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Registration Statement No. 333-
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As filed with the Securities and Exchange Commission on September 22, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
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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Title of each class Amount Proposed Maximum Proposed Maximum
of securities to be to be Offering Price Aggregate Offering Amount of
Registered Registered Per OP Unit (1) Price (1) Registration Fee
---------- ---------- --------------- --------- ----------------
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share 2,172,370 27.125 $58,925,536 $17,856.22
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</TABLE>
(1) This estimate is based on the average of the high ($27.25) and low ($27)
sales prices on the New Stock Exchange, Inc. of the Common Stock of
American General Hospitality Corporation on September 15, 1997, pursuant to
Rule 457(c) under the Securities Act of 1933, as amended, and is made
solely for purposes of determining the registration fee.
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 SEPTEMBER 22, 1997
SUBJECT TO COMPLETION
2,172,370 Shares
AMERICAN GENERAL HOSPITALITY CORPORATION
COMMON STOCK
American General Hospitality Corporation (collectively with its
subsidiaries, the "Company") is a self-administered real estate investment trust
(a "REIT"), organized as a corporation under the laws of Maryland, which owns
hotels, diversified by franchisor or brand affiliation, in several states (the
"Hotels"). The Company's Common Stock, $0.01 par value per share, (the "Common
Stock") is listed on the New York Stock Exchange under the symbol "AGT."
This prospectus (the "Prospectus") relates to (i) the possible
issuance from time to time by the Company of up to 1,896,996 shares of Common
Stock (the "Exchanged Shares"), if and to the extent that holders
("Unitholders") of up to 1,896,996 OP Units of limited partnership interest ("OP
Units") in American General Hospitality Operating Partnership, L.P., a Delaware
limited partnership (the "Operating Partnership") receive such shares in
exchange for OP Units; and (ii) the registration of 275,374 shares of Common
Stock (the "Restricted Stock") being registered for the account of certain
stockholders (the "Restricted Stockholders," and, together with the Unitholders,
the "Registering Stockholders"). The OP Units and the 137,008 shares of
Restricted Stock which were issued, in connection with the initial public
offering of the Company on August 31, 1996, in exchange for the acquisition by
the Company of equity interests in certain of the 13 initial hotels (the
"Initial Hotels"). 25,397 shares of the Restricted Stock were issued in
connection with the acquisition by the Company of the Wyndham(R) Royal Safari
Lake Buena Vista in Lake Buena Vista, Florida and 112,969 shares of the
Restricted Stock were issued pursuant to an alliance agreement between the
Company and Windham Hotel Corporation. See "Registering Stockholders."
Pursuant to the agreement of limited partnership of the Operating
Partnership (the "Operating Partnership Agreement") and an Exchange Rights
Agreement among the Company, the Operating Partnership and the Unitholders, a
Unitholder may tender its OP Units to the Operating Partnership for cash;
provided, however, that the Company may acquire any OP Units so tendered for an
equivalent number of shares of Common Stock. As a result, the Company may from
time to time issue up to 1,896,996 Exchanged Shares upon the acquisition of OP
Units tendered to the Company for exchange. Accordingly, the Company is
registering the Exchanged Shares to provide Unitholders with freely tradeable
securities upon exchange. See "Redemption of Units."
To ensure that the Company maintains its qualification as a REIT under
the Internal Revenue Code of 1986, as amended (the "Code"), the Company's
Charter limits the number of shares of Common Stock that may be owned by any
single person or affiliated group to 9.8% of the number of outstanding shares of
Common Stock and restricts the transferability of shares of Common Stock if the
purported transfer would prevent the Company from qualifying as a REIT. See
"Risk Factors --Potential Anti-Takeover Effect of Certain Provisions of Maryland
Law and of the Company's Charter and Bylaws and "Description of Capital Stock --
Restrictions on Transfer."
Each of the Registering Stockholders, directly or through agents or
dealers, may, from time to time, sell all or a portion of the Restricted Stock
or Exchanged Shares on terms to be determined at the time of sale. To the extent
required, the specific terms of a particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." Each Registering
Stockholder reserves the right to accept and, together with its agents or
dealers, to reject, in whole or in part, any proposed purchase of Restricted
Stock or Exchanged Shares.
The Company will not receive any proceeds from the issuance of any
Exchanged Shares offered hereby. The Company will acquire additional OP Units in
the Operating Partnership in exchange for any Exchanged Shares that the Company
may issue to a Unitholder pursuant to this Prospectus. The Company currently
holds an approximate 87.22% interest in the Operating Partnership. The Company
will not receive any proceeds from the sale of shares of Restricted Stock. The
Company has agreed to bear certain expenses of registration of the Exchanged
Shares and the Restricted Stock under federal and state securities laws.
See "Risk Factors" beginning on page 6 for certain factors relevant to
an investment in the Common Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE 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 September 22, 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 and June 30, 1997, filed with the Commission pursuant to the Exchange
Act;
3. The Company's Current Reports on Form 8-K, as amended, dated March 17,
1997, 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
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from the date of filing of such documents. Any statement contained in this
Prospectus or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge, upon
written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents. Written requests
should be mailed to Kenneth E. Barr, Secretary, American General Hospitality
Corporation, 5605 MacArthur Boulevard, Suite 1200, Irving, Texas 75038.
Telephone requests may be directed to (972) 550-6800.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Risk Factors," among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this Prospectus,
filings by the Company with the Securities and Exchange Commission (the
"Commission"), in the Company's press releases and in oral statements made by
authorized officers of the Company. When used in this Prospectus, the words
"estimate," "project," "anticipate," "expect," "intend," "believe," and similar
expressions are intended to identify forward-looking statements.
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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
August 31, 1997, the Company owned 26 hotels in sixteen states with an aggregate
of 6,686 guest rooms (the "Hotels"). At August 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 both of 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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Risk Factors
Prospective investors and Unitholders should carefully consider the matters
discussed under "Risk Factors" before making an investment decision regarding
the Common Stock offered hereby.
Tax Status of the Company
The Company has elected to be taxed as a REIT under Section 856 through 860 of
the Code, commencing with its taxable year ended December 31, 1996. As a REIT,
the Company generally will not be subject to federal income tax on net income
that it distributes to its shareholders as long as it distributes at least 95%
of its taxable income each year and complies with a number of other
organizational and operational requirements. Failure to qualify as a REIT will
render the Company subject to tax (including any applicable minimum tax) on its
taxable income at regular corporate rates, and distributions to the shareholders
in any such year will not be deductible by the Company. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to certain federal,
state and local taxes on its income and property. In connection with the
Company's election to be taxed as a REIT, the Company's Charter imposes certain
restrictions on the transfer of shares of Common Stock. The Company has adopted
the calendar year as its taxable year.
Securities to be Offered
This Prospectus relates to (i) the possible issuance from time to time by the
Company of up to 1,896,996 Exchanged Shares, if and to the extent that
Unitholders of up to 1,896,996 OP Units in the Operating Partnership receive
such shares in exchange for OP Units; and (ii) the registration of 275,374
shares of Restricted Stock being registered for the account of certain
Restricted Stockholders. The OP Units and 137,008 shares of Restricted Stock
were issued, in connection with the IPO, in exchange for the acquisition by the
Company of equity interests in the Initial Hotels. 25,397 of the shares of
Restricted Stock were issued in connection with the acquisition by the Company
of the Wyndham Royal Safari in Lake Buena Vista, Florida and 112,969 shares of
the Restricted Stock were issued pursuant to an alliance agreement between the
Company and Wyndham Hotel Corporation.
Pursuant to the Operating Partnership Agreement and the Exchange Rights
Agreement, a Unitholder may tender its OP Units to the Operating Partnership for
cash; provided, however, that the Company may acquire any OP Units so tendered
for an equivalent number of shares of Common Stock. As a result, the Company may
from time to time issue up to 1,896,996 Exchange Shares upon the acquisition of
OP Units tendered to the Operating Partnership for exchange. Accordingly, the
Company is registering the Exchanged Shares to provide Unitholders with freely
tradeable securities upon exchange.
The Company will not receive any proceeds from the issuance of any Exchanged
Shares offered hereby. The Company will acquire additional OP Units in the
Operating Partnership in exchange for any Exchanged Shares that the Company may
issue to a Unitholder pursuant to this Prospectus. As of August 31, 1997, the
Company holds an approximate 87.22% interest in the Operating Partnership. The
Company will not receive any proceeds from the sale of shares of Restricted
Stock offered hereby. The Company has agreed to bear certain expenses of
registration of the Exchanged Shares and the Restricted Stock under federal and
state securities laws.
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RISK FACTORS
An investment in the shares of Common Stock involves various risks. Unitholders
and Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus and
incorporated by reference herein before making an investment decision regarding
the Restricted Stock and the Exchanged Shares offered hereby.
Tax Consequences to Unitholders of Exchange of OP Units
Tax Consequences of Exchange of OP Units. In the event that the Company
exercises its right to acquire OP Units tendered in exchange for cash or
Exchanged Shares, the Company's acquisition of such OP Units will be treated for
tax purposes as a sale of the OP Units by the Unitholders. Such a sale will be
fully taxable to the Unitholder and the Unitholder will be treated as realizing
for tax purposes an amount equal to the sum of the cash received or the value of
the Exchanged Shares received in the exchange plus the amount of any Operating
Partnership liabilities allocable to the exchanged OP Units at the time of the
exchange. It is possible that the amount of gain recognized or even the tax
liability resulting from such gain could exceed the amount of cash and the value
of other property (i.e., Exchanged Shares) received upon such disposition. See
"Exchange of OP Units -- Tax Consequences of Exchange." In addition, the ability
of the Unitholder to sell a substantial number of Exchanged Shares in order to
raise cash to pay tax liabilities associated with the exchange of OP Units may
be limited as a result of fluctuations in the market price of the Common Stock,
and the price the Unitholder receives for such shares may not equal the value of
its OP Units at the time of exchange.
In the event that the Company does not exercise its right to acquire OP Units
tendered in exchange for Exchanged Shares, and such OP Units are redeemed by the
Operating Partnership for cash, the tax consequences may differ. See "Exchange
of OP Units."
Potential Change in Investment Upon Exchange of OP Units. If a Unitholder
exercises its right to require the exchange of all or a portion of its OP Units,
the Unitholder may receive cash or, at the option of the Company, Exchanged
Shares in exchange for its OP Units. If the Unitholder receives cash from either
the Operating Partnership or the Company, the Unitholder will not have any
interest in the Company or the Operating Partnership (except to the extent that
it retains OP Units) and will not benefit from any subsequent increases in the
value of Common Stock and will not receive any future distributions from the
Company or the Operating Partnership (unless the Unitholder retains or acquires
in the future additional Common Stock or OP Units). If the Unitholder receives
Common Stock, the Unitholder will become a stockholder of the Company rather
than a holder of OP Units in the Operating Partnership. See "Exchange of OP
Units--Comparison of Ownership of OP Units and Common Stock."
Conflicts of Interest
General
Because of Messrs. Jorns', Wiles' and Barr's ownership in and positions with the
Company, AGHI and the Lessee, there are inherent conflicts of interest in the
ongoing lease, acquisition, disposition, operation and management of the Hotels.
Accordingly, the interests of the Company's stockholders may not be reflected
fully in all decisions made or actions taken or to be taken by certain officers
and directors of the Company.
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No Arm's-Length Bargaining
The terms of the Participating Leases, the Management Agreements entered into
with AGHI, certain agreements granting the Company a right of first refusal to
acquire AGHI's interest in certain hotels (the "Option Agreements") and
agreements related to the sublease of areas of Hotels where alcoholic beverages
are served to corporations wholly owned by Mr. Jorns were not negotiated on an
arm's-length basis. In the event revenues from the Hotels increase significantly
over prior periods, and operating expenses with respect thereto are less than
historical or projected operating expenses, the Lessee could disproportionately
benefit. In the event incremental increases in expenses at the Hotels exceed
incremental increases in revenues, conflicts of interest may arise between the
Lessee and the Company. The Company does not own any interest in the Lessee.
Because Messrs. Jorns, Wiles and Barr are partners in AGH LP, and each of them
is an executive officer of the Company (Mr. Jorns is also a director of the
Company), there is an inherent conflict of interest with respect to the
enforcement and termination of the Participating Leases. Because of these
conflicts, Messrs. Jorns', Wiles' and Barr's decisions relating to the Company's
enforcement of its rights under the Participating Leases may not solely reflect
the interests of the Company's stockholders.
Conflicts Relating to Sale of Hotels Subject to Participating Leases
The Company generally will be obligated under the Participating Leases to pay a
lease termination fee to the Lessee if the Company elects to sell a Hotel and
does not replace it with another hotel on terms that would create a leasehold
interest in such hotel with a fair market value equal to the Lessee's remaining
leasehold interest under the Participating Lease to be terminated. Where
applicable, the termination fee is equal to the fair market value of the
Lessee's leasehold interest in the remaining term of the Participating Lease to
be terminated. The payment of a termination fee to the Lessee, which is owned in
part by Messrs. Jorns, Wiles and Barr, may result in decisions regarding the
sale of a Hotel that do not reflect solely the interests of the Company's
stockholders.
Conflicts Relating to Continued Management of Hotels
AGHI, in which Messrs. Jorns and Wiles own collectively an approximate 21.0%
interest, manages hotels for third parties. There are no restrictions in either
the Participating Leases or the Management Agreements that limit the Lessee's or
AGHI's ability to lease or manage hotels which may compete with the Company's
hotels. Accordingly, the Lessee's and AGHI's decisions relating to the operation
of any of the Hotels that are in competition with other hotels leased or managed
by either of them may not fully reflect the interests of the Company's
stockholders.
Dependence on Lessee and Payments Under the Participating Leases
The Company's ability to make distributions to its stockholders depends solely
upon the ability of the Lessee to make rent payments under the Participating
Leases (which will be dependent primarily on the ability of AGHI and other
potential operators to generate sufficient revenues from the Hotels in excess of
operating expenses). Any failure or delay by the Lessee in making rent payments
would adversely affect the Company's ability to make anticipated distributions
to its stockholders. Such failure or delay by the Lessee may be caused by
reductions in revenue from the Hotels or in the net operating income of the
Lessee or otherwise. On a pro forma basis for the twelve months ended December
31, 1995 and the twelve months ended December 31, 1996, the Lessee experienced
net losses. Accordingly, there can be no assurance that the Lessee will not
experience net losses in the future. The Lessee is a recently organized limited
purpose entity; accordingly, it has limited assets. The partners of the Lessee
have pledged 275,000 OP Units to the Company to secure the Lessee's obligations
under the Participating Leases (the "Lessee Pledge"). Although failure on the
part of the Lessee to materially comply with the terms of a Participating Lease
(including failure to pay rent when due) gives the Company the non-exclusive
right to terminate such lease, repossess the applicable property and enforce the
payment
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obligations under the lease and the Lessee Pledge, the Company would then be
required to find another lessee to lease such hotel. There can be no assurance
that the Company would be able to find another lessee or that, if another lessee
were found, the Company would be able to enter into a new lease on favorable
terms.
Lack of Control Over Operations of the Hotels
The Company is dependent on the ability of the Lessee, AGHI and other operators
of hotels to operate and manage the Hotels. To maintain its status as a REIT,
the Company will not be able to operate the Hotels or any subsequently acquired
hotels. As a result, the Company will be unable to directly implement strategic
business decisions with respect to the operation and marketing of its hotels,
such as decisions with respect to the setting of room rates, food and beverage
operations and certain similar matters.
Hotel Industry Risks
Operating Risks
The Hotels are subject to all operating risks common to the hotel industry.
These risks include, among other things, (i) competition for guests from other
hotels, some of which may have greater marketing and financial resources than
the Company, the Lessee and AGHI; (ii) increases in operating costs due to
inflation and other factors, which increases may not have been offset in recent
years, and may not be offset in the future by increased room rates; (iii)
dependence on business and commercial travelers and tourism, which business may
fluctuate and be seasonal; (iv) increases in energy costs and other expenses of
travel, which may deter travelers; and (v) adverse effects of general and local
economic conditions. These factors could adversely affect the Lessee's ability
to generate revenues and to make rent payments and therefore the Company's
ability to make expected distributions to its stockholders.
Risks of Necessary Operating Costs and Capital Expenditures; Required Hotel
Renovations
Hotels in general, including the Hotels, require ongoing renovations and other
capital improvements, including periodic replacement or refurbishment of
furniture, fixtures and equipment ("FF&E"). Under the terms of the Participating
Leases, the Company is obligated to establish a reserve to pay the cost of
certain capital expenditures at the Hotels and pay for periodic replacement or
refurbishment of FF&E. The Company controls the use of funds in this reserve.
However, if capital expenditures exceed the Company's expectations, there can be
no assurance that sufficient sources of financing will be available to fund such
expenditures. The additional cost of such expenditures could have an adverse
effect on cash available for distribution to the Company's stockholders. In
addition, the Company may acquire hotels in the future that require significant
renovation. Renovation of hotels involves certain risks, including the
possibility of environmental problems, construction cost overruns and delays,
uncertainties as to market demand or deterioration in market demand after
commencement of renovation and the emergence of unanticipated competition from
other hotels. In addition, the Company also plans substantial renovations at the
hotels it acquires. Such substantial renovations will likely disrupt the
operations of those hotels due to hotel guest rooms and common areas being taken
out of service for extended periods.
Competition for Investment Opportunities
The Company may be competing for investment opportunities with entities that
have substantially greater financial resources than the Company. These entities
generally may be able to accept more risk than the Company can prudently manage,
including risks with respect to the creditworthiness of a hotel operator or the
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geographic proximity of its investments. Competition generally may reduce the
number of suitable investment opportunities offered to the Company and increase
the bargaining power of property owners seeking to sell.
Seasonality of Hotel Industry
The hotel industry is seasonal in nature. Generally, hotel revenue for business
hotels is greater in the second and third quarters of a calendar year, although
this may not be true for hotels in major tourist destinations. Revenue for
hotels in tourist areas generally is substantially greater during the tourist
season than other times of the year. Seasonal variations in revenue at the
Hotels may cause quarterly fluctuations in the Company's lease revenue.
Investment in Single Industry
The Company's current strategy is to acquire interests only in hotels. As a
result, the Company will be subject to risks inherent in investments in a single
industry. The effects on Cash Available for Distribution resulting from a
downturn in the hotel industry may be more pronounced than if the Company had
diversified its investments.
Contingent Liabilities of Selling Partnerships
In connection with the IPO, the Company acquired all the partnership interests
in the entities that owned eight of the Initial Hotels, and since the IPO the
Company acquired all the partnership interests in the entities that owned the
Wyndham Royal Safari Lake Buena Vista and the Cocoa Beach Hilton and all the
limited liability company interests in the entity that owned the Holiday Inn
Select Bucks County and may acquire other partnership or similar interests in
the future. As a result, the Company may become liable for certain liabilities,
including contingent liabilities of such selling entities. There is, therefore,
a risk that unforeseen liabilities could exist for which the Company could be
liable and which could adversely affect Cash Available for Distribution.
Risks of Leverage; No Limits on Indebtedness
Neither the Company's Bylaws nor its charter (the "Charter") limits the amount
of indebtedness the Company may incur. In addition, upon the closing of the IPO,
the Company closed a $100 million line of credit, which has subsequently been
increased and currently the maximum committed amount available under the line is
$300 million (the "Line of Credit") with a consortium of banks led by Societe
General, Southwest Agency and Bank One, Texas N.A. The Line of Credit is secured
by among other things, first mortgage liens on all of the Hotels, other than
Holiday Inn Select(R) Dallas DFW Airport South, Courtyard by Marriott (R)
- -Meadowlands, Radisson Hotel(R) Arlington Heights and Double Tree Guest Suites
Hotel. The Line of Credit has an initial term of three years that is subject to
extension under certain circumstances for an additional one-year term. While its
organizations documents contain no limitation on the amount of debt it may
incur, the Line of Credit limits its consolidated indebtedness (measured at the
time the debt is incurred) to not more than 50% of the Company's investment in
hotels. Subject to the limitations described above and other limitations
contained in the Line of Credit, the Company may borrow additional amounts from
the same or other lenders in the future or may issue corporate debt securities
in public or private offerings. Certain of such additional borrowings may be
secured by hotels owned by the Company.
There can be no assurances that the Company will be able to meet its debt
service obligations, and, to the extent that it cannot, the Company risks the
loss of some or all of its assets, including any Hotels that secure the Line of
Credit or other indebtedness, to foreclosure. Economic conditions could result
in higher interest rates, which could increase debt service requirements on
variable rate debt, such as the Line of Credit, and could reduce the amount of
Cash Available for Distribution. Adverse economic conditions could cause the
terms on which borrowings become available to the Company to be unfavorable. In
such circumstances, if the Company is in
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need of capital to repay indebtedness in accordance with its terms or otherwise,
it could be required to liquidate one or more investments in hotel properties,
which may result in a financial loss to the Company.
Lack of Operating History or Revenues; History of Losses
The Company has been recently organized and has limited operating history. There
can be no assurance that the Company will be able to generate sufficient Cash
Available for Distribution to continue to make distributions to its
stockholders. The Company is subject to the risks generally associated with the
formation of any new business. Certain of the Hotels experienced net losses in
recent years. Accordingly, there can be no assurance that the Company will not
experience net losses in the future.
Competition for Management Time
Messrs. Jorns, Wiles, Barr and Valentine are employed both as executive officers
of the Company and AGHI and are thus necessarily subject to competing demands on
their time.
Real Estate Investment Risks
General Risks
The Company's investments are subject to varying degrees of risk generally
incident to the ownership of real property. The underlying value of the
Company's hotel investments and the Company's income and ability to make
distributions to its stockholders is dependent upon the ability of the Lessee,
AGHI and any third party operators to operate the Hotels in a manner sufficient
to maintain or increase revenues and to generate sufficient revenue in excess of
operating expenses to make rent payments under the Participating Leases. Income
from the Hotels may be adversely affected by changes in national economic
conditions, changes in local market conditions due to changes in general or
local economic conditions and neighborhood characteristics, changes in interest
rates and in the availability, cost and terms of mortgage funds, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements, particularly in older
structures, changes in real estate tax rates and other operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, including earthquakes, hurricanes, floods and other natural disasters
(which may result in uninsured losses), acts of war, adverse changes in zoning
laws, and other factors which are beyond the control of the Company.
Value and Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the Company to
vary its portfolio in response to changes in economic and other conditions will
be limited. If the Company must sell an investment, there can be no assurance
that the Company will be able to dispose of it in the time period it desires or
that the sale price of any investment will recoup or exceed the amount of the
Company's investment.
Property Taxes and Casualty Insurance
Each Hotel is subject to real and personal property taxes. Under the
Participating Leases, the Company is required to pay real and personal property
taxes. The real and personal property taxes on hotel properties in which the
Company invests may increase or decrease as property tax rates change and as the
properties are assessed or reassessed by taxing authorities. Each Hotel is
covered by casualty insurance, which, pursuant to the Participating Leases, must
be paid by the Company, the rates for which may increase or decrease depending
on claims experience. The increase in property taxes or casualty insurance
premiums could adversely affect the Company's ability to make expected
distributions to its stockholders.
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Consents of Lessors Required for Sale and Renovation of Certain Hotels
The Wyndham Albuquerque Airport Hotel, the Courtyard by Marriott-Meadowlands,
the Wyndham Airport Hotel San Jose and the Hilton Hotel-Toledo are each subject
to ground leases, the Hotel Madison de Ville is subject to a space lease for its
restaurant facilities and certain of its guest rooms and the Sheraton Key Largo
is subject to a bay bottom lease for certain offshore property at the resort,
each with third-party lessors. In addition, the Radisson Hotel Arlington Heights
is subject to a space lease with respect to its restaurant facilities until
January 1998. Any proposed sale of such hotels by the Company or any proposed
assignment of the Company's leasehold interest in the ground leases, the space
lease and the bay bottom lease, as well as the subletting to the Lessee may
require the consent of the respective third-party lessors. There can be no
assurance that the Company will be able to obtain such requisite consents. As a
result, the Company may not be able to sell, assign, transfer or convey its
interest in these Hotels in the future, even if such transactions may be in the
best interests of the stockholders of the Company.
Environmental Matters
The Company's operating costs may be affected by the obligation to pay for the
cost of complying with existing environmental laws, ordinances and regulations,
as well as the cost of future legislation. Under various federal, state and
local environmental laws, ordinances and regulations, a current or previous
owner or operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such property. Such
laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect the owner's ability to
use the property, sell the property or borrow by using such real property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
such substances at the disposal or treatment facility, whether or not such
facility is or ever was owned or operated by such person. Certain environmental
laws and common law principles could be used to impose liability for releases of
hazardous materials, including asbestos-containing materials ("ACMs"), into the
environment, and third parties may seek recovery from owners or operators of
real properties for personal injury associated with exposure to released ACMs or
other hazardous materials.
Environmental laws also may impose restrictions on the manner in which a
property may be used or transferred or in which businesses may be operated, and
these restrictions may require expenditures. In connection with the ownership of
the Hotels, the Company or the Lessee may be potentially liable for any such
costs. The cost of defending against claims of liability or remediating
contaminated property and the cost of complying with environmental laws could
materially adversely affect the Company's results of operations and financial
condition. Phase I environmental site assessments ("ESAs") have been conducted
at all of the Hotels by qualified independent environmental engineers. The
purpose of Phase I ESAs is to identify potential sources of contamination for
which the Hotels may be responsible and to assess the status of environmental
regulatory compliance. The ESAs have not revealed any environmental liability or
compliance concerns that the Company believes would have a material adverse
effect on the Company's business, assets, results of operations or liquidity,
nor is the Company aware of any material environmental liability or concerns.
Nevertheless, it is possible that these ESAs did not reveal all environmental
liabilities or compliance concerns or that material environmental liabilities or
compliance concerns exist of which the Company is currently unaware.
Compliance with Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990, as amended (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. A determination that the Company is not
in compliance with the ADA could result in imposition of fines or an award of
damages
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to private litigants. If the Company were required to make modifications to its
hotels to comply with the ADA, the Company's ability to make expected
distributions to its stockholders could be adversely affected.
Uninsured and Underinsured Losses
Each Participating Lease requires comprehensive insurance to be maintained on
each of the Hotels, including liability, fire and extended coverage. Management
believes such specified coverage is of the type and amount customarily obtained
for or by an owner of hotels. Leases for subsequently acquired hotels will
contain similar provisions. However, there are certain types of losses,
generally of a catastrophic nature, such as those caused by earthquakes,
hurricanes and floods, that may be uninsurable or not economically insurable.
The Company's Board of Directors and management will use their discretion in
determining amounts, coverage limits and deductibility provisions of insurance,
with a view to maintaining appropriate insurance coverage on the Company's
investments at a reasonable cost and on suitable terms. This may result in
insurance coverage that, in the event of a substantial loss, would not be
sufficient to pay the full current market value or current replacement cost of
the Company's lost investment. Inflation, changes in building codes and
ordinances, environmental considerations and other factors also might make it
infeasible to use insurance proceeds to replace the property after such property
has been damaged or destroyed. Under such circumstances, the insurance proceeds
received by the Company might not be adequate to restore its economic position
with respect to such property.
Acquisition and Development Risks
The Company intends to pursue acquisitions of additional hotels and, under
appropriate circumstances, may pursue development opportunities. Acquisitions
entail risks that investments will fail to perform in accordance with
expectations and that estimates of the cost of improvements necessary to market
and acquire hotels will prove inaccurate, as well as general investment risks
associated with any new real estate investment. New project development is
subject to numerous risks, including risks of construction delays or cost
overruns that may increase project costs, new project commencement risks such as
receipt of zoning, occupancy and other required governmental approvals and
permits and the incurrence of development costs in connection with projects that
are not pursued to completion. In addition, the Line of Credit provides that the
lenders thereunder must consent to any development activities by the Company
other than development in connection with the limited expansion of existing
hotels. The fact that the Company must distribute 95.0% of REIT taxable income
in order to maintain its qualification as a REIT may limit the Company's ability
to rely upon lease income from the Hotels or subsequently acquired hotels to
finance acquisitions or new developments. As a result, if debt or equity
financing were not available on acceptable terms, further acquisitions or
development activities might be curtailed or Cash Available for Distribution
might be adversely affected.
Tax Risks
Failure to Qualify as a REIT
The Company operates in a manner designed to permit it to qualify as a REIT for
federal income tax purposes.
Qualification as a REIT involves the application of highly technical and complex
Code provisions for which there are only limited judicial or administrative
interpretations. The determination of various factual matters and circumstances
not entirely within the Company's control may affect its ability to continue to
qualify as a REIT. The complexity of these provisions and of the applicable
income tax regulations that have been promulgated under the Code is greater in
the case of a REIT that holds its assets through a partnership, such as the
Company. Moreover, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not change the tax laws
with respect to qualification as a REIT or the federal income tax
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consequences of such qualification. The Company has received an opinion of
Battle Fowler LLP, counsel to the Company ("Counsel"), to the effect that, based
on various assumptions relating to the operation of the Company and
representations made by the Company as to certain factual matters, the Company
meets the requirements for qualification and taxation as a REIT. Such legal
opinion is not binding on the IRS. See "Federal Income Tax Considerations."
If the Company fails to qualify as a REIT in any taxable year, the Company will
not be allowed a deduction for distributions to its stockholders in computing
its taxable income and will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at the applicable
corporate rate. In addition, unless it were entitled to relief under certain
statutory provisions, the Company would be disqualified from treatment as a REIT
for the four taxable years following the year during which qualification is
lost. This disqualification would reduce the funds of the Company available for
investment or distribution to stockholders because of the additional tax
liability of the Company for the year or years involved.
If the Company were to fail to qualify as a REIT, it no longer would be subject
to the distribution requirements of the Code and, to the extent that
distributions to stockholders would have been made in anticipation of the
Company's qualifying as a REIT, the Company might be required to borrow funds or
to liquidate certain of its assets to pay the applicable corporate income tax.
Although the Company currently operates in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the Company's Board of Directors to decide to revoke
the REIT election. See "Federal Income Tax Considerations."
Adverse Effects of REIT Minimum Distribution Requirements
To obtain the favorable tax treatment accorded to REITs under the Code, the
Company generally will be required each year to distribute to its stockholders
at least 95% of its REIT taxable income. The Company will be subject to income
tax on any undistributed REIT taxable income and net capital gain, and to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85% of
its ordinary income for the calendar year, (ii) 95% of its capital gain net
income for such year, and (iii) 100% of its undistributed income from prior
years.
The Company has made distributions to its stockholders to comply with the
distribution provisions of the Code and to avoid federal income taxes and the
non-deductible 4% excise tax. The Company's income consists primarily of its
share of the income of the Operating Partnership, and the Company's cash flow
consists primarily of its share of distributions from the Operating Partnership.
Differences in timing between the receipt of income and the payment of expenses
in arriving at taxable income (of the Company or the Operating Partnership) and
the effect of non-deductible capital expenditures, the creation of reserves or
required debt amortization payments could in the future require the Company to
borrow funds through the Operating Partnership on a short-term or long-term
basis to meet the distribution requirements that are necessary to continue to
qualify as a REIT. In such circumstances, the Company might need to borrow funds
to avoid adverse tax consequences even if management believes that the then
prevailing market conditions generally are not favorable for such borrowings or
that such borrowings are not advisable in the absence of such tax
considerations.
Distributions by the Operating Partnership are determined by its sole general
partner, a wholly owned subsidiary of the Company and are dependent on a number
of factors, including the amount of Cash Available for Distribution, the
Operating Partnership's financial condition, any decision by the Company's Board
of Directors to reinvest funds rather than to distribute such funds, the
Operating Partnership's capital expenditure requirements, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. There is no assurance that the
Company will be able to continue to
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satisfy the annual distribution requirement so as to avoid corporate income
taxation on the earnings that it distributes. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT -- Annual
Distribution Requirements."
Consequences of Failure to Qualify as Partnerships
The Operating Partnership has received an opinion of Counsel stating that,
assuming that the Operating Partnership and each Subsidiary Partnership (as
defined in "The Company -- The Operating Partnership") is being operated in
accordance with its respective organizational documents, the Operating
Partnership and each of the Subsidiary Partnerships will be treated as a
partnership, and not as a corporation, for federal income tax purposes. Such
opinion is not binding on the IRS. If the IRS were to challenge successfully
the status of the Operating Partnership or any Subsidiary Partnership as a
partnership for federal income tax purposes, the Operating Partnership or the
affected Subsidiary Partnership would be taxable as a corporation. In such
event, the Company would cease to qualify as a REIT for federal income tax
purposes. The imposition of a corporate tax on the Operating Partnership or any
of the Subsidiary Partnerships, with a concomitant loss of REIT status of
the Company, would reduce substantially the amount of Cash Available for
Distribution. See "Federal Income Tax Considerations -- Tax Aspects of the
Operating Partnership."
ERISA
Depending upon the particular circumstances of the plan, an investment in Common
Stock may not be an appropriate investment for an ERISA Plan, a Qualified Plan
or an IRA. In deciding whether to purchase Common Stock, a fiduciary of an
ERISA Plan, in consultation with its advisors, should carefully consider its
fiduciary responsibilities under ERISA, the prohibited transaction rules of
ERISA and the Code and the effect of the "plan asset" regulations issued by the
U.S. Department of Labor.
Risks of Operating Hotels Under Franchise Agreements; Approval for Brand
Conversions
As of August 31, 1997, 25 of the Hotels are subject to franchise agreements with
nationally recognized hotel companies. The continuation of such franchise
agreements is subject to specified operating standards and other terms and
conditions. Franchisors typically inspect licensed properties periodically to
confirm adherence to operating standards. Action or inaction on the part of any
of the Company, the Lessee, AGHI or third party operators could result in a
breach of such standards or other terms and conditions of the franchise
agreements and could result in the loss or cancellation of a franchise license.
It is possible that a franchisor could condition the continuation of a franchise
license on the completion of capital improvements which the Board of Directors
determines are too expensive or otherwise unwarranted in light of general
economic conditions or the operating results or prospects of the affected hotel.
In that event, the Board of Directors may elect to allow the franchise license
to lapse. In any case, if a franchise is terminated, the Company and the Lessee
may seek to obtain a suitable replacement franchise or to operate the Hotel
independent of a franchise license. The loss of a franchise license could have a
material adverse effect upon the operations or the underlying value of the hotel
covered by the franchise because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the
franchisor.
Potential Anti-Takeover Effect of Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws
Certain provisions of Maryland law and of the Company's Charter and Bylaws may
have the effect of discouraging a third party from making an acquisition
proposal for the Company and could delay, defer or prevent a transaction or a
change in control of the Company under circumstances that could give the holders
of
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Common Stock the opportunity to realize a premium over the then prevailing
market prices of the Common Stock or that might otherwise be in such holders'
best interest. Such provisions include the following:
Ownership Limitation
In order for the Company to maintain its qualification as a REIT under the Code,
not more than 50.0% in value of the outstanding shares of stock of the Company
may be owned, directly or indirectly, by five or fewer individuals (as defined
in the Code to include certain entities) at any time during the last half of the
Company's taxable year (other than the first year for which the election to be
treated as a REIT has been made). Furthermore, if any partner of the Lessee
owns, actually or constructively, 10% or more in value of the stock of the
Company, the Lessee could become a Related Party Tenant (as defined in "Federal
Income Tax Consequences -- Requirements for Qualification as a REIT -- Income
Tests") of the Company, which would result in loss of REIT status for the
Company. For the purpose of preserving the Company's REIT qualification, the
Company's Charter prohibits direct or indirect ownership (taking into account
applicable ownership provisions of the Code) of more than 9.8% of the number of
outstanding shares of Common Stock by any person (the "Ownership Limitation"),
subject to an exception that permits mutual funds and certain other entities to
own as much as 15.0% of any class of the Company's stock in appropriate
circumstances (the "Look-Through Ownership Limitation"). Generally, the stock
owned by affiliated owners will be aggregated for purposes of the Ownership
Limitation. The Ownership Limitation could have the effect of delaying,
deferring or preventing a transaction or a change in control of the Company in
which holders of some or a majority of the Common Stock might receive a premium
for their Common Stock over the then prevailing market price or which such
holders might believe to be otherwise in their best interests. See "Description
of Capital Stock -- Restrictions on Transfer" and "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT."
Staggered Board
The Board of Directors is divided into three classes of directors. The initial
term of the first class expired in 1997 and that director was reelected to a
term scheduled to expire in 2000 and the initial terms of the second and third
classes will expire in 1998 and 1999, respectively. As the term of each class
expires, directors in that class will be elected by the stockholders of the
Company for a term of three years and until their successors are duly elected
and qualified. A director may be removed, with or without cause, by the
affirmative vote of 75.0% of the votes entitled to be cast for the election of
directors, which super-majority vote may have the effect of delaying, deferring
or preventing a change of control of the Company. The staggered terms of
directors may reduce the possibility of a tender offer or an attempt to change
control of the Company even though a tender offer or change in control might be
in the best interests of the stockholders. See "Certain Provisions of Maryland
Law and of the Company's Charter and Bylaws -- Number of Directors;
Classification of the Board of Directors."
Maryland Business Combination Law
Under the Maryland General Corporation Law, as may be amended from time to time
(the "MGCL"), certain "business combinations" (including certain issuances of
equity securities) between a Maryland corporation such as the Company and any
person who owns 10.0% or more of the voting power of the corporation's shares
(an "Interested 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
approved by two super-majority votes unless, among other conditions, the holders
of shares of Common Stock receive a minimum price (as defined in the MGCL) for
their stock and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. See "Certain
Provisions of Maryland Law and of the Company's Charter and Bylaws -- Business
Combinations."
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Maryland Control Share Acquisition Statute
In addition to certain provisions of the Charter, the Maryland control share
acquisition statute may have the effect of discouraging a third party from
making an acquisition proposal for the Company. The MGCL provides that "control
shares" of a Maryland corporation acquired in a "control share acquisition" have
no voting rights except to the extent approved by a vote of two-thirds of the
votes eligible under the statute to be cast on the matter. "Control shares" are
voting shares of stock, which, if aggregated with all other such shares of stock
previously acquired by the acquiror or in respect of which the acquiror is able
to exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power: (i) one-
fifth or more but less than one-third, (ii) one-third or more but less than a
majority, or (iii) a majority of all voting power. Control shares do not include
shares that the acquiring person is then entitled to vote as a result of having
previously obtained stockholder approval. A "control share acquisition" means
the acquisition of control shares, subject to certain exceptions.
If voting rights are not approved at a meeting of stockholders, then, subject to
certain conditions and limitations, the issuer may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for control shares are approved at a
stockholders' meeting and the acquiror becomes entitled to vote a majority of
the shares of stock entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition.
The Company's Bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any persons of shares of stock
of the Company. There can be no assurance that such provision will not be
amended or eliminated at any point in the future. If the foregoing exemption in
the Company's Bylaws is rescinded or amended, the control share acquisition
statute could have the effect of delaying, deferring, preventing or otherwise
discouraging offers to acquire the Company and of increasing the difficulty of
consummating any such offer. See "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws -- Control Share Acquisition Statute."
Reliance on Board of Directors and Management
Stockholders have no right or power to take part in the management of the
Company except through the exercise of voting rights on certain specified
matters. The Board of Directors are responsible for directing the management of
the business and affairs of the Company. The Company relies upon the services
and expertise of its management for strategic business direction. The Company
has in effect employment agreements with Steven D. Jorns, Chairman of the Board,
Chief Executive Officer and President; Bruce G. Wiles, Executive Vice President;
Kenneth E. Barr, Executive Vice President and Chief Financial Officer; and Russ
C. Valentine, Senior Vice President -- Acquisitions, which currently provide for
base salary at below market rates for comparable positions. Accordingly, the
loss of services of any such officer may require the Company to hire a
replacement officer at a salary greater than the Company is currently obligated
to pay, which, in turn, would increase the Company's operating costs and reduce
Cash Available for Distribution.
Conflicts Relating to Continued Ownership of Other Hotel Properties
Two of the hotels owned by AGHI (the "Option Hotels"), are Courtyards by
Marriott (one of which is still under development) that were not transferred to
the Company in connection with the IPO because construction of those hotels had
not been completed at that time. The Company holds an option and a right of
first refusal to acquire, subject to the receipt of any necessary third-party
consents, the interests of AGHI in either or both of the Option Hotels during
the two-year period following their respective openings (the Option Hotel
located in Boise, Idaho
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was opened in October 1996). The Option Hotel located in Durham, North Carolina
(the "Durham Option Hotel"), remains under development and is located
approximately one mile from the Hilton Hotel-Durham, an Acquired Hotel. The
Durham Option Hotel is expected to compete with the Hilton Hotel-Durham. The
Company recently entered into a contract to purchase the other hotel, a Ramada
Limited(R) located in Madison, Wisconsin. The purchase is subject to a number of
conditions and no assurances can be given that the Company will acquire the
hotel as planned. Currently, the Company plans upon acquisition to renovate and
reposition the hotel to operate as a Holiday Inn by February 1998.
Ability of Board to Change Policies
The major policies of the Company, including its policies with respect to
acquisitions, financing, growth, operations, debt capitalization and
distributions, are determined by its Board of Directors. The Board of Directors
may amend or revise these and other policies at any time and from time to time
at the Board's discretion without a vote of the stockholders of the Company. See
"Policies and Objectives with Respect to Certain Activities."
Adverse Effect of Increase in Market Interest Rates on Price of Common Stock
One of the factors that may influence the price of the Common Stock in public
trading markets will be the annual yield from distributions by the Company on
the Common Stock as compared to yields on certain financial instruments. Thus,
an increase in market interest rates will result in higher yields on certain
financial instruments, which could adversely affect the market price of the
Common Stock.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of (i) the capital stock of the Company and
(ii) certain provisions of Maryland law and of the Charter and Bylaws of the
Company does not purport to be complete and is subject to and qualified in its
entirety by reference to Maryland law described herein, and to the Charter and
Bylaws of the Company.
General
Under its Charter, the Company has the authority to issue 100,000,000 shares of
Common Stock, $0.01 par value per share. Under Maryland law, stockholders
generally are not liable for a corporation's debts or obligations.
Common Stock
All shares of Common Stock offered hereby will be duly authorized, fully paid
and nonassessable. Subject to the preferential rights of any other class or
series of stock, holders of shares of Common Stock are entitled to receive
dividends on such stock if, as and when authorized and declared by the Board of
Directors of the Company out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding up after
payment of or adequate provision for all known debts and liabilities of the
Company.
Subject to the provisions of the Charter regarding the restrictions on transfer
of stock, each outstanding share of Common Stock entitles the holder to one vote
on all matters submitted to a vote of stockholders, including the election of
directors and, except as provided with respect to any other class or series of
stock, the holders of such shares will possess the exclusive voting power.
There is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of Common Stock can elect all of
the directors then standing for election and the holders of the remaining shares
will not be able to elect any directors.
Holders of shares of Common Stock have no preference, conversion, exchange,
sinking fund redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of the Company. Shares of Common Stock will have
equal dividend, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the corporation's charter. The Charter provides
that, with the exception of certain amendments to the Charter, the affirmative
vote of holders of shares entitled to cast a majority of all votes entitled to
be cast on such matters will be sufficient to approve the aforementioned
transactions.
Power to Issue Additional Shares of Common Stock
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock will provide the
Company with increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. The additional
shares of Common Stock will be available for issuance without further action by
the Company's stockholders, unless such action is
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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 that at least 75% of the
Company's gross income for each calendar year must consist of rents from real
property and income from certain other real property investments. The rents
received by the Operating Partnership and the Subsidiary Partnerships from the
Lessee will not qualify as rents from real property, which could result in loss
of REIT status for the Company, if the Company owns, actually or constructively,
10% or more of the ownership interests in the Lessee, within the meaning of
section 856(d)(2)(B) of the Code. See "Federal Income Tax Considerations --
Requirements for Qualification as a REIT -- Income Tests."
Because the Board of Directors believes it is essential for the Company to
continue to qualify as a REIT, the Charter, subject to certain exceptions
described below, provides that no person may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.8% of the number
outstanding shares of any class of Common Stock (subject to the Look-Through
Ownership Limitation applicable to certain stockholders, as described below).
Certain types of entities, such as pension trusts qualifying under section 401
(a) of the Code, mutual funds qualifying as regulated investment companies under
section 851 of the Code, and corporations, will be looked through for purposes
of the "closely held" test in section 856(h) of the Code. Subject to certain
limited exceptions, the Charter will allow such an entity under the Look-Through
Ownership Limitation to own up to 15% of the shares of any class or series of
the Company's stock, provided that such ownership does not cause any beneficial
owner of such entity to exceed the Ownership Limitation or otherwise result in a
violation of the tests described in clauses (ii), (iii) and (iv) of the second
sentence of the succeeding paragraph.
Any transfer of Common Stock that would (i) result in any person owning,
directly or indirectly, Common Stock in excess of the Ownership Limitation (or
the Look-Through Ownership Limitation, if applicable), (ii) result in Common
Stock being owned by fewer than 100 persons (determined without reference to any
rules of attribution), (iii) result in the Company being "closely held" within
the meaning of section 856(h) of the Code, or (iv) cause the Company to own,
actually or constructively, 9.9% or more of the ownership interests in a tenant
of the Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code, will be void
ab initio, and the intended transferee will acquire no rights in such shares of
Common Stock.
Subject to certain exceptions described below, any purported transfer of Common
Stock that would (i) result in any person owning, directly or indirectly, shares
of Common Stock in excess of the Ownership Limitation (or the Look-Through
Ownership Limitation, if applicable), (ii) result in the shares of Common Stock
being owned by fewer than 100 persons (determined without reference to any rules
of attribution), (iii) result in the Company being "closely held" within the
meaning of section 856(h) of the Code, or (iv) cause the Company to own,
actually or constructively, 10% or more of the ownership interests in a tenant
of the Company's, the Operating
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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.
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.
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"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 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
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
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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. See "Risk Factors -- Potential Anti-
Takeover Effect of Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws."
Removal; Filling Vacancies
The Bylaws provide that, unless the Board of Directors otherwise determines, any
vacancies (except vacancies resulting from an increase in the number of
directors) will be filled by the affirmative vote of a majority of the remaining
directors, though less than a quorum. Any directors so elected shall hold
office until the next annual meeting of stockholders. The Charter provides that
directors may be removed, with or without cause, only by the affirmative vote of
the holders of at least 75.0% of votes entitled to be cast in the election of
the directors. This provision, when coupled with the provision of the Bylaws
authorizing the Board of Directors to fill vacant directorships precludes
stockholders from removing incumbent directors except upon a substantial
affirmative vote and filling the vacancies created by such removal with their
own nominees.
Limitation of Liability and Indemnification
The MGCL permits a Maryland corporation to include in its charter a provision
limiting the liability of its directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonest established by a final judgment as being
material to the cause of active. The Charter of the Company contains such a
provision which eliminates such liability to the maximum extent permitted by
Maryland law.
The Charter obligates the Company, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, and
threatened, pending or completed action, suit or proceeding whether or not by or
in the right of the Company, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, trustee, partner, member, agent or employee of
another corporation, partnership, limited liability company, association, joint
venture, trust or other enterprise. The Charter also permits the Company to
indemnify and advance expenses to any person who served a predecessor of the
Company in any of the capacities described above and to any employee or agent of
the Company or a predecessor of the Company.
The MGCL requires a Maryland corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the
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defense of any proceeding to which he is made a party by reason of his service
in that capacity. The MGCL permits a Maryland corporation to indemnify its
present and former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that a
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL requires the
Company, as a condition to advancing expenses, to obtain (a) written affirmation
by the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the Company as authorized by the
Charter and (b) a written statement by or on his behalf to repay the amount paid
or reimbursed by the Company if it shall ultimately be determined that the
standard of conduct was not met. Indemnification under the provisions of the
MGCL is not deemed exclusive of any other rights, by indemnification or
otherwise, to which an officer or director may be entitled under the Company's
Charter or Bylaws, or under resolutions of stockholders or directors, contract
or otherwise. It is the position of the Commission that indemnification of
directors and officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act.
The Company also has purchased and maintains insurance on behalf of all of its
directors and executive officers against liability asserted against or incurred
by them in their official capacities with the Company, whether or not the
Company is required or has the power to indemnify them against the same
liability.
Business Combinations
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10.0% or more of the voting
power of such corporation's shares or an affiliate of such corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10.0% or more of the voting power of the then-outstanding
voting shares of such corporation (an "Interested Stockholder") or an affiliate
thereof are prohibited for five years after the most recent date on which the
Interested Stockholder became an Interested Stockholder. Thereafter, any such
business combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (a) 80.0% of the
votes entitled to be cast by holders of outstanding voting shares of such
corporation and (b) two-thirds of the votes entitled to be cast by holders of
voting shares of such corporation other than the shares held by the Interested
Stockholder with whom (or with whose affiliate) the business combination is to
be affected, unless, among other conditions, the corporation's stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Stockholder for its shares. These provisions of the MGCL do not
apply, however, to business combination that are approved or exempted by the
board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder.
Control Share Acquisition Statute
The MGCL provides that "control shares" of a Maryland corporation acquired in a
"control share acquisition" have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror, by officers or by directors who are
employees of the corporation. "Control Shares" are voting shares which, if
aggregated with all other such shares previously
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acquired by the acquiror, or in respect of which the acquiror is able to
exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power: (i) one-
fifth or more but less than one-third, (ii) one-third or more but less than a
majority, or (iii) a majority or more of all voting power. Control Shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or purposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does
not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than 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.
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Advance Notice of Director Nominations and New Business
The Bylaws of the Company provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election of the Board of Directors and
the proposal of business to be considered by stockholders may be made only (i)
pursuant to the Company's notice of the meeting, (ii) by the Board of Directors
or (iii) by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in the Bylaws and (b) with
respect to special meetings of stockholders, only the business specified in the
Company's notice of meeting may be brought before the meeting of stockholders
and nominations of persons for election to the Board of Directors (iii) provided
that the Board of Directors has determined that directors shall be elected at
such meeting, by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
Meetings of Stockholders
The Company's Bylaws provide that annual meetings of stockholders shall be held
on a date and at the time set by the Board of Directors during the month of May
each year (commencing in May 1997). Special meetings of the stockholders may be
called by (i) the President of the Company, (ii) the Chief Executive Officer or
(iii) the Board of Directors. As permitted by the MGCL, the Bylaws of the
Company provide that special meetings must be called by the Secretary of the
Company upon the written request of the holders of shares entitled to cast not
less than a majority of all votes entitled to be cast at the meeting.
Operations
The Charter requires the Board of Directors generally to use commercially
reasonable efforts to cause the Company to qualify as a REIT.
Anti-Takeover Effect of Certain Provisions of Maryland Law and of the Charter
and Bylaws
The business combination provisions and, if the applicable provision in the
Bylaws is amended or rescinded, the control share acquisition provisions of the
MGCL, the provisions of the Charter on classification of the Board of Directors
and removal of directors and the advance notice provisions of the Bylaws could
delay, defer or prevent a transaction or a change in control of the Company that
might involve a premium price for holders of Common Stock or otherwise be in
their best interest.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
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DESCRIPTION OF OP UNITS
General
Substantially all of the Company's assets are held by, and all of its operations
are conducted through the Operating Partnership. AGH GP, Inc. is a wholly owned
subsidiary of the Company and is the sole general partner of the Operating
Partnership holding 1% of the issued OP Units therein. AGH LP, Inc. is a wholly
owned subsidiary of the Company and is a limited partner of the Operating
Partnership holding as of August 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,
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through AGH GP and AGH LP, the proceeds of any stock offering as additional
capital to the Operating Partnership. Moreover, the Company is authorized,
through AGH GP and AGH LP, to cause the Operating Partnership to issue
partnership interests for less than fair market value if the Company has
concluded in good faith that such issuance is in the best interests of the
Company and the Operating Partnership. If the Company so contributes additional
capital to the Operating Partnership, AGH GP and AGH LP will receive additional
OP Units, and their percentage interests in the Operating Partnership will be
increased on a proportionate basis based upon the amount of such additional
capital contributions and the value of the Operating Partnership at the time of
such contributions. Conversely, the percentage interests of the Limited
Partners, other than AGH LP, will be decreased on a proportionate basis in the
event of additional capital contributions by the Company.
Exchange Rights
Pursuant to the Exchange Rights Agreement among the Company, the Operating
Partnership and the Limited Partners other than AGH LP, 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
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and expenses incurred by the Company that are attributable to hotel properties
or partnership interests in a Subsidiary Partnership that are owned by the
Company directly rather than through the Operating Partnership. The Company does
not own any of the Hotels directly.
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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EXCHANGE OF OP UNITS
General
Unitholders may, subject to certain limitations, require the Operating
Partnership to exchange all or a portion of their OP Units (the "Exchange
Right"). This Exchange Right is exercisable pursuant to a notice of exchange
delivered to the Operating Partnership, with a copy delivered to the Company.
Upon exchange, for each OP Unit exchanged, a Unitholder will receive in cash in
an amount equal to the market value (as defined below) of a share of Common
Stock (subject to certain adjustments in the event of stock dividends and stock
splits); provided, however, that the Company may, in its sole discretion, by
notice to the Unitholder within five business days after receipt of the notice
of exchange, elect to acquire any OP Unit presented to the Operating Partnership
for exchange for cash or for one share of Common Stock (subject to the same
adjustments). The market value of the Common Stock for purposes of exchanging
OP Units will be equal to the average of the closing trading price of the Common
Stock for the five trading days prior to the day on which the exchange notice
was received by the Operating Partnership.
If the Company elects to acquire any OP Units presented to the Operating
Partnership for exchange by the issuance of the Exchanged Shares, such an
acquisition by the Company will be treated as a sale of the OP Units to the
Company for Federal income tax purposes. See " -- Tax Consequences of
Exchange." Upon an exchange for cash, a Unitholder's right to receive
distributions with respect to the OP Units redeemed will cease. Upon the receipt
of Exchanged Shares, a Unitholder will have rights as a stockholder of the
Company, including the right to receive dividends from the time of its
acquisition of the Exchanged Shares.
A Unitholder must notify the Company of its desire to require the Operating
Partnership to redeem OP Units. A Unitholder may not exercise the Exchange
Right for less than 1,000 OP Units or, if such Unitholder holds less than 1,000
OP Units, all of the OP Units held by such Unitholder. A Unitholder is not
entitled to exercise the Exchange Right if the delivery of Exchanged Shares
would be prohibited under the provisions of the Operating Partnership Agreement
to protect the Company's qualification as a REIT.
Tax Consequences of an Exchange
The following discussion summarizes certain Federal income tax considerations
that may be relevant to a Unitholder should it exercise its right to redeem its
OP Units.
Tax Treatment of Exchange or Exchange of OP Units. If the Company elects to
purchase OP Units tendered for exchange, the Operating Partnership Agreement
provides that each of the Unitholder, the Operating Partnership and the Company
shall treat the transaction between the Unitholder and the Company as a sale of
OP Units by the Unitholder at the time of such exchange. Such sale will be
fully taxable to the Unitholder and the Unitholder will be treated as realizing
for tax purposes an amount equal to the sum of the cash value or the value of
the Common Stock received in the exchange plus the amount of any Operating
Partnership liabilities allocable to the exchanged OP Units at the time of the
exchange. The determination of the amount of gain or loss is discussed more
fully below. If the Company does not elect to purchase a Unitholder's OP Units
tendered for exchange and the Operating Partnership exchanges such OP Units for
cash that the Company contributes to the Operating Partnership to effect such
exchange, the exchange likely would be treated for tax purposes as a sale of
such OP Units to the Company in a fully taxable transaction, although the matter
is not free from doubt. In that event, the Unitholder would also be treated as
realizing an amount equal to the sum of the cash received in the exchange plus
the amount of any Operating Partnership liabilities allocable to the redeemed OP
Units at the time of the exchange. The determination of the amount and
character of gain or loss in the event of such a sale is
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discussed more fully below. See " -- Tax Treatment of Disposition of OP Units by
a Limited Partner Generally."
If the Company does not elect to purchase OP Units tendered for exchange and the
Operating Partnership redeems a Unitholder's OP Units for cash that is not
contributed by the Company to effect the exchange, the tax consequences would be
the same as described in the previous paragraph, except that, if the Operating
Partnership redeems less than all of a Unitholder's OP Units, the Unitholder
would not be permitted to recognize any loss occurring on the transaction and
would recognize taxable gain only to the extent that the cash, plus the amount
of any Operating Partnership liabilities allocable to the redeemed OP Units,
exceeded the Unitholder's adjusted basis in all of its OP Units immediately
before the exchange.
If the Company contributes cash to the Operating Partnership to effect an
exchange, and in the unlikely event that the exchange transaction is treated as
the exchange of a Unitholder's OP Units by the Operating Partnership rather than
a sale of OP Units to the Company, the income tax consequences to the Unitholder
would be as described in the preceding paragraph.
Tax Treatment of Disposition of OP Units by a Unitholder Generally. If an OP
Unit is disposed of in a manner that is treated as a sale of the OP Unit, or a
Unitholder otherwise disposes of an OP Unit, the determination of gain or loss
from the sale or other disposition will be based on the difference between the
amount considered realized for tax purposes and the adjusted tax basis in such
OP Unit. See " -- Basis of OP Units." Upon the sale of an OP Unit, the "amount
realized" will be measured by the sum of the cash and fair market value of other
property, (i.e., Exchanged Shares) received plus the amount of any Operating
Partnership liabilities allocable to the OP Units sold. To the extent that the
amount of cash or property received plus the allocable share of any Operating
Partnership liabilities exceeds the Unitholder's adjusted tax basis in the OP
Units disposed of, such Unitholder will recognize gain. It is possible that the
amount of gain recognized or even the tax liability resulting from such gain
could exceed the amount of cash and/or the value of any other property (i.e.,
Exchanged Shares) received upon such disposition.
Except as described below, any gain recognized upon a sale or other disposition
of OP Units will be treated as gain attributable to the sale or disposition of a
capital asset. To the extent, however, that the amount realized upon the sale
of an OP Unit attributable to a Unitholder's share of "unrealized receivables"
of the Operating Partnership (as defined in Section 751 of the Code) exceeds the
basis attributed to those assets, such excess will be treated as ordinary
income. Unrealized receivables include, to the extent not previously included
in Operating Partnership income, any rights to payment for services rendered or
to be rendered as well as amounts that would be subject to recapture as ordinary
income if the Operating Partnership had sold its assets at their fair market
value at the time of the transfer of an OP Unit.
Basis of OP Units. In general a Unitholder who acquired his OP Units by
contribution of property and/or money to the Operating Partnership had an
initial tax basis in his OP Units ("Initial Basis") equal to the sum of (i) the
amount of money contributed (or deemed contributed as described below) and (ii)
his adjusted tax basis in any other property contributed in exchange for such OP
Units, less the amount of any money distributed (or deemed distributed, as
described below) in connection with the acquisition of the OP Units. The
Initial Basis of OP Units acquired by other means would have been determined
under the general rules of the Code, including the partnership provisions,
governing the determination of tax basis. Other rules, including the "disguised
sale" rules discussed below, also may affect Initial Basis, and Unitholders are
urged to consult their own tax advisors regarding their Initial Basis. A
Unitholder's Initial Basis in his OP Units is generally increased by (i) such
Unitholder's share of Operating Partnership taxable and tax-exempt income and
(ii) increases in such Unitholder's allocable share of liabilities of the
Operating Partnership (including any increase in his share of liabilities
occurring in connection with the acquisition of his OP Units). Generally, such
Unitholder's basis in his OP Units is decreased (but not below zero) by (i) such
Unitholder's share of Operating Partnership
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distributions, (ii) decreases in such Unitholder's allocable share of
liabilities of the Operating Partnership (including any decrease in his share of
liabilities of the Operating Partnership occurring in connection with the
acquisition of his OP Units), (iii) such Unitholder's share of losses and
deductible expenses of the Operating Partnership and (iv) such Unitholder's
share of nondeductible expenditures of the Operating Partnership that are not
chargeable to his capital account.
Potential Application of the Disguised Sale Regulations to a Exchange of OP
Units. There is a risk that a exchange by the Operating Partnership of OP Units
issued in exchange for a contribution of property to the Operating Partnership
may cause the original transfer of property to the Operating Partnership in
exchange for OP Units to be treated as a "disguised sale" of property. Section
707 of the Code and the Treasury Regulations thereunder (the "Disguised Sale
Regulations") generally, provide that, unless one of the prescribed exceptions
is applicable, a partner's contribution of property to a partnership and a
simultaneous or subsequent transfer of money or other consideration (which may
include the assumption of or taking subject to a liability) from the partnership
to the partner will be presumed to be a sale, in whole or in part, of such
property by the partner to the partnership. Further, the Disguised Sale
Regulations provide generally that, in the absence of an applicable exception,
if money or other consideration is transferred by a partnership to a partner
within two years of the partner's contribution of property, the transactions are
presumed to be a sale of the contributed property unless the facts and
circumstances clearly establish that the transfers do not constitute a sale.
The Disguised Sale Regulations also provide that if two years have passed
between the transfer of money or other consideration and the contribution of
property, the transactions will be presumed not to be a sale unless the facts
and circumstances clearly establish that the transfers constitute a sale.
Accordingly, if a OP Unit is redeemed by the Operating Partnership from a
Unitholder who holds OP Units that were issued in exchange for a contribution of
property to the Operating Partnership, the Internal Revenue Service (the "IRS")
could contend that the Disguised Sale Regulations apply because the Unitholder
will thus receive cash subsequent to a previous contribution of property to the
Operating Partnership. In that event, the IRS could contend that the
contribution was taxable as a disguised sale under the Disguised Sale
Regulations. Any gain recognized thereby may be eligible for installment
reporting under Section 453 of the Code, subject to certain limitations. In
addition, in such event, the Disguised Sale Regulations might apply to cause a
portion of the proceeds received by a redeeming Unitholder to be characterized
as original issue discount on a deferred obligation which would be taxable as
interest income in accordance with the provisions of Section 1272 of the Code.
Each Unitholder is advised to consult its own tax advisors to determine whether
exchange of its OP Units could be subject to the Disguised Sale Regulations.
Comparison of Ownership of OP Units and Common Stock
The nature of an investment in Common Stock of the Company is generally
economically equivalent to an investment in OP Units in the Operating
Partnership. There are, however, some differences between ownership of OP Units
and ownership of Common Stock, some of which may be material to investors. The
information below highlights a number of significant differences between the
Operating Partnership and the Company relating to, among other things, form of
organization, permitted investments, policies and restrictions, management
structure, compensation and fees, investor rights and Federal income taxation
and compares certain legal rights associated with the ownership of OP Units and
Common Stock, respectively. These comparisons are intended to assist Unitholders
in understanding how their investment will be changed if their OP Units are
acquired for Common Stock. This discussion is summary in nature and does not
constitute a complete discussion of these matters. Investors should carefully
review the balance of this Prospectus and the registration statement of which
this Prospectus is a part and the organizational documents for the Operating
Partnership and the Company which are attached as exhibits to the registration
statement of which this Prospectus is a part for additional important
information about the Company.
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Form of Organization and Assets Owned. The Operating Partnership is organized
as a Delaware limited partnership. A substantial amount of the Company's
operations are conducted through the Operating Partnership.
The Company was incorporated under the laws of the State of Maryland in April
1996. Because of certain state tax considerations, the Company holds its
interest in the Operating Partnership through AGH GP and AGH LP. AGH GP is the
sole general partner of and owns a 1% partnership interest in the Operating
Partnership. AGH LP is one of the Operating Partnership's Limited Partners and
as of August 31, 1997 owns an approximate 86.22% limited partnership interest in
the Operating Partnership. Through its ownership of AGH GP and AGH LP, the
Company has an indirect investment in the Hotels and other assets owned by the
Operating Partnership.
Length of Investment. The Operating Partnership has a stated termination date
of December 31, 2046, although it may be terminated earlier under certain
circumstances. The Company has a perpetual term and intends to continue its
operations for an indefinite time period.
Purpose and Permitted Investments. The purpose of the Operating Partnership
includes the conduct of any business that may be lawfully conducted by a limited
partnership formed under Delaware law, except that the Partnership Agreement
requires the business of the Operating Partnership to be conducted in such a
manner that will permit the Company to be classified as a REIT for Federal
income tax purposes. The Operating Partnership may, subject to the foregoing
limitation, invest or enter into partnerships, joint ventures or similar
arrangements and may own interests in any other entity.
Under its Charter, the Company may engage in any lawful activity permitted under
the MGCL.
Additional Equity. The Operating Partnership is authorized to issue OP Units
and other partnership interests to its partners or to other persons for such
consideration and on such terms and conditions as AGH GP, as general partner
(the "General Partner"), in its sole discretion, may deem appropriate.
The Board of Directors of the Company may authorize the issuance of shares of
stock of any class, whether now or hereafter authorized, or securities or
rights, convertible into shares of stock, for such consideration as the Board of
Directors may deem advisable, subject to such restrictions or limitations as may
be set forth in the Company's Bylaws. However, the Charter provides that the
only class of stock that the Company has authority to issue is Common Stock. An
amendment to the Charter is necessary in order to authorize any other class or
series of stock or to permit the Board of Directors to reclassify authorized but
unissued shares of Common Stock into other classes or series of classes of stock
of the Company. As long as the Operating Partnership is in existence, the
proceeds of all equity capital raised by the Company will be contributed to the
Operating Partnership in exchange for OP Units or other interests in the
Operating Partnership.
Borrowing Policies. The Operating Partnership has no restrictions on
borrowings, and the General Partner has full power and authority to borrow money
on behalf of the Operating Partnership.
The Company is not restricted under the Charter or its Bylaws from incurring
borrowings.
Other Investment Restrictions. Other than restrictions precluding investments
by the Operating Partnership that would adversely affect the qualification of
the Company as a REIT, there are no restrictions upon the Operating
Partnership's authority to enter into certain transactions, including, among
others, making investments, lending Operating Partnership funds, or reinvesting
the Operating Partnership's cash flow and net sale or refinancing proceeds.
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Neither the Company's Charter nor its Bylaws impose any restrictions upon the
types of investments that may be made by the Company.
Management Control. All management powers over the business and affairs of the
Operating Partnership are vested in the General Partner, and no Limited Partner
of the Operating Partnership has any right to participate in or exercise control
or management power over the business and affairs of the Operating Partnership.
The Company's business and affairs are managed under the direction of the Board
of Directors subject only to the restrictions in the Charter and the Bylaws.
The Company's Board of Directors is divided into three classes of directors. 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. The policies adopted by
the Board of Directors may be altered or eliminated without advice of the
stockholders of the Company. Accordingly, except for their vote in the elections
of directors, stockholders of the Company have no control over the ordinary
business policies of the Company.
Management Liability and Indemnification. The Operating Partnership Agreement
generally provides that the General Partner will incur no liability to the
Operating Partnership or any Limited Partner for losses sustained or liabilities
incurred as a result of errors in judgment or of any act or omission if the
General Partner acted in good faith. In addition, the General Partner is not
responsible for any misconduct or negligence on the part of its agents provided
the General Partner appointed such agents in good faith. The Operating
Partnership Agreement also provides for indemnification of the General Partner,
AGH LP, the Company, the Directors and officers of the General Partner, AGH LP
or the Company, and such other persons as the General Partner may from time to
time designate, against any and all losses, claims, damages, liabilities, joint
or several expenses (including reasonable legal fees and expenses), judgments,
fines, settlements and other amounts arising from any and all claims, demands,
actions, suits or proceedings, civil, criminal, administrative or investigative,
that relate to the operations of the Operating Partnership in which such person
may be involved.
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 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
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proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the
corporation. In addition, the MGCL requires the Company, as a condition to
advancing expenses, to obtain (a) written affirmation by the director or officer
of his good faith belief that he has met the standard of conduct necessary for
indemnification by the Company as authorized by the Bylaws and (b) a written
statement by or on his behalf to repay the amount paid or reimbursed by the
Company if it shall ultimately be determined that the standard of conduct was
not met. Indemnification under the provisions of the MGCL is not deemed
exclusive of any other rights, by indemnification or otherwise, to which an
officer or director may be entitled under the Company's Charter or Bylaws, or
under resolutions of stockholders or directors, contract or otherwise. It is the
position of the Commission that indemnification of directors, 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.
Antitakeover Provisions. Except in limited circumstances, the General Partner
has exclusive management power over the business and affairs of the Operating
Partnership. Except in the case of bankruptcy or dissolution, the General
Partner may not be removed by the Limited Partners with or without cause.
The Charter and Maryland law contain a number of provisions that may have the
effect of delaying, deferring or preventing an unsolicited proposal for the
acquisition of the Company or the removal of incumbent management. See
"Charter and Bylaw Provisions and Certain Provisions of Maryland Law."
Voting Rights. Under the Operating Partnership Agreement, the Limited Partners
do not have voting rights relating to the operation and management of the
Operating Partnership except in connection with matters, as described more fully
below, involving certain amendments to the Operating Partnership Agreement.
Subject to the provisions of the Charter regarding the restrictions on the
transfer of stock, stockholders of the Company have the right to vote on, among
other things, a merger or sale of substantially all of the assets of the
Company, certain amendments to the Charter and dissolution of the Company. The
business and affairs of the Company are managed and controlled by a Board of
Directors, specified classes of which are elected each year to three year terms
by the stockholders of the Company. Each share of Common Stock has one vote.
Amendment of the Operating Partnership Agreement or the Charter. Amendments to
the Operating Partnership Agreement nay be proposed by the General Partner.
Certain amendments that would, among other things, adversely affect the rights
of any Limited Partner in profits, losses or distributions, affect the Exchange
Right in a manner adverse to the Limited Partners, or impose on the Limited
Partners any obligation to make capital contributions, require the consent of
Limited Partners (other than AGH LP) holding more than 50% of the interests of
Limited Partners (other than AGH LP).
The Charter 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
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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.
Compensation, Fees and Distributions. The General Partner does not receive any
compensation for its services to the Operating Partnership. As a partner in the
Operating Partnership, however, the General Partner has the same right to
allocations and distributions as other partners of the Operating Partnership.
In addition, the Operating Partnership will reimburse the General Partner for
all expenses incurred relating to the ownership and operation of, or for the
benefit of, the Operating Partnership.
The Director and Officers of the Company receive compensation for their
services.
Liability of Investors. Under the Operating Partnership Agreement and
applicable Delaware law, the liability of the Limited Partners for the Operating
Partnership's debts and obligations is generally limited to the amount of their
investment in the Operating Partnership.
Under Maryland law, stockholders generally are not personally liable for the
debts or obligations of the Company. See "Description of Capital Stock."
Nature of Investment. The OP Units constitute equity interests entitling
holders thereof to their pro rata share of cash distributions made to the
Limited Partners of the Operating Partnership. The General Partner is entitled
to receive its pro rata share of distributions made by the Operating Partnership
with respect to its interest in the Operating Partnership.
Shares of Common Stock constitute equity interests in the Company. Subject to
the provisions of the Charter regarding the restrictions on transfer of stock,
each stockholder will be entitled to his pro rata share of any dividends or
distributions paid with respect to Common Stock. The dividends payable to the
stockholders are not fixed in amount and are paid only if, when and as
authorized and declared by the Board of Directors. In order to qualify as a
REIT, the Company must distribute at least 95% of its taxable income (excluding
capital gains), and any taxable income (including capital gains) not distributed
will be subject to corporate income tax.
Liquidity. Subject to certain exceptions, the Unitholders may transfer all or
any portion of their OP Units with or without the consent of the General
Partner. However, the General Partner, in its sole and absolute discretion, may
or may not consent to the admission as a substituted limited partner of any
transferee of such OP Units. If the General Partner does not consent to the
admission of a transferee as a substituted limited partner, the transferee shall
be considered an assignee of an economic interest in the Operating Partnership
but will not be a holder of OP Units for any other purpose; accordingly, the
assignee will not be permitted to vote on any affairs or issues on which a
Limited Partner may vote.
The Common Stock is listed on the NYSE. The breadth and strength of this market
will depend upon, among other things, the number of shares outstanding, the
Company's financial results and prospects, the general interest in the Company's
real estate investments and the Company's dividend yield compared to that of
other debt and equity securities.
Federal Income Taxation. The Operating Partnership is taxed as a partnership
for federal income tax purposes. Accordingly, each Unitholder includes on his
individual income tax return as income, gain, deduction or loss his distributive
share of the Operating Partnership's items of income, gain, deduction or loss,
determined as if the Unitholder realized such items directly from the source
from which realized by the Operating Partnership or incurred such items in the
same manner incurred by the Operating Partnership. Distributions by the
Operating Partnership to a Unitholder are generally not taxable to the
Unitholder unless they exceed the Unitholder's basis
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in his OP Units. Special limitations, such as the passive activity loss rules,
may limit a Unitholder's ability to use his share of the Operating Partnership's
losses and deductions to offset income from other sources. Income and gain from
the Operating Partnership, however, should be characterized as passive activity
income and may be offset by losses and deductions from other passive activities
in which a Unitholder holds an interest.
The Company is a corporation taxed as a REIT. Stockholders may not include in
their individual income tax returns any net operating losses or capital losses
of the Company. Instead, such losses would be carried over by the Company for
potential offset against its future income (subject to certain limitations).
Taxable distributions from the Company and gain from the disposition of the
Common Stock will not be treated as passive activity income and, therefore,
stockholders generally will not be able to apply any "passive activity losses"
(such as losses from certain types of limited partnerships in which the
stockholder is a limited partner) against such income. In addition, taxable
distributions from the Company generally will be treated as investment income
for purposes of the investment interest limitations.
As long as the Company qualifies as a REIT, distributions made to the Company's
taxable U.S. stockholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account by
such U.S. stockholders as ordinary income and will not be eligible for the
dividends received deduction generally available to corporations. As used
herein, the term "U.S. stockholder" means a holder of Common Stock that for U.S.
federal income tax purposes is (i) a citizen or resident of the United States,
(ii) a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of political subdivision thereof, or
(iii) an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source. Distributions that are designated as capital
gain dividends will be taxed as long-term capital gains (to the extent they do
not exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which the stockholder has held his Common Stock.
However, corporate stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's Common
Stock, but rather will reduce the adjusted basis of such stock. To the extent
that such distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a stockholder's Common Stock, such
distributions will be included in income as long-term capital gain (or short-
term capital gain if the Common Stock has been held for one year or less)
assuming the Common Stock is a capital asset in the hands of the stockholder.
In addition, any distribution declared by the Company in October, November, or
December of any year and payable to a stockholder of record on a specified date
in any such month shall be treated as both paid by the Company and received by
the stockholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
The rules governing U.S. federal income taxation of tax-exempt entities,
nonresident alien individuals, foreign corporations, foreign partnerships or
other foreign entities with regard to their investments in U.S. partnerships and
in REITs are complex, and no attempt is made here to summarize such rules. TAX-
EXEMPT AND FOREIGN UNITHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS TO
DETERMINE THE EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX LAWS WITH
REGARD TO AN INVESTMENT IN COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
State and Local Taxation. In general, the differences between the state and
local tax treatments of Unitholders in the Operating Partnership and
Stockholders in the Company will be similar to the differences between the
federal income tax treatments of Unitholders and stockholders. Variations in
state and local tax laws, are, however, impossible to summarize here. EACH
UNITHOLDER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC
DIFFERENCES IN STATE AND LOCAL TAX TREATMENTS OF OP UNITHOLDERS AND
STOCKHOLDERS.
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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
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prohibition on a subsequent election to be taxed as a REIT is not applicable if
(i) the Company did not willfully fail to file a timely return with respect to
the termination taxable year, (ii) the inclusion of any incorrect information in
such return was not due to fraud with intent to evade tax, and (iii) the Company
establishes that its failure to meet the requirements was due to reasonable
cause and not to willful neglect.
The Company will make an election to be treated as a REIT commencing with its
taxable year ending December 31, 1996.
Structural Requirements. To be eligible to be taxed as a REIT, the Company
must satisfy certain structural and organizational requirements. Among the
requirements are the following: (i) the shares of Common Stock must be
transferable, (ii) the shares of Common Stock must be held by 100 or more
persons during at least 335 days of a taxable year of twelve months (or during a
proportionate part of a taxable year of less than twelve months) (the "100-
person requirement"), and (iii) no more than 50% of the value of the outstanding
shares of Common Stock may be owned, directly or indirectly, by five or fewer
individuals at any time during the last half of each taxable year (the "five or
fewer" requirement). The requirements of (ii) and (iii) are not applicable to
the first taxable year for which the Company makes an election to be treated as
a REIT. However, the Company believes that it has issued a sufficient amount of
Common Stock with sufficient diversity of ownership so that requirements (ii)
and (iii) are satisfied. The Company expects, and intends to take all necessary
measures within its control to ensure, that the beneficial ownership of the
Company will at all times be held by 100 or more persons. In addition, the
Company's Charter contains certain restrictions on the ownership and transfer of
the Company's stock which are designed to help ensure that the Company will be
able to satisfy the "five or fewer" requirement. If the Company were to fail to
satisfy the "five or fewer" requirement, the Company's status as a REIT would
terminate, and the Company would not be able to prevent such termination. See
"--Failure to Qualify as a REIT" and "Description of Capital Stock--Restrictions
on Transfer."
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
that subsidiary is disregarded for federal income tax purposes, and all assets,
liabilities and items of income, deduction and credit of the subsidiary are
treated as assets, liabilities and such items of the REIT itself. A "qualified
REIT subsidiary" is a corporation all of the stock of which is owned by the
REIT. For taxable years ending on or before December 31, 1997, the Company must
own all of the stock of the corporate subsidiary from the commencement of such
corporation's existence. The Company has two wholly owned subsidiary
corporations, AGH GP and AGH LP, which are "qualified REIT subsidiaries."
Consequently, AGH GP and AGH LP will not be subject to federal corporate income
taxation, although they may be subject to state and local taxation. The Company
also may have additional corporate subsidiaries in the future.
Income Tests. In order to qualify and to continue to qualify as a REIT for
years ending on or before December 31, 1997, the Company must satisfy three
income tests for each taxable year. First, at least 75% of the Company's annual
gross income (excluding annual gross income from certain sales of property held
primarily for sale to customers in the ordinary course of business) must be
derived directly or indirectly from investments relating to real property or
mortgages on real property or certain temporary investments. Second, at least
95% of the Company's annual gross income (excluding gross income from certain
sales of property held primarily for sale in the ordinary course of business)
must be derived directly or indirectly from any of the sources qualifying for
the 75% test and from dividends, interest, and gain from the sale or disposition
of stock or securities. Third, subject to certain exceptions in the year in
which the Company is liquidated, (i) short-term gains from sales of stock or
securities, (ii) gains from sales of property (other than foreclosure property)
held primarily for sale to customers in the ordinary course of business and
(iii) gains from the sale or other taxable disposition of real property
(including interests in real property and mortgages on real property) held for
less than four years (other than from involuntary conversions and foreclosure
property) must represent in the aggregate less than 30% of the Company's annual
gross income. In applying these tests, because the Company is a partner in the
Operating Partnership, which is in turn a partner, either directly or
indirectly, in the Subsidiary
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Partnerships, the Company will be treated as realizing its proportionate share
of the income and loss of these respective partnerships, as well as the
character of such income or loss, and other partnership items, as if the Company
owned its proportionate share of the assets owned by these partnerships
directly. For taxable years beginning on or after January 1, 1998, the third
test noted above has been repealed by the enactment of the Taxpayer Relief Act
of 1997. Thus, for the Company's taxable years beginning on and after January 1,
1998, the Company no longer is required to satisfy the 30 percent income test.
Substantially all of the income received by the Company is expected to be rental
income from the Rents. In order to qualify as "rents from real property" for
purposes of satisfying the 75% and 95% gross income tests, several conditions
must be satisfied. First, the amount of rent must not be based in whole or in
part on the income or profits of any person, although rents generally will
qualify as rents from real property if they are based on a fixed percentage of
receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" if the Company or an owner of 10% or more of the
Company, directly or constructively, owns 10% or more of such tenant (a "Related
Party Tenant"). Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15% of the total rent
received under the lease, the portion of rent attributable to such personal
property will not qualify as "rents from real property." Finally, the Company
generally must not operate or manage the property or furnish or render services
to the tenants of such property, other than through an "independent contractor"
from whom the Company derives no income. However, the "independent contractor"
requirement does not apply to the extent the services rendered by the Company
are customarily furnished or rendered in connection with the rental of the real
property (i.e., services which are not considered rendered to the occupant of
the property). In addition, for taxable years of the Company beginning on or
after January 1, 1998, the Company is permitted to receive up to 1% of the gross
income of each Hotel from the provision of non-customary services and still
treat all other amounts received from such Hotel as "rents from real property."
Pursuant to the Participating Leases, the Lessee has leased from the Operating
Partnership the land, buildings, improvements, furnishings, and equipment
comprising the Hotels for a term of twelve years. The Participating Leases
provide that the Lessee will be obligated to pay to the Operating Partnership
(i) the greater of Base Rent or Participating Rent and (ii) Additional Charges.
Participating Rent is calculated by multiplying fixed percentages by various
revenue categories for each of the Hotels. Generally, both Base Rent and the
thresholds in the Participating Rent formulas will be adjusted for inflation.
Base Rent accrues and is required to be paid monthly. Participating Rent is
payable quarterly, with a yearly adjustment based on actual results.
In order for Base Rent, Participating Rent, and Additional Charges to constitute
"rents from real property," the Participating Leases must be respected as true
leases for federal income tax purposes and not treated as service contracts,
joint ventures or some other type of arrangement. The determination of whether
the Participating Leases are true leases depends on an analysis of all the
surrounding facts and circumstances. In making such a determination, courts have
considered a variety of factors, including: (i) the intent of the parties, (ii)
the form of the agreement, (iii) the degree of control over the property that is
retained by the property owner (e.g., whether the lessee has substantial control
over the operation of the property or whether the lessee was required simply to
use its best efforts to perform its obligations under the agreement), and (iv)
the extent to which the property owner retains the risk of loss with respect to
the property (e.g., whether the lessee bears the risk of increases in operating
expenses or the risk of damage to the property) or the potential for economic
gain (e.g., appreciation) with respect to the property.
In addition, Code section 7701(e) provides that a contract that purports to be a
service contract (or a partnership agreement) is treated instead as a lease of
property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property, (ii) the service recipient controls the
property, (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the
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recipient shares in any appreciation in the value of the property, the recipient
shares in increases in the property's operating costs, or the recipient bears
the risk of damage to or loss of the property), (iv) the service provider does
not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract, (v) the
service provider does not use the property concurrently to provide significant
services to entities related to the service recipient, and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination of whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
Battle Fowler LLP is of the opinion that the Participating Leases will be
treated as true leases for federal income tax purposes. Such opinion is based,
in part, on the following facts: (i) the Operating Partnership or a Subsidiary
Partnership, as applicable, and the Lessee intend for their relationship to be
that of a lessor and lessee and such relationship will be documented by lease
agreements, (ii) the Lessee will have the right to exclusive possession and use
and quiet enjoyment of the 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
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faith and use its best efforts to prevent the Adjusted Basis Ratio for any Hotel
from exceeding 15%, which cooperation includes the purchase by Lessee at fair
market value of enough personal property at such Hotel so that the Adjusted
Basis Ratio for such Hotel is less than 15%. In the event that the amount of
personal property relating to certain of the Hotels will result in an Adjusted
Basis Ratio in excess of 15% and therefore would cause a portion of the Rents
received attributable to such Hotels to not qualify as rents from real property,
the Operating Partnership will sell a portion of such personal property relating
to such Hotels to the Lessee in exchange for the FF&E Note. In addition, the
Participating Leases provide that if future renovations and refurbishments to a
Hotel would cause the Adjusted Basis Ratio for such Hotel to exceed 15%, the
Operating Partnership and/or a Subsidiary Partnership, if applicable, has the
right to sell as much personal property to the Lessee as necessary so that the
Adjusted Basis Ratio does not exceed 15% for such Hotel. The interest income
derived from the FF&E Note will be qualifying income for the 95% gross income
test but not for the 75% gross income test. Finally, amounts in the Company's
reserve for capital expenditures may not be expended to acquire additional
personal property for a Hotel to the extent that such acquisition would cause
the 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
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preceding fiscal year (after establishing a reserve for partner tax
distributions). In addition, Messrs. Jorns and Wiles are required to use 50% of
the after-tax dividends received by them from AGHI that are attributable to
AGHI's earnings from the management of hotels owned by the Company to purchase
annually in the open market shares of Common Stock. The Exchange Agreement
provides that the Company may not satisfy an exchanging Limited Partner's
Exchange Right by delivery of Common Stock, if and to the extent the delivery of
Common Stock upon the exercise of such rights would cause the Company to own,
actually or constructively, 10% or more of the ownership interest in a tenant of
the Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code. The Charter
likewise prohibits a stockholder of the Company from owning Common Stock that
would cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of the Company's, the Operating Partnership's or
a Subsidiary Partnership's real property, within the meaning of section
856(d)(2)(B) of the Code. Thus, the Company should never own, actually or
constructively, 10% of more of the Lessee. However, because the Code's
constructive ownership rules for purposes of the Related Party Tenant rules are
broad and it is not possible to monitor continually direct and indirect
transfers of Common Stock, no absolute assurance can be given that such
transfers or other events of which the Company has no knowledge will not cause
the Company to own constructively 10% or more of the Lessee at some future date.
A fourth requirement noted above for qualification of the Rents as "rents from
real property" is that for taxable years ending on or before December 31, 1997,
the Company cannot furnish or render noncustomary services to the tenants of the
Hotels, or manage or operate the Hotels, other than through an independent
contractor who is adequately compensated and from whom the Company itself does
not derive or receive any income. Provided that the Participating Leases are
respected as true leases, the Company should satisfy this requirement, because
AGHI, pursuant to the Management Agreements, will be performing services to such
tenants for the Lessee, which will lease the Hotels from the Operating
Partnership. Neither the Company, the Operating Partnership nor any Subsidiary
Partnership will furnish or provide any services to a tenant, and none of such
entities will contract with any other person to provide any such services. The
Company has represented that if the Company decides to render noncustomary
services to tenants in the future, it will do so through an independent
contractor from which it will not receive any income.
If a portion of the Rents from a particular hotel property does not qualify as
"rents from real property" because the amount attributable to personal property
exceeds 15% of the total Rents for a taxable year, the portion of the Rents that
is attributable to personal property will not be qualifying income for purposes
of either the 75% or 95% gross income tests. A portion of the Rent paid to the
Company by the Lessee will be allocable to the Franchise Licenses. Appraisals
obtained by the Company with respect to the Initial Hotels indicate that the
Franchise Licenses with respect to the Initial Hotels represent less than 1.0%
of the total value of the Company's assets. The Company is currently in the
process of obtaining appraisals of the Franchise Licenses with respect to all
hotels acquired after the Initial Hotels. Because the Company does not expect
the total amount of Rents attributable to personal property plus any other non-
qualifying income it receives (including any amounts attributable to the
Franchise Licenses) to exceed 5% of its annual gross income, the Company's REIT
status should not be affected. If, however, the Rents do not qualify as "rents
from real property" because either (i) the Participating Rent is considered
based on income or profits of the Lessee, (ii) the Company owns, actually or
constructively, 10% or more of the Lessee, or (iii) the Company furnishes
noncustomary services to the tenants of the Hotels, or manages or operates the
Hotels, other than through a qualifying independent contractor, and for taxable
years of the Company beginning on or after January 1, 1998, the Company is
deemed to receive income from the provision of such noncustomary services or
from managing or operating the Hotels in excess of 1% of all amounts received
with respect to such Hotels, none of the Rents would qualify as "rents from real
property." In that case, the Company likely would lose its REIT status because
it would be unable to satisfy either the 75% or 95% gross income tests.
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In addition to the Rents, the Lessee is required to pay to the Operating
Partnership Additional Charges. To the extent that Additional Charges represent
either (i) reimbursements of amounts that the Lessee is obligated to pay to
third parties or (ii) penalties for nonpayment or late payment of such amounts,
Additional Changes should qualify as "rents from real property." To the extent,
however, that Additional Charges represent interest that is accrued on the late
payment of the Rents or Additional Charges, Additional Charges would not qualify
as "rents from real property," but instead would be treated as interest that
qualifies for the 95% gross income test.
Based on the foregoing, the Rents and the Additional Charges should qualify as
"rents from real property" for purposes of the 75% and 95% gross income tests,
except to the extent that the Additional Charges represent interest that is
accrued on the late payment of the Rents or the Additional Charges (which will
be qualifying gross income for the 95% test but not the 75% test).
The term "interest" generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed percentage or percentages of receipts or sales.
Furthermore, interest from a loan that is based on the residual cash proceeds
from sale of the property securing the loan will be treated as gain from the
sale of the secured property.
It is possible that, from time to time, the Company, the Operating Partnership
or a Subsidiary Partnership will enter into hedging transactions with respect to
one or more of its assets or liabilities. Any such hedging transactions could
take a variety of forms. If the Company, the Operating Partnership or a
Subsidiary Partnership enters into an interest rate swap or cap contract to
hedge any variable rate indebtedness incurred to acquire or carry real estate
assets, any periodic income or gain from the disposition of such contract should
be qualifying income for purposes of the 95% gross income test, but not for the
75% gross income test. Furthermore, for taxable years of the Company on December
31, 1997, any such contract would be considered a "security" for purposes of
applying the 30% gross income test. To the extent that the Company, the
Operating Partnership or a Subsidiary Partnership hedges with other types of
financial instruments or in other situations, it may not be entirely clear how
the income from those transactions will be treated for purposes of the various
income tests that apply to REITs under the Code. The Company intends to
structure any hedging transactions in a manner that does not jeopardize its
status as a REIT.
If the sum of the income realized by the Company (whether directly or through
its interest in the Operating Partnership or the Subsidiary Partnerships) which
does not satisfy the requirements of the 95% gross income test (collectively,
"Non-Qualifying Income"), exceeds 5% of the Company's gross income for any
taxable year, the Company's status as a REIT would be jeopardized. The Company
has represented that the amount of its Non-Qualifying Income will not exceed 5%
of the Company's annual gross income for any taxable year.
If the Company fails to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, it may still qualify as a REIT for such year if the
Company's failure to meet such tests was due to reasonable cause and not to
willful neglect, the Company attaches a schedule of the sources of its income to
its return, and any incorrect information on the schedule was not supplied
fraudulently with the intent to evade tax. It is not possible to specify the
circumstances under which the Company may be entitled to the benefit of these
relief provisions. Even if these relief provisions apply, a 100% tax is imposed
on the net income attributable to the greater of the amount by which the Company
failed the 75% test or the 95% test. Failure to comply with the 30% gross
income test is not excusable; therefore, if the Company fails to meet the
requirements of the 30% gross income test for a taxable year ending on or before
December 31, 1997, its status as a REIT automatically terminates regardless of
the reason for such failure.
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Asset Tests. At the close of each quarter of its taxable year, the Company
also must satisfy two tests relating to the nature and diversification of its
assets. First, at least 75% of the value of the Company's total assets must be
represented by real estate assets (including its allocable share of real estate
assets held by the Operating Partnership and the Subsidiary Partnerships), stock
or debt instruments held for not more than one year purchased with the proceeds
of an issuance of stock or long-term (at least five years) debt of the Company,
cash, cash items and government securities. Second, no more than 25% of the
Company's total assets may be represented by securities other than those that
can satisfy the 75% asset test described in the preceding sentence. Of the
investments included in the 25% asset class, the value of any one issuer's
securities (excluding shares in qualified REIT subsidiaries such as AGH GP and
AGH LP or another REIT and excluding partnership interests such as those in the
Operating Partnership and in any Subsidiary Partnerships) owned by the Company
may not exceed 5% of the value of the Company's total assets, and the Company
may not own more than 10% of any one issuer's outstanding voting securities
(excluding securities of a qualified REIT subsidiary or another REIT and
excluding partnership interests). The Company has represented that, as of the
date of the Offering, (i) at least 75% of the value of its total assets will be
represented by real estate assets, cash and cash items (including receivables),
and government securities and (ii) it will not own any securities that do not
satisfy the 25% asset requirement. In addition, the Company has represented that
it will not acquire or dispose, or cause the Operating Partnership or a
Subsidiary Partnership to acquire or dispose, of assets in the future in a way
that would cause it to violate either asset requirement. See "--Other Tax
Considerations--State and Local Taxes."
Annual Distribution Requirements. In order to qualify as a REIT, the Company
must distribute to the holders of shares of Common Stock an amount at least
equal to (A) the sum of 95% of (i) the Company's "real estate investment trust
taxable income" (computed without regard to the deduction for dividends paid and
excluding any net capital gain) plus (ii) the excess of the net income, if any,
from foreclosure property over the tax on such income, minus (B) the excess of
the sum of certain items of non-cash income (income attributable to leveled
stepped rents, original issue discount on purchase money debt, or a like-kind
exchange that is later determined to be taxable (plus, for taxable years
beginning on or after January 1, 1998, income from cancellation of
indebtedness, original issue discount and coupon interest) over 5% of the amount
determined under clause (i) above). Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before the Company timely files its tax return for such year and if paid on or
before the first regular distribution date after such declaration. The amount
distributed must not be preferential--i.e., each holder of shares of Common
Stock must receive the same distribution per share. A REIT may have more than
one class of stock, as long as distributions within each class are pro rata and
non-preferential. Such distributions are taxable to holders of Common Stock
(other than tax-exempt entities or nontaxable persons, as discussed below) in
the year in which paid, even though such distributions reduce the Company's
taxable income for the year in which declared. To the extent that the Company
does not distribute all of its net capital gain or distributes at least 95%, but
less than 100%, of its "real estate investment trust taxable income," it will be
subject to tax thereon at regular corporate tax rates. Finally, as discussed
below, the Company may be subject to an excise tax if it fails to meet certain
other distribution requirements.
The Company expects, and intends to take measures within its control, to make
quarterly distributions to the holders of shares of Common Stock in an amount
sufficient to satisfy the requirements of the annual distribution test. In this
regard, the Partnership Agreement authorizes AGH GP, as general partner, to take
such steps as are necessary to distribute to the partners of the Operating
Partnership an amount sufficient to permit the Company to meet the annual
distribution requirements. However, it is possible that the Company, from time
to time, may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement, or to distribute such greater amount as may be
necessary to avoid income and excise taxation, due to timing differences between
(i) the actual receipt of income and actual payment of deductible expenses and
(ii) the inclusion of such income and deduction of such expenses in arriving at
taxable income of the Company, or if the amount of nondeductible expenses, such
as principal amortization or capital expenditures exceeds the amount of noncash
deductions, such as depreciation. In the event that such timing differences
occur, the Company may find it necessary to cause the
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Operating Partnership to arrange for borrowings or liquidate some of its
investments in order to meet the annual distribution requirement, or attempt to
declare a consent dividend, which is a hypothetical distribution to holders of
shares of Common Stock out of the earnings and profits of the Company. The
effect of such a consent dividend (which, in conjunction with dividends actually
paid, must not be preferential to those holders who agree to such treatment)
would be that such holders would be treated for federal income tax purposes as
if they had received such amount in cash and they then had immediately
contributed such amount back to the Company as additional paid-in capital. This
would result in taxable income to those holders without the receipt of any
actual cash distribution but would also increase their tax basis in their shares
of Common Stock by the amount of the taxable income recognized.
If the Company fails to meet the 95% distribution test due to an adjustment to
the Company's income by reason of a judicial decision or by agreement with the
IRS, the Company may pay a "deficiency dividend" to holders of shares of Common
Stock in the taxable year of the adjustment, which dividend would relate back to
the year being adjusted. In such case, the Company also would be required to pay
interest plus a penalty to the IRS. However, a deficiency dividend cannot be
used to meet the 95% distribution test if the failure to meet such test was due
to the Company's failure to distribute sufficient amounts to the holders of
shares of Common Stock.
In addition, if the IRS successfully challenged the Company's deduction of all
or a portion of the salary and bonus it pays to officers who are also holders of
shares of Common Stock, such payments could be recharacterized as dividend
distributions to such employees in their capacity as stockholders. If such
distributions were viewed as preferential distributions, they would not count
toward the 95% distribution test.
Failure to Qualify as a REIT
The Company's treatment as a REIT for federal income tax purposes will be
terminated automatically if the Company fails to meet the requirements described
above and any available relief provisions do not apply. In such event, the
Company will be subject to tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates, and distributions to
holders of shares of Common Stock will not be deductible by the Company. All
distributions to holders of shares of Common Stock will be taxable as ordinary
income to the extent 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.
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100 Percent Tax. The Company will be subject to a 100% tax on (i) the greater
of the net income attributable to the amount by which it fails the 75% income
test or the 95% income test; and (ii) any net income derived from a "prohibited
transaction" (i.e., the sale of "dealer" property by the Company). The
imposition of any such tax on the Company would reduce the amount of cash
available for distribution to holders of shares of Common Stock.
A "dealer" is one who holds property primarily for sale to customers in the
ordinary course of its trade or business. All inventory required in the
operation of the Hotels will be owned by the Lessee under the terms of the
Participating Leases. Accordingly, the Company believes no asset owned by the
Company, the Operating Partnership or a Subsidiary Partnership is held for sale
to customers and that a sale of any such asset will not be in the ordinary
course of business of the Company, the Operating Partnership or a Subsidiary
Partnership. Whether property is held "primarily for sale to customers in the
ordinary course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to a
particular property. Nevertheless, the Company will attempt to comply with the
terms of safe harbor provisions in the Code prescribing when asset sales will
not be characterized as prohibited transactions. Complete assurance cannot be
given, however, that the Company can comply with the safe harbor provisions of
the Code or avoid owning property that may be characterized as property held
primarily for sale to customers in the ordinary course of a trade or business.
Because a determination of "dealer status" is necessarily dependent upon facts
which will occur in the future, Counsel cannot render an opinion on this issue.
Tax on Net Income from Foreclosure Property. The Company will be subject to a
tax at the highest rate applicable to corporations (currently 35%) on any "net
income from foreclosure property." "Foreclosure property" is property acquired
by the Company as a result of a foreclosure proceeding or by otherwise reducing
such property to ownership by agreement or process of law. "Net income from
foreclosure property" is the gross income derived during the taxable year from
foreclosure property, less applicable deductions, but only to the extent such
income does not qualify under the 75% income test and 95% income test. As a
result of the rules with respect to foreclosure property, if the Lessee defaults
on its obligations under a Participating Lease for a Hotel, the Company
terminates the Participating Lease, and the Company is unable to find a
replacement lessee for such Hotel within 90 days of such foreclosure, gross
income from hotel operations conducted by the Company from such Hotel would
cease to qualify for the 75% and 95% gross income tests and, thus, the Company
would fail to qualify as a REIT. However, although it is unclear under the Code,
if the hotel operations were conducted by an independent contractor, it may be
possible for the Hotel to cease to be foreclosure property two years after such
foreclosure, (which period could be extended an additional four years).
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
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acquired, such C corporation generally will be treated as if it sold all of its
assets to such REIT at their respective fair market values and liquidated
immediately thereafter, recognizing and paying tax on all gain. However, under
such circumstances under present law, the REIT is permitted to make an election
under which the C corporation will not recognize gain and instead the REIT will
be required to recognize gain and pay any tax thereon only if it disposes of
such assets during the subsequent 10-year period (the "10-Year Rule"). The
Company intends to make the appropriate election to obtain the above-described
tax consequences. Thus, if the Company acquires any asset from a C corporation
as a result of a merger or other nontaxable exchange, and the Company recognizes
gain on the disposition of such asset during the 10-year period following
acquisition of the asset, then such gain will be subject to tax at the highest
regular corporate rate to the extent the Built-In Gain (the excess of (a) the
fair market value of such asset as of the date of acquisition over (b) the
Company's adjusted basis in such asset as of such date) on the sale of such
asset exceeds any Built-In Loss arising from the disposition during the same
taxable year of any other assets acquired in the same transaction, where Built-
In Loss equals the excess of (x) the Company's adjusted basis in such other
assets as of the date of acquisition over (y) the fair market value of such
other assets as of such date.
Taxation of Stockholders
Taxable U.S. Stockholders
Dividend Income. Distributions from the Company (other than distributions
designated as capital gains dividends) will be taxable to holders of shares of
Common Stock which are not tax-exempt entities as ordinary income to the extent
of the current or accumulated earnings and profits of the Company. Distributions
from the Company which are designated (by notice to stockholders within 30 days
after the close of the Company's tax year or with its annual report) as capital
gains dividends by the Company will be taxed as long-term capital gains to
taxable holders of shares of Common Stock to the extent that they do not exceed
the Company's actual net capital gain for the taxable year. Holders of shares of
Common Stock that are corporations may be required to treat up to 20% of any
such capital gains dividends as ordinary income. Such distributions, whether
characterized as ordinary income or as capital gain, are not eligible for the
70% dividends received deduction for corporations.
Distributions from the Company to holders which are not designated as capital
gains dividends and which are in excess of the Company's current and accumulated
earnings and profits are treated as a return of capital to such holders and
reduce the tax basis of a holder's shares of Common Stock (but not below zero).
Any such distribution in excess of the tax basis is taxable to any such holder
that is not a tax-exempt entity as gain realized from the sale of the shares of
Common Stock, taxable as described below.
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.
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Sale of Shares. A holder of shares of Common Stock who sells shares will
recognize taxable gain or loss equal to the difference between (i) the amount of
cash and the fair market value of any property received on such sale or other
disposition and (ii) the holder's adjusted basis in such shares. Gain or loss
recognized by a holder of shares of Common Stock who is not a dealer in
securities and whose shares have been held for more than one year will generally
be taxable as long-term capital gain or loss.
Back-up Withholding. Distributions from the Company will ordinarily not be
subject to withholding of federal income taxes, except as discussed under
"Foreign Stockholders." Withholding of income tax at a rate of 31% may be
required, however, by reason of a failure of a holder of shares of Common Stock
to supply the Company or its agent with the holder's taxpayer identification
number. Such "backup" withholding also may apply to a holder of shares of Common
Stock who is otherwise exempt from backup withholding (including a nonresident
alien of the United States and, generally, a foreign entity) if such holder
fails to properly document his status as an exempt recipient of distributions.
Each holder will therefore be asked to provide and certify his correct taxpayer
identification number or to certify that he is an exempt recipient.
Tax-Exempt Stockholders
Non-taxability of Dividend Income. In general, a holder of shares of Common
Stock which is a tax-exempt entity will not be subject to tax on distributions
from the Company. The IRS has ruled that amounts distributed as dividends by a
qualified REIT do not constitute unrelated business taxable income ("UBTI") when
received by certain tax-exempt entities. Thus, distributions paid to a holder of
shares of Common Stock which is a tax-exempt entity and gain on the sale of
shares of Common Stock by a tax-exempt entity (other than those tax-exempt
entities described below) will not be treated as UBTI, even if the Company
incurs indebtedness in connection with the acquisition of real property (through
its percentage ownership of the Operating Partnership and the Subsidiary
Partnerships) provided that the tax-exempt entity has not financed the
acquisition of its shares of Common Stock of the Company.
For tax-exempt entities which are social clubs, voluntary employee beneficiary
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans exempt from federal income taxation under Code Sections
501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an investment
in the Company will constitute UBTI unless the organization is able to properly
deduct amounts set aside or placed in reserve for certain purposes so as to
offset the UBTI generated by its investment in the Company. Such prospective
investors should consult their own tax advisors concerning these "set aside" and
reserve requirements.
In the case of a "qualified trust" (generally, a pension or profit-sharing
trust) holding shares in a REIT, the beneficiaries of such a trust are treated
as holding shares in the REIT in proportion to their actuarial interests in the
qualified trust, instead of treating the qualified trust as a single individual
(the "look through exception"). A qualified trust that holds more than 10% of
the shares of a REIT is required to treat a percentage of REIT dividends as UBTI
if the REIT incurs debt to acquire or improve real property. This rule applies,
however, only if (i) the qualification of the REIT depends upon the application
of the "look through" exception (described above) to the restriction on 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
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percentage is less than 5%. Because the Company expects the shares of Common
Stock to be widely held, this provision should not result in UBTI to any tax-
exempt entity.
Foreign Stockholders
The rules governing United States federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, foreign estates and
foreign trusts (collectively, "Foreign Investors") are complex, and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Foreign Investors should consult their own tax advisors to determine the impact
of federal, state and local income tax laws on an investment in the shares of
Common Stock, including any reporting requirements, as well as the tax treatment
of such an investment under their home country laws.
Foreign Investors which are not engaged in the conduct of a business in the
United States and who purchase shares of Common Stock will generally not be
considered as engaged in the conduct of a trade or business in the United States
by reason of ownership of such shares. The taxation of distributions by the
Company to Foreign Investors will depend upon whether such distributions are
attributable to operating income or are attributable to sales or exchanges by
the Company of its United States Real Property Interests ("USRPIs"). USRPIs are
generally direct interests in real property located in the United States and
interests in domestic corporations in which the fair market value of its USRPIs
exceeds a certain percentage.
The Company anticipates that a substantial portion of the distributions to
holders of shares of Common Stock will be attributable to receipt of Rent by the
Company. To the extent that such distributions do not exceed the current or
accumulated earnings and profits of the Company, they will be treated as
dividends and will be subject to a withholding tax equal to 30% of the gross
amount of the dividend, which tax will be withheld and remitted to the IRS by
the Company. Such 30% rate may be reduced by United States income tax treaties
in effect with the country of residence of the Foreign Investor; however, a
Foreign Investor must furnish a completed IRS Form 1001 to the Company to secure
such a reduction. Distributions in excess of the Company's earnings and profits
will be treated as a nontaxable return of capital to a Foreign Investor to the
extent of the basis of his shares of Common Stock, and any excess amount will be
treated as an amount received in exchange for the sale of his shares of Common
Stock and treated under the rules described below for the sale of Common Stock.
Distributions which are attributable to net capital gains realized from the
disposition of USRPIs (i.e., the Hotels) by the Company will be taxed as though
the Foreign Investors were engaged in a trade or business in the United States
and the distributions were gains effectively connected with such trade or
business. Thus, a Foreign Investor would be entitled to offset its gross income
by allowable deductions and would pay tax on the resulting taxable income at the
graduated rates applicable to United States citizens or residents. For both
individuals and corporations, the Company must withhold a tax equal to 35% of
all dividends that could be designated by the Company as capital gain dividends.
To the extent that such withholding exceeds the actual tax owed by the Foreign
Investor, a Foreign Investor may claim a refund from the IRS.
The Company or any nominee (e.g., a broker holding shares in street name) may
rely on a certificate of non-foreign status on Form W-8 or Form W-9 to determine
whether withholding is required on gains realized from the disposition of
USRPIs. A domestic person (a "nominee") who holds shares of Common Stock on
behalf of a Foreign Investor will bear the burden of withholding, provided that
the Company has properly designated the appropriate portion of a distribution as
a capital gain dividend.
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
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USRPIs and gains on sales of such shares will not be taxed to such Foreign
Investors as long as the seller is not otherwise considered to be engaged in a
trade or business in the United States. (The same rule applies to gains
attributable to distributions in excess of the Foreign Investor's cost for its
shares, discussed above.) Similarly, a foreign corporation not otherwise subject
to United States tax which distributes shares of Common Stock to its
stockholders will not be taxed under this rule.
The IRS is authorized to impose annual reporting requirements on certain United
States and foreign persons directly holding USRPIs. The required reports are in
addition to any necessary income tax returns, and do not displace existing
reporting requirements imposed on Foreign Investors by the Agricultural Foreign
Investment Disclosure Act of 1978 and the International Investment Survey Act of
1976. As of the date of this Prospectus, the IRS has not exercised its authority
to impose reporting under this provision. Furthermore, because shares in a
domestically controlled REIT do not constitute a USRPI, such reporting
requirements are not expected to apply to a Foreign Investor in the Company.
However, the Company is required to file an information return with the IRS
setting forth the name, address and taxpayer identification number of the payee
of distributions from the Company (whether the payee is a nominee or is the
actual beneficial owner).
Statement of Stock Ownership
The Company is required to demand annual written statements from the record
holders of designated percentages of its shares of Common Stock disclosing the
actual owners of the shares of Common Stock. The Company must also maintain,
within the Internal Revenue District in which it is required to file its federal
income tax return, permanent records showing the information it has received as
to the actual ownership of such shares of Common Stock and a list of those
persons failing or refusing to comply with such demand.
Tax Aspects of the Operating Partnership
The following discussion summarizes certain federal income tax considerations
applicable solely to the Company's investment in the Operating Partnership and
the Subsidiary Partnerships. The discussion does not cover state or local tax
laws or any federal tax laws other than income tax laws.
Classification as a Partnership. A substantial portion the Company's real
estate investments will be made through the Operating Partnership and the
Subsidiary Partnerships, certain of which will hold interests in other
partnerships. In general, partnerships are "pass-through" entities which are not
subject to federal income tax. Instead, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership, and are subject to tax thereon, without regard to whether the
partners receive cash distributions from the partnership. The Company will be
entitled to include in its REIT taxable income its distributive share of the
income of any partnership (including the Operating Partnership) in which it has
an interest and to deduct its distributive share of the losses of any
partnership (including the Operating Partnership) in which it has an interest
only if each such partnership is classified for federal income tax purposes as a
partnership rather than as an association taxable as a corporation.
Under recently issued regulations ("check the box regulations"), an organization
with two or more members will be classified as a partnership on or after January
1, 1997 unless it elects to be treated as an association (and therefore taxable
as a corporation) or falls within one of several specific provisions which
define a corporation. For entities which were in existence prior to January 1,
1997 (such as the Operating Partnership and the Subsidiary Partnerships), the
claimed classification by the entity will be respected for all periods prior to
January 1, 1997 if (i) the entity had a reasonable basis for its claimed
classification under the law prior to January 1, 1997; (ii) the entity and all
members thereof recognized the federal tax consequence of any change in the
entity's classification within the sixty (60) months prior to January 1, 1997;
and (iii) neither the entity nor any member was notified in writing on or before
May 8, 1996 that the classification of the entity was under
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examination (in which case the entity's classification would be determined in
the examination). An exception to partnership classification under the "check
the box regulations" exists for a "publicly traded partnership" (i.e., a
partnership in which interests are traded on an established securities market or
are readily tradable on a secondary market or the substantial equivalent
thereof). A publicly traded partnership is treated as a corporation unless at
least 90% of the gross income of such partnership, for each taxable year the
partnership is a publicly traded partnership, consists of "qualifying income."
"Qualifying income" includes income from real property rents, gain from the sale
or other disposition of real property, interest and dividends.
The IRS has issued final regulations providing limited safe harbors from the
definition of a publicly traded partnership. Pursuant to one of those safe
harbors (the "Private Placement Exclusion"), interests in a partnership will not
be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all of the partnership interests are issued in a
transaction that is not required to be registered under the Securities Act and
(ii) the partnership does not have more than 100 partners at any time during the
taxable year (taking into account as a partner each person who indirectly owns
an interest in the partnership through a partnership, grantor trust, or S
corporation (a "flow-through entity"), but only if (a) substantially all the
value of the beneficial owner's interest in the flow-through entity is
attributable to the flow-through entity's interest (direct or indirect) in the
partnership, and (b) a principal purpose of the use of the tiered arrangement is
to permit the partnership to satisfy the 100-partner limitation).
All of the partnership interests in the Operating Partnership and the Subsidiary
Partnerships have been issued in transactions that are not required to be
registered under the Securities Act. In addition, the Operating Partnership and
the Subsidiary Partnerships do not have more than 100 partners (even taking into
account indirect ownership of such partnerships through partnerships, grantor
trusts, and S corporations). Thus, the Operating Partnership and each Subsidiary
Partnership should satisfy the Private Placement Exclusion.
None of the Operating Partnership and the Subsidiary Partnerships has requested
and none intends to request, a ruling from the IRS that it will be classified as
a partnership for federal income tax purposes. Instead, Battle Fowler LLP has
delivered its opinion that, based on the provisions of the partnership agreement
of the Operating Partnership and each Subsidiary Partnership, certain factual
assumptions, and certain representations described in the opinion, the Operating
Partnership and each Subsidiary Partnership pursuant to the provisions of the
"check the box regulations" as well as the law prior to January 1, 1997 will be
treated for federal income tax purposes as partnerships and not as associations
taxable as corporations or as publicly traded partnerships. Unlike a tax ruling,
an opinion of counsel is not binding upon the IRS, and no assurance can be given
that the IRS will not challenge the status of the Operating Partnership and each
Subsidiary Partnership as partnerships for federal income tax purposes. If such
challenge were sustained by a court, the Operating Partnership and each
Subsidiary Partnership would be treated as corporations for federal income tax
purposes, as described below. In addition, the opinion of Battle Fowler LLP is
based on existing law, which is to a great extent the result of administrative
and judicial interpretation. No assurance can be given that administrative or
judicial changes would not modify the conclusions expressed in the opinion.
If for any reason any partnership in which the Company has an interest was
taxable as a corporation rather than as a partnership for federal income tax
purposes, the Company likely would not be able to satisfy the asset requirements
for REIT status. See "--Requirements for Qualification as a REIT--Asset Tests."
In addition, any change in the partnership status of such entities for tax
purposes might be treated as a taxable event in which case the Company might
incur a tax liability without any related cash distribution. See "--Income
Taxation of the Operating Partnership and Its Partners--Basis in Operating
Partnership Interest." Further, items of income and deduction of such
partnerships would not pass through to its partners (including the Company), and
such partners would be treated as stockholders for tax purposes. The
partnerships in which the Company has an interest would be required to pay
income tax at corporate tax rates on their net income, and distributions to
their
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<PAGE>
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.
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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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. The taxpayer Relief Act of 1997 (the "1997 Act") was
signed into law on August 5, 1997. The Act contains many provisions which
generally make it easier for entities to operate and to continue to qualify as a
REIT for taxable years beginning on or after January 1, 1998. Nevertheless,
prospective stockholders should recognize that the present federal income tax
treatment of an investment in the Company may be modified by legislative,
judicial or administrative action at any time and that any such action may
affect investments and commitments previously made. The rules dealing with
federal income taxation are constantly under legislative and administrative
review, resulting in revisions of regulations and revised interpretations of
established concepts as well as statutory changes. Revisions in federal tax laws
and interpretations thereof could adversely affect the tax consequences of an
investment in the Company.
Current Texas franchise tax law applies only to corporations and limited
liability companies. Thus, partnerships engaged in business in Texas, including
the Subsidiary Partnerships that own property in Texas, presently are not
subject to the Texas franchise tax. The corporate general partners in those
partnerships, however, are subject to the Texas franchise tax. It is expected
that Texas legislators and/or the Comptroller will propose or recommend, as the
case may be, statutory amendments subjecting all comparable limited partners to
the franchise tax or expanding the application of the Texas franchise tax to
include certain non-corporate businesses, specifically including partnerships,
in the franchise tax base. It cannot be predicted whether such proposals will be
adopted by the legislature. If such proposals are enacted, AGH LP and/or
Subsidiary Partnerships that own property in Texas would be subjected to the
then applicable Texas franchise tax.
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<PAGE>
USE OF PROCEEDS
The Registering Stockholders will receive all of the proceeds from the sale of
the Exchanged Shares and the Restricted Stock offered hereby. The Company will
not receive any proceeds from the sale of such shares of Common Stock.
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<PAGE>
REGISTERING STOCKHOLDERS
As described elsewhere herein, the Registering Stockholders are persons who
either (i) have received or may receive Exchanged Shares in exchange for OP
Units or (ii) have already received shares of Restricted Stock of the Company.
The Table below sets forth, as of August 31, 1997, certain information regarding
the beneficial ownership of the shares of Common Stock by each Registering
Stockholder prior to this offering and adjusted to give effect to the sale of
all the shares of Common Stock offered hereby. As the Registering Stockholders
may sell all, some or none of the Exchanged Shares or Restricted Stock that are
to be offered hereby, no estimate can be made of the aggregate number of shares
of Common Stock offered hereby, or the aggregate number of shares of Common
Stock that will be owned by each Registering Stockholder upon completion of the
offering to which this Prospectus relates. Except as otherwise noted below, none
of the Registering Stockholders has, within the past three years, had any
position, office or other material relationship with the Company.
The Exchanged Shares and Restricted Stock offered by this Prospectus may be
offered from time to time by the Registering Stockholders named below or by
pledgees, donees, transferees or other successors in interest thereto:
<TABLE>
<CAPTION>
Number of Shares
Shares to Be
Beneficially Maximum Number Beneficially Percentage to Be
Owned Prior of Shares Which Owned Beneficially
to this May Be Sold After this Owned After this
Name Offering(1) Hereunder Offering(2) Offering(2)
- -------------------------------------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Holders of Exchanged Shares:
3005 Hotel Associates, Ltd. 31,430 31,430 0 *
Jackson-Shaw Partners No. 51, Ltd. 28,933 28,933 0 *
3100 Hotel Associates, L.P. 24,321 24,321 0 *
Virtual Hospitality, Inc. (3) 6,229 6,229 0 *
James E. Sowell (4) 112,358 112,358 0 *
Lewis W. Shaw, II (5) 71,800 71,800 0 *
Kenneth W. Shaw (6) 70,687 70,687 0 *
Monica Jorns (7) 19,104 19,104 0 *
Steven D. Jorns (8) 235,208 (9) 52,696 182,512 *
Bruce G. Wiles (10) 76,999 (11) 21,286 55,713 *
Kenneth E. Barr (12) 36,779 (13) 10,000 26,779 *
3860 Investors Joint Venture 21,556 21,556 0 *
Jim Sowell Construction Co., Inc. 89,778 89,778 0 *
John D. Gourley 6,731 6,731 0 *
Louis E. Capt 29,767 28,741 1,026 *
Richard O. Jacobson 43,112 43,112 0 *
Thomas J. Corcoran, Jr. (14) 48,112 43,112 5,000 *
Hervey A. Feldman (15) 21,556 21,556 0 *
Jerry Jacob 10,059 10,059 0 *
Pin Nien Hwang 7,185 7,185 0 *
Thomas L. Wiese 3,593 3,593 0 *
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Shares
Beneficially Maximum Number Number of Shares Percentage to Be
Owned Prior of Shares Which to Be Owned Beneficially
to this May Be Sold After this Owned After this
Name Offering(1) Hereunder Offering(2) Offering(2)
- -------------------------------------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Steven L. Cobb 3,593 3,593 0 *
Richard and Barbara Hess 8,207 8,207 0 *
DFW South Acquisition Corporation 115,683 115,683 0 *
Corporate Property Associates 4, a 427,008 427,008 0 *
California Limited Partnership
Corporate Property Associates 8, L.P. 493,664 493,664 0 *
Craig Stark, Inc. 100,257 100,257 0 *
Devlo, Inc. 24,317 24,317 0 *
Holders of Restricted Stock:
American General Hospitality, Inc. 137,008 137,008 0 *
Retirement Savings Plan
Richard C. Kessler 25,397 25,397 0 *
WHC Franchise Corporation 112, 969 112,969 0 *
</TABLE>
- --------------------
(*) Less than 1%
(1) Beneficial ownership as of August 31, 1997, based upon information provided
by the respective Registering Stockholders. Unless otherwise noted in the
following footnotes, the Exchanged Shares and/or Restricted Stock set forth
in this column with respect to a particular Registering Stockholder have
not been attributed to the shareholders, limited partners or general
partners of such Registering Stockholders.
(2) Assumes sale of all shares of Common Stock registered hereunder, although
Registering Stockholders are under no obligation known to the Company to
sell any shares of Common Stock at this time.
(3) Virtual Hospitality, Inc. is a limited partner in 3005 Hotel Associates,
L.P. and in 3100 Hotel Associates, Ltd.
(4) James E. Sowell controls all of the voting stock of Jim Sowell Construction
Co., Inc. and controls the general partner of Jackson-Shaw Partners No. 51,
Ltd. James E. Sowell is a shareholder in Virtual Hospitality, Inc., a
general partner in 3860 Investors Joint Venture and a limited partner in
3100 Hotel Associates, L.P.
(5) Lewis W. Shaw, II is a limited partner in 3005 Hotel Associates, Ltd. and
3100 Hotel Associates, L.P., a general partner in 3860 Investors Joint
Venture and a shareholder in Virtual Hospitality, Inc.
(6) Kenneth W. Shaw is a limited partner in 3005 Hotel Associates, Ltd. and
3100 Hotel Associates, L.P. and a shareholder in Virtual Hospitality, Inc.
(7) Monica Jorns is the wife of Steven D. Jorns. Steven D. Jorns disclaims
beneficial ownership of the Exchanged Shares that may be issued to Mrs.
Jorns in exchange for the OP Units held by her.
(8) Steven D. Jorns, who is the Chairman of the Board, Chief Executive Officer
and President of the Company, is also a limited partner in 3100 Hotel
Associates, L.P., a general partner in 3860 Investors Joint Venture, a
shareholder in Virtual Hospitality, Inc. and a participant in the American
General Hospitality, Inc.'s Retirement Savings Plan (the "Plan").
(9) Includes 3,811, 3,412, 1,123 and 9,295 Exchanged Shares that may be issued
in exchange for OP Units held by 3100 Hotel Associates, L.P., 3860
Investors Joint Venture, Virtual Hospitality, Inc. and 3005 Hotel
Associates, Ltd., respectively, and attributable to Mr. Jorns; 2,167 shares
of Restricted Stock held by the Plan and attributable to Mr. Jorns; and
19,104 Exchanged Shares that may be issued in exchange for OP Units held by
Monica Jorns, Mr. Jorns' wife, with respect to which Mr. Jorns disclaims
beneficial ownership.
(10) Bruce G. Wiles, who is an Executive Vice President of the Company, is also
a limited partner in 3100 Hotel Associates, L.P. and 3005 Hotel Associates,
Ltd., a general partner in 3860 Investors Joint Venture, a shareholder in
Virtual Hospitality Inc. and a participant in the Plan.
(11) Includes 1,203, 2,924, 1,079, and 355 Exchanged Shares that may be issued
in exchange for OP Units held by 3100 Hotel Associates, L.P., 3005 Hotel
Associates, Ltd., 3860 Investors Joint Venture and Virtual Hospitality,
Inc., respectively, and attributable to Mr. Wiles; and 2,352 shares of
Restricted Stock held by the Plan and attributable to Mr. Wiles.
(12) Kenneth E. Barr is the Executive Vice President, Chief Financial Officer,
Secretary, Treasurer and Principal Accounting Officer of the Company.
Mr. Barr is a participant in the Plan.
(13) Includes 79 shares of Restricted Stock held by the Plan and attributable to
Mr. Barr.
(14) Thomas J. Corcoran controls 50% of the voting stock of DFW South
Acquisition Corporation.
(15) Hervey A. Feldman controls 50% of all the voting stock of DFW South
Acquisition Corporation.
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<PAGE>
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time of the Exchanged
Shares and the Restricted Shares by the Registering Stockholders; or by
pledgees, donees, transferees or other successors in interest thereto, who have
received or may receive Exchanged Shares and/or Restricted Stock without
registration. The Registering Stockholders may sell the Exchanged Shares and the
Restricted Stock being offered hereby: (i) in ordinary brokerage transactions
and in transactions in which brokers solicit purchasers; (ii) in privately
negotiated direct sales or sales effected through agents not involving
established trading markets; or (iii) through transactions in put or call
options or other rights (whether exchange-listed or otherwise) established after
the effectiveness of the Registration Statement of which this Prospectus is a
part. The Exchanged Shares and the Restricted Stock may be sold at prices and at
terms then prevailing or at prices related to the then current market price of
the Common Stock on the NYSE or at other negotiated prices. In addition, any of
the Exchanged Shares and the Restricted Stock that qualify for sale pursuant to
Rule 144 may be sold in transactions complying with such rule, rather than
pursuant to this Prospectus.
The Restricted Stock and the Exchanged Shares consist of (i) Common Stock
previously issued to Restricted Stockholders in private transactions exempt from
the registration requirements of the Securities Act and (ii) Common Stock issued
or to be issued to Unitholders upon exchange by the Company of OP Units
previously issued to such persons in private transactions exempt from the
registration requirements of the Securities Act. If the Company elects to
acquire each OP Unit exchanged by it for a share of Common Stock, then its
interest in the Operating Partnership will increase.
In the case of sales of the Exchanged Shares and the Restricted Stock effected
to or through broker-dealers, such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Registering
Stockholders or the purchasers of the Exchanged Shares and the Restricted Stock
sold by or through such broker-dealers, or both. The Company has advised the
Registering Stockholders that the anti-manipulative Rules 10b-6 and 10b-7 under
the Securities Exchange Act of 1934, as amended ("Exchange Act") may apply to
their sales in the market and has informed them of the need for delivery of
copies of this Prospectus. The Company is not aware as of the date of this
Prospectus of any agreements between any of the Registering Stockholders and any
broker-dealers with respect to the sale of the shares offered by this
Prospectus. The Registering Stockholders and any broker-dealer or other agent
executing sell orders on behalf of the Registering Stockholders may be deemed to
be "underwriters" within the meaning of the Securities Act, in which case the
commissions received by any such broker-dealer or agent and profit on any resale
of the shares of Common Stock may be deemed to be underwriting commissions under
the Securities Act. The commissions received by a broker-dealer or agent may be
in excess of customary compensation. The Company will receive no part of the
proceeds from the sale of any Exchanged Shares and the Restricted Stock
hereunder.
Pursuant to the terms of the Registering Stockholders registration rights
agreements entered into by and among the Company and the Registering
Stockholders, the Registering Stockholders will pay their costs and expenses of
selling the Exchanged Shares and the Restricted Stock hereunder, including
commissions and discounts of underwriters, brokers, dealers or agents, and the
Company has agreed to pay the costs and expenses incident to its registration
and qualification of the Exchanged Shares and the Restricted Stock offered
hereby, including applicable filing fees, legal and accounting fees and
expenses. In addition the Company has agreed to indemnify the Registering
Stockholders against certain liabilities, including certain liabilities arising
under the Securities Act.
The Registering Stockholders may elect to sell all, a portion or none of the
Exchanged Shares and the Restricted Stock offered by them hereunder.
59
<PAGE>
EXPERTS
The Consolidated Financial Statements of American General Hospitality
Corporation as of December 31, 1996 and for the period from August 31, 1996
through December 31, 1996 and the related financial statement schedule; the
Financial Statements of AGH Leasing, L.P. as of December 31, 1996 and for the
period from August 31, 1996 through December 31, 1996 and the Combined Financial
Statements of the AGH Predecessor Hotels as of December 30, 1994, December 29,
1995 and August 30, 1996 and for the period from December 30, 1993 through
December 31, 1993, each of the two years in the period ended December 29, 1995
and for the period from December 30, 1995 through August 30, 1996 and the
related financial statement schedule are incorporated by reference in this
Registration Statement by reference to the Company's Annual Report on Form 10-K.
independent accountants.
The Combined Financial Statements of the AKL Acquisition Hotels as of and for
the year ended December 31, 1995 are incorporated by reference in this
Registration Statement by reference to the Company's Report on Form 8-K dated
March 17, 1997. The Combined Financial Statements of the MUI Acquisition Hotels
as of and for the year ended December 31, 1996 are incorporated by reference in
this Registration Statement by reference to the Company's Report on Form 8-K/A
dated August 1, 1997.
The above said financial statements have been so incorporated in reliance on the
reports of Coopers & Lybrand L.L.P.,
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Battle Fowler LLP, New York, New York. In addition, the
description of federal income tax consequences contained in the section of the
Prospectus entitled "Federal Income Tax Considerations" is based on the opinion
of Battle Fowler LLP, New York, New York. The description of Texas franchise tax
matters contained in the section of the Prospectus entitled "Federal Income Tax
Considerations--Other Tax Considerations," is based on the opinion of Coopers &
Lybrand L.L.P., Dallas, Texas. Battle Fowler LLP will rely on Ballard Spahr
Andrews & Ingersoll, Baltimore, Maryland as to certain matters of Maryland law.
60
<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............................. $17,856.22
Printing and mailing expenses.................................................... 10,000.00
Accountant's fees and expenses................................................... 5,000.00
Blue Sky fees and expenses....................................................... 5,000.00
Legal fees....................................................................... 25,000.00
Miscellaneous expenses........................................................... 10,143.78
---------
Total.............................................................. $73,000.00
==========
</TABLE>
Item 15. Indemnification of Directors and Officers
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
The Charter of the Company obligates it, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to any person (or the
estate of any person) who is or was a party to, or is threatened to be made a
party to, any threatened, pending or completed action, suit or proceeding
whether or not by or in the right of the Company, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or officer of the Company, or is or was serving at
the request of the Company as a director, officer, trustee, partner, member,
agent or employee of another corporation, partnership, limited liability
company, association, joint venture, trust or other enterprise. The Charter also
permits the Company to indemnify and advance expenses to any person who served a
predecessor of the Company in any of the capacities described above and to any
employee or agent of the Company or a predecessor of the Company.
The MGCL requires a Maryland corporation (unless its charter provides
otherwise, which the Company's Charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any Maryland proceeding to which he is made a party by reason of his service in
that capacity. The MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or
II-1
<PAGE>
services or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. However,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In addition, the MGCL requires the Company, as
a condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company as authorized by the Bylaws
and (b) a written statement by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the standard
of conduct was not met.
The Company has purchased director and officer liability insurance for
the purpose of providing a source of funds to pay any indemnification described
above.
Item 16. Exhibits
4.1 -- Form of Share Certificate (filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form S-11 (File No. 333-4568) and
incorporated herein by reference).
5.1 -- Opinion of Battle Fowler LLP.
8.1 -- Opinion of Battle Fowler LLP as to Tax Matters.
8.2 -- Opinion of Coopers & Lybrand L.L.P. as to Texas Franchise Tax Matters.
23.1 -- Consent of Battle Fowler LLP (included in Exhibits 5.1 and 8.1).
23.2 -- Consent of Coopers & Lybrand L.L.P. as to its opinion on Texas
Franchise Tax Matters (included in Exhibit 8.2).
23.3 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Power of Attorney (included on signature page hereto).
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of a prospectus
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
II-2
<PAGE>
(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.
II-3
<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 22nd day of September,
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. Jorns Chairman of the Board, September 22, 1997
- ------------------------- Chief Executive Officer,
Steven D. Jorns President and Director
/s/ Kenneth E. Barr Executive Vice President, Chief Financial September 22, 1997
- ------------------------- Officer, Secretary, Treasurer and Principal
Kenneth E. Barr Accounting Officer
/s/ H. Cabot Lodge III Director September 22, 1997
- -------------------------
H. Cabot Lodge III
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ James R. Worms Director September 22, 1997
- -----------------------
James R. Worms
/s/ James McCurry Director September 22, 1997
- -----------------------
James McCurry
/s/ Kent R. Hance Director September 22, 1997
- -----------------------
Kent R. Hance
</TABLE>
II-5
<PAGE>
Exhibit 5.1
[LETTERHEAD OF BATTLE FOWLER LLP APPEARS HERE]
September 22, 1997
Board of Directors
American General Hospitality Corporation
5605 MacArthur Blvd.
Suite 1200
Irving, Texas 75038
Re: American General Hospitality Corporation
Registration Statement on Form S-3
----------------------------------------
Gentlemen:
We are acting as counsel for American General Hospitality Corporation, a
Maryland corporation (the "Company"), in connection with its Registration
Statement on Form S-3, and any amendments thereto (the "Registration
Statement"), as filed with the Securities and Exchange Commission, with respect
to the registration of up to 2,172,370 shares (the "Shares") of Common Stock,
$0.01 par value per share (the "Common Stock") by the Company, pursuant to the
above-referenced Registration Statement, and all amendments thereto (the
"Registration Statement"). Up to 1,896,996 of the Shares (the "OP Exchange
Shares") may be issued by the Company to holders of units of limited partnership
interests ("OP Units") in American General Hospitality Operating Partnership,
L.P., a Delaware limited Partnership, in exchange for OP Units and 275,374 of
the Shares (the "Restricted Shares") are being registered by the Company for the
account of certain stockholders.
In connection with our representation of the Company, and as a basis for
the opinion hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of the following
documents (hereinafter collectively referred to as the "Documents"):
1. The charter of the Company, certified as of a recent date by the State
Department of Assessments and Taxation of Maryland (the "SDAT");
2. The Bylaws of the Company, certified as of a recent date by its
Secretary:
3. Resolutions adopted by the Board of Directors of the Company relating
to the registration, sale and issuance of the Shares (the "Resolutions"),
certified as of a recent date by the Secretary of the Company;
4. A certificate as of a recent date of the SDAT as to the good standing
of the Company;
5. The form of certificate representing a share of the Common Stock,
certified as of a recent date by the Secretary of the Company; and
6. A certificate executed by Kenneth E. Barr, Secretary of the Company,
dated as of a recent date.
<PAGE>
2
Board of Directors September 22, 1997
In addition, we have assumed the genuineness of all signatures
and the authenticity of all documents submitted to us as originals, and the
conformity to original documents of all documents submitted to us as certified
or photostatic copies. As to various questions of fact material to this opinion,
we have relied upon representations or certificates of officers or directors of
the Company and upon documents, records and instruments furnished to us by the
Company, without independently checking or verifying the accuracy of such
documents, records and instruments furnished to us by the Company.
In expressing the opinion set forth below, we have assumed, and
so far as is known to us there are no facts inconsistent with, the following:
1. Each individual executing any of the Documents, whether on behalf of
such individual or another person, is legally competent to do so;
2. Each individual executing any of the Documents on behalf of a party
(other than the Company) is duly authorized to do so;
3. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the Documents to
which such party is a signatory, and such party's obligations set forth therein
are legal, valid and binding and are enforceable in accordance with all stated
terms; and
4. All Documents submitted to us as originals are authentic. All
Documents submitted to us as certified or photostatic copies conform to the
original documents. All signatures on all Documents are genuine. All public
records reviewed or relied upon by us or on our behalf are true and complete.
All Statements and information contained in the Documents are true and complete.
There are no modifications of or amendments to the Documents, and there has been
no waiver of any of the provisions of the Documents, by action or omission of
the parties or otherwise.
We are not admitted to the practice of law in any jurisdiction
but the State of New York, and we do not express any opinion as to the laws of
other states or jurisdictions other than the laws of the State of New York and
the federal law of the United States. With respect to matters of Maryland law,
we have relied exclusively on the opinion of Ballard Spahr Andrews & Ingersoll,
Maryland counsel to the Company, a copy of which is attached hereto as Exhibit
-------
A. No opinion is expressed as to the effect that the law of any other
- -
jurisdiction may have upon the subject matter of the opinion expressed herein
under conflicts of law principles, rules and regulations or otherwise.
Based upon and subject to the foregoing, we are of the opinion
that:
1. The Company is a corporation duly incorporated and existing
under and by virtue of the laws of the State of Maryland and is in good standing
with SDAT.
2. The Restricted Shares have been duly authorized, are
validly issued and nonassessable.
3. The OP Exchange Shares, upon the due execution,
countersignature and delivery of certificates representing OP Exchange Shares
and assuming that the sum of (a) all shares of Common Stock issued as of the
date hereof, (b) any shares of Common Stock issued between the date hereof and
the date on which any of the OP Exchange Shares are actually issued (not
including any of the OP Exchange Shares), and (c) the OP Exchange Shares, will
not exceed the total number of shares of Common Stock that the Company is
authorized to issue, the OP Exchange Shares are duly authorized and, when and if
delivered against payment therefor in accordance with the resolutions of the
Board of Directors authorizing their issuance, will be validly issued, fully
paid and nonassessable.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the use
of our name under the
<PAGE>
3
Board of Directors September 22, 1997
caption "Legal Matters" in the Prospectus included therein. In giving this
consent, we do not admit that we are within the category of persons whose
consent is required by Section 7 of the Securities Act of 1933 or the rules and
regulations promulgated thereunder by the Securities and Exchange Commission.
Very truly yours,
BATTLE FOWLER LLP
<PAGE>
EXHIBIT A
---------
[LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL APPEARS HERE]
September 22, 1997
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Re: American General Hospitality Corporation:
Registration Statement on Form S-3: 2,172,370
Shares of Common Stock
----------------------------------------------
Ladies and Gentlemen:
We have served as Maryland counsel to American General Hospitality
Corporation, a Maryland corporation (the "Company"), in connection with certain
matters of Maryland law arising out of the registration of up to 2,172,370
shares (the "Shares") of Common Stock, $.01 par value per share (the "Common
Stock"), by the Company, pursuant to the above-referenced Registration
Statement, and all amendments thereto (the "Registration Statement"), under the
Securities Act of 1933, as amended (the "1933 Act"). Up to 1,896,996 of the
Shares (the "OP Exchange Shares") may be issued by the Company to holders of
units of limited partnership interest ("OP Units") in American General
Hospitality Operating Partnership, L.P., a Delaware limited partnership (the
"Operating Partnership"), in exchange for OP Units and 275,374 of the Shares
(the "Restricted Shares") are being registered by the Company for the account of
certain stockholders. Capitalized terms used but not defined herein shall have
the meanings given to them in the Registration Statement.
<PAGE>
Battle Fowler LLP
September 22 1997
Page 2
In connection with our representation of the Company, and as a basis for
the opinion hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of the following
documents (hereinafter collectively referred to as the "Documents"):
1. The charter of the Company, certified as of a recent date by the State
Department of Assessments and Taxation of Maryland (the "SDAT");
2. The Bylaws of the Company, certified as of a recent date by its
Secretary:
3. Resolutions adopted by the Board of Directors of the Company relating
to the registration, sale and issuance of the Shares (the "Resolutions"),
certified as of a recent date by the Secretary of the Company;
4. A certificate as of a recent date of the SDAT as to the good standing
of the Company;
5. The form of certificate representing a share of the Common Stock,
certified as of a recent date by the Secretary of the Company;
6. A certificate executed by Kenneth E. Barr, Secretary of the Company,
dated as of a recent date; and
7. Such other documents and matters as we have deemed necessary or
appropriate to express the opinion set forth herein, subject to the assumptions,
limitations and qualifications stated herein.
In expressing the opinion set forth below, we have assumed, and so far as
is known to us there are no facts inconsistent with, the following:
1. Each individual executing any of the Documents, whether on behalf of
such individual or another person, is legally competent to do so;
2. Each individual executing any of the Documents on behalf of a party
(other than the Company) is duly authorized to do so;
3. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the Documents to
which such party is a signatory, and such party's obligations set forth therein
are legal, valid and binding and are enforceable in accordance with all stated
terms; and
4. All Documents submitted to us as originals are authentic. All
Documents submitted to us as certified or photostatic copies conform to the
original documents. All signatures on
<PAGE>
Battle Fowler LLP
September 22, 1997
Page 3
all Documents are genuine. All public records reviewed or relied upon by us or
on our behalf are true and complete. All Statements and information contained
in the Documents are true and complete. There are no modifications of or
amendments to the Documents, and there has been no waiver of any of the
provisions of the Documents, by action or omission of the parties or otherwise.
The phrase "known to us" is limited to the actual knowledge, without
independent inquiry, of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
Based upon the foregoing, and subject to the assumptions, limitations and
qualifications stated herein, it is our opinion that:
1. The Company is a corporation duly incorporated and existing under and
by virtue of the laws of the State of Maryland and is in good standing with the
SDAT.
2. The Restricted Shares have been duly authorized and are validly issued,
fully paid and nonassessable.
3. The OP Exchange Shares, upon the due execution, countersignature and
delivery of certificates representing OP Exchange Shares and assuming that the
sum of (a) all shares of Common Stock issued as of the date hereof, (b) any
shares of Common Stock issued between the date hereof and the date on which any
of the OP Exchange Shares are actually issued (not including any of the OP
Exchange Shares), and (c) the OP Exchange Shares will not exceed the total
number of shares of Common Stock that the Company is authorized to issue, the OP
Exchange Shares are duly authorized and, when and if delivered against payment
therefor in accordance with the resolutions of the Board of Directors
authorizing their issuance, will be validly issued, fully paid and
nonassessable.
The foregoing opinion is limited to the substantive laws of the State of
Maryland and we do not express any opinion herein concerning any other law. We
express no opinion as to compliance with any securities laws.
We assume no obligation to supplement this opinion if any applicable law
changes after the date hereof or if we become aware of any fact that might
change the opinion expressed herein after the date hereof.
This opinion is being furnished to you solely for purposes of rendering an
opinion to the Board of Directors of the Company in connection with the
registration of the Shares pursuant to the Registration Statement. This opinion
may be submitted to the Securities and Exchange Commission as an exhibit to the
Registration Statement and, except as provided above, it may not be relied upon
by, quoted in any manner to, or delivered to any other person or entity (other
than the Company) without, in each instance, our prior written consent.
<PAGE>
Battle Fowler LLP
September 22, 1997
Page 4
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm therein. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required by Section 7 of the 1933 Act.
Very truly yours,
BALLARD SPAHR ANDREWS & INGERSOLL
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF BATTLE FOWLER LLP APPEARS HERE]
September 22, 1997
American General Hospitality Corporation
5605 MacArthur Boulevard
Suite 1200
Irving, Texas 75038
Gentlemen:
We have acted as counsel to American General Hospitality Corporation, a
Maryland corporation (the "Company"), in connection with the preparation of a
registration statement (the "Registration Statement") filed with the Securities
and Exchange Commission on September 19, 1997, with respect to the possible
issuance, by the Company, from time to time, in one or more series, of up to
1,896,996 shares of the Company's common stock, $.01 par value, per share (the
"Common Stock") to holders of units of limited partnership interests in American
General Hospitality Operating Partnership, L.P., a Delaware limited partnership
(the "Operating Partnership") who exercise their right to exchange such units
for cash, or, at the Company's option, for a number of shares of Common Stock
equal to the number of units of the Operating Partnership exchanged. The
Company is also registering 275,374 shares of Common Stock which is restricted
stock, for the account of certain stockholders. You have requested our opinion
on certain federal income tax matters in connection with the registration of
such Common Stock.
The Company owns all of the stock of AGH GP, Inc., a Nevada corporation
("AGH GP") and AGH LP, Inc. a Nevada corporation ("AGH LP"). AGH GP is the sole
general partner of the Operating Partnership. AGH LP is a limited partner in
the Operating
<PAGE>
Battle Fowler LLP Page
American General Hospitality Corporation September 22, 1997
Page 2
Partnership. The Operating Partnership owns, and will own, equity interests, in
hotels (the "Hotels") directly and owns, and will own, equity interests in other
Hotels through limited liability companies, joint ventures or subsidiary
partnerships (collectively, the "Subsidiary Partnerships"). The Operating
Partnership or the Subsidiary Partnerships, as the case may be, lease or will
lease each of the Hotels to AGH Leasing, L.P. (the "Lessee"), pursuant to
substantially similar operating leases (the "Leases"). Except for one Hotel,
American General Hospitality, Inc., a Texas corporation, operates or will
operate the Hotels pursuant to management agreements (the "Management
Agreements") between it and the Lessee.
In connection with the opinions rendered below, we have examined the
following:
1. the Company's Articles of Amendment and Restatement, as filed with the
Secretary of State of Maryland;
2. the Company's Amended and Restated Bylaws;
3. the Registration Statement, including the prospectus contained as part
of the Registration Statement (the "Prospectus");
4. the Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated as of July 31, 1996 (the "Operating Partnership
Agreement"), among AGH GP, as general partner, AGH LP, as the initial limited
partner, and several other limited partners;
5. the partnership agreements, operating agreements and joint venture
agreements (together with the Operating Partnership Agreement, the "Partnership
Agreements") of the Subsidiary Partnerships;
6. the Leases between the Operating Partnership or the Subsidiary
Partnerships and the Lessee;
7. the Lease Master Agreement between the Operating Partnership, the
Subsidiary Partnerships and the Lessee;
8. the Management Agreements between American General Hospitality, Inc.
and the Lessee; and
9. such other documents as we have deemed necessary or appropriate for
purposes of this opinion.
<PAGE>
Battle Fowler LLP Page
American General Hospitality Corporation September 22, 1997
Page 3
In connection with the opinions rendered below, we have assumed generally
that:
1. each of the documents referred to above has been duly authorized,
executed, and delivered; is authentic, if an original, or is accurate, if a
copy; and has not been amended;
2. during each taxable year, including its short taxable year ending
December 31, 1996, the Company has operated and will continue to operate in such
a manner that will make the representations contained in the Representation
Letter, dated January 27, 1997 as updated through the date hereof and executed
by the executive vice president of the Company (the "Representation Letter"),
true for such years;
3. the Company will not make any amendments to its organizational
documents or the Partnership Agreements, after the date of this opinion that
would affect Company's qualification as a real estate investment trust (a
"REIT") for any taxable year;
4. each limited partner (a "Limited Partner") of the Operating Partnership
(other than AGH LP) that is a corporation or other entity has valid legal
existence; and
5. each Limited Partner (other than AGH LP) has full power, authority, and
legal right to enter into and perform the terms of the Operating Partnership
Agreement and the transactions contemplated thereby.
In connection with the opinions rendered below, we also have relied upon
the correctness of the representations contained in the Representation Letter.
For purposes of our opinions, we made no independent investigation of the
facts contained in the documents and assumptions set forth above, the
representations set forth in the Representation Letter, or the Prospectus. No
facts have come to our attention, however, that would cause us to question the
accuracy and completeness of such facts or documents in a material way.
In addition, to the extent that any of the representations provided to us
in the Representation Letter are with respect to matters set forth in the
Internal Revenue Code of 1986, as amended (the "Code"), or the Treasury
regulations thereunder (the "Regulations"), we have reviewed with the
individuals making such representation the relevant portion of the
<PAGE>
Battle Fowler LLP Page
American General Hospitality Corporation September 22, 1997
Page 4
Code and the applicable Regulations and are reasonably satisfied that such
individuals understand such provisions and are capable of making such
representations.
Based on the documents and assumptions set forth above, the
representations set forth in the Representation Letter, and the discussion in
the Prospectus under the caption "Federal Income Tax Considerations" (which is
incorporated herein by reference), we are of the opinion that:
(a) commencing with the Company's short taxable year ending December
31, 1996, the Company qualifies to be taxed as a REIT pursuant to sections
856 through 860 of the Code, and the Company's proposed method of operation
will enable it to qualify as a REIT for its subsequent taxable years;
(b) the descriptions of the law and the legal conclusions contained
in the Prospectus under the caption "Federal Income Tax Considerations" are
correct in all material respects, and the discussion contained therein
fairly summarizes the federal tax considerations that are material to a
holder of the Common Stock; and
(c) the Operating Partnership and the Subsidiary Partnerships will be
treated for federal income tax purposes as partnerships and not as
associations taxable as corporations or as publicly traded partnerships.
We will not review on a continuing basis the Company's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Representation Letter. Accordingly, no assurance can be given that the
actual results of the Company's operations for any given taxable year will
satisfy the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code and the
Regulations, published administrative interpretations thereof, and published
court decisions. The Internal Revenue Service has not issued Regulations or
administrative interpretations with respect to various provisions of the Code
relating to REIT qualification. No assurance can be given that the law will not
change in a way that will prevent the Company from qualifying as a REIT, or the
Operating Partnership or the Subsidiary Partnerships from being classified as
partnerships for federal income tax purposes.
<PAGE>
Battle Fowler LLP Page
American General Hospitality Corporation September 22, 1997
Page 5
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Battle Fowler LLP
under the captions "Federal Income Tax Considerations" and "Legal Matters" in
the Prospectus.
The foregoing opinions are limited to the federal income tax matters
addressed herein, and no other opinions are rendered with respect to other
federal tax matters or to any issues arising under the tax laws of any state or
locality. We undertake no obligation to update the opinions expressed herein
after the date of this letter. This opinion letter is solely for the information
and use of the addressees, and may not be relied upon for any purpose by any
other person other than the stockholders of the Company without our express
written consent.
Very truly yours,
/s/ Battle Fowler LLP
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND L.L.P. APPEARS HERE]
Exhibit 8.2
September 22, 1997
American General Hospitality Corporation
5605 MacArthur Boulevard, Suite 1200
Irving, Texas 75038
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Gentlemen:
Coopers & Lybrand L.L.P. (the "Firm") has acted as special tax consultant
to American General Hospitality Corporation, a Maryland corporation ("Company"),
in connection with the preparation of the Unitholder Shelf registration
statement (the "Registration Statement") with respect to (i) the possible
issuance from time to time by the Company of up to 1,896,996 shares of its
common stock, if and to the extent that holders of up to 1,896,996 OP Units of
limited partnership interest ("OP Units") in American General Hospitality
Operating Partnership, L.P., a Delaware limited partnership (the "Operating
Partnership") received such shares in exchange for OP Units; and (ii) the
registration of 275,364 shares of common stock being registered for the account
of certain stockholders. You have requested our opinion as to the application of
the Texas franchise tax to Company, AGH GP, Inc., a Nevada corporation ("GP
Corporation"), AGH LP, Inc., a Nevada corporation ("LP Corporation"), Operating
Partnership, the LLCs, the Subsidiary LLC and the
<PAGE>
American General Hospitality Corporation, et al.
September 22, 1997
Page 2
Subsidiary Partnerships (as hereinafter defined). The Company has received a
ruling from the Comptroller of Public Accounts of the State of Texas (the
"Comptroller") with respect to the matters addressed herein.
Section I of this letter (the "Opinion Letter") and the Registration
Statement, including the prospectus contained as part of the Registration
Statement (the "Prospectus"), contain the facts upon which the Firm's opinion is
based. Section II of this Opinion Letter contains the opinion. Section III of
this Opinion Letter contains limitations on the opinion.
I. FACTS
Company owns all of the stock of GP Corporation and LP Corporation. GP
Corporation is the sole general partner of Operating Partnership. LP Corporation
is a limited partner in Operating Partnership. Operating Partnership currently
owns or will acquire interests in certain hotels and associated personal
property (the "Hotels") either directly or through its ownership of interests in
certain subsidiary partnerships (the "Subsidiary Partnerships") or a limited
liability company (the "Subsidiary LLC"). Operating Partnership will be the sole
limited partner of the Subsidiary Partnerships. One of three limited liability
companies in which Company and Operating Partnership are the sole members will
be the sole general partner in each Subsidiary Partnership (individually, an
"LLC" and together, the "LLCs"). Operating Partnership and one of the LLCs will
be the sole members of Subsidiary LLC. Operating Partnership, Subsidiary LLC or
the Subsidiary Partnerships, as the case may be, will lease each of the Hotels
to AGH Leasing, L.P. (the "Lessee") pursuant to substantially similar operating
leases. American General Hospitality Inc. (the "Manager") will operate the
Hotels pursuant to management agreements with the Lessee. Neither Company, GP
Corporation, LP Corporation, the LLCs, Operating Partnership, Subsidiary LLC nor
the Subsidiary Partnerships will own any interest in the Lessee or the Manager.
II. OPINION
We have reviewed all authorities as of the date hereof relevant to the
application of the Texas franchise tax to Company, GP Corporation, LP
Corporation, the LLCs, Operating Partnership, Subsidiary LLC and the Subsidiary
Partnerships. Based upon our analysis of the foregoing authorities and subject
to the limitations set forth in Section III, the Firm is of the opinion as of
the date hereof that:
1. The description of the Texas franchise tax considerations and
consequences set forth in the Prospectus under the heading "Federal Income Tax
Considerations - Other Tax Considerations - State and Local Taxes" accurately
summarizes the Texas franchise tax matters discussed therein.
<PAGE>
American General Hospitality Corporation, et al.
September 22, 1997
Page 3
2. LP Corporation is not subject to the Texas franchise tax.
3. Operating Partnership and the Subsidiary Partnerships are not subject
to the Texas franchise tax.
4. Company, GP Corporation, each of the LLCs and Subsidiary LLC are
subject to the Texas franchise tax.
5. Company will not owe any Texas franchise tax unless it has gross
receipts apportionable to Texas.
6. GP Corporation will owe Texas franchise tax based on the greater of
(a) .25% of its taxable capital apportionable to Texas or (b) 4.5% of its
taxable earned surplus apportionable to Texas.
7. GP Corporation's gross receipts for purposes of the earned surplus
component of the franchise tax will be based solely upon its share of Operating
Partnership's gross receipts (including Operating Partnership's share of the
Subsidiary Partnerships' gross receipts). For this purpose, gross receipts of
Operating Partnership and the Subsidiary Partnerships will be apportioned as if
they had been received directly by GP Corporation.
8. GP Corporation's gross receipts for purposes of the taxable capital
component of the franchise tax will be based solely on its share of Operating
Partnership's net profit. For this purpose, net profit of Operating Partnership
will be apportioned in accordance with the commercial domicile of Operating
Partnership, unless such gross receipts can be presented properly on a gross
basis for generally accepted accounting principles and GP Corporation uses such
method.
9. Each LLC and Subsidiary LLC will owe Texas franchise tax based on the
greater of (a) .25% of its taxable capital apportionable to Texas or (b) 4.5% of
its taxable earned surplus apportionable to Texas.
10. Each LLC's gross receipts for purposes of the earned surplus component
of the franchise tax will be based solely upon its share of the gross receipts
of the Subsidiary Partnership(s) in which it is the general partner and, with
respect to the LLC that is a member in the Subsidiary LLC, certain items
attributable to Subsidiary LLC. For this purpose, each Subsidiary Partnership's
gross receipts will be apportioned as if they had been received directly by the
relevant LLC and the items attributable to Subsidiary LLC will be apportioned
with respect to its state of organization.
<PAGE>
American General Hospitality Corporation, et al.
September 22, 1997
Page 4
11. Each LLC's gross receipts for purposes of the taxable capital
component of the franchise tax will be based solely on its share of the net
profit of the Subsidiary Partnership(s) in which it is the general partner and,
with respect to the LLC that is a member in the Subsidiary LLC, certain items
attributable to Subsidiary LLC. For this purpose, net profit of the Subsidiary
Partnerships will be apportioned in accordance with the commercial domicile of
each Subsidiary Partnership, unless such gross receipts can be presented
properly on a gross basis for generally accepted accounting principles and the
relevant LLC uses such method and the items attributable to Subsidiary LLC will
be apportioned with respect to its state of organization.
III. LIMITATIONS
1. Except as otherwise indicated, the opinions set forth in Section II
are based upon the Texas Tax Code and the rules promulgated thereunder, judicial
decisions and current administrative rulings and practices of the Comptroller,
all as in effect on the date of this Opinion Letter. These authorities may be
amended or revoked at any time. Any such changes may or may not be retroactive
with respect to transactions entered into or contemplated prior to the effective
date thereof and could significantly alter the conclusions reached in this
Opinion Letter. There is no assurance that legislative, judicial or
administrative changes will not occur in the future or that any such changes
will not (i) subject LP Corporation, Operating Partnership or the Subsidiary
Partnerships to the Texas franchise tax; or (ii) cause the Texas franchise tax
liability of the Company, GP Corporation, the LLCs or Subsidiary LLC to
materially increase. The Firm assumes no obligation to update or modify this
Opinion Letter to reflect any developments that may occur after the date hereof.
2. As to certain facts material to our opinion, we have assumed the
accuracy of the representations contained in the Certificate signed by an
officer of Company and attached hereto as Exhibit A , both as of the date
---------
thereof and as of the effective date of the registration statement. We also have
assumed that Operating Partnership and each Subsidiary Partnership has been
validly formed as a limited partnership under the laws of the state in which it
was organized. For purposes of our opinion, we made no independent investigation
and will not monitor compliance with the facts contained herein or in the
Prospectus, the assumptions set forth herein or the representations set forth in
the Certificate.
3. The opinion set forth in Section II is not binding on the Comptroller
or the courts and is dependent upon the accuracy and completeness of the facts
set forth in Section I and the Prospectus and the accuracy of the assumptions
set forth in the preceding paragraph (the "Assumptions"). The Firm has relied
upon these facts and Assumptions and any inaccuracy in the Assumptions or any
inaccuracy or incompleteness in the Firm's understanding of those facts could
adversely affect the opinion stated in Section II.
<PAGE>
American General Hospitality Corporation, et al.
September 22, 1997
Page 5
4. In connection with the opinion set forth in Section II, the Firm
examined copies or originals, certified or otherwise identified, of such
documents and records as it has deemed necessary or advisable for purposes of
the opinion set forth in Section II. The Firm has assumed that all signatures
on all documents presented to it are genuine, that all documents submitted to it
as originals or copies are accurate, that all information submitted to it was
accurate and complete and that all persons executing and delivering originals or
copies of documents examined by it were competent to execute and deliver such
documents.
5. The Firm is expressing its opinion only as of the date hereof and only
as to those matters expressly set forth in Section II. No opinion should be
inferred as to any other matters including, but not limited to, any federal tax
matters, any matters arising under the tax laws of any state, locality or
jurisdiction other than the State of Texas or any Texas state tax other than the
franchise tax.
6. This Opinion Letter is issued solely for the benefit of the addressees
and may not be relied upon for any purpose by any other person other than the
stockholders of Company, without our express written consent. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement. We
also consent to the references to Coopers & Lybrand L.L.P. in the Prospectus
under the caption "Federal Income Tax Considerations - State and Local Taxes"
and under the caption "Experts" as having provided an opinion to Battle Fowler
LLP. In giving this consent, we do not admit that we are in the category of
persons whose consent is required by Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations promulgated thereunder by the Securities
and Exchange Commission.
Respectfully submitted,
/s/ Coopers & Lybrand L.L.P.
-------------------------------------
COOPERS & LYBRAND L.L.P.
<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 of "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
September 19, 1997
