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Registration Statement No. 333-
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As filed with the Securities and Exchange Commission on August 6, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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. [ ]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
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Proposed
Maximum
Amount Proposed Maximum Aggregate Amount of
Title of Shares to be to be Aggregate Offering Offering Registration
Registered Registered Price Price(1) Fee
- -------------------------------------------- ---------- ----- -------- ---
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share (2)..
- --------------------------------------------
Common Stock Warrants....................... N/A N/A $500,000,000 $151,516
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</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
in accordance with Rule 457(o) and based upon the maximum aggregate
offering price of all securities being registered.
(2) Such indeterminate number of shares of Common Stock as may from time
to time be issued at indeterminate prices registered hereunder or upon
exercise of the Common Stock Warrants registered hereunder, as the
case may be.
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 nor 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 AUGUST 6, 1997
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SUBJECT TO COMPLETION
$500,000,000
AMERICAN GENERAL HOSPITALITY CORPORATION
COMMON STOCK AND COMMON STOCK WARRANTS
American General Hospitality Corporation, a Maryland corporation (the
"Company"), may offer from time to time in one or more series (i) shares of its
Common Stock, $0.01 par value per share ("Common Stock"), or (ii) warrants to
purchase Common Stock ("Common Stock Warrants") with an aggregate public
offering price of up to $500,000,000 (or its equivalent based on the exchange
rate at the time of sale) in amounts, at prices and on terms to be determined at
the time of offering. The Common Stock and Common Stock Warrants (collectively,
the "Securities") may be offered separately or together, in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Common Stock, the specific
number of shares and any public offering price per share and (ii) in the case of
Common Stock Warrants, the duration, offering price, exercise price and
detachability. In addition, such specific terms may include limitations on
direct or beneficial ownership and restrictions on transfer of the Securities,
in each case as may be consistent with the Company's Charter (as hereinafter
defined) or otherwise appropriate to preserve the status of the Company as a
real estate investment trust (a "REIT") for federal income tax purposes. See
"Description of Common Stock--Restrictions on Transfer."
The applicable Prospectus Supplement will also contain information, where
appropriate, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered by the Company directly to one or more
purchasers, through agents designated from time to time by the Company or to or
through underwriters or dealers. If any agents or underwriters are involved in
the sale of any of the Securities, their names, and any applicable purchase
price, fee, commission or discount arrangement between or among them, will be
set forth, or will be calculable from the information set forth, in the
Prospectus Supplement describing the method and terms of the offering of such
Securities. See "Plan of Distribution." No Securities may be sold pursuant to
this Prospectus without the delivery of a Prospectus Supplement describing the
method and terms of the offering of such Securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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 August ___, 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, 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,
and June 25, 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 filing of such documents. Any statement contained
in this Prospectus or in a document
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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. Certain factors 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.
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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
American General Hospitality Corporation was incorporated and formed on April
12, 1996, as a Maryland corporation, for the purpose of continuing and expanding
the hotel acquisition, development and repositioning operations of American
General Hospitality, Inc., and certain of its affiliates ("AGHI"). The Company
is a self-administered real estate investment trust (a "REIT"). On July 31,
1996, the Company completed an initial public offering (the "IPO") of 7,500,000
shares of its Common Stock (the "Common Stock") (an additional 575,000 shares
were issued pursuant to the underwriters' overallotment option in August, 1997),
acquired equity interests in 13 hotels (the "Initial Hotels") and commenced
operations. The Company contributed all of the net proceeds of the IPO to
American General Hospitality Operating Partnership, L.P. (the "Operating
Partnership") in which the Company acquired limited partnership interests of the
Operating Partnership ("OP Units"); the remaining OP Units were issued to the
sellers of the Initial Hotels.
In February 1997, the Company completed a follow-on public offering (the "1997
Public Offering") of 6,368,300 shares of its Common Stock (inclusive of the
shares issued pursuant to the exercise of the underwriters' over allotment
option in March 1997). The Company contributed all of the net proceeds of the
1997 Public Offering to the Operating Partnership. Since the IPO, the Company
has acquired thirteen hotels with an aggregate of 3,651 guest rooms. As of July
31, 1997, the Company owned 26 hotels in sixteen states with an aggregate of
6,686 guest rooms (the "Hotels"). At July 31, 1997, the Company held an
approximate 87.22% interest in the Operating Partnership.
In order to qualify as a REIT, the Company may not operate hotels. As a result,
the Company currently leases 25 of the Hotels to AGH Leasing, L.P. ("AGH
Leasing") and the one hotel to Twin Towers Leasing, L.P. ("Twin Towers")
(together with AGH Leasing, the "Lessee"), pursuant to separate participating
leases (the "Participating Leases"). AGH Leasing is owned in part by Steven D.
Jorns, Bruce G. Wiles and Kenneth E. Barr, executive officers of both the
Company and AGHI and is the sole general partner of Twin Towers. Each
Participating Lease has a term of twelve years from the inception of the leases,
subject to earlier termination upon the occurrence of certain events. Under the
Participating Leases, the Lessee is obligated to pay the Company the greater of
fixed weekly base rent and monthly participating rent based on a percentage of
revenues at each of the Hotels. The Participating Leases are designed to allow
the Company to achieve substantial participation in any future growth of
revenues generated at the Hotels.
In addition, the Lessee has engaged AGHI to manage all of the Hotels pursuant to
separate management agreements (the "Management Agreements") other than the
Wyndham Garden Hotel-Marietta, which is managed by Wyndham Hotel Corporation.
The Company does not have any economic interest in AGHI's hotel management
operations.
The Company's executive offices are located at 5605 MacArthur Boulevard, Suite
1200, Irving, Texas 75038, and its telephone number is (972) 550-6800.
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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
American General Hospitality Corporation ("Company") may offer from time to
time in one or more series (i) shares of its Common Stock or (ii) Common Stock
Warrants with an aggregate public offering price of up to $500,000,000 (or its
equivalent based on the exchange rate at the time of sale) in amounts, at prices
and on terms to be determined at the time of offering. The Common Stock and
Common Stock Warrants may be offered separately or together, in separate series,
in amounts, at prices and on terms to be set forth in one or more Prospectus
Supplements.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company will contribute the net proceeds from the sale of the Securities to the
Operating Partnership, in exchange for comparable securities thereof. The
Operating Partnership expects to use such net proceeds for various purposes,
which may include, without limitation, the repayment of outstanding
indebtedness, the acquisition of additional hotels, the improvement and/or
expansion of one or more of its hotel properties or for working capital
purposes. Pending such uses, the net proceeds of any offering of Securities may
be invested in short-term, investment grade securities or instruments, interest-
bearing bank accounts, certificates of deposit, mortgage participations or
similar securities, to the extent consistent with the Company's qualification as
a REIT, the Company's Charter, and the Company's agreements with its lenders.
DESCRIPTION OF COMMON 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.
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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.
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
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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 of
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 15.0% of the shares of any class or series of
the Company's stock, provided that such ownership does not cause any beneficial
owner of such entity to exceed the Ownership Limitation or otherwise result in a
violation of the tests described in clauses (ii), (iii) and (iv) of the 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.
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.
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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.
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
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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 increase the likelihood that incumbent
directors will retain their positions.
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Removal; Filling Vacancies
The Bylaws provide that 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
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Bylaws, or under resolutions of stockholders or directors, contract or
otherwise. It is the position of the Commission that indemnification of
directors and officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act.
The Company also 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 combinations 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
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shares are considered and not approved. If voting rights for control shares are
approved at a stockholders meeting and the acquiror becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition, and certain limitations and
restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange, if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation.
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
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be called by the Secretary of the Company upon the written request of the
holders of shares entitled to cast not less than a majority of all votes
entitled to be cast at the meeting.
Operations
The 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.
DESCRIPTION OF COMMON STOCK WARRANTS
The following description of Common Stock Warrants does not purport to be
complete and is qualified in its entirety by reference to the description of a
particular series of Common Stock Warrants contained in an applicable Prospectus
Supplement. For information relating to the Common Stock which may be purchased
Pursuant to Common Stock Warrants, see "Description of Common Stock."
The Company may issue one or more series of Common Stock Warrants for the
purchase of Common Stock. Common Stock Warrants of any series may be issued
independently of, or together with, any Securities offered pursuant to any
Prospectus Supplement. If offered together with other Securities, Common Stock
Warrants may be attached to, or separate from, such Securities. Each series of
Common Stock Warrants will be issued under a separate warrant agreement (each a
"Warrant Agreement") to be entered into between the Company and the holder of
such Common Stock Warrants or, if the holders are expected to be numerous, a
warrant agent identified in the applicable Prospectus Supplement ("Warrant
Agent"). Any Warrant Agent, if engaged, will act solely as an agent of the
Company in connection with the Common Stock Warrants of the series specified in
the Warrant Agreement relating thereto and such Warrant Agent will not assume
any relationship or obligation of agency or trust for or with any holders or
beneficial owners of Common Stock Warrants. Further terms of the Common Stock
Warrants and the related Warrant Agreements will be set forth in the applicable
Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of such Common
Stock Warrants, including the following where applicable: (i) the title of such
Common Stock Warrants; (ii) the aggregate number of such Common Stock Warrants;
(iii) the price or prices at which such Common Stock Warrants will be issued;
(iv) the currencies in which the price of such Common Stock Warrants may be
payable; (v) the designation, aggregate principal amount and terms of the
securities purchasable upon exercise of such Common Stock Warrants; (vi) the
designation and terms of the series of Common Stock with which such Common Stock
Warrants are being offered and the number of such Common Stock Warrants being
offered with such security; (vii) the date, if any, on and after which such
Common Stock Warrants and the related securities will be transferable
separately; (viii) the price at which and currency or currencies, including
composite currencies, in which the securities purchasable upon exercise of such
Common Stock Warrants may be purchased; (ix) the date
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on which the right to exercise such Common Stock Warrants shall commence and the
date on which such right shall expire; (x) any material United States federal
income tax consequences; (xi) the terms, if any, on which the Company may
accelerate the date by which the Common Stock Warrants must be exercised; and
(xii) any other terms of such Common Stock Warrants, including terms, procedures
and limitations relating to the exchange and exercise of such Common Stock
Warrants.
The Common Stock Warrants will be subject to certain restrictions upon the
exercise, ownership and transfer thereof which were adopted for the purpose of
enabling the Company to preserve its status as a REIT. For a description of such
restrictions and the Maryland Anti-Takeover Statutes, see "Description of Common
Stock -- Restrictions on Transfer."
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OPERATING PARTNERSHIP AGREEMENT
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 July 31, 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
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Partnership. Moreover, the Company is authorized, through AGH GP and AGH LP, to
cause the Operating Partnership to issue partnership interests for less than
fair market value if the Company has concluded in good faith that such issuance
is in the best interests of the Company and the Operating Partnership. If the
Company so contributes additional capital to the Operating Partnership, AGH GP
and AGH LP will receive additional OP Units, and their percentage interests in
the Operating Partnership will be increased on a proportionate basis based upon
the amount of such additional capital contributions and the value of the
Operating Partnership at the time of such contributions. Conversely, the
percentage interests of the Limited Partners, other than AGH LP, will be
decreased on a proportionate basis in the event of additional capital
contributions by the Company.
EXCHANGE RIGHTS
Pursuant to the Exchange Rights Agreement among the Company, the Operating
Partnership and the Limited Partners other than AGH LP, 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
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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.
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
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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.
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 has been owned by
the REIT 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, 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.
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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). 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.
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
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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
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additional personal property for a Hotel to the extent that such acquisition
would cause the 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
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is not possible to monitor continually direct and indirect transfers of Common
Stock, no absolute assurance can be given that such transfers or other events of
which the Company has no knowledge will not cause the Company to own
constructively 10% or more of the Lessee at some future date.
A fourth requirement noted above for qualification of the Rents as "rents from
real property" is that the Company cannot furnish or render noncustomary
services to the tenants of the 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, 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.
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It is possible that, from time to time, the Company, the Operating Partnership
or a Subsidiary Partnership will enter into hedging transactions with respect to
one or more of its assets or liabilities. Any such hedging transactions could
take a variety of forms. If the Company, the Operating Partnership or a
Subsidiary Partnership enters into an interest rate swap or cap contract to
hedge any variable rate indebtedness incurred to acquire or carry real estate
assets, any periodic income or gain from the disposition of such contract should
be qualifying income for purposes of the 95% gross income test, but not for the
75% gross income test. Furthermore, any such contract would be considered a
"security" for purposes of applying the 30% gross income test. To the extent
that the Company, the Operating Partnership or a Subsidiary Partnership hedges
with other types of financial 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, 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
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income, minus (B) the excess of the sum of certain items of non-cash income
(income attributable to leveled stepped rents, original issue discount on
purchase money debt, or a like-kind exchange that is later determined to be
taxable over 5% of the amount determined under clause (i) above). Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular distribution
date after such declaration. The amount distributed must not be preferential--
i.e., each holder of shares of Common Stock must 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
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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 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
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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).
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
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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.
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.
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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 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
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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.
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.
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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 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, at the closing of the
Offering, Battle Fowler LLP will deliver its opinion that, based on the
provisions of the partnership agreement of the Operating Partnership and each
Subsidiary Partnership, certain factual assumptions, and certain representations
described in the opinion, the Operating Partnership and each Subsidiary
Partnership pursuant to the provisions of the "check the box regulations" as
well as the law prior to January 1, 1997 will be
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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.
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.
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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.
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
33
<PAGE>
denominator of which is the corporation's gross receipts from its entire
business, with the amount and timing of such gross receipts being generally
determined in accordance with generally accepted accounting principles (in the
case of "taxable capital") and the Code (in the case of taxable earned surplus).
For purposes of determining the source of gross receipts, dividends and interest
received by a corporation are generally apportioned based upon the state of
incorporation of a corporate payor or a corporate debtor, respectively. A
similar rule applies to receipts by a corporation from a limited liability
company. Thus, interest and dividends received by a corporation from another
corporation or distributions and interest received by a corporation from a
limited liability company will not be treated as gross receipts from business
transacted in Texas unless the payor is incorporated or organized, respectively,
in Texas. To calculate the tax on net taxable capital, receipts reflecting the
corporation's share of net profits from a partnership are apportioned to Texas
if the partnership's principal place of business (the location of its day-to-day
operations) is in Texas; however, if the corporation's share of the gross
receipts from the partnership is treated as revenue of the corporation under
generally accepted accounting principles, then the receipts of the partnership
are apportioned based on normal apportionment rules as if the receipts were
received directly by the corporation. For purposes of the tax on net taxable
earned surplus, receipts are apportioned as though the corporation directly
received the receipts from the underlying activities of the partnership. The
franchise tax on "net taxable capital" ("taxable capital" apportioned to Texas)
is imposed at the rate of .25% of a corporation's net taxable capital. The
franchise tax rate on "net taxable earned surplus" ("taxable earned surplus"
apportioned to Texas) is 4.5%. The Texas franchise tax is generally equal to the
greater of the tax on "net taxable capital" and the tax on "net taxable earned
surplus." The Texas franchise tax is not applied on a consolidated group basis.
In addition, with respect to REITs organized as corporations, the Comptroller of
Public Accounts (the "Comptroller") has taken the position administratively that
the tax on net taxable earned surplus is determined based upon the income of
such corporation prior to reduction for the dividends-paid deduction available
to REITs. Any Texas franchise tax that the Company is required to pay will
reduce the Cash Available for Distribution by the Company to its stockholders.
The Comptroller has issued a rule providing that a corporation is not considered
to be doing business in Texas for purposes of the Texas franchise tax imposed on
net taxable capital solely by virtue of its ownership of an interest as a
limited partner in a limited partnership that does business in Texas. The same
rule provides, however, that a corporation is considered to be doing business in
Texas if it owns an interest as a general partner in a partnership that does
business in Texas. A parallel rule for purposes of the tax on net taxable earned
surplus, by negative implication, incorporates the taxable capital nexus
standards, including the limited partner exception. The Comptroller has verified
these results in private determinations. The Comptroller also has expressed
informally its view that a corporation is not considered to be doing business in
Texas for Texas franchise tax purposes merely because the corporation owns stock
in another corporation that does business in Texas.
In accordance with these pronouncements by the Comptroller, AGH GP will be
treated as doing business in Texas because it will be the general partner of the
Operating Partnership, and the Operating Partnership will be doing business in
Texas. Accordingly, AGH GP will be subject to the Texas franchise tax. The
Company will be treated as doing business in Texas because it will have an
office in Texas. Accordingly, the Company will be 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
34
<PAGE>
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.
Possible Legislative or Other Actions Affecting Tax Consequences; Possible
Adverse Tax Legislation. Prospective stockholders should recognize that the
present federal income tax treatment of an investment in the Company may be
modified by legislative, judicial or administrative action at any time and that
any such action may affect investments and commitments previously made. The
rules dealing with federal income taxation are constantly under legislative and
administrative review, resulting in revisions of regulations and revised
interpretations of established concepts as well as statutory changes. Revisions
in federal tax laws and interpretations thereof could adversely affect the tax
consequences of an investment in the Company.
Current Texas franchise tax law applies only to corporations and limited
liability companies. Thus, partnerships engaged in business in Texas, including
the Subsidiary Partnerships that own property in Texas, 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.
35
<PAGE>
PLAN OF DISTRIBUTION
The Company may sell Securities in or outside the United States through
underwriters or dealers, directly to one or more purchasers, through agents or
through a combination of any such methods of sale. The Prospectus Supplement
with respect to the Securities will set forth the terms of the offering of the
Securities, including the name or names of any underwriters, dealers or agents,
the initial public offering price, any underwriting discounts and other items
constituting underwriters compensation, any discounts or concessions allowed or
reallowed or paid to dealers, and any securities exchanges on which the
securities may be listed.
Securities may be sold directly by the Company through agents designated by
the Company from time to time at fixed prices, which may be changed, or at
varying prices determined at the time of sale. Any agent involved in the offer
or sale of the Securities will be named, and any commissions payable by the
Company to such agent will be set forth, in the Prospectus Supplement relating
thereto. Unless otherwise indicated in the Prospectus Supplement, any such
agent will be acting on a best efforts basis for the period of its appointment.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities, for whom
they may act as agents, in the form of discounts, concessions or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers, and agents that participate in the distribution
of Securities may be deemed to be underwriters under the Securities Act, and any
discounts or commissions they receive from the Company and any profit on the
resale of Securities they realize may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Company will be
described, in the applicable Prospectus Supplement. Unless otherwise set forth
in the Prospectus Supplement relating thereto, the obligations of the
underwriters or agents to purchase the Securities will be subject to conditions
precedent and the underwriters will be obligated to purchase all the Securities
if any are purchased. The initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers may be changed from time to
time.
Unless otherwise specified in the related Prospectus Supplement, the Common
Stock Warrants will be a new issue with no established trading market, other
than the Common Stock which is traded on the NYSE under the symbol "AGT." Any
shares of Common Stock sold pursuant to a Prospectus Supplement will be approved
for trading, upon notice of issuance, on the NYSE. It is possible that one or
more underwriters may make a market in the Common Stock Warrants, but will not
be obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of, or the
trading market for, the Common Stock Warrants.
Under agreements into which the Company may enter, underwriters, dealers and
agents who participate in the distribution of Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, the Company in the ordinary course of business.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states securities may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and complied with.
36
<PAGE>
EXPERTS
The Consolidated Financial Statements of American General Hospitality
Corporation as of December 31, 1996 and for the period from July 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 July 31, 1996 through December 31, 1996 and the Combined Financial
Statements of the 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 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. 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 and the related financial
statement schedule 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 4, 1997.
The above said financial statements have been so incorporated in reliance on the
reports of Coopers & Lybrand L.L.P., independent accountants.
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.
37
<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>
<S> <C>
Securities and Exchange Commission, registration fee.. $151,516
NASD filing fee....................................... 30,500
NYSE listing fee...................................... 79,300
Printing, engraving and mailing expenses.............. 255,000
Blue sky fees and expenses............................ 15,000
Accountant's fees and expenses........................ 50,000
Legal fees............................................ 150,000
Miscellaneous expenses................................ $168,684
--------
Total................................... $900,000
========
</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 or for a judgment of liability on the basis that an
II-1
<PAGE>
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) a written affirmation by the director or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the Company as authorized by the Bylaws and (b)
a written statement by or on his behalf to repay the amount paid or reimbursed
by the Company if it shall ultimately be determined that the standard of conduct
was not met.
The Company 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
<TABLE>
<CAPTION>
Exhibit
Number
- -------
<S> <C>
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 hereto)
23.3 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Power of Attorney (included on signature page hereto).
</TABLE>
- ---------------
* To be filed by Amendment.
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
II-2
<PAGE>
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
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.
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<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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Irving, State of Texas, on the 6th day of August,
1997.
AMERICAN GENERAL HOSPITALITY CORPORATION
a Maryland corporation (Registrant)
By: /s/ Steven D. Jorns
-------------------------------------
Steven D. Jorns
Chairman of the Board, Chief Executive Officer
and President
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Steven D. Jorns and Kenneth E. Barr and each or either of them, his
true and lawful attorney-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement (or any registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933) and to cause the same to be filed, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby granting to said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing whatsoever requisite or desirable to be done in and about the premises, as
fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things that said attorneys-
in-fact and agents, or either of them, or their substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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>
/s/ Steven D. Jorn Chairman of the Board, Chief Executive August 6, 1997
- ---------------------- Officer, President and Director
Steven D. Jorns
/s/ Kenneth E. Barr Executive Vice President, Chief Financial August 6, 1997
- ---------------------- Officer, Secretary, Treasurer and Principal
Kenneth E. Barr Accounting Officer
/s/ H. Cabot Lodge III Director August 6, 1997
- -----------------------
H. Cabot Lodge III
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ James R. Worms Director August 6, 1997
- -----------------------
James R. Worms
/s/ James McCurry Director August 6, 1997
- -----------------------
James McCurry
/s/ Kent R. Hance Director August 6, 1997
- -----------------------
Kent R. Hance
</TABLE>
II-5
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement on
Form S-3, filed on or about the date hereof, 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 is included on
Form 10-K; dated March 17, 1997, on our audit of the combined financial
statements and financial statement schedule of the AKL 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
"Experts".
COOPERS & LYBRAND L.L.P.
Dallas, Texas
August 6, 1997
