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Registration Statement No. 333-36127
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As filed with the Securities and Exchange Commission on November 18, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AMERICAN GENERAL HOSPITALITY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Maryland 75-2648842
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
5605 MacArthur Boulevard
Suite 1200
Irving, Texas 75038
(972) 550-6800
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
Steven D. Jorns
Chairman, Chief Executive Officer
and
President
5605 MacArthur Boulevard
Suite 1200
Irving, Texas 75038
(972) 550-6800
(Name Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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copy to:
Peter M. Fass, Esq.
Steven L. Lichtenfeld, Esq.
Leslie H. Loffman, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
(212) 856-7000
Approximate date of commencement of proposed sale to public: From time to
time after this registration statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.[_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration 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. [_]
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until 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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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.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS DATED NOVEMBER 18, 1997
SUBJECT TO COMPLETION
2,172,370 Shares
AMERICAN GENERAL HOSPITALITY CORPORATION
COMMON STOCK
American General Hospitality Corporation (collectively with its
subsidiaries, the "Company") is a self-administered real estate investment trust
(a "REIT"), organized as a corporation under the laws of Maryland, which owns
hotels, diversified by franchisor or brand affiliation, in several states (the
"Hotels"). The Company's Common Stock, $0.01 par value per share, (the "Common
Stock") is listed on the New York Stock Exchange, Inc. under the symbol "AGT."
Of the 2,172,370 shares of Common Stock offered hereby (i) 1,896,996 shares
of restricted Common Stock (the "Exchanged Shares") are being registered on
account of the holders ("Unitholders") of 1,896,996 units of limited partnership
interest ("OP Units") in American General Hospitality Operating Partnership,
L.P., a Delaware limited partnership (the "Operating Partnership"), which shares
have been, or may be acquired by such Unitholders upon exchange of their OP
Units for such shares of Common Stock; and (ii) 275,374 shares of restricted
Common Stock (the "Restricted Stock") are being registered for the account of
certain stockholders (the "Restricted Stockholders," and, together with the
Unitholders, the "Registering Stockholders"). 1,896,996 OP Units and 137,008
shares of Restricted Stock were issued, in connection with the initial public
offering (the "IPO") of the Company on July 31, 1996, in exchange for the
acquisition by the Company of equity interests in certain of the 13 initial
hotels (the "Initial Hotels"). 25,397 shares of the Restricted Stock were issued
in connection with the acquisition by the Company of the Wyndham(R) Royal Safari
Lake Buena Vista in Lake Buena Vista, Florida and 112,969 shares of the
Restricted Stock were issued pursuant to an alliance agreement between the
Company and WHC Franchise Corporation, an affiliate of Wyndham Hotel
Corporation. See "Registering Stockholders."
Pursuant to the agreement of limited partnership of the Operating
Partnership (the "Operating Partnership Agreement") and an Exchange Rights
Agreement among the Company, the Operating Partnership and the Unitholders, a
Unitholder may tender its OP Units to the Operating Partnership for cash;
provided, however, that the Company may acquire any OP Units so tendered for an
equivalent number of shares of Common Stock. As a result, the Company may from
time to time issue up to 1,896,996 Exchanged Shares upon the acquisition of OP
Units tendered to the Company for exchange. The Company has undertaken to
register the Exchanged Shares, all of which are, or will be, owned beneficially
and of record by the Unitholders, the Restricted Stockholders or by pledgees,
donees, transferees or other successors in interest thereto, under the
Securities Act of 1933, as amended (the "Securities Act") pursuant to a
registration statement to be declared effective and to remain effective until
the earlier of the distribution of the Exchanged Shares or the Restricted
Stock, as the case may be, has been completed in accordance with the Plan of
Distribution or the Exchanged Shares have become eligible for sale pursuant to
Rule 144 under the Securities Act.
To ensure that the Company maintains its qualification as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"), the Company's Charter
limits the number of shares of Common Stock that may be owned by any single
person or affiliated group to 9.8% of the number of outstanding shares of Common
Stock and restricts the transferability of shares of Common Stock if the
purported transfer would prevent the Company from qualifying as a REIT. See
"Risk Factors--Potential Anti-Takeover Effect of Certain Provisions of Maryland
Law and of the Company's Charter and Bylaws" and "Description of Capital Stock
- --Restrictions on Transfer."
Each of the Registering Stockholders, directly or through agents or
dealers, may, from time to time, sell all or a portion of the Restricted Stock
or Exchanged Shares on terms to be determined at the time of sale. To the
extent required, the specific terms of a particular offer will be set forth in
an accompanying Prospectus Supplement. See "Plan of Distribution." Each
Registering Stockholder reserves the right to accept and, together with its
agents or dealers, to reject, in whole or in part, any proposed purchase of
Restricted Stock or Exchanged Shares.
The Company will not receive any proceeds from the sale of any Exchanged
Shares nor from the sale of shares of Restricted Stock. The Company has agreed
to bear certain expenses of registration of the Exchanged Shares and the
Restricted Stock under federal and state securities laws.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
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.
The date of this Prospectus is November __, 1997.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the "SEC" or
"Commission") a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities. This Prospectus, which constitutes part of the
Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits thereto on file with the Commission
pursuant to the Securities Act and the rules and regulations of the Commission
thereunder. Statements contained in this Prospectus as to the contents of any
contract or other document referred to 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. The Registration Statement, including
exhibits thereto, may 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 material may be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Company files information electronically with the Commission, and the Commission
maintains a Web Site that contains reports, proxy and information statements and
other information regarding registrants (including the Company) that file
electronically with the Commission. The address of the Commission's Web Site is
(http://www.sec.gov).
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the locations described above. Copies of such materials
can be obtained by mail from the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the Common Stock is listed on the New York Stock
Exchange, Inc. (the "NYSE"), and such materials can be inspected and copied at
the NYSE, 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1996, filed with the Commission pursuant to the Exchange Act;
2. The Company's Quarterly Reports on Form 10-Q for the quarter ended March
31, 1997, June 30, 1997 and September 30, 1997, filed with the Commission
pursuant to the Exchange Act;
3. The Company's Current Reports on Form 8-K, as amended, dated March 17,
1997, June 25, 1997, September 9, 1997 and November 7, 1997 and filed with the
Commission pursuant to the Exchange Act and the Company's Current Reports on
Form 8-K/A dated January 3, 1997, and August 4, 1997, filed with the Commission
pursuant to the Exchange Act; and
4. The description of the Company's Common Stock contained in its Registration
Statement on Form 8-A, filed with the Commission on July 6, 1996 pursuant to the
Exchange Act, including all amendments and reports updating such description.
All other documents filed with the Commission by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the securities are to
be incorporated herein by reference and such documents shall be deemed to be a
part hereof from the date of
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filing of such documents. Any statement contained in this Prospectus or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge, upon
written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents. Written requests
should be mailed to Kenneth E. Barr, Secretary, American General Hospitality
Corporation, 5605 MacArthur Boulevard, Suite 1200, Irving, Texas 75038.
Telephone requests may be directed to (972) 550-6800.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Risk Factors," among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this Prospectus,
filings by the Company with the Securities and Exchange Commission (the
"Commission"), in the Company's press releases and in oral statements made by
authorized officers of the Company. When used in this Prospectus, the words
"estimate," "project," "anticipate," "expect," "intend," "believe," and similar
expressions are intended to identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. 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.
THE COMPANY
The Company is a self-administered real estate investment trust (a "REIT")
that owns a portfolio of primarily full- service hotels located in major
metropolitan markets. As of November 1, 1997, the Company owned a
geographically diverse portfolio of 26 hotel properties, located in sixteen
states and containing an aggregate of approximately 6,750 guest rooms (the
"Hotels"). Substantially all of the Hotels are operated under licensing or
franchising agreements with national hotel brands, including Crowne Plaza(R),
Hilton(R), Wyndham(R), Marriott(R), Holiday Inn Select(R), Radisson(R),
Westin(R), DoubleTree Guest Suites(R), Holiday Inn(R) and Hampton Inn(R).
Management believes that the full-service segment of the hotel market continues
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 the Company's repositioning strategies.
The Company expects to continue to expand and enhance the value of its
hotel portfolio by continuing to (i) make opportunistic acquisitions of full-
service hotels and (ii) strategically reposition selected hotels through product
upgrades and brand conversions. The Company will continue to pursue the
acquisition of full-service hotels, primarily in the moderate and lower upscale
segments at prices which management believes are below replacement cost, and
that have attractive yields on investment that the Company believes can be
improved over time. The Company believes that its continued use of a flexible
lessee/manager structure, coupled with the continued expansion of its brand and
franchise relationships, will result in additional acquisition opportunities for
the Company.
In order to qualify as a REIT, the Company may not operate hotels. As a
result, the Company has leased the Hotels to AGH Leasing, L.P. ("AGH Leasing")
and its subsidiary, Twin Towers Leasing, L.P. ("Twin Towers," and together with
AGH Leasing, the "Lessee") pursuant to separate participating leases (the
"Participating Leases"). The Participating Leases are designed to allow the
Company to achieve substantial participation
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in any future growth of revenues generated at the Hotels. The Lessee, in turn,
has entered into separate management agreements with American General
Hospitality, Inc. ("AGHI") and Wyndham Hotel Corporation ("Wyndham") to manage
the Hotels (the "Management Agreements"). The Lessee and AGHI are owned, in
part, by certain executive officers of the Company.
The Company's executive offices are located at 5605 MacArthur Boulevard,
Suite 1200, Irving, Texas 75038, and its telephone number is (972) 550-6800.
RISK FACTORS
Prospective investors should carefully consider the matters discussed under
"Risk Factors" before making an investment decision regarding the Common Stock
offered hereby.
TAX STATUS OF THE COMPANY
The Company has elected to be taxed as a REIT under Section 856 through 860
of the Code, commencing with its taxable year ended December 31, 1996. As a
REIT, the Company generally will not be subject to federal income tax on net
income that it distributes to its shareholders as long as it distributes at
least 95% of its taxable income each year and complies with a number of other
organizational and operational requirements. Failure to qualify as a REIT will
render the Company subject to tax (including any applicable minimum tax) on its
taxable income at regular corporate rates, and distributions to the shareholders
in any such year will not be deductible by the Company. 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 certain
restrictions on the transfer of shares of Common Stock. The Company has adopted
the calendar year as its taxable year.
SECURITIES TO BE OFFERED
This Prospectus relates to (i) the possible offer and sale of up to
1,896,996 Exchanged Shares, if and to the extent that Unitholders of up to
1,896,996 OP Units receive such shares of Common Stock in exchange for such OP
Units; and (ii) the possible offer and sale of up to 275,374 shares of
Restricted Stock by certain Restricted Stockholders. The 1,896,996 OP Units and
137,008 shares of Restricted Stock were issued, in connection with the IPO, in
exchange for the acquisition by the Company of equity interests in the Initial
Hotels. 25,397 of the shares of Restricted Stock were issued in connection with
the acquisition by the Company of the Wyndham Royal Safari in Lake Buena Vista,
Florida and 112,969 shares of the Restricted Stock were issued pursuant to an
alliance agreement between the Company and WHC Franchise Corporation, an
affiliate of Wyndham Hotel Corporation.
Pursuant to the Operating Partnership Agreement and the Exchange Rights
Agreement, a Unitholder may tender its OP Units to the Operating Partnership for
cash; provided, however, that the Company may acquire any OP Units so tendered
for an equivalent number of shares of Common Stock. As a result, the Company
may from time to time issue up to 1,896,996 Exchange Shares upon the acquisition
of OP Units tendered to the Operating Partnership for exchange. Accordingly,
the Company is registering the Exchanged Shares to provide Unitholders with
freely tradeable securities upon exchange.
The Company will not receive any proceeds from the sale of any Exchanged
Shares nor from
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the sale of shares of Restricted Stock offered hereby. The Company has agreed to
bear certain expenses of registration of the Exchanged Shares and the Restricted
Stock under federal and state securities laws.
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RISK FACTORS
An investment in the shares of Common Stock involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus and incorporated by
reference herein before making an investment decision regarding the Common
Shares offered hereby.
RISKS ASSOCIATED WITH THE COMPANY'S ACQUISITION OF A SUBSTANTIAL NUMBER OF
ADDITIONAL HOTELS
As part of its ongoing business, the Company continuously seeks
opportunities to acquire additional hotel properties. The Company is currently
experiencing a period of rapid growth. As of September 30, 1997, since the
Company's IPO, the Company has spent approximately $325 million to purchase 13
additional hotels, increasing its guest room portfolio by more than 120%. The
Company's ability to manage its growth effectively will require it to select
companies to lease and manage newly acquired hotels. There can be no assurance
that the Company, the Lessee, AGHI or other hotel management companies and/or
operators will be able to manage the Company's newly acquired or subsequently
acquired hotels effectively.
CONFLICTS OF INTEREST
General
The four key executive officers of the Company, including Steven D. Jorns,
the Chairman, Chief Executive Officer and President of the Company, also hold a
variety of ownership and management interests in AGHI and the
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Lessee. Accordingly, there are inherent conflicts of interest in the ongoing
lease, acquisition, disposition, operation and management of the Hotels. As a
result, the interests of the Company's stockholders may not be reflected fully
in all decisions made or actions taken or to be taken by the Company's
management.
No Arm's-Length Bargaining
The terms of the Participating Leases, the Management Agreements entered
into between the Lessee and AGHI, certain agreements granting the Company a
right of first refusal to acquire AGHI's interest in certain hotels and
agreements related to the sublease of alcoholic beverage service areas in
certain of the Hotels to corporations wholly owned by Mr. Jorns were not
negotiated on an arm's-length basis. In the event revenues from the Hotels
increase significantly over prior periods, and operating expenses with respect
thereto are less than historical or projected operating expenses, the Lessee
could benefit disproportionately. In the event incremental increases in
expenses at the Hotels exceed incremental increases in revenues, conflicts of
interest may arise between the Lessee and the Company. The Company does not own
any interest in the Lessee. Because certain executive officers of the Company
are also partners in the Lessee, there is an inherent conflict of interest with
respect to the enforcement and termination of the Participating Leases. Because
of these conflicts, management'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.
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 a 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 three key executive officers of the Company, including Mr. Jorns, may
result in decisions regarding the sale of a Hotel that do not reflect solely the
interests of the Company's stockholders.
Conflicts Relating to Continued Management of Hotels
AGHI, in which certain executive officers of the Company (including Mr.
Jorns) own collectively an approximate 21% interest, manages hotels for third
parties. There are no restrictions in either the Participating Leases or the
Management Agreements that 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 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.
DEPENDENCE ON LESSEE AND PAYMENTS UNDER THE PARTICIPATING LEASES
The Company's ability to make distributions to its stockholders depends
solely upon the ability of the Lessee to make rent payments under the
Participating Leases. Any failure or delay by the Lessee in making such 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 Hotels or in the net operating income
of the Lessee or otherwise. Although the Lessee experienced net losses for the
period ended December 31, 1996 and for the six month period ended June 30,
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1997 of $721,039 and $589,449, respectively, the Lessee generated approximately
$5.2 million and $2.6 million of net cash flow from operations during the same
periods, respectively. Accordingly, there can be no assurance that the Lessee
will not experience net losses in the future. The Lessee is a recently organized
limited purpose entity; accordingly, it has limited assets. The partners of AGH
Leasing have pledged 275,000 OP Units to the Company to secure the Lessee's
obligations under the Participating Leases (the "Lessee Pledge"). 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) gives the Company
the non-exclusive right to terminate such lease, repossess the applicable
property and enforce the payment obligations under such lease and the Lessee
Pledge, the Company would then be required to find another lessee to lease such
hotel because the Company cannot operate hotels directly due to certain federal
income tax restrictions. 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 HOTELS
The Company is dependent on the ability of the Lessee, AGHI and other
operators of hotels to operate and manage the Hotels. To maintain its status as
a REIT, the Company will not be able to operate the 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, food and
beverage operations and certain similar matters.
HOTEL INDUSTRY RISKS
Operating Risks
The Hotels are 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 may have; (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
experience seasonality and other fluctuations; (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 Hotels, require ongoing renovations and
other capital improvements, including periodic replacement or refurbishment of
furniture, fixtures and equipment ("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 Hotels and pay for periodic
replacement or refurbishment of FF&E. The Company controls the use of funds in
this reserve. However, if capital requirements exceed the amount of the reserve,
there can be no assurance that sufficient sources of financing will be available
to fund such requirements. The additional cost of such expenditures could have
an adverse effect on cash available for distribution to the Company's
stockholders. 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. In addition, the Company plans substantial renovations at
the hotels it acquires. 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.
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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 Hotels may cause quarterly fluctuations in the Company's lease revenue.
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.
RISKS OF LEVERAGE; NO LIMITS ON INDEBTEDNESS
Neither the Company's Bylaws nor its charter (the "Charter") limits the
amount of indebtedness the Company may incur. As a result of incurring debt,
the Company is subject to risks normally associated with debt financing,
including the risks (i) that revenues from the Participating Leases will be
insufficient to meet required payments of principal and interest and (ii) that
interest rates may fluctuate. Although the Company anticipates that it will be
able to repay or refinance its existing indebtedness and any other indebtedness,
there can be no assurance that
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it will be able to do so or that the terms of such refinancing will be favorable
to the Company.
COMPETITION FOR MANAGEMENT TIME
The Company's four key executive officers are also employed by AGHI and are
thus necessarily subject to competing demands on their time. See "-Conflicts of
Interest."
REAL ESTATE INVESTMENT RISKS
General Risks
The Company's investments are 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,
AGHI and certain third party operators to operate the 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 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
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, hurricanes, floods 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.
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. 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.
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Property Taxes and Casualty Insurance
Each 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 Hotel is
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.
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 use the property, sell the property or 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 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 Hotels by qualified independent environmental engineers. The
purpose of Phase I ESAs is to identify potential sources of contamination for
which the 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
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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 the 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 that the Company maintain comprehensive
insurance on each of the 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, hurricanes 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.
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. 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 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 operates in a manner designed to permit it to qualify as a REIT
for federal income tax purposes.
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Qualification as a REIT involves the application of the provisions of the
highly technical and complex Internal Revenue Code of 1986, as amended (the
"Code") 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 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 has received an opinion of Battle Fowler LLP,
counsel to the Company ("Counsel"), to the effect that, based on various
assumptions relating to the operation of the Company and representations made by
the Company as to certain factual matters, the Company meets the requirements
for qualification and taxation as a REIT. Such legal opinion is not binding on
the Internal Revenue Service (the "IRS").
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 operates 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.
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%
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% of
its ordinary income for the calendar year, (ii) 95% of its capital gain net
income for such year, and (iii) 100% of its undistributed income from prior
years.
The Company has made, and intends to continue to make, distributions to its
stockholders to comply with the distribution provisions of the Code and to avoid
federal income taxes and the non-deductible 4% excise tax. The Company's income
consists primarily of its share of the income of the Operating Partnership, and
the Company's cash flow consists 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 non-deductible capital expenditures,
the creation of reserves or required debt amortization payments could in the
future 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 are determined by its sole
general partner, a wholly owned subsidiary of the Company, and are dependent on
a number of factors, including the amount of
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cash available for distribution, the Operating Partnership's financial
condition, any decision by the Company's 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 can be no assurance that the Company will be able to continue to
satisfy the annual distribution requirement so as to avoid corporate income
taxation on the earnings that it distributes.
Consequences of Failure to Qualify as Partnerships
The Operating Partnership has received an opinion of Counsel stating that,
assuming that the Operating Partnership and each subsidiary partnership or
limited liability company of the Operating Partnership (each, a "Subsidiary
Partnership") is being operated in accordance with its respective organizational
documents, the Operating Partnership and each of the Subsidiary Partnerships
have been and will continue to be treated as partnerships, and not as
corporations, 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 resulting loss of REIT status of the Company, would reduce
substantially the amount of cash available for distribution to the Company's
stockholders.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS; APPROVAL FOR BRAND
CONVERSIONS
As of November 1, 1997, 25 of the Hotels are subject to franchise
agreements with nationally recognized hotel companies. 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, AGHI or third party operators could result in a
breach of such standards or other terms and conditions of the franchise
agreements 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 that 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 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.
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POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S CHARTERAND 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 or that might otherwise be in such holders'
best interest. 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% 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 partner of
the Lessee owns, actually or constructively, 10% 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 the number of
outstanding shares of Common 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% 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 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.
Staggered Board
The Board of Directors is divided into three classes of directors. The
initial term of the first class expired in 1997 and that director was reelected
to a term scheduled to expire in 2000 and the initial terms of the second and
third classes will expire in 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 qualified. A director may be removed, with or without cause, by the
affirmative vote of 75% 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.
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% or more of the voting power of the corporation's shares (an
"Interested Stockholder") or an affiliate thereof are prohibited for five years
after the most recent date on which the Interested Stockholder became an
Interested Stockholder. Thereafter, any such business combination must be
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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 Stockholder 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 Maryland corporation prior to the time
that the Interested Stockholder becomes an Interested Stockholder.
Maryland Control Share Acquisition Statute
Under the MGCL, "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 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 stockholder
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 or amended, 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.
RELIANCE ON BOARD OF DIRECTORS AND MANAGEMENT
Stockholders 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 are responsible for directing the management of
the business and affairs of the Company. The Company relies upon the services
and expertise of its management for strategic business direction. The Company
has in effect employment agreements with Steven D. Jorns, Chairman of the Board,
Chief Executive Officer and President; Bruce G. Wiles, Executive Vice President;
Kenneth E. Barr, Executive Vice President and Chief Financial Officer; and Russ
C. Valentine, Senior Vice President -- Acquisitions, which currently provide for
base salary at below market rates for comparable positions. Accordingly, the
loss of services of any such officer may require the Company to hire a
replacement officer at a salary greater than the Company is currently obligated
to pay, which, in turn, would increase the Company's operating costs and reduce
cash available for distribution.
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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, are determined by its Board of Directors. The Board of Directors
may amend or revise these and other policies at any time and from time to time
at the Board's discretion without a vote of the stockholders of the
Company.
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.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of (i) the capital stock of the Company and
(ii) certain provisions of Maryland law and of the Charter and Bylaws of the
Company does not purport to be complete and is subject to and qualified in its
entirety by reference to Maryland law described herein, and to the Charter and
Bylaws of the Company.
GENERAL
Under its Charter, the Company has the authority to issue 100,000,000 shares
of Common Stock, $0.01 par value per share. 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.
Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, 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 redemption or appraisal 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.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common 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
shares of 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.
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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% 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 shares of stock of 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. These 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% 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% 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, provides that no person may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.8% of the number
outstanding shares of any class of Common Stock (subject to the Look-Through
Ownership Limitation applicable to certain stockholders, as described below).
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. Subject to certain
limited exceptions, the Charter will allow such an entity under the Look-Through
Ownership Limitation to own up to 15% 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 second
sentence of the succeeding paragraph.
Any transfer of Common Stock that would (i) result in any person owning,
directly or indirectly, Common Stock in excess of the Ownership Limitation (or
the Look-Through Ownership Limitation, if applicable), (ii) result in Common
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, 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.
Subject to certain exceptions described below, any purported transfer of
Common Stock that would (i) result in any person owning, directly or indirectly,
shares of Common Stock in excess of the Ownership Limitation (or the Look-
Through Ownership Limitation, if applicable), (ii) result in the shares of
Common 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% 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. The record holder of the shares of
Common Stock that are designated as Shares-in-Trust (the "Prohibited Owner")
will be required to submit such number of shares of Common 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.
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Shares-in-Trust will remain issued and outstanding shares of Common 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 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. "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 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 are listed or admitted
to trading or, if the shares of Common 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 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 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 are listed or admitted to trading is open for the
transaction of business or, if the shares of Common 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 in violation of
the foregoing restrictions, or any person who owned shares of Common 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.
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All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common 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 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 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 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.
CHARTER AND BYLAW PROVISIONS AND CERTAIN PROVISIONS OF MARYLAND LAW
Number of Directors; Classification of the Board of Directors
The Charter and Bylaws 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. There are five
directors, four of whom are Independent Directors. The holders of Common Stock
are 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, the Board of Directors is divided into three
classes of directors. The initial term of the first class expired in 1997 and
that director was reelected to a term scheduled to expire in 2000, and the
initial terms of the second and third classes will expire in 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
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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 (except vacancies resulting from an increase in the
number of directors) 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
precludes stockholders from removing incumbent directors except upon a
substantial affirmative vote and filling the vacancies created by such removal
with their 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 from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonest established by a
final judgment as being material to the cause of active. 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 or for a judgment of liability on the basis that a
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL requires the
Company, as a condition to advancing expenses, to obtain (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
Charter 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.
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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 has purchased and maintains 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 Stockholder") or an affiliate
thereof are prohibited for five years after the most recent date on which the
Interested Stockholder became an Interested Stockholder. 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
corporation and (b) two-thirds of the votes entitled to be cast by holders of
voting shares of such corporation other than the shares held by the Interested
Stockholder with whom (or with whose affiliate) the business combination is to
be affected, 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 Stockholder for its shares. These provisions of the MGCL do not
apply, however, to business combination that are approved or exempted by the
board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder.
Control Share Acquisition Statute
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 stockholder
approval. A "control share acquisition" means the acquisition of control
shares, subject to certain exceptions.
A person who has made or purposes 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 shareholders 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
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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.
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. 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, 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 of 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 (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. As permitted by the MGCL, the Bylaws
of the Company provide that 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.
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Operations
The Charter requires the Board of Directors generally to use commercially
reasonable efforts to cause the Company 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 amended or 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 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
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DESCRIPTION OF OP UNITS
GENERAL
Substantially all of the Company's assets are held by, and all of its
operations are conducted through the Operating Partnership. AGH GP, Inc. is a
wholly owned subsidiary of the Company and is the sole general partner of the
Operating Partnership holding 1% of the issued OP Units therein. AGH LP, Inc.
is a wholly owned subsidiary of the Company and is a limited partner of the
Operating Partnership holding as of September 30, 1997 approximately 86.22% of
the issued OP Units therein. The remaining issued OP Units are held by other
Limited Partners who acquired their units in exchange for property or other
interests.
The material terms of the OP Units, including a summary of certain
provisions of the Partnership Agreement, are set forth below. The following
description of the terms and provisions of the OP Units and certain other
matters does not purport to complete and is subject to and qualified in its
entirety by reference to applicable provisions of Maryland law and the
Partnership Agreement.
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
with AGH GP, as general partner, AGH LP, as a limited partner, and certain other
persons, 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"), has 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 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 Partner, (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 Partner, 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.
CAPITAL CONTRIBUTION
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
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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, such Limited Partners
received rights (the "Exchange Rights") that enable them to cause the Operating
Partnership to exchange each OP Unit for cash equal to the value of one 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. 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.
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreements among the Company and the
Limited Partners other than AGH LP (the "Registration Rights Agreements"), the
Limited Partners 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 the
registration statement of which this Prospectus is a part. 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.
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 pays all administrative
costs and expenses of the Company, AGH GP and AGH LP (the "Company Expenses"),
and the Company Expenses are treated as expenses of the Operating Partnership.
The Company Expenses generally 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, do 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 does not own any of
the Hotels directly.
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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 the 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 operates 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
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 qualifies 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 generally 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 believes that it has issued a sufficient amount of
Common Stock with sufficient diversity of ownership so that requirements (ii)
and (iii) are satisfied. 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 is
owned by the REIT. For taxable years ending on or before December 31, 1997, the
Company must own all of the stock of the corporate subsidiary from the
commencement of such corporation's existence. The Company has two wholly owned
subsidiary corporations, AGH GP and AGH LP, which are "qualified REIT
subsidiaries." Consequently, AGH GP and AGH LP will not be subject to federal
corporate income taxation, although they may be subject to state and local
taxation. 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
for years ending on or before December 31, 1997, 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 to customers in the ordinary course of business) 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. For taxable years beginning on or after
January 1, 1998, the third test noted above has been repealed by the enactment
of the Taxpayer Relief Act of 1997. Thus, for the Company's taxable years
beginning on and after January 1, 1998, the Company no longer is required to
satisfy the 30 percent income test.
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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 as rents from real property 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 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). In addition, for taxable years of the Company beginning on or
after January 1, 1998, the Company is permitted to receive up to 1% of the gross
income of each Hotel from the provision of non-customary services and still
treat all other amounts received from such Hotel as "rents from real property."
Pursuant to the Participating Leases, the Lessee has leased from the Operating
Partnership the land, buildings, improvements, furnishings, and equipment
comprising the 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 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.
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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 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 Hotels and generally will control how the Hotels
are operated and maintained, (iv) the Lessee will bear all of the costs and
expenses of operating the 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 Hotels
during the term of the 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 Hotels or (B) the Lessee's use, management, maintenance or
repair of the Hotels, (vii) the Lessee is obligated to pay substantial fixed
rent for the period of use of the Hotels, and (viii) the Lessee stands to incur
substantial losses (or reap substantial gains) depending on how successfully it
operates the 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 a Hotel must not be
greater than 15% of the Rents received under the Participating Lease. The Rents
attributable to the personal property in a 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 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 Hotel at the beginning and at the
end of such taxable year (the "Adjusted Basis Ratio"). With respect to each
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 Participating Leases provide that the Adjusted Basis Ratio for each
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 Hotel from exceeding 15%, which cooperation
includes the purchase by Lessee at fair market value of enough personal property
at such Hotel so that the Adjusted Basis Ratio for such Hotel is less than 15%.
In the event that the amount of personal property relating to certain of the
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 Hotels to not
qualify as rents from real property, the Operating Partnership will sell a
portion of such personal property relating to such Hotels to the Lessee in
exchange for the FF&E Note. In addition, the Participating Leases provide that
if future renovations and refurbishments to a Hotel would cause the Adjusted
Basis Ratio for such 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 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 a Hotel to the
extent that such acquisition would cause the
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Adjusted Basis Ratio for that Hotel to exceed 15%. The Company does not expect
the Adjusted Basis Ratio for any Hotel to exceed 15% and therefore expects that
the portion of rents received attributable to personal property will be treated
as rents from real property. However, there can be no 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 income that is
nonqualifying income for purposes of the 95% gross income test, 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
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 purchase 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 after-tax 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 prohibits a stockholder 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.
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A fourth requirement noted above for qualification of the Rents as "rents
from real property" is that for taxable years ending on or before December 31,
1997, the Company cannot furnish or render noncustomary services to the tenants
of the Hotels, or manage or operate the 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 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 with respect to the Initial Hotels indicate
that the Franchise Licenses with respect to the Initial Hotels represent less
than 1.0% of the total value of the Company's assets. The Company is currently
in the process of obtaining appraisals of the Franchise Licenses with respect to
all hotels acquired after the Initial Hotels. 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 Hotels, or manages or
operates the Hotels, other than through a qualifying independent contractor, and
for taxable years of the Company beginning on or after January 1, 1998, the
Company is deemed to receive income from the provision of such noncustomary
services or from managing or operating the Hotels in excess of 1% of all amounts
received with respect to such Hotels, 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
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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, for taxable years of the Company on December
31, 1997, 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 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 95% gross income
test (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 for a taxable year ending on or before December 31,
1997, 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 the Subsidiary Partnerships), 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 25% 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. 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 (plus,
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for taxable years beginning on or after January 1, 1998, income from
cancellation of indebtedness, original issue discount and coupon interest) 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 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 alternative 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
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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 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 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 a Hotel, the Company
terminates the Participating Lease, and the Company is unable to find a
replacement lessee for such Hotel within 90 days of such foreclosure, gross
income from hotel operations conducted by the Company from such 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 Hotel to cease to be foreclosure property two years after such
foreclosure, (which period could be extended an additional four years).
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Alternative Minimum Tax. The Company will be subject to the alternative
minimum tax on undistributed 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.
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.
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.
Distributions from the Company to holders which are not designated as
capital gains dividends and which are in excess of the Company's current and
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 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 if (i) the qualification of the REIT depends upon the application
of the "look through" exception (described above) to the restriction on
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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
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 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
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.
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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 Operating Partnership and 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.
Under recently issued regulations ("check the box regulations"), an
organization with two or more members will be classified as a partnership on or
after January 1, 1997 unless it elects to be treated as an association (and
therefore taxable as a corporation) or falls within one of several specific
provisions which define a corporation. For entities which were in existence
prior to January 1, 1997 (such as the Operating Partnership and the Subsidiary
Partnerships), the claimed classification by the entity will be respected for
all periods prior to January 1, 1997 if (i) the entity had a reasonable basis
for its claimed classification under the law prior to January 1, 1997; (ii) the
entity and all members thereof recognized the federal tax consequence of any
change in the entity's classification within the sixty (60) months prior to
January 1, 1997; and (iii) neither the entity nor any member was notified in
writing
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on or before May 8, 1996 that the classification of the entity was under
examination (in which case the entity's classification would be determined in
the examination). An exception to partnership classification under the "check
the box regulations" exists for 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). A publicly traded partnership is treated as a corporation unless at
least 90% of the gross income of such partnership, for each taxable year the
partnership is a publicly 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 have been issued in transactions that are not required
to be registered under the Securities Act. In addition, the Operating
Partnership and the Subsidiary Partnerships do 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, Battle
Fowler LLP has delivered 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
pursuant to the provisions of the "check the box regulations" as well as the law
prior to January 1, 1997 will be treated for federal income tax purposes as
partnerships and not as associations taxable as corporations or as publicly
traded partnerships. 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
partnerships for federal income tax purposes. If such challenge were sustained
by a court, the Operating Partnership and each Subsidiary Partnership would be
treated as corporations 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 partnership in which the Company has an interest was
taxable as a corporation rather than as a partnership for federal income tax
purposes, the Company likely 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.
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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 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 exchange 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 an 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.
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.
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. The Company
will allocate the cash purchase price of newly acquired hotels among land,
building and personal property and will claim depreciation deductions based on
prescribed tax depreciation rates.
44
<PAGE>
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 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 is
organized as a Maryland corporation and has an office in Texas. AGH LP is
organized as a Nevada corporation and will not have any contacts with Texas
other than ownership of its limited partnership interest in the Operating
Partnership. The Operating Partnership is 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.
45
<PAGE>
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 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.
The Company has received a private determination from the Comptroller that
verifies the foregoing Texas franchise tax consequences of this structure. There
can be no assurance, however, that the Comptroller will not revoke the
pronouncements upon which that determination is based. In addition, that
determination will not be binding upon the Comptroller to the extent the Company
or its subsidiaries fail to comply with the factual representations set forth in
the determination.
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
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.
46
<PAGE>
Possible Legislative or Other Actions Affecting Tax Consequences; Possible
Adverse Tax Legislation. The taxpayer Relief Act of 1997 (the "1997 Act") was
signed into law on August 5, 1997. The Act contains many provisions which
generally make it easier for entities to operate and to continue to qualify as a
REIT for taxable years beginning on or after January 1, 1998. Nevertheless,
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, presently are not
subject to the Texas franchise tax. The corporate general partners in those
partnerships, however, are subject to the Texas franchise tax. It is expected
that Texas legislators and/or the Comptroller will propose or recommend, as the
case may be, statutory amendments subjecting all comparable limited partners to
the franchise tax or expanding 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, AGH LP and/or
Subsidiary Partnerships that own property in Texas would be subjected to the
then applicable Texas franchise tax.
47
<PAGE>
USE OF PROCEEDS
The Registering Stockholders will receive all of the proceeds from the sale
of the Exchanged Shares and the Restricted Stock offered hereby. The Company
will not receive any proceeds from the sale of such shares of Common Stock.
48
<PAGE>
REGISTERING STOCKHOLDERS
As described elsewhere herein, the Registering Stockholders are persons who
either (i) have received or may receive Exchanged Shares in exchange for OP
Units or (ii) have already received shares of Restricted Stock of the Company.
The Table below sets forth, as of August 31, 1997, certain information regarding
the beneficial ownership of the shares of Common Stock by each Registering
Stockholder prior to this offering and adjusted to give effect to the sale of
all the shares of Common Stock offered hereby. As the Registering Stockholders
may sell all, some or none of the Exchanged Shares or Restricted Stock that are
to be offered hereby, no estimate can be made of the aggregate number of shares
of Common Stock offered hereby, or the aggregate number of shares of Common
Stock that will be owned by each Registering Stockholder upon completion of the
offering to which this Prospectus relates. Except as otherwise noted below,
none of the Registering Stockholders has, within the past three years, had any
position, office or other material relationship with the Company.
The Exchanged Shares and Restricted Stock offered by this Prospectus may be
offered from time to time directly by the Registering Stockholders named below
or by pledgees, donees, transferees or other successors in interest thereto:
<TABLE>
<CAPTION>
Maximum Number of
Number of Shares to Percentage to
Shares Beneficially Shares Which Beneficially Be Beneficially
Owned Prior to May Be Sold Owned After Owned After
Name this Offering(1) Hereunder this Offering(2) this Offering(2)
- ------------------------------------- ------------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Holders of Exchaged Shares:
3005 Hotel Associates, Ltd. 31,430 31,430 0 *
Jackson-Shaw Partners No. 51, Ltd. 28,933 28,933 0 *
3100 Hotel Associates, L.P. 24,321 24,321 0 *
Virtual Hospital, Inc. (3) 6,229 6,229 0 *
James E. Sowell (4) 112,358 112,358 0 *
Lewis W. Shaw, II (5) 71,800 71,800 0 *
Kenneth W. Shaw (6) 70,687 70,687 0 *
Monica Jorns (7) 19,104 19,104 0 *
Steven D. Jorns (8) 235,208(9) 52,696 182,512 1.2%
Bruce G. Wiles (10) 76,999(11) 21,286 55,713 *
Kenneth E. Barr (12) 36,779(13) 10,000 26,779 *
3860 Investors J Venture 21,556 21,556 0 *
Jim Sowell Constion Co., Inc. 89,778 89,778 0 *
Jonn D. Gourley 6,731 6,731 0 *
Louis E. Capt 29,767 28,741 1,026 *
Richard O. Jacobson 43,112 43,112 0 *
Thomas J. Corcoran, Jr. (14) 48,112 43,112 5,000 *
Hervey A. Feldman (15) 21,556 21,556 0 *
Jerry Jacob 10,059 10,059 0 *
Pin Nien Hwang 7,185 7,185 0 *
Thomas L. Wiese 3,593 3,593 0 *
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Maximum Number of
Number of Shares to Percentage to
Shares Beneficially Shares Which Beneficially Be Beneficially
Owned Prior to May Be Sold Owned After Owned After
Name this Offering(1) Hereunder this Offering(2) this Offering(2)
- ------------------------------------- ------------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Steven L. Cobb 3,593 3,593 0 *
Richard and Barbara Hess 8,207 8,207 0 *
DFW South Acquistion 115,683 115,683 0 *
Corporation
Corporate Property Associates 4, a 427,008 427,008 0 *
California Limi Partnership
Corporate Property Associates 8, 493,664 493,644 0 *
L.P.
Craig Stark, Inc. 100,257 100,257 0 *
Devlo, Inc. 24,317 24,317 0 *
Holders of Restricted Stock:
American General Hospitality, Inc. 137,008 137,008 0 *
Retirement Savings Plan
Richard C. Kessler 25,397 25,497 0 *
WHC Franchise Corporation 112,969 112,969 0 *
</TABLE>
______________________
(*) Less than 1%
(1) Beneficial ownership as of August 31, 1997, based upon information provided
by the respective Registering Stockholders. Unless otherwise noted in the
following footnotes, the Exchanged Shares and/or Restricted Stock set forth
in this column with respect to a particular Registering Stockholder have
not also been attributed to the shareholders, limited partners or general
partners of such Registering Stockholders.
(2) Assumes sale of all shares of Common Stock registered hereunder, although
Registering Stockholders are under no obligation known to the Company to
sell any shares of Common Stock at this time. Assumes that all OP Units
held by or attributable to the person are exchanged for shares of Common
Stock. The total number of shares of Common Stock outstanding used in
calculating this percentage assumes that none of the OP Units held by other
persons are exchanged for shares of Common Stock.
(3) Virtual Hospitality, Inc. is a limited partner in 3005 Hotel Associates,
L.P. and in 3100 Hotel Associates, Ltd.
(4) James E. Sowell controls all of the voting stock of Jim Sowell Construction
Co., Inc. and controls the general partner of Jackson-Shaw Partners No. 51,
Ltd. James E. Sowell is a shareholder in Virtual Hospitality, Inc., a
general partner in 3860 Investors Joint Venture and a limited partner in
3100 Hotel Associates, L.P.
(5) Lewis W. Shaw, II is a limited partner in 3005 Hotel Associates, Ltd. and
3100 Hotel Associates, L.P., a general partner in 3860 Investors Joint
Venture and a shareholder in Virtual Hospitality, Inc.
(6) Kenneth W. Shaw is a limited partner in 3005 Hotel Associates, Ltd. and
3100 Hotel Associates, L.P. and a shareholder in Virtual Hospitality, Inc.
(7) Monica Jorns is the wife of Steven D. Jorns. Steven D. Jorns disclaims
beneficial ownership of the Exchanged Shares that may be issued to Mrs.
Jorns in exchange for OP Units held by her.
(8) Steven D. Jorns, who is the Chairman of the Board, Chief Executive Officer
and President of the Company, is also a limited partner in 3100 Hotel
Associates, an indirect holder of limited partnership interests in 3005
Hotel Associates, Ltd., a general partner in 3860 Investors Joint Venture,
a shareholder in Virtual Hospitality, Inc. and a participant in American
General Hospitality Inc.'s Retirement Savings Plan (the "Plan").
50
<PAGE>
(9) Includes 3,811, 3,412, 1,123 and 9,295 Exchanged Shares that may be issued
in exchange for OP Units held by 3100 Hotel Associates, L.P., 3860
Investors Joint Venture, Virtual Hospitality, Inc. and 3005 Hotel
Associates, Ltd., respectively, and attributable to Mr. Jorns; 2,167 shares
of Restricted Stock held by the Plan and attributable to Mr. Jorns; and
19,104 Exchanged Shares that may be issued in exchange for OP Units held by
Monica Jorns, Mr. Jorns' wife, with respect to which Mr. Jorns disclaims
beneficial ownership.
(10) Bruce G. Wiles, who is an Executive Vice President of the Company, is also
a limited parter in 3100 Hotel Associates, L.P. and 3005 Hotel Associates,
Ltd., a general partner in 3860 Investors Joint Venture, and a shareholder
in Virtual Hospitality, Inc. and a participant in the Plan.
(11) Includes 1,203, 2,924, 1,079, and 355 Exchanged Shares that may be issued
in exchange for OP Units held by 3100 Hotel Associates, L.P., 3005 Hotel
Associates, Ltd., 3860 Investors Joint Venture and Virtual Hospitality,
Inc., respectively, and attributable to Mr. Wiles; and 2,532 shares of
Restricted Stock held by the Plan and attributable to Mr. Wiles.
(12) Kenneth E. Barr is the Executive Vice President, Chief Financial Officer,
Secretary, Treasurer and Principal Accounting Officer of the Company. Mr.
Barr is a participant in the Plan.
(13) Includes 79 shares of Restricted Stock held by the Plan and attributable to
Mr. Barr.
(14) Thomas J. Corcoran controls 50% of the voting stock of DFW South
Acquisition Corporation.
(15) Hervey A. Feldman controls 50% of the voting stock of DFW South Acquisition
Corporation.
51
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time of the
Exchanged Shares and the Restricted Shares by the Registering Stockholders, or
by pledgees, donees, transferees or other successors in interest thereto, who
have received or may receive Exchanged Shares and/or Restricted Stock without
registration. The Registering Stockholders may sell the Exchanged Shares and the
Restricted Stock being offered hereby: (i) in ordinary brokerage transactions
and in transactions in which brokers solicit purchasers; (ii) in privately
negotiated direct sales or sales effected through agents not involving
established trading markets; or (iii) through transactions in put or call
options or other rights (whether exchange-listed or otherwise) established after
the effectiveness of the Registration Statement of which this Prospectus is a
part. The Exchanged Shares and the Restricted Stock may be sold at prices and at
terms then prevailing or at prices related to the then current market price of
the Common Stock on the NYSE or at other negotiated prices. In addition, any of
the Exchanged Shares and the Restricted Stock that qualify for sale pursuant to
Rule 144 may be sold in transactions complying with such rule, rather than
pursuant to this Prospectus.
The Restricted Shares and the Exchanged Stock consist of (i) Common Stock
previously issued to Restricted Stockholders in private transactions exempt
from the registration requirements of the Securities Act and (ii) Common Stock
issued or to be issued in private transactions exempt from the registration
requirements of the Securities Act to Unitholders upon exchange by the Company
of OP Units previously issued to such persons in private transactions exempt
from the registration requirements of the Securities Act.
In the case of sales of the Exchanged Shares and the Restricted Stock
effected to or through broker-dealers, such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Registering Stockholders or the purchasers of the Exchanged Shares and the
Restricted Stock sold by or through such broker-dealers, or both. The Company
has advised the Registering Stockholders that the anti-manipulative Rules 10b-6
and 10b-7 under the Securities Exchange Act of 1934, as amended ("Exchange Act")
may apply to their sales in the market and has informed them of the need for
delivery of copies of this Prospectus. The Company is not aware as of the date
of this Prospectus of any agreements between any of the Registering Stockholders
and any broker-dealers with respect to the sale of the shares offered by this
Prospectus. The Registering Stockholders and any broker-dealer or other agent
executing sell orders on behalf of the Registering Stockholders may be deemed to
be "underwriters" within the meaning of the Securities Act, in which case the
commissions received by any such broker-dealer or agent and profit on any resale
of the shares of Common Stock may be deemed to be underwriting commissions under
the Securities Act. The commissions received by a broker-dealer or agent may be
in excess of customary compensation. The Company will receive no part of the
proceeds from the sale of any Exchanged Shares and the Restricted Stock offered
hereunder.
Pursuant to the terms of the Registering Stockholders registration rights
agreements entered into by and among the Company and the Registering
Stockholders, the Registering Stockholders will pay their costs and expenses of
selling the Exchanged Shares and the Restricted Stock offered hereunder,
including commissions and discounts of underwriters, brokers, dealers or agents,
and the Company has agreed to pay the costs and expenses incident to its
registration and qualification of the Exchanged Shares and the Restricted Stock
offered hereby, including applicable filing fees, legal and accounting fees and
expenses. In addition the Company has agreed to indemnify the Registering
Stockholders against certain liabilities, including certain liabilities arising
under the Securities Act.
The Registering Stockholders may elect to sell all, a portion or none of
the Exchanged Shares and the Restricted Stock offered by them hereunder.
52
<PAGE>
EXPERTS
The Consolidated Financial Statements of American General Hospitality
Corporation as of December 31, 1996 and for the period from August 31, 1996
through December 31, 1996 and the related financial statement schedule; the
Financial Statements of AGH Leasing, L.P. as of December 31, 1996 and for the
period from August 31, 1996 through December 31, 1996 and the Combined Financial
Statements of th December 30, 1994, December 29, 1995 and August 30, 1996 and
for the period from December 30, 1993 through December 31, 1993, each of the two
years in the period ended December 29, 1995 and for the period from December 30,
1995 through August 30, 1996 and the related financial statement schedule are
incorporated by reference in this Registration Statement by reference to the
Company's Annual Report on Form 10-K. independent accountants.
The Combined Financial Statements of the AKL Acquisition Hotels as of and
for the year ended December 31, 1995 are incorporated by reference in this
Registration Statement by reference to the Company's Report on Form 8-K dated
March 17, 1997. The Combined Financial Statements of the MUI Acquisition Hotels
as of and for the year ended December 31, 1996 are incorporated by reference in
this Registration Statement by reference to the Company's Report on Form 8-K/A
dated August 1, 1997.
The above said financial statements have been so incorporated in reliance
on the reports of Coopers & Lybrand L.L.P.,
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. Battle Fowler LLP will rely on Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland as to certain matters of Maryland
law.
53
<PAGE>
===============================================================================
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the Registering Stockholders. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Common
Stock in any jurisdiction where, 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 hereunder shall, under any circumstances, create an implication that
there has not been any change in the facts set forth in this Prospectus or in
the affairs of the Company since the date hereof.
TABLE OF CONTENTS
Page
Available Information............................................... 2
Incorporation of Certain Documents by Reference..................... 2
Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995........... 3
Prospectus Summary.................................................. 4
Risk Factors........................................................ 7
Description of Capital Stock........................................ 19
Description of OP Units............................................. 27
Federal Income Tax Considerations................................... 30
Use of Proceeds..................................................... 48
Registering Stockholders............................................ 49
Plan of Distribution................................................ 52
Legal Matters....................................................... 53
Experts............................................................. 53
===============================================================================
===============================================================================
2,172,370 Shares
AMERICAN GENERAL
HOSPITALITY CORPORATION
Common Stock
--------------------------------
PROSPECTUS
--------------------------------
November __, 1997
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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 shares of
Common Stock.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission, registration fee.........$17,856.22
Printing and mailing expenses................................ 10,000.00
Accountant's fees and expenses............................... 5,000.00
Blue Sky fees and expenses................................... 5,000.00
Legal fees................................................... 25,000.00
Miscellaneous expenses....................................... 10,143.78
----------
Total..........................................$73,000.00
==========
</TABLE>
ITEM 15. 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 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
<PAGE>
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 has purchased director and officer liability insurance for the
purpose of providing a source of funds to pay any indemnification described
above.
ITEM 16. EXHIBITS
4.1 -- Form of Share Certificate (filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form S-11 (File No. 333-4568) and
incorporated herein by reference).
*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.
*23.1 -- Consent of Battle Fowler LLP (included in Exhibits 5.1 and 8.1).
*23.2 -- Consent of Coopers & Lybrand L.L.P. as to its opinion on Texas
Franchise Tax Matters (included in Exhibit 8.2).
23.3 -- Consent of Coopers & Lybrand L.L.P.
*24.1 -- Power of Attorney (included on signature page hereto).
- ---------
* Previously filed
ITEM 17.UNDERTAKINGS
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;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
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 and of the
estimated maximum offering range may be reflected in the form of a prospectus
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
<PAGE>
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offering therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement 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.
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 15 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.
<PAGE>
SIGNATURES
Pursuant to the requirement 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-3 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Irving, State of Texas, on the 18th day
of November, 1997.
AMERICAN GENERAL HOSPITALITY CORPORATION
a Maryland corporation (Registrant)
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. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board, Chief Executive November 18, 1997
- ------------------------- Officer, President and Director
Steven D. Jorns
/s/ Kenneth E. Barr Executive Vice President, Chief Financial November 18, 1997
- ------------------------- Officer, Secretary, Treasurer and Principal
Kenneth E. Barr Accounting Officer
* Director November 18, 1997
- -------------------------
H. Cabot Lodge III
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director November 18, 1997
- -------------------------
James R. Worms
* Director November 18, 1997
- -------------------------
James McCurry
* Director November 18, 1997
- -------------------------
Kent R. Hance
*By:/s/ Kenneth E. Barr November 18, 1997
Kenneth E. Barr
Attorney-in-Fact
</TABLE>
<PAGE>
Exhibit 23.3
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Amendment 1 of the
registration statement on Form S-3 (File No. 333-36127) of our reports dated
January 25, 1997, on our audits of the consolidated financial statements and
financial statement schedule of American General Hospitality Corporation as of
December 31, 1996, and for the period from July 31, 1996 through December 31,
1996, which report is included on Form 10-K; dated February 21, 1992, on our
audit of AGH Leasing, L.P. as of December 31, 1996 and for the period from July
31, 1996 through December 31, 1996, which report is included on Form 10-K; dated
September 19, 1996, on our audits of the combined financial statements and
financial statement schedule of AGH Predecessor Hotels as of December 30, 1994,
December 29, 1995 and July 30, 1996 and for the period from December 30, 1993
through December 31, 1993, each of the two years in the period ended December
29, 1995 and for the period from December 30, 1995 through July 30, 1996, which
report in included on Form 10-K; dated March 17, 1997, on our audit of the
combined financial statements and financial statement schedule of the AKI.
Acquisition Hotels, which report is included on Form 8-K dated March 28, 1997;
and dated June 16, 1997, on our audits of the combined financial statements and
financial statement schedule of the MUI Acquisition Hotels, which report is
included on Form 8-K/A dated August 4, 1997. We also consent to the reference to
our firm under the caption of "Experts".
/s/ Coopers & Lybrand L.L.P.
---------------------------------------------
Dallas, Texas
November 17, 1997
