................................................ 51
18.1 Personal Property Limitation .................................. 51
----------------------------
18.2 Sublease Rent Limitation ...................................... 52
------------------------
18.3 Sublease Lessee Limitation .................................... 52
--------------------------
18.4 Lessee Ownership Limitation ................................... 52
----------------------------
ARTICLE XIX .............................................................. 52
Holding Over ........................................................ 52
ARTICLE XX ............................................................... 53
Indemnification ..................................................... 53
ARTICLE XXI .............................................................. 54
21.1 Subletting and Assignment ..................................... 54
-------------------------
21.2 Attornment .................................................... 55
----------
ARTICLE XXII ............................................................. 55
Officer's Certificates; Financial Statements; Lessor's
Estoppel Certificates and Covenants .......................... 55
ARTICLE XXIII ............................................................ 56
Lessor's Right to Inspect ........................................... 56
ARTICLE XXIV ............................................................. 57
No Waiver ........................................................... 57
ARTICLE XXV .............................................................. 57
Remedies Cumulative ................................................. 57
ARTICLE XXVI ............................................................. 57
Acceptance of Surrender ............................................. 57
ARTICLE XXVII ............................................................ 57
No Merger of Title .................................................. 57
ARTICLE XXVIII ........................................................... 58
28.1 Conveyance by Lessor .......................................... 58
--------------------
28.2 Other Interests ............................................... 58
---------------
ARTICLE XXIX ............................................................ 60
Quiet Enjoyment ..................................................... 60
ARTICLE XXX .............................................................. 61
Notices ............................................................. 61
ARTICLE XXXI ............................................................. 61
Appraisers .......................................................... 61
ARTICLE XXXII ............................................................ 62
[Intentionally omitted.] ............................................ 62
-iii-
<PAGE>
ARTICLE XXXIII ......................................................... 62
33.1 Miscellaneous ................................................. 62
-------------
33.2 Transition Procedures ......................................... 63
---------------------
33.3 Standard of Discretion ........................................ 64
----------------------
33.4 Action for Damages ............................................ 64
------------------
ARTICLE XXXIV ........................................................... 64
Memorandum of Lease ................................................. 64
ARTICLE XXXV ............................................................. 64
[Intentionally omitted.] ............................................ 64
ARTICLE XXXVI ............................................................ 64
36.1 Lessor's Option to Terminate Lease ............................ 64
----------------------------------
36.2 Provisions Relating to Purchase of the Leased
---------------------------------------------
Property ..................................................... 66
--------
ARTICLE XXXVII ........................................................... 67
Compliance with Franchise Agreement ................................. 67
ARTICLE XXXVIII .......................................................... 68
Capital Expenditures ................................................ 68
ARTICLE XXXIX ............................................................ 69
Lessor's Default .................................................... 69
ARTICLE XL ............................................................... 70
40.1 Arbitration ................................................... 70
-----------
40.2 Alternative Arbitration ....................................... 70
-----------------------
40.3 Arbitration Procedures ........................................ 70
----------------------
-iv-
<PAGE>
Exhibit A: Other Properties
Exhibit B: Land
Exhibit C: Base Rent; Calculation of Participating Rent and Portion of Rent
Attributable to Franchise
Exhibit D: Furniture and Equipment Sold to Lessee
The exhibits of Exhibit 10.3, set forth herein (Exhibits A, B, C, and D), have
not been included as exhibits to the Registration Statement. The Registrant
agrees to furnish supplementally a copy of any such omitted schedule or exhibit
upon request.
-v-
<PAGE>
LEASE AGREEMENT
---------------
THIS LEASE AGREEMENT (hereinafter called "Lease"), made as of the
_____ day of _______________, 1996, by and between [OWNER OF HOTEL] (hereinafter
called "Lessor"), and AGH LEASING, L.P., a Delaware limited partnership
(hereinafter called "Lessee"), provides as follows.
W I T N E S S E T H:
-------------------
[Contemporaneously with the execution hereof, (i) Lessor acquired the
Leased Property; (ii) Affiliates of Lessor acquired (directly or indirectly)
certain Other Properties, and such Affiliates are entering with Lessee into the
Other Leases for such Other Properties; and (iii) American General Hospitality
Operating Partnership, L.P. (the "OP"), (which owns directly or indirectly all
partnership interests in Lessor and the Affiliates) and Lessee are]/1/ entering
into the Lease Master Agreement with respect to this Lease and the Other Leases
(all such terms being hereinafter defined).
In furtherance of the consummation of such series of transactions,
Lessor and Lessee wish to enter into this Lease.
NOW, THEREFORE, Lessor, in consideration of the payment of rent by
Lessee to Lessor, the covenants and agreements to be performed by Lessee, and
upon the terms and conditions hereinafter stated, does hereby rent and lease
unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased
Property.
ARTICLE I
---------
1.1 Leased Property. The Leased Property is comprised of Lessor's
---------------
[leasehold]/2/ interest in the following/3/:
- ------------------------
1. Alternate for partnership interest: Lessor owns the Leased Property;
contemporaneously with the execution hereof, (i) American General
Hospitality Operating Partnership, L.P. (the "OP") has acquired, directly
or indirectly, all the partnership interests in Lessor; (ii) Affiliates of
the OP have also acquired directly or indirectly certain Other Properties
and such Affiliates are entering into the Other Leases with Lessee; and
(iii) the OP and Lessee are
2. Alternate for ground leases.
3. Alternate for ground leases: add [,pursuant to that certain ground lease
[describe] (the "Ground Lease")].
<PAGE>
(a) the land described in Exhibit "B" attached hereto and by reference
-----------
incorporated herein (the "Land");
(b) all buildings, structures and other improvements of every kind
including, but not limited to, alleyways and connecting tunnels, sidewalks,
utility pipes, conduits and lines (on-site and off-site), parking areas and
roadways appurtenant to such buildings and structures presently situated upon
the Land (collectively, the "Leased Improvements");
(c) all easements, rights and appurtenances relating to the Land and
Leased Improvements;
(d) all equipment, machinery, fixtures, and other items of property
required for or incidental to the use of the Leased Improvements as a hotel,
including all components thereof, now and hereafter permanently affixed to or
incorporated into the Leased Improvements, including, without limitation, all
furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting,
ventilating, refrigerating, incineration, air and water pollution control, waste
disposal, air-cooling and air-conditioning systems and apparatus, sprinkler
systems and fire and theft protection equipment, all of which to the greatest
extent permitted by law are hereby deemed by the parties hereto to constitute
real estate, together with all replacements, modifications, alterations and
additions thereto (collectively, the "Fixtures");
(e) all furniture and furnishings and all other items of personal
property (excluding Inventory and Lessee's Personal Property) located on, and
used in connection with, the operation of the Leased Improvements as a hotel,
together with all replacements, modifications, alterations and additions
thereto;
(f) all existing leases of the Leased Property (including any security
deposits or collateral held by Lessor pursuant thereto); and
(g) the rights of Lessor in the Franchise Agreement with respect to
the Facility.
THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION
OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF
PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL
COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD
INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS AND MATTERS WHICH WOULD BE DISCLOSED
BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF.
1.2 Term. The term of the Lease (the "Term") shall commence on the
----
date hereof (the "Commencement Date") and shall
-2-
<PAGE>
end on the twelfth (12th) anniversary of the last day of the month prior to the
month in which the Commencement Date occurs, unless sooner terminated in
accordance with the provisions hereof.
1.3 Initial Transaction. Lessor and Lessee acknowledge that the
-------------------
Commencement Date is the date of [the acquisition of the Lease Property]./4/
Pursuant to a separate Assignment and Assumption Agreement of even date
herewith, Lessor has assigned to Lessee, and Lessee has assumed, certain
occupancy agreements and operating agreements to which the Leased Property
remains subject after the date hereof and has also sold to Lessee certain
Furniture and Equipment as described on [Exhibit D].
ARTICLE II
----------
Definitions: For all purposes of this Lease, except as otherwise
-----------
expressly provided or unless the context otherwise requires, (a) the terms
defined in this Article have the meanings assigned to them in this Article and
include the plural as well as the singular, (b) all accounting terms not
otherwise defined herein have the meanings assigned to them in accordance with
GAAP, (c) all references in this Lease to designated "Articles," "Sections" and
other subdivisions are to the designated Articles, Sections and other
subdivisions of this Lease and (d) the words "herein," "hereof" and "hereunder"
and other words of similar import refer to this Lease as a whole and not to any
particular Article, Section or other subdivision.
Additional Charges: As defined in Section 3.3.
------------------
Affiliate: As used in this Lease the term "Affiliate" of a Person
---------
shall mean (a) any Person that, directly or indirectly, controls or is
controlled by or is under common control with such Person, (b) any other Person
that owns, beneficially, directly or indirectly, ten percent or more of the
outstanding capital stock, shares or equity interests of such Person, or (c) any
officer, director, employee, partner, member or trustee of such Person or any
Person controlling, controlled by or under common control with such Person
(excluding trustees and Persons serving in similar capacities who are not
otherwise an Affiliate of such Person). For the purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), as used with respect to any person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, through the ownership
- ------------------
4. [For partnership interest deal: the OP's direct and indirect acquisition
of all of the interest in Lessor.]
-3-
<PAGE>
of voting securities, partnership interests or other equity interests, by
contract or otherwise.
Annual Budget: As used in this Lease, the term "Annual Budget" shall
-------------
mean the Operating Budget and a Capital Budget prepared by Lessee and approved
by Lessor in accordance with Section 3.5.
Award: As defined in Section 15.1(c).
-----
Base Rate: The prime rate (or base rate) reported in the Money Rates
---------
column or comparable section of The Wall Street Journal as the rate then in
-----------------------
effect for corporate loans at large U.S. money center commercial banks, whether
or not such rate has actually been charged by any such bank. If no such rate is
reported in The Wall Street Journal or if such rate is discontinued, then Base
-----------------------
Rate shall mean such other successor or comparable rate as Lessor may reasonably
designate.
Base Rent: As defined in Section 3.1(a).
---------
Beverage Sales: Shall mean gross revenues from (i) the sale of wine,
--------------
beer, liquor or other alcoholic beverages, whether sold in a bar or lounge,
delivered to or available in a guest room, sold at meetings or banquets or at
any other location at the Leased Property and (ii) non-alcoholic beverages sold
in a bar or lounge. Such revenue shall include sales by Lessee and its
permitted subtenants, licensees and concessionaires (including, without
limitation, any lease/concession agreement entered into with an entity owned by
Steven D. Jorns, as licensee), but as to subleases, licenses or similar
arrangements for alcoholic beverage sales which are entered into by Lessor or
any prior owner of the Leased Property with parties who are not Affiliates of
Lessee and which were existing as of the date of this Lease, such revenue shall
only include rents received under such existing subleases, licenses or similar
arrangements. Such revenue shall be determined in a manner consistent with the
Uniform System and shall not include the following:
(a) Any gratuity or service charge added to a customer's bill or
statement in lieu of a gratuity which is paid directly to an employee;
(b) Credits, rebates or refunds; and
(c) Sales taxes or taxes of any other kind imposed on the sale of
alcoholic or other beverages.
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday
------------
that is not a day on which national banks in New York City or in the
municipality wherein the Leased Property is located are closed.
-4-
<PAGE>
Capital Budget: As defined in Section 3.5.
--------------
Capital Expenditures: Amounts advanced to pay the costs of Capital
--------------------
Improvements.
Capital Expenditures Reserve: As defined in Article XXXVIII.
----------------------------
Capital Impositions: Taxes, assessments or similar charges imposed
-------------------
upon or levied against the Leased Property for the costs of public improvements,
including, without limitation, roads, sidewalks, public lighting fixtures,
utility lines, storm sewers, drainage facilities, and similar improvements.
Capital Improvements: Improvements to the Leased Property and
--------------------
replacement or refurbishing of Fixtures and of Furniture and Equipment that
constitute portions of the Leased Property in connection with its Primary
Intended Use, all as designated as capital improvements by and determined in
accordance with GAAP.
CERCLA: The Comprehensive Environmental Response, Compensation and
------
Liability Act of 1980, as amended.
Change in Operations: As defined in Section 3.8.
--------------------
COBRA: The Consolidated Omnibus Budget Reconciliation Act of 1985, as
-----
amended.
Code: The Internal Revenue Code of 1986, as amended.
----
Commencement Date: As defined in Section 1.2.
-----------------
Company: American General Hospitality Corporation, the parent of the
-------
general partner of the OP.
Condemnation, Condemnor: As defined in Section 15.1(a).
-----------------------
Consumer Price Index: The "Consumer Price Index" published by the
--------------------
Bureau of Labor Statistics of the United States Department of Labor, U.S. City
Average, All Items for Urban Wage Earners and Clerical Workers (1982-1984 =
100).
Date of Taking: As defined in Section 15.1(b).
--------------
Emergency Expenditures: Expenditures required to take necessary or
----------------------
appropriate actions to respond to Emergency Situations.
Emergency Situations: Fire, any other casualty, or any other events,
--------------------
circumstances or conditions which threaten the
-5-
<PAGE>
safety or physical well-being of the Facility's guests or employees or which
involve the risk of material property damage or material loss to the Facility.
Environmental Authority: Any department, agency or other body or
-----------------------
component of any Government that exercises any form of jurisdiction or authority
under any Environmental Law.
Environmental Authorization: Any license, permit, order, approval,
---------------------------
consent, notice, registration, filing or other form of permission or
authorization required under any Environmental Law.
Environmental Laws: All applicable federal, state, local and foreign
------------------
laws and regulations relating to pollution of the environment (including without
limitation, ambient air, surface water, ground water, land surface or subsurface
strata), including without limitation laws and regulations relating to
emissions, discharges, Releases or threatened Releases of Hazardous Materials or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials. Environmental
Laws include but are not limited to CERCLA, FIFRA, RCRA, SARA and TSCA.
Environmental Liabilities: Any and all actual or potential
-------------------------
obligations to pay the amount of any judgment or settlement, the cost of
complying with any settlement, judgment or order for injunctive or other
equitable relief, the cost of compliance or corrective action in response to any
notice, demand or request from an Environmental Authority, the amount of any
civil penalty or criminal fine, and any court costs and reasonable amounts for
attorney's fees, fees for witnesses and experts, and costs of investigation and
preparation for defense of any claim or any Proceeding, regardless of whether
such Proceeding is threatened, pending or completed, that may be or have been
asserted against or imposed upon Lessor, Lessee, any Predecessor, the Leased
Property or any property used therein and arising out of:
(a) Failure to comply at any time with all Environmental Laws
applicable to the Leased Property;
(b) Presence of any Hazardous Materials on, in, under, at or in any
way affecting the Leased Property;
(c) A Release or threatened Release of any Hazardous Materials on, in,
at, under or in any way affecting the Leased Property;
-6-
<PAGE>
(d) Identification of Lessee, Lessor or any Predecessor as a
potentially responsible party under CERCLA or under any other Environmental Law;
(e) Presence at any time of any above-ground and/or underground
storage tanks, as defined in RCRA or in any applicable Environmental Law on, in,
at or under the Leased Property or any adjacent site or facility; or
(f) Any and all claims for injury or damage to persons or property
arising out of exposure to Hazardous Materials originating or located at the
Leased Property, or resulting from operation thereof or any adjoining property.
Event of Default: As defined in Section 16.1.
----------------
Facility: The hotel and/or other facility offering lodging and other
--------
services or amenities being operated or proposed to be operated on the Leased
Property.
FF&E Note: The promissory note(s) made by Lessee to Lessor and/or
---------
Affiliates of Lessor which evidences the consideration for acquiring certain
personal property at the Leased Property and/or the Other Properties.
Fair Market Value: The fair market value of the Leased Property means
-----------------
an amount equal to the price that a willing buyer not compelled to buy would pay
a willing seller not compelled to sell for such leased property, (a) assuming
the same is unencumbered by this Lease, (b) determined in accordance with the
appraisal procedures set forth in Article XXXI or in such other manner as shall
be mutually acceptable to Lessor and Lessee, (c) assuming that such seller must
pay customary closing costs and title premiums, and (d) taking into account the
positive or negative effect on the value of the Leased Property attributable to
the interest rate, amortization schedule, maturity date, prepayment penalty and
other terms and conditions of any encumbrance that is assumed by the transferee
or subject to which the Leased Property is transferred. In addition, in
determining the Fair Market Value with respect to damaged or destroyed Leased
Property such value shall be determined as if such Leased Property had not been
so damaged or destroyed.
FIFRA: The Federal Insecticide, Fungicide, and Rodenticide Act, as
-----
amended.
Fixtures: As defined in Section 1.1.
--------
Food Sales: Shall mean (i) gross revenues from the sale of food and
----------
non-alcoholic beverages that are sold or delivered on or off the Facility by
Lessee, its permitted subtenants, licensees or concessionaires, whether for cash
or for
-7-
<PAGE>
credit, including in respect of guest rooms, banquet rooms, meeting rooms and
other similar rooms, and (ii) gross revenue from the rental of banquet, meeting
and other similar rooms. Such revenue shall include sales by Lessee and its
permitted subtenants, licensees and concessionaires (including, without
limitation, any lease/concession agreement entered into with an entity owned by
Steven D. Jorns, as licensee), but as to subleases, licenses or similar
arrangements for food and non-alcoholic beverage sales which were entered into
by Lessor or any prior owner of the Leased Property with parties who are not
Affiliates of Lessee and which are existing as of the date of this Lease, such
revenue shall only include rents received under such existing subleases,
licenses or similar arrangements. Such revenue shall be determined in a manner
consisted with the Uniform System and shall not include the following:
(a) Vending machine sales;
(b) Any gratuities or service charges added to a customer's bill or
statement in lieu of a gratuity which is paid directly to an employee;
(c) Non-alcoholic beverages sold from a bar or lounge;
(d) Credits, rebates or refunds; and
(e) Sales taxes or taxes of any other kind imposed on the sale of food
or non-alcoholic beverages.
Franchise Agreement: Any franchise agreement or license agreement
-------------------
with a franchisor under which the Facility is operated.
Furniture and Equipment: For purposes of this Lease, the terms
-----------------------
"furniture and equipment" shall mean collectively all furniture, furnishings,
wall coverings, fixtures and hotel equipment and systems located at, or used in
connection with, the Facility, together with all replacements therefor and
additions thereto, including, without limitation, (i) all equipment and systems
required for the operation of kitchens, bars and restaurants, if any, laundry
and dry cleaning facilities, (ii) office equipment, (iii) dining room wagons,
materials handling equipment, cleaning and engineering equipment, (iv) telephone
and computerized accounting systems, and (v) vehicles.
GAAP: Generally accepted accounting principles as are at the time
----
applicable and otherwise consistently applied.
Government: The United States of America, any state, district or
----------
territory thereof, any foreign nation, any state,
-8-
<PAGE>
district, department, territory or other political division thereof, or any
political subdivision of any of the foregoing.
Gross Revenues: All revenues, receipts, and income of any kind
--------------
derived directly or indirectly by Lessee from or in connection with the Facility
(including rentals or other payments from tenants, lessees, licensees or
concessionaires but not including their gross receipts) whether on a cash basis
or credit, paid or collected, determined in accordance with GAAP and the Uniform
System, excluding, however: (i) funds furnished by Lessor, (ii) federal, state
and municipal excise, sales, and use taxes collected directly from patrons and
guests or as a part of the sales price of any goods, services or displays, such
as gross receipts, admissions, cabaret or similar or equivalent taxes and paid
over to federal, state or municipal governments, (iii) gratuities, (iv) proceeds
of insurance and condemnation, (v) proceeds from sales other than sales in the
ordinary course of business, (vi) all loan proceeds from financing or
refinancings of the Facility or interests therein or components thereof, (vii)
judgments and awards, except any portion thereof arising from normal business
operations of the hotel, and (viii) items constituting "allowances" under the
Uniform System.
[Ground Lease: As defined in the Recitals.]
------------
Hazardous Materials: All chemicals, pollutants, contaminants, wastes
-------------------
and toxic substances, including without limitation:
(a) Solid or hazardous waste, as defined in RCRA or in any
Environmental Law;
(b) Hazardous substances, as defined in CERCLA or in any Environmental
Law;
(c) Toxic substances, as defined in TSCA or in any Environmental Law;
(d) Insecticides, fungicides, or rodenticides, as defined in FIFRA or
in any Environmental Law;
(e) Gasoline or any other petroleum product or byproduct,
polychlorinated biphenols, asbestos and urea formaldehyde;
(f) Asbestos or asbestos containing materials;
(g) Urea formaldehyde foam insulation; and
(h) Radon gas.
-9-
<PAGE>
Holder: Any holder of a Mortgage, any purchaser of the Leased
------
Property or any portion thereof at a foreclosure sale or any sale in lieu
thereof, or any designee of any of the foregoing.
Impositions: Collectively, all taxes (including, without limitation,
-----------
all ad valorem, sales and use, occupancy, single business, gross receipts,
transaction privilege, rent or similar taxes as the same relate to or are
imposed upon Lessee or Lessor or Lessee's business conducted upon the Leased
Property), assessments (including, without limitation, all assessments for
public improvements or benefit, whether or not commenced or completed prior to
the date hereof and whether or not to be completed within the Term), ground
rents, water, sewer or other rents and charges, excises, tax inspection,
authorization and similar fees and all other governmental charges, in each case
whether general or special, ordinary or extraordinary, or foreseen or
unforeseen, of every character in respect of the Leased Property or the business
conducted thereon by Lessee (including all interest and penalties thereon caused
by any failure in payment by Lessee), which at any time during or with respect
to the Term hereof may be assessed or imposed on or with respect to or be a lien
upon (a) Lessor's interest in the Leased Property, (b) the Leased Property, or
any part thereof or any rent therefrom or any estate, right, title or interest
therein, or (c) any occupancy, operation, use or possession of, or sales from,
or activity conducted on or in connection with the Leased Property, or the
leasing or use of the Leased Property or any part thereof by Lessee. Nothing
contained in this definition of Impositions shall be construed to require Lessee
to pay (1) any tax based on net income (whether denominated as a franchise or
capital stock or other tax) imposed on Lessor or any other person, or (2) any
net revenue tax of Lessor or any other person, or (3) any tax imposed with
respect to the sale, exchange or other disposition by Lessor of any Leased
Property or the proceeds thereof, or (4) any single business, gross receipts
(other than a tax on any rent received by Lessor from Lessee), transaction,
privilege or similar taxes as the same relate to or are imposed upon Lessor
except to the extent that any tax, assessment, tax levy or charge that Lessee is
obligated to pay pursuant to the first sentence of this definition and that is
in effect at any time during the Term hereof is totally or partially repealed,
and a tax, assessment, tax levy or charge set forth in clause (1) or (2) is
levied, assessed or imposed expressly in lieu thereof.
Indemnified Party: Either of a Lessee Indemnified Party or a Lessor
-----------------
Indemnified Party.
Indemnifying Party: Any party obligated to indemnify an Indemnified
------------------
Party pursuant to any provision of this Lease.
-10-
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Insurance Requirements: All terms of any insurance policy required by
----------------------
this Lease and all requirements of the issuer of any such policy.
Inventory: All "Inventories of Merchandise" and "Inventories of
---------
Supplies" as defined in the Uniform System, including, but not limited to,
linens, china, silver, glassware and other non-depreciable personal property,
and any property of the type described in Section 1221(1) of the Code.
Land: As defined in Article I.
----
Lease: This Lease.
-----
Lease Master Agreement: That certain Lease Master Agreement of even
----------------------
date herewith relating to this Lease and the Other Leases.
Lease Year: Any 12-month period from January 1 to December 31 during
----------
the Term, or any shorter period at the beginning or the end of the Term.
Leased Improvements; Leased Property: Each as defined in Article I.
------------------------------------
Legal Requirements: All federal, state, county, municipal and other
------------------
governmental statutes, laws, rules, orders, regulations, ordinances, judgments,
decrees and injunctions affecting either the Leased Property or the maintenance,
construction, use, operation or alteration thereof (whether by Lessee or
otherwise), whether or not hereafter enacted and in force, including (a) all
laws, rules or regulations pertaining to the environment, occupational health
and safety and public health, safety or welfare, and (b) any laws, rules or
regulations that may (1) require repairs, modifications or alterations in or to
the Leased Property or (2) in any way adversely affect the use and enjoyment
thereof; and all permits, licenses and authorizations necessary or appropriate
to operate the Leased Property for its Primary Intended Use and all covenants,
agreements, restrictions and encumbrances contained in any instruments, either
of record or known to Lessee (other than encumbrances hereafter created by
Lessor without the consent of Lessee), at any time in force affecting the Leased
Property.
Lessee: The Lessee designated on this Lease and its respective
------
permitted successors and assigns.
Lessee Indemnified Party: Lessee, any Affiliate of Lessee, any other
------------------------
Person against whom any claim for indemnification may be asserted hereunder as a
result of a direct or indirect ownership interest in Lessee, the officers,
directors, stockholders, partners, members, employees, agents and
-11-
<PAGE>
representatives of any of the foregoing Persons and any corporate stockholder,
agent, or representative of any of the foregoing Persons, and the respective
heirs, personal representatives, successors and assigns of any such officer,
director, stockholder, employee, agent or representative.
Lessee's Personal Property: As defined in Section 6.2.
--------------------------
Lessor: The Lessor designated on this Lease and its respective
------
successors and assigns.
Lessor Indemnified Party: Lessor, any Affiliate of Lessor, including
------------------------
the Company, any other Person against whom any claim for indemnification may be
asserted hereunder as a result of a direct or indirect ownership interest in
Lessor, the officers, directors, stockholders, partners, members, employees,
agents and representatives of any of the foregoing Persons and of any
stockholder, partner, member, agent, or representative of any of the foregoing
Persons, and the respective heirs, personal representatives, successors and
assigns of any such officer, director, partner, stockholder, member, employee,
agent or representative.
Lessor's Audit: An audit by Lessor's independent certified public
--------------
accountants of the operation of the Leased Property during any Lease Year, which
audit may, at Lessor's election, be either a complete audit of the Leased
Property's operations or an audit of Room Revenues, Food Sales, Beverage Sales
and Other Income realized from the operation of the Leased Property during such
Lease Year.
Manager: Any Person retained by Lessee to manage or operate the
-------
Facility pursuant to a management or agency agreement.
Mortgage: As defined in Section 28.2.
--------
Notice: A notice given pursuant to Article XXX.
------
Officer's Certificate: A certificate of Lessee reasonably acceptable
---------------------
to Lessor, signed by the chief financial officer or another officer duly
authorized so to sign by Lessee or a general partner of Lessee, or any other
person whose power and authority to act has been authorized by delegation in
writing by any such officer.
Operating Budget: As defined in Section 3.5.
----------------
Other Income: All revenues, receipts, and income of any kind derived
------------
directly or indirectly from or in connection with the Facility and included in
Gross Revenues other than Room Revenues, Food Sales or Beverage Sales.
-12-
<PAGE>
Overdue Rate: On any date, a rate equal to the Base Rate plus 5% per
------------
annum, but in no event greater than the maximum nonusurious rate then permitted
under applicable law.
Other Leases: The leases of the Other Properties.
------------
Other Properties: The properties described on Exhibit "A" attached
----------------
hereto, as the same may be amended from time to time pursuant to the provisions
of the Lease Master Agreement.
Payment Date: Any due date for the payment of any installment of
------------
Rent.
Participating Rent: As defined in Sections 3.1(b), 3.1(c) and 3.1(d).
------------------
Person: The term "Person" means and includes individuals,
------
corporations, general and limited partnerships, limited liability companies,
stock companies or associations, joint ventures, associations, companies,
trusts, banks, trust companies, land trusts, business trusts, or other legal
entities and governments and agencies and political subdivisions thereof.
Personal Property Taxes: All personal property taxes imposed on the
-----------------------
furniture, furnishings or other items of personal property located on, and used
in connection with, the operation of the Leased Improvements as a hotel (other
than Inventory and other personal property owned by the Lessee), together with
all replacements, modifications, alterations and additions thereto.
Predecessor: Any Person whose liabilities arising under any
-----------
Environmental Law have or may have been retained or assumed by Lessor or Lessee
pursuant to the provisions of this Lease.
Primary Intended Use: As defined in Section 7.2(b).
--------------------
Proceeding: Any judicial action, suit or proceeding (whether civil or
----------
criminal), any administrative proceeding (whether formal or informal) any
investigation by a governmental authority or entity (including a grand jury),
and any arbitration, mediation or other non-judicial process for dispute
resolution.
RCRA: The Resource Conservation and Recovery Act, as amended.
----
Real Estate Taxes: All real estate taxes, including general and
-----------------
special assessments, if any, which are imposed upon the Land and any
improvements thereon.
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<PAGE>
Release: A "Release" as defined in CERCLA or in any Environmental
-------
Law, unless such Release has been properly authorized and permitted in writing
by all applicable Environmental Authorities or is allowed by such Environmental
Law without authorizations or permits.
Rent: Collectively, the Base Rent, Participating Rent, and Additional
----
Charges.
Room Revenues: Gross revenue from the rental of guest rooms, whether
-------------
to individuals, groups or transients, at the Facility, determined in a manner
consistent with the Uniform System and excluding the following:
(a) The amount of all credits, rebates or refunds to customers, guests
or patrons;
(b) All sales taxes or any other taxes imposed on the rental of such
guest rooms; and
(c) Any fees collected for amenities including, but not limited to,
telephone, laundry, movies or concessions.
SARA: The Superfund Amendments and Reauthorization Act of 1986, as
----
amended.
SEC: The U.S. Securities and Exchange Commission or any successor
---
agency.
State: The State or Commonwealth of the United States in which the
-----
Leased Property is located.
Subsidiaries: Corporations or other entities in which Lessee owns,
------------
directly or indirectly, 50% or more of the voting rights or control, as
applicable (individually, a "Subsidiary").
Taking: A permanent or temporary taking or voluntary conveyance
------
during the Term hereof of all or part of the Leased Property, or any interest
therein or right accruing thereto or use thereof, as the result of, or in
settlement of, any Condemnation or other eminent domain proceeding affecting the
Leased Property whether or not the same shall have actually been commenced.
Tax Law Change: A change in the Code (including, without limitation,
--------------
a change in the Treasury regulations promulgated thereunder) or in the judicial
or administrative interpretations of the Code, which in Lessor's determination
will permit Lessor or an Affiliate thereof to operate the Facility as a hotel
without adversely affecting the Company's qualification for taxation as a real
estate investment trust under the applicable provisions of the Code.
-14-
<PAGE>
Term: As defined in Section 1.2.
----
TSCA: The Toxic Substances Control Act, as amended.
----
Unavoidable Delay: Delay due to strikes, lock-outs, labor unrest,
-----------------
inability to procure materials, power failure, acts of God, governmental
restrictions, enemy action, civil commotion, fire, unavoidable casualty,
condemnation or other similar causes beyond the reasonable control of the party
responsible for performing an obligation hereunder, provided that lack of funds
shall not be deemed a cause beyond the reasonable control of either party hereto
unless such lack of funds is caused by the breach of the other party's
obligation to perform any obligations of such other party under this Lease.
Unavoidable Occurrence: The occurrence of strikes, lock-outs, labor
----------------------
unrest, inability to procure materials, power failure, acts of God, governmental
restrictions, enemy action, civil commotion, fire, unavoidable casualty,
condemnation or other similar causes beyond the reasonable control of Lessee,
provided that any such occurrence is an extraordinary (as opposed to a routine
or cyclical) material event, which may be an economic event, that was not
reasonably foreseeable when the then applicable Annual Budget was prepared.
Uneconomic for its Primary Intended Use: A state or condition of the
---------------------------------------
Facility such that in the judgment of Lessor the Facility cannot be operated on
a commercially practicable basis for its Primary Intended Use, such that Lessor
intends to, and shall, complete the cessation of operations from the Leased
Facility.
Uniform System: Shall mean the Uniform System of Accounts for Hotels
--------------
(8th Revised Edition, 1986) as published by the Hotel Association of New York
City, Inc., as same may hereafter be revised, and as the same has been
interpreted and applied by Coopers & Lybrand LLP in connection with the audit of
the Leased Property prepared for the Company in connection with its initial
public offering.
Unsuitable for its Primary Intended Use: A state or condition of the
---------------------------------------
Facility such that in the judgment of Lessor the Facility cannot function as an
integrated hotel facility consistent with standards applicable to a well
maintained and operated hotel comparable in quality and function to that of the
Facility prior to the damage or loss.
WARN: Work Adjustment and Retraining Notification Act, as amended.
----
-15-
<PAGE>
ARTICLE III
-----------
3.1 Rent. Lessee will pay to Lessor in lawful money of the United
----
States of America which shall be legal tender for the payment of public and
private debts, at Lessor's address set forth in Article XXX hereof or at such
other place or to such other Person, as Lessor from time to time may designate
in a Notice, all Base Rent, Participating Rent and Additional Charges, during
the Term, as follows:
(a) Base Rent: The fixed annual sum set forth on Exhibit C (subject
---------
to increase as set forth in Subparagraph (d) hereof, the "Base Rent"), payable
in arrears in equal, consecutive monthly installments, on or before ___________,
1996 and the first day of each subsequent calendar month of the Term; provided,
however, that (i) Base Rent shall be prorated as to any Lease Year which is less
than twelve (12) months, (ii) the first and last monthly payments of Base Rent
shall be prorated as to any partial month, and (iii) payments of Base Rent shall
be subject to abatement where and only where and to the extent expressly
provided in this Lease; and
(b) Participating Rent: For each calendar quarter ending March 31,
------------------
June 30, September 30 and December 31 during the Term commencing with the
calendar quarter ending _____________, 1996 and each quarter thereafter, Lessee
shall pay percentage rent ("Participating Rent") in arrears in an amount
calculated by the following formula (the "Revenues Computation"):
For any quarter, Participating Rent shall equal:
The amount equal to the Quarterly Revenue Computation (defined
below)
less
an amount equal to the Base Rent paid for the Lease Year to date
less
an amount equal to the Participating Rent paid for the Lease Year
to date.
Participating Rent for the portion of the quarter ending ____________,
1996 falling within the Term shall be paid on or before ______________.
Participating Rent for each succeeding calendar quarter during the Term shall be
paid on or before the tenth (10th) day of the next month. In no event shall
Participating Rent be less than zero. For purposes of defining the Quarterly
Computation:
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<PAGE>
(i) "Cumulative Quarterly Portion" shall mean a fraction having as its
numerator the total number of calendar quarters (including partial quarters) in
a Lease Year which have elapsed including the quarter for which the calculation
is being made and having as its denominator the total number of quarters
(including partial quarters) in such Lease Year. For example, the Cumulative
Quarterly Portion in a four-quarter Lease Year for the March 31 Participating
Rent payment due April 10 will be 1/4 and for the June 30 Participating Rent
payment due July 10 will be 2/4, and such progression shall continue for the
ensuing quarters so that the Cumulative Quarterly Portion for the December 31
Participating Rent payment (due January 10) of the next Lease Year) will be 4/4
or 100%.
(ii) "First Tier Room Revenue Percentage," "Second Tier Room Revenue
Percentage," "Third Tier Room Revenue Percentage," "First Tier Food Sales
Percentage," "Second Tier Food Sales Percentage," and "Other Income Percentage"
shall mean the percentages corresponding to each of such terms as set forth on
Exhibit C.
(iii) "Annual Room Revenues First Break Point" and "Annual
Room Revenues Second Break Point" shall mean the amount of annual Room Revenues
corresponding to each of such terms as set forth on Exhibit C.
(iv) "Annual Food Sales Break Point" shall mean the amount of annual
Food Sales and Beverage Sales corresponding to such term as set forth on Exhibit
C.
The Quarterly Revenues Computation shall be the amount obtained by
adding, for the applicable Lease Year, (i) an amount equal to the First Tier
Room Revenue Percentage of all year to date Room Revenues up to (but not
exceeding) the Cumulative Quarterly Portion of the Annual Room Revenues First
Break Point, (ii) an amount equal to the Second Tier Room Revenue Percentage of
all year to date Room Revenues in excess of the Cumulative Quarterly Portion of
the Annual Room Revenues First Break Point up to (but not exceeding) the
Cumulative Quarterly Portion of the Annual Room Revenues Second Break Point,
(iii) an amount equal to the Third Tier Room Revenue Percentage of all year to
date Room Revenues in excess of the Cumulative Quarterly Portion of the Annual
Room Revenues Second Break Point, (iv) an amount equal to the First Tier Food
Sales Percentage of the Cumulative Quarterly Portion of all year to date Food
Sales and Beverage Sales up to (but not exceeding) the Cumulative Quarterly
Portion of the Annual Food Sales Break Point, (v) an amount equal to the Second
Tier Food Sales Percentage of all year to date Food Sales and Beverage Sales in
excess of the Cumulative Quarterly Portion of the Annual Food Sales Break Point,
and (vi) an amount equal to the Other Income Percentage of year to date revenues
from Other Income.
-17-
<PAGE>
If the Term begins or ends in the middle of a calendar year, then the
number of quarters (or portions thereof) falling within the Term during such
calendar year shall constitute a separate Lease Year. In that event, the Annual
Room Revenues First Break Point, the Annual Room Revenues Second Break Point,
and the Annual Food Sales Break Point (collectively, the "Break Points") shall
each be multiplied by a fraction equal to (A) the number of quarters (including
partial quarters) in the Lease Year divided by (B) four (4), and the Cumulative
----------
Quarterly Portion for each of the quarters (including partial quarters) in such
Lease Year shall be determined as set forth in the definition of Cumulative
Quarterly Portion above. For example, since the Term begins on ___________,
1996, (i) each of the Break Points for the 1996 Lease Year shall be multiplied
by __________, and (ii) the Cumulative Quarterly Portion for the Participating
Rent payments due for the 1996 Lease Year will be ___________ for [quarter], for
____________ [quarter], and ___________ or 100% for __________.
(c) Officer's Certificates. Within 30 days after each of the first
----------------------
three quarters of each Lease Year (or part thereof) in the Term, Lessee shall
deliver to Lessor an Officer's Certificate reasonably acceptable to Lessor,
setting forth the calculation of the Participating Rent payment for such
quarter. Such quarterly payments shall be based on the formulas set forth in
Section 3.1(b). There shall be no reduction in the Base Rent regardless of the
result of the Revenues Computation.
In addition, on or before _____________ of each year, commencing with
March 31, 1997, Lessee shall deliver to Lessor an Officer's Certificate
reasonably acceptable to Lessor setting forth the computation of the actual
Participating Rent that accrued for each quarter of the Lease Year that ended on
the immediately preceding December 31. Additionally, if the annual
Participating Rent due and payable for any Lease Year (as shown in the
applicable Officer's Certificate) exceeds the amount actually paid as
Participating Rent by Lessee for such year, Lessee also shall pay such excess to
Lessor at the time such certificate is delivered. If the Participating Rent
actually due and payable for such Lease Year is shown by such certificate to be
less than the amount actually paid as Participating Rent for the applicable
Lease Year, Lessor, at its option, shall reimburse such amount to Lessee or
credit such amount against subsequent months' Base Rent and, to the extent
necessary, subsequent quarters' Participating Rent payments, or, if none, then
such amounts shall be paid to Lessee. Any such credit to Base Rent shall not be
applied for purposes of calculating Participating Rent payable for any
subsequent quarter.
Any difference between the annual Participating Rent due and payable
for any Lease Year (as shown in the applicable Officer's Certificate or as
adjusted pursuant to Section 3.1(d))
-18-
<PAGE>
and the total amount actually paid by Lessee as Participating Rent for such
Lease Year, whether in favor of Lessor or Lessee, shall bear interest at the
Base Rate, which interest shall accrue from the due date of the last quarterly
Participating Rent payment for the Lease Year until the amount of such
difference shall be paid or otherwise discharged. Any such interest payable to
Lessor shall be deemed to be and shall be payable as Additional Charges.
The obligation to pay Participating Rent shall survive the expiration
or earlier termination of the Term, and a final reconciliation, taking into
account, among other relevant adjustments, any adjustments which are accrued
after such expiration or termination date but which related to Participating
Rent accrued prior to such termination date, shall be made not later than ninety
(90) days after such expiration or termination date.
(d) CPI Adjustments. For each Lease Year during the Term beginning
---------------
with the Lease Year commencing January 1, 1997, the Base Rent then in effect,
the Annual Room Revenues First Break Point and the Annual Room Revenues Second
Break Point (together, the "Annual Room Revenues Break Points"), and the Annual
Food Sales Break Point then included in the Revenues Computation set forth in
Section 3.1(b), shall be increased as follows:
(1) For the Lease Year commencing January 1, 1997 and for each Lease
Year thereafter during the Term, the Consumer Price Index for the day before the
day that the new Lease Year commences (the "Measurement Date") shall be divided
by the Consumer Price Index for the day that is twelve months preceding the
Measurement Date;
(2) The new Base Rent for the then current Lease Year shall be the
product of the Base Rent in effect in the most recently ended Lease Year and the
quotient obtained under subparagraph (1) above;
(3) The new Annual Room Revenues Break Points in the Revenues
Computation described in Section 3.1(b) above for the Lease Year commencing
January 1, 1997 shall be the product of the Annual Room Revenues Break Points in
effect in the Lease Year ending December 31, 1996 and the quotient obtained in
subparagraph (1) above, and the new Annual Room Revenues Break Points in the
Revenues Computation for the Lease Year beginning with the Lease Year commencing
January 1, 1998 and for each Lease Year thereafter during the Term, shall be the
product of (a) the Annual Room Revenues Break Points in effect in the most
recently ended Lease Year and (b) the quotient obtained in subparagraph (1)
above plus seventy-five one hundredths percent (.75%); and
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<PAGE>
(4) The new Annual Food Sales Break Point in the Revenues Computation
described in Section 3.1(b) above for the Lease Year commencing January 1, 1997
shall be the product of the Annual Food Sales Break Point in effect in the Lease
Year ending December 31, 1996 and the quotient obtained in subparagraph (1)
above, and the new Annual Food Sales Break Point in the Revenues Computation for
the Lease Year beginning with the Lease Year commencing January 1, 1998 and for
each Lease Year thereafter during the Term, shall be the product of (a) the
Annual Food Sales Break Point in effect in the most recently ended Lease Year
and (b) the quotient obtained in subparagraph (1) above plus seventy-five one
hundredths percent (.75%).
In no event shall the Base Rent, the Annual Room Revenues Break Points
or the Annual Food Sales Break Point be reduced as a result of any changes in
the Consumer Price Index.
Adjustments calculated as set forth above in the Base Rent, the Annual
Room Revenues Break Points and the Annual Food Sales Break Point shall be
effective on the first day of each calendar Lease Year to which such adjusted
amounts apply. If Rent is paid prior to the determination of the amount of any
adjustment to Base Rent, the Annual Room Revenues Break Points or the Annual
Food Sales Break Point applicable for such period, whether because of a delay in
the publication of the Consumer Price Index for the Measurement Date or because
of any other reason, payment adjustments for any shortfall in or overpayment of
Rent paid shall be made with the first Base Rent and Participating Rent payments
due after the amount of the adjustments are determined.
If (1) a significant change is made in the number or nature (or both)
of items used in determining the Consumer Price Index, or (2) the Consumer Price
Index shall be discontinued for any reason, the Bureau of Labor Statistics shall
be requested to furnish a new index comparable to the Consumer Price Index,
together with information which will make possible a conversion to the new index
in computing the adjusted Base Rent, Annual Room Revenues Break Points, and
Annual Food Sales Break Point hereunder. If for any reason the Bureau of Labor
Statistics does not furnish such an index and such information, the parties will
instead mutually select, accept and use such other index or comparable
statistics on the cost of living in various U.S. cities that is computed and
published by an agency of the United States or a responsible financial
periodical of recognized authority.
The portion of the aggregate of Base Rent and Participating Rent
designated on Exhibit C payable for each Lease Year shall be attributed to the
rights to the Franchise Agreement granted by Lessor to Lessee pursuant to
Section 1.1(g).
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<PAGE>
3.2 Confirmation of Participating Rent. Lessee shall utilize, or
----------------------------------
cause to be utilized, an accounting system for the Leased Property in accordance
with its usual and customary practices, and in accordance with GAAP and the
Uniform System, that will accurately record all data necessary to compute
Participating Rent, and Lessee shall retain, for at least five (5) years after
the expiration of each Lease Year, reasonably adequate records conforming to
such accounting system showing all data necessary to conduct Lessor's Audit and
to compute Participating Rent for the applicable Lease Years. Lessor shall have
the right from time to time by its accountants or representatives to audit such
information in connection with Lessor's Audit, and to examine all Lessee's
records (including supporting data and sales and excise tax returns) reasonably
required to either complete Lessor's Audit and to verify Participating Rent,
subject to any prohibitions or limitations on disclosure of any such data under
Legal Requirements. If any Lessor's Audit discloses a deficiency in the payment
of Participating Rent, and either Lessee agrees with the result of Lessor's
Audit or the matter is otherwise determined or compromised, Lessee shall
forthwith pay to Lessor the amount of the deficiency, as finally agreed or
determined, together with interest at the Overdue Rate from the date when said
payment should have been made to the date of payment thereof; provided, however,
that as to any Lessor's Audit that is commenced more than one (1) year after the
end of any Lease Year, the deficiency, if any, with respect to such
Participating Rent shall bear interest at the Overdue Rate only from the date
such determination of deficiency is made unless such deficiency is the result of
gross negligence or willful misconduct on the part of Lessee, in which case
interest at the Overdue Rate will accrue from the date such payment should have
been made to the date of payment thereof. If any Lessor's Audit discloses a
deficiency in the payment of Participating Rent which, as finally agreed or
determined exceeds 4%, Lessee shall pay the costs of the portion of Lessor's
Audit allocable to the determination of Gross Revenues (the "Revenue Audit"). In
no event shall Lessor undertake a Lessor's Audit more than three (3) years after
the last day of the Lease Year for which such audit is requested. If any
Lessor's Audit discloses an excess in the payment of Participating Rent, Lessor,
at its option, shall reimburse such amount to Lessee or credit such amount
against subsequent months' Base Rent, and, to the extent necessary, subsequent
quarters' Participating Rent payments, or, if none, then such amount shall be
paid to Lessee. Any credit to Base Rent shall not be applied for purposes of
calculating Participating Rent payable for any subsequent quarter. Any
proprietary information obtained by Lessor pursuant to the provisions of this
Section shall be treated as confidential, except that such information may be
used, subject to appropriate confidentiality safeguards, in any arbitration or
litigation between the parties and except further that Lessor may disclose such
information to prospective lenders
-21-
<PAGE>
and investors and to any other persons to whom disclosure is necessary to comply
with applicable laws, regulations and government requirements. The obligations
of Lessee contained in this Section shall survive the expiration or earlier
termination of this Lease. Any dispute as to the existence or amount of any
deficiency in the payment of Participating Rent as disclosed by Lessor's Audit
shall, if not otherwise settled by the parties, be submitted to arbitration
pursuant to the provisions of Section 40.2.
3.3 Additional Charges. In addition to the Base Rent and
------------------
Participating Rent, (a) Lessee also will pay and discharge as and when due and
payable all other amounts, liabilities, obligations and Impositions that Lessee
assumes or agrees to pay under this Lease, and (b) in the event of any failure
on the part of Lessee to pay any of those items referred to in clause (a) of
this Section 3.3, Lessee also will promptly pay and discharge every fine,
penalty, interest and cost that may be added for non-payment or late payment of
such items (the items referred to in clauses (a) and (b) of this Section 3.3
being additional rent hereunder and being referred to herein collectively as the
"Additional Charges"), and Lessor shall have all legal, equitable and
contractual rights, powers and remedies provided either in this Lease or by
statute or otherwise in the case of non-payment of the Additional Charges as in
the case of non-payment of the Base Rent. If any installment of Base Rent,
Participating Rent or Additional Charges (but only as to those Additional
Charges that are payable directly to Lessor) shall not be paid on its due date,
Lessee will pay Lessor within ten (10) days of demand, as Additional Charges, a
late charge (to the extent not in violation of any usury statutes and otherwise
permitted by law) computed at the Overdue Rate on the amount of such
installment, from the due date of such installment to the date of payment
thereof. To the extent that Lessee pays any Additional Charges to Lessor
pursuant to any requirement of this Lease, Lessee shall be relieved of its
obligation to pay such Additional Charges to the entity to which they would
otherwise be due and Lessor shall pay same from monies received from Lessee.
3.4 No Set Off. Except as provided in Article XXXIX, Rent shall be
----------
paid to Lessor without set off, deduction or counterclaim, subject to any other
provisions of this Lease that expressly provide for adjustment or abatement of
or set offs against Rent or other charges, and further subject to Lessee's right
to assert any claim or mandatory counterclaim in any action brought by either
party under this Lease.
3.5 Annual Budget. Not later than sixty (60) days prior to the
-------------
commencement of each Lease Year, Lessee shall prepare and submit to Lessor an
operating budget (the "Operating Budget") and a capital budget (the "Capital
Budget") prepared in accordance with the requirements of this Section 3.5. The
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<PAGE>
Operating Budget and the Capital Budget (together, the "Annual Budget") shall be
prepared in accordance with the Uniform System to the extent applicable and show
by month and quarter and for the year as a whole in the degree of detail
specified by the Uniform System for monthly statements, and in accordance with
the detail level of monthly financial statements, the following:
(a) Lessee's reasonable estimate of Gross Revenues (including room
rates and Room Revenues) for the forthcoming Lease Year itemized on schedules on
a monthly and quarterly basis as approved by Lessor and Lessee, together with
the assumptions, in narrative form, forming the basis of such schedules.
(b) An estimate of any amounts Lessor will be requested to provide for
Capital Improvements during the current and the next Lease Year, subject to the
limitations set forth in Article XXXVIII.
(c) A cash flow projection.
(d) A narrative description of the program for advertising and
marketing the Facility for the forthcoming Lease Year containing a detailed
budget itemization of the proposed advertising expenditures by category and the
assumptions, in narrative form, forming the basis of such budget itemization.
(e) Lessee's reasonable estimate for each quarter of the Lease Year of
Participating Rent including Room Revenues, Food Sales, Beverage Sales and Other
Income.
Lessor shall have thirty (30) days after the date on which it receives
the Annual Budget to review, approve, disapprove or change the entries and
information appearing in the Capital Budget portion of the Annual Budget. If
the parties are not able to reach agreement on the Capital Budget for any Lease
Year during Lessor's thirty (30) day review period, the parties shall attempt in
good faith during the subsequent thirty (30) day period to resolve any disputes,
which attempt shall include, if requested by either party, at least one (1)
meeting of executive-level officers of Lessor and Lessee. In the event the
parties are still not able to reach agreement on the Capital Budget for any
particular Lease Year after complying with the foregoing requirements of this
Section 3.5, the parties shall adopt such portions of the Capital Budget as they
may have agreed upon, and any matters not agreed upon shall be referred to
arbitration as provided for in Section 40.2 hereof. Pending the results of such
arbitration or the earlier agreement of the parties, if the Capital Budget has
not been agreed upon, no Capital Expenditures shall be made unless the same are
set forth in a previously approved Capital Budget, are specifically required by
Lessor or are otherwise required to comply with Legal Requirements, to make
Emergency Expenditures or to comply with the Franchise Agreement
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(but if required solely to comply with the Franchise Agreement, such Capital
Expenditures shall be made at Lessee's expense). Lessee shall provide Lessor
with copies of any revisions to the Annual Budget which it may desire or
otherwise deem appropriate to make from time to time during any Lease Year, but
no such revision shall require Lessor's approval or constitute a change in the
Annual Budget for the purposes of Section 3.7 or any other provisions of this
Lease. The Capital Budget, once approved and as approved, shall form the basis
on which expenditures for Capital Improvements shall be made. Unless such
expenditures are otherwise permitted in writing by Lessor or are Emergency
Expenditures or are required by the Franchise Agreement, Lessee agrees not to
cause or permit any such expenditures for a Lease Year in excess of those set
forth in the Capital Budget. Lessee shall promptly report to Lessor in writing
any actual or anticipated deviation from the Capital Budget of any material or
long-term consequence. Representatives of Lessee and Lessor shall meet
quarterly to review and discuss the previous and future quarters' operating
statements, Gross Revenues, Capital Expenditures and the general concerns of
Lessee and Lessor. In the event that Lessee fails to make expenditures for
Capital Improvements in accordance with the provisions of the Capital Budget as
set forth in this Section 3.6, then Lessor, in addition to its other rights and
remedies under this Lease and under applicable law, shall have the right to
submit the matter to arbitration under Section 40.1 hereof.
3.6 Books and Records. Lessee shall keep full and adequate books of
-----------------
account and other records reflecting the results of operation of the Facility on
an accrual basis, all in accordance with the Uniform System and GAAP and the
obligations of Lessee under this Lease. The books of account and all other
records relating to or reflecting the operation of the Facility shall be kept
either at the Facility or at Lessee's offices in Dallas, Texas and shall be
available to Lessor and its representatives and its auditors or accountants, at
all reasonable times for examination, audit, inspection, and transcription. All
of such books and records pertaining to the Facility including, without
limitation, books of account, guest records and front office records, at all
times shall be the property of Lessee but shall not be removed from the Facility
or Lessee's offices without Lessor's prior written approval. Lessor shall be
entitled to make copies of any or all such books and records for its own files.
Lessee's obligations under this Section 3.6 shall survive termination of this
Lease for any reason.
3.7 [Intentionally omitted.]
3.8 Hotel Operations. (a) [Lessee covenants to operate the Facility
----------------
as a "full service hotel". A full service hotel is
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<PAGE>
a hotel that operates a restaurant and meeting facilities and may have some or
all of the following: conference facilities, banquet space, lounge areas, gift
shops, recreational facilities (including swimming pool), and guest services
(including room service, valet service and laundry). 5] If, during the Term,
Lessee desires to provide food and beverage operations at the Facility (other
than those that are presently provided at the Facility and complimentary
continental breakfast) or to discontinue any such operations which are presently
provided (any such action, a "Change in Operations"), Lessee shall give notice
of such desire to Lessor. Lessor and Lessee shall then commence negotiations to
adjust Rent to reflect the proposed change to the operation of the Facility,
each acting reasonably and in good faith. All other terms of this Lease will
remain substantially the same. During negotiations, which shall not extend
beyond 60 days, Lessee shall not implement the proposed Change in Operations and
shall continue fulfilling its obligations under the existing terms of this
Lease. If no agreement is reached after such 60-day period, (i) if Lessee in its
reasonable judgment believes the failure to accomplish the proposed Change in
Operations will have an adverse economic impact on Lessee's operation of the
Facility, Lessee may submit the adjustment to Rent to arbitration in accordance
with Section 40.1, otherwise, (ii) Lessee shall withdraw such notice and shall
not be entitled to implement the proposed Change in Operations, and this Lease
shall continue in full force.
(b) Nothwithstanding anything to the contrary contained herein, no
adjustment of Rent pursuant to a Change in Operations described above shall be
implemented without the receipt by Lessor of an opinion from its tax counsel,
satisfactory to Lessor in form and substance, that such adjustment will not
adversely affect the Company's ability to qualify as a real estate investment
trust under the applicable provisions of the Code.
3.9 Allocation of Revenues. In the event that individuals or groups
----------------------
purchase rooms, food and beverage and/or the use of other hotel facilities or
services together or as part of a package, Lessee agrees that revenues shall be
allocated among Room Revenues, Food Sales, Beverage Sales and/or other revenue
categories, as applicable, in a reasonable manner consistent with the historical
allocation of such revenues.
ARTICLE IV
----------
4.1 Payment of Impositions. Subject to Article XII relating to
----------------------
permitted contests, Lessee will pay, or cause to be paid, all Impositions (other
than Capital Impositions, Real Estate Taxes and Personal Property Taxes, which
shall be paid by Lessor) before any fine, penalty, interest or cost may be added
for nonpayment, such payments to be made directly to the taxing or other
authorities where feasible, and will promptly furnish to Lessor copies of
official receipts or other satisfactory proof evidencing such payments.
Lessee's obligation to pay such Impositions shall be deemed absolutely fixed
upon the date such Impositions become a lien upon the Leased Property or any
part thereof subject to Lessee's right to contest pursuant to Article XII. If
any such Imposition may, at the option of the taxpayer, lawfully be paid in
installments (whether or not interest shall accrue on the unpaid balance of such
Imposition), Lessee may exercise the option to pay the same (and any accrued
interest on the unpaid balance of such Imposition) in installments and in such
event, shall pay such installments and any unpaid balance of such Impositions
prior to the expiration or earlier termination of the Term hereof and before any
fine, penalty, premium, further interest or cost may be added thereto. Lessor,
at its expense, shall, to the extent required or permitted by applicable law,
prepare and file all tax returns in respect of Lessor's net income, gross
receipts, sales and use, single business, transaction privilege, rent, ad
valorem, franchise taxes, Real Estate Taxes, Personal Property Taxes and taxes
on its capital stock, and Lessee, at its expense, shall, to the extent required
or permitted by applicable laws and regulations, prepare and file all other tax
returns and reports in respect of any Imposition as may be required by
governmental authorities. If any refund shall be due from any taxing authority
in respect of any Imposition paid by Lessee, the same shall be paid over to or
retained by Lessee if no Event of Default shall have occurred hereunder and be
continuing. If an Event of Default shall have been declared by Lessor and be
continuing, any such refund shall be paid over
5. Delete for two limited-service hotels.
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<PAGE>
to or retained by Lessor. Any such funds retained by Lessor due to an Event of
Default shall be applied as provided in Article XVI. Lessor and Lessee shall,
upon request of the other, cooperate with the other party and otherwise provide
such data as is maintained by the party to whom the request is made with respect
to the Leased Property as may be necessary to prepare any required returns and
reports. Notwithstanding the foregoing provisions of this Section, Lessee shall
file all Personal Property Tax returns in such jurisdictions where it is legally
required to so file. Lessor, to the extent it possesses the same, and Lessee,
to the extent it possesses the same, will provide the other party, upon request,
with cost and depreciation records necessary for filing returns for any property
classified as personal property. Where Lessor is legally required to file
Personal Property Tax returns, Lessee shall provide Lessor with copies of
assessment notices in sufficient time for Lessor to file a protest. Lessor,
may, upon notice to Lessee, at Lessor's option and at Lessor's sole expense,
protest, appeal, or institute such other proceedings (in its or Lessee's name)
as Lessor may deem appropriate to effect a reduction of real estate or personal
property assessments for those Impositions to be paid by Lessor, and Lessee, at
Lessor's expense as aforesaid, shall fully cooperate with Lessor in such
protest, appeal, or other action. Lessor hereby agrees to indemnify, defend,
and hold harmless Lessee from and against any claims, obligations, and
liabilities against or incurred by Lessee in connection with such cooperation.
Billings for reimbursement of Personal Property Taxes by Lessee to Lessor shall
be accompanied by copies of a bill therefor and payments thereof which identify
the personal property with respect to which such payments are made. Lessor,
however, reserves the right to effect any such protest, appeal or other action
and, upon notice to Lessee, shall control any such activity, which shall then go
forward at Lessor's sole expense. Upon such notice, Lessee, at Lessor's
expense, shall cooperate fully with such activities. To the extent received by
it, Lessee shall furnish Lessor with copies of all assessment notices for Real
Estate Taxes and Personal Property Taxes in sufficient time for Lessor to file a
protest and pay such taxes without penalty. Lessor shall within thirty (30)
days after making such payment furnish Lessee with evidence of payment of
Capital Impositions, Real Estate Taxes and Personal Property Taxes.
4.2 Notice and Accrual of Impositions. Lessor shall give prompt
---------------------------------
Notice to Lessee of all Impositions payable by Lessee hereunder of which Lessor
at any time has knowledge, provided that Lessor's failure to give any such
Notice shall in no way diminish Lessee's obligations hereunder to pay such
Impositions, but if Lessee did not otherwise have knowledge of such Imposition
sufficient to permit it to pay same, such failure shall obviate any default
hereunder for a reasonable time after Lessee receives Notice of any Imposition
which it is obligated to pay during the first taxing period applicable thereto,
and will reimburse Lessee
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<PAGE>
for any fine, penalty or interest arising from such delay. If requested by
Lessor or required by the holder of a Mortgage, Lessee shall accrue and set
aside on a monthly basis a portion (as Lessor or such holder shall designate) of
Gross Revenues for the payment of those Impositions that are payable by Lessor,
and such accruals shall be deposited with such holder, if so required by it, or
as otherwise approved by Lessor.
4.3 Adjustment of Impositions. Impositions payable by Lessee which
-------------------------
are imposed in respect of the tax-fiscal period during which the Term terminates
shall be adjusted and prorated between Lessor and Lessee, whether or not such
Imposition is imposed before or after such termination, and Lessee's obligation
to pay its prorated share thereof after termination shall survive such
termination.
4.4 Utility Charges. Lessee will be solely responsible for obtaining
---------------
and maintaining utility services to the Leased Property and will pay or cause to
be paid all charges for electricity, gas, oil, water, sewer and other utilities
used in the Leased Property during the Term.
4.5 Franchise Fees. Lessee will pay or cause to be paid all fees and
--------------
other charges payable pursuant to the Franchise Agreement with respect to the
Facility.
ARTICLE V
---------
5.1 No Termination, Abatement, etc. Except as otherwise specifically
-------------------------------
provided in this Lease, Lessee, to the extent permitted by law, shall remain
bound by this Lease in accordance with its terms and shall neither take any
action without the written consent of Lessor to modify, surrender or terminate
the same, nor seek nor be entitled to any abatement, deduction, deferment or
reduction of the Rent, or setoff against the Rent, nor shall the obligations of
Lessee be otherwise affected by reason of (a) any damage to, or destruction of,
any Leased Property or any portion thereof from whatever cause or any Taking of
the Leased Property or any portion thereof, (b) any bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution, winding up
or other proceedings affecting Lessor or any assignee or transferee of Lessor,
or (c) for any other cause whether similar or dissimilar to any of the foregoing
other than a discharge of Lessee from any such obligations as a matter of law.
Lessee hereby specifically waives all rights, arising from any default under
this Lease by Lessor which may now or hereafter be conferred upon it by law to
(1) modify, surrender or terminate this Lease or quit or surrender the Leased
Property or any portion thereof, or (2) entitle Lessee to any abatement,
reduction, suspension or deferment of or set off against the Rent or other sums
payable by
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<PAGE>
Lessee hereunder, except as otherwise specifically provided in this Lease. The
obligations of Lessee hereunder shall be separate and independent covenants and
agreements and the Rent and all other sums payable by Lessee hereunder shall
continue to be payable in all events unless the obligations to pay the same
shall be terminated, abated or modified pursuant to the express provisions of
this Lease or by termination of this Lease other than by reason of an Event of
Default.
ARTICLE VI
----------
6.1 Ownership of the Leased Property. Lessee acknowledges that the
--------------------------------
Leased Property is the [property of Lessor]/5/ and that Lessee has only the
right to the possession and use of the Leased Property upon the terms and
conditions of this Lease.
6.2 Lessee's Personal Property. (a) Upon commencement of the Term,
--------------------------
Lessee shall purchase from Lessor all Inventory at the Facility for its fair
market value. Throughout the Term, Lessee shall maintain a full stock of
Inventory at the facility consistent with the amount of inventory customarily
maintained in a hotel of the type and character of the Facility and as otherwise
is required to operate the Leased Property in the manner contemplated by this
Lease and in compliance with the Franchise Agreement and all Legal Requirements
(a "Complete Inventory"). The Complete Inventory shall be the property of
Lessee. Lessee may (and shall as provided hereinbelow), at its expense,
install, affix or assemble or place on any parcels of the Land or in any of the
Leased Improvements, any items of personal property (including Inventory,
Furniture and Equipment) owned by Lessee (collectively, the "Lessee's Personal
Property"). All of Lessee's Personal Property, other than Inventory, not
removed by Lessee within thirty (30) days following the expiration or earlier
termination of the Term shall be considered abandoned by Lessee and may be
appropriated, sold, destroyed or otherwise disposed of by Lessor without first
giving Notice thereof to Lessee without any payment to Lessee and without any
obligation to account therefor. Lessee will, at its expense, restore the Leased
Property to the condition required by Section 9.1(d), including repair of all
damage to the Leased Property caused by the removal of Lessee's Personal
Property, whether effected by Lessee or Lessor.
(b) Upon the expiration or earlier termination of the Term for any
reason. Lessor or its designee shall purchase the Inventory from Lessee for its
Fair Market Value.
- ---------------------
5. Add where applicable [the property of the Lessor subject to the Ground
Lease].
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<PAGE>
(c) If, during the Term, as a result of additions, modifications or
improvements to the Leased Property, the ratio (expressed as a percentage) of
(x) the adjusted basis for Federal income tax purposes of that portion of the
Leased Property consisting of personal property, to (y) the adjusted basis for
such purposes of the Leased Property, shall exceed 15%, Lessor, at its option,
may sell to Lessee (and Lessee shall purchase from Lessor) a sufficient quantity
of such personal property as shall be necessary so that the aforesaid percentage
does not exceed 15%. The aforesaid sale shall be at Fair Market Value for the
items sold.
6.3 Lessor's Lien. To the fullest extent permitted by applicable
-------------
law, Lessor is granted a lien and security interest in all of the Lessee's
property (including the Lessee's Personal Property) now or hereinafter placed in
or upon the Leased Property, and such lien and security interest shall remain
attached to such property until payment in full of all Rent and satisfaction of
all of Lessee's obligations hereunder; provided, however, Lessor shall
subordinate its lien and security interest only to that of any non-Affiliate of
Lessee which finances such property or any non-Affiliate conditional seller of
such property, the terms and conditions of such subordination to be satisfactory
to Lessor in the exercise of reasonable discretion. Lessee shall, upon the
request of Lessor, execute such financing statements or other documents or
instruments reasonably requested by Lessor to perfect the lien and security
interests herein granted.
ARTICLE VII
-----------
7.1 Condition of the Leased Property. Lessee acknowledges receipt
--------------------------------
and delivery of possession of the Leased Property. Lessee has examined and
otherwise has knowledge of the condition of the Leased Property and has found
the same to be satisfactory for its purposes hereunder. Lessee is leasing the
Leased Property "as is", "with all faults", and in its present condition.
Except as otherwise specifically provided herein, Lessee waives any claim or
action against Lessor in respect of the condition of the Leased Property.
LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF
THE LEASED PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE,
DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, IT BEING
AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT
THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT.
Lessor shall have the right to proceed against any predecessor in title for
breaches of warranties or representations or for latent defects in the Leased
Property, and Lessor shall, if requested by Lessee, assign any such right to
Lessee if and to the extent Lessor determines not to exercise such right. If
either party
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<PAGE>
determines to exercise such right, the other party shall fully cooperate in the
prosecution of any such claim, in Lessor's or Lessee's name, all at the cost and
expense of the prosecuting party, who hereby agrees to indemnify, defend and
hold harmless the other party from and against any claims, obligations and
liabilities against or incurred by such other party in connection with such
cooperation, and who further agrees to apply all amounts realized from the
prosecution of such claim, less its expenses in connection therewith, to remedy
such breach or cure such defect.
7.2 Use of the Leased Property.
--------------------------
(a) Lessee covenants that it will proceed with all due diligence and
will exercise its best efforts to obtain and to maintain all approvals needed to
use and operate the Leased Property and the Facility under applicable local,
state and federal law.
(b) Lessee shall use or cause to be used the Leased Property only as a
hotel facility, and for such other uses as may be necessary or incidental to
such use, or such other use as otherwise approved by Lessor (the "Primary
Intended Use"). Lessee shall not use the Leased Property or any portion thereof
for any other use without the prior written consent of Lessor. No use shall be
made or permitted to be made of the Leased Property, and no acts shall be done,
which will cause the cancellation of any insurance policy covering the Leased
Property or any part thereof (unless another adequate policy satisfactory to
Lessor is available and Lessee pays any premium increase), nor shall Lessee sell
or permit to be kept, used or sold in or about the Leased Property any article
which is prohibited by law or fire underwriter's regulations. Lessee shall
comply with all of the requirements pertaining to the Leased Property of any
insurance board, association, organization or company necessary for the
maintenance of insurance, as herein provided, covering the Leased Property and
Lessee's Personal Property, which compliance shall be performed at Lessee's sole
cost except to the extent that such compliance requires the performance of a
Capital Improvement or the payment of a Capital Imposition which are Lessor's
responsibilities.
(c) Subject to the provisions of Articles XIV and XV, Lessee covenants
and agrees that during the Term it will either directly or through an approved
manager (1) operate continuously the Leased Property as a hotel facility, (2)
keep in full force and effect and comply in all material respects with all the
provisions of the Franchise Agreement, (3) not terminate or amend in any respect
the Franchise Agreement without the consent of Lessor, (4) maintain appropriate
certifications and licenses for such use and (5) keep Lessor advised of the
status of any material litigation affecting the Leased Property.
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<PAGE>
(d) Lessee shall not commit any waste on the Leased Property, or in
the Facility, nor shall Lessee cause any nuisance thereon, nor shall Lessee
cause or permit any nuisance thereon.
(e) Lessee shall neither use nor permit the Leased Property or any
portion thereof, or Lessee's Personal Property, to be used in such a manner as
(1) would impair Lessor's (or Lessee's, as the case may be) title thereto or to
any portion thereof, or (2) would support a claim or claims of adverse usage or
adverse possession by the public, as such, or of implied dedication of the
Leased Property or any portion thereof.
7.3 Lessor to Grant Easements, etc. Lessor will, from time to time,
-------------------------------
so long as no Event of Default has occurred and is continuing, at the request of
Lessee and at Lessee's cost and expense (but subject to the approval of Lessor,
which approval may be granted or denied in Lessor's sole discretion), (a) grant
easements and other rights in the nature of easements with respect to the Leased
Property to third parties, (b) release existing easements or other rights in the
nature of easements which are for the benefit of the Leased Property, (c)
dedicate or transfer unimproved portions of the Leased Property for road,
highway or other public purposes, (d) execute petitions to have the Leased
Property annexed to any municipal corporation or utility district, (e) execute
amendments to any covenants and restrictions affecting the Leased Property and
(f) execute and deliver to any person any instrument appropriate to confirm or
effect such grants, releases, dedications, transfers, petitions and amendments
(to the extent of its interests in the Leased Property), but only upon delivery
to Lessor of an Officer's Certificate stating that such grant, release,
dedication, transfer, petition or amendment does not interfere with the proper
conduct of the business of Lessee on the Leased Property and does not materially
reduce the value of the Leased Property.
ARTICLE VIII
------------
8.1 Compliance with Legal and Insurance Requirements, etc. Subject
-----------------------------------------------------
to Sections 8.2, 8.3(b) and Article XII relating to permitted contests, Lessee,
at its expense, will promptly (a) comply with all applicable Legal Requirements
and Insurance Requirements in respect of the use, operation maintenance, repair
and restoration of the Leased Property, subject however to the provisions of
Section 9.1(b), and (b) procure, maintain and comply with all appropriate
licenses and other authorizations required for any use of the Leased Property
and Lessee's Personal Property then being made, and for the proper erection,
installation, operation and maintenance of the Leased Property or any part
thereof.
8.2 Legal Requirements Covenants. Subject to Section 8.3(b) below,
----------------------------
Lessee covenants and agrees that the Leased
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<PAGE>
Property and Lessee's Personal Property shall not be used for any unlawful
purpose, and that Lessee shall not permit or suffer to exist any unlawful use of
the Leased Property by others. Lessee shall acquire and maintain all
appropriate licenses, certifications, permits and other authorizations and
approvals needed to operate the Leased Property in its customary manner for the
Primary Intended Use, and any other lawful use conducted on the Leased Property
as may be permitted from time to time hereunder. Lessee further covenants and
agrees that Lessee's use of the Leased Property and maintenance, alteration, and
operation of the same, and all parts thereof, shall at all times conform to all
Legal Requirements, unless the same are finally determined by a court of
competent jurisdiction to be unlawful (and Lessee shall cause all such sub-
tenants, invitees or others to so comply with all Legal Requirements).
8.3 Environmental Covenants. Lessor and Lessee (in addition to, and
-----------------------
not in diminution of, Lessee's covenants and undertakings in Sections 8.1 and
8.2 hereof) covenant and agree as follows:
(a) At all times hereafter until Lessee completely vacates the Leased
Property and surrenders possession of the same to Lessor, Lessee shall fully
comply with all Environmental Laws applicable to the Leased Property and the
operations thereon, except to the extent that such compliance would require the
remediation of Environmental Liabilities for which Lessee has no indemnity
obligations under Section 8.3(b). Lessee agrees to give Lessor prompt written
notice of (1) all Environmental Liabilities; (2) all pending, threatened or
anticipated Proceedings, and all notices, demands, requests or investigations,
relating to any Environmental Liability or relating to the issuance, revocation
or change in any Environmental Authorization required for operation of the
Leased Property; (3) all Releases at, on, in, under or in any way affecting the
Leased Property, or any Release known by Lessee at, on, in or under any property
adjacent to the Leased Property; and (4) all facts, events or conditions that
could reasonably lead to the occurrence of any of the above-referenced matters.
(b) Lessee hereby agrees to defend, indemnify and save harmless any
and all Lessor Indemnified Parties from and against any and all Environmental
Liabilities EXCEPT TO THE EXTENT THAT THE SAME (I) ARE CAUSED BY THE INTENTIONAL
ACTS OR NEGLIGENT ACTS OR FAILURES TO ACT OF LESSOR, OR (II) RESULT FROM
CONDITIONS EXISTING AT THE LEASED PROPERTY AT THE DATE OF THIS LEASE (AN
"EXISTING CONDITION") OR FROM RELEASES OR OTHER VIOLATIONS OF ENVIRONMENTAL LAWS
ORIGINATING ON ADJACENT PROPERTY BUT AFFECTING THE LEASED PROPERTY (A
"MIGRATION"), provided that in either case such exclusions shall not apply to
the extent that the Existing Condition or the Migration has been exacerbated by
Lessee's intentional act, negligent act or negligent failure to act.
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<PAGE>
(c) Lessor hereby agrees to defend, indemnify and save harmless any
and all Lessee Indemnified Parties from and against any and all Environmental
Liabilities to the extent that the same arise from an Existing Condition or
Migration (except as provided in Section 8.3(b) above) or were caused by the
intentional or negligent acts or failures to act of Lessor.
(d) If any Proceeding is brought against any Indemnified Party in
respect of an Environmental Liability with respect to which such Indemnified
Party may claim indemnification under either Section 8.3(b) or (c), the
Indemnifying Party, upon request, shall at its sole expense resist and defend
such Proceeding, or cause the same to be resisted and defended by counsel
designated by the Indemnifying Party and approved by the Indemnified Party,
which approval shall not be unreasonably withheld; provided, however, that such
approval shall not be required in the case of defense by counsel designated by
any insurance company undertaking such defense pursuant to any applicable policy
of insurance. Each Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel will be at the sole expense of such
Indemnified Party unless a conflict of interest prevents representation of such
Indemnified Party by the counsel selected by the Indemnifying Party and such
separate counsel has been approved by the Indemnifying Party, which approval
shall not be unreasonably withheld. The Indemnifying Party shall not be liable
for any settlement of any such Proceeding made without its consent, which shall
not be unreasonably withheld, but if settled with the consent of the
Indemnifying Party, or if settled without its consent (if its consent shall be
unreasonably withheld), or if there be a final, nonappealable judgment for an
adversary party in any such Proceeding, the Indemnifying Party shall indemnify
and hold harmless the Indemnified Parties from and against any liabilities
incurred by such Indemnified Parties by reason of such settlement or judgment.
(e) If at any time any Indemnified Party has reason to believe
circumstances exist which could reasonably result in an Environmental Liability,
upon reasonable prior written notice to Lessee stating such Indemnified Party's
basis for such belief, an Indemnified Party shall be given immediate access to
the Leased Property (including, but not limited to, the right to enter upon,
investigate, drill wells, take soil borings, excavate, monitor, test, cap and
use available land for the testing of remedial technologies), Lessee's
employees, and to all relevant documents and records regarding the matter as to
which a responsibility, liability or obligation is asserted or which is the
subject of any Proceeding; provided that such access may be conditioned or
restricted as may be reasonably necessary to ensure compliance with law and the
safety of personnel and facilities or to protect confidential or privileged
information. All Indemnified Parties
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<PAGE>
requesting such immediate access and cooperation shall endeavor to coordinate
such efforts to result in as minimal interruption of the operation of the Leased
Property as practicable.
(f) The indemnification rights and obligations provided for in this
Article VIII shall be in addition to any indemnification rights and obligations
provided for elsewhere in this Lease.
(g) The indemnification rights and obligations provided for in this
Article VIII shall survive the termination of this Agreement.
For purposes of this Section 8.3, all amounts for which any
Indemnified Party seeks indemnification shall be computed net of (a) any actual
income tax benefit resulting therefrom to such Indemnified Party, (b) any
insurance proceeds received (net of tax effects) with respect thereto, and (c)
any amounts recovered (net of tax effects) from any third parties based on
claims the Indemnified Party has against such third parties which reduce the
damages that would otherwise be sustained; provided that in all cases, the
timing of the receipt or realization of insurance proceeds or income tax
benefits or recoveries from third parties shall be taken into account in
determining the amount of reduction of damages. Each Indemnified Party agrees
to use its reasonable efforts to pursue, or assign to Lessee or Lessor, as the
case may be, any claims or rights it may have against any third party which
would materially reduce the amount of damages otherwise incurred by such
Indemnified Party.
ARTICLE IX
----------
9.1 Maintenance and Repair.
----------------------
(a) Except as provided in Section 9.1(b), Lessee will keep the Leased
Property and all private roadways, sidewalks and curbs appurtenant thereto that
are under Lessee's control, including windows and plate glass, parking lots,
HVAC, mechanical, electrical and plumbing systems and equipment (including
conduit and ductware), and non-load bearing interior walls, in good order and
repair, except for ordinary wear and tear (whether or not the need for such
repairs occurred as a result of Lessee's use, any prior use, the elements or the
age of the Leased Property, or any portion thereof but subject to the obligation
to make necessary and appropriate repairs and replacements as provided in this
Section 9.1(a)), and, except as otherwise provided in Section 9.1(b), Article
XIV or Article XV, with reasonable promptness, make all necessary and
appropriate repairs, replacements and improvements thereto of every kind and
nature, whether interior or exterior, ordinary or extraordinary, foreseen or
unforeseen or arising by reason of a condition
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existing prior to the commencement of the Term of this Lease, or required by any
governmental agency having jurisdiction over the Leased Property. Lessee,
however, shall be permitted to prosecute claims against Lessor's predecessors in
title for breach of any representation or warranty or for any latent defects in
the Leased Property to be maintained by Lessee unless Lessor is already
diligently pursuing such a claim. All repairs shall, to the extent reasonably
achievable, be at least equivalent in quality to the original work. Lessee will
not take or omit to take any action, the taking or omission of which might
materially impair the value or the usefulness of the Leased Property or any part
thereof for its Primary Intended Use. If Lessee fails to make any required
repairs or replacements after fifteen (15) days' notice from Lessor, or after
such longer period as may be reasonably required provided that Lessee at all
times diligently proceeds with such repair or replacement, then Lessor shall
have the right, but shall not be obligated, to make such repairs or replacements
on behalf of and for the account of Lessee. In such event, such work shall be
paid for in full by Lessee as Additional Charges.
(b) Notwithstanding Lessee's obligations under Section 9.1(a) above
but subject to the limitations on Lessor's obligations for Capital Expenditures
set forth in Article XXXVIII, unless caused by Lessee's negligence or willful
misconduct or that of its employees, contractors or agents, Lessor shall be
required to make all Capital Expenditures. Except as set forth in the preceding
sentence, Lessor shall not under any circumstances be required to build or
rebuild any improvement on the Leased Property, or to make any repairs,
replacements, alterations, restorations or renewals of any nature or description
to the Leased Property, whether ordinary or extraordinary, foreseen or
unforeseen, or to make any expenditure whatsoever with respect thereto, in
connection with this Lease, or to maintain the Leased Property in any way.
Lessee hereby waives, to the extent permitted by law, the right to make repairs
at the expense of Lessor pursuant to any law in effect at the time of the
execution of this Lease or hereafter enacted. Lessor shall have the right to
give, record and post, as appropriate, notices of non-responsibility under any
mechanic's lien laws now or hereafter existing.
If Lessor fails to make any required Capital Expenditures after the
expiration of all notice and cure periods set forth in Article XXXIX, then
Lessee shall have the right, but shall not be obligated to make, such Capital
Expenditures on behalf of and for the account of Lessor. In such event, Lessee
may offset the amount of such expenditures against future Rent hereunder.
(c) Nothing contained in this Lease and no action or inaction by
Lessor shall be construed as (1) constituting the
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request of Lessor, expressed or implied, to any contractor, subcontractor,
laborer, materialman or vendor to or for the performance of any labor or
services or the furnishing of any materials or other property for the
construction, alteration, addition, repair or demolition of or to the Leased
Property or any part thereof, or (2) giving Lessee any right, power or
permission to contract for or permit the performance of any labor or services or
the furnishing of any materials or other property in such fashion as would
permit the making of any claim against Lessor in respect thereof or to make any
agreement that may create, or in any way be the basis for any right, title,
interest, lien, claim or other encumbrance upon the estate of Lessor in the
Leased Property, or any portion thereof.
(d) Lessee will, upon the expiration or prior termination of the Term,
vacate and surrender the Leased Property to Lessor in the condition in which the
Leased Property was originally received from Lessor, except as repaired,
rebuilt, restored, altered or added to as permitted or required by the
provisions of this Lease and except for ordinary wear and tear (subject to the
obligation of Lessee to maintain the Leased Property in good order and repair in
accordance with Section 9.1(a) above, as would a prudent owner of comparable
property, during the entire Term) or damage by casualty or Condemnation (subject
to the obligation of Lessee to restore or repair as set forth in this Lease).
ARTICLE X
---------
10.1 Alterations. Subject to first obtaining the written approval of
-----------
Lessor, which shall not be unreasonably withheld, Lessee shall have the right,
but not the obligation, to make such additions, modifications or improvements to
the Leased Property from time to time as Lessee deems desirable for its
permitted uses and purposes, provided that such action will not alter the
character or purposes of the Leased Property or detract from the value or
operating efficiency thereof and will not impair the revenue-producing
capability of the Leased Property or adversely affect the ability of the Lessee
to comply with the provisions of this Lease. All such work shall be performed
in a first class manner in accordance with all applicable governmental rules and
regulations and after receipt of all required permits and licenses. If
reasonably required by Lessor all such work shall be covered by performance
bonds issued by bonding companies reasonably acceptable to Lessor. The cost of
such additions, modifications or improvements to the Leased Property shall be
paid by Lessee, and all such additions, modifications and improvements shall,
without payment by Lessor at any time, be included under the terms of this Lease
and upon expiration or earlier termination of this Lease shall pass to and
become the property of Lessor.
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10.2 Salvage. All materials which are scrapped or removed in
-------
connection with the making of repairs pursuant to Article IX or X shall be or
become the property of Lessor or Lessee depending on which party is paying for
or providing the financing of such work.
10.3 Lessor Alterations. Lessor shall have the right, without
------------------
Lessee's consent, to make or cause to be made alterations to the Leased Property
required in connection with (i) Emergency Situations, (ii) Legal Requirements,
(iii) maintenance of the Franchise Agreement, (iv) any Mortgage or (v) the
performance by Lessor of its obligations under this Lease. Notwithstanding
anything to the contrary aforesaid, however, Capital Improvements made pursuant
to the requirements of the Capital Budget shall be made in a manner mutually
agreed to by Lessor and Lessee to the extent required by Article XXXVIII(c).
Lessor shall further have the right, but not the obligation, to make such other
additions to the Leased Property as it may reasonably deem appropriate during
the term of the Lease, subject to Lessee's approval which shall not be
unreasonably withheld. All such work unless necessitated by Lessee's acts or
omissions or unless otherwise required to be performed by Lessee under this
Lease (in which event work shall be paid for by Lessee) shall be performed at
Lessor's expense and shall be done after reasonable notice to and coordination
with Lessee, so as to minimize any disruptions or interference with the
operation of the Facility. In the event such work materially interferes with
the operation of the Facility, Base Rent shall be equitably abated. If Lessee
withholds its consent to any additions or other work which Lessor has the right,
but not the obligation, to make pursuant to the foregoing provisions of this
Section 10.3, if the extent of abatement of Rent cannot be agreed upon, the
matter shall be referred to arbitration pursuant to the provisions of Article
XL.
ARTICLE XI
----------
Liens. Subject to the provision of Article XII relating to permitted
-----
contests, Lessee will not directly or indirectly create or allow to remain and
will promptly discharge at its expense any lien, encumbrance, attachment, title
retention agreement or claim upon the Leased Property resulting from the action
or inaction of Lessee, or any attachment, levy, claim or encumbrance in respect
of the Rent, excluding, however, (a) this Lease, (b) the matters, if any,
included as exceptions or insured against in the title policy insuring Lessor's
interest in the Leased Property, (c) restrictions, liens and other encumbrances
which are consented to in writing by Lessor, (d) liens for those taxes which
Lessee is not required to pay hereunder, (e) subleases permitted by Article XXI
hereof, (f) liens for Impositions or for sums resulting from noncompliance with
Legal Requirements to the extent Lessee is responsible hereunder for
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such compliance so long as (1) the same are not yet delinquent or (2) such liens
are in the process of being contested as permitted by Article XII, and (g) liens
of mechanics, laborers, suppliers or vendors for sums either disputed or not yet
due provided that any such liens for disputed sums are in the process of being
contested as permitted by Article XII hereof.
ARTICLE XII
-----------
Permitted Contests. Lessee shall have the right to contest the amount
------------------
or validity of any Imposition to be paid by Lessee or any Legal Requirement or
any lien, attachment, levy, encumbrance, charge or claim (any such Imposition,
Legal Requirement, lien, attachment, levy, encumbrance, charge or claim herein
referred to as "Claims") not otherwise permitted by Article XI, by appropriate
legal proceedings in good faith and with due diligence (but this shall not be
deemed or construed in any way to relieve, modify or extend Lessee's covenants
to pay or its covenants to cause to be paid any such charges at the time and in
the manner as in this Article provided), on condition, however, that such legal
proceedings shall not operate to relieve Lessee from its obligations hereunder
and shall not cause the sale or loss of any portion of the Leased Property, or
any part thereof, or cause Lessor or Lessee to be in default under any Mortgage.
Upon the request of Lessor, as security for the payment of such claims, Lessee
shall either (a) provide a bond or other assurance reasonably satisfactory to
Lessor (and to any Holder, if approval thereof is required by such Holder's
Mortgage) that all Claims which may be assessed against the Leased Property
together with interest and penalties, if any, thereon will be paid, or (b)
deposit within the time otherwise required for payment with a bank or trust
company as trustee upon terms reasonably satisfactory to Lessor or with any
Holder upon terms satisfactory to such Holder, money in an amount sufficient to
pay the same, together with interest and penalties in connection therewith, as
to all Claims which may be assessed against or become a Claim on the Leased
Property, or any part thereof, in said legal proceedings. Lessee shall furnish
Lessor and any Holder with reasonable evidence of such deposit within five days
of the same. Lessor agrees to join in any such proceedings if the same be
required to legally prosecute such contest of the validity of such Claims;
provided, however, that Lessor shall not thereby be subjected to any liability
for the payment of any costs or expenses in connection with any proceedings
brought by Lessee; and Lessee covenants to indemnify and save harmless Lessor
from any such costs or expenses. Lessee shall be entitled to any refund of any
Claims and such charges and penalties or interest thereon which have been paid
by Lessee or paid by Lessor and for which Lessor has been fully reimbursed. In
the event that Lessee fails to pay any Claims when due or to provide the
security therefor as provided in this paragraph and
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to diligently prosecute any contest of the same, Lessor may, upon ten days
advance Notice to Lessee, pay such charges together with any interest and
penalties and the same shall be repayable by Lessee to Lessor as Additional
Charges at the next Payment Date provided for in this Lease. Lessor reserves
the right to contest any of the Claims not pursued by Lessee at Lessor's
expense. Lessor and Lessee agree to cooperate in coordinating the contest of
any Claims.
ARTICLE XIII
------------
13.1 General Insurance Requirements.
------------------------------
(a) Coverages. During the Term of this Lease, the Leased Property
---------
shall at all times be insured with the kinds and amounts of insurance described
below. This insurance shall be written by companies authorized to issue
insurance in the State. The policies must name the party obtaining the policy
as the insured and the other party as an additional named insured, and the
Manager shall also be named as an additional insured under the coverages
described in Sections 13.1(a)(iii) through (xi). Losses shall be payable, for
the benefit of the respective insureds, to Lessor or Lessee as provided in this
Lease. Any loss adjustment for coverage insuring multiple parties shall require
the written consent of each of them, each acting reasonably and in good faith.
Evidence of insurance shall be deposited with Lessor. The policies on the
Leased Property, including the Leased Improvements, Fixtures and Lessee's
Personal Property, shall at all times satisfy the requirements of the Franchise
Agreement and of any Mortgage, affecting the Leased Property and at a minimum
shall include:
(i) Building insurance on the "Special Form" (formerly "All Risk"
form) (including earthquake and flood in reasonable amounts if and as determined
by Lessor) in an amount not less than 100% of the then full replacement cost
thereof (as defined in Section 13.2) or such other amount which is acceptable to
Lessor, and personal property insurance on the "Special Form" in the full amount
of the replacement cost thereof;
(ii) Insurance for loss and damage (direct and indirect) from steam
boilers, pressure vessels or similar apparatus, air conditioning systems, piping
and machinery, and sprinklers, if any, now or hereafter installed in the
Facility, in the minimum amount of $5,000,000 or in such greater amounts as are
then customary or as may be reasonably requested by Lessor from time to time;
(iii) Loss of income insurance on the "Special Form", in the amount of
one year of the greater of Base Rent or Participating Rent (based on the last
Lease Year of operation or,
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to the extent the Leased Property has not been operated for an entire 12-month
Lease Year, based on prorated Participating Rent) for the benefit of Lessor, and
business interruption insurance on the "Special Form" in the amount of one year
of gross profit, for the benefit of Lessee including one year of management fees
to Manager;
(iv) Commercial general liability insurance, with amounts not less
than $1,000,000 combined single limit for each occurrence and $2,000,000 for the
aggregate of all occurrences within each policy year, as well as excess
liability (umbrella) insurance with limits of at least $25,000,000 per
occurrence, covering each of the following: bodily injury, death, or property
damage liability per occurrence, personal and advertising injury, general
aggregate, products and completed operations, with respect to Lessor, Lessee and
Manager, and "all risk legal liability" (including liquor law or "dram shop"
liability, if liquor or alcoholic beverages are served on the Leased Property)
with respect to Lessor, Lessee and Manager;
(v) Fidelity bonds or blanket crime policies with limits and
deductibles as may be reasonably determined by Lessor, covering Lessee's or
Manager's employees in job classifications normally bonded under prudent hotel
management practices in the United States or otherwise required by law;
(vi) Workers' compensation insurance to the extent necessary to
protect Lessor, Lessee, and Manager and the Leased Property against Lessee's or
Manager's workman's compensation claims to the extent required by applicable
state laws;
(vii) Comprehensive form vehicle liability insurance for
owned, non-owned and hired vehicles, in the amount of $1,000,000;
(viii) Garagekeeper's legal liability insurance covering both
comprehensive and collision-type losses with a limit of liability in keeping
with prudent hotel management practice;
(ix) Innkeeper's legal liability insurance covering property of guests
while on the Leased Property for which Lessor is legally responsible (other than
property in a safe deposit box), with a limit of not less than $5,000 for any
one occurrence or $25,000 in the aggregate;
(x) Safe deposit box legal liability insurance covering property of
guests while in a safe deposit box on the Leased Property for which Lessor is
legally responsible, with a limit of not less than $100,000 for any one
occurrence; and
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(xi) Insurance covering such other liabilities or hazards (such as
plate glass or other common risks) and in such amounts as may be customary for
comparable properties in the area of the Leased Property and is available from
insurance companies, insurance pools or other appropriate companies authorized
to do business in the State at rates which are economically practicable in
relation to the risks covered as may be reasonably determined by Lessor.
(b) Responsibility for Insurance. Lessee shall obtain the insurance
----------------------------
and pay the premiums for the coverages described in Sections 13.1(a)(iv) through
(x), and Lessor shall obtain the insurance and pay the premiums for the coverage
described in Sections 13.1(a)(i) through (iii), provided that Lessee shall
reimburse Lessor immediately after demand therefor for any premiums paid by
Lessor for the coverages required under Sections 13.1(a)(i) and (iii) to the
extent that the premiums relate to coverages for property owned by Lessee or
coverages which benefit Lessee or Manager. Insurance required by Section
13.1(a)(xi) shall be obtained and paid for by Lessor to the extent that it
relates to risks of the type covered by the insurance obtained pursuant to
Section 13.1(a)(i) through (iii), and obtained and paid for by Lessee if it
relates to risks of the type covered by the insurance obtained pursuant to
Sections 13.1(a)(iv) through (x). The party responsible for the premium for any
insurance coverage shall also be responsible for any and all deductibles and
self-insured retentions in connection with such coverages. In the event that
either party can obtain comparable insurance coverage required to be carried by
the other party from comparable insurers and at a cost significantly less than
that at which such other party can obtain such coverage, the parties shall
cooperate in good faith to obtain such coverage at the lower cost and shall
allocate the premiums therefor in accordance with the provisions of the first
sentence of this Section 13.1(b).
13.2 Replacement Cost. The term "full replacement cost" as used
----------------
herein shall mean the actual replacement cost of the Leased Property requiring
replacement from time to time including an increased cost of construction
endorsement, if available, and the cost of debris removal. In the event either
party believes that full replacement cost has increased or decreased at any time
during the Lease Term, it shall have the right to have such full replacement
cost redetermined.
13.3 (Intentionally omitted)
13.4 Waiver of Subrogation. All insurance policies carried by Lessor
---------------------
or Lessee covering the Leased Property, the Fixtures, the Facility or Lessee's
Personal Property, including, without limitation, contents, fire and casualty
insurance, shall expressly waive any right of subrogation on the part of the
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insurer against the other party and Manager to the extent available without
additional cost.
13.5 Form Satisfactory, etc. All of the policies of insurance
-----------------------
referred to in this Article XIII shall be written in a form, with deductibles
and by insurance companies satisfactory to Lessor and Lessee and shall satisfy
the requirements of any ground lease, Mortgage, and the Franchise Agreement.
The party responsible for obtaining any policy shall pay all of the premiums
therefor, and deliver copies of such policies or certificates thereof to the
other party prior to their effective date (and, with respect to any renewal
policy, 10 days prior to the expiration of the existing policy), and in the
event of the failure of the responsible party either to effect such insurance as
herein called for or to pay the premiums therefor, or to deliver such policies
or certificates thereof to the other party at the times required, such other
party shall be entitled, but shall have no obligation, after 10 days' Notice to
the responsible party, to effect such insurance and pay the premiums therefor,
and to be reimbursed for any such premiums upon written demand therefor. Each
insurer mentioned in this Article XIII shall agree, by endorsement to the policy
or policies issued by it, or by independent instrument furnished to the party
not responsible hereunder for obtaining such policy, that it will give to such
party 10 days' Notice before the policy or policies in question shall be
materially altered, allowed to expire or cancelled.
13.6 Increase in Limits. If either Lessor or Lessee at any time
------------------
deems the limits of the personal injury or property damage under the
comprehensive public liability insurance then carried to be either excessive or
insufficient, Lessor and Lessee shall endeavor in good faith to agree on the
proper and reasonable limits for such insurance to be carried and such insurance
shall thereafter be carried with the limits thus agreed on until further change
pursuant to the provisions of this Section. If the parties fail to agree on
such limits, the matter shall be referred to arbitration as provided for in
Article XL. In no event, however, shall such limits fail to satisfy the
requirements of the Franchise Agreement and of any ground lease or Mortgage.
13.7 Blanket Policy. Notwithstanding anything to the contrary
--------------
contained in this Article XIII, Lessee or Lessor may bring the insurance
provided for herein within the coverage of a so-called blanket policy or
policies of insurance carried and maintained by Lessee or Lessor; provided,
however, that the coverage afforded to Lessor, Lessee and Manager will not be
reduced or diminished or otherwise be different from that which would exist
under a separate policy meeting all other requirements of this Lease by reason
of the use of such blanket
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policy of insurance, and provided further that the requirements of this Article
XIII are otherwise satisfied.
13.8 Separate Insurance. Neither Lessor nor Lessee shall on its own
------------------
initiative or pursuant to the request or requirement or any third party, take
out separate insurance concurrent in form or contributing in the event of loss
with that required in this Article XIII to be furnished, or increase the amount
of any then existing insurance by securing an additional policy or additional
policies, unless all parties having an insurable interest in the subject matter
of the insurance, including in all cases Lessor, are included therein as
additional insureds, and the loss is payable under such additional separate
insurance in the same manner as losses are payable under this Lease. Each party
shall immediately notify the other party that it has obtained any such separate
insurance or of the increasing of any of the amounts of the then existing
insurance.
13.9 Reports On Insurance Claims. Lessee shall promptly investigate
---------------------------
and make a complete and timely written report to the appropriate insurance
company as to all accidents, all claims for damage relating to the ownership,
operation, and maintenance of the Facility, and any damage or destruction to the
Facility and the estimated cost of repair thereof and shall prepare any and all
reports required by any insurance company in connection therewith. All such
reports shall be timely filed with the insurance company as required under the
terms of the insurance policy involved, and a copy of all such reports shall be
furnished to Lessor. Lessee shall be authorized to adjust, settle or compromise
any insurance loss, or to execute proofs of such loss, in the aggregate amount
of $5,000 or less, with respect to any single casualty or other event.
ARTICLE XIV
-----------
14.1 Insurance Proceeds. All proceeds of the insurance contemplated
------------------
by Sections 13.1(a)(i) and (ii) payable by reason of any loss or damage to the
Leased Property, or any portion thereof, and insured under any policy of
insurance required by Article XIII of this Lease shall, subject to the terms of
any Mortgage and/or ground lease, be paid to Lessor and held in trust by Lessor
in an interest-bearing account, and made available, if applicable, for
reconstruction or repair, as the case may be, of any damage to or destruction of
the Leased Property or any portion thereof, and, if applicable, shall be paid
out by Lessor from time to time for the reasonable costs of such reconstruction
or repair upon satisfaction of reasonable terms and conditions specified by
Lessor. Any excess proceeds of insurance remaining after the completion of the
restoration or reconstruction of the Leased Property shall be paid to Lessor.
If neither Lessor nor Lessee is required or elects to repair and
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restore, and the Lease is terminated as described in Section 14.2, all such
insurance proceeds shall be retained by Lessor except for any amount thereof
paid with respect to Lessee's Personal Property. All salvage resulting from any
risk covered by insurance shall belong to Lessor, except to the extent of
salvage relating to Lessee's Personal Property.
14.2 Reconstruction in the Event of Damage or Destruction Covered by
---------------------------------------------------------------
Insurance. Except as provided in Section 14.6, if during the Term the Leased
- ---------
Property is totally or partially destroyed by a risk covered by the insurance
described in Article XIII and the Facility thereby is rendered Unsuitable for
its Primary Intended Use, Lessor may, at Lessor's option, either (1) restore the
Facility to substantially the same condition as existed immediately before the
damage or destruction and otherwise in accordance with the terms of this Lease,
or (2), subject to the provisions of Section 36.1, terminate this Lease. Lessor
shall be entitled to retain all insurance proceeds.
14.3 Reconstruction in the Event of Damage or Destruction Not Covered
----------------------------------------------------------------
by Insurance. Except as provided in Section 14.6, if during the Term the
- ------------
Facility is totally or partially damaged or destroyed by a risk not covered by
the insurance described in Article XIII, whether or not such damage or
destruction renders the Facility Unsuitable for its Primary Intended Use, Lessor
may at its option either, (a) at Lessor's sole cost and expense, restore the
Facility to substantially the same condition it was in immediately before such
damage or destruction and such damage or destruction shall not terminate this
Lease, or (b), subject to the provisions of Section 36.1, terminate this Lease.
Notwithstanding the foregoing, if such damage or destruction is not material,
Lessor shall, at Lessor's sole cost and expense, restore the Facility to
substantially the same condition as existed immediately before the damage or
destruction and otherwise in accordance with the terms of the Lease, and such
damage or destruction shall not terminate the Lease.
14.4 Lessee's Property and Business Interruption Insurance. All
-----------------------------------------------------
insurance proceeds payable by reason of any loss of or damage to any of Lessee's
Personal Property and the business interruption insurance maintained for the
benefit of Lessee shall be paid to Lessee; provided, however, no such payments
shall diminish or reduce the insurance payments otherwise payable to or for the
benefit of Lessor hereunder.
14.5 Abatement of Rent. Any damage or destruction due to casualty
-----------------
notwithstanding, this Lease shall remain in full force and effect but Lessee's
obligation to make rental payments and to pay all other charges required by this
Lease shall abate during any period required for the applicable repair and
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restoration to the extent the Facility is unsuitable for its Primary Intended
Use (unless such damage was caused by Lessee's negligence or wilful misconduct
and then only to the extent such rental payments and charges are not paid to
Lessor from proceeds of insurance).
14.6 Damage Near End of Term. Notwithstanding any provisions of
-----------------------
Section 14.2 or 14.3 appearing to the contrary, if damage to or destruction of
the Facility rendering it Unsuitable for its Primary Intended Use occurs during
the last 24 months of the Term, then Lessee shall have the right to terminate
this Lease by giving Notice to Lessor within 30 days after the date of damage or
destruction, whereupon all accrued Rent shall be paid immediately, and this
Lease shall automatically terminate five (5) days after the date of such notice.
ARTICLE XV
----------
15.1 Definitions.
-----------
(a) "Condemnation" means a Taking resulting from (1) the exercise of
any governmental power, whether by legal proceedings or otherwise, by a
Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor,
either under threat of condemnation or while legal proceedings for condemnation
are pending.
(b) "Date of Taking" means the date the Condemnor has the right to
possession of the property being condemned.
(c) "Award" means all compensation, sums or anything of value awarded,
paid or received on a total or partial Condemnation.
(d) "Condemnor" means any public or quasi-public authority, or private
corporation or individual, having the power of Condemnation.
15.2 Parties' Rights and Obligations. If during the Term there is
-------------------------------
any Condemnation of all or any part of the Leased Property or any interest in
this Lease, the rights and obligations of Lessor and Lessee shall be determined
by this Article XV, subject to the provisions of any Mortgage [and the Ground
Lease].
15.3 Total Taking. If title to the fee of the whole of the Leased
------------
Property is condemned by any Condemnor, this Lease shall cease and terminate as
of the Date of the Taking by the Condemnor. If title to the fee of less than
the whole of the Leased Property is so taken or condemned, which nevertheless
renders the Leased Property Unsuitable or Uneconomic for its
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Primary Intended Use, then either Lessee or Lessor shall have the option, by
notice to the other, at any time prior to the Date of Taking, to terminate this
Lease as of the Date of Taking. Upon such date, if such Notice has been given,
this Lease shall thereupon cease and terminate. All Base Rent, Participating
Rent and Additional Charges paid or payable by Lessee hereunder shall be
apportioned as of the Date of Taking, and Lessee shall promptly pay Lessor such
amounts.
15.4 Allocation of Award. The total Award made with respect to the
-------------------
Leased Property or for loss of rent, or for Lessor's loss of business beyond the
Term, shall be solely the property of and payable to Lessor. Any Award made for
loss of Lessee's business during the remaining Term, if any, for the taking of
Lessee's Personal Property, or for removal and relocation expenses of Lessee in
any such proceedings shall be the sole property of and payable to Lessee. In
any Condemnation proceedings Lessor and Lessee shall each seek its Award in
conformity herewith, at its respective. Neither Lessor nor Lessee shall
initiate, prosecute or acquiesce in any proceedings that may result in a
diminution of any Award payable to the other, except that Lessor and Lessee
shall equitably apportion their respective Awards to the extent that they can
not comply with the provisions of this Section.
15.5 Partial Taking. If title to less than the whole of the Leased
--------------
Property is condemned, and the Leased Property is still suitable for its Primary
Intended Use, and not Uneconomic for its Primary Intended Use, or if Lessee or
Lessor is entitled but neither elects to terminate this Lease as provided in
Section 15.3, Lessee at its cost shall with all reasonable dispatch restore the
untaken portion of any Leased Improvements so that such Leased Improvements
constitute a complete architectural unit of the same general character and
condition (as nearly as may be possible under the circumstances) as the Leased
Improvements existing immediately prior to the Condemnation. Lessor shall in
good faith seek a fair and equitable allocation of any Award among restoration,
taken Leasehold Improvements and other elements. Lessor shall contribute to the
cost of restoration that part of its Award specifically allocated to such
restoration, together with severance and other damages awarded for the taken
Leased Improvements; provided, however, that the amount of such contribution
shall not exceed such cost.
15.6 Temporary Taking. If the whole or any part of the Leased
----------------
Property or of Lessee's interest under this Lease is condemned by any Condemnor
for its temporary use or occupancy, this Lease shall not terminate by reason
thereof, and Lessee shall continue to pay, in the manner and at the times herein
specified, the full amounts of Base Rent and Additional Charges, but only to the
extent of the net (i.e. after deduction of all costs, expenses, and other
obligations attendant to such
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<PAGE>
Condemnation have been paid) Award made to Lessee for such Condemnation
allocable to the term of this Lease. In addition, to the extent of the
remaining balance, if any, of the net Award made for such Condemnation allowable
to the term of this Lease (after payment of Base Rent and Additional Charges),
Lessee shall pay Participating Rent at a rate equal to the average Participating
Rent during the last three preceding Lease Years (or if three Lease Years shall
not have elapsed, the average during the preceding Lease Years). Except only to
the extent that Lessee may be prevented from so doing pursuant to the terms of
the order of the Condemnor, Lessee shall continue to perform and observe all of
the other terms, covenants, conditions and obligations hereof on the part of the
Lessee to be performed and observed, as though such Condemnation had not
occurred. In the event of any Condemnation as in this Section 15.6 described,
the entire amount of any Award made for such Condemnation allocable to the Term
of this Lease, whether paid by way of damages, rent or otherwise, shall be paid
to Lessee. Lessee covenants that upon the termination of any such period of
temporary use or occupancy it will, to the extent that its Award is sufficient
therefor and subject to Lessor's contribution as set forth below, restore the
Leased Property as nearly as may be reasonably possible to the condition in
which the same was immediately prior to such Condemnation, unless such period of
temporary use or occupancy extends beyond the expiration of the Term, in which
case Lessee shall not be required to make such restoration. If restoration is
required hereunder, Lessor shall, having sought a fair and equitable allocation
as provided in Section 15.5 above, contribute to the cost of such restoration
that portion of its entire Award that is specifically allocated to such
restoration in the judgment or order of the court, if any.
ARTICLE XVI
-----------
16.1 Events of Default. Any one or more of the following events
-----------------
shall constitute an Event of Default hereunder:
(a) if Lessee fails to make any payment of Base Rent, Participating
Rent or Additional Charges within ten (10) days after receipt by the Lessee of
Notice from Lessor that the same has become due and payable; or
(b) if Lessee fails to observe or perform any other term, covenant or
condition of this Lease and such failure is not curable, or if curable is not
cured by Lessee within a period of 30 days after receipt by the Lessee of Notice
thereof from Lessor, unless such failure is curable but cannot with due
diligence be cured within a period of 30 days, in which case it shall not be
deemed an Event of Default if (i) Lessee, within such 30 day period, proceeds
with due diligence to commence to cure the failure and thereafter diligently
completes the curing
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thereof within 180 days, and (ii) the failure does not result in a notice or
declaration of default under any material contract or agreement to which Lessor,
the Company, or any Affiliate of either of them is a party or by which any of
their assets are bound; or
(c) if Lessee shall (i) be generally not paying its debts as they
become due, (ii) file, or consent by answer or otherwise to the filing against
it of, a petition for relief or reorganization or arrangement or any other
petition in bankruptcy, for liquidation or to take advantage of any bankruptcy
or insolvency law of any jurisdiction, (iii) make a general assignment for the
benefit of its creditors, (iv) consent to the appointment of a custodian,
receiver, trustee or other officer with similar powers with respect to it or
with respect to any substantial part of its assets, (v) be adjudicated insolvent
or (vi) take corporate action for the purpose of any of the foregoing; or if a
court or governmental authority of competent jurisdiction shall enter an order
appointing, without consent by Lessee, a custodian, receiver, trustee or other
officer with similar powers with respect to it or with respect to any
substantial part of its assets, or if an order for relief shall be entered in
any case or proceeding for liquidation or reorganization or otherwise to take
advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering
the dissolution, winding-up or liquidation of Lessee, or if any petition for any
such relief shall be filed against Lessee and such order or petition shall not
be rescinded or dismissed within 120 days; or
(d) if Lessee is liquidated or dissolved, or commences proceedings
toward such liquidation or dissolution, or, in any manner, ceases to do business
or permits the sale or divestiture of all or substantially all of its assets; or
(e) if the estate or interest of Lessee in the Leased Property or any
part thereof is voluntarily or involuntarily transferred, assigned, conveyed,
levied upon or attached in any Proceeding; or
(f) if, except as a result of and to the extent required by damage,
destruction, Condemnation or Unavoidable Delay, Lessee voluntarily ceases
operations on the Leased Property for a period in excess of three (3) days; or
(g) if notice of a default or an event of default has been given by
the franchisor under the Franchise Agreement with respect to the Facility on the
Leased Property as a result of any action or failure to act by the Lessee or any
Person with whom the Lessee contracts for management services at the Facility
(including any Manager), which default or event of default is not cured within
applicable cure periods and does not arise from
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<PAGE>
Lessor's breach of any of its obligations under this Lease which are required to
maintain the Franchise Agreement in effect; or
(h) if an Event of Default occurs under any lease for one (1) or more
of the Other Properties.
(i) if a Default by Lessee shall occur under the Lease Master
Agreement.
An Event of Default under this Section 16.1 shall constitute an Event
of Default hereunder and under all leases of the Other Properties.
No Event of Default (other than a failure to make a payment of money)
shall be deemed to exist under clause (b) during any time the curing of a
failure described in clause (b) is prevented by an Unavoidable Delay, provided
that upon the cessation of such Unavoidable Delay, Lessee proceeds to remedy
such failure as provided in clause (b) without further delay.
If litigation is commenced with respect to any alleged default under
this Lease, the prevailing party in such litigation shall receive, in addition
to its damages incurred, such sum as the court shall determine as its reasonable
attorneys' fees, and all costs and expenses incurred in connection therewith.
16.2 Remedies. Upon the occurrence of an Event of Default, Lessor
--------
shall have the right, at Lessor's option, to elect to do any one or more of the
following without further notice or demand to Lessee: (a) terminate this Lease,
in which event Lessee shall immediately surrender the Leased Property to Lessor,
and, if Lessee fails to so surrender, Lessor shall have the right, without
notice, to enter upon and take possession of the Leased Property and to expel or
remove Lessee and its effects without being liable for prosecution or any claim
for damages therefor; and Lessee shall, and hereby agrees to, indemnify Lessor
for all loss and damage which Lessor suffers by reason of such termination,
including without limitation, damages in an amount equal to the total of (1) the
reasonable costs of recovering the Leased Property in the event that Lessee does
not promptly surrender the Leased Property, and all other reasonable expenses
incurred by Lessor in connection with Lessee's default; and (2) the unpaid Rent
earned as of the date of termination, plus interest at the Overdue Rate accruing
after the due date; (3) the then present value of the unpaid Rent for the
balance of the Term discounted at a market discount rate, less the present value
of a fair market rent for the balance of the Term discounted at the same
discount rate; and (4) all other sums of money and damages owing by Lessee to
Lessor; or (b) enter upon and take possession of the Leased Property without
terminating this Lease and without being liable to prosecution or any claim for
damages therefor, and, if Lessor elects, relet the Leased
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Property on such terms as Lessor deems advisable, in which event Lessee shall
pay to Lessor on demand the reasonable cost of repossessing the Leased Property
and any deficiency between the Rent payable hereunder (including Participating
Rent as determined below) and the rent paid under such reletting; provided,
however, that Lessee shall not be entitled to any excess payments received by
Lessor from such reletting. Lessor's failure to relet the Leased Property shall
not release or affect Lessee's liability for Rent or for damages; or (c) enter
the Leased Property without terminating this Lease and without being liable for
prosecution or any claim for damages therefor and maintain the Leased Property
and repair or replace any damage thereto or do anything for which Lessee is
responsible hereunder. Lessee shall reimburse Lessor immediately upon demand
for any expense which Lessor incurs in thus effecting Lessee's compliance under
this Lease, and Lessor shall not be liable to Lessee for any damages with
respect thereto. Notwithstanding anything herein to the contrary, Lessee shall
not be liable to Lessor for consequential, punitive or exemplary damages.
The rights granted to Lessor in this Section 16.2 shall be cumulative
of every other right or remedy provided in this Lease or which Lessor may
otherwise have at law or in equity or by statute, and the exercise of one or
more rights or remedies shall not prejudice or impair the concurrent or
subsequent exercise of other rights or remedies or constitute a forfeiture or
waiver of Rent or damages accruing to Lessor by reason of any Event of Default
under this Lease.
Participating Rent for the purposes of this Section 16.2 shall be a
sum equal to (i) the average of the annual amounts of the Participating Rent for
the three 12-month Lease Years immediately preceding the Lease Year in which the
termination, re-entry or repossession takes place, or (ii) if three 12-month
Lease Years shall not have elapsed, the average of the Participating Rent during
the preceding 12-month Lease Years during which the Lease was in effect, or
(iii) if one 12-month Lease Year has not elapsed, the amount derived by
annualizing the Participating Rent from the effective date of this Lease.
16.3 [Intentionally Omitted].
16.4 Waiver. Each party waives, to the extent permitted by
------
applicable law, any right to a trial by jury in any proceedings brought by
either party to enforce the provisions of this Lease, including, without
limitation, proceedings to enforce the remedies set forth in this Article XVI.
Lessee waives the benefit of any laws now or hereafter in force exempting
property from liability for rent or for debt, and Lessor waives any right to
assert an "alter ego" of Lessee or its partners or to "pierce the corporate
veil" of Lessee or its partners other than to the extent funds shall have been
inappropriately paid following a
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default resulting in an Event of Default to any Person directly or indirectly
having an ownership interest in Lessee.
16.5 Application of Funds. Any payments received by Lessor under any
--------------------
of the provisions of this Lease during the existence or continuance of any Event
of Default shall be applied to Lessee's obligations in the order that Lessor may
determine or as may be prescribed by the laws of the State.
ARTICLE XVII
------------
Lessor's Right to Cure Lessee's Default. If Lessee fails to make any
---------------------------------------
payment or to perform any act required to be made or performed under this Lease
including, without limitation, Lessee's failure to comply with the terms of any
Franchise Agreement, and fails to cure the same within the relevant time
periods, if any, provided in Section 16.1, Lessor, without waiving or releasing
any obligation or default, may (but shall be under no obligation to) at any time
thereafter upon Notice to Lessee make such payment or perform such act for the
account and at the expense of Lessee, and may, to the extent permitted by law,
enter upon the Leased Property for such purpose and, subject to Section 16.2,
take all such action thereon as, in Lessor's opinion, may be necessary or
appropriate therefor. No such entry shall be deemed an eviction of Lessee. All
sums so paid by Lessor and all costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses, in each case to the extent
permitted by law) so incurred, together with a late charge thereon (to the
extent permitted by law) at the Overdue Rate from the date on which such sums or
expenses are paid or incurred by Lessor, shall be paid by Lessee to Lessor on
demand. The obligations of Lessee and rights of Lessor contained in this
Article shall survive the expiration or earlier termination of this Lease.
ARTICLE XVIII
-------------
18.1 Personal Property Limitation. Anything contained in this Lease
----------------------------
to the contrary notwithstanding, the average of the adjusted tax bases of the
items of Lessor's personal property that are leased to the Lessee under this
Lease at the beginning and at the end of any Lease Year shall not exceed 15% of
the average of the aggregate adjusted tax bases of the Leased Property at the
beginning and at the end of such Lease Year (the "Personal Property
Limitation"). Lessor and Lessee shall at all times cooperate in good faith and
use their best efforts to permit Lessor to comply with the Personal Property
Limitation, which compliance may include, by way of example only and not by way
of limitation or obligation, the purchase by Lessee at fair market value of
personal property in excess of the Personal
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Property Limitation and an equitable reduction of the Rent payable by Lessee.
All such compliance shall be effected in a manner which has no material net
economic detriment to Lessee and will not jeopardize the Company's status as a
real estate investment trust under the applicable provisions of the Code. This
Section 18.1 is intended to ensure that the Rent qualifies as "rents from real
property," within the meaning of Section 856(d) of the Code, or any similar or
successor provisions thereto, and shall be interpreted in a manner consistent
with such intent.
18.2 Sublease Rent Limitation. Anything contained in this Lease to
------------------------
the contrary notwithstanding, Lessee shall not sublet the Leased Property or
enter into any similar arrangement on any basis such that the rental or other
amounts to be paid by the sublessee thereunder would be based, in whole or in
part, on either (a) the net income or profits derived by the business activities
of the sublessee, or (b) any other formula such that any portion of the Rent
would fail to qualify as "rents from real property" within the meaning of
Section 856(d) of the Code, or any similar or successor provision thereto.
18.3 Sublease Lessee Limitation. Anything contained in this Lease to
--------------------------
the contrary notwithstanding, Lessee shall not sublease the Leased Property to,
or enter into any similar arrangement with, any Person in which the Company
owns, directly or indirectly, a 10% or more interest, within the meaning of
Section 856(d)(2)(B) of the Code, or any similar or successor provisions
thereto.
18.4 Lessee Ownership Limitation. Anything contained in this Lease
---------------------------
to the contrary notwithstanding, Lessor shall not take, or permit an Affiliate
of Lessor to take, any action that would cause the Company to own, directly or
indirectly, a 10% or more interest in the Lessee within the meaning of Section
856(d)(2)(B) of the Code, or any similar or successor provision thereto.
Anything contained in this Lease to the contrary notwithstanding, Lessee shall
not take, or permit an Affiliate of Lessee to take, any action that would cause
the Company to own, directly or indirectly, a 10% or more interest in the Lessee
within the meaning of Section 856(d)(2)(B) of the Code, or any similar or
successor provision thereto.
ARTICLE XIX
-----------
Holding Over. If Lessee for any reason remains in possession of the
------------
Leased Property after the expiration or earlier termination of the Term, such
possession shall be as a tenant at sufferance during which time Lessee shall pay
as rental each month two times the aggregate of (a) one-twelfth of the aggregate
Base Rent and Participating Rent payable with respect to the last
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Lease Year of the Term, (b) all Additional Charges accruing during the
applicable month and (c) all other sums, if any, payable by Lessee under this
Lease with respect to the Leased Property. During such period, Lessee shall be
obligated to perform and observe all of the terms, covenants and conditions of
this Lease, but shall have no rights hereunder other than the right to the
extent given by law to tenancies at sufferance, to continue its occupancy and
use of the Leased Property. Nothing contained herein shall constitute the
consent, express or implied, of Lessor to the holding over of Lessee after the
expiration or earlier termination of this Lease.
ARTICLE XX
----------
Indemnification. Lessee will protect, indemnify, hold harmless and
---------------
defend Lessor Indemnified Parties from and against all liabilities, obligations,
claims, damages, penalties, causes of action, costs and expenses (including,
without limitation, reasonable attorneys' fees and expenses) to the extent
permitted by law, EXCLUDING THOSE RESULTING FROM A LESSOR INDEMNIFIED PARTY'S
NEGLIGENCE OR WILLFUL MISCONDUCT, imposed upon or incurred by or asserted
against Lessor Indemnified Parties by reason of: (a) any accident, injury to or
death of persons or loss of or damage to property occurring on or about the
Leased Property or adjoining sidewalks, including without limitation any claims
under liquor liability, "dram shop" or similar laws, (b) any past, present or
future use, misuse, non-use, condition, management, maintenance or repair by
Lessee or any of its agents, employees or invitees of the Leased Property or
Lessee's Personal Property or any litigation, proceeding or claim by
governmental entities or other third parties to which a Lessor Indemnified Party
is made a party or participant related to such use, misuse, non-use, condition,
management, maintenance, or repair thereof by Lessee or any of its agents,
employees or invitees, including any failure of Lessee or any of its agents,
employees or invitees to perform any obligations under this Lease or imposed by
applicable law (other than arising out of Condemnation proceedings and save and
except any capital improvements mandated by law which shall be the
responsibility of Lessor), (c) any Impositions that are the obligations of
Lessee pursuant to the applicable provisions of this Lease, (d) any failure on
the part of Lessee to perform or comply with any of the terms of this Lease on
the part of Lessee to be performed or complied with, and (e) the nonperformance
of any of the terms and provisions of any and all existing and future subleases
of the Leased Property to be performed by the landlord thereunder.
Lessor shall indemnify, save harmless and defend Lessee Indemnified
Parties from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses imposed upon or incurred by or
asserted against
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<PAGE>
Lessee Indemnified Parties as a result of (a) the negligence or willful
misconduct of Lessor arising in connection with this Lease or (b) any failure on
the part of the Lessor to perform or comply with any of the terms of this Lease.
Any amounts that become payable by an Indemnifying Party under this
Section shall be paid within ten days after liability therefor on the part of
the Indemnifying Party is determined by litigation or otherwise, and if not
timely paid, shall bear a late charge (to the extent permitted by law) at the
Overdue Rate from the date of such determination to the date of payment. Any
such amounts shall be reduced by insurance proceeds received and any other
recovery (net of costs) obtained by the Indemnified Party. An Indemnifying
Party, at its expense, shall contest, resist and defend any such claim, action
or proceeding asserted or instituted against the Indemnified Party. The
Indemnified Party, at its expense, shall be entitled to participate in any such
claim, action, or proceeding, and the Indemnifying Party, at its expense, shall
be entitled to participate in any such claim, action, or proceeding, and the
Indemnifying Party may not compromise or otherwise dispose of the same without
the consent of the Indemnified Party, which may not be unreasonably withheld.
Nothing herein shall be construed as indemnifying a Lessor Indemnified Party
against its own negligent acts or omissions or willful misconduct.
Lessee's or Lessor's liability for a breach of the provisions of this
Article shall survive any termination of this Lease.
ARTICLE XXI
-----------
21.1 Subletting and Assignment. Subject to the provisions of Article
-------------------------
XVIII and Section 21.2 and any other express consents, conditions, limitations
or other provisions set forth herein and in the Lease Master Agreement, Lessee
shall not assign this Lease or hereafter sublease all or any part of the
Leased Property without first obtaining the prior written consent of
Lessor, which consent shall not be unreasonably withheld for any sublease of a
retail portion (excluding a restaurant portion) of the Leased Improvements
provided that (i) the rent derived from such sublease does not equal or exceed
5% of Gross Revenues, and (ii) in Lessor's judgment reasonably exercised, such
sublease will not materially and adversely change the character of the Facility.
In the case of a permitted subletting, the sublease shall comply with the
provisions of Section 21.2, and in the case of a permitted assignment,
the assignee shall assume in writing and agree to keep and perform all of the
terms of this Lease on the part of Lessee to be kept and performed and shall be,
and become, jointly and severally liable with Lessee for the performance
thereof. In case of either an assignment or
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subletting made during the Term. Lessee shall remain primarily liable, as
principal rather than as surety, for the prompt payment of the Rent and for the
performance and observance of all of the covenants and conditions to be
performed by Lessee hereunder. An original counterpart of any such sublease or
assignment and assumption, duly executed by Lessee and such sublessee or
assignee, as the case may be, in form and substance satisfactory to Lessor,
shall be delivered promptly to Lessor.
21.2 Attornment. Lessee shall insert in each future sublease
----------
permitted under Section 21.1 provisions to the effect that (a) such sublease is
subject and subordinate to all of the terms and provisions of this Lease and to
the rights of Lessor hereunder, (b) if this Lease terminates before the
expiration of such sublease, the sublessee thereunder will, at Lessor's option,
attorn to Lessor and waive any right the sublessee may have to terminate the
sublease or to surrender possession thereunder as a result of the termination of
this Lease, and (c) if the sublessee receives a written Notice from Lessor or
Lessor's assignees, if any, stating that an uncured Event of Default exists
under this Lease, the sublessee shall thereafter be obligated to pay all rentals
accruing under said sublease directly to the party giving such Notice, or as
such party may direct. All rentals received from the sublessee by Lessor or
Lessor's assignees, if any, as the case may be, shall be credited against the
amounts owing by Lessee under this Lease.
ARTICLE XXII
------------
Officer's Certificates; Financial Statements; Lessor's Estoppel
---------------------------------------------------------------
Certificates and Covenants.
- --------------------------
(a) At any time and from time to time upon not less than 10 days
Notice by Lessor, Lessee will furnish to Lessor an Officer's Certificate
certifying that this Lease is unmodified and in full force and effect (or that
this Lease is in full force and effect as modified and setting forth the
modifications), the date to which the Rent has been paid, whether to the
knowledge of Lessee there is any existing default or Event of Default hereunder
by Lessor or Lessee, and such other information as may be reasonably requested
by Lessor. Any such certificate furnished pursuant to this Section may be
relied upon by Lessor, any lender, any underwriter and any prospective purchaser
of the Leased Property.
(b) Lessee will furnish the following statements and operating
information to Lessor:
(1) the most recent Consolidated Financials of Lessee within 45 days
after each quarter of any fiscal year (or,
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in the case of the final quarter in any fiscal year, the most recent audited
Consolidated Financial of Lessee within 90 days);
(2) with reasonable promptness, such other information respecting the
financial condition, operations and affairs of Lessee and the Leased Property
(A) as Lessor or the Company may be required or may deem desirable in its
reasonable discretion to file with or provide to the SEC or any other
governmental agency or any other Person, all in the form, and either audited or
unaudited, as Lessor may request in Lessor's reasonable discretion and all to be
prepared at Lessor's expense to the extent that such information is not
otherwise maintained by Lessee in the normal course of its business, and (B)
subject to the provisions of the Lease Master Agreement, as may be reasonably
necessary to confirm compliance by Lessee and its Affiliates with the
requirements of the Lease Master Agreement; and
(3) on or about the 20th day of each month, a balance sheet, and
detailed profit and loss and cash flow statements showing the financial position
of the Facility as at the end of the preceding month and the results of
operation of the Facility for such preceding month and the Lease Year to date
(including a comparison to the Operating Budget as approved).
(c) At any time and from time to time upon not less than 10 days
notice by Lessee, Lessor will furnish to Lessee or to any person designated by
Lessee an estoppel certificate certifying that this Lease is unmodified and in
full force and effect (or that this Lease is in full force and effect as
modified and setting forth the modifications), the date to which Rent has been
paid, whether to the knowledge of Lessor there is any existing default or Event
of Default on Lessee's part hereunder, and such other information as may be
reasonably requested by Lessee. Any such certificate furnished pursuant to this
section may be relied upon by Lessee, any lender, any underwriter and any
purchaser of the assets of Lessee.
ARTICLE XXIII
-------------
Lessor's Right to Inspect. Lessee shall permit Lessor and its
-------------------------
authorized representatives as frequently as reasonably requested by Lessor to
inspect the Leased Property and Lessee's accounts and records pertaining thereto
and make copies thereof, during usual business hours upon reasonable advance
notice, subject only to any business confidentiality requirements reasonably
requested by Lessee. In conducting such inspections Lessor shall not
unreasonably interfere with the conduct of Lessee's business. Lessee will
provide customary gratuitous accommodations, services and amenities at the
Leased Property to
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Lessor and its authorized representatives in connection with such inspections.
ARTICLE XXIV
------------
No Waiver. No failure by Lessor or Lessee to insist upon the strict
---------
performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof, and no acceptance of full or partial payment
of Rent during the continuance of any such breach, shall constitute a waiver of
any such breach or of any such term. To the extent permitted by law, no waiver
of any breach shall affect or alter this Lease, which shall continue in full
force and effect with respect to any other then existing or subsequent breach.
ARTICLE XXV
-----------
Remedies Cumulative. To the extent permitted by law but subject to
-------------------
Article XXXIX and any other provisions of this Lease expressly limiting the
rights, powers and remedies of either Lessor or Lessee, each legal, equitable or
contractual right, power and remedy of Lessor or Lessee now or hereafter
provided either in this Lease or by statute or otherwise shall be cumulative and
concurrent and shall be in addition to every other right, power and remedy and
the exercise or beginning of the exercise by Lessor or Lessee of any one or more
of such rights, powers and remedies shall not preclude the simultaneous or
subsequent exercise by Lessor or Lessee of any or all of such other rights,
powers and remedies.
ARTICLE XXVI
------------
Acceptance of Surrender. No surrender to Lessor of this Lease or of
-----------------------
the Leased Property or any part thereof, or of any interest therein, shall be
valid or effective unless agreed to and accepted in writing by Lessor, and no
act by Lessor or any representative or agent of Lessor, other than such a
written acceptance by Lessor, shall constitute an acceptance of any such
surrender.
ARTICLE XXVII
-------------
No Merger of Title. There shall be no merger of this Lease or of the
------------------
leasehold estate created hereby by reason of the fact that the same person or
entity may acquire, own or hold, directly or indirectly: (a) this Lease or the
leasehold estate created hereby or any interest in this Lease or such leasehold
estate and (b) the fee estate in the Leased Property.
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ARTICLE XXVIII
--------------
28.1 Conveyance by Lessor. Lessor shall have the unrestricted right
--------------------
to mortgage or otherwise convey the Leased Property to a Holder. If Lessor
conveys the Leased Property in accordance with the terms hereof other than to a
Holder, and the grantee or transferee of the Leased Property expressly assumes
all obligations of Lessor hereunder arising or accruing from and after the date
of such conveyance or transfer, Lessor shall thereupon be released from all
future liabilities and obligations of Lessor under this Lease arising or
accruing from and after the date of such conveyance or other transfer as to the
Leased Property and all such future liabilities and obligations shall thereupon
be binding upon the new owner. If Lessee is not reasonably satisfied that the
new owner is a capable, reliable and qualified Person of good reputation and
character, Lessee may terminate this Lease upon sixty (60) days' Notice to
Lessor given within thirty (30) days after Lessee receives Notice of such
conveyance.
28.2 Other Interests. Without the consent of Lessee, Lessor may from
---------------
time to time, directly or indirectly, create or otherwise cause to exist deeds
to secure debt, deeds of trust, mortgages, heretofore or hereafter granted by
Lessor or which otherwise encumber or affect the Leased Property and to any and
all advances to be made thereunder and to all renewals, modifications,
consolidations, replacements, substitutions, and extensions thereof (all of
which are herein called the "Mortgage"). This Lease and Lessee's interest
hereunder shall at all times be subject and subordinate to the lien and security
title of any mortgage, provided that the Mortgage and all security agreements
delivered by Lessor in connection therewith shall be subject to Lessee's rights
under this Lease to receive all Gross Revenues of the Facility prior to the
earlier of the occurrence of an Event of Default or the date that this Lease is
terminated by the holder of the Mortgage in the exercise of its remedies
thereunder. In confirmation of such subordination, however, Lessee shall, at
Lessor's request, promptly execute, acknowledge and deliver any instrument which
may be required to evidence subordination to any Mortgage and to the holder
thereof. In the event of Lessee's failure to deliver such subordination and if
the Mortgage does not change any term of this Lease, Lessor may, in addition to
any other remedies for breach of covenant hereunder, execute, acknowledge, and
deliver the instrument as the agent or attorney-in-fact of Lessee, and Lessee
hereby irrevocably constitutes Lessor its attorney-in-fact for such purpose,
Lessee acknowledging that the appointment is coupled with an interest and is
irrevocable.
Lessee shall, upon the request of Lessor or any existing or future
Holder, (i) provide Holder with copies of all
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licenses, permits, occupancy agreements, operating agreements, leases, contracts
and similar agreements reasonably requested in connection with any existing or
proposed financing of the Leased Property, and (ii) execute, or cause the
Manager or other appropriate party to execute, such estoppel agreements and
collateral assignments with respect to the Facility's liquor license and any of
the other aforementioned agreements as Holder may reasonably request in
connection with any such financing, provided that no such estoppel agreement or
collateral assignment shall in any way affect the Term or affect adversely in
any material respect any rights of Lessee under this Lease.
No act or failure to act on the part of Lessor which would entitle
Lessee under the terms of this Lease, or by law, to be relieved of any of
Lessee's obligations hereunder (including, without limitation, its obligation to
pay Rent) or to terminate this Lease, shall result in a release or termination
of such obligations of Lessee or a termination of this Lease unless, subject to
the provisions of the next succeeding paragraph: (i) Lessee shall have first
given written notice of Lessor's act or failure to act to the Holder, specifying
the act or failure to act on the part of Lessor which would give basis to
Lessee's rights; and (ii) the Holder, after receipt of such notice, shall have
failed or refused to correct or cure the condition complained of within a
reasonable time thereafter (in no event more than sixty (60) days), provided
that such cure period shall include a reasonable time for such Holder to obtain
possession of the Leased Property, if possession is reasonably necessary for the
Holder to correct or cure the condition, or to foreclose such Mortgage, if the
Holder notifies the Lessee of its intention to take possession of the Leased
Property or to foreclosure such Mortgage and unconditionally commits to correct
or cure such condition. If such Holder is prohibited by any process or
injunction issued by any court or by reason of any action by any court having
jurisdiction or any bankruptcy, debtor rehabilitation or insolvency proceedings
involving Lessor from commencing or prosecuting foreclosure or other appropriate
proceedings in the nature thereof, provided however, that the Lease shall
continue to be in full force and effect, the times for commencing or prosecuting
such foreclosure or other proceedings shall be extended for the period of such
prohibition.
Lessee shall deliver by notice delivered in the manner provided in
Article XXX to any Holder who gives Lessee written notice of its status as a
Holder, at such Holder's address stated in the Holder's written notice or at
such other address as the Holder may designate by later written notice to
Lessee, a duplicate copy of any and all notices regarding any default which
Lessee may from time to time give or serve upon Lessor pursuant to the
provisions of this Lease. Copies of such notices given by Lessee to Lessor
shall be delivered to such Holder simultaneously with delivery to Lessor. No
such notice by Lessee to Lessor
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hereunder shall be deemed to have been given unless and until a copy thereof has
been mailed to such Holder.
At any time, and from time to time, upon not less than ten (10) days'
notice by a Holder to Lessee, Lessee shall deliver to such Holder an estoppel
certificate certifying as to the information required in paragraph (a) of
Article XXII, and such other information as may be reasonably requested by such
Holder. Any such certificate may be relied upon by such Holder.
Lessee shall cooperate in all reasonable respects, and, as generally
described in Section 33.2 of this Lease, with any transfer of the Leased
Property to a Holder that succeeds to the interest of Lessor in the Leased
Property (including, without limitation, in connection with the transfer of any
franchise, license, lease, permit, contract, agreement, or similar item to such
Holder or such Holder's designee necessary or appropriate to operate the Leased
Property), provided that all costs and expenses associated with such transfer
shall be the responsibility of Lessor or Holder, as they shall choose. Lessor
and Lessee shall cooperate in (i) including in this Lease by suitable amendment
from time to time any provision which may be requested by any proposed lender,
or may otherwise be reasonably necessary, to implement the provisions of this
Article and (ii) entering into any further agreement with or at the request of
any Holder which may be reasonably requested or required by such Holder in
furtherance or confirmation of the provisions of this Article; provided,
however, that any such amendment or agreement shall not in any way affect the
Term nor affect adversely in any material respect any rights of Lessor or Lessee
under this Lease.
ARTICLE XXIX
-------------
Quiet Enjoyment. So long as Lessee pays all Rent as the same becomes
---------------
due and complies with all of the terms of this Lease and performs its
obligations hereunder, in each case within the applicable grace and/or cure
periods, if any, Lessee shall peaceably and quietly have, hold and enjoy the
Leased Property for the Term hereof, free of any claim or other action by Lessor
or anyone claiming by, through or under Lessor and not claiming by, through or
under Lessee, but subject to all liens and encumbrances subject to which the
Leased Property was conveyed to Lessor or hereafter consented to by Lessee or
provided for herein. Lessee shall have the right by separate and independent
action to pursue any claim it may have against Lessor as a result of a breach by
Lessor of the covenant of quiet enjoyment contained in this Section.
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ARTICLE XXX
-----------
Notices. All notices, demands, requests, consents approvals and other
-------
communications ("Notice" or "Notices") hereunder shall be in writing and
personally served or mailed (by express mail, courier, registered or certified
mail, return receipt requested and postage prepaid),
(i) if to Lessor at:
__________________________
__________________________
__________________________
(ii) if to Lessee at:
__________________________
__________________________
__________________________
or to such other address or addresses as either party may hereafter designate.
Personally delivered Notice shall be effective upon receipt, and Notice given by
mail shall be complete at the time of deposit in the U.S. Mail system, but any
prescribed period of Notice and any right or duty to do any act or make any
response within any prescribed period or on a date certain after the service of
such Notice given by mail shall be extended five days.
ARTICLE XXXI
------------
Appraisers. If it becomes necessary to determine the fair market
----------
value or fair market rental of the Leased Property for any purpose of this
Lease, then, except as otherwise expressly provided in this Lease, the party
required or permitted to give Notice of such required determination shall
include in the Notice the name of a person selected to act as appraiser on its
behalf. Within 10 days after Notice, Lessor (or Lessee, as the case may be)
shall by Notice to Lessee (or Lessor, as the case may be) appoint a second
person as appraiser on its behalf. The appraisers thus appointed, each of whom
must be a member of the American Institute of Real Estate Appraisers (or any
successor organization thereto) with at least five years experience in the State
appraising property similar to the Leased Property, shall, within 10 days after
the date of the Notice appointing the second appraiser, proceed to appraise the
Leased Property to determine the fair market value or fair market rental thereof
as of the relevant date (giving effect to the impact, if any, of inflation from
the date of their decision to the relevant date); provided, however, that if
only one appraiser shall have
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been so appointed, then the determination of such appraiser shall be final and
binding upon the parties. If two appraisers are appointed and if the difference
between the amounts so determined does not exceed 5% of the lesser of such
amounts, then the fair market value or fair market rental shall be an amount
equal to 50% of the sum of the amounts so determined. If the difference between
the amounts so determined exceeds 5% of the lesser of such amounts, then such
two appraisers shall have 10 days to appoint a third appraiser. If no such
appraiser shall have been appointed within such 10 days or within 60 days of the
original request for a determination of fair market value or fair market rental,
whichever is earlier, either Lessor or Lessee may apply to any court having
jurisdiction to have such appointment made by such court. Any appraiser
appointed by the original appraisers or by such court shall be instructed to
determine the fair market value or fair market rental within 30 days after
appointment of such appraiser. The determination of the appraiser which differs
most in the terms of dollar amount from the determinations of the other two
appraisers shall be excluded, and 50% of the sum of the remaining two
determinations shall be final and binding upon Lessor and Lessee as the fair
market value or fair market rental of the Leased Property, as the case may be.
This provision for determining by appraisal shall be specifically enforceable to
the extent such remedy is available under applicable law, and any determination
hereunder shall be final and binding upon the parties except as otherwise
provided by applicable law. Lessor and Lessee shall each pay the fees and
expenses of the appraiser appointed by it and each shall pay one-half of the
fees and expenses of the third appraiser and one-half of all other costs and
expenses incurred in connection with each appraisal.
ARTICLE XXXII
-------------
[Intentionally omitted.]
ARTICLE XXXIII
---------------
33.1 Miscellaneous. Anything contained in this Lease to the contrary
-------------
notwithstanding, all claims against, and liabilities of, Lessee or Lessor
arising prior to any date of termination of this Lease shall survive such
termination. If any term or provision of this Lease or any application thereof
is invalid or unenforceable, the remainder of this Lease and any other
application of such term or provisions shall not be affected thereby. If any
late charges or any interest rate provided for in any provision of this Lease is
based upon a rate in excess of the maximum rate permitted by applicable law, the
parties agree that such charges shall be fixed at and limited to the maximum
permissible rate. Neither this Lease nor any provision hereof may be changed,
waived, discharged or terminated
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except by a written instrument signed by Lessor and Lessee. All the terms and
provisions of this Lease shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns. The headings in
this Lease are for convenience of reference only and shall not limit or
otherwise affect the meaning hereof. This Lease shall be governed by and
construed in accordance with the laws of the State, but not including its
conflicts of laws rules.
33.2 Transition Procedures. Upon the expiration or termination of
---------------------
the Term of this Lease, for whatever reason, Lessor and Lessee shall do the
following (and the provisions of this Section 33.2 shall survive the expiration
or termination of this Lease until they have been fully performed) and, in
general, shall cooperate in good faith to effect an orderly transition of the
Facility. Nothing contained herein shall limit Lessor's rights and remedies
under this Lease if such termination occurs as the result of an Event of
Default.
(a) Transfer of Licenses. Upon the expiration or earlier termination
--------------------
of the Term, Lessee shall use its best efforts (i) to transfer to Lessor or
Lessor's nominee all licenses, operating permits and other governmental
authorizations and all contracts, including contracts with governmental or
quasi-governmental entities, that may be necessary for the operation of the
Facility (collectively, "Licenses"), or (ii) if such transfer is prohibited by
law or Lessor otherwise elects, to cooperate with Lessor or Lessor's nominee in
connection with the processing by Lessor or Lessor's nominee of any applications
for all Licenses, including Lessee continuing to operate the liquor operations
under its licenses with Lessor agreeing to indemnify and hold Lessee harmless as
a result thereof except for the negligence or willful misconduct of Lessee;
provided, in either case, that the costs and expense of any such transfer or the
processing of any such application shall be paid by Lessor or Lessor's nominee.
(b) Leases and Concessions. Lessee shall assign to Lessor or
----------------------
Lessor's nominee simultaneously with the termination of this Agreement, and the
assignee shall assume, all leases, contracts, concessions agreements and
agreements in effect with respect to the Facility then in Lessee's name.
(c) Books and Records. To the extent that Lessor has not already
-----------------
made or received copies thereof, all books and records (including computer
records) for the Facility kept by Lessee pursuant to Section 3.6 shall be
promptly made available to Lessor or Lessor's nominee for photocopying or other
duplication.
(d) Receivables and Payables, etc. Lessee shall be entitled to
------------------------------
retain all cash, bank accounts and house banks, and
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to collect all Gross Revenues and accounts receivable accrued through the
termination date. Lessee shall be responsible for the payment of Rent, all
operating expenses of the Facility and all other obligations of Lessee accrued
under this Lease as of the termination date, and Lessor shall be responsible for
all operating expenses of the Facility accruing after the termination date.
Lessee shall surrender the Leased Property with the amount of Inventory required
by Section 6.2(b), and Lessor shall have no obligation to purchase such
Inventory or any other items of Lessee's Personal Property.
33.3 Standard of Discretion. In any provision of this Lease
----------------------
requiring or permitting the exercise by Lessor or Lessee of such party's
approval, election, decision, consent, judgment, determination or words of
similar import (collectively, an "Approval"), such Approval may, unless
otherwise expressly specified in such provision, be given or withheld in such
party's sole, absolute and unreviewable discretion. Any Approval which by the
terms of this Lease may not be unreasonably withheld shall also not be
unreasonably delayed.
33.4 Action for Damages. In any suit or other claim brought by
------------------
either party seeking damages against the other party for breach of its
obligations under this Lease, the party against whom such claim is made shall be
liable to the other party only for actual damages and not for consequential,
punitive or exemplary damages.
ARTICLE XXXIV
--------------
Memorandum of Lease. Lessor and Lessee shall promptly upon the
-------------------
request of either enter into a short form memorandum of this Lease, in form
suitable for recording under the laws of the State in which reference to this
Lease, and all options contained herein, shall be made. The party requesting
the short form memorandum shall pay all costs and expenses of recording such
memorandum of this Lease.
ARTICLE XXXV
------------
[Intentionally omitted.]
ARTICLE XXXVI
-------------
36.1 Lessor's Option to Terminate Lease. (a) In the event Lessor
----------------------------------
enters into a bona fide contract to sell the Leased Property to a non-Affiliate
or determines not to restore the Facility pursuant to Section 14.2 or Section
14.3 after damage or destruction thereof, or in the event of a Tax Law Change
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resulting in Lessor's determination to terminate this Lease and the Other
Leases, then in any such event Lessor may terminate this Lease by giving not
less than 30 days prior Notice to Lessee of Lessor's election to terminate this
Lease upon the closing under such contract, as of the date of damage or
destruction, or upon a date specified by Lessor which is on or after the
effective date of the Tax Law Change. Effective upon such date, this Lease
shall terminate and be of no further force and effect except as to any
obligations of the parties existing as of such date that survive termination of
this Lease and all Rent including Participating Rent and Additional Charges
shall be adjusted as of the termination date.
(b) As compensation for the early termination of its leasehold estate
under this Article XXXVI because of a sale of the Leased Property or a
determination not to restore, Lessor shall, not more than one (1) year prior to
the anticipated termination date of the Lease and in any event within 90 days
after the closing of such sale, in the event of a sale, or within 90 days after
the date of damage or destruction, either (i) pay to Lessee the fair market
value of Lessee's leasehold estate hereunder as of the closing of the sale or
the date of damage or destruction of the Leased Property or (ii) offer to lease
to Lessee one or more substitute hotel facilities pursuant to one or more leases
that would create for the Lessee leasehold estates that have an aggregate fair
market value of no less than the fair market value of the original leasehold
estate, both such values as determined as of the closing of the sale of the
Leased Property or the date of damage or destruction. Lessee may reject any
proposed substitute leasehold estate or combination of substitute leasehold
estates having a fair market value of no less than the fair market value of
Lessee's leasehold estate hereunder (a "Comparable Lease"), in which event
Lessor shall be entitled to defer the payment due Lessee pursuant to the option
described in (i) above for a period of up to two (2) years during which Lessor
shall be allowed to propose other Comparable Leases to Lessee. If Lessee
rejects three (3) Comparable Leases during such two-year period, Lessor shall
have no further obligations to Lessee with respect to compensation for the early
termination of this Lease. In the event Lessor and Lessee are unable to agree
upon the fair market value of an original or replacement leasehold estate, it
shall be determined by appraisal using the appraisal procedure set forth in
Article XXXI.
(c) As compensation for the early termination of its leasehold estate
under this Article XXXVI because of a Tax Law Change, Lessor shall, not more
than one (1) year prior to the anticipated termination date of the Lease and in
any event within ninety (90) days after such termination, pay to Lessee the fair
market value of Lessee's leasehold estate hereunder as of the termination date
of this Lease.
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(d) For the purposes of this Section, fair market value of the
leasehold estate means, as applicable, an amount equal to the price that a
willing buyer not compelled to buy would pay a willing seller not compelled to
sell for Lessee's leasehold estate under this Lease or an offered replacement
leasehold estate.
(e) In the event that Lessor terminates this Lease pursuant to the
provisions of this Article XXXVI or pursuant to any other provisions of this
Lease except for the provisions allowing Lessor to terminate this Lease upon the
occurrence of an Event of Default, the parties agree that, on and after the
effective date of such termination, hotel personnel employed by Lessee or
Manager immediately prior to the effective date of termination will either be
employed by Lessor, or Lessor will take such other action with respect to their
employment, which may include notification of the prospective termination of
their employment, so as, in any case, to insure that Lessee does not incur any
liability pursuant to the WARN Act. Lessor hereby agrees to defend, indemnify
and hold harmless Lessee from and against any and all manner of claims, actions,
liabilities, costs and expenses (including, without limitation, reasonable
attorneys' fees and disbursements) relating to or arising from Lessor's breach
of this covenant, including, without limitation, any liability, costs and
expenses arising out of asserted or actual violation of the requirements of the
WARN Act. Further, Lessor shall assume and does hereby assume, all severance
pay, accrued vacation or personal leave, COBRA and similar liabilities and
obligations to the Facility's personnel, which Lessee and Manager shall or may
incur in connection with such termination of this Lease, and Lessor hereby
agrees to defend, indemnify and hold harmless Lessee and Manager from and
against any and all manner of claims, actions, liabilities, costs and expenses
(including, without limitation, reasonable attorneys' fees and disbursements)
relating to or resulting from Lessor's breach of the foregoing covenant,
including, without limitation, any liability, costs and expenses arising out of
asserted or actual violation of the requirements of the COBRA legislation. Upon
Lessor's written request to Lessee, Lessee shall take all action prudent and
proper as Lessee, to notify, advise and cooperate with Lessor in order to assist
Lessor to comply with the WARN Act or COBRA legislation and to mitigate Lessor's
expense or liability with respect to the WARN Act and COBRA legislation.
36.2 Provisions Relating to Purchase of the Leased Property. If
------------------------------------------------------
Lessee purchases the Leased Property from Lessor pursuant to any of the terms of
this Lease, Lessor shall, upon receipt from Lessee of the applicable purchase
price, together with full payment of any unpaid Rent due and payable with
respect to any period ending on or before the date of the purchase, deliver to
Lessee an appropriate limited or special warranty deed or other conveyance
conveying the entire interest of Lessor in
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and to the Leased Property to Lessee free and clear of all encumbrances other
than (a) those that Lessee has agreed hereunder to pay or discharge, (b) those
mortgage liens, if any, that Lessee has agreed in writing to accept and to take
title subject to, (c) those liens and encumbrances that existed upon the date of
this Lease, (d) encumbrances, easements, licenses or rights of way required to
be imposed on the Leased Property under Section 7.3, and (e) any other
encumbrances permitted to be imposed on the Leased Property hereunder that are
assumable at no cost to Lessee or to which Lessee may take subject without cost
to Lessee. The difference between the applicable purchase price and the total
of the encumbrances assumed or taken subject to shall be paid in cash to Lessor
or as Lessor may direct, in federal or other immediately available funds, except
as otherwise mutually agreed by Lessor and Lessee. All expenses of such
conveyance, including, without limitation, the cost of title examination or
title insurance, if desired by Lessee, Lessee's attorneys' fees incurred in
connection with such conveyance and release, and transfer taxes and recording
fees, shall be paid by Lessee. Lessor shall pay its attorney's fees.
ARTICLE XXXVII
--------------
Compliance with Franchise Agreement. To the extent any of the
-----------------------------------
provisions of the Franchise Agreement impose a greater obligation on Lessee than
the corresponding provisions of this Lease, Lessee shall be obligated to comply
with, and to take all reasonable actions necessary to prevent breaches or
defaults under the provisions of the Franchise Agreement, except to the extent
that Lessee is prevented from complying with the Franchise Agreement because of
Lessor's acts such as its breach of its obligations pursuant to Article XXXVIII.
It is the intent of the parties hereto that Lessee shall comply in every respect
with the provisions of the Franchise Agreement so as to avoid any default
thereunder during the term of this Agreement. Lessee shall not terminate or
enter into any modification of the Franchise Agreement without in each instance
first obtaining Lessor's written consent. Lessor and Lessee agree to cooperate
fully with each other in the event it becomes necessary to obtain a franchise
extension or modification or a new franchise for the Leased Property, and in any
transfer of the Franchise Agreement to Lessor or any Affiliate thereof or any
other successor to Lessee upon the termination of this Lease.
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ARTICLE XXXVIII
---------------
Capital Expenditures.
--------------------
(a) Lessor shall be obligated to set up and maintain a reserve (the
"Capital Expenditures Reserve") in an amount equal to 4% of Gross Revenues from
the Facility during each Lease Year. Upon written request by Lessee to Lessor
stating the specific use to be made and subject to the reasonable approval
thereof by Lessor, such funds shall be made available by Lessor for Capital
Expenditures set forth in the Capital Budget; provided, however, that no Capital
Expenditures shall be used to purchase property (other than "real property"
within the meaning of Treasury Regulations Section 1.856-3(d)), to the extent
that doing so would cause the Lessor to recognize income other than "rents from
real property" as defined in Section 856(d) of the Code. Lessor's obligation
shall be cumulative, but not compounded, and any amounts that have accrued
hereunder shall be payable in future periods for such uses and in accordance
with the procedure set forth herein. Lessee shall have no interest in any
accrued obligation of Lessor hereunder after the termination of this Lease. All
Capital Improvements shall be owned by Lessor subject to the provisions of this
Lease.
(b) Lessor's obligation for Capital Expenditures and for compliance
with the provisions of this Lease which may require the availability of funds
for Capital Improvements shall be limited to amounts available in the Capital
Expenditures Reserve and such additional amounts as Lessor may agree to make
available to Lessee in Lessor's sole discretion; provided, however, that if
additional Capital Expenditures are required to meet Emergency Situations,
Lessor shall make such amounts available to Lessee and receive a pro rata credit
therefor against amounts which Lessor is obligated to contribute to the Capital
Expenditures Reserve during the ensuing five (5) Lease Years. No arbitration
resulting from the failure of Lessor and Lessee to agree on the Capital Budget
shall increase Lessor's obligation for Capital Expenditures beyond the amount
set forth in the immediately preceding sentence. To the extent that Lessee's
obligations under this Lease (including, without limitation, the obligations set
forth in Sections 7.2, 8.1 and 9.1 and in Article XXXVII) are dependent upon the
availability of amounts for Capital Expenditures which exceed the amounts that
Lessor is obligated to provide pursuant to this Article XXXVIII, such
obligations of Lessee shall be correspondingly diminished.
(c) Prior to the final three (3) Lease Years of the Term, the
implementation of all Capital Improvements made pursuant to the requirements of
the Capital Budget shall be subject to the approval of Lessor and Lessee. Such
approval shall extend both to the plans and specifications (including matters of
design and decor) and to the contracting and
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purchasing of all labor, services and materials. In the event that Lessor and
Lessee are unable to agree on any aspect of the implementation of a Capital
Improvement to be made pursuant to the Capital Budget prior to the final three
(3) Lease Years, such matter shall be referred to arbitration as provided in
Section 40.2. During the final three (3) Lease Years, Lessor shall have sole
authority with regard to the implementation of all such Capital Improvements but
shall consult Lessee in connection therewith.
(d) If requested by Lessor, Lessee (or Manager, if Lessee so directs)
shall be responsible for supervising the design, installation and construction
of all Capital Improvements. Lessor shall reimburse Lessee for Lessee's (or
Manager's) actual reasonable expenses incurred in performing these services,
provided that any such reimbursement shall be in an approved Capital Budget,
shall be paid as a Capital Expenditure and shall be subject to the limitations
of the provisions of subsection (b) hereof. These reimbursements shall include
a reasonable allocation (as determined in good faith by Lessee) of the salaries,
bonuses, benefits, travel, and related expenses incurred by Lessee's (or
Manager's) personnel in the performance of these services.
ARTICLE XXXIX
-------------
Lessor's Default. It shall be a breach of this Lease if Lessor fails
----------------
to observe or perform any term, covenant or condition of this Lease on its part
to be performed and such failure continues for a period of 30 days after Notice
thereof from Lessee, unless such failure cannot with due diligence be cured
within a period of 30 days, in which case such failure shall not be deemed a
breach if Lessor proceeds within such 30-day period, with due diligence, to
commence to cure the failure and thereafter diligently completes the curing
thereof. The time within which Lessor shall be obligated to cure any such
failure also shall be subject to extension of time due to the occurrence of any
Unavoidable Delay. If Lessor does not cure any such failure within the
applicable time period as aforesaid, Lessee may declare the existence of a
"Lessor Default" by a second Notice to Lessor. Thereafter, Lessee may forthwith
cure the same and, subject to the provisions of the following paragraph, invoice
Lessor for costs and expenses (including reasonable attorneys' fees and court
costs) incurred by Lessee in curing the same, together with interest thereon
from the date Lessor receives Lessee's invoice, at the Overdue Rate, or, at
Lessee's option, offset such sums against Rent next coming due hereunder.
If Lessor shall in good faith dispute the occurrence of any Lessor
Default and Lessor, before the expiration of the applicable cure period, shall
give Notice thereof to Lessee, setting forth, in reasonable detail, the basis
therefor, no Lessor Default shall be deemed to have occurred and Lessor shall
have no obligation with respect thereto until final adverse determination
thereof, whether through arbitration or otherwise; provided, however, that in
-------- -------
the event of any such adverse determination, Lessor shall pay to Lessee interest
on any disputed funds at the Overdue Rate, from the date demand for such funds
was made by Lessee until paid. If Lessee and Lessor shall fail, in good faith,
to resolve any such dispute within ten (10) days after Lessor's Notice of
dispute, either may submit the matter for determination by arbitration, but only
if such matter is required to be submitted to arbitration pursuant to any
provision of this Lease, or otherwise by a court of competent jurisdiction.
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ARTICLE XL
----------
40.1 Arbitration. Except as set forth in Section 40.2, in each case
-----------
specified in this Lease in which it shall become necessary to resort to
arbitration, such arbitration shall be determined as provided in this Section
40.1. The party desiring such arbitration shall give Notice to that effect to
the other party, and an arbitrator shall be selected by mutual agreement of the
parties, or if they cannot agree within thirty (30) days of such notice, by
appointment made by the American Arbitration Association ("AAA") from among the
members of its panels who are qualified and who have experience in resolving
matters of a nature similar to the matter to be resolved by arbitration.
40.2 Alternative Arbitration. In each case specified in this Lease
-----------------------
for a matter to be submitted to arbitration pursuant to the provisions of this
Section 40.2, Lessor shall be entitled to designate any nationally recognized
accounting firm with a hospitality division of which Lessor or an Affiliate of
Lessor is not a significant client to serve as arbitrator of such dispute within
fifteen (15) days after written demand for arbitration is received or sent by
Lessor. In the event Lessor fails to make such designation within such fifteen
(15) day period, Lessee shall be entitled to designate any nationally recognized
accounting firm with a hospitality division of which Lessee or an Affiliate of
Lessee is not a significant client to serve as arbitrator of such dispute within
fifteen (15) days after Lessor fails to timely make such designation. In the
event no nationally recognized accounting firm satisfying such qualifications is
available and willing to serve as arbitrator, the arbitration shall instead be
administered as set forth in Section 40.1.
40.3 Arbitration Procedures. In any arbitration commenced pursuant
----------------------
to Section 40.1 or 40.2, a single arbitrator shall be designated and shall
resolve the dispute. The arbitrator's decision shall be binding on all parties
and shall not be subject to further review or appeal except as otherwise allowed
by applicable law. Upon the failure of either party (the "non-complying party")
to comply with his decision, the arbitrator shall be empowered, at the request
of the other party, to order such compliance by the non-complying party and to
supervise or arrange for the supervision of the non-complying party's obligation
to comply with the arbitrator's decision, all at the expense of the non-
complying party. To the maximum extent practicable, the arbitrator and the
parties, and the AAA if applicable, shall take any action necessary to insure
that the arbitration shall be concluded within ninety (90) days of the filing of
such dispute. The fees and expenses of the arbitrator shall be shared equally
by Lessor and Lessee except as otherwise
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<PAGE>
specified in this Section 40.3. Unless otherwise agreed in writing by the
parties or required by the arbitrator or AAA, if applicable, arbitration
proceedings hereunder shall be conducted in the State. Notwithstanding formal
rules of evidence, each party may submit such evidence as each party deems
appropriate to support its position and the arbitrator shall have access to and
right to examine all books and records of Lessee and Lessor regarding the
Facility during the arbitration.
IN WITNESS WHEREOF, the parties have executed this Lease by their duly
authorized representatives as of the date first above written.
LESSOR
------
[HOTEL OWNER]
By: ______________________________
its General Partner
By: _________________________
Name:
Title:
LESSEE
------
AGH LEASING, L.P.
By: ________________________________
its General Partner
By: _________________________
Name:
Title:
-71-
<PAGE>
Exhibit 10.4
FORM OF
LEASE MASTER AGREEMENT
----------------------
THIS LEASE MASTER AGREEMENT (this "Agreement") is made as of this ____ day
of _________, 1996, by and between AMERICAN GENERAL HOSPITALITY OPERATING
PARTNERSHIP, L.P., a Delaware limited partnership (together with any entity
controlled thereby, the "Lessor"), and AGH LEASING, L.P., a Delaware limited
partnership (the "Lessee").
RECITALS
--------
A. The Lessor has acquired interests in the thirteen hotels
identified on Exhibit A (the "Initial Hotels"), using the net proceeds from an
underwritten initial public offering (the "Public Offering") of the Common
Stock, $0.01 par value, of American General Hospitality Corporation, a Maryland
corporation ("AGHC").
B. AGHC has elected to be taxed as a real estate investment trust
beginning with the taxable year ending December 31, 1996.
C. Simultaneously with the execution of this Agreement, Lessor has
leased the Initial Hotels to the Lessee pursuant to separate Participating
Leases and, hereafter, the Lessor may from time to time lease additional hotels
to the Lessee.
<PAGE>
D. The parties hereto desire to enter into this Agreement to set
forth certain agreements relating to the matters set forth herein.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the following
-------------------
terms have the meanings set forth in this Section or in the Section indicated.
Unless the context otherwise requires, (a) all capitalized terms not otherwise
defined herein shall have the meanings set forth in the Participating Leases (as
defined in Section 2), (b) references to the singular shall include the plural
and vice versa, (c) references to gender shall include all genders, (d)
references to designated "Sections" or other subdivisions are references to the
designated Sections or other subdivisions of this Agreement, (e) all accounting
terms not otherwise defined herein shall have the meanings assigned to them in
accordance with GAAP (as defined below) and (f) the words "herein," "hereof,"
and "hereunder" and other words of similar import refer to this Agreement as a
whole and not to any particular Section or other subdivision.
Additional Hotels--shall mean the hotels (if any) other than the
Initial Hotels that have been or, as of any pertinent
-2-
<PAGE>
date, are then currently leased by the Lessor to the Lessee pursuant to
Participating Leases.
Affiliate--shall mean (a) any person that, directly or indirectly,
controls or is controlled by or is under common control with such person, (b)
any other person that owns, beneficially, directly or indirectly, ten percent or
more of the outstanding capital stock, shares or equity interests of such
person, or (c) any officer, director, employee, partner or trustee of such
person or any person controlling, controlled by or under common control with
such person (excluding trustees and persons serving in similar capacities who
are not otherwise an Affiliate of such person). The term "person" means and
includes individuals, corporations, general and limited partnerships, limited
liability companies, stock companies or associations, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts, business
trusts, or other legal entities and governments and agencies and political
subdivisions thereof. For the purposes of this definition, "control" (including
the correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such person, through the ownership of voting securities,
partnership interests or other equity interests.
-3-
<PAGE>
Agreement--shall have the meaning set forth in the Preamble.
AGHC--shall have the meaning set forth in the Recitals.
AGHI--shall mean American General Hospitality, Inc., a Texas
corporation.
Approved Financial Institution--shall mean (i) any U.S. commercial
bank which is FDIC insured and has a consolidated net worth, as of any pertinent
date under the terms of this Agreement, of not less than $250,000,000 and is
otherwise reasonably satisfactory to the Lessor or (ii) any other substantial
U.S. financial institution that is satisfactory to the Lessor.
Beverage Sublease--shall mean those certain Subleases between the
Lessee and certain corporations formed by Steven D. Jorns for the purpose of
subleasing the areas of certain of the Hotels that sell alcoholic beverages.
Cash--shall mean cash or other immediately available funds.
Cash Equivalents--shall mean (i) any debt instrument with a term of up
to 12 months that is issued by or backed by the full faith and credit of the
United States, (ii) any certificate of deposit with a term of up to 12 months
that is issued by an issuer that, on the date of issuance and on each date of
any renewal or reissuance thereof, is an Approved Financial Institution, and
which instrument and any applicable assignment thereof is in form and substance
satisfactory to the Lessor,
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<PAGE>
(iii) any irrevocable, "clean" letter of credit issued by an issuer that, on the
date of issuance and on each date of any renewal or reissuance thereof, is an
Approved Financial Institution, and which instrument is in form and substance
satisfactory to the Lessor, and (iv) a repurchase agreement with a term of up to
90 days that is binding upon an Approved Financial Institution, and which
agreement is in form and substance satisfactory to the Lessor.
Common Stock--means the shares of Common Stock, $0.01 par value, of
AGHC.
Current Market Value--shall mean, as of any pertinent date: (i) as to
Cash and Cash Equivalents, the face amount thereof; (ii) as to a Unit, the
closing price, as set forth below, of the Common Stock for which such Unit may
be exchanged (based on one Unit for one share of Common Stock), and as to shares
of the Common Stock, the closing price of such shares, as reported in The Wall
Street Journal for the trade date next preceding such pertinent date; and (iii)
as to Other Marketable Securities, the closing price of such securities, as
reported in The Wall Street Journal for the trade date next preceding such
pertinent date.
Designated Amount--shall have the meaning set forth in Section 6(a).
Determination--shall mean a written determination of (i) the Net Worth
of the Lessee, (ii) the Participating Lease Cash Flow or (iii) the Undistributed
Earnings of the Lessee (as
-5-
<PAGE>
applicable), such determination to be made by the Lessee when required hereunder
or at any other such times as the Lessee may elect, accompanied by a certificate
of an officer of the Lessee, delivered to the Lessor and not objected to by the
Lessor in writing within five business days of its receipt thereof. The Lessee
shall deliver a proposed Determination to the Lessor (A) on (and as of) the date
on which the Lessee proposes to make any distribution or payment (other than
payments permitted under Section 5); (B) within 45 days of each calendar quarter
with respect to the preceding calendar quarter and (C) within ten business days
of any written request to do so from the Lessor, which request may be made at
any time, but not more frequently than once in any 30-day period and in no event
sooner than 30 days after the most recent Determination by the Lessee.
FF&E Notes--shall mean those certain promissory notes dated the date
hereof, in the aggregate principal amount of $315,000, given by the Lessee to
the Lessor in connection with the Lessee's purchase of certain furnishings,
fixtures and equipment (the "FF&E") from the Lessor, which FF&E Notes are
secured, in each case, by pledges of the FF&E acquired from the Lessor.
Form Participating Lease--shall have the meaning set forth in
Section 2.
GAAP--shall mean, as of any pertinent date, those generally accepted
United States accounting principles and practices which are recognized as such
by the American Institute
-6-
<PAGE>
of Certified Public Accountants acting through its Accounting Principles Board
or by the Financial Accounting Standards Board or through other appropriate
boards or committees thereof and which are consistently applied for all periods
so as to fairly present the financial condition, results of operations and
changes in financial position of any person. The term "consistently applied,"
as used in connection therewith, means that the accounting principles applied
are consistent in all material respects to those applied at prior dates or for
prior periods.
Hotels--shall mean, as of any pertinent date or for any pertinent
period, those Initial Hotels and those Additional Hotels, if any, which are then
currently leased by the Lessor to the Lessee.
Initial Hotels--shall have the meaning set forth in the Recitals.
Initial Participating Leases--shall mean those Participating Leases
covering the Initial Hotels entered into between the Lessor and the Lessee as of
the Offering Date.
Lessee--shall have the meaning set forth in the Preamble.
Lessee Capital--shall have the meaning set forth in Section 5(a).
Lessee Expenses--shall mean, for any applicable calendar year (and for
the partial calendar year ending December 31, 1996), the sum of (i) the
aggregate amount of Rent for all of
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<PAGE>
the Hotels plus (ii) management fees and reimbursements payable by the Lessee to
AGHI or others pursuant to the Management Arguments in connection with the day-
to-day operation of the Hotels (subject to the limitations set fourth in Section
8 hereof, plus (iii) the aggregate amount of all other costs of operating the
Hotels pursuant to the Participating Leases and the Management Agreements,
including, without limitation, amounts payable under the Franchise Agreements
relating to the Hotels plus (iv) payments under the FF&E Notes plus (v)
salaries, benefits and other administrative and overhead expenses incurred by
the Lessee in connection with the operation of the Hotels, in any calendar year
an amount not to exceed $8,000 per Hotel leased during such calendar year and
pro rated for any partial years). Lessee Expenses shall exclude amounts payable
to Affiliates of the Lessee other than amounts otherwise payable pursuant to
clauses (i) through (v) above and the amounts set forth on Schedule 1.
Lessor--shall have the meaning set forth in the Preamble.
Management Agreements--shall mean those agreements between the Lessee
and AGHI or its Affiliates or others in connection with the day-to-day operation
of the Hotels.
Minimum Distribution Threshold--shall mean, as of any pertinent date,
Net Worth equal to the greater of (a) 17.5% of the aggregate Rent paid under the
Participating Leases during the preceding calendar year (annualized for 1996)
and (b) $6,000,000.
Net Worth--shall mean the excess of total assets over total
liabilities, total assets and total liabilities each to be
-8-
<PAGE>
determined in accordance with GAAP, excluding, however, from the determination
of total assets: (a) goodwill, organizational expenses, research and
development expenses, trademarks, trade names, copyrights, patents, patent
applications, and other similar intangibles; (b) all deferred charges that are
not required to be capitalized in accordance with GAAP or unamortized debt
discounts and expense; (c) treasury stock; (d) securities which are not readily
marketable (other than Units); (e) any write-up in the book value of any asset
resulting from a revaluation thereof, other than as recognized pursuant to the
terms of this Agreement; (f) the Participating Leases; and (g) any items not
included in clauses (a) through (f) above that are treated as intangibles in
conformity with GAAP. All Units and Other Marketable Securities will be valued
at their Current Market Value and the Current Market Value thereof will be
adjusted only on the date of a Determination.
Obligations--shall have the meaning set forth in Section 4(a).
Offering Date--shall mean the date of the closing and funding of the
Public Offering.
Other Marketable Securities--shall mean Cash Equivalents and
securities (including, without limitation, Common Stock) listed on either the
New York or American Stock Exchange or quoted on The Nasdaq Stock Market's
National Market System.
Participating Lease--shall have the meaning set forth in Section 2.
-9-
<PAGE>
Participating Lease Cash Flow--shall mean, as of the end of each
calendar year, the Lessee's income (loss) plus depreciation, amortization and
other non-cash items (determined in accordance with GAAP) but exclusive of any
income attributable to interest, distributions or dividends received by the
Lessee during such period or income, depreciation, amortization and other non-
cash items attributable to any Lessee operations that do not relate to the
Participating Leases.
Partner--shall mean each person who owns an interest in the profits,
losses and distributions from the Lessee.
Partner Collateral--shall have the meaning set forth in Section 4(a).
Pledge Agreement--shall have the meaning set forth in Section 4(a).
Public Offering--shall have the meaning set forth in the Recitals.
Tax Distribution Payment--shall mean a distribution from the Lessee
made to a Partner in an amount sufficient to allow such Partner to pay annual
federal, state and local income taxes due on such Partner's annual taxable
income from the Lessee, to be calculated for each Partner at the highest
marginal rate for federal income taxes as well as state and local income taxes
based on the place of residence of the Partner who resides in the state that has
the highest marginal rate of all the Partners.
Undistributed Earnings--shall mean, as of the date of any
Determination, the cumulative income (loss) plus the depreciation, amortization
and other non-cash items of the Lessee
-10-
<PAGE>
since the date of its inception minus all cash distributions from its date of
inception through and including the date of Determination (if any) immediately
preceding the date of Determination with respect to which the calculation of
Undistributed Earnings is being made; provided, however, for purposes of this
calculation, any income or other amounts which have not been previously
distributed and which are not subject to the limitation on distributions set
forth in Section 5 shall be excluded.
Units--shall mean units of limited partnership interest in American
General Hospitality Operating Partnership, L.P.
2. Leasing of the Hotels. Simultaneously with entering into this
---------------------
Agreement, each Lessor and the Lessee have entered into an individual lease
substantially in the form attached hereto as Exhibit B (the "Form Participating
Lease") for each of the Initial Hotels at the Base Rent and Participating Rent
specified on Exhibit C attached hereto. The Lessor and the Lessee shall also
utilize the Form Participating Lease for any Additional Hotels leased by a
Lessor to the Lessee and in good faith shall negotiate the Rent payable under
such lease. Leases for the Initial Hotels and any Additional Hotels are
hereinafter referred to as "Participating Leases".
3. Initial Capitalization. On the Offering Date, the Lessee has
----------------------
caused or will cause its Partners to capitalize the Lessee with an aggregate of
$500,000 in cash.
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<PAGE>
4. Collateral.
----------
(a) To secure payment and performance of the Lessee's obligations
under the Participating Leases (the "Obligations"), the Lessee will cause its
Partners to severally guarantee to the Lessor the Obligations pursuant to a
written guarantee (the "Partners' Guarantee"), in the form attached hereto as
Exhibit D. Recourse under the Partners' Guarantee will be limited severally
(pro rata in accordance with each Partner's partnership interest in the Lessee)
to a pledge to the Lessor of an aggregate of 275,000 Units (the "Partner
Collateral") pursuant to the pledge agreement (the "Pledge Agreement") in the
form attached hereto as Exhibit E. For so long as Lessee is not in default under
this Agreement or any Participating Lease, any distributions made with respect
to the Partner Collateral shall be paid to the Partner owning such Partner
Collateral.
(b) The number of Units included as part of the Partner Collateral
shall be reduced (but not increased), without duplication, (i) on a one-for-one
basis for each Unit or share of Common Stock acquired by the Lessee pursuant to
Section 6, (ii) upon the contribution to the capital of Lessee by one or more of
its Partners of cash or Cash Equivalents, by a number equal to the quotient of
(A) the cash or Cash Equivalents contributed divided by (B) the Current Market
Value of the Units or (iii) by a number equal to the quotient of (x) the
Undistributed Earnings of the Lessee (to the extent positive) and (y) the
Current Market Value of a Unit.
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<PAGE>
(c) If the number of Units subject to the Partner Collateral is
reduced, the Lessor shall release the Partner Collateral from the pledge (pro
rata in accordance with the number of Units that remain subject to the Pledge
Agreement and shall reassign and deliver such Units to the Partner in whose name
the Units are registered.
5. Limitation on Distributions and Other Payments.
----------------------------------------------
(a) Subject to the immediately succeeding sentence, no distributions
(other than distributions in the form of equity interests in the Lessee) shall,
for any period, be declared, paid or set apart for payment on any equity
interest in the Lessee (the "Lessee Capital"), and no Lessee Capital shall be
redeemed, purchased or otherwise acquired by the Lessee for any consideration
(except by conversion into or exchange for other equity interests in the
Lessee), unless (i) after giving effect to such proposed distribution, the Net
Worth of the Lessee equals or exceeds the Minimum Distribution Threshold
(determined as of each March 31 during the term of this Agreement) and (ii) no
uncured Event of Default exists under this Agreement or any Participating Lease.
The foregoing restriction on distributions, redemptions, acquisitions and
purchases in respect of the Lessee Capital shall not apply to (y) Tax
Distribution Payments, or (z) distributions attributable to interest,
distributions or dividends received by the Lessee from any cash, Cash
Equivalents, Other Marketable Securities or Units held by the Lessee.
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<PAGE>
(b) Except for distributions to Partners permitted under clause (a)
and the payment of Lessee Expenses, the Lessee shall not make, directly or
indirectly, any payments (for services or otherwise) to Affiliates of the Lessee
unless after giving effect to such proposed payment, the Net Worth of the Lessee
equals or exceeds the Minimum Distribution Threshold (determined as of each
March 31 during the term of this Agreement).
6. Acquisition of Common Stock or Units.
------------------------------------
(a) As soon as practicable after the end of each calendar year during
the term of this Agreement (but in no event later than March 31), Lessee shall
deliver to Lessor a Determination of Participating Lease Cash Flow during such
calendar year. As soon as practicable after such Determination is made, the
Lessee shall set apart, if positive, cash in an amount equal to the
Participating Lease Cash Flow during the preceding calendar year minus the Tax
Distribution Payments relating to such calendar year (the "Designated Amount").
The Lessee shall, periodically during the 270 day period following such
Determination, acquire shares of Common Stock on the open market.
Notwithstanding the foregoing, if any such purchase would violate the ownership
limitations in AGHC's charter, at the option of the Lessor, the Lessee will use
the Designated Amount (or the applicable portion thereof) to acquire Units in
American General Hospitality Operating Partnership, L.P., at a price per Unit
equal to the market price of a share of Common Stock at the
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<PAGE>
time of purchase. The foregoing obligation to purchase shares of Common Stock
or Units shall be suspended during any period that, in the good faith judgment
of the Lessee based on the advice of independent counsel, such purchase is
prohibited by applicable securities laws. If at any time the Lessee is
prohibited from acquiring shares of Common Stock pursuant to the terms of AGHC's
charter and the Lessor declines to exercise its option to sell the Lessee Units,
the Lessee's obligation to acquire shares of Common Stock or Units with the
Designated Amount (or the applicable portion thereof) that the Lessee offered to
use to acquire Units shall terminate with respect to the applicable Purchase
period.
(b) Any shares of Common Stock or Units acquired pursuant to clause
(a) above may not be sold, transferred, distributed or otherwise disposed of for
a period of two years following their acquisition without the prior written
consent of the Lessor (other than distributions of such shares or Units to
Partners in accordance with Section 5 hereof). Upon the Lessee's acquisition of
any shares of Common Stock or Units pursuant to this Section 6, the Lessee shall
enter into a Lock-up Agreement with the Lessor with respect to such interests in
the form attached hereto as Exhibit F.
7. Debt to Net Worth Ratio. The Lessee shall at all times during the
-----------------------
term hereof maintain a ratio of total debt to Net Worth of less than or equal to
50%, exclusive of capitalized leases and the FF&E Notes.
-15-
<PAGE>
8. Approval of Operators. The Lessee shall not engage or retain any
---------------------
person to operate or manage any Initial Hotels or Additional Hotels other than
AGHI or its Affiliates without the prior written consent of Lessor (which
consent will not be unreasonably withheld). The Lessee shall not pay fees to
AGHI or its Affiliates under any Management Agreement in an amount in excess of
3.5% of Adjusted Gross Revenues (as such term is defined in the Management
Agreements) at a particular Hotel without the prior written consent of Lessor;
provided, however, the foregoing restriction shall not apply to any
reimbursements payable to AGHI or its Affiliates under such agreements. Without
the prior written consent of Lessor, the Lesee shall not make any amendment to
any Management Agreement that (i) alters the portion of the management fee
payable thereunder that is incentive based or the basis (but not the threshold)
on which such incentive based portion of such fee is earned, (ii) modifies the
reimbursements or non-management fees payable thereunder, including, without
limitation, amounts payable under the property level bonus plan for executive
employees of AGHI or (iii) materially alters the services to be provided by the
manager thereunder. The Management Agreement shall provide that (i) upon
termination of the Participating Lease or termination of Lessee's right to
possession of the leased property for any reason whatsoever, the Management
Agreement shall terminate without liability for any payment not yet due and
payable to the manager, (ii) during the continuance of any event of default
under the Participating Lease or any default under the FF&E Note, no management
fee otherwise due to the manager may be paid (subject to restoration upon cure
of the event of default), and (iii) the payment of any management fees to the
manager shall be subordinated to the payment of rent under the Participating
Lease. In the event the manager under a Management Agreement takes certain
actions or becomes subject to certain conditions which constitutes or, with the
passage of time, will constitute an event of default under any material
agreement to which the Lessee is a party, Lessee shall use
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<PAGE>
commercially reasonable efforts, consistent with the Management Agreement, to
timely take all action necessary to avoid the occurrence of, or to cure, such
default.
9. Default.
-------
(a) A default by the Lessee shall exist under this Agreement if the
Lessee shall fail to observe or perform any of its obligations under this
Agreement and such failure shall continue for a period of 30 days after notice
from the Lessor, unless the Lessee is promptly and diligently proceeding to cure
such failure, in which case such cure period shall be extended to 180 days after
such notice from the Lessor.
(b) A default under this Agreement shall also constitute a default
under each Participating Lease.
10. Participating Leases. The Lessee will not assign its interest in
--------------------
the Participating Leases (other than permitted subleases) without the prior
written consent of the Lessor (which consent will not be unreasonably withheld).
11. Miscellaneous.
-------------
(a) Modification, Amendments and Waivers. No modification, amendment
------------------------------------
or waiver of any provision of this Agreement shall be effective unless the same
is in writing signed by all parties to this Agreement.
(b) Notices. All notices and other communications pursuant to this
-------
Agreement shall be in writing and personally served or mailed as provided in
Article XXX of the Form Participating Lease.
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<PAGE>
(c) Successors and Assigns. The provisions of this Agreement shall be
----------------------
binding upon the parties hereto and all of their permitted successors and
assigns and inure to the benefit of the parties hereto and their permitted
successors and assigns.
(d) Termination. This Agreement shall terminate at such time as all
-----------
of the Participating Leases have terminated.
(e) Governing Law. This Agreement shall be governed by the laws of
-------------
the State of Texas, without regard to conflicts of laws.
(f) Counterparts. This Agreement may be signed in one or more
------------
counterparts, each of which shall be an original, with the same force and effect
as if the signatures thereto and hereto were upon the same instrument.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
LESSOR:
------
AMERICAN GENERAL HOSPITALITY OPERATING
PARTNERSHIP, L.P.
By: AGH GP, Inc., its general
partner
By:________________________________
Title:
LESSEE:
------
AGH LEASING, L.P.
By: AGHL GP, Inc., its general
partner
By:________________________________
Title:
-19-
<PAGE>
SCHEDULE 1
----------
1. Amounts payable to Hospitality Purchasing Services, in connection
with the purchase of goods and supplies in the ordinary course consistent with
past practice; provided, however, the cost of such goods and supplies does not
exceed the cost of acquiring such goods and services from a third party in an
arm's length transaction.
2. Amounts payable to the Help Desk in exchange for management
information services in the ordinary course consistent with past practice.
-20-
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit A . . . . . List of Initial Hotels
Exhibit B . . . . . Form of Participating Lease
Exhibit C . . . . . Schedule of Lease Payments
Exhibit D . . . . . Form of Partners' Guarantee
Exhibit E . . . . . Form of Pledge Agreement
Exhibit F . . . . . Form of Lock-up Agreement
Certain exhibits of Exhibit 10.4, set forth herein (exhibits A, B and C) have
not been included as exhibits to the Registration Statement. The Registrant
agrees to furnish supplementally a copy of any such omitted schedule or exhibit
upon request.
-21-
<PAGE>
Exhibit D
FORM OF PARTNERS' GUARANTEE
This Partners' Guarantee dated as of July __, 1996 (this "Agreement") is
executed by [__________] (the "Guarantor") is in favor of American General
Hospitality Operating Partnership, L.P., a Delaware limited partnership (the
"Lessor"). The Guarantor is a limited partner of the Lessee (as defined below);
and is an owner of limited partnership interest ("OP Units") in the Lessor.
INTRODUCTION
The Lessor, together with AGHL Leasing, L.P., a Delaware limited
partnership (the "Lessee") are parties to a Lease Master Agreement (the "Lease
Master Agreement"), pursuant to which the Guarantor, as a limited partner of the
Lessee, has agreed, among other things, to pledge that number of OP Units set
forth on Exhibit A (the "Collateral") owned by the Guarantor pursuant to a
Pledge Agreement in order to secure payment and performance, on a nonrecourse
basis, of the Guaranteed Obligations (as defined below) owed to the Lessor. The
recourse of the Guarantor's guarantee under this Agreement shall be limited to
the Collateral.
Therefor, in order to induce the Lessor to enter into the Lease Master
Agreement and the Participating Lease (as defined below), the Guarantor hereby
agrees as follows:
Section 1. Definitions. All capitalized terms not otherwise defined in this
Agreement that are defined in the Lease Master Agreement shall have the meaning
assigned to such terms by the Lease Master Agreement.
Section 2. Guarantee. The Guarantor hereby unconditionally and irrevocably,
---------
severally, guarantees the punctual payment and performance, when due, of all
liabilities and obligations of the Lessee, of any kind and description, now or
hereafter existing under certain leases entered into between the Lessor and the
Lessee (the "Participating Lease") (such obligations being the "Guaranteed
Obligations").
Section 3. Guarantee Absolute. The Guarantor guarantees that the Guaranteed
------------------
Obligations will be satisfied strictly in accordance with terms of the
Participating Lease regardless of any law, regulation, or order now or hereafter
in effect in any jurisdiction affecting any of such terms or the rights of the
Lessor. The liability of the Guarantor under this Agreements shall be limited
to the Collateral and the Guarantor shall not have personal liability of any
kind or nature with respect to the Guarantee, the Pledge Agreement, this
Agreement or otherwise.
<PAGE>
Section 4. Certain Waivers.
---------------
4.01. Notice. The Guarantor hereby waives promptness, diligence, notice of
------
acceleration, notice of intent to accelerate, and any other notice with respect
to any of the Guaranteed Obligations and this Agreement.
Section 5. Representations and Warranties. The Guarantor hereby represents and
------------------------------
warrants as follows:
5.01. Authority Binding Obligation. This Agreement constitutes actual and
----------------------------
binding obligation of such Guarantor enforceable against such Guarantor in
accordance with its terms, except as such enforceability may be qualified by
equitable principles and by bankruptcy, insolvency and similar laws.
5.02 Government Approval. No authorization or approval or other action
-------------------
by, and no notice to or filing with, any governmental authority is required for
due execution, delivery, and performance by Guarantor of this Agreement.
Section 6. Miscellaneous.
-------------
6.01. Addresses for Notices. All notices and other communications provided
---------------------
for hereunder shall be in writing, including telegraphic communication, and
delivered or teletransmitted to the parties hereto at their respective addresses
as set forth or to such other address as shall be designated by parties hereto
in written notice to the other parties. All such notices and other
communications shall be effective when delivered or teletransmitted to such
addresses.
Guarantor:
- ---------
___________________________
___________________________
___________________________
Lessor:
- ------
American General Hospital
Operating Partnership, L.P.
3860 West Northwest Highway
Suite 300
Dallas, Texas 75220
-2-
<PAGE>
6.02. Amendments, Etc. No amendment of this Agreement shall be effective
---------------
unless the same shall be in writing and signed by the parties hereto and any
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
6.03. No Waiver: Remedies. No failure on the part of the parties hereto
-------------------
to exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
6.04. Continuing Guarantee: Transfer of Interest. This Agreement shall
------------------------------------------
create a continuing guaranty and shall be binding upon the Guarantor, its
successors, and assigns, and inure, together with the rights and remedies of the
Lessor and their respective successors, transferees, and assigns.
6.05. Governing Law. This Agreement shall be governed by, and construed
-------------
and enforced in accordance with , the laws of the State of Texas. The Guarantor
hereby irrevocably submits to the jurisdiction of any Texas state or federal
court sitting in Dallas, Texas in any action or proceeding arising out of or
relating to this Agreement, and the Guarantor hereby irrevocably agrees that all
claims in respect of such action or proceeding may be heard and determined in
such court. The Guarantor hereby irrevocably waives, to the fullest extent it
may effectively do so, any right it may have to the defense of an inconvenient
forum to the maintenance of such action or proceeding. The Guarantor hereby
agrees that service of copies of the summons and complaint and any other process
which may be served in any such action or proceeding may be made by mailing or
delivering a copy of such process to the Guarantor at its address specified
above. The Guarantor agrees that a final judgement in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgement or in any other manner provided by law.
6.06. Termination. This Agreement and the obligations of the Guarantor
-----------
hereunder shall terminate upon the termination of the Pledge Agreement.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
-3-
<PAGE>
The Guarantor has caused this Agreement to be duly executed as of the date
first above written.
GUARANTOR:
-4-
<PAGE>
Exhibit E
FORM OF
PLEDGE AGREEMENT
----------------
PLEDGE AGREEMENT ("AGREEMENT") dated as of July [ ], 1996 among American
General Hospitality Operating Partnership L.P., a Delaware limited partnership
(the "PARTNERSHIP") and [ ] the guarantor (the "GUARANTOR") of certain
obligations of AGH Leasing, L.P. ("LESSEE") to the partnership.
Reference is made to that certain Guarantee Agreement (the "Guarantee"),
dated as of July [ ], 1996, between the Guarantor and the Partnership.
Capitalized terms used in this Agreement and not otherwise defined herein shall
have the meanings ascribed to them in the Guarantee.
RECITALS
--------
A. The Partnership and the Guarantor are entering into this Agreement in
connection with the Guarantee relating to the Lessee's obligations under the
Participating Leases.
B. Guarantor is a partner in the Lessee.
C. As a condition to the Partnership entering into the Participating
Leases with the Lessee, the Guarantor has agreed to execute and deliver to the
Partnership this Agreement.
Accordingly, the parties hereby agree as follows:
Section 1. The Pledge.
--------- ----------
(a) As collateral security for the full and timely performance of
the obligations and liabilities of the Guarantor contained in the Guarantee (the
"SECURED OBLIGATIONS"), Guarantor hereby transfers, conveys, pledges,
hypothecates and delivers to the Partnership and its successors and assigns, and
grants to the Partnership and its successors and assigns a security interest in,
the following property (collectively referred to herein as the "PLEDGED
COLLATERAL"):
(i) the units of limited partnership interest in the
Partnership ("OP UNITS") issued under the Amended and Restated
Agreement of Limited Partnership of the Partnership dated July [ ],
1996 (the "PARTNERSHIP AGREEMENT"), owned by Guarantor on the date
hereof and identified on Exhibit A attached hereto, (collectively,
the "PLEDGED OP UNITS");
(ii) all payments due or to become due to each pledgor arising
out of, as a result of or in connection with such pledgor's
ownership of the Pledged OP Units whether as dividends,
<PAGE>
distributions of cash or property or otherwise
(collectively, the "Distributions") and all of
such pledgor's rights, whether now existing or
hereafter arising or acquired, to exercise all
voting, consensual and other powers of ownership
pertaining to such pledgor's ownership of the
above items of Pledged Collateral (including,
without limitation, Pledgor's rights as owner
of such items of Pledged Collateral to make
determinations, to exercise any election
(including, without limitation, election of
remedies) or option, to give or receive any
notice, consent, amendment, waiver or approval);
and
(iii) all proceeds of any and all of the
foregoing and all increases, substitutions,
replacements, additions, and accessions thereto.
(b) Notwithstanding anything herein or in the Lease Master
Agreement or the Guarantee to the contrary, the Guarantor hereby acknowledges
and agrees that (a) it is not (and at no time will be) necessary for the
Partnership, in order to enforce any of its rights and remedies in respect of
the Secured Obligations, to first institute or exhaust the Partnership's rights
and remedies against the Lessee or any other guarantor of the Lessee's
obligations under the Participating Leases, and (b) any delay in exercising,
failure to exercise, or non-exercise (or partial exercise), from time to time,
by the Partnership of any rights or remedies hereunder (or to insist upon
strict performance) in any one or more instances shall not constitute a waiver
thereof (or preclude full exercise or insistence upon strict performance
thereof) in that or any other instance, and any single exercise of the
Partnership's right or remedies hereunder in any one or more instances shall not
preclude full exercise in any other instance.
Section 2. Dividends and Other Distributions. So long as no breach
--------- ---------------------------------
of the Secured Obligations shall have occurred and be continuing (an "EVENT OF
DEFAULT"), all cash distributions and dividends payable in respect of the
Pledged Collateral shall be paid to the Guarantor; provided, that all cash
--------
distributions and dividends payable in respect of the Pledged Collateral which
are determined by the Partnership in its reasonable discretion to represent in
whole or in part an extraordinary or liquidating distribution shall be paid, to
the extent so determined to represent an extraordinary or liquidating
distribution, to the Partnership and retained by it in a separate interest
bearing account as part of the Pledged Collateral. The Partnership shall also be
entitled to receive directly, and to retain as part of the Pledged Collateral to
be held and applied in the manner set forth in this Agreement;
(i) all additional stock, partnership
interests or other securities or property (other
than cash) paid or distributed by way of dividend
or otherwise in respect of the Pledged Collateral;
(ii) all additional stock, partnership
interests or other securities or property (including
cash) paid or distributed in respect
2
<PAGE>
of the Pledged Collateral by way of stock-split, spin-off,
split-up, reclassification, combination of partnership
interests or shares or similar rearrangement; and
(iii) all additional stock, partnership interests or
other securities or property (including cash) which may be
paid in respect of the Pledged Collateral by reason of any
consolidation, merger, exchange of stock or interests,
conveyance of assets, liquidation or similar corporate or
partnership reorganization.
Section 3. Voting Power. So long as no Event of Default exists, the
--------- ------------
pledgors shall be entitled to exercise all voting, consensual and other powers
of ownership pertaining to the Pledged Collateral, provided that no vote shall
--------
be cast nor any approval, consent, waiver or ratification given, nor any power
pertaining to the Pledged Collateral exercised, nor any other action taken,
which would violate or be inconsistent with the terms of this Agreement. If an
Event of Default occurs and is continuing, the Partnership shall have the sole
and exclusive right to exercise all voting, consensual and other powers of
ownership pertaining to the Pledged Collateral.
Section 4. Events of Default and Remedies.
--------- ------------------------------
(a) During any period in which an Event of Default shall have
occurred and be continuing, the Partnership shall have the following rights
regarding the Pledged Collateral: (i) the Partnership shall have all of the
rights and remedies with respect to the Pledged Collateral of a secured party
under the Uniform Commercial Code, as is in effect from time to time in the
State of Texas, and such additional rights and remedies to which a secured party
is entitled under the laws in effect in any jurisdiction where any rights and
remedies hereunder may be asserted, including, without limitation, the right, to
the fullest extent permitted by law, to exercise all voting, and other powers of
ownership pertaining to the Pledged Collateral as if the Partnership were the
sole and absolute owner thereof (and the pledgors under this Agreement agree to
take all reasonable actions as may be appropriate to give effect to such
rights); (ii) the Partnership in its discretion may, in its name or the name of
the Guarantor or otherwise, demand, sue for, collect or receive any money or
property at any time payable or receivable on account of or in exchange for any
of the Pledged Collateral, but shall be under no obligation to do so; and (iii)
the Partnership may, upon 10 business days' written notice to the Guarantor
under this Agreement of the time and place, sell, assign or otherwise dispose of
all or any part of the Pledged Collateral, at such place or places as the
Partnership deems best, and for cash, credit or future delivery (without thereby
assuming any credit risk), without demand or performance or further notice of
intention to effect such disposition or the time or place thereof (except such
notices which are required by applicable statute and cannot be waived); and,
further, the Partnership or anyone else who may be the purchaser, the lessee,
transferee or assignee of any or all of the Pledged Collateral so disposed of
shall thereafter hold the same absolutely free from any claim or right or
whatsoever kind, including any right or equity of redemption (statutory or
otherwise).
3
<PAGE>
The proceeds of each collection, sale or other disposition under this
Section shall be applied in accordance with Section 9 hereof.
The Guarantor recognizes that, by reason of certain prohibitions contained
in the Securities Act of 1933, as amended (the "SECURITIES ACT"), and applicable
state securities laws ("BLUE SKY LAWS"), the Partnership may be compelled, with
respect to any sale of all or any part of the Pledged Collateral, to make sales
of such Pledged Collateral to purchasers who have agreed, among other things, to
acquire the Pledged Collateral for their own account, for investment and not
with a view to the distribution or resale thereof. The Guarantor acknowledges
that such sales may be at prices and on terms less favorable to the Partnership
than those obtainable through a public sale without such restrictions, and
notwithstanding such circumstances, agree that any such sale shall be deemed to
have been made in a commercially reasonable manner. The Guarantor acknowledges
and agrees that, subject to compliance with the Securities Act and Blue Sky
Laws, under no circumstances will the Partnership be required to register any of
the Pledged Securities under the Securities Act or any Blue Sky Laws.
The Guarantor hereby appoints the Partnership, effective during the
continuance of an Event of Default, as the Guarantor's attorney-in-fact, with
full power of substitution for the purposes specified in, or contemplated by,
this Agreement. Such appointment is irrevocable and coupled with an interest.
As attorney-in-fact, the Partnership may (in addition to the actions specified
in other provisions of this Agreement), in the name, place and stead of any
pledgor, make and execute all convenyances, assignments and transfers of the
Pledged Collateral sold pursuant hereto, and such Guarantor hereby ratifies and
confirms all that the Partnership, as attorney-in-fact, shall do by virtue
hereof. Nevertheless, such Guarantor shall, if so requested by the Partnership,
ratify and confirm any sale or sales by executing and delivering to the
Partnership, or to such purchaser or purchasers, all such instruments as may, in
the judgment of the Partnership, be advisable for the purpose.
Section 5. Certain Representations and Warranties. The Guarantor hereby
--------- --------------------------------------
represents and warrants to the Partnership as follows:
(i) the Guarantor is the legal, record and beneficial owners of,
and have good and marketable title to, the Pledged Collateral, subject to
pledge, claim, lien, security interest, charge, option or other encumbrance
(a "LIEN") except for (A) the security interest created by this Agreement
and (B) restrictions on transfer under the Securities Act and Blue Sky
Laws;
(ii) the Pledged Collateral has been duly and validly issued and is
fully paid and non-assessable and such Pledged Collateral is not subject to
any options to purchase or similar rights except those in favor of the
Operating Partnership;
(iii) this Agreement creates, in favor of the Operating Partnership
and as security for the Secured Obligations, a valid and enforceable
perfected lien on the Pledged Collateral;
4
<PAGE>
(iv) to the best of their knowledge after consultation with counsel, no
consent, filing, recording or registration, other than the filing of Uniform
Commercial Code financing statements, is required to perfect the lien purported
to be created by this Agreement against the Pledged Collateral;
(v) the execution, delivery and performance of this Agreement will not (a)
violate any provision of any applicable law or regulation of any governmental
body, violate any provision of any mortgage, indenture, lease, contract, pledge
or other instrument or undertaking to which Guarantor is a party or which
purports to be binding upon Guarantor or any of his assets, or (b) result in the
creation or imposition of any Lien on any assets of Guarantor except the Lien
created by this Agreement; and
(vi) the residence of Guarantor is as follows:[ ]
Section 6. Covenants of the Guarantor. The Guarantor covenants and agrees with
- --------- --------------------------
the Partnership as follows:
(i) he will defend the Partnership's right, title, claim or possession and
Lien in and to the Pledged Collateral against the claims and demands of all
Persons;
(ii) he will pay and discharge all Liens, charges, claims, taxes and other
governmental charges, and all contractual obligations requiring the payment of
money, before such become overdue, that may affect the Pledged Collateral or any
part thereof, unless (but only to the extent that) such payment is being
contested in good faith in accordance with law;
(iii) he will not, without the prior written consent of the Partnership
(which consent shall not be unreasonably withheld), amend or modify, or consent
to the amendment or modification of, the organizational documents of the Lessee;
(iv) he will join with the Partnership in executing and file and refile
under the Uniform Commercial Code such financing statements, continuation
statements and other documents in such offices as the Partnership may reasonably
deem necessary or desirable and wherever required or permitted by law in order
to perfect and preserve the Partnership's security interest in the Pledged
Collateral and hereby authorizes the Partnership to file financing statements
and amendments thereto relative to all or any part of the Pledged Collateral
without the signature of such pledgor where permitted by law, and agrees to do
such further acts and things and to make, execute and deliver to the Partnership
such additional conveyances, assignments, agreements, instruments and financing
statements as the Partnership may reasonably require or deem advisable to carry
into effect the purposes of this Agreement or to further assure and confirm unto
the Partnership its rights, powers and remedies hereunder, and if any pledgor
shall fail to execute any such additional conveyances, assignments, agreements,
instruments or financing statements, the Partnership, as attorney-in-fact for
such pledgor may in the
5
<PAGE>
name, place and stead of such pledgor, make, execute and deliver any of
the foregoing; and
(v) notify the Partnership in writing forty-five (45) business
days prior to the date any pledgor changes its principal place of business
or principal residence in the event such pledgor is an individual, which
notice shall set forth the full and complete new principal place of
business or principal residence, as the case may be, of such pledgor.
Section 7. Marshalling. The Partnership shall not be required to
--------- -----------
marshall any present or future security for (including, but not limited to this
Agreement or any collateral pledged hereunder), or guaranties of, the Secured
Obligations of any pledgorm, or to resort to such security or guaranties in any
particular order; and all of its rights hereunder, and in respect of such
security and guaranties shall be cumulative and in addition to all other rights
hereunder, however existing or arising. To the extent that any pledgor may
lawfully do so, each pledgor hereby agree not to invoke any law relating to the
marshalling of collateral which may cause delay and/or impede the enforcement of
any of the Partnership's rights under this Agreement, or any other instrument
evidencing any of the obligations under this Agreement or under which any of
such obligations is outstanding or by which any of such obligations is secured
or guarantied, and to the extent that such pledgor may lawfully do so, each
pledgor hereby irrevocably waives the benefit of all such laws.
Section 8. Deficiency. If the proceeds of sale, collection or realization
--------- ----------
of or upon the Pledged Collateral pursuant to Section 4 hereof are insufficient
to cover the cost and expenses of such realization and the payment in full of
the Secured Obligations, the pledgor shall not be liable for any amounts which
exceed the Pledged Collateral. The Partnership may not collect from the Pledged
Collateral more than the Secured Obligations plus costs and expenses of
realizing on such Pledged Collateral.
Section 9. The Guarantors' Obligations Not Affected. The obligations of
--------- ----------------------------------------
each pledgor hereunder shall remain in full force and effect and shall not be
impaired by:
(a) any bankruptcy or insolvency of any other pledgor;
(b) any amendment to or modification of any instrument (other than
this Agreement) securing any of the Secured Obligations;
(c) the taking of additional security for, or any guaranty of, any
of the Secured Obligations or the release or discharge or termination of any
security or guaranty for any of the Secured Obligations; or
(d) the lack of enforceability of any of the Secured Obligations
against any pledgor or any other person.
6
<PAGE>
Section 10. Application of Proceeds. Except as otherwise expressly provided
---------- -----------------------
in Section 8 herein, the proceeds of any collection, sale or other realization
of any or any part of the Pledged Collateral pursuant hereto shall be applied by
the Partnership: first, to the payment of the costs and expenses of such
collection, sale or other realization, including reasonable out-of-pocket costs
and expenses of the Partnership and the reasonable fees and expenses of its
agents and counsel; second, to the payment in full of the Secured Obligations;
and finally, to the payment to the pledgors (in accordance with their interests
in the Pledged Collateral), or their heirs, executives, administrators,
successors or assigns, or as a court of competent jurisdiction may direct, of
any surplus then remaining.
As used in this Section 10, "THE PROCEEDS" of the Pledged Collateral shall
mean cash, securities and other property realized.
Section 11. Perfection. The Guarantor shall deliver to the Partnership (i)
---------- ----------
to the extent that the Pledged Collateral are certificated securities, the
certificates representing the Pledged Collateral accompanied by undated stock or
other similar powers duly endorsed in blank, (ii) such Uniform Commercial Code
financing statements, executed by the applicable pledgor and in a form ready for
filing, as may be necessary or desirable to perfect the first priority security
interests in the Pledged Collateral granted to the Partnership pursuant to this
Agreement and (iii) satisfactory evidence that all other filings, recordings,
registrations and other actions the Partnership deems necessary or desirable to
establish, preserve and perfect the security interests granted to the
Partnership pursuant to this Agreement shall have been made.
Section 12. Transfer. Etc. Without the prior written consent of the
---------- -------------
Partnership the pledgors will not sell, assign, transfer or otherwise dispose
of, grant any option with respect to, or pledge or grant any security interest
in or otherwise encumber any of the Pledged Collateral or any interest therein,
except for the pledge provided for in this Agreement.
Section 13. Termination. The security interest in the Pledged Collateral
---------- -----------
granted to the Partnership as security for the Secured Obligations shall be
released, from time to time, in accordance with the Lease Master Agreement (each
a "RELEASE DATE"). On the applicable Release Date, the Partnership shall
forthwith cause to be assigned, transferred and delivered, against receipt, the
applicable portion of the Pledged Collateral and any money received in respect
of, to or in the order of the applicable pledges.
Section 14. Further Assurances. The Guarantor will from time to time
---------- ------------------
execute and deliver to the Partnership all such other and further instruments
and documents and take or cause to be taken all such other and further actions
as the Partnership may reasonably request in order to effect and confirm more
securely in the Partnership all rights contemplated in this Agreement.
Section 15. Miscellaneous.
---------- -------------
(a) Waiver, etc. No act, failure or delay by the Partnership shall
-----------
constitute a waiver of its rights, powers or remedies hereunder or otherwise. No
single or partial waiver by
7
<PAGE>
the Trust or any of its agents of any default or right or remedy which it may
have shall constitute a waiver of any other default, right or remedy or of the
same default, right or remedy on a future occasion. The pledgors hereby waive
presentment, notice of dishonor and protest of all instruments and any and all
other notices and demands whatsoever (except as expressly provided herein). The
remedies herein are cumulative and are not so exclusive of any other remedies
which may be provided by law.
(b) Governing Law. This Agreement shall be governed by, and construed
-------------
in accordance with, the laws of the State of New York, without giving effect to
the conflicts of law principles thereof.
(c) All communications herein provided shall be in writing and shall
be sufficient if sent by United States mail, registered or certified, delivered
by messenger, overnight courier, telex or telefax, addressed as follows:
If to the Partnership:
American General Hospitality
Operating Partnership, L.P.
3860 West Northwest Highway
Suite 3860
Dallas, Texas 75220
Attention: General Partner
If to pledgor:
_____________________________________
_____________________________________
_____________________________________
_____________________________________
or such other addresses where any party may receive any such communication or
notice as may be designated by written notice to the other parties. Any notice
given pursuant to this Section to effect a change of address shall be effective
when received.
(d) Successors and Assigns. This Agreement and all obligations of the
----------------------
pledgors herein shall be binding upon the heirs, executives, successors and
assigns of the pledgors and shall, together with the rights and remedies of the
Partnership, insure to the benefit of the Partnership and its successors and
assigns.
(e) Severability. If any term in this Agreement shall be held to be
------------
invalid or illegal or unenforceable in any respect, the validity of all other
terms hereof shall be in no way
8
<PAGE>
affected thereby, and this Agreement shall be construed and be enforceable as if
such invalid, illegal or unenforceable term had not been included herein.
(f) Exclusive Agreement. This Agreement supersedes all prior
-------------------
agreements among the parties with respect to its subject matter and is intended
as a complete and exclusive statement of the terms of the Agreement among the
parties.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument and any other parties hereto may execute this Agreement by signing
any such counterparts.
9
<PAGE>
IN WITNESS WHEREOF, American General Hospitality Operating
Partnership, L.P. and Pledgor have caused this Agreement to be duly executed as
of the date first above written.
AMERICAN GENERAL HOSPITALITY
OPERATING PARTNERSHIP, L.P.
----------------------------
AGH GP, INC., its general partner
By: ___________________________________
Name:
Title:
PLEDGOR
-------
_________________________________________
(signature pages continued)
<PAGE>
EXHIBIT A TO PLEDGE AGREEMENT
The number of OP Units issued under the Partnership Agreement owned by
the Pledgor, on the date hereof and which are subject to this Agreement:
________________________ _____
<PAGE>
EXHIBIT F
[FORM OF LOCK-UP AGREEMENT]
AGH LEASING, L.P.
____ __, 1996
AMERICAN GENERAL HOSPITALITY CORPORATION
3860 West Northwest Highway
Dallas, Texas 75220
SMITH BARNEY INC.
LEGG MASON WOOD WALKER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
THE ROBINSON-HUMPHREY COMPANY, INC.
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, NY 10013
Dear Sirs:
In accordance with the terms of the Lease Master Agreement, between
American General Hospitality Operating Partnership, L.P., a Delaware limited
partnership (the "Operating Partnership"), and AGH Leasing, L.P., a Delaware
limited partnership (the "Lessee"), the Lessee agreed to periodically acquire
shares of Common Stock, $0.01 par value per share of American General
Hospitality Corporation, a Maryland corporation (the "Common Stock"), and units
of limited partnership interests in the Operating Partnership (the "OP Units").
In consideration of the execution of the Lease Master Agreement, the
undersigned, in exchange of and for other good and valuable consideration,
hereby irrevocably agrees that without the prior written consent of Smith Barney
Inc. and the Company, the undersigned will not (and, except as may be disclosed
in the Prospectus, will not announce or disclose any intention to) sell, offer
to sell, solicit an offer to buy, contract to sell, grant any option to
purchase, or otherwise transfer or dispose of, any shares of Common Stock, or
any securities convertible into or exercisable or exchangeable for Common Stock,
including any OP Units owned by the undersigned, for a period of twenty-four
(24) months after the date of acquisition of such shares of Common Stock or OP
Units, as the case may be. Prior to the expiration of such period, the
undersigned will not publicly announce or disclose
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
AND
SMITH BARNEY INC.
LEGG MASON WOOD WALKER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
THE ROBINSON-HUMPHREY COMPANY, INC.
____ __, 1996
Page 2
any intention to do anything after the expiration of such period that the
undersigned is prohibited, as provided in the preceding sentence, from doing
during such period.
The undersigned agrees that the provisions of this agreement shall be
binding also upon the successors, assigns, heirs and personal representatives of
the undersigned.
In furtherance of the foregoing, the Company and Continental Stock Transfer
& Trust Company, its Transfer Agent, are hereby authorized to decline to make
any transfer of securities if such transfer would constitute a violation or
breach of this letter agreement.
Very truly yours,
AGH LEASING, L.P.
By AGHL GP, Inc.,
its general partner
----------------------------------
Name:
Title:
<PAGE>
Exhibit 10.5
--------------
[BF Draft -- 5-29-96]
[BF Draft -- 6-10-96]
[BF Draft -- 6-11-96]
[BF Draft -- 6-14-96]
[BF Draft -- 6-18-96]
FORM
OF
MANAGEMENT AGREEMENT
This Management Agreement (this "Agreement") is made and entered into
as of this _____ day of ___________, 199_, by and between AGH LEASING, L.P., a
Delaware limited partnership, with offices located at 3860 W. Northwest Highway,
Suite 300, Dallas, Texas 75220 ("Lessee") and AMERICAN GENERAL HOSPITALITY,
INC., a Texas corporation, with offices located at 3860 W. Northwest Highway,
Suite 300, Dallas, Texas 75220 ("Manager").
RECITALS:
---------
A. American General Hospitality Operating Partnership, L.P., a
Delaware limited partnership (the "Partnership"), has acquired fee or leasehold
title to, or ownership of the partnership or limited liability company that owns
fee or leasehold estate title to, the ______________________ (the "Hotel")
located at ____________________________ in ___________________________.
B. The Hotel has been leased to Lessee pursuant to that certain Lease
Agreement (the "Participating Lease") dated ___________________________________.
C. Lessee has agreed to engage Manager to manage, or to continue to
manage, as the case may be, the Hotel on the terms and conditions hereinafter
set forth, effective as of the closing of the initial public offering of shares
of Common Stock in American General Hospitality Corporation (the "Effective
Date").
ARTICLE I.
TERM
----
Section 1.1. Term. The term shall commence on the Effective Date and,
-----------------
unless earlier terminated in the manner provided herein, shall continue for a
period of 12 years from the Effective Date (the "Term"). In the event that the
term of the Participating Lease (as the same may be modified, amended, extended
or renewed from time to time) expires (whether by its own terms, by agreement of
the parties thereto or by reason of an event of default thereunder) prior to or
after the scheduled expiration of the Term, the Term of this Agreement shall be
correspondingly shortened or lengthened, so that the Term of this Agreement
shall be coterminous with the term of the Participating Lease.
<PAGE>
ARTICLE II.
MANAGER'S DUTIES AND AUTHORIZATIONS
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Section 2.1. Manager's Duties and Authorizations. Manager acknowledges
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that it has received and reviewed a copy of the Participating Lease and the
Franchise License Agreement and agrees to maintain and manage the Hotel in
accordance with the terms thereof. Manager, on behalf of Lessee and at Lessee's
expense as provided for in this Agreement, shall direct and be responsible for
the operation of the Hotel in accordance with the terms of this Agreement, the
Participating Lease and the Franchise License Agreement. Manager is hereby
exclusively authorized, and shall have the responsibility, to direct the day-to-
day activities of the Hotel and establish all policies and procedures relating
to the management and operation of the Hotel, subject to the terms and
conditions of this Agreement, the Participating Lease and the Franchise License
Agreement. Except as herein specifically provided to be "at the expense of
Manager", or similar specific language, all cost(s) and expense(s) incurred by
Manager in connection with the performance of its obligations hereinafter set
forth shall be Operating Costs (as defined in Exhibit "B") and accordingly shall
be paid from the Hotel Account(s) (as hereinafter defined in Section 3.1(d)).
Manager, during the Term, shall have the following duties and obligations:
(a) Allocation of Costs under Participating Lease. Pursuant to the
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terms of the Participating Lease, certain costs are to be paid by the
Partnership and certain costs are to be paid by the Lessee. To the extent
this Agreement authorizes or directs Manager to pay any such costs, Manager
shall pay such costs to the extent of funds in the Hotel Account(s) or the
Reserve Fund (as such terms are defined below), and shall maintain records
and accounts of all such payments for periodic review by the Lessee and the
Partnership.
(b) Personnel. Manager is to be the sole judge of the fitness and
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qualification of all employees of the Hotel (whether full-time, part-time,
temporary, "casual", salaried or hourly, sometimes herein referred to as
the "personnel") and is vested with absolute discretion in the hiring,
discharging, supervision and direction of such personnel during the course
of their employment at the Hotel. It is expressly understood and agreed
that all such personnel will be the employees of Manager, and not the
Lessee, and, subject to Section 2.1(e), that all costs and expenses related
to the personnel shall be Operating Costs and not an expense of Manager and
these shall include, but not be limited to, wages, salaries, benefits,
bonuses, commissions, vacation, workers compensation insurance programs,
unemployment, severance, life, health, accident insurance premiums,
retirement programs, payroll processing, other usual and customary direct
or indirect compensation items, and employee benefits regularly granted by
Manager in the usual course of its management business, as well as all
other unusual or non-customary direct or indirect compensation items and
other employee benefits not regularly granted in the usual course of
business but which Manager has disclosed to, and which have been approved
by, Lessee ("Extra Benefits") (all of the foregoing being herein
collectively referred to as
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"Compensation"). Manager shall be responsible, as the employer of all
personnel, for the proper and timely reporting and payment (as an expense
of the Hotel) of all required governmental charges with respect to the
personnel.
1. Manager will hire, train, supervise, direct the work of, and
discharge all personnel of the Hotel. Manager will not discriminate
against any employee or applicant for employment because of race,
creed, color, sex, age or national origin or any other legally
prohibited criteria. Except as stated below, such personnel shall be
deemed employees of the Manager, and Lessee shall have no right to
supervise or direct employees.
2. The salaries, wages and other compensation, including social
security, taxes and insurance, of any employees not located at the
Hotel shall be paid by Manager without reimbursement by Lessee.
3. In the event that Manager in its reasonable judgment
determines that employees of the Manager not located at the Hotel
should become full-time, on-site personnel of the Hotel on a temporary
basis, subject to Section 2.1(e), the compensation of such employees,
to the extent their time is devoted to such Hotel, shall be deemed to
be Operating Costs reimbursable to Manager out of the Hotel
Account(s).
4. Notwithstanding anything herein to the contrary, and in
addition to any other expenses or compensation payable under any other
provisions of this Agreement, members of Manager's internal audit
staff, Manager's regional operations and marketing managers, all home-
office personnel for Manager's hotel operations, Manager's Accountants
(as hereinafter defined), and Manager's construction personnel shall
receive complimentary room, food, and beverage services and other
amenities at the Hotel during their visits to the Hotel if such
personnel must travel to the Hotel to work on a specific project for
the Hotel's benefit, and Manager shall be entitled to payment or
reimbursement for any reasonable travel related expenses, including
air and ground transportation with respect thereto.
5. Manager may, on occasion, transfer employees from one hotel
to another, or secure the employment of a person that is not a
resident of the same city as the Hotel. In this instance, Manager
shall use the most economical method of relocating the employee and,
with Lessee's prior approval, charge all expenses of relocation to the
Hotel.
6. Any relocated or newly hired personnel (including spouse and
dependent children, if any), may receive complimentary room, food and
beverage service in the Hotel (not to exceed two residential units)
for a period
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up to ninety (90) days from the date such personnel commence work at
the Hotel.
7. Manager shall provide all eligible personnel with its
standard benefits package and bonus program, and, if applicable, the
Extra Benefits, in effect from time to time, the cost of which shall
be Operating Costs. It is understood that certain executive employees
of Manager will participate in the Property level bonus plan as an
incentive to maximize revenues and profits, and these shall be
Operating Costs, provided that in no event will the aggregate cost of
any bonuses paid to such executive employees of Manager during any
Term Year with respect to the Hotel exceed $25,000.
8. So long as Manager is not in default hereunder, Lessee shall
not interfere with or give orders or instructions to the personnel
employed at the Hotel.
9. Except as otherwise herein provided, Manager shall be
reimbursed for travel and other reasonable and necessary out-of-pocket
expenses incurred by Manager or the personnel in the performance of
the duties imposed hereunder.
10. Except as otherwise herein provided, the reasonable and
necessary costs, fees, compensation and other out-of-pocket expenses
of any persons engaged by Lessee or Manager to perform duties of a
special nature, directly related to the operation of the Hotel,
including but not limited to, attorneys, auditors, and the like, shall
be Operating Costs.
11. Manager agrees that it will consult with Lessee regarding
the hiring, transferring, or terminating of the General Manager and
Director of Sales for the Hotel. Lessee shall be afforded an
opportunity to review the resumes of, and to interview, the candidates
that Manager deems to be the best candidate(s) for each such position.
Manager and Lessee shall consult with each other concerning such
decisions, and Manager agrees to give serious consideration to the
views of Lessee, but in the event Manager and Lessee are not able to
reach a mutually agreeable decision, the decision of Manager shall
control.
(c) Hotel Policies. Manager shall determine the terms of guest
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admittance to the Hotel, room rates, and use of rooms for commercial
purposes, subject to the right of Lessee to identify from time to time
certain individuals who shall be entitled to receive complimentary rooms as
guests of Lessee.
(d) Bank Accounts. On or before the effective date, Manager shall
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open the following "Hotel Accounts" and establish the following cash
management procedures:
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1. Manager shall open two accounts (respectively, the
"Depository Account" and the "General Manager's Account") with a
banking institution acceptable to Lessee which accounts shall be in
the name of the Hotel and shall have as authorized signatories for
check writing and withdrawals any one among Lessee, Lessee's nominee,
Manager's chief executive officer, and such nominees of Manager as
Lessee shall approve in writing. Upon the opening of the General
Manager's Account, Lessee shall immediately deposit therein a sum
estimated by Lessee and Manager to be necessary for certain payments
required or customarily made to vendors through the issuance of a
check from an account maintained with a local banking institution.
Thereafter, Lessee shall from time to time deposit such amounts as
Manager and Lessee agree are necessary to replenish the General
Manager's Account in order to continue to provide for payments to
local vendors as described in the immediately preceding sentence.
Manager shall on a daily basis cause (i) all cash receipts and the
proceeds of credit card receipts, in each case generated from the
management and operation of the Hotel, to be deposited into the
Depository Account, and (ii) all amounts in the Depository Account, in
excess of any minimum required by law or the local banking institution
with which the Depository Account is maintained, to be deposited into
the Operating Account (as defined below). Without the prior written
consent of Lessee, neither Manager nor any of its nominees shall cause
any checks to be issued or otherwise permit amounts to be withdrawn
from the Depository Account, except for the daily deposits into the
Operating Account contemplated hereunder.
2. Manager shall open an account (the "Operating Account") with
a banking institution acceptable to Lessee, which account shall be in
the name of the Hotel and shall have as its authorized signatories for
check writing and withdrawals any one among Lessee, Lessee's nominee,
Manager's chief executive officer, and such nominees of Manager as
Lessee shall approve in writing. Upon the opening of the Operating
Account, Lessee shall immediately deposit into the Operating Account a
sum estimated by Lessee and Manager to be necessary for the initial
operation of the Hotel.
3. Manager shall cause all amounts remaining in the Operating
Account at the end of each month, after the payment and disbursement
of such amounts contemplated under the terms hereof or approved by
Lessee, including any allowances for checks written and not yet
presented for payment against the Operating Account, to be transferred
to Lessee.
4. It is expressly agreed that Manager shall in no event have or
suffer any liability or responsibility whatsoever for lost funds or
the unavailability of funds deposited in any of the Hotel Accounts
resulting from the errors or omissions of any bank where such account
is maintained (unless
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the failure to correct same results from Manager's negligence or
intentional acts) or the failure, closing and/or restructuring
thereof. Manager agrees that each nominee or designee of Manager who
is an authorized signatory of the Hotel Accounts shall be a bonded
employee of Manager and Manager shall supply to Lessee copies of such
bonds or insurance; the expense of obtaining and maintaining such
insurance and bonds shall be borne exclusively by Manager.
Notwithstanding anything to the contrary contained herein, neither
Manager nor any of its nominees or designees authorized to issue
checks or disburse funds under the Hotel Accounts shall make any
payment in respect of, or otherwise settle any claims arising under,
any obligations owed or arising prior to one day following the
Effective Date.
5. As agent for Lessee, Manager shall collect all income arising
from the operation of the Hotel, however arising, and shall deposit
same in the Hotel Accounts.
(e) Operating Budget.
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1. Manager and Lessee have agreed to a budget ("Operating
Budget") for the balance of calendar year 1996, attached hereto as
Exhibit __. Hereafter, Manager, not less than sixty (60) days prior
to the commencement of each succeeding calendar year, shall submit to
Lessee, for Lessee's approval, a proposed Operating Budget for the
ensuing full or partial calendar year, as the case may be. Each
Operating Budget shall be accompanied by, and shall include an
estimated profit and loss statement on a monthly basis generally in
accordance with the latest edition of the Uniform System of Accounts
as adopted by the Hotel Association of New York City, Inc. and the
American Hotel & Motel Association (the "Uniform System of Accounts"),
and, a business plan which shall describe business objectives and
strategies for the period covered by the Operating Budget. The
business plan shall include without limitation an analysis of the
market area in which the Hotel competes, a comparison of the Hotel and
its business with competitive hotels, an analysis of categories of
potential guests, and a description of sales and marketing activities
designed to achieve and implement identified objectives and
strategies.
2. Manager shall meet with Lessee to discuss the proposed
Operating Budget within 20 days after submitting the proposed
Operating Budget to Lessee, and Lessee shall provide a written
response to Manager approving or disapproving a proposed Operating
Budget within twenty (20) days after the date Manager and Lessee have
met to discuss the proposed Operating Budget. If Lessee fails to
provide an effective notice disapproving a proposed Operating Budget
within such 20-day period, the proposed Operating Budget shall be
deemed to be approved. If the proposed Operating Budget
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contains disputed budget item(s), Lessee and Manager agree to
cooperate with each other in good faith to resolve the disputed or
objectionable proposed item(s). In the event (A) Lessee and Manager
are not able to reach mutual agreement concerning any disputed or
objectionable item within a period of twenty (20) days after the date
Lessee provides written notice of its objections to Manager, then
either party shall be entitled to submit the dispute to arbitration in
accordance with the provisions of Section 9.2 below. If Lessee and
Manager are unable to resolve the disputed or objectionable matter(s)
prior to the commencement of the applicable calendar year, the
undisputed portions of the proposed Operating Budget shall be deemed
to be adopted and approved. The disputed line item(s) shall be
adjusted as set forth in the next sentence and shall be substituted in
lieu of the disputed item in the proposed Operating Budget. Those
disputed line items which represent variable costs from year to year
shall be adjusted by increasing the corresponding line items of the
Operating Budget for the preceding calendar year by an amount
determined by Manager which does not exceed the increase in the
Consumer Price Index for All Urban Consumers published by the Bureau
of Labor Statistics of the United States Department of Labor, U.S.
City Average, all items (1982-1984=100) (the "CPI"), or any successor
or replacement index thereto, for the calendar year prior to the
calendar year with respect to which the adjustment to the line item is
being calculated. The resulting Operating Budget shall be deemed to
be the Operating Budget in effect until such time as Manager and
Lessee have resolved the their dispute over item(s) objected to by
Lessee.
3. Manager may revise the Operating Budget from time to time, as
necessary, to reflect any unpredicted significant changes, variables
or events or to include significant, additional, unanticipated items
of revenue and expense. Any such revision shall be submitted to
Lessee for approval, which approval shall not be unreasonably
withheld, delayed or conditioned. Manager may reallocate part or all
of the amount budgeted with respect to any line item to another line
item in the same Department (below defined), but may not reallocate
from one Department to another without Lessee's consent, which shall
not be unreasonably withheld or delayed. The term "Department" shall
mean and refer to those general divisional categories shown in the
Operating Budget (e.g., Room Department or Administration Department),
but shall not mean or refer to subcategories (e.g., linen replacement
or uniforms) appearing in a divisional category. In addition, in the
event actual Adjusted Gross Revenues (as defined on Exhibit "B"
hereto) for any calendar period are greater than those provided for in
the Operating Budget, the amounts approved in the Operating Budget
(for room, food and beverage, telephone, utilities, marketing, and
hotel repair and maintenance) for any calendar month shall be
automatically deemed to be increased to an amount that bears the same
relationship (ratio) to the amounts budgeted for such items as actual
Adjusted
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Gross Revenue for such month bears to the budgeted Adjusted Gross
Revenue for such month.
4. Lessee acknowledges that the Operating Budget is intended
only to be a reasonable estimate of the Hotel's income and expenses
for the ensuing calendar year. Manager shall not be deemed to have
made any guarantee, warranty or representation whatsoever in
connection with the Operating Budget.
(f) Operating Statements. Manager shall prepare and furnish to
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Lessee the following statements: (i) within twenty (20) days after the end of
each calendar month a detailed profit and loss statement setting forth the
results of the Hotel's operations for such calendar month and the calendar year
to date, with a comparison to the then current Operating Budget; and a balance
sheet setting forth the results of the Hotel's operations for the calendar year
to date and the previous calendar year; and (ii) within twenty (20) days after
the end of each calendar year, a balance sheet, together with a comparison to
the previous calendar year, a related statement of profit and loss (including
all supporting departmental schedules of revenues and expenses), together with a
comparison to the previous calendar year, and having annexed thereto a
computation in reasonable detail of the Basic Management Fee and the Incentive
Management Fee for such calendar year; and such other additional (operating)
statements, computations and reports as Lessee shall reasonably request.
(g) Capital Budgets.
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1. Manager and Lessee have agreed to a capital budget ("Capital
Budget") for the balance of calendar year 1996, attached hereto as
Exhibit __. Thereafter, Manager, not less than sixty (60) days prior
to the commencement of each succeeding calendar year, shall submit to
Lessee for its written approval, a recommended Capital Budget for the
ensuing full or partial calendar year, as the case may be. Each
Capital Budget shall address furnishings, equipment, and Hotel capital
replacement items as shall be required to operate the Hotel in
accordance with the standards referred to in the applicable Franchise
License Agreement. Manager, to the extent it is able to do so without
compromising compliance with the minimum standards required under the
terms of the Franchise License Agreement, shall take into
consideration the amount of funds available to pay for the proposed
capital expenditures. Manager shall also identify for Lessee those
projects that are required to meet the minimum standards of the
Franchise License Agreement and give priority to such items. Lessee
and Manager shall meet within twenty (20) days after submission of
each proposed Capital Budget to discuss the proposed Capital Budget.
If the Lessee does not approve a proposed Capital Budget by the
beginning of a calendar year, Manager shall be allowed to spend
annually (until a Capital Budget is approved by Lessee) an amount up
to the
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amount of the Reserve Fund (as defined below) for such items which the
franchisor has indicated are necessary to maintain the franchise
license under the Franchise License Agreement.
2. Manager, at Lessee's expense, shall be responsible for
supervising the design, installation and construction of alterations
or additions to, or rebuilding or renovation of, the Hotel, including
any additions to Hotel furnishings and equipment (collectively,
"Capital Improvements"). These services shall be entitled "Technical
Services", and Lessee agrees to reimburse the Manager for Manager's
actual reasonable expenses incurred in performing these services.
These reimbursements shall include a reasonable allocation (as
determined in good faith by the Manager) of the salaries, bonuses,
benefits, travel, and related expenses incurred by Manager's personnel
in the performance of these services in accordance with a Capital
Budget previously approved by Lessee.
3. Lessee shall have the right to approve and inspect Capital
Improvements. Any mortgagee having a lien on either the Partnership's
or the Lessee's estate in the Hotel (the "Mortgagee") shall also have
any right of approval or inspection of the Capital Improvements set
forth in the mortgage, deed of trust or other loan documents
(collectively, the "Financing Documents").
4. After a Capital Budget has been adopted, it shall be subject
to review and modification in the event unpredicted or unanticipated capital
expenditures are required during any calendar year. Manager and Lessee each
agree not to unreasonably withhold or delay its consent to a proposed
modification of a Capital Budget. Any amendment that is mutually agreed upon
shall be set forth in writing and signed by all parties. The provisions of this
Section 2.1 (g) are supplemental to, and not in limitation on, Section 3.1 (e)
below.
(h) General Maintenance and Non-Capital Replacements. Manager shall
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supervise the maintenance, repair and replacement of fixtures, furnishings and
equipment, regardless whether such expenditures are expensed or capitalized and
amortized.
(i) Operating Equipment. Manager shall select and purchase all
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operating equipment for the Hotel such as linens, utensils, uniforms and other
similar items.
(j) Operating Supplies. Manager shall select and purchase all
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operating supplies for the Hotel such as food, beverages, uniforms, cleaning
materials, and other consumable items.
(k) Accounting Standards. Manager shall maintain the books and
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records reflecting the operations of the Hotel in accordance with the Uniform
System of Accounts in
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conformity with generally accepted accounting principles ("GAAP") consistently
applied and in a manner which permits an audit in accordance with generally
accepted auditing standards. The Hotel level generated accounting records
reflecting detailed day-to-day transactions of the Hotel's operations shall be
kept by Manager at the Hotel or at Manager's corporate headquarters, or at such
other location as Manager shall reasonably determine. Manager agrees upon
request to cooperate in good faith with Lessee and its designees to facilitate
an examination or audit of such books and records.
(l) Marketing and Advertising. Manager shall advertise and promote
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the Hotel in coordination with the sales and marketing programs approved in the
Operating Budget. Manager may cause the Hotel to participate in sales and
promotional campaigns and activities involving complimentary rooms which are
intended to benefit the business of the Hotel. Manager, in marketing and
advertising the Hotel, shall have the right to use marketing and advertising
services of Manager's off-site personnel which shall be charged as Operating
Costs.
(m) Permits and Licenses. Manager shall be responsible for obtaining
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and maintaining all licenses and permits that are necessary to enable Manager to
operate the Hotel in accordance with the terms of this Agreement and the
Franchise License Agreement. In addition, Manager shall upon request cooperate
with and assist Lessee in obtaining the various permits and licenses that are
allowed or required to be held in the name of either or both of Lessee and the
Partnership that are necessary to enable Manager to operate the Hotel. Manager
shall use all reasonable efforts, to the extent within its control, to comply
with the terms and conditions of all licenses and permits issued with respect to
the Hotel and the business conducted at the Hotel, including without limitation
the terms and conditions of the Franchise License Agreement.
(n) Lessee Meetings. A representative of Manager's corporate staff
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and the Hotel's general manager shall meet with Lessee's Representatives
quarterly to review and discuss the previous and future quarter's operating
statement cash flow, budget, capital expenditures, important personnel matters
and the general concerns of Lessee and Manager ("Quarterly Lessee's Meeting").
(o) Insurance. Manager shall procure and maintain throughout the
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Term the insurance coverages set forth on Exhibits "C" and "D" and in accordance
with the Participating Lease. To the extent that the insurance requirements in
the Participating Lease are more stringent, onerous or extensive than those set
forth on Exhibits "C" and "D", the provisions in the Participating Lease shall
control. Manager may elect to purchase certain insurance coverages that are loss
sensitive. Such policies are broad in coverage and cost efficient to the
operation of the Hotel but carry with them a degree of risk. Manager may incur
additional costs as a result of poor loss experience during the policy year or
may receive a return for good experience. Manager is responsible for the
additional premium risks and shall be entitled to all returns associated with
such coverages at no additional cost or liability to the Lessee or any of the
other insured parties.
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(p) Lease and Concession Agreements. Manager shall consult with
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Lessee to determine the desirability of entering into lease and concession
agreements to provide activities or services such as the food and beverage
facilities for the benefit of the Hotel and its guests. In situations in which
it is mutually determined to be desirable to enter into lease or concession
agreements, Manager shall assist Lessee to the extent requested in identifying
suitable lessees and concessionaires, negotiating mutually agreeable lease and
concession agreements, and monitoring the performance of the lessees and
concessionaires under the agreements. Except for leases and concession
agreements with any person or entity holding the liquor license for the Hotel,
the revenues and income generated by a lessee or concessionaire shall be
excluded from Gross Revenues, but Gross Revenues shall include all rental or
other payments made to Lessee pursuant to the provisions of such agreements.
(q) Taxes and Assessments. Manager shall annually review and submit
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statements of all real estate and personal property taxes and all assessments
affecting the Hotel, including, to the extent applicable, any common areas or
common elements with respect to multiparty cost sharing obligations applicable
to the Hotel to Lessee, and Manager shall recommend payment thereof or appeal
therefrom. Manager shall file all personal property tax returns for the Hotel.
(r) Compliance with Law. Subject to the availability of funds in
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accordance with this Agreement, Manager shall use all reasonable efforts to
comply with all laws, ordinances, regulations, and requirements of any federal,
state, or municipal government that are applicable to the use and operation of
the Hotel, as well as with all orders and requirements of the local fire
department; provided, however, that Lessee shall have the right to contest by
proper legal proceedings, the validity of any such law, ordinance, rule,
regulation, order, decision or requirement and may postpone compliance therewith
to the extent and in the manner provided by law until final determination of any
such proceedings. Manager promptly shall notify Lessee in writing of all
notices of legal requirements applicable to the Hotel that are received by
Manager and of any non-compliance matters which to cure would require the
expenditure of funds in excess of the amounts allocated therefor in either the
Operating Budget or the Capital Budget.
(s) Satisfaction of Obligations. From and to the extent that funds
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are available in the Hotel Accounts, Manager agrees to pay, when due, the costs
and expenses described on Exhibit "A" hereto, and to comply with all other
covenants and obligations of the Lessee relating to the operation and
maintenance of the Hotel contained in the Participating Lease and in all
equipment leases, utility contracts, concession agreements, leases for retail or
commercial space, service and maintenance contracts, the Franchise License
Agreement and, if requested by Lessee, the Financing Documents, to the extent
that compliance therewith is within the reasonable control of Manager by reason
of its management and operation of the Hotel pursuant to this Agreement;
provided, however, that if compliance with any of the provisions in the
Financing Documents will materially conflict with Manager's rights and
obligations under the Agreement, Lessee shall use its best efforts to reconcile
the conflict to the reasonable satisfaction of the holder of the Financing
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Documents and Manager but, in any event, Lessee shall indemnity and hold Manager
harmless from any loss, claim or expense in any way arising from any
irreconcilable conflict. The indemnity set forth in this Section 2.1(s) shall
survive any termination of this Agreement.
(t) Requests for Information. Manager shall respond, with reasonable
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promptness, to any information requests made in accordance with the Financing
Documents, to the extent such information is required to be furnished by Manager
to Lessee pursuant to this Agreement. Any additional information or reports
shall be provided by Manager only if Lessee so directs Manager in writing and,
to the extent such information or reports are not being prepared for Lessee in
the ordinary course of business pursuant to this Agreement, Lessee agrees to pay
the reasonable expenses of preparing such information and reports.
(u) Tax and Insurance Accruals. If requested by Lessee or required
--------------------------
by the Mortgagee, Manager shall accrue and set aside on a monthly basis a
portion (as Lessee or such Mortgagee shall designate) of Gross Revenues for the
payment of real estate and personal property taxes and insurance premiums, and
such accruals shall be deposited with the Mortgagee, if so required by the
Financing Documents or otherwise approved by Lessee, or in a separate account
and not commingled with other operating accounts for Hotel operations generally.
ARTICLE III.
LESSEE'S OBLIGATIONS
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Section 3.1. Lessee's Obligations. During the Term, Lessee shall
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have the obligations set forth below:
(a) Hotel Franchise License Agreement. Lessee shall comply with all
---------------------------------
the terms and conditions of the Hotel's franchise license agreement (the
"Franchise License Agreement") to the extent that compliance therewith is within
the control of the Lessee and use its best efforts to keep the Franchise License
Agreement in full force and effect from the Effective Date through the remainder
of the Term. Nothing in this Agreement shall be interpreted in a manner which
would relieve Lessee of any of its obligations under the Franchise License
Agreement.
(b) Licenses and Permits. Lessee shall use its best efforts to
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obtain and maintain (or shall cause to be obtained and maintained), with
Manager's assistance and cooperation as needed, all governmental permissions,
licenses and permits required or allowed to be held in either Lessee's or the
Partnership's name that are necessary to enable Manager to operate the Hotel in
accordance with the terms of this Agreement, the Participating Lease and the
Franchise License Agreement.
(c) Intentionally Omitted.
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(d) Operating Funds. Lessee shall provide all funds necessary to
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enable Manager to manage and operate the Hotel in accordance with the terms of
this Agreement, the Franchise License Agreement, the Participating Lease and the
Financing Documents. Lessee agrees to deliver to Manager for deposit into the
General Manager's Account on the Effective Date the amount specified on Exhibit
"A", which amount shall be the "Minimum Balance" to be maintained by Lessee in
the General Manager's Account throughout each calendar year during the Term. The
Minimum Balance shall serve as working capital for the Hotel's operations.
Within five (5) business days of Manager's written request, Lessee agrees to
furnish Manager with sufficient funds to make up any deficiency in Minimum
Balance in the General Manager's Account. From time to time, Manager may request
additional funds for Operating Costs (an "Operating Deficit Advance") which
shall be based on anticipated cash shortfalls shown on the cash flow projection
delivered to Lessee or incurred cash shortfalls. If Manager determines, in its
good faith business judgment, that the amount of the Minimum Balance and the
Operating Deficit Advance are insufficient adequately to meet the working
capital needs for the Hotel's operations, Manager shall notify Lessee and
attempt to reach agreement on an adjustment to the amount of the Minimum Balance
and/or Operating Deficit Advance. In the event Lessee and Manager are unable to
agree after a period of 30 days, Manager may submit such matter to arbitration
pursuant to Section 9.2 below. Lessee shall be responsible for providing funds
to cover any shortfall in working capital for the Hotel.
(e) Capital Funds. Subject to the terms of the Capital Budget
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approved by the Lessee, Manager is directed by Lessee to utilize the
Capital Expenditure Reserve (as defined in the Participating Lease) for
renovation programs, furnishings, equipment and ordinary Hotel capital
replacement items as are required from time to time (i) to maintain the Hotel in
good order and repair; (ii) to comply with the standards referred to in the
Franchise License Agreement; (iii) to comply with applicable governmental
regulations and orders; and (iv) to comply with the Capital Budget, subject to
the restrictions contained in the Participating Lease. Any expenditures for
capital replacements during any calendar year which have been included in an
approved Capital Budget may be made without Lessee's additional approval and
shall be made by Manager from the Capital Expenditure Reserve. To the extent
the Capital Expenditure Reserve is insufficient at a particular time or to the
extent the Capital Expenditure Reserve plus anticipated contributions for the
ensuing calendar year is less than budgeted expenditures in an approved Capital
Budget for the ensuing calendar year, then in either such event, Manager shall
give Lessee written notice thereof at least 45 days before the anticipated date
such funds will be needed. Manager shall not dispose of any capital item or
group of capital items having a value in excess of $10,000 without Lessee's
prior written consent unless the disposal and replacement of such capital item
or group of capital items has been contemplated in the applicable Capital
Budget. To the extent that any expenditure under this Section 3.1 (e) shall
exceed $20,000, Manager shall first solicit bids from at least three different
reputable and qualified third parties and the lowest of the bidders shall be
selected unless waiver of the bid process or acceptance of a higher bid has been
approved by Lessee in writing. Manager shall maintain complete records of all
capital expenditures with respect to the Hotel and shall provide the Lessee and
its designees access to all such records at any time.
13
<PAGE>
(f) Payments to Manager. Lessee shall promptly pay to Manager all
-------------------
amounts due Manager under this Agreement, subject to the provisions of
Paragraphs 9 and 10 of Exhibit "B".
(g) Lessee's Representative. Lessee shall appoint two or more
-----------------------
representatives to represent Lessee in all matters relating to this Agreement
and/or the Hotel ("Lessee's Representatives"). Lessee's initial Lessee's
Representatives shall be the individuals named on Exhibit "A". Manager shall
have the right to deal solely with the Lessee's Representatives on all such
matters. Manager may rely upon statements and representations of any one of
Lessee's Representatives (without the joinder of the others) as being from and
binding upon Lessee. Lessee may change one or more of its Lessee's
Representatives from time to time by providing written notice to Manager in the
manner provided for herein. Lessee shall cause one or more of the Lessee's
Representatives or designated substitutes to attend all Quarterly Lessee's
Meetings.
(h) Lessee's Right of Inspection and Review. Lessee and its
---------------------------------------
designees and their respective accountants, attorneys, agents and other
representatives and invitees, shall have the right to enter upon any part of the
Hotel at all reasonable times during normal business hours and during the term
of this Agreement for the purpose of examining, repairing or inspecting the
same, preventing damage to the Hotel, showing the Hotel to prospective
purchasers or mortgagees or other parties, auditing, examining or making
extracts of books and records of the Hotel, or for any other purpose which
Lessee, shall deem necessary or advisable, but the same shall be done with as
little disruption to the business of the Hotel as under the circumstances is
practicable. Books and records of the Hotel shall be kept at Manager's office in
Dallas, Texas, or such other place as the Lessee may hereafter in writing agree.
Lessee's rights of examination and audit of the books and records of the Hotel
are subject to the provisions of Section 2.1 above.
(i) Quiet and Peaceable Operation. Lessee agrees that Manager
-----------------------------
shall be entitled to peaceably and quietly possess and operate the Hotel in
accordance with the terms of this Agreement, free from molestation, eviction and
disturbance by Lessee or by any other person or persons claiming by, through or
under Lessee.
ARTICLE IV.
MANAGEMENT FEE
--------------
Section 4.1. Management Fee. Lessee authorizes Manager to pay itself
----------------------------
from the Hotel Account(s) the Basic Management Fees and Incentive Management
Fees (hereinafter collectively referred to as the "Management Fees") as defined,
calculated and payable in accordance with Exhibit "B".
14
<PAGE>
ARTICLE V.
CLAIMS AND LIABILITY
--------------------
Section 5.1. Claims and Liability. Lessee and Manager mutually agree
----------------------------------
for the benefit of each other to look only to the appropriate insurance
coverages in effect pursuant to this Agreement in the event any demand, claim,
action, damage, loss, liability or expense occurs as a result of injury to
person, damage to property, or any act or omission regardless whether any such
demand, claim, action, damage, loss, liability or expense is caused or
contributed to by or results from the negligence of Lessee or Manager or their
respective subsidiaries, affiliates, employees, partners, directors, officers,
agents or independent contractors and regardless whether the injury to person,
damage to property or act or omission occurs in and about the Hotel or elsewhere
as a result of the performance of this Agreement. Nevertheless, to the extent
that insurance proceeds are insufficient or there is no insurance coverage to
satisfy the demand, claim, action, loss, liability or expense or that the
injuries, damages, acts or omissions are not insured or are not insurable and
the same did not arise out of a material breach of this Agreement by Manager or
the gross negligence or willful misconduct of Manager, Lessee agrees, at its
expense, to indemnify and hold Manager and its subsidiaries, affiliates,
partners, officers, directors, employees, agents or independent contractors
harmless therefrom and all costs and expenses of defense. For purposes of this
Section, any deductible amount under any policy of insurance shall not be deemed
to be included as part of collectible insurance proceeds, and Manager shall be
indemnified therefor to the extent provided in the foregoing sentence. Manager
shall indemnify and hold harmless Lessee, and its respective subsidiaries,
affiliates, partners, officers, directors, employees, agents or independent
contractors, from all demands, claims, actions, loss, liability and expense
which are not covered by insurance and which are determined to have resulted
from the gross negligence, willful misconduct or material breach of this
Agreement by Manager and its agents or employees in connection with the
operation of the Hotel.
Section 5.2. Survival. The provisions of this Article V shall
----------------------
survive any cancellation, termination or expiration of this Agreement and shall
remain in full force and effect until such time as the applicable statute of
limitation shall extinguish all rights to any demands, claims, actions, damages,
losses, liabilities or expenses which are the subject of the provisions of this
Article V.
ARTICLE VI.
CLOSURE, EMERGENCIES AND DELAYS
-------------------------------
Section 6.1. Events of Force Majeure. If at any time during the Term
-------------------------------------
of this Agreement it becomes necessary, in Manager's opinion, to cease operation
of the Hotel in order to protect the Hotel and/or the health, safety and welfare
of the guests and/or employees of the Hotel for reasons known to, but beyond the
reasonable control of, Manager, such as, but not limited to, acts of war,
insurrection, civil strife and commotion,
15
<PAGE>
labor unrest, governmental regulations and orders, shortage or lack of adequate
supplies or lack of skilled or unskilled employees, contagious illness,
catastrophic events or acts of God ("Force Majeure"), then in any such event or
similar events Manager may close and cease operation of all or any part of the
Hotel, reopening and commencing operation when Manager reasonably determines
that such may be done without jeopardy to the Hotel, its guests and employees.
Further, Manager and Lessee agree, except as otherwise provided herein, that the
time within which a party is required to perform an obligation hereunder shall
be extended for a period of time equivalent to the period of delay caused by an
event of Force Majeure, but only to the extent that delay is caused or
contributed to by a specific event of Force Majeure.
Section 6.2. Emergencies. If an emergency condition should exist
-------------------------
which requires that immediate repairs or replacements be made for the
preservation or protection of the Hotel or persons in the Hotel, or to assure
the continued operation of the Hotel (for purposes of this Section, an emergency
condition shall include any situation or circumstance that is reasonably
estimated to require corrective action within a period of seventy-two (72) hours
or less), Manager is authorized to take all actions and to make all expenditures
necessary to repair and correct such condition, regardless whether provisions
have been made in the applicable budget for such emergency expenditures.
Expenditures made by Manager in connection with an emergency shall be paid, in
Manager's sole discretion, out of the Hotel Account(s) to the extent funds are
available and, if not, from the Reserve Fund. Lessee shall to the extent
required to meet current obligations immediately replenish such funds. Manager
shall endeavor to communicate with Lessee prior to making any expenditures to
correct an emergency condition, but in any event shall promptly notify Lessee
after the emergency expenditures have been made.
ARTICLE VII.
CONDEMNATION AND CASUALTY
-------------------------
Section 7.1. Condemnation. If the Hotel is taken in any eminent
--------------------------
domain, expropriation, condemnation, compulsory acquisition or similar
proceeding by any competent authority, this Agreement shall automatically
terminate as of the date of taking or condemnation. Manager shall have the
right to file a claim with the appropriate authorities for the loss of
Management Fee income for the remainder of the Term and any extension thereof
because of the condemnation or taking; provided, however, that the filing of any
such claim or the payment of any award to Manager as a result thereof shall in
no way diminish or affect the amount or payment of any award which may be
claimed by the Partnership or the Lessee. Subject to contrary provisions in any
Financing Documents and the Participating Lease, if only a portion of the Hotel
is so taken and the taking does not make it unreasonable or imprudent, in the
reasonable opinion of Lessee and Manager, to operate the remainder as a hotel of
the type and class immediately preceding such taking, this Agreement shall not
terminate provided that any compensation shall be used to render the Hotel a
complete and
16
<PAGE>
satisfactory architectural unit as a hotel of the same type and class as it was
immediately preceding such taking or condemnation.
Section 7.2. Casualty. In the event of a fire or other casualty,
----------------------
Lessee shall comply with the terms of the Franchise License Agreement, the
Participating Lease and the Financing Documents, and if, as a result thereof,
the Franchise License Agreement and the Participating Lease remain in full force
and effect and, within ninety (90) days after the occurrence of such event,
Lessee notifies Manager that a decision has been made to restore the Hotel, this
Agreement shall not terminate provided that the Hotel is thus restored within a
reasonably appropriate period of time.
ARTICLE VIII.
DEFAULT: TERMINATION RIGHTS
---------------------------
Section 8.1. Lessee's Default. (a) Definition. The following shall,
------------------------------ ----------
at the election of Manager, constitute events of default by Lessee under this
Agreement (each such event being referred to herein as a "Lessee Default"):
(i) The failure of Lessee to pay any amount to Manager provided
for herein or to maintain, restore, or supplement the Hotel Accounts, the
Minimum Balance, the Operating Deficit Advance or the Reserve Fund as herein
provided for a period of ten (10) days after written notice by Manager of such
failure.
(ii) Material failure of Lessee to keep or perform any duty,
obligation, covenant or agreement of Lessee under this Agreement (other than the
obligations that are the subject of Section 8.1(a)(i) above) and such failure
continues for a period of 30 days after receipt of written notice thereof from
Manager; provided, however, if such failure cannot reasonably be remedied or
corrected within such 30-day period, then such 30-day period shall be extended
for such additional period as may be reasonably required to cure such default
but only if the Lessee promptly commences to cure such default and continues
thereafter with all due diligence to complete such a cure to the reasonable
satisfaction of Manager.
(iii) Lessee or the Partnership is voluntarily or involuntarily
dissolved or declared bankrupt or is insolvent, or commits an act of bankruptcy
or enters into liquidation whether compulsory or voluntary other than for the
purpose of amalgamation or reconstruction or compounds with its creditors, or
has a receiver appointed over all or any part of its assets, or conveys title in
lieu of foreclosure.
(b) Remedies. On the occurrence of any Lessee Default, Manager shall
--------
have the right to terminate this Agreement by written notice to Lessee, in
addition to its other rights hereunder and its rights to seek damages or other
remedies available to it at law or in equity.
17
<PAGE>
Section 8.2. Manager Default. (a) Definition. The following shall,
----------------------------- ----------
at the election of Lessee, constitute events of default by Manager under this
Agreement (each such event being referred to herein as a "Manager Default"):
(i) Material failure of Manager to keep or perform any duty,
obligation, covenant or agreement of Manager under this Agreement and such
failure shall continue for a period of 30 days after receipt of written notice
thereof from Lessee; provided, however, if such failure cannot reasonably be
remedied or corrected within such 30-day period, then such 30-day period shall
be extended for such additional period as may be reasonably required to cure
such default provided that Manager promptly commences to cure such default and
continues thereafter with all due diligence to complete such cure to the
satisfaction of Lessee.
(ii) Manager is voluntarily or involuntarily dissolved or
declared bankrupt or is insolvent, or commits an act of bankruptcy, or enters
into liquidation whether compulsory or voluntary other than for the purpose of
amalgamation or reconstruction or compounds with its creditors, or has a
receiver appointed over all or any part of its assets.
(iii) Manager shall fail to deliver to Lessee within one
hundred twenty (120) days after the end of each calendar year an audited
financial statement of Manger showing a net worth (computed in accordance with
GAAP) in excess of a negative three hundred thousand dollars (-$300,000).]+++
(iv) Manager shall fail to comply with any covenant or condition
in any of the Financing Documents which results in the occurrence of an event of
default thereunder.
(b) Remedies. Upon the occurrence of a Manager Default, Lessee shall
--------
have the right to terminate this Agreement by written notice to Manager, in
addition to its other rights hereunder and its rights to seek damages or other
remedies available to it at law or in equity.
Section 8.3. Delays. Notwithstanding any other provision of this
--------------------
Agreement, if any event of the type described in Article VI or VII occurs and
Manager is unable to operate a substantial portion of the Hotel for a period of
ninety (90) days, Manager shall have the right to terminate this Agreement upon
thirty (30) days' prior written notice to Lessee, without liability on the part
of Manager or its subsidiaries or affiliates.
Section 8.4. Transition Upon Termination. Upon any termination of
-----------------------------------------
this Agreement other than as a result of a material uncured Manager Default, the
remainder of all fees and payments that would be due to Manager under this
Agreement as of the effective date of termination, including all accrued and
unpaid fees and reimbursable charges and expenses, shall be paid to Manager
within ten (10) days after delivery to Lessee of an itemized statement of such
fees and payments and Manager shall be entitled to exercise the right of set-off
provided in Section 10.16 below with respect to such fees, charges and expenses.
Manager shall deliver to Lessee, or such other person or persons as Lessee may
designate, copies of all books and records of the Hotel and all funds in the
possession of Manager belonging to Lessee and received by Manager pursuant to
the terms of this
18
<PAGE>
Agreement, and shall assign, transfer or convey to such person or persons all
service contracts and personal property relating to or used in the operation and
maintenance of the Hotel, except any personal property which is owned by
Manager. Manager, at its cost and expense, shall remove all signs that it may
have placed at the Hotel indicating that it is the manager of same and replace
and restore any damage resulting therefrom. Manager shall also, for a period of
thirty (30) days after such expiration or termination, make itself available to
consult with and advise Lessee or such other person or persons regarding the
operation and maintenance of the Hotel at a consultation fee, and with an
accounting fee, to be agreed upon between Manager and Lessee.
Section 8.5. Termination Upon Termination of Participating Lease.
------------------------------------------------------------------
This Agreement shall terminate upon termination of the Participating Lease.
ARTICLE IX.
APPLICABLE LAW AND ARBITRATION
------------------------------
Section 9.1. Applicable Law. The interpretation, validity and
----------------------------
performance of this Agreement shall be governed by the procedural and
substantive laws of the State of Texas. If any judicial authority holds or
declares that the law of another jurisdiction is applicable, this Agreement
shall remain enforceable under the laws of that jurisdiction.
Section 9.2. Arbitration of Financial Matters.
----------------------------------------------
(a) Matters to be Submitted to Arbitration. In the case of a dispute
--------------------------------------
with respect to any of the following matters, either party may submit such
matter to arbitration which shall be conducted by the Accountants (as defined in
Section 9.2(b) below):
(i) Computation of the Management Fees;
(ii) Reimbursements due to Manager under the provisions of
Section 10.14;
(iii) Any adjustment in the Minimum Balance under the provisions
of Section 3.1 (d);
(iv) Any adjustment in dollar amounts of insurance coverages
required to be maintained hereunder; and
(v) Any dispute concerning the approval of an Operating Budget.
All disputes concerning the above matters shall be submitted to the Accountants.
The decision of the Accountants with respect to any matters submitted to them
under this Section 9.2(a) shall be binding on both parties hereto.
(b) The Accountants. The "Accountants" shall be one of the so-called
---------------
"Big Six" firms of certified public accountants, represented by a partner or
manager level
19
<PAGE>
employee who has personal experience with the hotel industry and hotel
operations. Lessee and Manager may select any one of such public accounting
firms, notwithstanding any existing relationships which may exist between Lessee
or Manager and such accounting firm. The party desiring to submit any matter to
arbitration under Section 9.2(a) shall do so by written notice to the other
party, which notice shall set forth the items to be arbitrated and such party's
choice of an accounting firm. The party receiving such notice shall within 15
days after receipt of such notice either approve such notice, or designate one
of the remaining firms by written notice back to the first party, and the first
party shall within 15 days after receipt of such notice either approve such
choice or disapprove the same. If both parties shall have approved one of the
firms under the preceding sentence, then such firm shall be the "Accountants"
for the purposes of arbitrating the dispute. If the parties are unable to agree
on an accounting firm, then the accounting firm selected by each party shall
represent the respective parties and the two firms so selected shall select a
third firm, and the three firms so selected shall be the "Accountants" for such
purpose. The Accountants shall be required to render a decision in accordance
with the procedures described in Section 9.2(c) within 15 days after being
notified of their selection. The fees and expenses of the Accountants with
respect of each disputed item will be paid by the non-prevailing party. In the
event that either Lessee or Manager cannot locate an "Accountant" satisfying all
of the above criteria who is willing to act as an arbitrator hereunder, the
matter shall be submitted to the American Arbitration Association for
arbitration in accordance with the procedures set forth herein.
(c) Procedures. In all arbitration proceedings submitted to the
-----------
Accountants, the Accountants (either the mutually agreed upon firm acting alone
or two of the three firms selected to constitute a panel) shall be required to
agree upon and approve in writing the substantive position advocated by Lessee
or Manager with respect to each disputed item. Any decision rendered by the
Accountants that does not reflect the position advocated by Lessee or Manager
shall be beyond the scope of authority granted to the Accountants and,
consequently, may be overturned by either party. All proceedings by the
Accountants shall be conducted in accordance with the Uniform Arbitration Act,
except to the extent the provisions of such act are modified by this Agreement
or by the mutual agreement of the parties. Unless Lessee and Manager agree
otherwise, all arbitration proceedings shall be conducted at the Hotel.
(d) Performance During Disputes. It is mutually agreed that during
----------------------------
any kind of bona fide, good faith controversy, claim, disagreement or dispute,
including a dispute as to the validity of this Agreement, Manager shall remain
in possession of the Hotel as Manager, and Lessee and Manager shall continue
their performance of the provisions of this Agreement and its exhibits until
termination of Manager's services pursuant to the terms of this Agreement.
20
<PAGE>
ARTICLE X.
GENERAL PROVISIONS
------------------
Section 10.1. Authorization. Lessee and Manager represent and
----------------------------
warrant to each other that their respective companies have full power and
authority to execute this Agreement and to be bound by and perform the terms
hereof. On request, each party shall furnish to the other evidence of such
authority.
Section 10.2. Relations. Manager and Lessee shall not be construed
------------------------
as joint venturers or partners of each other by reason of this Agreement and
neither shall have the power to bind or obligate the other except as set forth
in this Agreement.
Section 10.3. Manager's Contractual Authority in the Performance of
--------------------------------------------------------------------
this Agreement. Manager is authorized to make, enter into and perform in the
- --------------
name of and for the account of Lessee any contracts deemed necessary by Manager
to perform its obligations under this Agreement. In exercising its authority
hereunder, Manager shall be entitled to execute and enter into contracts without
the specific approval of Lessee so long as each such contract (i) requires
expenditures or otherwise establishes liability of twenty-five thousand dollars
($25,000) or less and (ii) has a term (including options in favor of Manager or
Lessee to renew) of one (1) year or less or can be canceled without penalty upon
sixty (60) days' notice or less. Any contract that does not satisfy the
conditions set forth in the preceding sentence shall require the prior approval
in each instance of Lessee, regardless whether such expenditure is authorized in
an applicable budget, unless the form of the contract proposed to be entered
into has been approved in advance by Lessee. Lessee agrees promptly to respond
to any request for approval and further agrees that its consent shall not be
unreasonably withheld or delayed. Manager shall be authorized to enter into
contracts with affiliates of Manager, but only so long as Lessee shall have
approved in advance by approved budget or otherwise the cost of the service or
product to be provided by such affiliate and only if in accordance with the
terms of this Agreement. Manager shall have no authority to enter into any
contract in the name of or for the account of the Partnership.
Section 10.4. Further Actions. Lessee and Manager agree to execute
------------------------------
all contracts, agreements and documents and to take all actions reasonably
necessary to comply with the provisions of this Agreement and the intent hereof.
Section 10.5. Successors and Assigns. This Agreement is not
-------------------------------------
assignable by Manager without the prior written consent of Lessee.
21
<PAGE>
Lessee shall have the right to assign this Agreement to any party acquiring or
leasing Lessee's interest in the Hotel, if such assignee or lessee shall
expressly assume, or be deemed to assume, the obligations of Lessee arising
hereunder. Otherwise, Lessee shall not have the right to assign this Agreement
without the prior written consent of Manager, which consent shall not be
unreasonably withheld or delayed.
Section 10.6. Notices. All notices or other communications provided
----------------------
for in this Agreement shall be in writing and shall be either hand delivered,
delivered by certified mail, postage prepaid, return receipt requested,
delivered by an overnight delivery service, or delivered by facsimile machine
(with an executed original sent the same day by an overnight delivery service),
addressed as set forth on Exhibit "A". Notices shall be deemed delivered on the
date that is four (4) calendar days after the notice is deposited in the U.S.
mail (not counting the mailing date) if sent by certified mail, or, if hand
delivered, on the date the hand delivery is made, or if delivered by facsimile
machine, on the date the transmission is made if receipt is confirmed. If given
by an overnight delivery service, the notice shall be deemed delivered on the
next business day following the date that the notice is deposited with the
overnight delivery service. The addresses provided on Exhibit "A" may be
changed by any party by notice given in the manner provided herein.
Section 10.7. Documents. Lessee shall furnish Manager copies of all
------------------------
leases, title documents, property tax receipts and bills, insurance statements,
all financing documents relating to the Hotel and such other documents
pertaining to the Hotel as Manager shall request.
Section 10.8. Defense. Manager shall defend and/or settle any claim
----------------------
or legal action brought against Manager or Lessee, individually, jointly or
severally, in connection with the operation of the Hotel. Manager or the
applicable insurance carrier shall retain legal counsel and Manager shall
supervise legal counsel, accountants and such other professionals, consultants
and specialists as Manager deems appropriate to defend and/or settle any such
claim or cause of action. Lessee shall have the right to actively participate
in the defense of any such claim or cause of action in which Lessee is a named
defendant. Manager shall confer with Lessee concerning any settlement proposal
that Manager is considering accepting, regardless whether Lessee is a named
party, but Lessee's approval shall not be required if Lessee is not a named
party and the settlement is covered by insurance. Lessee's approval shall be
required with respect to any proposed settlement of any claim or cause of action
in which Lessee is a named party or that is not covered by insurance (excluding
any deductible amount specified in the applicable policy of insurance). All
liabilities, costs, and expenses, including attorneys' fees and disbursements,
incurred in defending and/or settling any such claim or legal action which are
not covered by insurance shall be an expense of Lessee or Manager as applicable
under the provisions of Section 5.
22
<PAGE>
Section 10.9. Waivers. No failure or delay by Manager or Lessee to
----------------------
insist upon the strict performance of any covenant, agreement, term or condition
of this Agreement, or to exercise any right or remedy consequent upon the breach
thereof, shall constitute a waiver of any such breach or any subsequent breach
of such covenant, agreement, term or condition. No covenant, agreement, term,
or condition of this Agreement and no breach thereof shall be waived, altered or
modified except by written instrument. No waiver of any breach shall affect or
alter this Agreement, but each and every covenant, agreement, term and condition
of this Agreement shall continue in full force and effect with respect to any
other then existing or subsequent breach thereof.
Section 10.10. Changes. Any change to or modification of this
-----------------------
Agreement, including, without limitation, any change in the application of this
Agreement to the Hotel, must be evidenced by a written document signed by both
the Manager and the Lessee.
Section 10.11. Captions. The captions for each Article and Section
------------------------
are intended for convenience only.
Section 10.12. Severability. If any of the terms and provisions
----------------------------
hereof shall be held invalid or unenforceable, such invalidity or
unenforceability shall not affect any of the other terms or provisions hereof.
If, however, any material part of a party's rights under this Agreement shall be
declared invalid or unenforceable (specifically including Manager's right to
receive its Management Fees) the party whose rights have been declared invalid
or unenforceable shall have the option to terminate this Agreement upon thirty
(30) days' written notice to the other party, without liability on the part of
the terminating party.
Section 10.13. Interest. Any amount payable to Manager or Lessee by
------------------------
the other which has not been paid when due shall accrue interest at the lesser
of: (i) the highest legal limit in the state in which the Hotel is located, or
(ii) two percentage points (2%) over the published base rate of interest charged
by Citibank, N.A., New York, New York, to borrowers on ninety (90) day unsecured
commercial loans, as the same may be changed from time to time.
Section 10.14. Reimbursement. The performance by Manager of its
-----------------------------
responsibilities under this Agreement is conditioned upon Lessee providing
sufficient funds to Manager on a timely basis to enable Manager to perform its
obligations hereunder. Nevertheless, Manager shall be entitled, at its option
and without any obligation to do so, after first providing not less than ten
(10) days' prior written notice to Lessee specifying the obligations to be
satisfied and the amount of money to be advanced, to advance funds or contribute
property on behalf of the Lessee to satisfy obligations of Lessee in connection
with the Hotel and this Agreement; provided, however, that Manager shall not be
required to give prior written notice to advance funds for the purpose of paying
compensation for Hotel personnel within the Operating Budget or to remedy an
emergency or with respect to any other advance of funds for which provision is
otherwise made herein. Manager shall keep appropriate records to document all
reimbursable expenses paid by Manager, which records
23
<PAGE>
shall be made available for inspection by Lessee or its agents upon request.
Lessee agrees to reimburse Manager with interest upon demand for money paid or
property contributed by Manager to satisfy obligations of Lessee in connection
with the Hotel and this Agreement. Interest shall be calculated at the rate set
forth in Section 10.13 from the date Manager remits the funds or contributes the
property for the satisfaction of such obligation to the date reimbursement is
made.
Section 10.15. Agreement. This Agreement is not, and shall not be
-------------------------
deemed at any time to be or to create, an interest in real estate or a lien or
other encumbrance of any kind whatsoever against the Hotel or the land on which
it is erected.
Section 10.16. Setoff. Other than as provided in Sections 9, 10 and
----------------------
11 of Exhibit B hereto, Manager shall have the right to set off against the
Hotel Accounts and all other amounts payable to the Lessee hereunder any amount
due and payable to Manager under this Agreement.
Section 10.17. Third Party Beneficiary. This Agreement is
---------------------------------------
exclusively for the benefit of Manager and Lessee and it may not be enforced by
any party other than such parties and shall not give rise to liability to any
third party other than the authorized successors and permitted assigns of such
parties.
Section 10.18. Brokerage. Manager and Lessee represent and warrant
-------------------------
to each other that neither has sought the services of a broker, finder or agent
in this transaction, and neither has employed, nor authorized, any other person
to act in such capacity. Manager and Lessee each hereby agrees to indemnify and
hold the other harmless from and against any and all claims, loss, liability,
damage or expenses (including reasonable attorneys' fees) suffered or incurred
by the other party as a result of a claim brought by a person or entity engaged
or claiming to be engaged as a finder, broker or agent by the indemnifying
party.
Section 10.19. Survival of Covenants. Any covenant, term or
-------------------------------------
provision of this Agreement which, in order to be effective, must survive the
termination of this Agreement, shall survive any such termination.
Section 10.20. Estoppel Certificate. Manager and Lessee each agrees
------------------------------------
to furnish to the other party, from time to time upon request, an estoppel
certificate in such reasonable form as the requesting party may request stating
whether there have been any defaults under this Agreement known to the party
furnishing the estoppel certificate and such other information relating to the
Hotel as may be reasonably requested.
Section 10.21. Other Agreements. Except to the extent as may now or
--------------------------------
hereafter be specifically provided, nothing contained in this Agreement shall be
deemed to modify any other agreement between Lessee and Manager with respect to
the Hotel or any other property or with respect to the Franchise License
Agreement or the Participating Lease.
24
<PAGE>
Section 10.22. Periods of Time. Whenever any determination is to be
-------------------------------
made or action is to be taken on a date specified in this Agreement, if such
date shall fall on a Saturday, Sunday or legal holiday under the laws of the
state of Texas and/or the state in which the Hotel is located, then in such
event said date shall be extended to the next day which is not a Saturday,
Sunday or legal holiday.
Section 10.23. Preparation of Agreement. This Agreement shall not be
----------------------------------------
construed more strongly against either party regardless of who is responsible
for its preparation.
Section 10.24. Exhibits. All exhibits attached hereto are
------------------------
incorporated herein by reference and made a part hereof as if fully rewritten or
reproduced herein.
Section 10.25. Counterparts. This Agreement may be executed in two
----------------------------
(2) or more counterparts, each of which shall be deemed an original.
Section 10.26. Attorney's Fees and Other Cost. The parties to this
----------------------------------------------
Agreement shall bear their own attorney's fees in relation to negotiating and
drafting this Agreement. Should Lessee or Manager engage in litigation to
enforce their respective rights pursuant to this Agreement, the prevailing party
shall have the right to indemnity by the non-prevailing party for an amount
equal to the prevailing party's reasonable attorneys' fees, court costs and
expenses arising therefrom.
Section 10.27. Manager's Supervisor. Lessee acknowledges the special
------------------------------------
relationship of Manager's general manager/supervisor at the Hotel ("Supervisor")
to Manager and Supervisor's knowledge of Manager and that Manager would suffer
great loss and damage if this Agreement were terminated and Supervisor, or any
constituent of Supervisor, were engaged directly or indirectly for the
performance of Manager's duties hereunder or with respect to other similar
properties. Further, it would be difficult to ascertain the damages that might
result to Manager in such instance. Therefore, Lessee agrees that no
constituent of Supervisor shall be engaged or employed by Lessee or any related
person or entity in a management or management-related capacity, including
without limitation consultant services, with respect to the Hotel or with
respect to any hotel, motel or other overnight guest lodging related business
located within a one hundred (100) mile radius of the Hotel for a period of
twelve (12) months following termination of this Agreement by Lessee. Breach of
this covenant by Lessee shall be enforceable by Manager by injunctive relief or,
if unavailable or unsuccessful, then by suit for damages, if provable. This
Section shall survive any expiration or termination of this Agreement and shall
continue to bind the parties hereto in accordance with the terms hereof. The
covenant contained in this Section shall be construed as a covenant and
agreement independent of any other provision of this Agreement, and the
allegation or existence of any claim or cause of action of Lessee against
Manager, whether predicated on this Agreement or otherwise shall not constitute
a defense to the enforcement by Manager of the covenant contained herein.
25
<PAGE>
Section 10.28. Entire Agreement. This Agreement contains the entire
--------------------------------
agreement between Lessee and Manager regarding the management of the Hotel and
supersedes all prior agreements relating thereto.
26
<PAGE>
The parties have respectively caused this Agreement to be executed as
of the date set forth in the introductory paragraph above.
LESSEE:
AGH LEASING, L.P.
By: AGHL GP, Inc., its general partner
By:
--------------------------------------
Name:
Title:
MANAGER:
AMERICAN GENERAL HOSPITALITY, INC.
By: --------------------------------------
Name:
Title:
27
<PAGE>
EXHIBIT "A"
-----------
DEAL SPECIFIC TERMS
-------------------
Term: Twelve (12) years from the Effective Date.
- -----
Initial Minimum Balance for the Hotel Accounts: Twenty-Five Thousand Dollars
- -----------------------------------------------
($25,000.00).
Initial Lessee's Representatives: Steven D. Jorns and Kenneth E. Barr
- ---------------------------------
Disbursement Schedule:
- ----------------------
Each calendar month Manager shall disburse funds from the Hotel Accounts to
the extent available to pay the following costs and expenses, to the extent due
and payable or earned:
(a) monthly Base Rent and quarterly Participating Rent under the
Participating Lease;
(b) all fees, assessments and charges due and payable under the Franchise
License Agreement;
(c) the Basic Management Fee and the Incentive Management Fee (subject,
however, to the provisions of Paragraphs 9, 10 and 11 of Exhibit "B");
(d) all reimbursements or reimbursable expenses due Manager including,
without limitation, those reimbursements required under Sections
2.1(g) and 10.14 hereof;
(e) all other Operating Costs;
(f) all other Ownership Costs;
(g) additional costs and expenses to the extent requested by Lessee;
(h) repayment of any Operating Deficit Advances; and
(i) deposits into the Reserve Fund.
After the disbursements set forth above, any excess funds remaining in the
Hotel Accounts over the Minimum Balance shall be distributed to Lessee. If
after making the
A-1
<PAGE>
disbursements set forth above, there shall be a deficiency in the Minimum
Balance, Lessee shall within five (5) business days of Manager's written
request, provide such funds as may be required to maintain the Minimum Balance
in the Hotel Accounts.
<TABLE>
<CAPTION>
Notices:
- --------
<S> <C>
Lessee: Manager:
AGH Leasing, L.P. American General Hospitality, Inc.
3860 W. Northwest Hwy., Suite 300 3860 W. Northwest Hwy, Suite 300
Dallas, Texas 75220 Dallas, Texas 75220
Fax: (214) 351-0568 Fax: (214) 351-0568
Attn: Steven D. Jorns and/or Attn: Robert J. Karch and/or
Kenneth E. Barr Elizabeth Williams
with a copy for Lessee to: with a copy for Manager to:
Steven L. Lichtenfeld, Esq. Parker Nelson, Esq.
Battle Fowler LLP Calhoun & Stacy, PLLC
Park Avenue Tower 901 Main St., Suite 5700
75 East 55th Street Dallas, Texas 75202-3747
New York, NY 10022 Fax No. (214) 748-1421
Fax No. (212) 856-7812
</TABLE>
A-2
<PAGE>
EXHIBIT "B"
-----------
MANAGEMENT FEES
---------------
1. Defined Terms. Certain capitalized terms in this Exhibit "B",
--------------
are defined in Paragraph 8 below; other capitalized terms have the meaning given
such terms herein or in the Agreement.
2. Basic Management Fee. Subject to paragraphs 9, 10 and 11 below,
---------------------
commencing with the Effective Date and continuing during the Term of this
Agreement, Lessee shall pay to Manager a basic management fee (the "Basic
Management Fee"), payable monthly in an amount equal to one and one-half percent
(1.5%) (such percentage is referred to herein as the "Applicable Percentage") of
Adjusted Gross Revenues for the preceding calendar month, payable as soon as
Manager has closed the books for the applicable calendar month. Any overpayment
of the Basic Management Fee shall be refunded by Manager within sixty (60) days
after the end of each Term Year.
3. Incentive Management Fee. (a) Subject to paragraphs 9, 10 and 11
-------------------------
below, commencing with the first full Fiscal Quarter (as defined below)
following the Effective Date and continuing until the year ending December 31,
2000, Lessee shall pay to Manager an incentive management fee (the "Incentive
Management Fee") equal to .025% of Adjusted Gross Revenues during the applicable
Term Year for every 0.1% increase in the Adjusted Gross Revenues for such Term
Year over the Adjusted Gross Revenues for the preceding Term Year up to a
maximum Incentive Management Fee of 2.0% of Adjusted Gross Revenues for such
Term Year. The Incentive Management Fee shall be computed and paid within ten
(10) days after the end of each Fiscal Quarter during the Term Year (based on
the percentage increase in the Adjusted Gross Revenues for the applicable Term
Year through the end of such Fiscal Quarter over the Adjusted Gross Revenues for
the comparable period of time during the prior Term Year) and adjusted and
reconciled to reflect the actual results at the completion of each such Term
Year; if there has been any overpayment or underpayment of the Incentive
Management Fee to Manager for such Term Year as a result of the prior quarterly
payments, the amount thereof shall be either refunded or paid at such time, as
the case may be. In any event, any overpayment of the Incentive Management Fee
as of the end of any Term Year shall be refunded by Manager within sixty (60)
days after the end of such Term Year. In the event that any Term Year shall be
less than 365 days, the Incentive Management Fee for such Term Year shall be
computed by comparing the Adjusted Gross Revenues for such Term Year to the
Adjusted Gross Revenues for the comparable period of time during the prior Term
Year. As used herein, the term "Fiscal Quarter" shall mean any three month
period ending on March 31, June 30, September 30 or December 31.
(b) During the 60 day period prior to January 1, 2001 and every
fourth (4th) anniversary thereafter during the term of this Agreement (the
"Renegotiation Period"), the Lessee and Manager shall in good faith renegotiate
the terms of the Incentive Management Fee to reflect current market conditions,
the performance of the Hotel and comparable
B-1
<PAGE>
management and operating agreements that take into account the size and location
of the Hotel; provided, however, without the consent of the Lessee, the
Incentive Management Fee shall be limited to an aggregate maximum of 2.0% of
Adjusted Gross Revenues. Such renegotiated fee shall be reflected in an
amendment to this Agreement and shall be effective during the period commencing
with the expiration of the applicable Renegotiation Period and continuing for a
period of 4 years thereafter.
4. Accounting Reimbursement. Commencing with the Effective Date,
-------------------------
and continuing during the term of this Agreement, Lessee shall pay to Manager a
reimbursement of $1,500 per month, if the Hotel is a "full service" hotel
(containing a restaurant and meeting rooms), or $1,000 per month, if the Hotel
is a "limited service" hotel (the "Accounting Reimbursement"), for accounting
and financial management services rendered. At the beginning of the first Fiscal
Year following the first anniversary of this Agreement, and thereafter at the
beginning of each Fiscal Year for the balance of the term of this Agreement, the
Accounting Reimbursement will be adjusted annually by the CPI. The Accounting
Reimbursement shall be considered an Operating Expense.
5. Reimbursable Expenses. Subject to the provisions of Section 2.1,
----------------------
Lessee shall reimburse Manager for all reasonable out of pocket expenses
incurred by Manager for the account of and in connection with the operation of
the Hotel, such as reasonable travel expenses of Manager's executive personnel
incurred traveling to and from or on behalf of the Hotel, payroll processing,
and computer terminals placed at the Hotel for the transmission of data between
Manager and the Hotel. The intent being that the Manager shall not incur
operating expenses of the Hotel.
6. Books and Records. Manager shall maintain in the books and
------------------
records of the Hotel all Management Fees that have been paid and shall set forth
therein the accrual of all Management Fees that have been earned but are not yet
due and payable.
7. Proration. With respect to any calculation in this Exhibit "B"
----------
that is based on a Term Year that is not a full calendar year, such calculation
shall be prorated for any partial Term Year based on the actual number of days
elapsed in such partial Term Year that is applicable to the calculation.
8. Definitions. Unless otherwise expressly provided, each
------------
definition applies to each Term Year:
The term "Adjusted Gross Revenues" shall mean Gross Revenues less (a)
-------------------------
the following revenues actually received by the Hotel and booked as part of
Gross Revenues: (i) any gratuities or service charges added to a customer's
bill; (ii) any sales taxes, excise taxes, gross receipt taxes, admission taxes,
entertainment taxes, and tourist taxes or charges; (iii) any proceeds from the
sale or other disposition of the Hotel or its furnishings, equipment or other
capital assets, (iv) any fire, extended coverage or liability insurance
proceeds; (v) any condemnation awards; (vi) any proceeds of financing or
refinancing of the Hotel; and (b) the following that are actually paid or
credited after having been booked as part of Gross
B-2
<PAGE>
Revenues; (i) any credits or refunds made to customers, guests or patrons; (ii)
any sums and credits received by Lessee for lost or damaged merchandise:
The term "Gross Revenues" shall be defined as all revenues and income
----------------
of any nature derived directly or indirectly from the Hotel or from the use or
operation thereof, whether on or off the site, including total room sales, food
and beverage sales, if any, laundry, telephone, and facsimile revenues, other
income, rental or other payments from lessees, sublessees, licensees and
concessionaires (but not the gross receipts of such lessees, sublessees,
licensees or concessionaires, except for the gross receipts of any
lessee/concessionaire holding the liquor license(s) for the Hotel which shall be
included in Gross Revenues) and the proceeds of business interruption, use,
occupancy or similar insurance.
The term "Operating Costs" shall mean the entire cost and expense of
-----------------
maintaining, operating and supervising the operation of the Hotel and are
sometimes referred to as "Hotel Expenses" or "Expenses of the Hotel." Operating
Costs shall be the sum of such costs and expenses which are normally charged as
a cost of operation under standard accounting practices, including but not
limited to: (i) the Management Fees; (ii) all amounts payable under the
Franchise License Agreement; (iii) all reimbursable expenses due Manager; (iv)
the cost of operating equipment and operating supplies, wages, salaries and
employee fringe benefits, advertising and promotional expenses, the cost of
personnel training programs, utility and energy costs, operating licenses and
permits, grounds and landscaping maintenance costs and equipment rentals; (v)
all expenditures made for maintenance and repairs to keep the Hotel in good
condition and repair, specifically excluding capitalized expenditures for
capital replacements; (vi) premiums and charges on the insurance coverages
specified in Exhibit "C" and in the Participating Lease (to the extent not
covered in either Exhibits "C" or "D"); and (vii) audit, legal and other
professional or special fees pertaining to the Hotel or the operation thereof.
Operating Costs do not include Ownership Costs.
The term "Ownership Costs" shall mean (i) depreciation of the Hotel,
-----------------
furnishings, fixtures and equipment; (ii) rental pursuant to a ground lease, if
any, or any other lease payments; (iii) debt service (interest and principal) on
any mortgage(s) encumbering the Hotel, including the Financing Documents; (iv)
property taxes and assessments; (v) amortization of preopening expenses; (vi)
expenditures for capital replacements (to the extent actually capitalized rather
than expensed); (vii) premiums for the insurance coverages specified in Exhibit
"D"; (viii) equipment rentals for capitalized leases; (ix) administrative and
general expenses and disbursements of Lessee, including compensation of
employees of Lessee; (x) Federal, State and local Franchise and Income Taxes;
(xi) amortization of bond discounts and mortgage expenses; (xii) such other
costs or expenses which are normally treated as "Ownership Costs" under the
standard GAAP accounting practices (which are in accordance with generally
accepted accounting principles and are substantially similar to the Hotel and
Motel Standard System of Accounts); (xiii) repayment of any Operating Deficit
Advances;
B-3
<PAGE>
(xiv) deposits into the Reserve Fund; and (xv) payments of rent (base rent and
percentage rent) due under the Participating Lease.
The term "Term Year" shall mean (i) with respect to the calendar year
-----------
during which the Effective Date occurs, the period ending on the last day of
such calendar year; (ii) with respect to each subsequent calendar year during
the Term other than the last, a twelve month period ending on the anniversary
date of the end of the first Term Year, and (iii) with respect to the calendar
year during which the end of the Term occurs, the period commencing at the end
of the previous Term Year and ending on the date the Term ends.
9. Subordination of Management Fees. Payment of the Basic
---------------------------------
Management Fee and the Incentive Management Fee shall be subordinated to the
payment of rent (base rent and participating rent) due under the Participating
Lease. In the event that there are insufficient funds in the Hotel Accounts to
pay all of the base rent and participating rent under the Participating Lease,
the Operating Costs and the Ownership Costs, the payment of any Basic and
Incentive Management Fees owed to Manager shall be deferred (without interest)
to such time as there are sufficient funds in the Hotel Accounts to make such
payments.
10. Suspension of Payments During Events of Default Under the
---------------------------------------------------------
Participating Lease. Upon written notice from the Partnership of the occurrence
- --------------------
of any monetary Event of Default by the Lessee under the Participating Lease or
any default under that certain promissory note given by Lessee to Lessor in
connection with the transfer of certain personal property at the Hotel (the
"FF&E Note"), no further payments of any Basic and Incentive Management Fees
shall be made to the Manager during the continuation of such Event of Default or
default. If any sum is paid to Manager on account of any Basic or Incentive
Management Fee after the occurrence and during the continuation of a monetary
Event of Default under the Participating Lease or a default under the FF&E Note,
such sum shall be promptly redeposited by Manager in the appropriate Hotel
Accounts. If the Event of Default or default is subsequently cured, any Basic
and Incentive Management Fees owed to Manager for the period during which such
Event or Default or default continued shall be, subject to the terms of this
agreement, be thereafter paid (when otherwise due) to the extent of available
funds in the Hotel Accounts.
11. Limitation on Certain Management Fees.
--------------------------------------
(a) During the Term Years ending December 31, 1996, and December 31,
1997, the Basic and Incentive Management Fees will only be earned and paid to
the extent of any Available Lessee Income (as defined below) that is
attributable to Lessee operations during each of such years.
For this purpose: "Available Lessee Income" shall mean the product of
(i) the Applicable Percentage (as defined below) and (ii) Lessee Income (as
defined below).
"Applicable Percentage" shall mean, as of the end of any Term Year,
---------------------
Lessee income from the operations of the Hotel, divided by Lessee income from
the operations of all
B-4
<PAGE>
hotels (including the Hotel) leased to the Lessee by the Partnership, in each
case determined in accordance with GAAP and expressed as a decimal fraction.
"Lessee Income" shall mean, as of the end of any Term Year, (A) Lessee
-------------
income from the operation of all hotels (including the Hotel) leased to the
lessee by the Partnership (determined in accordance with GAAP) minus (B) to the
extent not previously deducted from Lessee income as set forth in clause (A),
the sum of (i) all rent payable to the Partnership under all leases between the
lessee and the Partnership, (ii) an allocable share of the Lessee's overhead
expenses that relate to hotels leased to the Lessee by the Partnership or its
affiliates and (iii) $50,000.
B-5
<PAGE>
EXHIBIT "C"
-----------
INSURANCE
---------
In accordance with and subject to the provisions of Section 2.1 (o),
Manager shall procure the insurance coverages (or operate the insurance
programs) hereinafter set forth and ensure that they are in full force and
effect on the Effective Date and that they remain in full force and effect
throughout the Term of this Agreement. All cost(s) and expense(s) incurred by
Manager in procuring the following insurance coverages (or operating the
insurance programs) shall be Operating Costs and shall be paid from the Hotel
Accounts:
<TABLE>
<CAPTION>
Coverages: Amounts of Insurance:
<S> <C>
At Lessee's Option: Workers
- ----------------------------
Compensation Insurance or Qualified
- -----------------------------------
Non-Subscriber Employee Injury Benefit Statutory or
- -------------------------------------- $1,000,000
Program ($200,000 deductible)
- -------
Employer's Liability $1,000,000
- --------------------
(Policy limits may be obtained by
purchasing an Umbrella Policy)
Fidelity (Employee Dishonesty) $1,000,000
- --------
Money and Securities Minimum of $50,000 Loss Inside/$50,000
- -------------------- Loss Outside
Hotel Operations Errors & Omissions $1,000,000
- -----------------------------------
Guest Property on Premises $5,000 per Claim
- --------------------------
Guest Property in Safes $100,000
- -----------------------
</TABLE>
All insurance coverages provided for under this Exhibit "C" shall be
effected by policies issued by insurance companies (i) that are authorized to do
business in the state in which the Hotel is located; and (ii) that are of good
reputation and of sound and adequate financial responsibility, having a Best
Rating of A-IX, or better, or a comparable rating if Best ceases to publish its
ratings or materially changes its rating standards or procedures.
Manager shall deliver to Lessee and the Partnership duly executed
certificates of insurance with respect to all of the policies of insurance
procured, including existing, additional and renewal policies.
C-1
<PAGE>
Each policy of insurance maintained in accordance with this Exhibit
"C", to the extent obtainable, shall specify that such policies shall not be
canceled or materially changed without at least thirty (30) days' prior written
notice to Lessee, Manager and the Partnership, except for cancellation due to
non-payment of premium which shall require ten (10) days' prior written notice
to Lessee, Manager and the Partnership.
Except as otherwise provided in the Agreement, Manager and Lessee each
waives, releases and discharges the other, but only to the extent of collectible
insurance proceeds, from all claims or demands which each may have or acquire
against the other or the other's subsidiaries, affiliates, directors, officers,
agents, employees, independent contractors or partners, with respect to any
claims for any losses, damages, liabilities or expenses (including attorneys'
fees) incurred or sustained by either of them on account of injury to persons or
damage to property or business arising out of the ownership, management,
operation and maintenance of the Hotel, regardless whether any such claim or
demand may arise because of the fault or negligence of the other party or its
subsidiaries, affiliates, officers, employees, directors, agents, partners or
independent contractors. Each policy of insurance maintained in accordance with
this Exhibit "C" shall contain a specific waiver of subrogation reflecting the
above.
All policies of insurance provided for under this Exhibit "C" shall be
carried in the name of the Manager. The Partnership shall be named as an
additional insured. Lessee's interest and that of any other applicable party to
the extent obtainable will be included in the coverage by an additional insured
endorsement.
Coverage afforded on behalf of the Lessee will be primary and will
name the Lessee and such other parties as Lessee shall specify as additional
insureds. Manager will also waive rights of subrogation against Lessee with
respect to Workers Compensation coverage.
All such policies of insurance shall be written on an "occurrence"
basis, with no per location aggregate limitation.
Either Manager, the Partnership or Lessee, by notice to the other,
shall have the right to require that the minimum amount of insurance to be
maintained with respect to the Hotel under this Exhibit "C" be increased to make
such insurance comparable with prudent industry standards and to reflect
increases in liability exposures, taking into account the size and location of
the Hotel.
C-2
<PAGE>
EXHIBIT "D"
-----------
INSURANCE
---------
In accordance with and subject to the provisions of Section 2.1(o),
Manager shall procure the insurance coverages (or operate the insurance
programs) hereinafter set forth and ensure that they are in full force and
effect on the Effective Date and that they remain in full force and effect
throughout the Term of this Agreement. All cost(s) and expense(s) incurred by
Manager in procuring the following insurance coverages (or operating the
insurance programs) shall be Ownership Costs and shall be paid from the Hotel
Accounts:
<TABLE>
<CAPTION>
Coverages: Amounts of Insurance:
<S> <C>
Builders Risk Completed value of the Hotel
- -------------
All risk for term of the initial Waiver of Co-Insurance
and any subsequent Hotel Subject to Policy Exclusions
construction and renovation.
Real and Personal Property 100% replacement value of building and
- -------------------------- contents
Blanket Coverage
Replacement Cost - all risk Waiver of Co-Insurance Subject to Policy
Boiler Machinery - written on a Exclusions
comprehensive form
Business Interruption Calculated yearly based on estimated
- --------------------- Hotel revenues.
Blanket Coverage for the
perils insured against under
Real and Personal Property in
this Exhibit "D". This
coverage shall specifically
cover Manager's loss of
applicable management fees.
The business interruption
insurance shall be for a
twelve (12) month indemnity
period.
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Lessee's Protective Liability $1,000,000
- -----------------------------
All risks from construction and
renovation occurring prior to the
Effective Date and all risks from
Hotel construction and renovation
projects costing more than
$250,000 occurring after the
Effective Date
Comprehensive General Liability* $10,000,000
- -------------------------------- per location
Including -
Premises - Operations
Products/Completed Operations
Contractual
Personal Injury
Liquor Liability/Dram Shop (if
applicable)
Elevators and Escalators
Valet Parking Away from Premises
Automobile Liability* $5,000,000
- ---------------------
Owned Vehicles
Non-Owned Vehicles
Uninsured Motorist where
required by statute
Garagekeepers
Automobile Physical Damage (Optional)
- -------------------------------------
Comprehensive (To value if insured)
Collision
(*General Liability and Auto Liability limits may be obtained
by purchasing an Umbrella Policy.)
</TABLE>
All insurance coverages provided for under this Exhibit "D" shall be
effected by policies issued by insurance companies (i) that are authorized to do
business in the state in which the Hotel is located; and (ii) that are of good
reputation and of sound and adequate financial responsibility, having a Best
Rating of A-IX, or better, or a comparable rating if Best ceases to publish its
ratings or materially changes its rating standards or procedures.
Manager shall deliver to Lessee and the Partnership duplicate copies of
either insurance policies or certificates of insurance (at Lessee's option) with
respect to all of the
D-2
<PAGE>
policies of insurance procured, including existing, additional and renewal
policies, and in the case of insurance nearing expiration, shall deliver
duplicate copies of the insurance policies or certificates of insurance with
respect to the renewal policies to Lessee and the Partnership not less than
thirty (30) days prior to the respective dates of expiration.
Each policy of insurance maintained in accordance with this Exhibit "D", to
the extent obtainable, shall specify that such policies shall not be canceled or
materially changed without at least thirty (30) days' prior written notice to
Lessee, the Partnership and Manager.
Except as otherwise provided in the Agreement, Manager and Lessee each
waives, releases and discharges the other, but only to the extent of collectible
insurance proceeds, from all claims or demands which each may have or acquire
against the other, or against the other's subsidiaries, affiliates, directors,
officers, agents, employees, independent contractors or partners, with respect
to any claims for any losses, damages, liabilities or expenses (including
attorneys' fees) incurred or sustained by either of them on account of injury to
persons or damage to property or business arising out of the ownership,
management, operation and maintenance of the Hotel, regardless whether any such
claim or demand may arise because of the fault or negligence of the other party
or its subsidiaries, affiliates, officers, employees, directors, agents or
independent contractors. Each policy of insurance maintained in accordance with
this Exhibit "D" shall contain a specific waiver of subrogation reflecting the
above.
All policies of insurance provided for under this Exhibit "D" shall be
carried in the name of the Partnership and Manager, and losses thereunder shall
be payable to the parties as their respective interests may appear. All
liability policies shall name the Lessee and any of its affiliated or subsidiary
companies which it may specify, and their respective directors, officers,
agents, employees and partners as additional named insureds. Manager will also
waive rights of subrogation against Lessee with respect to Workers Compensation
coverage.
All such policies of insurance shall be written on an "occurrence" basis.
Either Manager, the Partnership or Lessee, by notice to the other, shall
have the right to require the minimum amount of insurance to be maintained with
respect to the Hotel under this Exhibit "D" be increased to make such insurance
comparable with prudent industry standards and to reflect increases in liability
exposures, taking into account the size and location of the Hotel.
D-3
<PAGE>
EXHIBIT 10.9
FORM OF LOCK-UP AGREEMENT
_______________ __, 1996
[Name and address of
OP Unit Holder]
Gentlemen:
Reference is made to [INSERT NAME OF AGREEMENT], dated as of
------------------------
____________ __, 1996 (the "AGREEMENT"), between [ ], a [ ] and
American General Hospitality Operating Partnership, L.P., a Delaware limited
partnership (the "OPERATING PARTNERSHIP"), pursuant to which the undersigned
will receive interests in the Operating Partnership.
In order to induce the Operating Partnership to consummate the
transactions contemplated by the Agreement, the undersigned, intending to be
legally bound, hereby agrees that, without the prior written consent of a
majority of the Board of Directors of the general partner of the Operating
Partnership, American General Hospitality Corporation (the "COMPANY"), including
a majority of the independent directors of the Company, and Smith Barney Inc.
(the "UNDERWRITER"), for a twelve month period commencing on the date hereof
(the "LOCK-UP PERIOD") the undersigned will not, directly or indirectly, offer
to sell, sell, grant any option for the sale of, or otherwise dispose of, any
units of limited partnership interest ("OP UNITS") in the Operating Partnership
received pursuant to the Agreement or any shares of common stock of the Company,
$0.01 par value per share (the "STOCK"), issuable upon exchange of the OP Units
in accordance with the Exchange Rights Agreement (the "EXCHANGE AGREEMENT")
dated the date hereof among the undersigned, the Company and the other holders
of OP Units or pursuant to the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership.
The undersigned acknowledges that any sale or transfer of any OP Units
or Stock in violation of this letter will be null and void. The undersigned
acknowledges that it is impossible to measure the damages that will accrue to
the Company and/or the Underwriter by reason of a failure of the undersigned to
comply with the provisions of this letter. Therefore, if the Company and/or the
Underwriter shall institute any action or proceeding to enforce the provisions
hereof, the undersigned agrees that the Company and/or the Underwriter shall be
entitled to injunctive relief, and the undersigned waives, and shall not allege,
any claim or defense to such action or proceeding, including, without
limitation, any claim or defense that the undersigned has an adequate remedy at
law.
This letter shall not prohibit the undersigned from (i) exercising any
options to purchase Stock issued to the undersigned under the Company's 1996
Incentive Plan and/or
<PAGE>
the Company's Non-Employee Directors' Incentive Plan, (ii) in connection with an
exercise permitted by the preceding clause (i), delivering to the Company Stock
in payment of the exercise price of such options or the withholding taxes
payable in connection with such exercise, (iii) transferring OP Units to any
Affiliate (as defined below) of the undersigned, provided that such transferee
agrees in writing to the transfer restrictions described above, (iv) pledging
the OP Units and Stock which are subject to this Agreement to the Operating
Partnership or the Company, or to any financial institution as collateral for
any loan with respect to which the undersigned is personally liable, or (v)
exercising its rights pursuant to the Exchange Agreement. As used herein, the
term "AFFILIATE" shall mean any Person that, directly or indirectly, through one
or more intermediaries, controls, is controlled by or is under common control
with a specified Person, and, with respect to an individual, shall include such
Person's immediate family or a trust for the benefit thereof.
Very truly yours,
_____________________________
Signature
_____________________________
Name (Please Print or Type)
<PAGE>
Exhibit 10.10
CONFIDENTIAL
------------
The exhibit ("Guaranty") of this Exhibit 10.10 has not been included as an
exhibit to the Registration Statement. The Registrant agrees to furnish
supplementally a copy of any such omitted schedule or exhibit upon request
June 12, 1996
American General Hospitality Operating Partnership, L.P.
3860 W. Northwest Highway
Dallas, Texas 75220
Attn: Mr. Kenneth E. Barr
American General Hospitality Corporation
3860 W. Northwest Highway
Dallas, Texas 75220
Attn: Mr. Kenneth E. Barr
Ladies and Gentlemen:
Societe Generale, Southwest Agency ("SocGen") and Bank One, Texas, N.A. ("BOT")
(SocGen and BOT are hereinafter collectively referred to as the "Arrangers") are
pleased to advise you that each such institution is willing, subject to the
terms and conditions contained in this letter and in the attached Summary of
Terms and Conditions (the "Term Sheet"), to each commit up to $50,000,000 for a
commitment in the aggregate of up to $100,000,000 (the "Commitment") toward a
$100,000,000 Senior Secured Revolving Credit (the "Facility") in favor of
American General Hospitality Operating Partnership, L.P., a Delaware limited
partnership ("Borrower"), a subsidiary of American General Hospitality
Corporation ("Company"), a Delaware corporation qualifying as a real estate
investment trust to be formed by American General Hospitality, Inc. and its
affiliates ("American General") for the purpose of providing a portion of the
purchase price for acquiring hotels, renovating hotels, refinancing existing
indebtedness for acquired hotels, providing for general corporate purposes and
to pay related fees and expenses of Borrower, Company and American General.
Upon your acceptance of this Commitment Letter, the Arrangers will form a group
of financial institutions (together with SocGen and BOT, the "Banks") acceptable
to the Arrangers, for which SocGen will act as Structuring Agent and BOT will
serve as Administration Agent. The Administration Agent and the Structuring
Agent are hereinafter referred to as the "Agents". No other titles may be
awarded without the mutual consent of the Agents and Borrower.
The various fees payable to the Arrangers and to the Agents in connection with
the Facility are set forth in a separate letter of even date herewith (the "Fee
Letter").
<PAGE>
American General Hospitality, Inc.
June 12, 1996
Page 2
The Term Sheet attached hereto and incorporated herein by this reference, sets
forth certain terms and conditions which will govern the Facility. This letter
and the Term Sheet are not meant to be and shall not be construed as an attempt
to define all of the terms and conditions of the Facility which shall be set
forth in the definitive financing agreements.
To assist the Arrangers in their syndication effort, you agree to reasonably
assist and cooperate with the Arrangers in their syndication efforts, including,
but not limited to promptly preparing and providing upon their request all
information reasonably deemed necessary by them to complete successfully the
syndication of the Facility, including but not limited to information and
projections prepared by you or on your behalf relating to the transactions
contemplated hereby. Subject to the provisions of the Term Sheet requiring
that the Arrangers retain a percentage of the Commitment, the Arrangers reserve
the right to allocate the Commitments offered by the Banks.
In addition to the conditions to funding or closing set forth in the Term Sheet,
SocGen and BOTs' Commitment to provide financing hereunder is subject to, among
other conditions, (i) the negotiation and execution of a definitive bank credit
agreement, security documentation, and other related documentation satisfactory
to the Agents, (ii) there being no material adverse change in the reasonable
opinion of the Agents in the financial condition, business, operations,
properties or prospects of Borrower, Company, American General and the hotels
(the "Initial Hotels") to be initially acquired by Borrower and Borrower's
subsidiaries from the date of the financial statements (the "Financial
Statements") most recently provided prior to the date hereof and (iii) at the
time of the proposed initial funding, no injunction or other restraining order
shall have been issued or filed, or a hearing therefor be pending or noticed;
provided however that if a material adverse change should occur for American
General or any of the other events stated in clauses (b), (d) or (e) of the
Termination paragraph of this letter should occur for American General, the
Commitment shall not terminate if Borrower can by the expiration date of this
Commitment replace American General as manager for the Hotels with a reputable,
nationally-known, third party hotel manager acceptable to the Agents.
As you know, we have submitted this letter after conducting certain due
diligence. Our Commitment is subject to the satisfactory completion of our due
diligence. In the event that the results of our continuing due diligence
inquiries are, in our reasonable opinion, unsatisfactory, the Arrangers may, in
their sole discretion, suggest alternative financing structures that insure
adequate protection for the Banks.
Whether or not the transactions contemplated hereby are consummated, Borrower
and Company jointly and severally hereby agrees to indemnify and hold harmless
each of the Arrangers and the Agents, and their respective directors, officers,
employees and affiliates (each, an "indemnified person") from and against any
and all losses, claims, damages, liabilities (or actions or other proceedings
commenced or threatened in respect thereof) and
<PAGE>
American General Hospitality, Inc.
June 12, 1996
Page 3
expenses that arise out of, result from or in any way relate to this Commitment
Letter (subject to any limitations contained in the Fee Letter or the
Reimbursement Agreement described below), or the providing or syndication of the
Facility, and to reimburse each indemnified person, upon its demand, for any
legal or other expenses incurred in connection with investigation, defending or
participating in any such loss, claim, damage, liability or action or other
proceeding (whether or not such indemnified person is a party to any action or
proceeding out of which any such expenses arise), other than any of the
foregoing claimed by any indemnified person to the extent incurred by reason of
the gross negligence or willful misconduct of such person. Neither the
Arrangers nor the Agents, nor any of their affiliates, shall be responsible or
liable to Borrower, Company, American General or any other person for any
consequential damages which may be alleged. The obligations contained in this
paragraph will survive the closing of the Facility.
In addition, the Borrower and Company jointly and severally hereby agree to
reimburse the Arrangers and the Agents from time to time upon demand for the
reasonable out-of-pocket costs and expenses of Bracewell & Patterson, L.L.P.,
special counsel to SocGen and the Agents, and the reasonable out-of-pocket costs
and expenses of Donohoe, Jameson & Carroll, P.C., special counsel to BOT, in
connection with the Facility, regardless of whether the credit agreement is
executed or the Facility closes (subject to any limitations contained in the Fee
Letter or the Reimbursement Agreement. The Borrower agrees that the Borrower
remains bound by the terms of that certain Letter Agreement dated May 21, 1996
executed by the Agents and the Borrower which Letter Agreement governs the
obligation of the Borrower to reimburse the Agents for certain expenses (the
"Reimbursement Agreement").
The terms contained in this letter, the Fee Letter and the Term Sheet are
confidential and, except for disclosure to your Board of Directors, officers and
employees, professional advisors retained by you in connection with this
transaction, or as may be required by law, may not be disclosed in whole or in
part to any other person or entity without our prior written consent, except
that, following your acceptance hereof, you may make public disclosure of this
letter and may file a copy of this letter and the Term Sheet in any public
record in which it is required to be filed, based upon the advice of your
counsel.
Termination. This offer will terminate on June 14, 1996 unless on or before
- -----------
that date you sign and return an enclosed counterpart of this letter and the Fee
Letter, and it will expire on July 31, 1996 if the initial borrowing has not
occurred on or before that date. Furthermore, the Arrangers may terminate this
Commitment Letter and their obligations hereunder to provide the Facility if
prior to the closing of the transactions contemplated hereby (a) Borrower,
Company or American General shall fail or refuse to comply in a timely manner
with any of the terms or conditions set forth herein, (b) any material adverse
change since the date of this Commitment Letter shall occur with respect to any
of Initial Hotels, or the business, assets, condition (financial or otherwise)
or operations of Borrower, Company or American General at any time prior to the
closing of the transactions contemplated hereby,
<PAGE>
American General Hospitality, Inc.
June 12, 1996
Page 4
(c) any part of two (2) of the Initial Hotels shall have suffered a casualty or
shall have been taken in condemnation or other like proceeding, or any such
proceeding is pending or threatened at the time of the closing of the
transactions contemplated hereby; provided however, that if such casualty or
condemnation shall occur with respect to only one (1) of the Initial Hotels,
Borrower and the Agents shall work together in good faith to modify covenants 6,
11, 12 and 14 of the Borrower/Company/Affiliated Entity/Covenants section of
the Term Sheet if needed to more accurately reflect the characteristics of the
remaining Initial Hotels, (d) Borrower, Company or American General shall be
insolvent or involved as debtor in any arrangement, bankruptcy, reorganization
or insolvency proceeding, or (e) the Arrangers determine that the funding of the
Facility or performance of Borrower's, Company's or American General's duties or
obligations under this Commitment Letter (including the Term Sheet), the Fee
Letter, the Reimbursement Agreement or the documents evidencing or securing the
Facility would violate, or be prohibited by, applicable Federal, State or local
law, including usury limitations, or any applicable rule, order, statute,
judgment or decree of any legislative body, board, court, tribunal, commission,
or governmental authority or agency having jurisdiction over the Arrangers.
Furthermore, this Commitment Letter has been issued to Borrower on the basis of
(i) certain information and materials provided by Borrower, Company or American
General to the Arranger's, (ii) all representations, information, exhibits, data
and other material submitted with and in support of the loan application for the
Facility, and (iii) the agreement of Borrower and Company that hereafter the
Agents shall be permitted to conduct due diligence in a manner satisfactory to
the Agents. The Arrangers may terminate this Commitment Letter and the
obligations of the Arrangers hereunder to provide the Facility if, (i) in the
reasonable opinion of the Arrangers, any information or documentation submitted
to the Arrangers proves to be inaccurate, incomplete or misleading in any
material respect, (ii) American General, Borrower, or Company withholds any
information which, in the reasonable opinion of the Arrangers, is material to
the decisions of the Arrangers to provide the Facility to Borrower, (iii) any of
the fees or expenses required to be paid by American General and Borrower
hereunder or under the Reimbursement Agreement are not paid when due, or (iv)
the ability of the Arrangers to conduct due diligence in a manner satisfactory
to the Arrangers is, in the reasonable opinion of the Arrangers, hampered in any
material respect. Notwithstanding any termination of this Commitment Letter,
the compensation, reimbursement and indemnification provisions hereof shall
survive any termination hereof (subject to any limitations contained in the Fee
Letter or the Reimbursement Agreement).
Borrower and Company hereby represent to the Arrangers that all representations
are true and accurate as of the date hereof and all information, exhibits, data
and other materials submitted with and in support of the requested Facility are
true, correct and complete as of the date hereof. Borrower and Company shall
immediately notify the Agents in the event any representation, information or
document provided to the Agents becomes inaccurate or misleading in any material
respect.
<PAGE>
American General Hospitality, Inc.
June 12, 1996
Page 5
The Commitment Letter, the Fee Letter, the Reimbursement Agreement and the Term
Sheet shall be governed by, and construed in accordance with, the internal laws
of the State of Texas without reference to principles of conflict of law. ALL
PARTIES TO THIS LETTER AGREEMENT IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN
ANY JUDICIAL PROCEEDING ARISING OUT OF THIS COMMITMENT LETTER, THE REIMBURSEMENT
AGREEMENT, THE FEE LETTER AND THE TERM SHEET OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY. IN THE EVENT OF LITIGATION, THIS COMMITMENT LETTER MAY BE
FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
This Commitment Letter, the Fee Letter and the Term Sheet shall not be
assignable by you without the prior written consent of Agents and may not be
amended or any provision hereof or thereof waived or modified except by an
instrument in writing signed by each of the parties hereto.
This Commitment Letter is further conditioned on American General executing a
guaranty of Borrower's and Company's obligations under this Commitment Letter,
the Fee Letter and the Term Sheet for the benefit of the Arrangers and Agents in
the form attached hereto as Exhibit "A".
This Commitment Letter, the Fee Letter, the Reimbursement Agreement and the Term
Sheet constitute the entire agreement among the parties pertaining to the
subject matter hereof and thereof and supersede all prior and contemporaneous
agreements, understandings, representations or other arrangements, whether
express or implied, written or oral, of the parties in connection therewith
except to the extent expressly incorporated or specifically referred to herein
or therein.
If the foregoing is satisfactory to you, please indicate your agreement and
acceptance below and return a copy of this letter to us. Upon your delivery to
us of a signed copy of this letter and the Fee Letter and payment of the initial
installment of the arrangement fee as set forth in the Fee Letter, this letter
agreement shall become a binding agreement under laws of the State of Texas as
of the date so accepted. This Commitment Letter and the Fee Letter may be
executed in multiple counterparts, each of which shall be an original, but all
of which shall constitute but one Commitment Letter and Fee Letter.
<PAGE>
American General Hospitality, Inc.
June 12, 1996
Page 6
We are pleased to have this opportunity and look forward to working with you.
Very truly yours,
SOCIETE GENERALE, SOUTHWEST AGENCY
By: /s/ Thomas K. Day
----------------------------------
Thomas K. Day
Vice President
BANK ONE, TEXAS, N.A.
By: /s/ Jeff S. Lindsey
----------------------------------
Name: Jeff S. Lindsey
-------------------------------
Title: Vice President
------------------------------
Accepted and Agreed to:
AMERICAN GENERAL HOSPITALITY OPERATING PARTNERSHIP, L.P.
By: AGH GP, Inc., its general partner
By: /s/ Kenneth E. Barr
----------------------------------
Name: Kenneth E. Barr
---------------------------
Title: Executive Vice President
--------------------------
AMERICAN GENERAL HOSPITALITY CORPORATION
By: /s/ Kenneth E. Barr
--------------------------------
Name: Kenneth E. Barr
---------------------------
Title: Executive Vice President and
Chief Financial Officer
--------------------------
<PAGE>
- --------------------------------------------------------------------------------
Summary of Terms
Borrower: American General Hospitality Operating Partnership, L.P.
(the "Borrower").
Structuring Agent Societe Generale, Southwest Agency ("SG") which will
maintain a minimum 15% of the Facility at all times.
Administrative
Agent Bank One. Texas, NA ("BOT") which will maintain a minimum
15% of the Facility at all times.
Lenders: A syndicate of lending institutions in addition to SG and
BOT (collectively the "Co-Lenders").
Facility Amount $100 million credit revolving facility (the "Acquisition
Facility" or the "Facility") which will include a letter of
credit sub-limit of up to $10 million. The Co-Lenders will
have risk participations in any letters of credit provided
by BOT in accordance with their pro rata portions of the
Facility.
Interest Rate: The interest rate on the principal balance outstanding
shall be 30-day, 60-day, or 90-day LIBOR (at the Borrower's
option) plus 1.85% per annum, payable monthly in arrears.
In the limited circumstances when funds are advanced or are
to be repaid on a date other than a LIBOR contract rollover
date, the Facility would bear interest at the Alternate
Base Rate ("ABR") plus 0.50% per annum, payable monthly in
arrears. ABR will be the higher of (i) the Prime commercial
lending rate (the "Prime Rate") as publicly announced by
BOT to be in effect from time to time and (ii) the Federal
Funds Rate (as published by the Federal Reserve Bank of New
York) plus 0.50%.
Letter of Credit
Fees: 1.85% per annum payable monthly in advance which will be
paid to the Co-Lenders in accordance with their pro rata
portions of the Letter of Credit and a $500.00 per Letter
of Credit issuance fee payable to BOT.
Interest
Calculation: Interest on LIBOR borrowings will be calculated on the
basis of the actual number of days elapsed over a 360-day
year.
Interest on ABR borrowings will be calculated on the basis
of the actual number of days elapsed over a 365-day year
Default Rate: During the continuance of any Event of Default (as defined
herein), all applicable margins will increase by 3.0% per
annum.
Late Payment
Charge: If the Borrower fails to pay any installment of interest
within 5 days of the due date, the Borrower shall pay a
late payment charge of 4% on the past due amount.
Maturity: Initial maturity three years following closing of the
facility but not later than July 31, 1999. The Borrower
will be granted one, one-year extension (the "Renewal
Term") option subject to: (i) no defaults and all other
conditions of the Facility being met. (ii) payment of a one
quarter of one percent (1/4%) extension fee on the then
outstanding balance of the Facility: (iii) capping of the
loan at its then outstanding balance and conversion to term
out of the Facility with quarterly principal payments
<PAGE>
Mr. Kenneth E. Barr June 11, 1996
American General Hospitality Operating Partnership, L.P. Page 2
based upon a fifteen-year, straight-line amortization
schedule; and (iv) satisfactory reappraisals of the
Hotels.
Use of Proceeds: The Facility shall be available to (i) refinance the
existing hotels securing the Facility (the "Existing
Hotels"), (ii) to finance the acquisition by the
Borrower of additional hotels (the "Additional Hotels"),
(iii) to finance the renovation and capital improvements
with respect to the Existing Hotels and Additional
Hotels (to be pre-approved by the Co-Lenders), and (iv)
for general corporate purposes.
Subsidiaries: Title to hotels can be held by the Borrower and in
certain wholly-owned, single-asset-partnerships or
limited-liability companies which may be owned directly
or indirectly by the Borrower and which are acceptable
to SG and BOT in their sole-and-absolute discretion (the
"Approved Subsidiaries"); provided, however, that all
representations, warranties and covenants for Hotels
owned by the Borrower are complied with by the Approved
Subsidiaries.
Borrower shall not own any assets or subsidiaries except
for (i) Hotels or Additional Hotels (and other assets
relating to the ownership of Hotels or Additional
Hotels) which are Collateral for the credit Facility,
(ii) Approved Subsidiaries which own Hotels or
Additional Hotels which are Collateral for the credit
facility, (iii) Approved Subsidiaries which own the DFW
South and the Marriott Courtyard Secaucus hotels
provided that the Borrower shall not have any liability
in connection with any debt secured by the DFW South
Hotel and Marriott Courtyard Secaucus hotels and (iv)
Approved Subsidiaries which own Hotels which are
Non-Borrowing Base Collateral, have no material
environmental concerns, and are not encumbered by any
indebtedness.
Percentage Lease
Agreements: The Borrower may lease The Hotels to tenants (the
"Tenants") acceptable to SG and BOT in their
sole-and-absolute discretion pursuant to lease
agreements (the "Percentage Lease Agreements")
acceptable to SG and BOT in their sole-and-absolute
discretion.
Collateral: The Facility will be secured by (i) a
cross-collateralized blanket first mortgage or lien on
the fee simple and leasehold interests in all the hotels
owned by the Borrower and Borrower's subsidiaries
(except the DFW South and the Marriott Courtyard
Secaucus hotels) at the time of closing and such other
hotels which, from time to time, may be added as
additional collateral at the request of the Borrower
(the "Hotels"), (ii) an assignment of all franchises,
agreements, profits and licenses with respect to the
Hotels to the extent permissible, (iii) an assignment of
the leases with the operator of each of the Hotels,
which leases will be subordinated to the mortgage and
security interest held by the Lenders; (iv) an
assignment of all liquor licenses; (v) security
interest in the Hotel cash (including the Tenant's Cash)
pertaining to the Hotels which will be swept daily into
a cash collateral account at BOT, general intangibles
and personal property of Borrower (including the
Borrower's cash), and (vi) a pledge of all of the
Tenant's assets relating to the operations of the
Existing Hotels or Additional Hotels which are
collateral for the Facility and the Tenant's interests
in the Percentage Lease Agreements, collectively the
"Collateral".
Additional
Collateral: At the Borrower's option, the Borrower may submit for
inclusion as Collateral Additional Hotels for approval
by Lenders holding at least 2/3 of the Facility, for
inclusion as Collateral. Additional Hotels will be
included as part of the Collateral pool provided that:
<PAGE>
Mr. Kenneth E. Barr June 11, 1996
American General Hospitality Operating Partnership, L.P. Page 3
(i) all terms and conditions pertaining to the Existing
Hotels are satisfied by the Additional Hotels;
(ii) the Additional Hotels are comparable in quality to
the Existing Hotels;
(iii) all of the terms and conditions of the Facility
will continue to be complied with after inclusion
of any such Additional Hotel in the Collateral.
Except for the DFW South and the Marriott Courtyard
Secaucus, any Additional Hotels not satisfying the
condition for inclusion as Collateral but satisfying the
conditions in the Subsidiary section of the Summary of
Terms shall be deemed "Non-Borrowing Base Collateral".
Review of Additional
Collateral: In a manner that is usual and customary for transactions
of this size and type, and which is consistent with the
initial review of the Collateral necessary to close the
Facility.
Non-Borrowing Base
Collateral: If the Non-Borrowing Base Collateral is located in a state
without material mortgage or intangible taxes and can
otherwise be encumbered without a material adverse effect
to the Borrower, the Non-Borrowing Base Collateral shall
be pledged like the Collateral. If such taxes are
material or such encumbrance shall materially adversely
effect the Borrower, the Non-Borrowing Base Collateral
shall be pledged like the Collateral except no mortgage
need to be given until an Event of Default occurs. No
title insurance will be required in either case.
Commitment Fee: The sum of: a) three fourths of one percent (3/4%) of the
Acquisition Facility (which payment shall be allocated to
each syndicate lender on a pro rata basis); and
b) $250,000 which represents the up-front payment of the
maximum first year's Fee on Unused Portion.
Fee on Unused
Portion: Beginning in year two, one quarter of one percent (1/4%)
per annum of the average daily unused portion of the
Facility amount calculated on a 360-day year, payable
quarterly in arrears. At the end of each quarter in the
first year of the Facility. Borrower shall be refunded
the difference between $62,500 and the amount which would
have been payable based upon a one quarter of one percent
(1/4%) per annum fee on the average daily unused portion
of the Facility amount calculated on a 360-day year basis.
Payment of Fees: At the Borrower's option, the Facility may be closed on
the date of the Borrower's initial public offering with
the first funding of the Facility on such date or the
Facility may be closed into escrow. The Structuring Fee
and the Commitment Fee will be considered earned by and
payable to the Lenders on the date of the first funding
under the Facility.
If the Facility is closed into escrow and escrow is not
broken and the first draw does not occur within 10 days
of the Facility closing into escrow, the Facility will be
Terminated, the Co-Lenders will not be obligated to make
any advances under the Facility but will be obligated to
refund all the fees paid into escrow less a $50,000
break-up fee (which shall be shared between SG and BOT)
and any costs incurred in association with the
negotiations, documentation, due diligence, and closing
on the
<PAGE>
Mr. Kenneth E. Barr June 11, 1996
American General Hospitality Operating Partnership, L.P. Page 4
Facility regardless of whether the transaction is closed
or funded. The escrow shall be terminated at the time of
the first advance under the Facility
Recourse Obligation
and Guaranty of
Payment Borrower's obligation in respect of the Facility shall
constitute the full personal recourse obligations of
Borrower. In addition, American General Hospitality
Corporation (the "Company") and each subsidiary of the
Borrower (except the owner of the DFW South and the
Marriott Courtyard Secaucus hotels) will provide a joint
and several guarantee of payment for all obligations under
the Facility and the landlord's obligations under the
Percentage Lease Agreements.
Any partner of the Borrower shall have the right to
severally assume any portion of the Facility Indebtedness
by executing and delivering to the Lenders an assumption
of liability agreement reasonably acceptable to the
Lenders.
Property Related
Items: A property condition report for each Hotel, which is
satisfactory to each Co-Lender, will be required prior to
closing. In addition to this report, we will require
satisfactory surveys, ground lease estoppels (when
appropriate) and comfort letter from franchisors.
Environmental
Report A phase-one environmental report for each Hotel, which is
satisfactory to each Co-Lender, will be required prior to
closing.
Environmental
Indemnification: Borrower and Company will provide a joint and several
indemnification agreement.
Advances: Advances under the Facility are permitted provided that:
1. No defaults exist under the Facility as evidenced by a
compliance certificate and current calculation of the
Borrowing Base;
2. All affirmative and negative covenants and
representations and warranties shall be complied with
both before and after the making of each advance under
the Facility;
3. The advances are limited to twice per month, with and
exception for advances made for acquisition purposes.
Furthermore, only one advance will be made per month
for property improvements.
4. Regarding any property renovation of which the total
renovation exceeds $15,000 per room, Advance requests
will be accompanied by a summary outlining the Advance
request vis-a-vis the approved renovation budget,
invoices, lien waivers and any additional information
which the Administrative Agent may reasonably request.
Optional Loan
Prepayments: Paydowns of the Facility shall be in the minimum amount of
$500,000 and in increments of $100,000. All prepayments of
LIBOR borrowings will be subject to payment by the
Borrower of LIBOR contract breakage costs.
Borrower/Company/
Affiliated Entity/
Covenants: Usual and customary for credit facilities for this size,
type and purpose including, without limitation, the
following:
<PAGE>
Mr. Kenneth E. Barr June 11, 1996
American General Hospitality Operating Partnership, L.P. Page 5
1. Restriction on the transfer or further encumbrance of
the Hotels;
2. Facility Advances - The aggregate advances outstanding
under the Facility shall not exceed the lesser of (a)
40% of the aggregate appraised value of the Hotels
(appraised value will initially be based upon the "As
Is" value of a property and will based upon the "As
Improved" value of a property once the improvements are
completed in accordance with the budget as previously
approved by the Lenders); (b) 40% of the aggregate
purchase price (giving effect to any securities used to
purchase a Hotel at the fair market value of the
securities at the time of the purchase) plus (i) with
respect to the Existing Hotels, improvements completed
in conjunction with the purchase of the Hotels pursuant
to capital improvement budgets approved by SG and BOT
and (ii) with respect to the Additional Hotels,
improvements completed in conjunction with capital
improvement budgets approved by 2/3 of the Co-Lenders
within six months following acquisition (the "Original
Cost Basis" or "Original Cost"); or (c) the combined
trailing twelve months EBITDA generated by the Hotels
multiplied by 5. Outside of the Facility, the Borrower
and its subsidiaries may not incur any additional debt
or recourse obligations except for the debt for the DFW
South and Marriott Courtyard Secaucus hotels which are
non-recourse to the Borrower. The DFW South, Marriott
Courtyard Secaucus and Non-Borrowing Base Collateral
shall not be included in the calculation under this
paragraph or the following paragraph 3.
In all calculations regarding EBITDA, EBITDA will be
adjusted to account for an FF&E reserve equal to 4% of
gross revenues, grossed up to account for hotels owned
less than one year and decreased for hotels no longer
owned or currently not operating.
3. Facility Debt Service Coverage Ratio - A minimum debt
service coverage ratio of 1.75x is maintained on the
Facility at all times. Debt service coverage shall be
calculated on the basis of the greater of (i) the
interest rate applicable to the Facility at the time of
the calculation; (ii) a debt service constant utilizing
an interest rate equal to 2.25% over then prevailing
rates on ten-year Treasuries and an assumed 20-year
full amortization schedule; or (iii) 10%. The earnings
for the debt service coverage calculation will be based
upon the 12 month trailing earnings (related only to
the lease payments under the percentage lease
agreements for the Hotels which constitute Collateral
for the Facility) of the Borrower and the Company
before interest, taxes, depreciation and amortization
as determined on a consolidated basis and according to
GAAP.
4. Total Company Debt - The aggregate of outstandings
under the Facility and the maximum committed amount of
all additional Company recourse obligations (including
guaranties) and subsidiary indebtedness ("Total Company
Debt") shall at no time exceed the lesser of (a) 45% of
the aggregate value of all hotels owned by the Company
(appraised value will initially be based upon the "As
Is" value of property and will be based upon the "As
Improved" value of a property once the improvements are
completed in accordance with the approved budget as
approved by the Lenders); (b) 45% of the aggregate
Original Cost Basis of all hotels owned by the Company;
or (c) the aggregate trailing 12 months EBITDA of all
hotels owned by the Company multiplied by 5.5. The Co-
Lenders must be satisfied that such outside borrowings
will not have a material adverse effect on the
Borrower, the Company or their ability to perform their
obligations under the Facility, or on the Collateral
for the Facility.
<PAGE>
Mr. Kenneth E. Barr June 11, 1996
American General Hospitality Operating Partnership, L.P. Page 6
5. Total Company Debt Service Coverage - An obligation to
maintain earnings from all hotels owned by the Company,
irrespective of whether constituting part of the
collateral for the Facility, at a level sufficient to
provide at least 1.75x debt service coverage on the Total
Company Debt (calculations will be consistent with
methodology in paragraph 3, above);
6. No Individual Hotel will constitute more than 20% of the
Original Cost Basis of the Collateral pool;
7. No undeveloped land will be acquired except for the
acquisition of land in connection with the expansion of an
existing Hotel (which expansion shall not exceed the
lesser of $1 million or 5% of the Original Cost Basis of
the Hotel or Additional Hotel) and Borrower and the
Company should not engage in the development of new hotel
property.
8. Maintenance of REIT tax status;
9. The divided payout ratio of funds from operations shall
not exceed 90%;
10. The minimum net worth of the Company, as determined in
accordance with GAAP, must at all times be equal to or
greater than the aggregate of $100 million plus 75% of the
net proceeds of all subsequent equity offerings;
11. The aggregate Original Cost Basis of Hotels constituting
Collateral for the Facility must at all times be equal to
or in excess of $150 million.
12. No more than 20% of the Original Cost of all Hotels
constituting Collateral for the Facility will be comprised
of limited service hotels. Marriott Courtyards shall not
be considered limited service hotels.
13. Borrower must take action to keep all franchise and
license agreements in full force and effect and free from
defaults. Any change in franchisor or material change in a
franchise agreement that is part of the Collateral
requires the consent of the Co-Lenders.
14. No more than 20% of the Original Cost of all Hotels
constituting Collateral for the Facility will be comprised
of non-franchised hotels.
15. The management agreement and hotel lease agreement(s)
shall be subject to Co-Lender review and approval,
subordinate to the subject Facility, have combined maximum
fees of 6% and may be cancelable at no cost upon 30 days
notice at any point following a monetary default or
foreclosure;
16. Other covenants and defaults which would be customary for
a transaction of this nature and size.
Collateral
Release: Provided no default has occurred and is continuing, Hotels may
be released following a sale to a third party or transfer into
a separate Company-related entity (provided that such entity is
not a subsidiary of Borrower) in conjunction with a refinancing
upon the approval of BOT (which approval shall not be
unreasonably withheld) under the following situations:
<PAGE>
Mr. Kenneth E. Barr June 11, 1996
American General Hospitality Operating Partnership, L.P. Page 7
1. All covenants (including the loan to value requirements
and the debt service coverage ratios), terms and
conditions of the Facility must be satisfied both before
and after the release of any Hotels;
2. As the collateral pool properties are sold or
refinanced, mandatory paydowns to the Facility will be
the greater of: A) 120% of the allocated debt amount per
property (to be determined based upon appraisal values);
B) 75% of the net sales proceeds to the Borrower, or C)
an amount necessary to reduce the outstanding principal
balance of the loan to a level whereby the financial
covenants are met; provided, if such sale or refinancing
occurs during the Renewal Term and the conditions to a
Collateral Release contained in paragraph 1. and 3. are
satisfied, the mandatory paydown in connection with a
sale or refinancing during the Renewal Term shall not
exceed the amount which would cause the Company to
forfeit the Company's REIT status.
3. The Collateral pool shall maintain occupancies and
operating revenues, as well as geographic diversity,
comparable to those hotels which were in place prior to
such release.
Use of New Equity
or Debt Offering
Proceeds: The proceeds of any equity or debt raised shall be used to
first paydown the Facility.
FF&E Reserve: The Borrower shall escrow (with BOT or its designee) as an
FF&E and Cap-ex reserve, the cumulative net difference
between 4.0% of total gross revenues and the actual amount
spent on FF&E and Cap-ex, on a quarterly basis.
Cost and Yield
Protection: Standard provisions for illegality, inability to determine
rate, indemnification for break funding and increased costs
or reduced return, including those arising from reserve
requirements, taxes and capital requirements.
Expenses and
Indemnification: The Borrower shall reimburse SG and BOT for all third-party
costs associated with the negotiation, documentation, due
diligence and closing on the Acquisition Facility and the
addition of any collateral, regardless of whether the
transaction is closed. Such costs shall include but not be
limited to legal, title insurance, appraisals, environmental
review, engineering reviews, insurance reviews, recording
costs, travel expenses, surveys, mortgage and intangible
taxes. Facility documents shall contain expense and
indemnification provisions for the benefit of SG, BOT and
the Lenders customary for transactions of this size, type
and purpose. Borrower will pay for the fees and expenses
of Bracewell & Patterson, lead counsel to SG. Borrower
shall also be obligated to pay for BOT's legal counsel as
well as local counsel expenses associated with the states
in which the Collateral properties are located.
Appraisals: Borrower shall permit BOT or the Lenders holding 2/3 of the
Facility to commission updated MAI appraisals for the Hotels
complying with FIRREA standards. BOT or the Lenders holding
2/3 of the Facility will have the right to commission such
updated appraisals (i) if they believe, in their reasonable
discretion, that there has been a material reduction in the
value of a particular Hotel, or (ii) upon an Event of
Default. The MAI appraisals for each Hotel completed in
conjunction with the initial closing and after the closing
date of the Facility, shall be at the Borrower's sole cost
and expense.
<PAGE>
Mr. Kenneth E. Barr June 11, 1996
American General Hospitality Operating Partnership, L.P. Page 8
Property Reporting
Requirements: The Borrower shall provide each Lender with the
following for all of the Company's hotels including
those hotels which do not constitute Collateral for the
Facility:
1. Annual individual and consolidated operating and
capital expenditure budgets for each of the hotels
due the beginning of each calendar year;
2. Monthly unaudited individual and consolidated
property operating statements, reconciled to the then
current annual individual and consolidated operating
and capital expenditure budgets for the hotels, not
less than 45 days after the end of each calendar
month;
3. Annual individual and consolidated operating
statements of the hotels due 90 days after each
calendar year-end. In an Event of Default, the
Lenders may require that the Borrower provide audited
financial statements for each of the Hotels on a
consolidated and consolidating basis prepared by a
nationally-recognized accounting firm.
Borrower and Company
Reporting
Requirements: 1. Quarterly consolidated and consolidating unaudited
financial statements for Borrower and the Company not
later than 45 days after the end of each quarter;
2. Annual consolidated (audited by a nationally-
recognized accounting firm) and consolidating
(unaudited) financial statements of Borrower and the
Company not later than 90 days after the end of each
calendar year;
3. Copies of all other quarterly and annual filings of
the Borrower and the Company with the SEC and other
publicly-released information concurrent with such
filing or public release;
4. Copies of all material, non-administrative
correspondence between the Borrower and the issuers
of the franchise and license agreements for the
Hotels and (without limitation) all property reviews
done by franchisors:
5. Quarterly compliance certificates shall be delivered
to Lenders within 45 days following each quarter and
setting forth the calculations for each financial
covenant and the borrowing base and stating whether
or not any defaults exist; and
6. All Company-level press releases and the annual
operating budget for the Company on a consolidated
basis within 30 days prior to the beginning of each
fiscal year. Company shall not make any press
releases pertaining to the credit facility without
the approval of SG and BOT (which consent will not be
unreasonably withheld).
All statements are to be prepared in accordance with
GAAP and will be principally in a form and substance
acceptable to the Lenders. In the case that financial
statements are unaudited, the statements shall be
certified by the Chief Financial Officer or the Chief
Executive Officer of the Borrower and the Company.
Representations
& Warranties: Usual and customary for this type of Facility, including
but not limited to the following:
1. Valid existence and qualification, including REIT
qualification and tax status;
<PAGE>
Mr. Kenneth E. Barr June 11, 1996
American General Hospitality Operating Partnership, L.P. Page 9
2. Governmental authorization;
3. No contravention of laws or contracts;
4. Financial information is true and correct;
5. No material environmental matters;
6. Compliance with laws and regulations, including zoning,
fire safety and building requirements, ERISA, ADA,
environmental and REIT laws;
7. Maintenance of required licenses and permits with
respect to the Properties;
8. No material litigation, casualty or condemnation
proceedings pending;
9. Payment of taxes when due;
10. Full disclosure; good title; no other liens;
11. Properties are in good condition and repair, no deferred
maintenance;
12. No defaults or Event of Default (defined herein) under
the Facility or Franchise Agreement.
13. Perfection and priority of liens.
Events of Default: Usual and customary for credit facilities for this size,
type and purpose, including, without limitation:
1. Non-payment when due of any payment of principal in
respect of any of the Loans;
2. Non-payment within five days of the due date or any
interest payable under the Facility documents provided
that such late payment within five days shall not occur
more than twice per year.
3. Default in the performance or observance of any
covenants for more than 30 days after notice;
4. Cross acceleration/cross default with any direct or
recourse indebtedness of the Company in excess of
$5 million;
5. If the Company shall not qualify for tax treatment under
Sections 858-860, inclusive, of the Internal Revenue
Code;
6. Termination of any of the Franchise Agreement, if such
Franchise Agreement is not replaced within 60 days, with
a tentative franchise agreement with a nationally
recognized Franchise acceptable to 2/3 of the Lenders.
7. A material default under any ground lease constituting
collateral for the Facility.
8. Restrictions on mergers, acquisitions, distributions,
joint ventures, etc.
9. Restrictions on change of control at either the Company,
the Borrower, the Tenant or American General
Hospitality, Inc. ("AGHI").
<PAGE>
Mr. Kenneth E. Barr June 11, 1996
American General Hospitality Operating Partnership, L.P. Page 10
AGHI Convenants: As a condition to closing the Facility, AGHI must
provide an audited financial statement for its fiscal
year ended December 31, 1995 within 120 days following
the closing of the Facility. Following closing, AGHI
will be required to provide annual, audited financial
statements within 120 days following each fiscal year
end. Should AGHI be in bankruptcy or should its net
worth erode beneath negative $300,000, the Tenant or the
Borrower shall have 120 days to cure a potential Event
of Default or replace AGHI with a manager acceptable to
2/3 of the Co-Lenders. If an acceptable replacement
manager is not retained during this time period it shall
constitute an Event of Default under the Facility.
Governing Law: The law of the State of Texas for the Credit Agreement
and other facility documents; for collateral documents
local law will apply.
Waiver of Jury Trial
and Consent to
Texas Jurisdiction: Required.
<PAGE>
FORM OF SHARED SERVICES AND OFFICE SPACE AGREEMENT
1. PARTIES. This Shared Services and Office Space Agreement (this
"Agreement") is entered into by AMERICAN GENERAL HOSPITALITY, INC., a Texas
Corporation ("AGHI"), and AMERICAN GENERAL HOSPITALITY CORPORATION, a Maryland
corporation (the "Company").
2. PREMISES. AGHI hereby grants to the Company the right to share certain
office space located at 3860 Northwest Highway, Suite 300, Dallas, Texas 75220
(the "Premises"), together with the nonexclusive right to use the common areas
and facilities of the Premises as made available by AGHI from time to time to
other occupants of the Premises. The Premises may be occupied only for general
office use.
3. TERM. The term will commence on the date of this Agreement and will
continue until such time that any of the parties hereto provides the other party
with thirty (30) days prior written notice to terminate this Agreement on such
date provided in such notice and thereafter there shall be no further obligation
of the parties hereto except that the Company shall continue to be responsible
for all obligations incurred but unpaid prior to termination.
4. SERVICES. AGHI will furnish the Company copying, local and long distance
telephone service, facsimile communications, office supplies, reception,
administrative services, and use of conference rooms, kitchens, and other
facilities and services available to AGHI's own officers and employees generally
and all other services and amenities necessary to operate the Company's proposed
business (collectively, the "Services") on substantially the same basis and to
substantially the same extent as provided by AGHI to its own officers and
employees.
5. RENT. For as long as this Agreement remains in effect, on or before the
first day of each calendar month, the Company shall pay to AGHI in advance for
the use of the Premises and for the Services, without deduction, setoff, notice,
or demand and at such place as AGHI designates from time to time, the sum of
eight thousand five hundred eighty and thirty-three cents ($8,583.33). On or
about the beginning of each calendar year (or at other times if there is a
material change in the Company's utilization of the use of the Premises and the
Services), AGHI may, by written notice to the Company, adjust the amount of the
monthly installments of rent payable for use of the Premises and for the
Services to reflect AGHI's reasonable estimate of the actual cost of providing
the use of the Premises and the Services. AGHI shall provide the Company with
the opportunity to review and verify the reasonableness of such estimates.
6. MISCELLANEOUS.
(a) Assignment. The Company may assign its rights and obligations
----------
hereunder in whole or in part to one or more affiliates of the
Company.
(b) Governing Law. This Agreement shall be interpreted, governed and
-------------
enforced under the laws of the State of Texas (regardless of its or
any other jurisdiction's choice of law principles).
(c) Waiver. Failure by either party to insist upon strict adherence to any
------
one or more of the covenants and restrictions in this Agreement, on
one or more occasions, shall not be construed as a waiver, nor deprive
that party of the right to require strict compliance with the same
thereafter.
(d) Amendment. No amendments hereto, or waivers or releases of obligations
---------
or liabilities hereunder, shall be effective unless agreed to in
writing by all parties hereto.
(e) Severability. If any term, provision, covenant or restriction of this
------------
Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or
<PAGE>
unenforceable, the remaining covenants and restrictions of this Agreement
shall remain in full force and effect and in no way be affected, impaired
or invalidated.
(f) Counterparts. More than one counterpart of this Agreement may be executed
------------
by the parties hereto, and each fully executed counterpart shall be deemed
an original.
(g) No Benefit to Others. The representations, warranties, covenants and
--------------------
agreements contained in this Agreement are for the sole benefit of the
parties hereto and their respective successors and assigns and they shall
not be construed as conferring, and are not intended to confer, any rights
on any other persons.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first written above.
AMERICAN GENERAL HOSPITALITY, INC
By: _________________________________
Name:
Title:
AMERICAN GENERAL HOSPITALITY CORPORATION
By: _________________________________
Name:
Title:
<PAGE>
Exhibit 10.18
DURHAM, NORTH CAROLINA
OPTION AGREEMENT AND RIGHT OF FIRST OFFER/REFUSAL
-------------------------------------------------
THIS AGREEMENT made this ___ day of June, 1996, by and between 1815 HOTEL
ASSOCIATES LIMITED PARTNERSHIP, a Texas limited partnership ("Seller"), and
AMERICAN GENERAL HOSPITALITY OPERATING PARTNERSHIP, L.P., a Delaware limited
partnership("Buyer").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Seller, as general partner, owns the percentage interest set forth
opposite its name on Schedule 1 in Durham I-85 Limited Partnership, a Delaware
limited partnership ("I-85") which owns the fee interest in the parcel or
parcels of land set forth on Exhibit "A-1" (the "Partnership Interest");
WHEREAS, the beneficial owner of a majority of the partnership interests of
Buyer will be American General Hospitality Corporation (the "REIT"), a
corporation organized under the laws of the State of Maryland which intends to
be qualified as a real estate investment trust under the Internal Revenue Code
and an affiliate of the REIT will be the sole general partner of Buyer;
WHEREAS, I-85 is currently developing a 151-room "Courtyard by Marriott"
hotel in Durham, North Carolina (the "Hotel"); and
WHEREAS, Seller desires to grant and Buyer desires to accept certain
options and rights of first offer and refusal regarding the Partnership Interest
on the terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the payment of One Dollar ($1.00) to
each other, and of the mutual promises contained in this Agreement and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Seller and Buyer covenant and agree, intending to be legally
bound, as follows:
I. Purchase Option.
---------------
Seller hereby grants to Buyer the option to purchase the Partnership
Interest of Seller set forth on Schedule 1 opposite Seller's name (the "Purchase
Option"), for the price and otherwise on the terms and conditions set forth in
Exhibit "A". The Purchase Option may be exercised only by written notice of
- -----------
exercise (an "Exercise Notice") sent to Seller not later than two (2) years from
the date (the "Trigger Date") Seller notifies Buyer that the Hotel has opened
for business (the "Option Term"). If Buyer shall timely exercise such option,
then the Exercise Notice shall constitute an agreement of sale for the
Partnership Interest on the terms and conditions of Exhibit "A" hereto, except
-----------
to the extent such terms and conditions are altered by a subsequent written
agreement of the parties.
<PAGE>
II. Right of First Offer/Refusal for Partnership Interest.
-----------------------------------------------------
(a) If during the Option Term (i) Seller desires to Transfer (as
hereinafter defined) its Partnership Interest or (ii) Seller receives a bona
----
fide offer to Transfer such Partnership Interest, then prior to offering such
- ----
Offered Property (as hereinafter defined) for Transfer, or accepting an offer
for such Offered Property for Transfer, Seller shall give Buyer notice (the
"Offer Notice") specifying the purchase price and the other material terms and
conditions pursuant to which Seller is willing to Transfer the Offered Property.
As used herein, a "Transfer" is to sell, convey, assign, exchange or otherwise
transfer to an unrelated third-party all or any part of such Partnership
Interest or interest therein (such Partnership Interest or interest therein
intended to be transferred is herein called an "Offered Property").
(b) Upon the giving of the Offer Notice, Buyer shall have the right (the
"Right of First Offer"), exercisable by notice (the "Acceptance Notice")
delivered to Seller no later than thirty (30) days after the giving of the Offer
Notice and after Seller's delivery to Buyer of copies of all of the Development
Related Agreements, License Agreement, Leases and Service Agreements (all the
foregoing agreements, as defined in Exhibit "A") pertaining to the Offered
Property and other requested materials (including a true and correct copy of the
limited partnership and partnership agreements and tax returns for the three
year period prior to the Offer Notice for Seller and for I-85, or for such
shorter period for which tax returns have actually been filed), to acquire the
Offered Property in accordance with the terms and conditions of the Offer
Notice.
(c) If Buyer delivers an Acceptance Notice within the prescribed time
period, then the Acceptance Notice, together with the Offer Notice, shall be
deemed to be an agreement of sale and purchase, on the terms and conditions of
the Offer Notice and of Exhibit "A" hereto (to the extent not in conflict with
the terms of the Offer Notice), except to the extent such terms and conditions
are altered by a subsequent written agreement of the parties.
(d) If Buyer does not deliver to Seller either (i) an Acceptance Notice
with respect to the Offered Property or (ii) an Exercise Notice pursuant to
Paragraph I hereof with respect to the entire Partnership Interest, in either
case within the prescribed thirty (30) day period described above, Seller shall
be entitled to Transfer the Offered Property to an unrelated third party free of
any rights of Buyer under this Agreement on terms no less favorable to Seller
than those specified in the Offer Notice, and upon such Transfer, Buyer's rights
under this Agreement with respect to the Offered Property shall automatically
terminate. If Seller does not enter into a binding agreement to consummate such
Transfer (which agreement will be deemed binding notwithstanding customary
conditions to the obligations of parties thereunder) within six (6) months after
the expiration of the time for Buyer to give an Acceptance Notice or if Seller
does not complete such Transfer within three (3) months after the expiration of
the time for consummating the offer set forth in the Offer Notice (or, if no
such time is specified in the Offer Notice then within nine (9) months after the
expiration of the time for Buyer to give an Acceptance Notice), then Buyer's
rights hereunder with respect to such Offered Property shall be deemed
reinstated.
2
<PAGE>
(e) The term "Transfer" as used in this Agreement shall not include the
grant of a mortgage or deed of trust or the creation of any security interest to
secure a bona fide loan, dedication to a governmental body or public utility or
---- ----
any execution upon any mortgage, deed of trust, pledge agreement or security
interest, nor shall "Transfer" include any transfer by Seller to a party other
than an unrelated third party, provided, however, that any such transfer to a
party other than an unrelated third party shall be under and subject to the
rights of Buyer hereunder and the transferee shall assume and promise to observe
and perform the covenants and obligations of its transferror hereunder.
III. Access to Properties and Documents.
----------------------------------
Seller shall from time to time, upon the request of Buyer, furnish to
Buyer, at Buyer's expense, copies of all Development Related Agreements, Leases,
Service Agreements and such other documents, instruments and records in Seller's
possession as Buyer may reasonably request, and Seller shall afford Buyer access
to the Hotel and to Seller's books and records pertaining thereto, for purposes
of inspecting same and causing surveys and audits to be performed, all at
Buyer's expense. Except for permitting access to the foregoing by its trustees,
employees, partners, attorneys, accountants and advisors, Buyer will use
reasonable efforts to preserve the confidentiality of any of the foregoing which
have not been made public by Seller.
IV. Merger into Agreement of Sale.
-----------------------------
If Buyer gives an Exercise Notice or an Acceptance Notice then Buyer's
rights under this Agreement with respect to the Partnership Interest which are
the subject of the Agreement of Sale resulting from such Exercise Notice or
Acceptance Notice shall be deemed merged into such Agreement of Sale and shall
be extinguished.
V. Continuing Rights.
-----------------
The exercise or the non-exercise by Buyer of the Right of First
Offer/Refusal to acquire less than all of the Partnership Interest pursuant to
the terms of this Agreement shall not affect Buyer's continuing rights under
this Agreement as to that portion of the Partnership Interest which was not the
subject matter of a prior Offer Notice.
VI. Notices.
-------
(a) Each notice to be given pursuant to this Agreement shall be in writing
and shall be deemed to have been properly given or served by deposit of such
with the United States Postal Service certified mail, return receipt requested,
postage prepaid or with a nationally recognized overnight courier for next
business day delivery and addressed as hereinafter provided.
(b) Any such notice shall be effective upon the earlier of (i) actual
receipt or refusal to accept delivery by addressee or (ii) two business days
after deposit thereof at any main or branch of the United States Postal Service
or (iii) the first business day after deposit with nationally
<PAGE>
recognized overnight courier. Rejection or other refusal to accept or the
inability to deliver because of a changed address or status of which no written
notice was given shall be deemed to be receipt of the particular notice sent. By
giving to the other party entitled to notice hereunder a notice pursuant to the
provisions of this Section, the party entitled to notice shall have the right
from time to time during the term of this Agreement to change the address(es)
thereof and to specify as the address(es) thereof any other address(es) within
the United States of America.
The address for Seller for all purposes under this Agreement shall be the
following:
1815 HOTEL ASSOCIATES LIMITED PARTNERSHIP
c/o American General Hospitality, Inc.
3860 W. Northwest Highway, Suite 300
Dallas, Texas 75220
Attention: Bruce G. Wiles
with a copy to:
Battle Fowler, L.L.P.
75 East 55th Street
New York, New York 10022
Attention: Peter M. Fass, Esq.
The address for Buyer for all purposes under this Agreement shall be the
following:
American General Hospitality Operating Partnership, L.P.
c/o American General Hospitality, Inc.
3860 W. Northwest Highway, Suite 300
Dallas, Texas 75220
Attention: Bruce G. Wiles
with a copy to:
Battle Fowler, L.L.P.
75 East 55th Street
New York, New York 10022
Attention: Peter M. Fass, Esq.
VII. Subordination.
-------------
4
<PAGE>
This Agreement is and shall be subject and subordinate at all times to the
lien of any mortgage, deed of trust and/or other encumbrance affecting the
Partnership Interests, or any part thereof permitted under Paragraph II(e) (such
liens and matters of record are collectively referred to as a "Prior Interest"),
--------------
all automatically and without the necessity of any further action on the part of
Buyer to effectuate such subordination. Buyer shall, at Seller's request,
execute, acknowledge and deliver such further instruments evidencing such
subordination as shall be desired by Seller or the holder of a Prior Interest.
VIII. Term. This Agreement shall expire on the earlier to occur of
----
(i) ten (10) years from the date hereof, or (ii) the expiration of the Option
Term, each subject to the applicable extension if, during the Option Term, Buyer
either delivers to Seller an Exercise Notice, or receives from Seller an Offer
Notice with respect to the entire Partnership Interest, followed in the case of
an Offer Notice by an Acceptance Notice within the applicable thirty (30) day
period, whereupon the resulting agreement of sale shall expire upon closing of
the transaction pursuant thereto (subject to the survival of any provisions
which are stated to survive each Closing).
IX. Consequences of a Sale of the Hotel. Not less than forty-five (45)
-----------------------------------
days prior to any Transfer by I-85 of its real estate and personal property
comprising the Hotel to a third party unrelated to Seller (whether or not such
Transfer may be to a party related to one or more other partners in I-85),
Seller shall give notice to Buyer ("Pending Sale Notice") of the proposed
Transfer and all material terms and conditions of the proposed Transfer, and,
unless Buyer shall issue an Exercise Notice within thirty (30) days following
receipt by Buyer of the Pending Sale Notice, the proceeds of such Transfer
distributable to Seller will be retained by it; provided, however, that if such
Transfer is of less than all or substantially all of the Hotel, then the options
and rights of Buyer hereunder shall remain in effect; and provided further that
if Seller shall fail to give a Pending Sale Notice required hereunder, then
Seller shall be obligated to pay to Buyer, contemporaneous with its receipt of
its pro rata share of the net sales proceeds of such sale (as determined under
the terms of the limited partnership agreement of I-85), the amount by which the
pro rata share of the net sales proceeds exceeds the amount which would have
been the Purchase Price if the Option had been exercised and Closing had
occurred.
X. Successors and Assigns.
----------------------
(a) The terms and provisions of this Agreement shall be binding upon
Seller, and its successors and assigns, and shall inure to the benefit of Buyer
and its successors.
(b) Buyer shall have no right to assign or pledge its rights under this
Agreement, but Buyer may direct that the conveyance of the Hotel at Closing be
made to an affiliate of Buyer.
XI. Miscellaneous.
-------------
(a) This Agreement and the obligations of the parties shall be
interpreted, construed and enforced in accordance with the internal law of North
Carolina, without regard to the conflicts of law principles thereof.
5
<PAGE>
(b) If any provision of this Agreement shall be invalid or unenforceable to
any extent, the remainder of this Agreement and the application of such
provisions to any other circumstance shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
(c) This Agreement constitutes the entire Agreement of Seller and Buyer
with respect to the subject matter hereof. Neither this Agreement nor any
provision hereof may be changed, waived, discharged or terminated orally, but
only by an instrument in writing signed by the party against whom enforcement of
the change, waiver, discharge or termination is sought.
(d) All personal pronouns used in this Agreement, with the use in the
masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural; and the plural shall include the singular.
Titles of Paragraphs in this Agreement are for convenience only, and neither
limit nor amplify the provisions of this Agreement.
(e) This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original and all of which together shall comprise
but a single instrument.
(f) All exhibits and schedules attached to this Agreement are incorporated
by reference into and made a part of this Agreement.
XII. Consent of Other Partners of I-85.
---------------------------------
Buyer hereby acknowledges that the exercise by Buyer of its rights
hereunder may require approval of one or more partners of I-85 other than Seller
and by one or more of the partners constituting Seller (the "1815 Partners").
Seller will not seek such approval until receipt of an Exercise Notice or an
Acceptance Notice, as applicable, but thereafter Seller promises to use
commercially reasonable efforts to obtain such approvals, but Seller shall not
be required to pay money or other consideration to obtain such approvals except
that Seller will pay normal fees and expenses of counsel and such normal
overhead costs as may be necessary. The obligations of Seller and Buyer to
consummate Closing shall be conditioned upon the grant of such approvals of
other partners of I-85 and the 1815 Partners as may be necessary under the
agreements governing I-85 and Seller, respectively.
6
<PAGE>
IN WITNESS WHEREOF, intending to be legally bound, the parties have caused
this Agreement to be executed on the day and year first above written.
BUYER:
AMERICAN GENERAL HOSPITALITY OPERATING
PARTNERSHIP, L.P., a Delaware limited partnership (SEAL), by
its general partner
By: AGH GP, Inc., a Nevada Corporation
By: ____________________________________
Name:
Title:
SELLER:
1815 HOTEL ASSOCIATES LIMITED PARTNERSHIP, a Texas limited
partnership (SEAL), by its sole
general partner and Managing Partner
By: Virtual Hospitality, Inc., a Texas Corporation
By: ____________________________________
Name:
Title:
7
<PAGE>
EXHIBIT A
OPTION TERMS AND CONDITIONS
---------------------------
XIII. Sale of Partnership Interest.
----------------------------
Seller shall sell, transfer and assign to Buyer and Buyer shall
purchase from Seller, upon the terms and conditions hereinafter set forth all of
Seller's right and interest in and to the Partnership Interest, including,
without limitation, all right, title and interest of Seller in and to (i) all
distributions by I-85 from and after the Closing Date (defined below) of cash or
other assets from operations, capital transactions, sales, refinancings,
liquidation or any other source, which interest in such distributions shall not
be subordinate to any superior right to distributions or payments of any type to
any partners of Seller or affiliates of Seller or partners of Seller, including
return of capital, and (ii) all profits and losses incurred by I-85 from and
after the Closing Date; and, (iii) all capital of I-85. At Closing, Seller
shall deliver to Buyer duly executed originals of such amendments (the
"Partnership Amendments") to the limited partnership agreement of I-85 as are
necessary to substitute Buyer or its designee as general partner of I-85 in
place and instead of Seller. Buyer will, at Closing, assume the obligations of
Seller as general partner in I-85 pursuant to the limited partnership agreement
and limited partnership Amendments disclosed to Buyer from and after the Closing
Date, and Buyer will agree to defend, indemnify and hold harmless Seller from
and against any and every manner of loss, cost, damage or expense arising by
reason of any failure of Buyer to observe or perform any covenant or obligation
assumed by Buyer at Closing.
XIV. Purchase Price.
--------------
(a) The purchase price (the "Purchase Price") to be paid by Buyer to
Seller for the Partnership Interest shall be Seller's Share (hereafter defined)
of the Agreed Value. The Agreed Value shall be determined as follows:
(i) If the Exercise Notice is delivered prior to or on the first
anniversary of the Trigger Date, the Agreed Value shall be the
Cost of Developing the Hotel multiplied by 110%. For purposes of
this Paragraph 2 the "Cost of Developing the Hotel" shall mean
the total cost of constructing, furnishing and developing the
hotel incurred prior to the date the Hotel is issued a
certificate of occupancy, or a temporary certificate of
occupancy. Seller shall certify to Buyer as to the cost of
Developing the Hotel in a writing (the "Cost Certificate")
delivered to Buyer within thirty (30) days of the Trigger Date.
If Buyer objects to such amount within ten (10) days of Seller's
receipt of the Cost Certificate and the parties are unable to
resolve such dispute within five (5) days thereafter, either
party may elect to submit the dispute to JAMS/Endispute, Inc. for
resolution.
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(ii) If the Exercise Notice is delivered after the first anniversary
of the Trigger Date and prior to the expiration of the Option
Term, the Agreed Value shall be the amount determined in the
prior subparagraph, increased by a percentage equal to the
percentage increase in the U.S. Department of Labor, Bureau of
Labor Statistics, "United States City Average for All Items
Portion of the Consumer Price Index New Series for Urban
Consumers" (1982-84=100) ("CPI-U") measured for the twelve (12)
month period from the CPI-U published nearest to the Trigger Date
to the CPI-U on the next succeeding anniversary thereof. If
during the Option Term, the U.S. Department of Labor, Bureau of
Labor Statistics, ceases to publish a CPI-U, such other index or
standard as will most nearly accomplish the aim and purpose of
said CPI-U and the use thereof of the parties thereto, shall be
selected by Seller in its sole discretion in determining the
amount of any such adjustment.
(b) The Purchase Price, less Seller's Share of the outstanding
principal balance of any existing mortgage, shall be paid by Buyer to Seller at
Closing by either of the following methods designated by Seller:
(i) The delivery to Seller of a bank treasurer's check of a member
bank of The New York Clearing House, payable to the order of Seller or, at
Seller's option, the Escrow Agent, by check or by wire or debit and credit
transfer of immediately available same day United States Federal Funds to one or
more accounts to be designated by Seller, or
(ii) Subject to any securities laws limitations, by the issuance of
limited partnership interests in Buyer which shall be divided into units ("OP
Units") in the manner determined by the general partner of Buyer, and which
shall be exchangeable for common shares of beneficial interest ("Shares") of the
REIT, subject to the restrictions and on the basis to be established in the
limited partnership agreement of Buyer. The number of OP Units to be issued to
Seller shall be that number of OP Units convertible into Shares having a Share
Value as of the day preceding the Closing Date equal to the Purchase Price. For
purposes of this Agreement, the term "Share Value" as of a particular day shall
mean the average of the closing prices that a Share has traded for the five (5)
trading days immediately preceding that particular day on the New York Stock
Exchange (or, if Shares are not then traded on the New York Stock Exchange, then
on the principal stock exchange on which Shares are then traded).
(c) The term "Seller's Share" shall mean the percentage interest in
I-85 transferred by Seller to Buyer at Closing hereunder.
(d) In the event Buyer elects to receive the Purchase Price in
OP Units (such event, a "Unit Election"):
(1) The OP Units to be issued to Seller shall be subject to a Lock-Up
Agreement to be executed at Closing by Buyer and Seller, substantially in the
form attached hereto
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<PAGE>
as Schedule 2, whereby Seller will not be permitted to transfer OP Units
for one year after Closing, except as otherwise permitted under such agreement;
and
(2) At or prior to Closing, the REIT, Seller and the other parties
thereto shall enter into a Registration Rights Agreement and Exchange Rights
Agreement substantially in the forms attached hereto as Schedules 3 and 4,
respectively.
XV. Closing.
-------
(a) Closing shall be held on the date designated by Buyer by at least
twenty (20) days prior written notice to Seller ("Closing Date") which shall be
not less than thirty (30) days and not more than ninety (90) days following the
Exercise Notice or the Acceptance Notice, except that in the case of an
Acceptance Notice, if the Offer Notice shall have specified a date for Closing
then the Closing Date shall be the date specified in the Offer Notice.
(b) Closing is the event ("Closing") during which, among other things,
Buyer shall pay the Purchase Price to Seller for the Hotel and Seller shall
deliver to Buyer the Assignment (defined below) and such other documents or
instruments as may be required pursuant to this Agreement (the "Closing
Documents"). Buyer and Seller will, at or prior to the Closing, execute and
deliver the Closing Documents required by Buyer and, pending the Closing,
deposit such Closing Documents in escrow with Chicago Title Insurance Company,
as escrow agent of Buyer (the "Escrow Agent").
(c) In the event Buyer makes a Unit Election, the following deliveries
shall be made at the Closing:
(1) Buyer shall cause to be delivered to the Escrow Agent, (x) a
certificate of the general partner of Buyer (the "General Partner") certifying
that Seller has been or will be, effective as of the Closing, admitted as a
limited partner of Buyer and that Buyer's books and records indicate or will
indicate that Seller is the holder of the number of OP Units that represents the
Purchase Price and (y) if such OP Units are represented by certificates, a
certificate or certificates in the name of Seller representing the number of OP
Units to which Seller is entitled; and
(2) upon receipt of the consideration set forth in clause (1) above,
the Escrow Agent will release the Closing Documents to Buyer and deliver to
Seller, the certificates, if any, representing Seller's OP Units and, if
requested by Seller, a copy of the General Partner's certificate referred to in
clause (1).
(d) Notwithstanding any other provision of this Agreement, Buyer may,
in its sole discretion, elect not to consummate the contribution of the
Partnership Interest as follows:
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<PAGE>
(1) in the event that Seller either identifies in its Assignment a
breach of or other exception with respect to any of the representations,
warranties or covenants contained in Paragraph 5 or has otherwise breached this
Agreement,
(2) in the event that all authorizations, consents or approvals of any
governmental or administrative agency or authority or any third party necessary
in order to consummate the contribution of the Partnership Interest have not
been delivered, or there exists an order or judgment enjoining, restraining or
prohibiting, or assessing substantial damages in respect of such consummation,
or there shall be any action or proceeding instituted or threatened in writing
to enjoin, restrain, prohibit or assess substantial damages in respect of such
consummation, or
(3) in the event Buyer and Seller shall not have agreed to lease the
Hotel to a lessee acceptable to both parties, then, Buyer shall, in lieu of the
----
delivery with respect to Seller pursuant to clause (c)(1) above, either (A) in
the case of an election not to consummate the contribution of the Partnership
Interest, notify the Escrow Agent of such election and direct the Escrow Agent
to return Seller's Closing Documents to Seller, or (B) in all other cases,
equitably adjust the delivery with respect to Seller pursuant to clause (c)(1)
above, if applicable, to reflect the portion of the Partnership Interest with
respect to which the contribution is actually being consummated, which
adjustment shall be determined in Buyer's reasonable discretion, and shall in
all events be binding upon Seller.
4. Documents to Be Delivered at the Closing.
----------------------------------------
At or prior to the Closing, Seller shall execute, acknowledge where
deemed desirable or necessary by Buyer, and deliver to the Escrow Agent, in
addition to any other documents mentioned elsewhere herein, the following:
(a) An assignment of the Partnership Interest (the "Assignment"),
which assignment shall be in a form reasonably satisfactory to Buyer and Seller,
shall contain a warranty of title that Seller owns the Partnership Interest free
and clear of all Encumbrances (as defined below) and shall either (i) reaffirm
the accuracy of all representations and warranties and the satisfaction of all
covenants contained in Paragraph 5 hereof, or (ii) if such reaffirmation cannot
be made, identify those representations, warranties and/or covenants contained
in Paragraph 5 hereof which Seller can no longer make or comply with, represent
that Seller has used reasonable efforts to take such actions as would permit
Seller to make such representations and warranties and/or to comply with such
covenants, and reaffirm the accuracy of all other representations and warranties
and the satisfaction of all other covenants contained in Paragraph 5 hereof.
(b) A certified copy of all appropriate corporate resolutions or
partnership or trust actions authorizing the execution, delivery and performance
by Seller of this Agreement and the Closing Documents.
A-4
<PAGE>
(c) A written certification ("FIRPTA Certificate") dated no earlier
than ninety (90) days prior to the date of Closing, which certification shall be
in compliance with the Act and the regulations thereunder that are imposed by
the Foreign Investment in Real Property Tax Act ("FIRPTA") and certifying that
the Seller is not a person or entity subject to withholding under FIRPTA and the
Act, and containing Seller's tax identification number and address.
Alternatively, Seller hereby certifies in compliance with FIRPTA (i) that it is
not a foreign person, foreign corporation, foreign partnership, foreign trust or
foreign estate (as those terms are defined in the Act of FIRPTA, (ii) that its
Taxpayer Identification Number is as set forth in Schedule 1 (or will be
furnished prior to Closing), (iii) that his, her, or its address set forth in
Schedule 1 is correct, (iv) that it understands that this certification may be
disclosed to the Internal Revenue Service, (v) that any false statement
contained herein could be punished by fine, imprisonment, or both, and (vi) that
it, under penalties of perjury, hereby declares that it has examined this
certification and to the best of its knowledge and belief it is true, correct,
and complete. An affidavit establishing an exemption from the withholding
requirements of the ), as amended. In the event Seller fails to provide such an
affidavit, Buyer shall be entitled to withhold from the Purchase Price and pay
to the Internal Revenue Service the sums required to be withheld pursuant to
FIRPTA (and the amount so withheld shall be paid by Buyer to the Internal
Revenue Service, in order for Buyer to comply with the provisions of Section
1445 of the Internal Revenue Code of 1986 or successor similar legislation, as
the same may be amended hereafter).
(d) Any state, county and city documentary stamp declarations or
transfer or "gains" tax forms required in connection with the transfer of any of
the Partnership Interest.
(e) Estoppel letters and required consents from the ground lessor.
(f) The Lock-up Agreement, the Exchange Rights Agreement, the limited
partnership agreement for Buyer (the "Partnership Agreement") and the
Registration Rights Agreement.
(g) Any other documents, agreements or instruments as Buyer shall
reasonably request in order to assign, transfer and convey the Partnership
Interest to Buyer as a contribution to capital and to otherwise effectuate the
transactions contemplated hereby, including filings with any applicable
governmental jurisdiction in which Buyer is required to file its partnership
documentation.
5. Representations, Warranties and Covenants of Seller
---------------------------------------------------
As a material inducement to Buyer to enter into the Agreement and to
consummate the transactions contemplated hereby, Seller shall make to Buyer each
of the representations and warranties set forth in this Paragraph 5. As a
condition to Buyer's obligation to consummate the contribution of the
Partnership Interest to Buyer, such representations and warranties must be true
as of the Closing Date.
(a) Title to the Interests. Seller owns beneficially and of record,
----------------------
free and clear of any claim, lien, pledge (except for pledges relating to the
debt or equity financing of the Hotel (any such pledge, a "Permitted Pledge")),
voting agreement, option, charge, security interest,
A-5
<PAGE>
mortgage, deed of trust, encumbrance, right of assignment, purchase right or
other rights of any nature whatsoever (collectively, "Encumbrances"), and has
full power and authority to convey free and clear of any Encumbrances, its
Partnership Interest and, upon delivery of an Assignment by Seller conveying its
Partnership Interest and delivery of the Purchase Price by Buyer for the
Partnership Interest as herein provided, Buyer will acquire as a contribution to
capital good and valid title thereto, free and clear of any Encumbrance, except
Encumbrances created in favor of Buyer by the transactions contemplated hereby.
The Partnership Interest has been validly issued and Seller has funded (or will
fund before the same is past due) all capital contributions and advances to I-85
that are required to be funded or advanced prior to the date hereof and the date
of the Closing. There are no agreements, instruments or understandings with
respect to the Partnership Interest except as set forth in the limited
partnership agreement of I-85. Seller has no interest, either direct or
indirect, in I-85 except for the Partnership Interest. No Permitted Pledge will
be in existence as of the date of the Closing, and Seller shall provide, at the
Closing, such documentary evidence of the release of any Permitted Pledge as
Buyer may reasonably request.
(b) Organization; Authority; No Conflicts. Seller is a limited
-------------------------------------
partnership, duly organized, validly existing and in good standing under the
laws of the state of its organization. Seller has full right, authority, power
and capacity: (i) to execute and deliver this Agreement, each Closing Document
and each other agreement, document and instrument to be executed and delivered
by or on behalf of Seller pursuant to this Agreement; (ii) to perform the
transactions contemplated hereby and thereby; and (iii) to transfer, assign,
convey and deliver all of the Partnership Interest to Buyer in accordance with
this Agreement. All applicable corporate, partnership or trust action necessary
for Seller to execute and deliver this Agreement, the Closing Documents and each
other agreement, document and instrument executed by or on behalf of Seller
pursuant to this Agreement, and to perform the transactions contemplated hereby
and thereby, has been taken, or will be taken prior to the Closing Date. This
Agreement, each Closing Document and each other agreement, document and
instrument executed and delivered by or on behalf of Seller pursuant to this
Agreement constitutes, or when executed and delivered will constitute, the
legal, valid and binding obligation of Seller, each enforceable in accordance
with its respective terms. Except for any breaches, violations or defaults
which will be waived or cured, or discharged or repaid prior to or
contemporaneously with the Closing, the execution, delivery and performance of
this Agreement, the Closing Documents and each other agreement, document and
instrument to be executed and delivered by or on behalf of Seller: (x) does not
and will not violate Seller's charter and/or bylaws, partnership agreement or
declaration of trust, as applicable; (y) does not and will not violate any
foreign, federal, state, local or other laws applicable to Seller or require
Seller to obtain any approval, consent or waiver of, or make any filing with,
any person or authority (governmental or otherwise) that has not been obtained
or made and which does not remain in effect; and (z) does not and will not
result in a breach or a violation of, constitute a default under, accelerate any
obligation under or give rise to a right of termination of, any indenture, deed
of trust, mortgage, loan or credit agreement or any other agreement, contract,
instrument, lease, permit, authorization, order, writ, judgment, injunction,
decree, determination or arbitration award to which Seller is a party or by
which the property of Seller is bound or affected, or result in the creation of
any Encumbrance on any of the property or assets of I-85.
A-6
<PAGE>
(c) Litigation. Seller knows of no litigation or proceeding, either
----------
judicial or administrative, pending or overtly threatened, affecting all or any
portion of the Partnership Interest or Seller's ability to consummate the
transactions contemplated hereby. Seller knows of no outstanding order, writ,
injunction or decree of any court, government, governmental entity or authority
or arbitration against or affecting all or any portion of the Partnership
Interest, which in any such case would impair Seller's ability to enter into and
perform all of its obligations under this Agreement.
(d) Bankruptcy. Neither I-85, to the best of Seller's knowledge, nor
----------
Seller (i) is in receivership or dissolution, (ii) has made a currently
effective general assignment for the benefit of creditors or is currently
subject to a written admission of its inability to pay its debts as they mature,
or (iii) is currently an adjudicated bankrupt or currently has on file a
petition in voluntary bankruptcy or a petition or answer seeking reorganization
or an arrangement with creditors under the Federal bankruptcy law or any other
similar law or statute of the United States or any jurisdiction and no such
petition is currently on file against Seller or I-85.
(e) No Other Agreements. Seller has made no agreement with, and will
-------------------
not enter into any agreement with, and has no obligation (absolute or
contingent) to, any other person or entity to sell, transfer, dispose of or in
any way encumber any of the Partnership Interest or restricting in any way
Seller's ability to contribute the Partnership Interest to Buyer or to enter
into any agreement with respect to the Partnership Interest.
(f) No Brokers. Seller has not entered into, and covenants that it
----------
will not enter into, any agreement, arrangement or understanding with any person
or entity which will result in the obligation of Buyer to pay any finder's fee,
brokerage commission or similar payment in connection with the transactions
contemplated hereby.
(g) Survival. It is a condition to the Closing that the
--------
representations, warranties and covenants of Seller set forth in this Section 5
shall be true and correct on the Closing Date and shall survive the Closing for
a period of one (1) year from the date of the Closing, and shall expire at such
time, except for claims asserted by written notice given by or on behalf of
Buyer at any time during the one year period to Seller alleging a breach of any
representation or warranty.
(h) Representations and Warranties.
------------------------------
In the event Seller makes a Unit Election, the following
representations, and warranties shall apply:
(1) Seller has received and reviewed a copy of the Private Placement
Memorandum (the "Private Placement Memorandum") prepared in connection with the
contribution of the Partnership Interest to Buyer (which Private Placement
Memorandum includes a draft Registration Statement, the Summary of Partnership
Agreement Provisions (the "Partnership Summary") and the Summary of Tax Matters
(the "Tax Matters Summary"), and understands the risks of, and other
considerations relating to, an investment in OP Units. Seller, by reason of its
A-7
<PAGE>
business and financial experience, together with the business and financial
experience of those persons, if any, retained by it to represent or advise it
with respect to its investment in OP Units, (i) has such knowledge,
sophistication and experience in financial and business matters and in making
investment decisions of this type that it is capable of evaluating the merits
and risks of and of making an informed investment decision with respect to an
investment in OP Units, (ii) is capable of protecting its own interest or has
engaged representatives or advisors to assist it in protecting its interests and
(iii) is capable of bearing the economic risk of such investment. Seller is an
"accredited investor" as defined in Rule 501 of the regulations promulgated
under the Securities Act. If Seller has retained or retains a person to
represent or advise it with respect to its investment in OP Units, Seller will
advise Buyer of such retention and, at Buyer's request, Seller shall, prior to
or at the Closing, (i) acknowledge in writing such representation and (ii) cause
such representative or advisor to deliver a certificate to Buyer containing such
representations as may be reasonably requested by Buyer.
(2) Seller understands that an investment in Buyer involves
substantial risks. Seller has been given the opportunity to make a thorough
investigation of the proposed activities of Buyer and has been furnished with
materials relating to Buyer and its proposed activities, including, without
limitation, the Private Placement Memorandum, the Partnership Summary and the
Tax Matters Summary. Seller has been afforded the opportunity to obtain any
additional information requested by it. Seller has had an opportunity to ask
questions of and receive answers from representatives of Buyer concerning Buyer
and its proposed activities and the terms and conditions of an investment in OP
Units. Seller has relied and is making its investment decision based upon the
Private Placement Memorandum, the Partnership Summary, the Tax Matters Summary
and other written information provided to Seller by or on behalf of Buyer
and/or, as applicable, Seller's position as a director and/or executive officer
of the Company.
(3) The OP Units to be issued to Seller at the Closing will be
acquired by Seller for its own account, for investment only and not with a view
to, or with any intention of, a distribution or resale thereof, in whole or in
part, or the grant of any participation therein. Seller was not formed for the
specific purpose of acquiring an interest in Buyer.
(4) Seller acknowledges that (i) the OP Units to be issued to Seller
at the Closing have not been registered under the Securities Act or state
securities laws by reason of a specific exemption or exemptions from
registration under the Securities Act and applicable state securities laws and,
if such OP Units are represented by certificates, such certificates will bear a
legend to such effect, (ii) the Company's and Buyer's reliance on such
exemptions is predicated in part on the accuracy and completeness of the
representations and warranties of Seller contained herein, (iii) the OP Units to
be issued to Seller at the Closing may not be resold or otherwise distributed
unless registered under the Securities Act and applicable state securities laws,
or unless an exemption from registration is available, (iv) there is no public
market for such OP Units, and (v) Buyer has no obligation or intention to
register such OP Units under the Securities Act or any state securities laws or
to take any action that would make available any exemption from the registration
requirements of such laws, except as provided in the Registration Rights
Agreement. Seller hereby acknowledges that because of the restrictions on
transfer or assignment of such OP Units to be issued hereunder which will be set
forth in the Partnership Agreement and in the Lock-
A-8
<PAGE>
up Agreement, Seller may have to bear the economic risk of the investment
commitment evidenced by this Agreement and any OP Units issued hereunder for an
indefinite period of time, although (x) under the terms of the Exchange Rights
Agreement, as it will be in effect at the time of the initial public offering
(the "IPO"), OP Units will be exchangeable at the request of the holder thereof
at any time after the first anniversary of their issuance for cash based on
their fair market value or, at the option of the Company, for shares of common
stock (the "Common Stock") and (y) the holder of any such Common Stock issued
upon exchange of OP Units will be afforded certain rights to have such Common
Stock registered under the Securities Act and applicable state securities laws
pursuant to the Registration Rights Agreement.
(5) The Units are being acquired for Seller's investment and not for
resale to others. Seller agrees that it will not sell or otherwise transfer the
Units unless they are registered under the Securities Act or unless an exemption
from such registration is available. Seller represents that it has adequate
means of providing for its current needs and possible contingencies, and that it
has no need for liquidity of the investment.
(6) It is understood that all documents, records and books pertaining
to the investment have been made available for inspection by Seller's attorney
or the Seller's accountant or Seller's offeree representative and Seller, and
that the books and records of Buyer will be available upon reasonable notice,
for inspection by Seller at reasonable hours at its principle place of business.
(7) The address set forth under Seller's name in Exhibit A is the
address of Seller's principal place of business or, if a natural person, the
address of Seller's residence, and Seller has no present intention of becoming a
resident of any country, state or jurisdiction other than the country and state
in which such principal place of business or residence is sited.
(i) Covenant to Remedy Breaches. Each Seller covenants to use all
---------------------------
reasonable efforts within its control (i) to prevent the breach of any
representation or warranty of Seller hereunder, (ii) to satisfy all covenants of
Seller hereunder and (iii) to promptly clear any breach of a representation,
warranty or covenant of Seller hereunder upon its learning of same.
6. Representations, Warranties and Covenants of Buyer
--------------------------------------------------
As a material inducement to each Seller to enter into this Agreement
and to consummate the transactions contemplated, Buyer shall make to Seller each
of the representations and warranties set forth in this Paragraph 6, which
representations and warranties shall be true as of the date of execution and as
of the Closing.
(a) Authority. Buyer is a limited partnership duly organized,
---------
validly existing and in good standing under the laws of the state of Delaware.
Buyer has full right, authority, power and capacity: (i) to execute and deliver
this Agreement, each Closing Document to which it is a party and each other
agreement, document and instrument to be executed and delivered by or on behalf
of
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<PAGE>
it pursuant to this Agreement; (ii) to perform the transactions contemplated
hereby and thereby; and (iii) to issue OP Units to each Seller pursuant to and
in accordance with the terms of this Agreement. This Agreement, each Closing
Document to which Buyer is a party and each agreement, document and instrument
executed and delivered by Buyer pursuant to this Agreement constitutes, or when
executed and delivered will constitute, the legal, valid and binding obligation
of Buyer, each enforceable in accordance with its respective terms. The
execution, delivery and performance of this Agreement, each Closing Document to
which Buyer is a party and each such agreement, document and instrument by
Buyer: (x) does not and will not violate the Partnership Agreement; (y) does not
and will not violate any foreign, federal, state, local or other laws applicable
to Buyer or require Buyer to obtain any approval, consent or waiver of, or make
any filing with, any person or authority (government or otherwise) that has not
been obtained or made and which does not remain in effect; and (z) does not and
will not result in a breach or a violation of, constitute a default under,
accelerate any obligation under or give rise to a right of termination of, any
indenture, deed of trust, mortgage, loan or credit agreement, any other material
agreement, contract, instrument, lease, permit or authorization, or any order,
writ, judgment, injunction, decree, determination or arbitration award to which
Buyer is a party or by which the property of Buyer is bound or affected.
(b) No Brokers. Buyer has not entered into, and covenants that it
----------
will not enter into, any agreement, arrangement or understanding with any person
or entity which will result in the obligation of any Seller to pay any finder's
fee, brokerage commission or similar payment in connection with the transactions
contemplated hereby.
(c) Representations and Warranties.
------------------------------
In the event Seller makes a Unit Election, the following
representations and warranties shall apply:
(1) The Units to be issued to Seller at Closing will have been duly
and validly authorized and issued, free of any preemptive or similar rights, and
be fully paid and nonassessable, without any obligation to restore capital
except as required by the Delaware Revised Uniform Limited Partnership Act (the
"Delaware Act"). As a holder thereof, Seller shall be admitted as a limited
partner of the Partnership entitled to all of the rights and protections of a
limited partner under the Delaware Act and the provisions of the Partnership
Agreement, with the same rights, preferences and privileges as all existing
limited partners on a pari passu basis.
(2) Except as set forth in the Partnership Agreement, the Lock-Up
Agreement and the Supplemental Representations and Warranties Agreement or any
pledge agreement required to be executed thereunder, and subject to federal and
state securities laws, none of the Units, when delivered to Seller, will be
subject to any Encumbrance.
(3) At Closing, the REIT will have the full legal right, power and
authority to enter into the Registration Rights Agreement and the Exchange
Rights Agreement and to consummate the transactions contemplated therein. The
Registration Rights Agreement and the Exchange Rights Agreement will be duly
authorized by all necessary corporate action on the part of
A-10
<PAGE>
and will constitute the valid and binding obligation of the REIT, enforceable in
accordance with its terms. Buyer will have the full right, power and authority
to enter into the Lock-Up Agreement and its execution will be duly authorized by
all necessary partnership action.
(4) The Partnership Agreement and any partnership amendment will
constitute valid and binding obligations of affiliates of the REIT who will be
partners therein, enforceable in accordance with their terms.
(5) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery by the Buyer of the Units, the valid authorization, issuance,
sale and delivery of any shares of Common Stock that may be issued by the REIT
upon any exchange of the Units, and the execution, delivery and performance of
the Registration Rights Agreement by the REIT (other than complying with
applicable securities laws and regulations), will have been made or obtained and
will be full force and effect.
(6) Neither the issuance or sale and delivery by Buyer of the Units,
nor the issuance, sale and delivery by REIT of any shares of Common Stock that
may be issued upon any exchange of the Units, nor the execution, delivery and
performance of the Registration Rights Agreement, will conflict with or result
in a breach or violation of any of the terms and provisions of, or (with or
without the giving of notice or passage of time or both) constitute a default
under the certificate of incorporation or by-laws of the REIT or the certificate
of limited partnership or the Partnership Agreement of Buyer; any indenture,
mortgage, deed of trust, loan agreement, note, lease or other agreement or
instrument to which the REIT or Buyer is a party or to which any of them, any of
their respective properties or other assets or any hotel is subject; or any
applicable statute, judgment, decree, rule or regulation of any court or
governmental agency or body applicable to any of the foregoing or any of their
respective properties (other than compliance with the securities laws and
regulations); or result in the creation or imposition of any lien, charge, claim
or encumbrance upon any property or asset of the REIT or Buyer.
7. Further Assurances. The parties hereto will, at or prior to the
------------------
Closing, or at any time or from time to time thereafter, upon request of either
party, execute such additional instruments, documents or certificates as either
party deems reasonably necessary in order to effectuate the transactions
contemplated hereby.
8. Apportionments.
--------------
Distributions to the partners of I-85 with respect to the fiscal year
of I-85 in which Closing occurs will be pro-rated between Seller and Buyer on a
per diem basis promptly following the close of such fiscal year and the making
- --------
of the final distribution with respect to such fiscal year by I-85. Buyer will
be credited with the day of Closing, and will be entitled to receive from I-85
all distributions made by it on and after the day of Closing with respect to the
Partnership Interest acquired by Buyer at Closing. If either party has received
distributions with respect to such fiscal
A-11
<PAGE>
year in excess of such party's share determined on a per diem basis, such
party will pay such excess to the other promptly following the close of such
fiscal year and the determination of such excess.
9. Buyer's Default.
---------------
If Buyer defaults under this Agreement at or prior to Closing by
failing to complete Closing in accordance with the terms of this Agreement or in
any other respect, then on the date specified for Closing (or sooner in the
event of an anticipatory breach) Buyer's Purchase Option and Right of First
Offer with respect to the Partnership Interest shall terminate and Seller shall
have no further recourse against Buyer, provided, however, that if this
Agreement shall have resulted from the issuance by Seller of an Offer Notice and
the issuance by Buyer of an Acceptance Notice, then in addition to the
termination of Buyer's Purchase Option and Right of First Offer as to the
Partnership Interest, the liability of Buyer for default shall be the liability,
if any, specified in the Offer Notice.
10. Seller Default.
--------------
If Seller shall fail or be unable to perform in accordance with this
Agreement, then Buyer, shall have the right as its sole and exclusive remedies
to revoke the Exercise Notice or Acceptance Notice, or to obtain specific
performance of Seller's obligations hereunder and Seller expressly acknowledges
that its Partnership Interest is unique and that specific performance is an
appropriate remedy for Seller's default hereunder.
11. Fire or Other Casualty.
----------------------
In the event that the Hotel shall be damaged or destroyed by fire,
vandalism or other casualty prior to the completion of Closing, Buyer may choose
to complete Closing hereunder or Buyer may withdraw its Acceptance Notice or
Exercise Notice. Following Buyer's Acceptance Notice or Exercise Notice, Seller
will cause I-85 to maintain in effect through Closing its policies of property
insurance with respect to the Hotel. Seller shall give Buyer written notice of
any such casualty within three (3) days after the occurrence thereof, Buyer
shall notify Seller of its election within ten (10) business days of Seller's
notice.
12. Preparation of Assignment.
-------------------------
The Assignment shall be prepared and, if necessary, recorded at the
expense of Buyer. At least ten (10) days prior to the Closing Date, Buyer shall
submit the Assignment to Seller.
A-12
<PAGE>
13. Buyer's Right of Entry; Due Diligence Period.
--------------------------------------------
(a) Buyer and Buyer's agents, consultants and representatives, shall
have the right, from time to time, after giving the Acceptance Notice or the
Exercise Notice, during usual business hours, to enter upon (with the approval
of I-85, which approval Seller will use commercially reasonable efforts to
obtain, but Seller shall not be required to pay money or other consideration to
obtain such approvals except that Seller will pay normal fees and expenses of
counsel and such normal overhead costs as may be necessary) the Hotel for the
purpose of inspection, preparation of plans, making of test borings, taking of
measurements, making of surveys and generally for the reasonable ascertainment
of the condition of the Hotel; provided, however, that Buyer shall (i) give
Seller prior written notice of the time and place of such entry and permit a
representative of Seller to accompany Buyer; (ii) restore any or replace with
appropriate material any soil or other material removed during, such test
borings; (iii) indemnify, defend and save Seller harmless from and against any
and all liabilities which Seller may suffer by reason of such entry prior to
Closing; and (iv) not enter into any space leased to third parties or
communicate with any tenant without Seller's prior written consent. With
respect to environmental matters, at Buyer's sole option, such investigation may
include, without limitation, such testing of the soil, groundwater, building
components, tanks, containers and equipment at the Hotel, as applicable, as
Buyer or Buyer's agents, consultants or representatives shall deem necessary or
appropriate to confirm the condition of the Hotel and the compliance of the
operations conducted thereon.
(b) Prior to permitting any party to enter the Hotel prior to Closing
for the purpose of performing any services or supplying any materials for which
such party could claim a mechanic's lien against the Hotel or any part thereof,
Buyer shall cause to be delivered releases of mechanic's liens in form
reasonably satisfactory to Seller.
(c) At any time prior to sixty (60) days following the Exercise
Notice (the "Due Diligence Period"), Buyer may revoke its Exercise Notice by
written notice to Seller, whereupon the Purchase Option and the Right of First
Offer/Refusal will terminate as to the Partnership Interest. If this Agreement
shall have resulted from the issuance by Seller of an Offer Notice and the
issuance by Buyer of an Acceptance Notice, then the Due Diligence Period, if
any, and Buyer's termination right, if any, shall be as set forth in the Offer
Notice. Within fifteen (15) days following the Acceptance Notice or the Exercise
Notice (or such shorter time, if any, as may have been provided for in the Offer
Notice), Seller will furnish to Buyer the Rent Roll and copies of all of the
leases and agreements to lease (the "Leases"), service agreements (the "Service
Agreements"), the Courtyard by Marriott License Agreement (the "License
Agreement") and all plans, specifications, permits and approvals, architects'
contracts, construction contracts (collectively, the "Development Related
Agreements") then in effect with respect to the Hotel as of the date of the
Acceptance Notice or the Exercise Notice, together with a certificate
representing and warranting that there are no material inaccuracies in the Rent
Roll and that the copies of the Leases, Service Agreements, License Agreement
and Development Related Agreements are true, correct and complete.
A-13
<PAGE>
14. Condemnation.
------------
If any part or parts of the Hotel shall be taken by the exercise of
the power of eminent domain, this Agreement shall continue in full force and
effect and there shall be no adjustment of the Purchase Price. With respect to
any such taking after the date of this Agreement, Seller shall furnish to Buyer
a copy of the declaration of taking promptly after Seller's receipt thereof.
Buyer shall notify Seller of its election within ten (10) business days of
Seller's notice.
15. Condition of the Hotel.
----------------------
(a) The entire agreement between Seller and Buyer with respect to the
Partnership Interest and the sale thereof is expressly set forth in this
Agreement, and the parties are not bound by any agreement, understandings,
provisions, conditions, representations or warranties other than as are
expressly set forth in this Agreement. Without in any manner limiting the
generality of the foregoing, Buyer acknowledges that at the expiration of the
Due Diligence Period, it and its representatives will have fully inspected the
Hotel and the Service Agreements and the Leases, will then be fully familiar
with the physical and financial condition thereof, and that the Partnership
Interest shall have been purchased by Buyer in an "as is" and "where is"
condition as a result of such inspection and investigations and not in reliance
on any agreement, understanding, condition, warranty or representation made by
Seller or any agent or employee of Seller (except as expressly elsewhere
provided in this Agreement) as to the condition thereof, as to any permitted use
thereof, or as to the income or expense in connection therewith, or as to any
other matter in connection therewith; and Buyer further acknowledges that no
Seller nor any party acting on behalf of Seller has made or shall be deemed to
have made any such agreement, condition, representation or warranty, except as
expressly set forth in this Agreement.
(b) Between the date of the Exercise Notice or the Acceptance Notice
and the Closing, Seller shall cause I-85 to make all repairs to the Hotel
required to maintain them in the same condition as they are as of the date of
the Acceptance Notice or the Exercise Notice, as said condition shall be changed
by wear and tear, eminent domain, damage by fire or other casualty, or
vandalism.
16. Buyer's Indemnity.
-----------------
Subject to the limitation on liability set forth herein, Buyer agrees
to indemnify, defend (with counsel mutually acceptable to Buyer and Seller) and
hold Seller harmless against and with respect to the following:
(a) any loss or damage to Seller, subsequent to the Closing Date,
resulting from any inaccuracy in or breach of any representation or warranty of
Buyer or resulting from any breach or default by Buyer of any obligation of
Buyer under this Agreement or from liabilities incurred by Buyer, or the Hotel
after the Closing; and
A-14
<PAGE>
(b) all costs and expenses, including reasonable attorneys' fees,
related to any actions, suits or judgments incident to any of the foregoing.
The provisions of this Section shall survive Closing.
17. Limitation on Liability.
-----------------------
The parties acknowledge that this Agreement and all documents,
agreements, understandings and arrangements relating to the transactions
contemplated by this Agreement to be executed or undertaken by Buyer which have
been executed by one or more officers of its general partner have been or will
be so executed in his/her capacity as an officer of its general partner, and not
individually, and none of the partners, officers or employees of Buyer nor any
of the directors, officers, shareholders or employees of its general partner or
the REIT (in their capacities as directors, officers, shareholders or employees
of such corporation) shall be bound or have any personal liability hereunder or
thereunder except as shall arise from the gross negligence or willful misconduct
thereof. Seller shall look solely to the assets of Buyer for satisfaction of any
liability of Buyer in respect of this Agreement and all documents, agreements,
understandings and arrangements relating to this transaction and will not seek
recourse or commence any action against any of the partners, officers or
employees of Buyer nor any of the director, officers, shareholders or employees
of the REIT or any of their personal assets for the performance or payment of
any obligation hereunder or thereunder except as shall arise from the gross
negligence or wilful misconduct thereof.
18. Seller's Indemnity.
------------------
Subject to the limitation on liability set forth in Section 5(g)
hereof, Seller agrees to indemnify, defend (with counsel mutually acceptable to
Buyer and Seller) and hold Buyer harmless against and with respect to any loss
or damage to Buyer subsequent to the Closing Date, resulting from any inaccuracy
in or breach of any representation or warranty of Seller or resulting from any
breach or default by Seller of any obligation of such Seller under this
Agreement, as well as all costs and expenses, including reasonable attorneys'
fees, related to any actions, suits or judgments incident to any of the
foregoing. The provisions of this Section survive Closing.
19. Notice of Claims.
----------------
Seller and Buyer, as applicable, shall promptly notify the other in
the event any claim is made against Seller or Buyer as to which the other party
has agreed to indemnify and the indemnitor shall thereupon undertake to defend
and hold the indemnitee harmless therefrom. This provision shall survive
Closing.
A-15
<PAGE>
Schedule 1
----------
Name of Seller Partnership Interest
- -------------- --------------------
1815 HOTEL ASSOCIATES LIMITED PARTNERSHIP 16.667%
Address of Seller
- -----------------
c/o American General Hospitality, Inc.
3860 W. Northwest Highway, Suite 300
Dallas, TX 75220
Attn: Bruce G. Wiles
Tax Identification Number
- -------------------------
___________________________
<PAGE>
Exhibit 10.19
FORM OF
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT (the "Agreement") between American General
Hospitality Corporation, a Maryland corporation (the "Company"), and
____________________________, a director and/or an officer of the Company (the
"Indemnitee"), dated as of ____________________, 1996 [insert date of election
as director or officer].
R E C I T A L S:
1. It is essential that the Company retain as directors and officers the
most capable persons available.
2. Both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors/officers of public
companies in today's environment.
3. The Indemnitee has agreed to serve as a director and/or an officer of
the Company.
4. The charter (the "Charter") and the Bylaws of the Company (the
"Bylaws") provide for certain indemnification of the officers and directors of
the Company.
5. In recognition of Indemnitee's need for substantial protection against
personal liability and to provide Indemnitee with specific contractual assurance
that the protection provided by the Charter will be available to Indemnitee
(regardless of, among other things, any amendment to or revocation of the
Charter or Bylaws, or any Change in Control (as herein defined)), the Company
wishes to provide in this Agreement for the indemnification of and the
advancement of expenses to Indemnitee to the fullest extent permitted by
Maryland law and as set forth in this Agreement, and, to the extent insurance is
maintained, for the continued coverage of Indemnitee under the Company's
directors' and officers' liability insurance policies.
NOW, THEREFORE, in consideration of the premises and intending to be
legally bound hereby, the parties hereto agree as follows:
Section 1. Indemnification.
In the event that the Indemnitee was or is made a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, or is or was otherwise involved, in any threatened, pending or
completed action, suit, proceeding, arbitration, alternate dispute resolution
mechanism, or any inquiry or investigation, whether civil, criminal,
administrative or investigative (hereinafter a "Proceeding"), by reason of the
fact that the Indemnitee or a person of whom the Indemnitee is the legal
representative is or was a director, officer or employee of the Company or,
while a director or officer of the Company, is or was serving at the request of
the Company as a director, officer, partner, trustee, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such actual or threatened proceeding is alleged action or omission
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a
<PAGE>
director, officer, employee or agent, the Indemnitee shall be indemnified and
held harmless by the Company to the fullest extent authorized by the Maryland
General Corporation Law (the "MGCL"), the Charter and the Bylaws as the same
exist or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment), against all reasonable expenses, liability and loss (including,
without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) actually incurred by the
Indemnitee in connection therewith, and such indemnification shall continue as
to the Indemnitee if the Indemnitee ceases to be a director, officer, employee
or agent and shall inure to the benefit of the Indemnitee's heirs, executors and
administrators; provided, however, that, except as provided in Section 2 with
-------- -------
respect to proceedings seeking to enforce rights to indemnification, the Company
shall indemnify the Indemnitee in connection with a proceeding (or part thereof)
initiated by the Indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Company.
Section 2. Suit to Recover.
If a claim under Section 1 is not paid in full by the Company within forty-
five days after a written claim has been received by the Company, the Indemnitee
may at any time thereafter bring suit against the Company to recover the unpaid
amount of the claim and, if successful in whole or in part, the Indemnitee shall
be entitled to be paid also the expense of prosecuting such claim. It shall be
a defense to any such action (other than an action brought to enforce a claim
for expense incurred in defending any actual or threatened proceeding in advance
of its final disposition where the required undertaking, if any is required, has
been tendered to the Company) that the Indemnitee has not met the standard of
conduct which make it permissible under the MGCL for the Company to indemnify
the Indemnitee for the amount claimed, but the burden of proving such defense
shall be on the Company. Neither the failure of the Company (including its
Board of Directors, independent legal counsel or stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the Indemnitee is proper in the circumstances because the Indemnitee has met the
applicable standard of conduct set forth in the MGCL, nor an actual
determination by the Company (including its Board of Directors, independent
legal counsel or stockholders) that the Indemnitee has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that the Indemnitee has not met the applicable standard of conduct.
Section 3. "Change in Control".
Following any "change in control" of the Company of the type required to be
reported under Item 1 of Form 8-K promulgated under the Securities Exchange Act
of 1934, as amended, any determination as to entitlement to indemnification
shall be made by Independent Legal Counsel selected by the Indemnitee, such
Independent Legal Counsel to be retained by the Board of Directors on behalf of
the Company, "Independent Legal Counsel" shall mean an attorney or firm of
attorneys who shall not have otherwise performed services for the Company or
Indemnitee within the last five years (other than with respect to matters
concerning the rights of Indemnitee under this Agreement, or of other
indemnitees under similar indemnity agreements).
2
<PAGE>
Section 4. Insurance.
In the event that the Company maintains insurance to protect itself and any
director or officer of the Company against any expense, liability or loss, such
insurance shall cover the Indemnitee to at least the same extent as any other
director or officer of the Company.
Section 5. Advance of Expenses.
The right to indemnification conferred by this Agreement shall include the
right to be paid by the Company the reasonable expenses (including attorney's
fees) incurred in defending any actual or threatened proceeding in advance of
its final disposition; provided, however, that, if the MGCL requires, the
-------- -------
payment of such expenses incurred by the Indemnitee in advance of the final
disposition of any actual or threatened proceeding shall be made only upon
delivery to the Company of an undertaking, by or on behalf of the Indemnitee, to
repay all amounts so advanced if it shall ultimately be determined that the
Indemnitee is not entitled to be indemnified under this Agreement or otherwise.
Section 6. Indemnification for Additional Expenses.
The Company shall indemnify Indemnitee against any and all expenses
(including reasonable attorneys' fees) and, if requested by Indemnitee, shall
(within ten business days of such request) advance such expenses to Indemnitee,
which are incurred by Indemnitee in connection with any action brought by
Indemnitee for (i) indemnification or advance payment of expenses by the Company
under this Agreement, the Charter or any other agreement, certificate of
incorporation or Company by-law now or hereafter in effect relating to claims
and/or (ii) recovery under any directors' and officers' liability insurance
policies maintained by the Company; provided, however, that the payment of
-------- -------
expenses incurred by Indemnitee in advance of final disposition of such action
will be made only upon receipt by the Company of an undertaking by the
Indemnitee to repay all amounts advanced if it should be ultimately determined
that the Indemnitee is not entitled to be indemnified under this Agreement or
otherwise.
Section 7. Partial Indemnity.
If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for a portion of the expenses, judgments, fines,
penalties and amounts paid in settlement of a claim but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding
any other provision of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise in defense of any or all claims or in
defense of any proceeding, including dismissal without prejudice, Indemnitee
shall be indemnified against all reasonable expenses incurred in connection
therewith.
Section 8. Burden of Proof.
In connection with any determination by the Reviewing Party or otherwise as
to whether Indemnitee is entitled to be indemnified hereunder, the burden of
proof shall be on the Company to establish that Indemnitee is not so entitled.
3
<PAGE>
"Reviewing Party" shall mean, subject to any requirement set forth in the
MGCL, any person or group of persons consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Proceeding for which
Indemnitee is seeking indemnification, or Independent Legal Counsel, who shall
determine whether Indemnitee is entitled to be indemnified hereunder.
Section 9. No Presumptions.
For purposes of this Agreement, the termination of any claim, action, suit
or proceeding, by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not permitted by applicable law. In addition, neither
the failure of a Reviewing Party to have made a determination as to whether
Indemnitee has met any particular standard of conduct or had any particular
belief,nor an actual determination by a Reviewing Party that Indemnitee has not
met such standard of conduct or did not have such belief, prior to the
commencement of legal proceedings by Indemnitee to secure a judicial
determination that Indemnitee should be indemnified under applicable law, shall
be a defense to Indemnitee's claim or create a presumption that Indemnitee has
not met any particular standard of conduct or did not have any particular
belief.
Section 10. Non-Exclusivity.
The rights conferred in this Agreement shall not be exclusive of any other
right which the Indemnitee may have or hereafter acquire under any statute,
provision of the Charter, Bylaws, agreement, vote of stockholders or of
disinterested directors or otherwise.
Section 11. Subrogation.
In the event of payment under this Agreement, the Company shall be
subrogated to the extent of such payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce
such rights.
Section 12. No Duplication of Payments.
The Company shall not be liable under this Agreement to make any payment in
connection with any claim made against Indemnitee to the extent Indemnitee has
otherwise actually received payment (under any insurance policy, the Charter or
otherwise) of the amounts otherwise indemnifiable hereunder.
Section 13. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and their respective successors, assigns,
including any direct or indirect successor by purchase, merger, consolidation or
otherwise to all or substantially all of the business and/or assets of the
Company, spouses, heirs, executors and personal and legal representatives. This
Agreement shall continue in effect regardless of whether Indemnitee continues to
serve as an officer or director of the Company or of any other enterprise at the
Company's request.
4
<PAGE>
Section 14. Severability.
The provisions of this Agreement shall be severable in the event that any
of the provisions hereof (including any provision within a single section,
paragraph or sentence) is held by a court of competent jurisdiction to be
invalid, void or otherwise unenforceable in any respect, and the validity and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired and shall remain enforceable
to the fullest extent permitted by law.
Section 15. Amendment.
This Agreement may not be changed, modified or amended except in
writing signed by the parties hereto.
IN WITNESS WHEREOF, the Company and the Indemnitee have executed this
Agreement as of the day and year first above written.
COMPANY:
AMERICAN GENERAL HOSPITALITY CORPORATION
By:_______________________________________
Steven D. Jorns
Chairman, Chief Executive Officer and President
INDEMNITEE:
__________________________________________
5
<PAGE>
Exhibit 10.36
BOISE, IDAHO
OPTION AGREEMENT AND RIGHT OF FIRST OFFER/REFUSAL
-------------------------------------------------
THIS AGREEMENT made this day of June, 1996, by and between BROADWAY
MORRISON LIMITED PARTNERSHIP, a Texas limited partnership ("Seller"), and
AMERICAN GENERAL HOSPITALITY OPERATING PARTNERSHIP, L.P., a Delaware limited
partnership ("Buyer").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Seller owns the percentage interest set forth opposite its name on
Schedule 1 in Broadmorr Joint Venture, a joint venture in the form of an Idaho
general partnership ("Broadmorr") which owns the leasehold interest in the
parcel or parcels of land set forth on Exhibit "A-1" (the "Partnership
Interest");
WHEREAS, the beneficial owner of a majority of the limited partnership
interests of Buyer will be American General Hospitality Corporation (the
"REIT"), a corporation organized under the laws of the State of Maryland which
intends to be qualified as a real estate investment trust under the Internal
Revenue Code and an affiliate of the REIT will be the sole general partner of
Buyer;
WHEREAS, Broadmorr is currently developing a 167 room hotel in Boise, Idaho
(the "Hotel"); and
WHEREAS, Seller desires to grant and Buyer desires to accept certain
options and rights of first offer and refusal regarding the Partnership Interest
on the terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the payment of One Dollar ($1.00) to
each other, and of the mutual promises contained in this Agreement and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Seller and Buyer covenant and agree, intending to be legally
bound, as follows:
I. Purchase Option.
---------------
Seller hereby grants to Buyer the option to purchase the Partnership
Interest of Seller set forth on Schedule 1 opposite Seller's name (the "Purchase
Option"), for the price and otherwise on the terms and conditions set forth in
Exhibit "A". The Purchase Option may be exercised only by written notice of
- -----------
exercise (an "Exercise Notice") sent to Seller not later than two (2) years from
the date (the "Trigger Date") Seller notifies Buyer that the Hotel has opened
for business (the "Option Term"). If Buyer shall timely exercise such option,
then the Exercise Notice shall constitute an agreement of sale for the
Partnership Interest on the terms and conditions of Exhibit "A" hereto, except
-----------
to the extent such terms and conditions are altered by a subsequent written
agreement of the parties.
<PAGE>
II. Right of First Offer/Refusal for Partnership Interest.
-----------------------------------------------------
(a) If during the Option Term (i) Seller desires to Transfer (as
hereinafter defined) its Partnership Interest or (ii) Seller receives a bona
----
fide offer to Transfer such Partnership Interest, then prior to offering such
- ----
Offered Property (as hereinafter defined) for Transfer, or accepting an offer
for such Offered Property for Transfer, Seller shall give Buyer notice (the
"Offer Notice") specifying the purchase price and the other material terms and
conditions pursuant to which Seller is willing to Transfer the Offered Property.
As used herein, a "Transfer" is to sell, convey, assign, exchange or otherwise
transfer to an unrelated third-party all or any part of such Partnership
Interest or interest therein (such Partnership Interest or interest therein
intended to be transferred is herein called an "Offered Property").
(b) Upon the giving of the Offer Notice, Buyer shall have the right (the
"Right of First Offer"), exercisable by notice (the "Acceptance Notice")
delivered to Seller no later than thirty (30) days after the giving of the Offer
Notice and after Seller's delivery to Buyer of copies of all of the Development
Related Agreements, License Agreement, Leases and Service Agreements ( all the
foregoing agreements, as defined in Exhibit "A") pertaining to the Offered
Property and other requested materials (including a true and correct copy of the
joint venture and partnership agreements and tax returns for the three year
period prior to the Offer Notice for Seller and for Broadmorr, or for such
shorter period for which tax returns have actually been filed), to acquire the
Offered Property in accordance with the terms and conditions of the Offer
Notice.
(c) If Buyer delivers an Acceptance Notice within the prescribed time
period, then the Acceptance Notice, together with the Offer Notice, shall be
deemed to be an agreement of sale and purchase, on the terms and conditions of
the Offer Notice and of Exhibit "A" hereto (to the extent not in conflict with
the terms of the Offer Notice), except to the extent such terms and conditions
are altered by a subsequent written agreement of the parties.
(d) If Buyer does not deliver to Seller either (i) an Acceptance Notice
with respect to the Offered Property or (ii) an Exercise Notice pursuant to
Paragraph I hereof with respect to the entire Partnership Interest, in either
case within the prescribed thirty (30) day period described above, Seller shall
be entitled to Transfer the Offered Property to an unrelated third party free of
any rights of Buyer under this Agreement on terms no less favorable to Seller
than those specified in the Offer Notice, and upon such Transfer, Buyer's rights
under this Agreement with respect to the Offered Property shall automatically
terminate. If Seller does not enter into a binding agreement to consummate such
Transfer (which agreement will be deemed binding notwithstanding customary
conditions to the obligations of parties thereunder) within six (6) months after
the expiration of the time for Buyer to give an Acceptance Notice or if Seller
does not complete such Transfer within three (3) months after the expiration of
the time for consummating the offer set forth in the Offer Notice (or, if no
such time is specified in the Offer Notice then within nine (9) months after the
expiration of the time for Buyer to give an Acceptance Notice), then Buyer's
rights hereunder with respect to such Offered Property shall be deemed
reinstated.
2
<PAGE>
(e) The term "Transfer" as used in this Agreement shall not include the
grant of a mortgage or deed of trust or the creation of any security interest to
secure a bona fide loan, dedication to a governmental body or public utility or
---- ----
any execution upon any mortgage, deed of trust, pledge agreement or security
interest, nor shall "Transfer" include any transfer by Seller to a party other
than an unrelated third party, provided, however, that any such transfer to a
party other than an unrelated third party shall be under and subject to the
rights of Buyer hereunder and the transferee shall assume and promise to observe
and perform the covenants and obligations of its transferror hereunder.
III. Access to Properties and Documents.
----------------------------------
Seller shall from time to time, upon the request of Buyer, furnish to
Buyer, at Buyer's expense, copies of all Development Related Agreements, Leases,
Service Agreements and such other documents, instruments and records in Seller's
possession as Buyer may reasonably request, and Seller shall afford Buyer access
to the Hotel and to Seller's books and records pertaining thereto, for purposes
of inspecting same and causing surveys and audits to be performed, all at
Buyer's expense. Except for permitting access to the foregoing by its trustees,
employees, partners, attorneys, accountants and advisors, Buyer will use
reasonable efforts to preserve the confidentiality of any of the foregoing which
have not been made public by Seller.
IV. Merger into Agreement of Sale.
-----------------------------
If Buyer gives an Exercise Notice or an Acceptance Notice then Buyer's
rights under this Agreement with respect to the Partnership Interest which are
the subject of the agreement of sale resulting from such Exercise Notice or
Acceptance Notice shall be deemed merged into such Agreement of Sale and shall
be extinguished.
V. Continuing Rights.
-----------------
The exercise or the non-exercise by Buyer of the Right of First
Offer/Refusal to acquire less than all of the Partnership Interest pursuant to
the terms of this Agreement shall not affect Buyer's continuing rights under
this Agreement as to that portion of the Partnership Interest which was not the
subject matter of a prior Offer Notice.
VI. Notices.
-------
(a) Each notice to be given pursuant to this Agreement shall be in
writing and shall be deemed to have been properly given or served by deposit of
such with the United States Postal Service certified mail, return receipt
requested, postage prepaid or with a nationally recognized overnight courier for
next business day delivery and addressed as hereinafter provided .
(b) Any such notice shall be effective upon the earlier of (i) actual
receipt or refusal to accept delivery by addressee or (ii) two business days
after deposit thereof at any main or branch of the United States Postal Service
or (iii) the first business day after deposit with nationally recognized
overnight courier. Rejection or other refusal to accept or the inability to
deliver because
3
<PAGE>
of a changed address or status of which no written notice was given shall be
deemed to be receipt of the particular notice sent. By giving to the other party
entitled to notice hereunder a notice pursuant to the provisions of this
Section, the party entitled to notice shall have the right from time to time
during the term of this Agreement to change the address(es) thereof and to
specify as the address(es) thereof any other address(es) within the United
States of America.
The address for Seller for all purposes under this Agreement shall be the
following:
Broadway Morrison Limited Partnership
c/o American General Hospitality, Inc.
3860 W. Northwest Highway, Suite 300
Dallas, Texas 75220
Attention: Bruce G. Wiles
with a copy to:
Battle Fowler, L.L.P.
75 East 55th Street
New York, New York 10022
Attention: Peter M. Fass, Esq.
The address for Buyer for all purposes under this Agreement shall be the
following:
American General Hospitality Operating Partnership, L.P.
c/o American General Hospitality, Inc.
3860 W. Northwest Highway, Suite 300
Dallas, Texas 75220
Attention: Bruce G. Wiles
with a copy to:
Battle Fowler, L.L.P.
75 East 55th Street
New York, New York 10022
Attention: Peter M. Fass, Esq.
VII. Subordination.
-------------
4
<PAGE>
This Agreement is and shall be subject and subordinate at all times to the
lien of any mortgage, deed of trust and/or other encumbrance affecting the
Partnership Interests, or any part thereof permitted under Paragraph II(e) (such
liens and matters of record are collectively referred to as a "Prior Interest"),
--------------
all automatically and without the necessity of any further action on the part of
Buyer to effectuate such subordination. Buyer shall, at Seller's request,
execute, acknowledge and deliver such further instruments evidencing such
subordination as shall be desired by Seller or the holder of a Prior Interest.
VIII. Term. This Agreement shall expire on the earlier to occur of (i)
----
ten (10) years from the date hereof, or (ii) the expiration of the Option Term,
each subject to the applicable extension if, during the Option Term, Buyer
either delivers to Seller an Exercise Notice, or receives from Seller an Offer
Notice with respect to the entire Partnership Interest, followed in the case of
an Offer Notice by an Acceptance Notice within the applicable thirty (30) day
period, whereupon the resulting agreement of sale shall expire upon closing of
the transaction pursuant thereto (subject to the survival of any provisions
which are stated to survive each Closing).
IX. Consequences of a Sale of the Hotel. Not less than forty-five (45)
-----------------------------------
days prior to any Transfer by Broadmorr of its real estate and personal property
comprising the Hotel to a third party unrelated to Seller (whether or not such
Transfer may be to a party related to one or more other partners in Broadmorr),
Seller shall give notice to Buyer ("Pending Sale Notice") of the proposed
Transfer and all material terms and conditions of the proposed Transfer, and,
unless Buyer shall issue an Exercise Notice within thirty (30) days following
receipt by Buyer of the Pending Sale Notice, the proceeds of such Transfer
distributable to Seller will be retained by it; provided, however, that if such
Transfer is of less than all or substantially all of the Hotel, then the options
and rights of Buyer hereunder shall remain in effect; and provided further that
if Seller shall fail to give a Pending Sale Notice required hereunder, then
Seller shall be obligated to pay to Buyer, contemporaneous with its receipt of
its pro rata share of the net sales proceeds of such sale (as determined under
the terms of the joint venture agreement of Broadmorr), the amount by which the
pro rata share of the net sales proceeds exceeds the amount which would have
been the Purchase Price if the Option had been exercised and Closing had
occurred.
X. Successors and Assigns.
----------------------
(a) The terms and provisions of this Agreement shall be binding upon
Seller, and its successors and assigns, and shall inure to the benefit of Buyer
and its successors.
(b) Buyer shall have no right to assign or pledge its rights under this
Agreement, but Buyer may direct that the conveyance of the Hotel at Closing be
made to an affiliate of Buyer.
XI. Miscellaneous.
-------------
(a) This Agreement and the obligations of the parties shall be interpreted,
construed and enforced in accordance with the internal law of Idaho, without
regard to the conflicts of law principles thereof.
5
<PAGE>
(b) If any provision of this Agreement shall be invalid or unenforceable to
any extent, the remainder of this Agreement and the application of such
provisions to any other circumstance shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
(c) This Agreement constitutes the entire Agreement of Seller and Buyer
with respect to the subject matter hereof. Neither this Agreement nor any
provision hereof may be changed, waived, discharged or terminated orally, but
only by an instrument in writing signed by the party against whom enforcement of
the change, waiver, discharge or termination is sought.
(d) All personal pronouns used in this Agreement, with the use in the
masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural; and the plural shall include the singular.
Titles of Paragraphs in this Agreement are for convenience only, and neither
limit nor amplify the provisions of this Agreement.
(e) This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original and all of which together shall comprise
but a single instrument.
(f) All exhibits and schedules attached to this Agreement are incorporated
by reference into and made a part of this Agreement.
XII. Consent of Other Partners of Broadmorr.
--------------------------------------
Buyer hereby acknowledges that the exercise by Buyer of its rights
hereunder may require approval of one or more partners of Broadmorr other than
Seller and by one or more of the partners constituting Seller (the "Broadway
Morrison Partners"). Seller will not seek such approval until receipt of an
Exercise Notice or an Acceptance Notice, as applicable, but thereafter Seller
promises to use commercially reasonable efforts to obtain such approvals, but
Seller shall not be required to pay money or other consideration to obtain such
approvals except that Seller will pay normal fees and expenses of counsel and
such normal overhead costs as may be necessary. The obligations of Seller and
Buyer to consummate Closing shall be conditioned upon the grant of such
approvals of other partners of Broadmorr and the Broadway Morrison Partners as
may be necessary under the agreements governing Broadmorr and Seller,
respectively.
6
<PAGE>
IN WITNESS WHEREOF, intending to be legally bound, the parties have caused
this Agreement to be executed on the day and year first above written.
BUYER:
AMERICAN GENERAL HOSPITALITY OPERATING PARTNERSHIP,
L.P., a Delaware limited partnership, by its general
partner
By: AGH GP, Inc., a Nevada Corporation
By:
___________________________________
Name:
Title:
SELLER:
BROADWAY MORRISON LIMITED PARTNERSHIP, a Texas limited
partnership, by its sole general partner and Managing
Partner
By: Virtual Hospitality, Inc., a Texas Corporation
By:
___________________________________
Name:
Title:
7
<PAGE>
EXHIBIT A
OPTION TERMS AND CONDITIONS
---------------------------
XIII. Sale of Partnership Interest.
----------------------------
Seller shall sell, transfer and assign to Buyer and Buyer shall
purchase from Seller, upon the terms and conditions hereinafter set forth all of
Seller's right and interest in and to the Partnership Interest, including,
without limitation, all right, title and interest of Seller in and to (i) all
distributions by Broadmorr from and after the Closing Date (defined below) of
cash or other assets from operations, capital transactions, sales, refinancings,
liquidation or any other source, which interest in such distributions shall not
be subordinate to any superior right to distributions or payments of any type to
any partners of Seller or affiliates of Seller or partners of Seller, including
return of capital, and (ii) all profits and losses incurred by Broadmorr from
and after the Closing Date; and, (iii) all capital of Broadmorr. At Closing,
Seller shall deliver to Buyer duly executed originals of such amendments (the
"Joint Venture Amendments") to the joint venture agreement of Broadmorr as are
necessary to substitute Buyer or its designee as a joint venture partner of
Broadmorr in place and instead of Seller. Buyer will, at Closing, assume the
obligations of Seller as a venturer in Broadmorr pursuant to the joint venture
agreement and Joint Venture Amendments disclosed to Buyer from and after the
Closing Date, and Buyer will agree to defend, indemnify and hold harmless Seller
from and against any and every manner of loss, cost, damage or expense arising
by reason of any failure of Buyer to observe or perform any covenant or
obligation assumed by Buyer at Closing.
XIV. Purchase Price.
--------------
(a) The purchase price (the "Purchase Price") to be paid by Buyer to
Seller for the Partnership Interest shall be Seller's Share (hereafter defined)
of the Agreed Value. The Agreed Value shall be determined as follows:
(i) If the Exercise Notice is delivered prior to or on the first
anniversary of the Trigger Date, the Agreed Value shall be the Cost of
Developing the Hotel multiplied by 110%. For purposes of this
Paragraph 2 the "Cost of Developing the Hotel" shall mean the total
cost of constructing, furnishing and developing the hotel incurred
prior to the date the Hotel is issued a certificate of occupancy, or a
temporary certificate of occupancy. Seller shall certify to Buyer as
to the cost of Developing the Hotel in a writing (the "Cost
Certificate") delivered to Buyer within thirty (30) days of the
Trigger Date. If Buyer objects to such amount within ten (10) days of
Seller's receipt of the Cost Certificate and the parties are unable to
resolve such dispute within five (5) days thereafter, either party may
elect to submit the dispute to JAMS/Endispute, Inc. for resolution.
A-1
<PAGE>
(ii) If the Exercise Notice is delivered after the first anniversary of the
Trigger Date and prior to the expiration of the Option Term, the
Agreed Value shall be the amount determined in the prior subparagraph,
increased by a percentage equal to the percentage increase in the U.S.
Department of Labor, Bureau of Labor Statistics, "United States City
Average for All Items Portion of the Consumer Price Index New Series
for Urban Consumers" (1982-84=100) ("CPI-U") measured for the twelve
(12) month period from the CPI-U published nearest to the Trigger Date
to the CPI-U on the next succeeding anniversary thereof. If during the
Option Term, the U.S. Department of Labor, Bureau of Labor Statistics,
ceases to publish a CPI-U, such other index or standard as will most
nearly accomplish the aim and purpose of said CPI-U and the use
thereof of the parties thereto, shall be selected by Seller in its
sole discretion in determining the amount of any such adjustment.
(b) The Purchase Price, less Seller's Share of the outstanding
principal balance of any existing mortgage, shall be paid by Buyer to Seller at
Closing by either of the following methods designated by Seller:
(i) The delivery to Seller of a bank treasurer's check of a member
bank of The New York Clearing House, payable to the order of Seller or, at
Seller's option, the Escrow Agent, by check or by wire or debit and credit
transfer of immediately available same day United States Federal Funds to one or
more accounts to be designated by Seller, or
(ii) Subject to any securities laws limitations, by the issuance of
limited partnership interests in Buyer (the "Operating Partnership Interests"),
which shall be exchangeable for common shares of beneficial interest ("Shares")
of the REIT, subject to the restrictions and on the basis to be established in
the limited partnership agreement of Buyer. The Operating Partnership Interests
will be divided into units ("OP Units") in the manner determined by the general
partner of Buyer. The number of Operating Partnership Interests to be issued to
Seller shall be that number of Operating Partnership Interests convertible into
Shares having a Share Value as of the day preceding the Closing Date equal to
the Purchase Price. For purposes of this Agreement, the term "Share Value" as
of a particular day shall mean the average of the closing prices that a Share
has traded for the five (5) trading days immediately preceding that particular
day on the New York Stock Exchange (or, if Shares are not then traded on the New
York Stock Exchange, then on the principal stock exchange on which Shares are
then traded).
(c) The term "Seller's Share" shall mean the percentage interest in
Broadmorr transferred by Seller to Buyer at Closing hereunder.
(d) In the event Buyer elects to receive the Purchase Price in OP
Units (such event, a "Unit Election"):
(1) The OP Units to be issued to Seller shall be subject to a
Lock-Up Agreement to be executed at Closing by Buyer and Seller, substantially
in the form attached hereto
A-2
<PAGE>
as Schedule 2, whereby Seller will not be permitted to transfer OP Units for one
year after Closing, except as otherwise permitted under such agreement; and
(2) At or prior to Closing, the REIT, Seller and the other
parties thereto shall enter into a Registration Rights Agreement and Exchange
Rights Agreement substantially in the forms attached hereto as Schedules 3 and
4, respectively.
XV. Closing.
-------
(a) Closing shall be held on the date designated by Buyer by at
least twenty (20) days prior written notice to Seller ("Closing Date") which
shall be not less than thirty (30) days and not more than ninety (90) days
following the Exercise Notice or the Acceptance Notice, except that in the case
of an Acceptance Notice, if the Offer Notice shall have specified a date for
Closing then the Closing Date shall be the date specified in the Offer Notice.
(b) Closing is the event ("Closing") during which, among other
things, Buyer shall pay the Purchase Price to Seller for the Hotel and Seller
shall deliver to Buyer the Assignment (defined below) and such other documents
or instruments as may be required pursuant to this Agreement (the "Closing
Documents"). Buyer and Seller will, at or prior to the Closing, execute and
deliver the Closing Documents required by Buyer and, pending the Closing,
deposit such Closing Documents in escrow with Chicago Title Insurance Company,
as escrow agent of Buyer (the "Escrow Agent").
(c) In the event Buyer makes a Unit Election, the following
deliveries shall be made at the Closing:
(1) Buyer shall cause to be delivered to the Escrow Agent,
(x) a certificate of the general partner of Buyer (the "General Partner")
certifying that Seller has been or will be, effective as of the Closing,
admitted as a limited partner of Buyer and that Buyer's books and records
indicate or will indicate that Seller is the holder of the number of OP Units
that represents the Purchase Price and (y) if such OP Units are represented by
certificates, a certificate or certificates in the name of Seller representing
the number of OP Units to which Seller is entitled; and
(2) upon receipt of the consideration set forth in clause
(1) above, the Escrow Agent will release the Closing Documents to Buyer and
deliver to Seller, the certificates, if any, representing Seller's OP Units and,
if requested by Seller, a copy of the General Partner's certificate referred to
in clause (1).
(d) Notwithstanding any other provision of this Agreement, Buyer
may, in its sole discretion, elect not to consummate the contribution of the
Partnership Interest as follows:
A-3
<PAGE>
(1) in the event that Seller either identifies in its
Assignment a breach of or other exception with respect to any of the
representations, warranties or covenants contained in Paragraph 5 or has
otherwise breached this Agreement,
(2) in the event that all authorizations, consents or
approvals of any governmental or administrative agency or authority or any third
party necessary in order to consummate the contribution of the Partnership
Interest have not been delivered, or there exists an order or judgment
enjoining, restraining or prohibiting, or assessing substantial damages in
respect of such consummation, or there shall be any action or proceeding
instituted or threatened in writing to enjoin, restrain, prohibit or assess
substantial damages in respect of such consummation, or
(3) in the event Buyer and Seller shall not have agreed to
lease the Hotel to a lessee acceptable to both parties,
then, Buyer shall, in lieu of the delivery with respect to Seller pursuant to
- ----
clause (c)(1) above, either (A) in the case of an election not to consummate the
contribution of the Partnership Interest, notify the Escrow Agent of such
election and direct the Escrow Agent to return Seller's Closing Documents to
Seller, or (B) in all other cases, equitably adjust the delivery with respect to
Seller pursuant to clause (c)(1) above, if applicable, to reflect the portion of
the Partnership Interest with respect to which the contribution is actually
being consummated, which adjustment shall be determined in Buyer's reasonable
discretion, and shall in all events be binding upon Seller.
4. Documents to Be Delivered at the Closing.
----------------------------------------
At or prior to the Closing, Seller shall execute, acknowledge
where deemed desirable or necessary by Buyer, and deliver to the Escrow Agent,
in addition to any other documents mentioned elsewhere herein, the following:
(a) An assignment of the Partnership Interest (the
"Assignment"), which assignment shall be in a form reasonably satisfactory to
Buyer and Seller, shall contain a warranty of title that Seller owns the
Partnership Interest free and clear of all Encumbrances (as defined below) and
shall either (i) reaffirm the accuracy of all representations and warranties and
the satisfaction of all covenants contained in Paragraph 5 hereof, or (ii) if
such reaffirmation cannot be made, identify those representations, warranties
and/or covenants contained in Paragraph 5 hereof which Seller can no longer make
or comply with, represent that Seller has used reasonable efforts to take such
actions as would permit Seller to make such representations and warranties
and/or to comply with such covenants, and reaffirm the accuracy of all other
representations and warranties and the satisfaction of all other covenants
contained in Paragraph 5 hereof.
(b) A certified copy of all appropriate corporate resolutions or
partnership or trust actions authorizing the execution, delivery and performance
by Seller of this Agreement and the Closing Documents.
A-4
<PAGE>
(c) A written certification ("FIRPTA Certificate") dated no earlier
than ninety (90) days prior to the date of Closing, which certification shall be
in compliance with the Act and the regulations thereunder that are imposed by
the Foreign Investment in Real Property Tax Act ("FIRPTA") and certifying that
the Seller is not a person or entity subject to withholding under FIRPTA and the
Act, and containing Seller's tax identification number and address.
Alternatively, Seller hereby certifies in compliance with FIRPTA (i) that it is
not a foreign person, foreign corporation, foreign partnership, foreign trust or
foreign estate (as those terms are defined in the Act of FIRPTA, (ii) that its
Taxpayer Identification Number is as set forth in Schedule 1 (or will be
furnished prior to Closing), (iii) that his, her, or its address set forth in
Schedule 1 is correct, (iv) that it understands that this certification may be
disclosed to the Internal Revenue Service, (v) that any false statement
contained herein could be punished by fine, imprisonment, or both, and (vi) that
it, under penalties of perjury, hereby declares that it has examined this
certification and to the best of its knowledge and belief it is true, correct,
and complete. An affidavit establishing an exemption from the withholding
requirements of the), as amended. In the event Seller fails to provide such an
affidavit, Buyer shall be entitled to withhold from the Purchase Price and pay
to the Internal Revenue Service the sums required to be withheld pursuant to
FIRPTA (and the amount so withheld shall be paid by Buyer to the Internal
Revenue Service, in order for Buyer to comply with the provisions of Section
1445 of the Internal Revenue Code of 1986 or successor similar legislation, as
the same may be amended hereafter).
(d) Any state, county and city documentary stamp declarations or
transfer or "gains" tax forms required in connection with the transfer of any of
the Partnership Interest.
(e) Estoppel letters and required consents from the ground lessor.
(f) The Lock-up Agreement, the Exchange Rights Agreement, the limited
partnership agreement for Buyer (the "Partnership Agreement") and the
Registration Rights Agreement.
(g) Any other documents, agreements or instruments as Buyer shall
reasonably request in order to assign, transfer and convey the Partnership
Interest to Buyer as a contribution to capital and to otherwise effectuate the
transactions contemplated hereby, including filings with any applicable
governmental jurisdiction in which Buyer is required to file its partnership
documentation.
5. Representations, Warranties and Covenants of Seller
---------------------------------------------------
As a material inducement to Buyer to enter into the Agreement and to
consummate the transactions contemplated hereby, Seller shall make to Buyer each
of the representations and warranties set forth in this Paragraph 5. As a
condition to Buyer's obligation to consummate the contribution of the
Partnership Interest to Buyer, such representations and warranties must be true
as of the Closing Date.
(a) Title to the Partnership Interests. Seller owns beneficially and
----------------------------------
of record, free and clear of any claim, lien, pledge (except for pledges
relating to the debt or equity financing of the Hotel (any such pledge, a
"Permitted Pledge")), voting agreement, option, charge, security
A-5
<PAGE>
interest, mortgage, deed of trust, encumbrance, right of assignment, purchase
right or other rights of any nature whatsoever (collectively, "Encumbrances"),
and has full power and authority to convey free and clear of any Encumbrances,
its Partnership Interest and, upon delivery of an Assignment by Seller conveying
its Partnership Interest and delivery of the Purchase Price by Buyer for the
Partnership Interest as herein provided, Buyer will acquire as a contribution to
capital good and valid title thereto, free and clear of any Encumbrance, except
Encumbrances created in favor of Buyer by the transactions contemplated hereby.
The Partnership Interest has been validly issued and Seller has funded (or will
fund before the same is past due) all capital contributions and advances to
Broadmorr that are required to be funded or advanced prior to the date hereof
and the date of the Closing. There are no agreements, instruments or
understandings with respect to the Partnership Interest except as set forth in
the joint venture agreement of Broadmorr. Seller has no interest, either direct
or indirect, in Broadmorr except for the Partnership Interest. No Permitted
Pledge will be in existence as of the date of the Closing, and Seller shall
provide, at the Closing, such documentary evidence of the release of any
Permitted Pledge as Buyer may reasonably request.
(b) Organization; Authority; No Conflicts. Seller is a limited
-------------------------------------
partnership, duly organized, validly existing and in good standing under the
laws of the state of its organization. Seller has full right, authority, power
and capacity: (i) to execute and deliver this Agreement, each Closing Document
and each other agreement, document and instrument to be executed and delivered
by or on behalf of Seller pursuant to this Agreement; (ii) to perform the
transactions contemplated hereby and thereby; and (iii) to transfer, assign,
convey and deliver all of the Partnership Interest to Buyer in accordance with
this Agreement. All applicable corporate, partnership or trust action necessary
for Seller to execute and deliver this Agreement, the Closing Documents and each
other agreement, document and instrument executed by or on behalf of Seller
pursuant to this Agreement, and to perform the transactions contemplated hereby
and thereby, has been taken, or will be taken prior to the Closing Date. This
Agreement, each Closing Document and each other agreement, document and
instrument executed and delivered by or on behalf of Seller pursuant to this
Agreement constitutes, or when executed and delivered will constitute, the
legal, valid and binding obligation of Seller, each enforceable in accordance
with its respective terms. Except for any breaches, violations or defaults
which will be waived or cured, or discharged or repaid prior to or
contemporaneously with the Closing, the execution, delivery and performance of
this Agreement, the Closing Documents and each other agreement, document and
instrument to be executed and delivered by or on behalf of Seller: (x) does not
and will not violate Seller's charter and/or bylaws, partnership agreement or
declaration of trust, as applicable; (y) does not and will not violate any
foreign, federal, state, local or other laws applicable to Seller or require
Seller to obtain any approval, consent or waiver of, or make any filing with,
any person or authority (governmental or otherwise) that has not been obtained
or made and which does not remain in effect; and (z) does not and will not
result in a breach or a violation of, constitute a default under, accelerate any
obligation under or give rise to a right of termination of, any indenture, deed
of trust, mortgage, loan or credit agreement or any other agreement, contract,
instrument, lease, permit, authorization, order, writ, judgment, injunction,
decree, determination or arbitration award to which Seller is a party or by
which the property of Seller is bound or affected, or result in the creation of
any Encumbrance on any of the property or assets of Broadmorr.
A-6
<PAGE>
(c) Litigation. Seller knows of no litigation or proceeding, either
----------
judicial or administrative, pending or overtly threatened, affecting all or any
portion of the Partnership Interest or Seller's ability to consummate the
transactions contemplated hereby. Seller knows of no outstanding order, writ,
injunction or decree of any court, government, governmental entity or authority
or arbitration against or affecting all or any portion of the Partnership
Interest, which in any such case would impair Seller's ability to enter into and
perform all of its obligations under this Agreement.
(d) Bankruptcy. Neither Broadmorr, to the best of Seller's knowledge,
----------
nor Seller (i) is in receivership or dissolution, (ii) has made a currently
effective general assignment for the benefit of creditors or is currently
subject to a written admission of its inability to pay its debts as they mature,
or (iii) is currently an adjudicated bankrupt or currently has on file a
petition in voluntary bankruptcy or a petition or answer seeking reorganization
or an arrangement with creditors under the Federal bankruptcy law or any other
similar law or statute of the United States or any jurisdiction and no such
petition is currently on file against Seller or Broadmorr.
(e) No Other Agreements. Seller has made no agreement with, and will
-------------------
not enter into any agreement with, and has no obligation (absolute or
contingent) to, any other person or entity to sell, transfer, dispose of or in
any way encumber any of the Partnership Interest or restricting in any way
Seller's ability to contribute the Partnership Interest to Buyer or to enter
into any agreement with respect to the Partnership Interest.
(f) No Brokers. Seller has not entered into, and covenants that it
----------
will not enter into, any agreement, arrangement or understanding with any person
or entity which will result in the obligation of Buyer to pay any finder's fee,
brokerage commission or similar payment in connection with the transactions
contemplated hereby.
(g) Survival. It is a condition to the Closing that the
--------
representations, warranties and covenants of Seller set forth in this Section 5
shall be true and correct on the Closing Date and shall survive the Closing for
a period of one (1) year from the date of the Closing, and shall expire at such
time, except for claims asserted by written notice given by or on behalf of
Buyer at any time during the one year period to Seller alleging a breach of any
representation or warranty.
(h) Investment Representations and Warranties.
-----------------------------------------
In the event Seller makes a Unit Election, the following
Investment representations, and warranties shall apply:
(1) Seller has received and reviewed a copy of the Private
Placement Memorandum (the "Private Placement Memorandum") prepared in connection
with the contribution of the Partnership Interest to Buyer (which Private
Placement Memorandum includes a draft Registration Statement, the Summary of
Partnership Agreement Provisions (the "Partnership Summary") and the Summary of
Tax Matters (the "Tax Matters Summary"), and understands the risks of, and other
considerations relating to, an investment in OP Units. Seller, by reason of its
A-7
<PAGE>
business and financial experience, together with the business and financial
experience of those persons, if any, retained by it to represent or advise it
with respect to its investment in OP Units, (i) has such knowledge,
sophistication and experience in financial and business matters and in making
investment decisions of this type that it is capable of evaluating the merits
and risks of and of making an informed investment decision with respect to an
investment in OP Units, (ii) is capable of protecting its own interest or has
engaged representatives or advisors to assist it in protecting its interests and
(iii) is capable of bearing the economic risk of such investment. Seller is an
"accredited investor" as defined in Rule 501 of the regulations promulgated
under the Securities Act. If Seller has retained or retains a person to
represent or advise it with respect to its investment in OP Units, Seller will
advise Buyer of such retention and, at Buyer's request, Seller shall, prior to
or at the Closing, (i) acknowledge in writing such representation and (ii) cause
such representative or advisor to deliver a certificate to Buyer containing such
representations as may be reasonably requested by Buyer.
(2) Seller understands that an investment in Buyer involves
substantial risks. Seller has been given the opportunity to make a thorough
investigation of the proposed activities of Buyer and has been furnished with
materials relating to Buyer and its proposed activities, including, without
limitation, the Private Placement Memorandum, the Partnership Summary and the
Tax Matters Summary. Seller has been afforded the opportunity to obtain any
additional information requested by it. Seller has had an opportunity to ask
questions of and receive answers from representatives of Buyer concerning Buyer
and its proposed activities and the terms and conditions of an investment in OP
Units. Seller has relied and is making its investment decision based upon the
Private Placement Memorandum, the Partnership Summary, the Tax Matters Summary
and other written information provided to Seller by or on behalf of Buyer
and/or, as applicable, Seller's position as a director and/or executive officer
of the Company.
(3) The OP Units to be issued to Seller at the Closing will be
acquired by Seller for its own account, for investment only and not with a view
to, or with any intention of, a distribution or resale thereof, in whole or in
part, or the grant of any participation therein. Seller was not formed for the
specific purpose of acquiring an interest in Buyer.
(4) Seller acknowledges that (i) the OP Units to be issued to Seller
at the Closing have not been registered under the Securities Act or state
securities laws by reason of a specific exemption or exemptions from
registration under the Securities Act and applicable state securities laws and,
if such OP Units are represented by certificates, such certificates will bear a
legend to such effect, (ii) the Company's and Buyer's reliance on such
exemptions is predicated in part on the accuracy and completeness of the
representations and warranties of Seller contained herein, (iii) the OP Units to
be issued to Seller at the Closing may not be resold or otherwise distributed
unless registered under the Securities Act and applicable state securities laws,
or unless an exemption from registration is available, (iv) there is no public
market for such OP Units, and (v) Buyer has no obligation or intention to
register such OP Units under the Securities Act or any state securities laws or
to take any action that would make available any exemption from the registration
requirements of such laws, except as provided in the Registration Rights
Agreement. Seller hereby acknowledges that because of the restrictions on
transfer or assignment of such OP Units to be issued hereunder which will be set
forth in the Partnership Agreement and in the Lock-
A-8
<PAGE>
up Agreement, Seller may have to bear the economic risk of the investment
commitment evidenced by this Agreement and any OP Units issued hereunder for an
indefinite period of time, although (x) under the terms of the Exchange Rights
Agreement, as it will be in effect at the time of the initial public offering
(the "IPO"), OP Units will be exchangeable at the request of the holder thereof
at any time after the first anniversary of their issuance for cash based on
their fair market value or, at the option of the Company, for shares of common
stock (the "Common Stock") and (y) the holder of any such Common Stock issued
upon exchange of OP Units will be afforded certain rights to have such Common
Stock registered under the Securities Act and applicable state securities laws
pursuant to the Registration Rights Agreement.
(5) The Units are being acquired for Seller's investment and not for
resale to others. Seller agrees that it will not sell or otherwise transfer the
Units unless they are registered under the Securities Act or unless an exemption
from such registration is available. Seller represents that it has adequate
means of providing for its current needs and possible contingencies, and that it
has no need for liquidity of the investment.
(6) It is understood that all documents, records and books pertaining
to the investment have been made available for inspection by Seller's attorney
or the Seller's accountant or Seller's offeree representative and Seller, and
that the books and records of Buyer will be available upon reasonable notice,
for inspection by Seller at reasonable hours at its principle place of business.
(7) The address set forth under Seller's name in Schedule 1 is the
address of Seller's principal place of business or, if a natural person, the
address of Seller's residence, and Seller has no present intention of becoming a
resident of any country, state or jurisdiction other than the country and state
in which such principal place of business or residence is sited.
(i) Covenant to Remedy Breaches. Each Seller covenants to use all
---------------------------
reasonable efforts within its control (i) to prevent the breach of any
representation or warranty of Seller hereunder, (ii) to satisfy all covenants of
Seller hereunder and (iii) to promptly clear any breach of a representation,
warranty or covenant of Seller hereunder upon its learning of same.
6. Representations, Warranties and Covenants of Buyer
--------------------------------------------------
As a material inducement to each Seller to enter into this Agreement and
to consummate the transactions contemplated, Buyer shall make to Seller each of
the representations and warranties set forth in this Paragraph 6, which
representations and warranties shall be true as of the date of execution and as
of the Closing.
(a) Authority. Buyer is a limited partnership duly organized, validly
---------
existing and in good standing under the laws of the state of Delaware. Buyer has
full right, authority, power and capacity: (i) to execute and deliver this
Agreement, each Closing Document to which it is a party and each other
agreement, document and instrument to be executed and delivered by or on behalf
of
A-9
<PAGE>
it pursuant to this Agreement; (ii) to perform the transactions contemplated
hereby and thereby; and (iii) to issue OP Units to each Seller pursuant to and
in accordance with the terms of this Agreement. This Agreement, each Closing
Document to which Buyer is a party and each agreement, document and instrument
executed and delivered by Buyer pursuant to this Agreement constitutes, or when
executed and delivered will constitute, the legal, valid and binding obligation
of Buyer, each enforceable in accordance with its respective terms. The
execution, delivery and performance of this Agreement, each Closing Document to
which Buyer is a party and each such agreement, document and instrument by
Buyer: (x) does not and will not violate the Partnership Agreement; (y) does not
and will not violate any foreign, federal, state, local or other laws applicable
to Buyer or require Buyer to obtain any approval, consent or waiver of, or make
any filing with, any person or authority (government or otherwise) that has not
been obtained or made and which does not remain in effect; and (z) does not and
will not result in a breach or a violation of, constitute a default under,
accelerate any obligation under or give rise to a right of termination of, any
indenture, deed of trust, mortgage, loan or credit agreement, any other material
agreement, contract, instrument, lease, permit or authorization, or any order,
writ, judgment, injunction, decree, determination or arbitration award to which
Buyer is a party or by which the property of Buyer is bound or affected.
(b) No Brokers. Buyer has not entered into, and covenants that it
----------
will not enter into, any agreement, arrangement or understanding with any person
or entity which will result in the obligation of any Seller to pay any finder's
fee, brokerage commission or similar payment in connection with the transactions
contemplated hereby.
(c) Investment Representations and Warranties.
-----------------------------------------
In the event Seller makes a Unit Election, the following
Investment representations, and warranties shall apply:
(1) The Units to be issued to Seller at Closing will have
been duly and validly authorized and issued, free of any preemptive or similar
rights, and be fully paid and nonassessable, without any obligation to restore
capital except as required by the Delaware Revised Uniform Limited Partnership
Act (the "Delaware Act"). As a holder thereof, Seller shall be admitted as a
limited partner of the Partnership entitled to all of the rights and protections
of a limited partner under the Delaware Act and the provisions of the
Partnership Agreement, with the same rights, preferences and privileges as all
existing limited partners on a pari passu basis.
(2) Except as set forth in the Partnership Agreement, the
Lock-Up Agreement and the Supplemental Representations and Warranties Agreement
or any pledge agreement required to be executed thereunder, and subject to
federal and state securities laws, none of the Units, when delivered to Seller,
will be subject to any Encumbrance.
(3) At Closing, the REIT will have the full legal right,
power and authority to enter into the Registration Rights Agreement and the
Exchange Rights Agreement and to consummate the transactions contemplated
therein. The Registration Rights Agreement and the Exchange Rights Agreement
will be duly authorized by all necessary corporate action on the part of
A-10
<PAGE>
and will constitute the valid and binding obligation of the REIT, enforceable in
accordance with its terms. Buyer will have the full right, power and authority
to enter into the Lock-Up Agreement and its execution will be duly authorized by
all necessary partnership action.
(4) The Partnership Agreement and any partnership amendment will
constitute valid and binding obligations of affiliates of the REIT who will be
partners therein, enforceable in accordance with their terms.
(5) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery by the Buyer of the Units, the valid authorization, issuance,
sale and delivery of any shares of Common Stock that may be issued by the REIT
upon any exchange of the Units, and the execution, delivery and performance of
the Registration Rights Agreement by the REIT (other than complying with
applicable securities laws and regulations), will have been made or obtained and
will be full force and effect.
(6) Neither the issuance or sale and delivery by Buyer of the Units,
nor the issuance, sale and delivery by REIT of any shares of Common Stock that
may be issued upon any exchange of the Units, nor the execution, delivery and
performance of the Registration Rights Agreement, will conflict with or result
in a breach or violation of any of the terms and provisions of, or (with or
without the giving of notice or passage of time or both) constitute a default
under the certificate of incorporation or by-laws of the REIT or the certificate
of limited partnership or the Partnership Agreement of Buyer; any indenture,
mortgage, deed of trust, loan agreement, note, lease or other agreement or
instrument to which the REIT or Buyer is a party or to which any of them, any of
their respective properties or other assets or any hotel is subject; or any
applicable statute, judgment, decree, rule or regulation of any court or
governmental agency or body applicable to any of the foregoing or any of their
respective properties (other than compliance with the securities laws and
regulations); or result in the creation or imposition of any lien, charge, claim
or encumbrance upon any property or asset of the REIT or Buyer.
7. Further Assurances. The parties hereto will, at or prior to
------------------
the Closing, or at any time or from time to time thereafter, upon request of
either party, execute such additional instruments, documents or certificates as
either party deems reasonably necessary in order to effectuate the transactions
contemplated hereby.
8. Apportionments.
--------------
Distributions to the venturers of Broadmorr with respect to the fiscal
year of Broadmorr in which Closing occurs will be pro-rated between Seller and
Buyer on a per diem basis promptly following the close of such fiscal year and
--------
the making of the final distribution with respect to such fiscal year by
Broadmorr. Buyer will be credited with the day of Closing, and will be entitled
to receive from Broadmorr all distributions made by it on and after the day of
Closing with respect to the Partnership Interest acquired by Buyer at Closing.
If either party has received distributions with respect to such fiscal year in
excess of such party's share determined on a per
---
A-11
<PAGE>
diem basis, such party will pay such excess to the other promptly following the
- ----
close of such fiscal year and the determination of such excess.
9. Buyer's Default.
---------------
If Buyer defaults under this Agreement at or prior to Closing by
failing to complete Closing in accordance with the terms of this Agreement or in
any other respect, then on the date specified for Closing (or sooner in the
event of an anticipatory breach) Buyer's Purchase Option and Right of First
Offer with respect to the Partnership Interest shall terminate and Seller shall
have no further recourse against Buyer, provided, however, that if this
Agreement shall have resulted from the issuance by Seller of an Offer Notice and
the issuance by Buyer of an Acceptance Notice, then in addition to the
termination of Buyer's Purchase Option and Right of First Offer as to the
Partnership Interest, the liability of Buyer for default shall be the liability,
if any, specified in the Offer Notice.
10. Seller Default.
--------------
If Seller shall fail or be unable to perform in accordance with this
Agreement, then Buyer, shall have the right as its sole and exclusive remedies
to revoke the Exercise Notice or Acceptance Notice, or to obtain specific
performance of Seller's obligations hereunder and Seller expressly acknowledges
that its Partnership Interest is unique and that specific performance is an
appropriate remedy for Seller's default hereunder.
11. Fire or Other Casualty.
----------------------
In the event that the Hotel shall be damaged or destroyed by fire,
vandalism or other casualty prior to the completion of Closing, Buyer may choose
to complete Closing hereunder or Buyer may withdraw its Acceptance Notice or
Exercise Notice. Following Buyer's Acceptance Notice or Exercise Notice, Seller
will cause Broadmorr to maintain in effect through Closing its policies of
property insurance with respect to the Hotel. Seller shall give Buyer written
notice of any such casualty within three (3) days after the occurrence thereof,
Buyer shall notify Seller of its election within ten (10) business days of
Seller's notice.
12. Preparation of Assignment.
-------------------------
The Assignment shall be prepared and, if necessary, recorded at the
expense of Buyer. At least ten (10) days prior to the Closing Date, Buyer shall
submit the Assignment to Seller.
A-12
<PAGE>
13. Buyer's Right of Entry; Due Diligence Period.
--------------------------------------------
(a) Buyer and Buyer's agents, consultants and representatives, shall
have the right, from time to time, after giving the Acceptance Notice or the
Exercise Notice, during usual business hours, to enter upon (with the approval
of Broadmorr, which approval Seller will use commercially reasonable efforts to
obtain, but Seller shall not be required to pay money or other consideration to
obtain such approvals except that Seller will pay normal fees and expenses of
counsel and such normal overhead costs as may be necessary) the Hotel for the
purpose of inspection, preparation of plans, making of test borings, taking of
measurements, making of surveys and generally for the reasonable ascertainment
of the condition of the Hotel; provided, however, that Buyer shall (i) give
Seller prior written notice of the time and place of such entry and permit a
representative of Seller to accompany Buyer; (ii) restore any or replace with
appropriate material any soil or other material removed during, such test
borings; (iii) indemnify, defend and save Seller harmless from and against any
and all liabilities which Seller may suffer by reason of such entry prior to
Closing; and (iv) not enter into any space leased to third parties or
communicate with any tenant without Seller's prior written consent. With
respect to environmental matters, at Buyer's sole option, such investigation may
include, without limitation, such testing of the soil, groundwater, building
components, tanks, containers and equipment at the Hotel, as applicable, as
Buyer or Buyer's agents, consultants or representatives shall deem necessary or
appropriate to confirm the condition of the Hotel and the compliance of the
operations conducted thereon.
(b) Prior to permitting any party to enter the Hotel prior to Closing
for the purpose of performing any services or supplying any materials for which
such party could claim a mechanic's lien against the Hotel or any part thereof,
Buyer shall cause to be delivered releases of mechanic's liens in form
reasonably satisfactory to Seller.
(c) At any time prior to sixty (60) days following the Exercise Notice
(the "Due Diligence Period"), Buyer may revoke its Exercise Notice by written
notice to Seller, whereupon the Purchase Option and the Right of First
Offer/Refusal will terminate as to the Partnership Interest. If this Agreement
shall have resulted from the issuance by Seller of an Offer Notice and the
issuance by Buyer of an Acceptance Notice, then the Due Diligence Period, if
any, and Buyer's termination right, if any, shall be as set forth in the Offer
Notice. Within fifteen (15) days following the Acceptance Notice or the
Exercise Notice (or such shorter time, if any, as may have been provided for in
the Offer Notice), Seller will furnish to Buyer the Rent Roll and copies of all
of the leases and agreements to lease (the "Leases"), service agreements (the
"Service Agreements"), the Courtyard by Marriott License Agreement (the "License
Agreement") and all plans, specifications, permits and approvals, architects'
contracts, construction contracts (collectively, the "Development Related
Agreements") then in effect with respect to the Hotel as of the date of the
Acceptance Notice or the Exercise Notice, together with a certificate
representing and warranting that there are no material inaccuracies in the Rent
Roll and that the copies of the Leases, Service Agreements, License Agreement
and Development Related Agreements are true, correct and complete.
A-13
<PAGE>
14. Condemnation.
------------
If any part or parts of the Hotel shall be taken by the exercise of
the power of eminent domain, this Agreement shall continue in full force and
effect and there shall be no adjustment of the Purchase Price. With respect to
any such taking after the date of this Agreement, Seller shall furnish to Buyer
a copy of the declaration of taking promptly after Seller's receipt thereof.
Buyer shall notify Seller of its election within ten (10) business days of
Seller's notice.
15. Condition of the Hotel.
----------------------
(a) The entire agreement between Seller and Buyer with respect to the
Partnership Interest and the sale thereof is expressly set forth in this
Agreement, and the parties are not bound by any agreement, understandings,
provisions, conditions, representations or warranties other than as are
expressly set forth in this Agreement. Without in any manner limiting the
generality of the foregoing, Buyer acknowledges that at the expiration of the
Due Diligence Period, it and its representatives will have fully inspected the
Hotel and the Service Agreements and the Leases, will then be fully familiar
with the physical and financial condition thereof, and that the Partnership
Interest shall have been purchased by Buyer in an "as is" and "where is"
condition as a result of such inspection and investigations and not in reliance
on any agreement, understanding, condition, warranty or representation made by
Seller or any agent or employee of Seller (except as expressly elsewhere
provided in this Agreement) as to the condition thereof, as to any permitted use
thereof, or as to the income or expense in connection therewith, or as to any
other matter in connection therewith; and Buyer further acknowledges that no
Seller nor any party acting on behalf of Seller has made or shall be deemed to
have made any such agreement, condition, representation or warranty, except as
expressly set forth in this Agreement.
(b) Between the date of the Exercise Notice or the Acceptance Notice
and the Closing, Seller shall cause Broadmorr to make all repairs to the Hotel
required to maintain them in the same condition as they are as of the date of
the Acceptance Notice or the Exercise Notice, as said condition shall be changed
by wear and tear, eminent domain, damage by fire or other casualty, or
vandalism.
16. Buyer's Indemnity.
-----------------
Subject to the limitation on liability set forth herein, Buyer agrees
to indemnify, defend (with counsel mutually acceptable to Buyer and Seller) and
hold Seller harmless against and with respect to the following:
(a) any loss or damage to Seller, subsequent to the Closing Date,
resulting from any inaccuracy in or breach of any representation or warranty of
Buyer or resulting from any breach or default by Buyer of any obligation of
Buyer under this Agreement or from liabilities incurred by Buyer, or the Hotel
after the Closing; and
A-14
<PAGE>
(b) all costs and expenses, including reasonable attorneys' fees,
related to any actions, suits or judgments incident to any of the foregoing.
The provisions of this Section shall survive Closing.
17. Limitation on Liability.
-----------------------
The parties acknowledge that this Agreement and all documents, agreements,
understandings and arrangements relating to the transactions contemplated by
this Agreement to be executed or undertaken by Buyer which have been executed by
one or more officers of its general partner have been or will be so executed in
his/her capacity as an officer of its general partner, and not individually, and
none of the partners, officers or employees of Buyer nor any of the directors,
officers, shareholders or employees of its general partner or the REIT (in their
capacities as directors, officers, shareholders or employees of such
corporation) shall be bound or have any personal liability hereunder or
thereunder except as shall arise from the gross negligence or willful misconduct
thereof. Seller shall look solely to the assets of Buyer for satisfaction of any
liability of Buyer in respect of this Agreement and all documents, agreements,
understandings and arrangements relating to this transaction and will not seek
recourse or commence any action against any of the partners, officers or
employees of Buyer nor any of the director, officers, shareholders or employees
of the REIT or any of their personal assets for the performance or payment of
any obligation hereunder or thereunder except as shall arise from the gross
negligence or wilful misconduct thereof.
18. Seller's Indemnity.
------------------
Subject to the limitation on liability set forth in Section 5(g) hereof,
Seller agrees to indemnify, defend (with counsel mutually acceptable to Buyer
and Seller) and hold Buyer harmless against and with respect to any loss or
damage to Buyer subsequent to the Closing Date, resulting from any inaccuracy in
or breach of any representation or warranty of Seller or resulting from any
breach or default by Seller of any obligation of such Seller under this
Agreement, as well as all costs and expenses, including reasonable attorneys'
fees, related to any actions, suits or judgments incident to any of the
foregoing. The provisions of this Section survive Closing.
19. Notice of Claims.
----------------
Seller and Buyer, as applicable, shall promptly notify the other in the
event any claim is made against Seller or Buyer as to which the other party has
agreed to indemnify and the indemnitor shall thereupon undertake to defend and
hold the indemnitee harmless therefrom. This provision shall survive Closing.
A-15
<PAGE>
Schedule 1
----------
Name of Seller Partnership Interest
- -------------- --------------------
BROADWAY MORRISON LIMITED PARTNERSHIP 50%
Address of Seller
- -----------------
c/o Virtual Hospitality, Inc.
3860 W. Northwest Highway, Suite 300
Dallas, TX 75220
Attn: Bruce G. Wiles
Tax Identification Number
- -------------------------
75-2611038
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-11
(File No.333-4568) of our reports dated March 29, 1996, on our audits of the
combined financial statements and financial statement schedule of AGH
Predecessor Hotels; dated April 8, 1996, on our audits of the combined
financial statements and financial statement schedule of AGH Acquisition
Hotels; dated April 12, 1996, on our audit of the balance sheet of American
General Hospitality Corporation; and dated May 29, 1996 on our audit of the
balance sheet of AGH Leasing, L.P. We also consent to the reference to our
firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Dallas, Texas
June 19, 1996
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 1,299,053 1,240,272
<SECURITIES> 0 0
<RECEIVABLES> 281,169 392,552
<ALLOWANCES> 0 0
<INVENTORY> 55,611 59,889
<CURRENT-ASSETS> 0 0
<PP&E> 23,363,854 24,082,336
<DEPRECIATION> (945,502) (1,234,190)
<TOTAL-ASSETS> 24,676,104 25,115,004
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 4,004,707 4,198,306
<TOTAL-LIABILITY-AND-EQUITY> 24,676,104 25,115,004
<SALES> 0 0
<TOTAL-REVENUES> 10,882,132 3,307,395
<CGS> 0 0
<TOTAL-COSTS> 10,435,833 2,672,730
<OTHER-EXPENSES> 364,238 48,920
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,572,244 457,146
<INCOME-PRETAX> (1,490,183) 128,599
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,490,183) 128,599
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
Exhibit 99.4
CONSENT
The undersigned hereby consents to being named as a director of American
General Hospitality Corporation (the "Company") as described in the Company's
Registration Statement on Form S-11 to be filed with the Securities and Exchange
Commission.
May 30, 1996 /s/ Kent R. Hance
--------------------
Kent R. Hance
