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PROSPECTUS SUPPLEMENT
(To Prospectus dated August 28, 1997)
362,812 SHARES
AMERICAN GENERAL HOSPITALITY CORPORATION
COMMON STOCK
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American General Hospitality Corporation (together with its subsidiaries,
the "Company") is a self-administered real estate investment trust (a "REIT")
that owns a portfolio of primarily full-service hotels located in major
metropolitan markets. As of February 24, 1998, the Company owned a
geographically diverse portfolio of 53 hotel properties located in 21 states and
containing an aggregate of approximately 12,600 guest rooms.
All the shares of common stock, $0.01 par value per share (the "Common
Stock") offered hereby (the "Offering") are being offered by the Company. The
Company has paid regular quarterly distributions on the Common Stock since its
initial public offering in July 1996. The Common Stock is listed on the New York
Stock Exchange, Inc. (the "NYSE") under the symbol " AGT. "
On February 24, 1998, the last reported sale price of the Common Stock on
the NYSE was $27 7/ 16 per share. See "Price Range of Common Stock and
Distribution Policy. " The Company's Charter limits the number of shares of
Common Stock that may be owned by any single person or affiliated group. See
"Description of Common Stock - Restrictions on Transfer" in the accompanying
Prospectus.
SEE "RISK FACTORS" BEGINNING ON PAGE S-6 OF THIS PROSPECTUS SUPPLEMENT FOR
CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting
Discounts and Proceeds to
Price to Public Commissions Company
--------------- ------------ -------
Per Share $27.5625 $1.2403 $26.3222
Total $10,000,005.75 $450,000.26 $9,550,005.49
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $75,000.
The shares of Common Stock offered by this Prospectus Supplement are
offered by the Underwriter, subject to prior sale, when, as and if delivered to
and accepted by the Underwriter and subject to its right to reject orders in
whole or in part. It is expected that delivery of the shares of Common Stock
offered hereby will be made at the offices of Legg Mason Wood Walker,
Incorporated, Baltimore, Maryland, on or about February 27, 1998.
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LEGG MASON WOOD WALKER
Incorporated
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The date of this Prospectus Supplement is February 24, 1998
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PROSPECTUS SUPPLEMENT 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, A GH GP, Inc. ("A
GH GP ") and A GH LP, Inc. ("A GH 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.
Certain matters discussed under the caption "The Company " and elsewhere in
this Prospectus Supplement, the accompanying Prospectus, and the information
incorporated by reference herein and therein, may constitute forward-looking
statements for purposes of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under the caption "Risk Factors below.
THE COMPANY
The Company is a self-administered real estate investment trust (a "REIT")
that owns a geographically diverse portfolio of primarily full-service hotels.
As of February 24, 1998, the Company owned 53 hotels located in 21 states and
containing an aggregate of approximately 12,600 guest rooms (the "Hotels").
Substantially all of the Hotels are operated under licensing or franchising
agreements with national hotel brands, including Crowne Plaza, Hilton"',
Wyndham', Marriott", Holiday Inn Select, Radisson, Westin, DoubleTree Guest
Suite, Holiday Inn, Sheraton", St. Tropez All Suites", Hampton Inn,
Ramada and Howard Johnson". Management believes that the full-service segment
of the hotel market continues to offer numerous opportunities to acquire hotels
at attractive multiples of cash flow and at discounts to replacement value,
including underperforming hotels that may benefit from the Company's
repositioning strategies.
The Company expects to continue to expand and enhance the value of its
hotel portfolio by continuing to (i) make opportunistic acquisitions of
full-service hotels and (ii) strategically reposition selected hotels through
product upgrades brand conversions and operational repositionings. The Company
will continue to pursue the acquisition of full-service hotels, primarily in the
moderate and lower upscale segments at prices which management believes are
below replacement cost, and that have attractive yields on investment that the
Company believes can be improved over time. The Company believes that its use of
a multiple lessee/manager structure, coupled with the expansion of its brand and
franchise relationships, will result in additional acquisition opportunities for
the Company.
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In order to qualify as a REIT, the Company may not operate hotels. The Company
has leased each of the Hotels to AGH Leasing, L.P. and its subsidiary, Twin
Towers Leasing, L.P. ("Twin Towers," and together with AGH Leasing, L.P., "AGH
Leasing") and to independent lessees that are affiliates of Prime Hospitality
Corp.(" Prime"), a NYSE listed company (together, the "Prime Lessee"), each
pursuant to separate participating leases (the "Participating Leases"). The
Company expects to lease future acquired hotels to AGH Leasing, the Prime Lessee
or to independent third-party operators (collectively, the "Lessees"). The
Participating Leases are designed to allow the Company to achieve substantial
participation in any future growth of revenues generated at the Hotels. AGH
Leasing has entered into separate management agreements with American General
Hospitality, Inc. ("AGHI") to manage 44 of the Hotels and Wyndham Hotel
Corporation ("Wyndham") to manage one of the Hotels (the "Management
Agreements"). The remaining eight Hotels are leased and managed by the Prime
Lessee. AGH Leasing and AGHI are owned, in part, by certain executive officers
of the Company. Neither the Company nor members of its management own an
interest in, or participate in the management of, the Prime Lessee.
RECENT DEVELOPMENTS
RESULTS OF OPERATIONS
On January 26, 1998, the Company announced results of operations for the
fourth quarter and for the year ended December 31, 1997. For the quarter ended
December 31, 1997, the Company reported revenues of $18.5 million, net income of
$6.2 million, net income per share of $0.35 and funds from operations of $11.7
million. For the year ended December 31, 1997, the Company reported revenues of
$61.9 million, net income of $23.5 million, net income per share of $1.60 and
funds from operations of $40.7 million. Occupancy, average daily rate and
revenue per available room were 66.9%, $85.66 and $57.27, respectively, for the
quarter ended December 31, 1997 and 71.1 %, $85.91 and $6 1. 10, respectively,
for the year ended December 31, 1997.
RECENT ACQUISITIONS
Prime Group I
On January 8, 1998, the Company acquired a portfolio of eight hotels
("Prime Group I Acquisition") from Prime. The purchase price was paid in cash,
the issuance of limited partnership interests of the Operating Partnership (the
"OP Units"), and mortgage debt assumption. The hotels are leased to the Prime
Lessee.
Potomac Portfolio Acquisition
On January 22, 1998, the Company acquired three full-service hotels and one
limited-service hotel containing an aggregate of 815 guest rooms (the "Potomac
Portfolio Acquisition"). The purchase price was paid in cash from borrowings
under the Company's line of credit. The Potomac Portfolio Acquisition hotels are
leased to AGH Leasing and managed by AGHI.
Holiday Inn O'Hare International Hotel
On February 3, 1998, the Company acquired the Holiday Inn O'Hare
International Hotel, a full-service hotel with 507 guest rooms located near
O'Hare International Airport. The purchase price was paid in cash, the issuance
of Class C OP Units and mortgage debt assumption. The Class C OP Units bear a
preferred annual distribution rate of $1.89 per Class C OP Unit until such time
as the dividend distribution rate for the Company's Common Stock exceeds $1.89
at which time the distribution rate on the Class C OP Units shall equal the
distribution rate on the Company's Common Stock. In addition, the holders of the
Class C OP Units are entitled to receive additional OP Units if the Company's
Common Stock (as reported on the NYSE) is not trading at or above $30 per share
on the first anniversary date of the closing of the acquisition. The hotel is
leased to AGH Leasing and managed by AGHI.
FSA Portfolio Acquisition
On February 13, 1998, the Company acquired 13 hotels of a 14 hotel
portfolio containing an aggregate of 3,229 guest rooms (the "FSA Portfolio
Acquisition"). The Company expects to acquire the fourteenth hotel by mid-April
1998; however, the acquisition is subject to various closing conditions and no
assurance can be given that the acquisition will be completed. The purchase
price was paid entirely in cash and was funded by borrowings under the
Company's recently increased credit facility (described below). Thirteen of the
FSA Portfolio Acquisition hotels are leased to AGH Leasing and managed by AGHI.
The Company expects that the fourteenth hotel to be acquired by the Company will
continue to be leased to and managed by its current operator. The Company
intends to sell five of the FSA Portfolio Acquisition hotels either as a group
or individually although it has no binding purchase agreements with respect to
such sale.
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PENDING ACQUISITIONS
The Company has entered into contracts to purchase 13 additional hotels
(the "Proposed Acquisition Hotels"), including the remaining FSA Portfolio
Acquisition hotel, for purchase prices aggregating approximately $238 million.
The purchases of the Proposed Acquisition Hotels are subject to satisfactory
completion of various closing conditions and therefore no assurance can be given
that any or all of these acquisitions will be completed.
Prime Group II
The Company has entered into agreements to acquire from Prime 11
full-service hotels (the "Prime Group Il Acquisition"). The closing of the
purchase can occur at the Company's option at any time between September 30,
1998 and March 31, 1999. The aggregate purchase price is payable entirely in
cash. In 1998, Prime is obligated to complete an $18 million improvement program
on the Prime Group 11 Acquisition hotels and the closing of the Prime Group 11
Acquisition will follow the completion of the renovation program. Each of the
Prime Group 11 Acquisition hotels is expected to be leased and managed by the
Prime Lessee or other affiliates of Prime. The Prime Group 11 Acquisition hotels
are operated under franchise affiliations with Crowne Plaza, Holiday Inn,
Radisson, Sheraton and Ramada.
Madison Hotel
The Company has entered into an agreement to acquire a full-service 202
room Holiday Inn in Madison, Wisconsin. The acquisition of the hotel is
conditioned upon the seller's renovation of the hotel, which is currently owned
by a private partnership, consisting primarily of AGHI shareholders, including
certain executive officers of the Company. The hotel will be purchased with a
combination of cash and OP Units. The Company expects that the hotel will be
leased to AGH Leasing and continue to be managed by AGHI. The purchase of the
Madison hotel is expected to close during the second quarter of 1998.
Credit Facilities
On February 13, 1998, the Company replaced its $300 million secured line of
credit with two new unsecured credit facilities in the aggregate principal
amount of $600 million (the "Credit Facilities"). The Credit Facilities have a
three-year term and bear interest based upon the 30-day, 60-day or 90-day LIBOR
(5.625%, 5.625% and 5.64063% as of February 24, 1998) at the option of the
Company, plus an applicable margin for all or part of the facilities (the
"Margins"). The Margins, which are adjusted on a quarterly basis, range from a
minimum of 1.40% per annum to a maximum of 2% per annum based upon certain
leverage ratios. As of February 24, 1998 the Margins were 1.875% per annum. The
financial covenants contained in the Credit Facilities require the Company to
maintain a debt service coverage ratio of at least 2.0 to 1.0, and interest
coverage ratio of not less than 2.150 to 1.0 through December 31, 1998 and not
less than 2.50 to 1.0 thereafter and to maintain a minimum net worth of $450
million plus 75% of the net proceeds from stock offerings and offerings of
partnership interests in the Operating Partnership. In addition, the Credit
Facilities contain limits on total indebtedness based on a multiple of EBITDA
(earnings before interest, taxes, depreciation and amortization) that adjusts
downward as of December 31, 1998. As a result of the adjustment of certain
financial covenants that occur on December 31, 1998, the Company expects that it
would be required to repay or refinance a portion of the Credit Facilities at
that time.
Public Offerings
On February 18, 1998, the Company sold additional shares of Common Stock
through a public offering generating net proceeds of approximately $28.3
million, which were used to repay indebtedness borrowed under the Company's
credit facility. On February 23, 1998, the Company sold additional shares of
Common Stock through a public offering generating net proceeds of approximately
$28.4 million, which were used to repay indebtedness borrowed under the
Company's credit facility.
The Company's executive offices are located at 5605 MacArthur Boulevard,
Suite 1200, Irving, Texas 75038, and its telephone number is (972) 550-6800.
Tax Status of the Company
The Company has elected to be taxed as a REIT under Section 856 through 860
of the Internal Revenue Code of 1986, as amended (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
S-4
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organizational and operational requirements. Failure to qualify as a REIT will
render the Company subject to federal income tax (including any applicable
alternative 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.
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RISK FACTORS
An investment in the shares of Common Stock involves various risks.
Prospective investors should carefully consider the following information in
conjunction with the other information contained and incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus before making an
investment decision regarding the Common Shares offered hereby.
RISKS ASSOCIATED WITH THE COMPANY'S ACQUISITION OF A SUBSTANTIAL NUMBER OF
ADDITIONAL HOTELS
The Company currently is experiencing a period of rapid growth. Since the
Company's July 31, 1996 initial public offering (the "IPO"), the Company has
spent approximately $863 million to purchase 40 hotels, increasing its guest
room portfolio by more than 300% since the IPO. The Company's ability to manage
its growth effectively requires it to select capable lessees and managers for
newly acquired hotels. There can be no assurance that the Company, the Lessees,
AGHI or other hotel management companies and/or operators selected by the
Company will be able to manage the Company's newly acquired hotels effectively.
CONFLICTS OF INTEREST
General
The four key executive officers of the Company, including Steven D. Jorns,
the Chairman, Chief Executive Officer and President of the Company, also hold a
variety of ownership and management interests in AGHI and AGH Leasing.
Accordingly, there are inherent conflicts of interest in the ongoing lease,
acquisition, disposition, operation and management of the Hotels that are leased
and managed by AGH Leasing and AGHI, respectively. As a result, the interests of
the Company's stockholders may not be reflected fully in all decisions made or
actions taken or to be taken by the Company's management.
No Arm's-Length Bargaining
The terms of the Participating Leases, the Management Agreements entered
into between AGH Leasing and AGHI, and agreements related to the sublease of
alcoholic beverage service areas in certain of the Hotels to corporations wholly
owned by Mr. Jorns were not negotiated on an arm's-length basis. In the event
revenues from the Hotels increase significantly over prior periods, and
operating expenses with respect thereto are less than historical or projected
operating expenses, AGH Leasing could benefit disproportionately. In the event
incremental increases in expenses at the Hotels exceed incremental increases in
revenues, conflicts of interest may arise between AGH Leasing and the Company.
The Company does not own any interest in AGH Leasing. Because certain executive
officers of the Company are also partners in AGH Leasing, there is an inherent
conflict of interest with respect to the enforcement and termination of the
Participating Leases to which AGH Leasing is a party. Because of these
conflicts, management's decisions relating to the Company's enforcement of its
rights under those Participating Leases may not reflect solely 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 AGH Leasing if the Company elects to sell a Hotel
leased to AGH Leasing 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 AGH's Leasing's remaining leasehold interest under the Participating Lease to
be terminated. Where applicable, the termination fee is equal to the fair market
value of AGH Leasing's leasehold interest in the remaining term of the
Participating Lease to be terminated. The payment of a termination fee to AGH
Leasing, which is owned in part by three key executive officers of the Company,
including Mr. Jorns, may result in decisions regarding the sale of a hotel
leased to AGH Leasing that do not reflect solely the interests of the Company's
stockholders.
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Conflicts Relating to Continued Management of Hotels
AGHI, in which certain executive officers of the Company (including Mr.
Jorns) own collectively an approximate 21 % interest, manages hotels for third
parties. There are no restrictions in either the Participating Leases or the
Management Agreements that limit AGH Leasing's or AGHI's ability to lease or
manage hotels which may compete with the Company's hotels. Accordingly, AGH
Leasing's and AGHI's decisions relating to the operation of any of the Company's
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 LESSEES AND PAYMENTS UNDER THE PARTICIPATING LEASES
The Company's revenues and its ability to make distributions to its
stockholders depends solely upon the ability of the Lessees to make rent
payments under the Participating Leases. Any failure or delay by any Lessee in
making such rent payments would adversely affect the Company's ability to make
distributions to its stockholders. Such failure or delay by the Lessees may be
caused by reductions in revenue from the Company hotels they lease or in the net
operating income of the Lessees or otherwise. AGH Leasing experienced net losses
for the year ended December 31, 1996 and for the nine month period ended
September 30, 1997 of $721,039 and $932,503, respectively. AGH Leasing generated
positive net cash flow from operations during the same periods, and recognized
taxable income of $70,090 for its 1996 taxable year and is expected to recognize
at least this amount for its 1997 taxable year. However, there can be no
assurance that AGH Leasing will not experience net losses in the future or that
it will be able to fund its lease obligations to the Company. In addition, in
connection with the lease of one of the Company's hotels, AGH Leasing has
received cash flow guarantee payments in 1996 and 1997 of approximately $730,000
and $1,370,000 respectively; however, pursuant to the terms of such guarantee
agreements such payments have ceased. AGH Leasing is a recently organized
limited purpose entity; accordingly, it has limited assets and negative net
worth at September 30, 1997 of approximately $1,153,000. The partners of AGH
Leasing, L.P. have pledged 275,000 OP Units to the Company which, as of February
12, 1998, have a value of approximately $7,769,000, to secure AGH Leasing's
obligations under the Participating Leases (the "AGH Lessee Pledge"). The Prime
Lessee is a newly formed entity and, pursuant to the Participating Leases with
the Company, is required to maintain a minimum net worth of $3.4 million through
the end of 1998, and thereafter an amount equal to 17.5 % of the prior year's
rent under the Participating Leases in the form of cash, marketable securities
and/or letter(s) of credit or any combination thereof. Although failure on the
part of either AGH Leasing or the Prime 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 hotel and enforce the payment obligations under such lease and, in
the case of AGH Leasing, in order to enforce the payment obligations under the
AGH Lessee Pledge, the Company would then be required to find another lessee to
lease such hotel because the Company cannot operate hotels directly due to
certain federal income tax restrictions. In addition, it is possible that,
except for the AGH Lessee Pledge, the Company will be unable to enforce the
payment obligations under the leases following any such termination. 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 each Lessee, AGHI and other
operators of hotels to operate and manage the Hotels. To maintain its status as
a REIT, the Company cannot operate the Hotels or any subsequently acquired
hotels. As a result, the Company is 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.
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HOTEL INDUSTRY RISKS
Operating Risks
The Company's 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, each Lessee and AGHI may have; (ii) increases in
operating costs due to inflation and other factors, which increases may not have
been offset in recent years, and may not be offset in the future by increased
room rates; (iii) dependence on business and commercial travelers and tourism,
which business may experience seasonality and other fluctuations; (iv) increases
in energy costs and other expenses of travel, which may deter travelers; and (v)
adverse effects of general and local economic conditions. These factors could
adversely affect each 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 Company's hotels, require ongoing
renovations and other capital improvements, including periodic replacement or
refurbishment of FF&E. Under the terms of the Participating Leases, the Company
is obligated to establish a reserve to pay the cost of certain capital
expenditures at its hotels and pay for periodic replacement or refurbishment of
FF&E. The Company controls the use of funds in this reserve. However, if capital
requirements exceed the amount of the reserve, there can be no assurance that
sufficient sources of financing will be available to fund such requirements. The
additional cost of such expenditures could have an adverse effect on funds from
operations for distribution to the Company's stockholders. In addition, the
Company may acquire hotels in the future that require significant renovation.
Renovation of hotels involves certain risks, including the possibility of
environmental problems, construction cost overruns and delays, uncertainties as
to market demand or deterioration in market demand after commencement of
renovation and the emergence of unanticipated competition from other hotels. In
addition, the Company plans substantial renovations at the hotels it acquires.
Such substantial renovations will likely disrupt the operations of those hotels
due to hotel guest rooms and common areas being taken out of service for
extended periods. See "-Risks of Operating Hotels Under Franchise Agreements.
Competition for Investment Opportunities
The Company may be competing for investment opportunities with entities that
have substantially greater financial resources than the Company. These entities
generally may be able to accept more risk than the Company can prudently manage,
including risks with respect to the creditworthiness of a hotel operator or the
geographic proximity of its investments. Competition generally may reduce the
number of suitable investment opportunities offered to the Company and increase
the bargaining power of property owners seeking to sell.
Seasonality of Hotel Industry
The hotel industry is seasonal in nature. Generally, hotel revenue for business
hotels is greater in the second and third quarters of a calendar year, although
this may not be true for hotels in major tourist destinations. For instance,
such Company hotels generate greater hotel revenue during the first and second
quarters of the calendar year. 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 Company's hotels may cause quarterly
fluctuations in the Company's lease revenue.
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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 funds from operations resulting from a downturn in the
hotel industry may be more pronounced than if the Company had diversified its
investments.
RISKS OF LEVERAGE; NO LIMITS ON INDEBTEDNESS
Neither the Company's Bylaws nor its charter (the "Charter") limits the
amount of indebtedness the Company may incur. As a result of incurring debt, the
Company is subject to risks normally associated with debt financing, including
the risks (i) that revenues from the Participating Leases will be insufficient
to meet required payments of principal and interest and (ii) that existing debt
may not be refinanced or that the terms of any refinancing will not be as
favorable as the terms of existing debt. As of February 24, 1998, the Company
had total outstanding indebtedness of approximately $510 million. Although the
Company anticipates that it will be able to repay or refinance its existing
indebtedness and any other indebtedness, there can be no assurance that it will
be able to do so or that the terms of such refinancing will be favorable to the
Company. If the Company is unable to refinance its indebtedness on acceptable
terms, it might be forced to dispose of properties or other assets on
disadvantageous terms, potentially resulting in losses and adverse effects on
cash flow from operating activities. If the Company is unable to make required
payments of principal and interest on indebtedness secured by certain of the
Hotels, such properties could be foreclosed upon by the lender with a consequent
loss of income and asset value to the Company.
RISK OF RISING INTEREST RATE
The Company's borrowings under its line of credit bear interest at a
variable rate. Increases in interest rates could increase the Company's interest
expense and adversely affect cash flow.
COMPETITION FOR MANAGEMENT TIME
The Company's four key executive officers are also employed by AGHI and are
thus necessarily subject to competing demands on their time. See " -Conflicts of
Interest."
REAL ESTATE INVESTMENT RISKS
General Risks
The Company's investments are subject to varying degrees of risk generally
incident to the ownership of real property. The underlying value of the
Company's hotel investments and the Company's income and ability to make
distributions to its stockholders is dependent upon the ability of each Lessee,
AGRI and certain other third party operators to operate the Company's 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 Company's 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.
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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 of the Company's hotels 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. In addition, each of the Company's hotels is covered by casualty
insurance, which, pursuant to the Participating Leases, must be paid by the
Company, the rates for which may increase or decrease depending on claims
experience. The increase in property taxes or casualty insurance premiums could
adversely affect the Company's ability to make expected distributions to its
stockholders.
Environmental Matters
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of future legislation. Under various federal,
state and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
property. Such laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of such hazardous or toxic
substances. In addition, the presence of hazardous or toxic substances, or the
failure to remediate such property properly, may adversely affect the owner's
ability to use the property, sell the property or borrow by using such real
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether or
not such facility is or ever was owned or operated by such person. Certain
environmental laws and common law principles could be used to impose liability
for releases of hazardous materials, including asbestos-containing materials
("ACMs"), into the environment, and third parties may seek recovery from owners
or operators of real properties for personal injury associated with exposure to
released ACMs or other hazardous materials.
Environmental laws also may impose restrictions on the manner in which a
property may be used or transferred or in which businesses may be operated, and
these restrictions may require expenditures. In connection with the ownership of
the Company's hotels, the Company or a 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 or the Lessee's results of operations
and financial condition. Phase I environmental site assessments have been
conducted at all of the Hotels, and Phase 11 environmental site assessments have
been conducted at some of the Hotels by qualified independent environinental
engineers. The purpose of the environmental site assessments is to identify
potential sources of contamination for which the Hotels may be responsible and
to assess the status of environmental regulatory compliance. The environmental
site assessments 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.
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<PAGE>
Compliance with Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990, as amended (the "ADA"),
all public accommodations are required to meet certain federal requirements
related to access and use by disabled persons. A determination that the Company
is not in compliance with the ADA could result in the imposition of fines or an
award of damages to private litigants. If the Company were required to make
modifications to its hotels to comply with the ADA, the Company's ability to
make expected distributions to its stockholders could be adversely affected.
Uninsured and Underinsured Losses
Each Participating Lease requires that the Company maintain comprehensive
insurance on each of its 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, Development and Redevelopment Risks
The Company intends to pursue acquisitions of additional hotels and, under
appropriate circumstances, may pursue development and redevelopment
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 and redevelopment are subject to numerous risks, including risks of
construction delays or cost overruns that may increase project costs, new
project commencement risks such as receipt of zoning, occupancy and other
required governmental approvals and permits and the incurrence of development
costs in connection with projects that are not pursued to completion. The fact
that the Company must distribute 95 % 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 funds from operations might be adversely
affected.
TAX RISKS
Failure to Quality 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 the provisions of the highly technical and complex Internal
Revenue Code of 1986, as amended (the "Code") for which there are only limited
judicial or administrative interpretations. The determination of various factual
matters and circumstances not entirely within the Company's control may affect
its ability to continue to qualify as a REIT. The complexity of these provisions
and of the applicable income tax regulations that have been promulgated under
the Code is greater in the case of a REIT that holds its assets through a
partnership, such as the Company. Moreover, no assurance can be given that
legislation, new regulations, administrative interpretations or court decisions
will not change the tax laws with
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<PAGE>
respect to qualification as a REIT or the federal income tax consequences of
such qualification. The Company has received an opinion of Battle Fowler LLP,
counsel to the Company ("Counsel"), to the effect that, based on various
assumptions relating to the operation of the Company and representations made by
the Company as to certain factual matters, the Company meets the requirements
for qualification and taxation as a REIT. Such legal opinion is not binding on
the Internal Revenue Service (the "IRS").
If the Company fails to qualify as a REIT in any taxable year, the Company
will not be allowed a deduction for distributions to its stockholders in
computing its taxable income and will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at the
regular corporate rates. In addition, unless it were entitled to relief under
certain statutory provisions, the Company would be disqualified from treatment
as a REIT for the four taxable years following the year during which
qualification is lost. This disqualification would reduce the funds of the
Company available for investment or distribution to stockholders because of the
additional tax liability of the Company for the year or years involved.
If the Company were to fail to qualify as a REIT, it no longer would be
subject to the distribution requirements of the Code and, to the extent that
distributions to stockholders would have been made in anticipation of the
Company's qualifying as a REIT, the Company might be required to borrow funds or
to liquidate certain of its assets to pay the applicable corporate income tax.
Although the Company currently operates in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the Company's Board of Directors to decide to revoke
the REIT election.
Adverse Effects of REIT Minimum Distribution Requirements
To obtain the favorable tax treatment accorded to REITs under the Code, the
Company generally is 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. For taxable years after 1997, to the extent that the Company elects to
retain and pay income tax on its net capital gain, such retained amounts will be
treated as having been distributed for purposes of the 4 % excise tax.
The Company has made, and intends to continue to make, distributions to its
stockholders to comply with the distribution provisions of the Code and to avoid
federal income taxes and the non-deductible 4% excise tax. The Company's income
consists primarily of its share of the income of the Operating Partnership, and
the Company's cash flow consists primarily of its share of distributions from
the Operating Partnership. Differences in timing between the receipt of income
and the payment of expenses in arriving at taxable income (of the Company or the
Operating Partnership) and the effect of non-deductible capital expenditures,
the creation of reserves or required debt amortization payments could in the
future require the Company to borrow funds through the Operating Partnership on
a short-term or long-term basis to meet the distribution requirements that are
necessary to continue to qualify as a REIT. In such circumstances, the Company
might need to borrow funds to avoid adverse tax consequences even if management
believes that the then prevailing market conditions generally are not favorable
for such borrowings or that such borrowings are not advisable in the absence of
such tax considerations.
Distributions by the Operating Partnership are determined by its sole
general partner, a wholly owned subsidiary of the Company, and are dependent on
a number of factors, including the amount of funds from operations, the
Operating Partnership's financial condition, any decision by the Company's Board
of Directors to reinvest funds rather than to distribute such funds, the
Operating Partnership's capital expenditure requirements, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. There can be no assurance that
the Company will be able to continue to satisfy the annual distribution
requirement so as to avoid corporate income taxation on the earnings that it
distributes.
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<PAGE>
Consequences of Failure to Qualify as Partnerships
The Operating Partnership has received an opinion of Counsel stating that,
assuming that the Operating Partnership and each subsidiary partnership or
limited liability company of the Operating Partnership (each, a "Subsidiary
Partnership") is being operated in accordance with its respective organizational
documents, the Operating Partnership and each of the Subsidiary Partnerships
have been and will continue to be treated as partnerships, and not as
corporations, for federal income tax purposes. Such opinion is not binding on
the IRS. If the IRS were to successfully challenge the status of the Operating
Partnership or any Subsidiary Partnership as a partnership for federal income
tax purposes, the Operating Partnership or the affected Subsidiary Partnership
would be taxable as a corporation. In such event, the Company would cease to
qualify as a REIT for federal income tax purposes. The imposition of a corporate
tax on the Operating Partnership or any of the Subsidiary Partnerships, with a
resulting loss of REIT status of the Company, would substantially reduce the
amount of funds from operations for distribution to the Company's stockholders.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
Substantially all 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, a Lessee, AGHI or other third party operators could result in a
breach of such standards or other terms and conditions of the franchise
agreements and could result in the loss or cancellation of a franchise license.
It is possible that a franchisor could condition the continuation of a franchise
license on the completion of capital improvements that the Board of Directors
determines are too expensive or otherwise unwarranted in light of general
economic conditions or the operating results or prospects of the affected hotel.
In that event, the Board of Directors may elect to allow the franchise license
to lapse. In any case, if a franchise is terminated, the Company and the Lessee
may seek to obtain a suitable replacement franchise or to operate the hotel
independent of a franchise license. The loss of a franchise license could have a
material adverse effect upon the operations or the underlying value of a hotel
covered by the franchise because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the
franchisor. In addition, under certain circumstances the Company may be required
to pay a termination fee upon termination of a franchise license.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S CHARTER AND BYLAWS
Certain provisions of Maryland law and of the Company's Charter and Bylaws
may have the effect of discouraging a third party from making an acquisition
proposal for the Company and could delay, defer or prevent a transaction or a
change in control of the Company under circumstances that could give the holders
of Common Stock the opportunity to realize a premium over the then prevailing
market prices of the Common Stock or that might otherwise be in such holders'
best interest. Such provisions include the following:
Ownership Limitation
In order for the Company to maintain its qualification as a REIT under the
Code, not more than 50% in value of the outstanding shares of stock of the
Company may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) at any time during the last
half of the Company's taxable year (other than the first year for which the
election to be treated as a REIT has been made). Furthermore, if a partner of
AGH Leasing or a stockholder of the Prime Lessee owns, actually or
constructively, 10% or more in value of the stock of the Company, AGH Leasing or
the Prime Lessee, as applicable, could become a Related Party Tenant (as defined
in "Federal Income Tax Consequences-Requirements for Qualification as a
REIT-Income Tests" in the accompanying Prospectus) 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
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<PAGE>
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 (the "Ownership Limitation"), subject to an exception that permits
mutual funds and certain other entities to own as much as 15 % of the number of
outstanding shares of any class of the Company's stock in appropriate
circumstances (the "Look-Through Ownership Limitation"). Generally, the stock
owned by affiliated owners will be aggregated for purposes of the Ownership
Limitation. The Ownership Limitation could have the effect of delaying,
deferring or preventing a transaction or a change in control of the Company in
which holders of some or a majority of the Common Stock might receive a premium
for their Common Stock over the then prevailing market price or which such
holders might believe to be otherwise in their best interests.
Staggered Board
The Board of Directors is divided into three classes of directors. The
initial term of the first class expired in 1997 and that director was reelected
to a term scheduled to expire in 2000, and the initial terms of the second and
third classes will expire in 1998 and 1999, respectively. As the term of each
class expires, directors in that class will be elected by the stockholders of
the Company for a term of three years and until their successors are duly
elected and qualified. A director may be removed, with or without cause, by the
affirmative vote of 75 % of the votes entitled to be cast for the election of
directors, which super-majority vote may have the effect of delaying, deferring
or preventing a change of control of the Company. The staggered terms of
directors may reduce the possibility of a tender offer or an attempt to change
control of the Company even though a tender offer or change in control might be
in the best interests of the stockholders.
Maryland Business Combination Law
Under the Maryland General Corporation Law, as may be amended from time to
time (the "MGCL"), certain "business combinations" (including certain issuances
of equity securities) between a Maryland corporation such as the Company and any
person who owns 10% or more of the voting power of the corporation's shares (an
"Interested Stockholder") or an affiliate thereof are prohibited for five years
after the most recent date on which the Interested Stockholder became an
Interested Stockholder. Thereafter, any such business combination must be
approved by two super-majority votes unless, among other conditions, the holders
of shares of Common Stock receive a minimum price (as defined in the MGCL) for
their stock and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of directors of the Maryland corporation prior to the time
that the Interested Stockholder becomes an Interested Stockholder.
Maryland Control Share Acquisition Statute
Under the MGCL, "control shares" of a Maryland corporation acquired in a
"control share acquisition" have no voting rights except to the extent approved
by a vote of two-thirds of the votes eligible under the statute to be cast on
the matter. "Control shares" are voting shares of stock, which, if aggregated
with all other such shares of stock previously acquired by the acquiror or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-third,
(ii) one-third or more but less than a majority, or (iii) a majority of all
voting power. Control shares do not include shares that the acquiring person is
then entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control shares,
subject to certain exceptions.
If voting rights are not approved at a meeting of stockholders, then,
subject to certain conditions and limitations, the issuer may redeem any or all
of the control shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for control shares are approved at a
stockholders' meeting and the acquiror becomes entitled to vote a majority of
the shares of stock entitled to vote, all other
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stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The Company's Bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any persons of shares of stock
of the Company. There can be no assurance that such provision will not be
amended or eliminated at any point in the future. If the foregoing exemption in
the Company's Bylaws is rescinded or amended, the control share acquisition
statute could have the effect of delaying, deferring, preventing or otherwise
discouraging offers to acquire the Company and of increasing the difficulty of
consummating any such offer.
RELIANCE ON BOARD OF DIRECTORS AND MANAGEMENT
Stockholders have no right or power to take part in the management of the
Company except through the exercise of voting rights on certain specified
matters. The Board of Directors is 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 levels which the Company believes are 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 currently is obligated to pay, which, in turn, would increase the
Company's operating costs and reduce funds from operations.
ABILITY OF BOARD TO CHANGE POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, financing, growth, operations, debt capitalization and
distributions, are determined by its Board of Directors. The Board of Directors
may amend or revise these and other policies at any time and from time to time
at the Board's discretion without a vote of the stockholders of the Company.
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that may influence the price of the Common Stock in
public trading markets will be the annual yield from distributions by the
Company on the Common Stock as compared to yields on certain financial
instruments. Thus, an increase in market interest rates will result in higher
yields on certain financial instruments, which could adversely affect the market
price of the Common Stock.
RISKS RELATING TO YEAR 2000 ISSUE
Many existing computer programs were designed and developed without
considering the impact of the upcoming change in the century. The problem exists
when a computer program uses only two digits to identify a year in the date
field. Extensive problems can result to a company's business, requiring
substantial resources to remedy. The Company believes that the "Year 2000"
problem is material to the Company's business and operations. Although the
Company is addressing the problem with respect to its business operations, there
can be no assurance that the "Year 2000" problem will be properly or timely
resolved, which could have a material adverse effect on the Company's results of
operations and, in turn, cash available for distribution.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after payment of
estimated expenses incurred in connection with the Offering, are estimated to be
approximately $9.5 million. The Company will contribute the net proceeds from
the Offering to the Operating Partnership in exchange for additional interests
therein, and following such contribution will own an approximate 86.2% interest
in the Operating Partnership. The Operating Partnership intends to use such net
proceeds to reduce indebtedness borrowed under its Credit Facilities. Company's
borrowings under the Company's Credit Facilities, with accrued interest, totaled
approximately $442 million as of February 24, 1998, which amounts have been
borrowed principally to finance acquisition activities and to make renovations
and capital improvements to certain of the hotels. Borrowings under the
Company's Credit Facilities bear interest at a 30-day, 60-day or 90-day LIBOR
(5.625%, 5.625% and 5.64063%, respectively, at February 24, 1998), at the option
of the Company, plus a minimum of 1.40% per annum, which is subject to
adjustment on a quarterly basis and, as of February 24, 1998, equals 1.875% per
annum, and matures on February 13, 2001.
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<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION POLICY
The Company's Common Stock began trading on the NYSE on July 26, 1996
under the symbol "AGT." On February 24, 1998, the last reported sale price per
share of Common Stock on the NYSE was $27 7/16 and there were 92 holders of
record of the Company's Common Stock. The following table sets forth the
quarterly high and low closing sale prices per share of Common Stock reported on
the NYSE and the cash distributions declared per share by the Company with
respect to each such period.
<TABLE>
<CAPTION>
Cash
Price Range Distributions
----------- Declared
High Low Per Share
-------- ------- -------------
<S> <C> <C> <C>
1996
Third Quarter from July 26, 1996......... $ 19 $ 17 l/2 $0.2476(1)
Fourth Quarter........................... 23 3/4 18 7/8 $0.4075
1997
First Quarter............................ 28 3/8 23 1/8 $0.4075
Second Quarter........................... 27 1/8 23 $0.4075
Third Quarter............................ 29 l/4 24 1/4 $0.4275
Fourth Quarter........................... 29 7/8 24 5/8 $0.4275
1998
First Quarter through February 24, 1998.. 28 1/2 26 1/2 (2)
</TABLE>
(1) Represents a pro rata distribution of the Company's initial quarterly
distribution of $0.4075 per share of Common Stock, based on a partial
calendar quarter beginning on July 31, 1996 (the closing date of the IPO)
through September 30, 1996.
(2) Not yet declared.
Future distributions by the Company will be at the discretion of the Board
of Directors and will depend on the Company's financial condition, its capital
requirements, the annual distribution requirements under the REIT provisions of
the Code and such other factors as the Board of Directors deems relevant. There
can be no assurance that any such distributions will be made by the Company.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to stockholders as ordinary dividend income. Distributions in excess of current
and accumulated earnings and profits will be treated as a non-taxable reduction
of the stockholder's basis in its shares of Common Stock to the extent thereof,
and thereafter as taxable gain. Distributions that are treated as a reduction of
the stockholder's basis in its shares of Common Stock will have the effect of
deferring taxation until the sale of the stockholder's shares. The Company
estimates that, for federal income tax purposes, approximately 6.1 % of the
$1.67 per share distribution paid for 1997 represented a return of capital to
its stockholders. No assurances can be given regarding what portion of future
distributions will constitute return of capital for federal income tax purposes.
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This discussion supplements the discussion set forth in the accompanying
Prospectus under the heading "Federal Income Tax Considerations." In the opinion
of Battle Fowler LLP, which is based on certain representations from the
Company, the Company qualified as a REIT under the Internal Revenue Code of
1986, as amended, for its taxable years ended December 31, 1996 and 1997 and the
Company's current and proposed method of operation will enable it to continue to
qualify as a REIT for its taxable year ending December 31, 1998 and in future
years. Investors should be aware, however, that opinions of counsel are not
binding upon the IRS or any court. It must be emphasized that Battle Fowler
LLP's opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters, including
representations regarding the nature of the Company's properties and the future
conduct of its business. Such factual assumptions and representations are set
out in the federal income tax opinion that will be delivered by Battle Fowler
LLP at the closing of the Offering. Battle Fowler LLP will not review the
Company's compliance with those tests on a continuing basis. Accordingly, no
assurance can be given that the actual results of the Company's operations for
any particular taxable year will satisfy such requirements. For a discussion of
the tax consequences of the failure to qualify as a REIT, see "Federal Income
Tax Considerations--Failure to Qualify as a REIT" in the accompanying
Prospectus.
PROPOSED LEGISLATION
On February 2, 1998, President Clinton released his budget proposal for
fiscal year 1999 (the "Proposal"). Two provisions contained in the Proposal
could affect the Company if enacted in final form. First, the Proposal would
prohibit a REIT from owning, directly or indirectly, more than 10% of the voting
power or value of all classes of a C corporation's stock (other than the stock
of a qualified REIT subsidiary). Currently, a REIT may own no more than 10% of
the voting stock of a C corporation, but its ownership of the nonvoting stock of
a C corporation is not limited (other than by the rule that the value of a
REIT's combined equity and debt interest in a C corporation may not exceed 5 %
of the value of a REIT's total assets). That provision is proposed to be
effective with respect to stock in a C corporation acquired by a REIT on or
after the date of "first committee action" (i.e., first action by the House Ways
and Means Committee with respect to the provision) ("First Committee Action"). A
REIT that owns stock in a C corporation in excess of the new ownership limit
prior to First Committee Action would be "grand fathered," but only to the
extent that the corporation does not engage in a new trade or business or
acquire substantial new assets on or after the date of First Committee Action.
This provision, if enacted as presently written, would severely limit the use by
the Company of taxable subsidiaries to conduct businesses generating income that
would be nonqualifying income if received by the Company. Second, the Proposal
would require recognition of any built-in gain associated with the assets of a
"large" C corporation (i.e., a C corporation whose stock has a fair market value
of more than $5 million) upon its conversion to REIT status or merger into a
REIT. That provision is proposed to be effective for conversions to REIT status
effective for taxable years beginning after January 1, 1999 and mergers of C
corporations into REITs that occur after December 31, 1998.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an Underwriting Agreement
dated February 24, 1998 (the "Underwriting Agreement"), between the Company, the
Operating Partnership and the Underwriter, the Company has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Company,
362,812 shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus Supplement. The Underwriting Agreement provides that the
Underwriter's obligation to purchase the shares of Common Stock is subject to
the satisfaction of certain conditions, including the receipt of certain legal
opinions. The nature of the Underwriter's obligations is such that it is
committed to purchase all of the shares of Common Stock if any shares are
purchased.
The Underwriter intends to deposit the shares of Common Stock offered
hereby with the trustee of the Legg Mason REIT Trust, February 1998 Series (the
"Trust"), a registered unit investment trust under the Investment Company Act of
1940, as amended, in exchange for units of the Trust. The Underwriter is acting
as sponsor and depositor of the Trust, and is therefore considered an affiliate
of the Trust.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriter may be required to
make in respect thereof.
In the ordinary course of business, the Underwriter may from time to time
provide investment banking, financial advisory and commercial banking services
to the Company and its affiliates for which customary compensation will be
received.
EXPERTS
The (a) 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, (b) the Financial
Statements of AGH Leasing, L.P. as of December 31, 1996 and for the period from
July 31, 1996 through December 31, 1996, and (c) 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, included in the Company's Annual Report on Form 10-K; the Combined
Financial Statements and financial statement schedule of the AKL Acquisition
Hotels as of and for the year ended December 31, 1995, included in the Report on
Form 8-K dated March 17, 1997; the Combined Financial Statements and financial
statement schedule of the MUI Acquisition Hotels as of and for the year ended
December 31, 1996, included in the Report on Form 8-K/A dated August 4, 1997;
(a) the Financial Statements of the Chicago O'Hare Hotel and financial statement
schedule as of and for the year ended December 31, 1996, (b) the Combined
Financial Statements and financial statement schedule of the Potomac Acquisition
Hotels as of and for the year ended December 31, 1996 (c) the Combined
Financial Statements and financial statement schedule of the Prime Acquisition
Hotels as of December 31, 1994, 1995, and 1996 and for the years then ended, and
(d) the Combined Financial Statements and financial statement schedule of the
FSA Acquisition Hotels as of December 31, 1996 and September 30, 1997 and for
the years ended December 31, 1995 and 1996 and for the nine month period ended
September 30, 1997, incorporated by reference in this Registration statement
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their reports thereon. Each of the above referenced financial
statements have been incorporated by reference herein in reliance upon the
authority of said firm as expert in accounting and auditing.
<PAGE>
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 the section of the
accompanying 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 accompanying Prospectus
entitled "Federal Income Tax Considerations--Other Tax Considerations" is based
on the opinion of Coopers & Lybrand L.L.P., Dallas, Texas. Certain legal matters
relating to the Offering will be passed upon for the Underwriter by Hunton &
Williams, Richmond, Virginia. Battle Fowler LLP and Hunton & Williams will rely
on Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland as to certain
matters of Maryland law.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents incorporated by reference in the
accompanying Prospectus, the following documents filed by the Company with the
Commission are incorporated herein by reference and made a part hereof:
1. The Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, filed with the Commission pursuant to the
Exchange Act; and
2. The Company's Current Reports on Form 8-K, dated September 9,
1997, November 6, 1997, January 8, 1998 and February 18, 1998, filed
with the Commission pursuant to the Exchange Act.
All other documents filed 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
Supplement and prior to the termination of the Offering shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the date of filing such documents. Any statement contained 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 Supplement
to the extent that a statement contained herein (or in the accompanying
Prospectus) or in any other document subsequently filed with the Commission
which also is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus Supplement or the accompanying Prospectus.
S-20
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PROSPECTUS
----------
$500,000,000
AMERICAN GENERAL HOSPITALITY CORPORATION
COMMON STOCK AND COMMON STOCK WARRANTS
American General Hospitality Corporation, a Maryland corporation (the
"Company"), may offer from time to time in one or more series (i) shares of its
Common Stock, $0.01 par value per share ("Common Stock"), or (ii) warrants to
purchase Common Stock ("Common Stock Warrants") with an aggregate public
offering price of up to $500,000,000 (or its equivalent based on the exchange
rate at the time of sale) in amounts, at prices and on terms to be determined at
the time of offering. The Common Stock and Common Stock Warrants (collectively,
the "Securities") may be offered separately or together, in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Common Stock, the specific
number of shares and any public offering price per share and (ii) in the case of
Common Stock Warrants, the duration, offering price, exercise price and
detachability. In addition, such specific terms may include limitations on
direct or beneficial ownership and restrictions on transfer of the Securities,
in each case as may be consistent with the Company's Charter (as hereinafter
defined) or otherwise appropriate to preserve the status of the Company as a
real estate investment trust (a "REIT") for federal income tax purposes. See
"Description of Common Stock- Restrictions on Transfer. "
The applicable Prospectus Supplement will also contain information, where
appropriate, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered by the Company directly to one or more
purchasers, through agents designated from time to time by the Company or to or
through underwriters or dealers. If any agents or underwriters are involved in
the sale of any of the Securities, their names, and any applicable purchase
price, fee, commission or discount arrangement between or among them, will be
set forth, or will be calculable from the information set forth, in the
Prospectus Supplement describing the method and terms of the offering of such
Securities. See "Plan of Distribution. " No Securities may be sold pursuant to
this Prospectus without the delivery of a Prospectus Supplement describing the
method and terms of the offering of such Securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is August 28, 1997.
<PAGE>
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 quarters 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 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
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Prospectus to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge, upon
written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents. Written requests
should be mailed to Kenneth E. Barr, Secretary, American General Hospitality
Corporation, 5605 MacArthur Boulevard, Suite 1200, Irving, Texas 75038.
Telephone requests may be directed to (972) 550-6800.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor " for certain forward-looking statements. Certain factors could cause
actual results to differ materially from those contained in forward-looking
statements made in this Prospectus, filings by the Company with the Securities
and Exchange Commission (the "Commission "), in the Company's press releases and
in oral statements made by authorized officers of the Company. When used in this
Prospectus, the words "estimate," "project," "anticipate," "expect,"
"intend", "believe," and similar expressions are intended to identify
forward-looking statements.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Unless the context requires
otherwise, the term "Company," as used herein, includes American General
Hospitality Corporation and its two wholly owned subsidiaries, A GH GP, Inc. ("A
GH GP") and A GH LP, Inc. ("A GH LP"), and American General Hospitality
Operating Partnership, L. P., a Delaware limited partnership (the "Operating
Partnership"). The term "Operating Partnership," unless the context requires
otherwise, includes subsidiaries of the Operating Partnership.
THE COMPANY
American General Hospitality Corporation was incorporated and formed on April
12, 1996, as a Maryland corporation, for the purpose of continuing and expanding
the hotel acquisition, development and repositioning operations of American
General Hospitality, Inc., and certain of its affiliates ("AGHI"). The Company
is a self administered real estate investment trust (a "REIT"). On July 31,
1996, the Company completed an initial public offering (the "IPO") of 7,500,000
shares of its Common Stock (the "Common Stock") (an additional 575,000 shares
were issued pursuant to the underwriters' overallotment option in August, 1997),
acquired equity interests in 13 hotels (the "Initial Hotels") and commenced
operations. The Company contributed all of the net proceeds of the IPO to
American General Hospitality Operating Partnership, L.P. (the "Operating
Partnership") in which the Company acquired limited partnership interests of the
Operating Partnership ("OP Units"); the remaining OP Units were issued to the
sellers of the Initial Hotels.
In February 1997, the Company completed a follow-on public offering (the "1997
Public Offering") of 6,368,300 shares of its Common Stock (inclusive of the
shares issued pursuant to the exercise of the underwriters' over allotment
option in March 1997). The Company contributed all of the net proceeds of the
1997 Public Offering to the Operating Partnership. Since the IPO, the Company
has acquired thirteen hotels with an aggregate of 3,651 guest rooms. As of July
31, 1997, the Company owned 26 hotels in sixteen states with an aggregate of
6,686 guest rooms (the "Hotels"). At July 31, 1997, the Company held an
approximate 87.22% interest in the Operating Partnership.
In order to qualify as a REIT, the Company may not operate hotels. As a result,
the Company currently leases 25 of the Hotels to AGH Leasing, L.P. ("AGH
Leasing") and the one hotel to Twin Towers Leasing, L.P. ("Twin Towers")
(together with AGH Leasing, the "Lessee"), pursuant to separate participating
leases (the "Participating Leases"). AGH Leasing is owned in part by Steven D.
Jorns, Bruce G. Wiles and Kenneth E. Barr, executive officers of both the
Company and AGHI and is the sole general partner of Twin Towers. Each
Participating Lease has a term of twelve years from the inception of the leases,
subject to earlier termination upon the occurrence of certain events. Under the
Participating Leases, the Lessee is obligated to pay the Company the greater of
fixed weekly base rent and monthly participating rent based on a percentage of
revenues at each of the Hotels. The Participating Leases are designed to allow
the Company to achieve substantial participation in any future growth of
revenues generated at the Hotels.
In addition, the Lessee has engaged AGHI to manage all of the Hotels pursuant to
separate management agreements (the "Management Agreements") other than the
Wyndham Garden Hotel-Marietta, which is managed by Wyndham Hotel Corporation.
The Company does not have any economic interest in AGHI's hotel management
operations.
The Company's executive offices are located at 5605 MacArthur Boulevard, Suite
1200, Irving, Texas 75038, and its telephone number is (972) 550-6800.
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TAX STATUS OF THE COMPANY
The Company has elected to be taxed as a REIT under Section 856 through 860
of the Code, commencing with its taxable year ended December 31, 1996. As a
REIT, the Company generally will not be subject to federal income tax on net
income that it distributes to its shareholders as long as it distributes at
least 95% of its taxable income each year and complies with a number of other
organizational and operational requirements. Failure to qualify as a REIT will
render the Company subject to tax (including any applicable minimum tax) on its
taxable income at regular corporate rates, and distributions to the shareholders
in any such year will not be deductible by the Company. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to certain federal,
state and local taxes on its income and property. In connection with the
Company's election to be taxed as a REIT, the Company's Charter imposes certain
restrictions on the transfer of shares of Common Stock. The Company has adopted
the calendar year as its taxable year.
SECURITIES TO BE OFFERED
American General Hospitality Corporation ("Company") may offer from time to
time in one or more series (i) shares of its Common Stock or (ii) Common Stock
Warrants with an aggregate public offering price of up to $500,000,000 (or its
equivalent based on the exchange rate at the time of sale) in amounts, at prices
and on terms to be determined at the time of offering. The Common Stock and
Common Stock Warrants may be offered separately or together, in separate series,
in amounts, at prices and on terms to be set forth in one or more Prospectus
Supplements.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company will contribute the net proceeds from the sale of the Securities to the
Operating Partnership, in exchange for comparable securities thereof. The
Operating Partnership expects to use such net proceeds for various purposes,
which may include, without limitation, the repayment of outstanding
indebtedness, the acquisition of additional hotels, the improvement and/or
expansion of one or more of its hotel properties or for working capital
purposes. Pending such uses, the net proceeds of any offering of Securities may
be invested in short-term, Investment grade securities or instruments,
interest-bearing bank accounts, certificates of deposit, mortgage participations
or similar securities, to the extent consistent with the Company's qualification
as a REIT, the Company's Charter, and the Company's agreements with its lenders.
DESCRIPTION OF COMMON STOCK
The following summary description of (i) the capital stock of the Company
and (ii) certain provisions of Maryland law and of the Charter and Bylaws of the
Company does not purport to be complete and is subject to and qualified in its
entirety by reference to Maryland law described herein, and to the Charter and
Bylaws of the Company.
GENERAL
Under its Charter, the Company has the authority to issue 100,000,000 shares of
Common Stock, $0.01 par value per share. Under Maryland law, stockholders
generally are not liable for a corporation's debts or obligations.
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COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully paid
and nonassessable. Subject to the preferential rights of any other class or
series of stock, holders of shares of Common Stock are entitled to receive
dividends on such stock if, as and when authorized and declared by the Board of
Directors of the Company out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding up after
payment of or adequate provision for all known debts and liabilities of the
Company.
Subject to the provisions of the Charter regarding the restrictions on transfer
of stock, each outstanding share of Common Stock entitles the holder to one vote
on all matters submitted to a vote of stockholders, including the election of
directors and, except as provided with respect to any other class or series of
stock, the holders of such shares will possess the exclusive voting power. There
is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of Common Stock can elect all of
the directors then standing for election and the holders of the remaining shares
will not be able to elect any directors.
Holders of shares of Common Stock have no preference, conversion, exchange,
sinking fund redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of the Company. Shares of Common Stock will have
equal dividend, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the corporation's charter. The Charter provides
that, with the exception of certain amendments to the Charter, the affirmative
vote of holders of shares entitled to cast a majority of all votes entitled to
be cast on such matters will be sufficient to approve the aforementioned
transactions.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock will provide the
Company with increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. The additional shares
of Common Stock will be available for issuance without further action by the
Company's stockholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which the Company's
securities may be listed or traded.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of stock.
Specifically, not more than 50% in value of the Company's outstanding shares of
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year, and the shares of stock of the Company must be beneficially owned
by 100 or more persons during at least 335 days of a taxable year of twelve
months or during a proportionate part of a shorter taxable year. These two
requirements do not apply until after the first taxable year for which the
Company makes an election to be taxed as a REIT. See "Federal Income Tax
Considerations - Requirements for Qualification as a REIT." In addition, the
Company must meet certain requirements regarding the nature of its gross income
in order to qualify as a REIT. One such requirement is 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
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interests in the Lessee, within the meaning of section 856(d)(2)(B) of the Code.
See "Federal Income Tax Considerations - Requirements for Qualification as a
REIT - Income Tests. "
Because the Board of Directors believes it is essential for the Company to
continue to qualify as a REIT, the Charter, subject to certain exceptions
described below, provides that no person may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.8% of the number of
outstanding shares of any class of Common Stock (subject to the Look-Through
Ownership Limitation applicable to certain stockholders, as described below).
Certain types of entities, such as pension trusts qualifying under section 401
(a) of the Code, mutual funds qualifying as regulated investment companies under
section 851 of the Code, and corporations, will be looked through for purposes
of the "closely held" test in section 856(h) of the Code. Subject to certain
limited exceptions, the Charter will allow such an entity under the Look-Through
Ownership Limitation to own up to 15.0% of the shares of any class or series of
the Company's stock, provided that such ownership does not cause any beneficial
owner of such entity to exceed the Ownership Limitation or otherwise result in a
violation of the tests described in clauses (ii), (iii) and (iv) of the second
sentence of the succeeding paragraph.
Any transfer of Common Stock that would (i) result in any person owning,
directly or indirectly, Common Stock in excess of the Ownership Limitation (or
the Look-Through Ownership Limitation, if applicable), (ii) result in Common
Stock being owned by fewer than 100 persons (determined without reference to any
rules of attribution), (iii) result in the Company being "closely held" within
the meaning of section 856(h) of the Code, or (iv) cause the Company to own,
actually or constructively, 9.9% or more of the ownership interests in a tenant
of the Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code, will be void
ab initio, and the intended transferee will acquire no rights in such shares of
Common Stock.
Subject to certain exceptions described below, any purported transfer of Common
Stock that would (i) result in any person owning, directly or indirectly, shares
of Common Stock in excess of the Ownership Limitation (or the Look-Through
Ownership Limitation, if applicable), (ii) result in the shares of Common Stock
being owned by fewer than 100 persons (determined without reference to any rules
of attribution), (iii) result in the Company being "closely held" within the
meaning of section 856(h) of the Code, or (iv) cause the Company to own,
actually or constructively, 10% or more of the ownership interests in a tenant
of the Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code, will be
designated as "Shares-in-Trust" and will be transferred automatically to a trust
(a "Trust"), effective on the day before the purported transfer of such shares
of Common Stock. The record holder of the shares of Common Stock that are
designated as Shares-in-Trust (the "Prohibited Owner") will be required to
submit such number of shares of Common Stock to the Company for registration in
the name of the trustee of the Trust (the "Trustee"). The Trustee will be
designated by the Company but will not be affiliated with the Company. The
beneficiary of the Trust (the "Beneficiary") will be one or more charitable
organizations named by the Company.
Shares-in-Trust will remain issued and outstanding shares of Common Stock and
will be entitled to the same rights and privileges as all other shares of the
same class or series. The Trustee will receive all dividends and distributions
on the Shares-in-Trust and will hold such dividends or distributions in trust
for the benefit of the Beneficiary. The Trustee will vote all Shares-in-Trust.
The Trustee will designate a permitted transferee of the Shares-in-Trust,
provided that the permitted transferee (i) purchases such Shares-in-Trust for
valuable consideration and (ii) acquires such Shares-in-Trust without such
acquisition resulting in another transfer to another Trust.
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
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authority to rescind and recast such vote. The Prohibited Owner generally will
receive from the Trustee the lesser of (i) the price per share such Prohibited
Owner paid for the shares of Common Stock that were designated as
Shares-in-Trust (or, in the case of a gift or devise, the Market Price (as
defined below) per share on the date of such transfer) or (ii) the price per
share received by the Trustee from the sale of such Shares-in-Trust. Any amounts
received by the Trustee in excess of the amounts to be paid to the Prohibited
Owner will be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the Company,
or its designee, at a price per share equal to the lesser of (i) the price per
share in the transaction that created such Shares-in-Trust (or, in the case of a
gift or devise, the Market Price per share on the date of such transfer) or (ii)
the Market Price per share on the date that the Company, or its designee,
accepts such offer. Subject to the Trustee's ability to designate a permitted
transferee, the Company will have the right to accept such offer for a period of
90 days after the later of (i) the date of the purported transfer which resulted
in the creation of such Shares-in-Trust or (ii) the date the Company determines
in good faith that a transfer resulting in such Shares-in-Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price for the
five consecutive Trading Days ending on such date. The "Closing Price" on any
date shall mean the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
in either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the NYSE or,
if the shares of Common Stock are not listed or admitted to trading on the NYSE,
as reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the shares of Common Stock are listed or admitted to trading or, if the
shares of Common Stock are not listed or admitted to trading on any national
securities exchange, the last quoted price, or if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported by
the National Association of Securities Dealers, Inc. Automated Quotation System
or, if such system is no longer in use, the principal other automated quotations
system that may then be in use or, if the shares of Common Stock are not quoted
by any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the shares of Common
Stock selected by the Board of Directors. "Trading Day" shall mean a day on
which the principal national securities exchange on which the shares of Common
Stock are listed or admitted to trading is open for the transaction of business
or, if the shares of Common Stock are not listed or admitted to trading on any
national securities exchange, shall mean any day other than a Saturday, a Sunday
or a day on which banking institutions in the State of New York are authorized
or obligated by law or executive order to close.
Any person who acquires or attempts to acquire Common Stock in violation of the
foregoing restrictions, or any person who owned shares of Common Stock that were
transferred to a Trust, will be required (i) to give immediately written notice
to the Company of such event and (ii) to provide to the Company such other
information as the Company may request in order to determine the effect, if any,
of such transfer on the Company's status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common Stock must, within 30 days after January 1 of each
year, provide to the Company a written statement or affidavit stating (i) the
name and address of such direct or indirect owner, (ii) the number of shares of
Common Stock owned directly or indirectly, and (iii) a description of how such
shares are held. In addition, each direct or indirect stockholder shall provide
to the 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.
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All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority, of shares of Common Stock might receive a premium from their shares of
Common Stock over the then prevailing market price or which such holders might
believe to be otherwise in their best interest.
CHARTER AND BYLAW PROVISIONS AND CERTAIN PROVISIONS OF MARYLAND LAW
Number of Directors; Classification of the Board of Directors
The Charter and Bylaws provide that the number of directors will consist of not
less than three nor more than fifteen persons, as determined by the affirmative
vote of a majority of the members of the entire Board of Directors. At all
times, a majority of the directors shall be Independent Directors, except that
upon the death, removal, incapacity or resignation of an Independent Director,
such requirement shall not be applicable for 60 days. There are five directors,
four of whom are Independent Directors. The holders of Common Stock are entitled
to vote on the election or removal of directors, with each share entitled to one
vote. Any vacancy will be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining directors,
except that a vacancy resulting from an increase in the number of directors must
be filled by a majority of the entire Board of Directors.
Pursuant to the Charter, the Board of Directors is divided into three classes of
directors. The initial term of the first class expired in 1997 and that director
was reelected to a term scheduled to expire in 2000, and the initial terms of
the second and third classes will expire in 1998 and 1999, respectively. As the
term of each class expires, directors in that class will be elected by the
stockholders of the Company for a term of three years and until their successors
are duly elected and qualify. Classification of the Board of Directors is
intended to assure the continuity and stability of the Company's business
strategies and policies as determined by the Board of Directors. Because holders
of Common Stock will have no right to cumulative voting in the election of
directors, at each annual meeting of stockholders, the holders of a majority of
the shares of Common Stock will be able to elect all of the successors of the
class of directors whose terms expire at that meeting.
The classified board provision could have the effect of making the replacement
of incumbent directors more time consuming and difficult, which could delay,
defer, discourage or prevent an attempt by a third party to obtain control of
the Company or other transaction, even though such an attempt or other
transaction might be beneficial to the Company and its stockholders. At least
two annual meetings of stockholders, instead of one, will generally be required
to effect a change in a majority of the Board of Directors. Thus, the classified
board provision could increase the likelihood that incumbent directors will
retain their positions.
Removal; Filling Vacancies
The Bylaws provide that any vacancies (except vacancies resulting from an
increase in the number of directors) will be filled by the affirmative vote of a
majority of the remaining directors, though less than a quorum. Any directors so
elected shall hold office until the next annual meeting of stockholders. The
Charter provides that directors may be removed, with or without cause, only by
the affirmative vote of the holders of at least 75.0% of votes entitled to be
cast in the election of the directors. This provision, when coupled with the
provision of the Bylaws authorizing the Board of Directors to fill vacant
directorships precludes stockholders from removing incumbent directors except
upon a substantial affirmative vote and filling the vacancies created by such
removal with their own nominees.
Limitation of Liability and Indemnification
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The MGCL permits a Maryland corporation to include in its charter a provision
limiting the liability of its directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonest established by a final judgment as being
material to the cause of active. The Charter of the Company contains such a
provision which eliminates such liability to the maximum extent permitted by
Maryland law.
The Charter obligates the Company, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, and
threatened, pending or completed action, suit or proceeding whether or not by or
in the right of the Company, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, trustee, partner, member, agent or employee of
another corporation, partnership, limited liability company, association, joint
venture, trust or other enterprise. The Charter also permits the Company to
indemnify and advance expenses to any person who served a predecessor of the
Company in any of the capacities described above and to any employee or agent of
the Company or a predecessor of the Company.
The MGCL requires a Maryland corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a Maryland corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that a personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In addition, the MGCL requires the Company, as a condition to
advancing expenses, to obtain (a) written affirmation by the director or officer
of his good faith belief that he has met the standard of conduct necessary for
indemnification by the Company as authorized by the Charter and (b) a written
statement by or on his behalf to repay the amount paid or reimbursed by the
Company if it shall ultimately be determined that the standard of conduct was
not met. Indemnification under the provisions of the MGCL is not deemed
exclusive of any other rights, by indemnification or otherwise, to which an
officer or director may be entitled under the Company's Charter or Bylaws, or
under resolutions of stockholders or directors, contract or otherwise. 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
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date on which the Interested Stockholder became an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(a) 80.0% of the votes entitled to be cast by holders of outstanding voting
shares of such corporation and (b) two-thirds of the votes entitled to be cast
by holders of voting shares of such corporation other than the shares held by
the Interested Stockholder with whom (or with whose affiliate) the business
combination is to be affected, unless, among other conditions, the corporation's
stockholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid
by the Interested Stockholder for its shares. These provisions of the MGCL do
not apply, however, to business combinations that are approved or exempted by
the board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder.
Control Share Acquisition Statute
The MGCL provides that "control shares" of a Maryland corporation acquired in a
"control share acquisition" have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror, by officers or by directors who are
employees of the corporation. "Control Shares" are voting shares which, if
aggregated with all other such shares previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-third,
(ii) one-third or more but less than a majority, or (iii) a majority or more of
all voting power. Control Shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control shares,
subject to certain exceptions.
A person who has made or purposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does
not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such 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
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The Charter of the Company may be amended by the affirmative vote of holders of
shares entitled to cast a majority of all votes entitled to be cast on such an
amendment; provided, however, (i) no term or provision of the Charter may be
added, amended or repealed in any respect that would, in the determination of
the Board of Directors, cause the Company not to qualify as a REIT under the
Code, (ii) certain provisions of the Charter, including provisions relating to
the classification of directors, the removal of directors, Independent
Directors, preemptive rights of holders of stock and the indemnification and
limitation of liability of officers and directors may not be amended or repealed
and (iii) provisions imposing cumulative voting in the election of directors may
not be added to the Charter, unless, in each such case, such action is approved
by the affirmative vote of the holders of not less than two-thirds of all the
votes entitled to be cast on the matter.
Dissolution of the Company
The dissolution of the Company must be approved by the affirmative vote of the
holders of not less than a majority of all of the votes entitled to be cast on
the matter.
Advance Notice of Director Nominations and New Business
The Bylaws of the Company provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election of the Board of Directors and
the proposal of business to be considered by stockholders may be made only (i)
pursuant to the Company's notice of the meeting, (ii) by the Board of Directors
or (iii) by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in the Bylaws and (b) with
respect to special meetings of stockholders, only the business specified in the
Company's notice of meeting may be brought before the meeting of stockholders
and nominations of persons for election to the Board of Directors (iii) provided
that the Board of Directors has determined that directors shall be elected at
such meeting, by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
Meetings of Stockholders
The Company's Bylaws provide that annual meetings of stockholders shall be held
on a date and at the time set by the Board of Directors during the month of May
each year (commencing in May 1997). Special meetings of the stockholders may be
called by (i) the President of the Company, (ii) the Chief Executive Officer or
(iii) the Board of Directors. As permitted by the MGCL, the Bylaws of the
Company provide that special meetings must be called by the Secretary of the
Company upon the written request of the holders of shares entitled to cast not
less than a majority of all votes entitled to be cast at the meeting.
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.
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Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
DESCRIPTION OF COMMON STOCK WARRANTS
The following description of Common Stock Warrants does not purport to
be complete and is qualified in its entirety by reference to the description of
a particular series of Common Stock Warrants contained in an applicable
Prospectus Supplement. For information relating to the Common Stock which may be
purchased Pursuant to Common Stock Warrants, see "Description of Common Stock."
The Company may issue one or more series of Common Stock Warrants for the
purchase of Common Stock. Common Stock Warrants of any series may be issued
independently of, or together with, any Securities offered pursuant to any
Prospectus Supplement. If offered together with other Securities, Common Stock
Warrants may be attached to, or separate from, such Securities. Each series of
Common Stock Warrants will be issued under a separate warrant agreement (each a
"Warrant Agreement") to be entered into between the Company and the holder of
such Common Stock Warrants or, if the holders are expected to be numerous, a
warrant agent identified in the applicable Prospectus Supplement ("Warrant
Agent"). Any Warrant Agent, if engaged, will act solely as an agent of the
Company in connection with the Common Stock Warrants of the series specified in
the Warrant Agreement relating thereto and such Warrant Agent will not assume
any relationship or obligation of agency or trust for or with any holders or
beneficial owners of Common Stock Warrants. Further terms of the Common Stock
Warrants and the related Warrant Agreements will be set forth in the applicable
Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of such Common
Stock Warrants, including the following where applicable: (i) the title of such
Common Stock Warrants; (ii) the aggregate number of such Common Stock Warrants;
(iii) the price or prices at which such Common Stock Warrants will be issued;
(iv) the currencies in which the price of such Common Stock Warrants may be
payable; (v) the designation, aggregate principal amount and terms of the
securities purchasable upon exercise of such Common Stock Warrants; (vi) the
designation and terms of the series of Common Stock with which such Common Stock
Warrants are being offered and the number of such Common Stock Warrants being
offered with such security; (vii) the date, if any, on and after which such
Common Stock Warrants and the related securities will be transferable
separately; (viii) the price at which and currency or currencies, including
composite currencies, in which the securities purchasable upon exercise of such
Common Stock Warrants may be purchased; (ix) the date on which the right to
exercise such Common Stock Warrants shall commence and the date on which such
right shall expire; (x) any material United States federal income tax
consequences; (xi) the terms, if any, on which the Company may accelerate the
date by which the Common Stock Warrants must be exercised; and (xii) any other
terms of such Common Stock Warrants, including terms, procedures and limitations
relating to the exchange and exercise of such Common Stock Warrants.
The Common Stock Warrants will be subject to certain restrictions upon the
exercise, ownership and transfer thereof which were adopted for the purpose of
enabling the Company to preserve its status as a REIT. For a description of such
restrictions and the Maryland Anti-Takeover Statutes, see "Description of Common
Stock -- Restrictions on Transfer."
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OPERATING PARTNERSHIP AGREEMENT
General
Substantially all of the Company's assets are held by, and all of its operations
are conducted through the Operating Partnership. AGH GP, Inc. is a wholly owned
subsidiary of the Company and is the sole general partner of the Operating
Partnership holding 1% of the issued OP Units therein. AGH LP, Inc. is a wholly
owned subsidiary of the Company and is a limited partner of the Operating
Partnership holding as of July 31, 1997 approximately 86.22% of the issued OP
Units therein. The remaining issued OP Units are held by other Limited Partners
who acquired their units in exchange for property or other interests.
The material terms of the OP Units, including a summary of certain provisions of
the Partnership Agreement, are set forth below. The following description of the
terms and provisions of the OP Units and certain other matters does not purport
to complete and is subject to and qualified in its entirety by reference to
applicable provisions of Maryland law and the Partnership Agreement.
Management
The Operating Partnership is organized as a Delaware limited partnership with
AGH GP, as general partner, AGH LP, as a limited partner, and certain other
persons, as additional limited partners (the "Partnership Agreement"). Pursuant
to the Partnership Agreement, AGH GP, as the sole general partner of the
Operating Partnership (the "General Partner"), has full, exclusive and complete
responsibility and discretion in the management and control of the Operating
Partnership, and the Limited Partners in their capacity as such have no
authority to transact business for, or participate in the management activities
or decisions of, the Operating Partnership. However, any amendment to the
Partnership Agreement, other than amendments that (i) add to the obligations of
the General Partner, (ii) reflect the admission or withdrawal of partners, (iii)
set forth the rights or preferences of additional partnership interests issued
by the Operating Partnership, (iv) reflect a change that does not adversely
affect Limited Partner, and (v) are necessary to satisfy legal requirements,
requires the consent of Limited Partners holding more than 50.0% of the OP Units
held by such Limited Partners. The consent of each adversely affected partner is
required for any amendment that would affect a Limited Partner's liability or
right to receive distributions or that would dissolve the Operating Partnership
prior to December 31, 2046 (other than as a result of certain mergers or
consolidations).
Transferability of Interests
Subject to limited exceptions, AGH GP and AGH LP may not voluntarily withdraw
from the Operating Partnership or transfer or assign their interests in the
Operating Partnership unless the transaction in which such withdrawal or
transfer occurs results in the Limited Partners' receiving property in an amount
equal to the amount they would have received had they exercised their Exchange
Rights immediately prior to such transaction, or unless the successors to AGH GP
and AGH LP contribute substantially all of their assets to the Operating
Partnership in return for an interest in the Operating Partnership. With certain
exceptions, the Limited Partners may transfer their OP Units, in whole or in
part, without the consent of the General Partner.
Capital Contribution
The Partnership Agreement provides that if the Operating Partnership requires
additional funds at any time or from time to time in excess of funds available
to the Operating Partnership from borrowing or capital contributions, the
Company may borrow such funds from a financial institution or other lender and
lend such funds to the Operating Partnership on the same terms and conditions as
are applicable to the Company's borrowing of such funds. Under the Partnership
Agreement, the Company generally is obligated to contribute, through AGH GP and
AGH LP, the proceeds of any stock offering as additional capital to the
Operating Partnership. Moreover, the Company is authorized, through AGH GP and
AGH LP, to cause the Operating
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Partnership to issue partnership interests for less than fair market value if
the Company has concluded in good faith that such issuance is in the best
interests of the Company and the Operating Partnership. If the Company so
contributes additional capital to the Operating Partnership, AGH GP and AGH LP
will receive additional OP Units, and their percentage interests in the
Operating Partnership will be increased on a proportionate basis based upon the
amount of such additional capital contributions and the value of the Operating
Partnership at the time of such contributions. Conversely, the percentage
interests of the Limited Partners, other than AGH LP, will be decreased on a
proportionate basis in the event of additional capital contributions by the
Company.
Exchange Rights
Pursuant to the Exchange Rights Agreement among the Company, the Operating
Partnership and the Limited Partners other than AGH LP, such Limited Partners
received rights (the "Exchange Rights") that enable them to cause the Operating
Partnership to exchange each OP Unit for cash equal to the value of one share of
Common Stock (or, at the Company's election, the Company may purchase each OP
Unit offered for exchange for one share of Common Stock). The Company may not
satisfy a Limited Partner's Exchange Right by delivery of Common Stock, if and
to the extent that the delivery of Common Stock upon exercise of such rights
would (i) be prohibited under the Charter, (ii) otherwise jeopardize the REIT
status of the Company, or (iii) cause the acquisition of shares of Common Stock
by such exchanging Limited Partner to be "integrated" with any other
distribution of shares of Common Stock for purposes of complying with the
Securities Act. A Limited Partner may not exercise the Exchange Rights for less
than 1,000 OP Units or, if such Limited Partner holds less than 1,000 OP Units,
for all of the OP Units held by such Limited Partner.
Registration Rights
Pursuant to the Registration Rights Agreements among the Company and the Limited
Partners other than AGH LP (the "Registration Rights Agreements"), the Limited
Partners have certain rights to require the registration for resale of the
shares of Common Stock held by them or received by them upon exchange of their
OP Units. Such rights include the right to include such shares in the
registration statement of which this Prospectus is a part. The Company is
required to bear the costs of such registration statements exclusive of
underwriting discounts, commissions and certain other costs attributable to, and
to be borne by, the selling stockholders.
Operations
The Partnership Agreement requires that the Operating Partnership be operated in
a manner that will enable the Company to satisfy the requirements for being
classified as a REIT, to avoid any federal income or excise tax liability
imposed under the Code and to ensure that the Operating Partnership will not be
classified as a "publicly traded partnership" for purposes of section 7704 of
the Code.
In addition to the administrative and operating costs and expenses incurred by
the Operating Partnership, the Operating Partnership pays all administrative
costs and expenses of the Company, AGH GP and AGH LP (the "Company Expenses"),
and the Company Expenses are treated as expenses of the Operating Partnership.
The Company Expenses generally include (i) all expenses relating to the
formation of the Company and the Operating Partnership, (ii) all expenses
relating to the public offering and registration of securities by the Company,
(iii) all expenses associated with the preparation and filing of any periodic
reports by the Company under federal, state or local laws or regulations, (iv)
all expenses associated with compliance by the Company, AGH GP and AGH LP with
laws, rules and regulations promulgated by any regulatory body and (v) all other
operating or administrative costs of AGH GP incurred in the ordinary course of
its business on behalf of the Operating Partnership. The Company Expenses,
however, do not include any administrative and operating costs and expenses
incurred by the Company that are attributable to hotel properties or partnership
interests in a Subsidiary Partnership that are owned by the Company directly
rather than through the Operating Partnership. The Company does not own any of
the Hotels directly.
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Distributions and Allocations
The Partnership Agreement provides that the Operating Partnership will
distribute cash from operations (including net sale or refinancing proceeds, but
excluding net proceeds from the sale of the Operating Partnership's property in
connection with the liquidation of the Operating Partnership) on a quarterly
(or, at the election of the General Partner, more frequent) basis, in amounts
determined by the General Partner in its sole discretion, to the partners in
accordance with their respective percentage interests in the Operating
Partnership. Upon liquidation of the Operating Partnership, after payment of, or
adequate provision for, debts and obligations of the Operating Partnership,
including any partner loans, any remaining assets of the Operating Partnership
will be distributed to all partners with positive capital accounts in accordance
with their respective positive capital account balances.
Profit and loss of the Operating Partnership for each fiscal year of the
Operating Partnership generally will be allocated among the partners in
accordance with their respective interests in the Operating Partnership. Taxable
income and loss will be allocated in the same manner, subject to compliance with
the provisions of Code sections 704(b) and 704(c) and the Treasury Regulations
promulgated thereunder.
Term
The Operating Partnership will continue until December 31, 2046, or until sooner
dissolved upon (i) the withdrawal of the General Partner (unless a majority of
remaining partners elect to continue the business of the Operating Partnership),
(ii) the election by the General Partner to dissolve the Operating Partnership
(which election, prior to December 31, 2046, requires the consent of a majority
of the Limited Partners other than AGH LP), (iii) the entry of a decree of
judicial dissolution of the Operating Partnership, (iv) the sale of all or
substantially all the assets and properties of the Operating Partnership, or (v)
the bankruptcy or insolvency of AGH GP, unless all of the remaining partners
elect to continue the business of the Operating Partnership.
Tax Matters
Pursuant to the Partnership Agreement, the General Partner will be the tax
matters partner of the Operating Partnership and, as such, will have authority
to handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
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FEDERAL INCOME TAX CONSIDERATIONS
The Company operates in such a manner so as to meet the Code requirements for
qualification as a REIT for federal income tax purposes. However, no assurance
can be given that such requirements will be met or that the Company will be so
qualified at any time. Based on various assumptions relating to the organization
and operation of the Company and the Operating Partnership and representations
made by the Company and the Operating Partnership as to certain factual matters,
including matters related to the organization and operation of the Company, the
Operating Partnership and the Subsidiary Partnerships, in the opinion of
Counsel, Battle Fowler LLP, the Company qualifies to be taxed as a REIT under
the Code commencing with its taxable year ending December 31, 1996 and the
Operating Partnership and the Subsidiary Partnerships will be treated as
partnerships for federal income tax purposes. Counsel will not review the
Company's operating results and no assurance can be given that the Company's
actual operating results will meet the REIT requirements on a continuing basis.
The opinions described herein represent Counsel's best legal judgment as to the
most likely outcome of an issue if the matter were litigated. Opinions of
counsel have no binding effect or official status of any kind, and in the
absence of a ruling from the IRS, there can be no assurance that the IRS will
not challenge the conclusion or propriety of any of Counsel's opinions. The
Company does not intend to apply for a ruling from the IRS that it qualifies as
a REIT.
The following summary includes a discussion of the material federal income tax
considerations associated with an investment in the Common Stock being sold in
the Offering. The summary should not be construed as tax advice. The provisions
governing treatment as a REIT are highly technical and complex, and this summary
is qualified in its entirety by the applicable Code provisions, the rules and
regulations promulgated thereunder and administrative and judicial
interpretations thereof. Moreover, this summary does not deal with all tax
aspects that might be relevant to a particular prospective stockholder in light
of his personal circumstances and it does not deal with particular types of
stockholders that are subject to special treatment under the Code, such as
tax-exempt organizations, insurance companies, financial institutions or
broker-dealers, and (with the exception of the general discussion below) foreign
corporations and persons who are not citizens or residents of the United States.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR REGARDING
THE SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES TO HIM OF
THE PURCHASE, OWNERSHIP AND SALE OF COMMON STOCK, OF THE COMPANY' S ELECTION TO
BE TAXED AS A REIT AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Requirements for Qualification as a REIT
In General. Under the Code, a trust, corporation or unincorporated association
meeting certain requirements (see "-Structural Requirements") may elect to be
treated as a REIT for purposes of federal income taxation. If a valid election
is made, then, subject to certain conditions, the Company's income which is
distributed to its stockholders generally will be taxed to such stockholders
without being subject to tax at the Company level. This substantially eliminates
the "double taxation" (taxation at both the corporate and stockholder levels)
that typically results from the use of corporate investment vehicles. However,
the Company will be taxed at regular corporate rates on any of its income that
is not distributed to the stockholders. (See "-Taxation of the Company. ") Once
made, the election to be taxed as a REIT continues in effect until voluntarily
revoked or automatically terminated by the Company's failure to qualify as a
REIT for a taxable year. If the Company's election to be treated as a REIT is
terminated automatically or is voluntarily revoked, the Company will not be
eligible to elect such status until the fifth taxable year after the first
taxable year for which the Company's election was terminated. However, in the
event such election is terminated automatically, the four-year prohibition on a
subsequent election to be taxed as a REIT is not applicable if (i) the Company
did not willfully fail to file a timely return with respect to the termination
taxable year, (ii) the inclusion of any incorrect information in such return was
not due to fraud with intent to evade tax, and (iii) the Company establishes
that its failure to meet the requirements was due to reasonable cause and not to
willful neglect.
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The Company will make an election to be treated as a REIT commencing with its
taxable year ending December 31, 1996.
Structural Requirements. To be eligible to be taxed as a REIT, the Company must
satisfy certain structural and organizational requirements. Among the
requirements are the following: (i) the shares of Common Stock must be
transferable, (ii) the shares of Common Stock must be held by 100 or more
persons during at least 335 days of a taxable year of twelve months (or during a
proportionate part of a taxable year of less than twelve months) (the "100-
person requirement"), and (iii) no more than 50% of the value of the outstanding
shares of Common Stock may be owned, directly or indirectly, by five or fewer
individuals at any time during the last half of each taxable year (the "five or
fewer" requirement). The requirements of (ii) and (iii) are not applicable to
the first taxable year for which the Company makes an election to be treated as
a REIT. However, the Company believes that it has issued a sufficient amount of
Common Stock with sufficient diversity of ownership so that requirements (ii)
and (iii) are satisfied. The Company expects, and intends to take all necessary
measures within its control to ensure, that the beneficial ownership of the
Company will at all times be held by 100 or more persons. In addition, the
Company's Charter contains certain restrictions on the ownership and transfer of
the Company's stock which are designed to help ensure that the Company will be
able to satisfy the "five or fewer" requirement. If the Company were to fail to
satisfy the "five or fewer" requirement, the Company's status as a REIT would
terminate, and the Company would not be able to prevent such termination. See "-
Failure to Qualify as a REIT" and "Description of Capital Stock-Restrictions on
Transfer."
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
that subsidiary is disregarded for federal income tax purposes, and all assets,
liabilities and items of income, deduction and credit of the subsidiary are
treated as assets, liabilities and such items of the REIT itself. A "qualified
REIT subsidiary" is a corporation all of the stock of which is owned by the
REIT. For taxable years ending on or before December 31, 1997, the Company must
own all of the stock of the corporate subsidiary from the commencement of such
corporation's existence. The Company has two wholly owned subsidiary
corporations, AGH GP and AGH LP, which are "qualified REIT subsidiaries."
Consequently, AGH GP and AGH LP will not be subject to federal corporate income
taxation, although they may be subject to state and local taxation. The Company
also may have additional corporate subsidiaries in the future.
Income Tests. In order to qualify and to continue to qualify as a REIT for years
ending on or before December 31, 1997, the Company must satisfy three income
tests for each taxable year. First, at least 75% of the Company's annual gross
income (excluding annual gross income from certain sales of property held
primarily for sale to customers in the ordinary course of business) must be
derived directly or indirectly from investments relating to real property or
mortgages on real property or certain temporary investments. Second, at least
95 % of the Company's annual gross income (excluding gross income from certain
sales of property held primarily for sale in the ordinary course of business)
must be derived directly or indirectly from any of the sources qualifying for
the 75 % test and from dividends, interest, and gain from the sale or
disposition of stock or securities. Third, subject to certain exceptions in the
year in which the Company is liquidated, (i) short-term gains from sales of
stock or securities, (ii) gains from sales of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business and (iii) gains from the sale or other taxable disposition of real
property (including interests in real property and mortgages on real property)
held for less than four years (other than from involuntary conversions and
foreclosure property) must represent in the aggregate less than 30% of the
Company's annual gross income. In applying these tests, because the Company is a
partner in the Operating Partnership, which is in turn a partner, either
directly or indirectly, in the Subsidiary Partnerships, the Company will be
treated as realizing its proportionate share of the income and loss of these
respective partnerships, as well as the character of such income or loss, and
other partnership items, as if the Company owned its proportionate share of the
assets owned by these partnerships directly. For taxable years beginning on or
after January 1, 1998, the third test noted above has been repealed by the
enactment of the Taxpayer Relief Act of 1997. Thus, for the Company's taxable
years beginning on and after January 1, 1998, the Company no longer is required
to satisfy the 30 percent income test.
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Substantially all of the income received by the Company is expected to be rental
income from the Rents. In order to qualify as "rents from real property" for
purposes of satisfying the 75% and 95% gross income tests, several conditions
must be satisfied. First, the amount of rent must not be based in whole or in
part on the income or profits of any person, although rents generally will
qualify as rents from real property if they are based on a fixed percentage of
receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" if the Company or an owner of 10% or more of the
Company, directly or constructively, owns 10% or more of such tenant (a "Related
Party Tenant"). Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15% of the total rent
received under the lease, the portion of rent attributable to such personal
property will not qualify as "rents from real property." Finally, the Company
generally must not operate or manage the property or furnish or render services
to the tenants of such property, other than through an "independent contractor"
from whom the Company derives no income. However, the "independent contractor"
requirement does not apply to the extent the services rendered by the Company
are customarily furnished or rendered in connection with the rental of the real
property (i.e., services which are not considered rendered to the occupant of
the property). In addition, for taxable years of the Company beginning on or
after January 1, 1998, the Company is permitted to receive up to 1% of the
gross income of each Hotel from the provision of non-customary services and
still treat all other amounts received from such Hotel as "rents from real
property." Pursuant to the Participating Leases, the Lessee has leased from the
Operating Partnership the land, buildings, improvements, furnishings, and
equipment comprising the Hotels for a term of twelve years. The Participating
Leases provide that the Lessee will be obligated to pay to the Operating
Partnership (i) the greater of Base Rent or Participating Rent and (ii)
Additional Charges. Participating Rent is calculated by multiplying fixed
percentages by various revenue categories for each of the Hotels. Generally,
both Base Rent and the thresholds in the Participating Rent formulas will be
adjusted for inflation. Base Rent accrues and is required to be paid monthly.
Participating Rent is payable quarterly, with a yearly adjustment based on
actual results.
In order for Base Rent, Participating Rent, and Additional Charges to constitute
"rents from real property," the Participating Leases must be respected as true
leases for federal income tax purposes and not treated as service contracts,
joint ventures or some other type of arrangement. The determination of whether
the Participating Leases are true leases depends on an analysis of all the
surrounding facts and circumstances. In making such a determination, courts have
considered a variety of factors, including: (i) the intent of the parties, (ii)
the form of the agreement, (iii) the degree of control over the property that is
retained by the property owner (e.g., whether the lessee has substantial control
over the operation of the property or whether the lessee was required simply to
use its best efforts to perform its obligations under the agreement), and (iv)
the extent to which the property owner retains the risk of loss with respect to
the property (e.g., whether the lessee bears the risk of increases in operating
expenses or the risk of damage to the property) or the potential for economic
gain (e.g., appreciation) with respect to the property.
In addition, Code section 7701(e) provides that a contract that purports to be a
service contract (or a partnership agreement) is treated instead as a lease of
property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property, (ii) the service recipient controls the
property, (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in increases in the property's operating costs, or the
recipient bears the risk of damage to or loss of the property), (iv) the service
provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities related to the service recipient, and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination of whether a
service contract should be treated as a lease is inherently factual, the
presence or absence of any single factor may not be dispositive in every case.
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Battle Fowler LLP is of the opinion that the Participating Leases will be
treated as true leases for federal income tax purposes. Such opinion is based,
in part, on the following facts: (i) the Operating Partnership or a Subsidiary
Partnership, as applicable, and the Lessee intend for their relationship to be
that of a lessor and lessee and such relationship will be documented by lease
agreements, (ii) the Lessee will have the right to exclusive possession and use
and quiet enjoyment of the Hotels during the term of the Participating Leases,
(iii) the Lessee will bear the cost of, and be responsible for, day-to-day
maintenance and repair of the Hotels and generally will control how the Hotels
are operated and maintained, (iv) the Lessee will bear all of the costs and
expenses of operating the Hotels (including the cost of any inventory used in
their operation) during the term of the Participating Leases (other than real
estate and personal property taxes, casualty insurance and capital improvements
(determined in accordance with generally accepted accounting principles)), (v)
the Lessee will benefit from any savings in the costs of operating the Hotels
during the term of the Participating Leases, (vi) the Lessee will indemnify the
Company against all liabilities imposed upon or asserted against the Company
during the term of the Participating Leases by reason of, among other things,
(A) accident, injury to or death of persons, or loss of or damage to property
occurring at the Hotels or (B) the Lessee's use, management, maintenance or
repair of the Hotels, (vii) the Lessee is obligated to pay substantial fixed
rent for the period of use of the Hotels, and (viii) the Lessee stands to incur
substantial losses (or reap substantial gains) depending on how successfully it
operates the Hotels.
Investors should be aware that there are no controlling Treasury Regulations,
published rulings, or judicial decisions involving leases with terms
substantially the same as the Participating Leases that discuss whether such
leases constitute true leases for federal income tax purposes. Therefore, the
opinion of Battle Fowler LLP with respect to the relationship between the
Operating Partnership or a Subsidiary Partnership, as applicable, and the Lessee
is based upon all of the facts and circumstances and upon rulings and judicial
decisions involving situations that are considered to be analogous. Opinions of
counsel are not binding upon the IRS or any court, and there can be no complete
assurance that the IRS will not assert successfully a contrary position. If the
Participating Leases are recharacterized as service contracts or partnership
agreements, rather than true leases, part or all of the payments that the
Operating Partnership and the Subsidiary Partnerships receive from the Lessee
would not be considered rent or would not otherwise satisfy the various
requirements for qualification as "rents from real property. " In that case, the
Company likely would not be able to satisfy either the 75% or 95% gross income
tests and, as a result, would lose its REIT status.
As noted above, the Rents attributable to personal property leased in connection
with the lease of the real property comprising a Hotel must not be greater than
15% of the Rents received under the Participating Lease. The Rents attributable
to the personal property in a Hotel is the amount that bears the same ratio to
total rent for the taxable year as the average of the adjusted bases of the
personal property in the Hotel at the beginning and at the end of the taxable
year bears to the average of the aggregate adjusted bases of both the real and
personal property comprising the Hotel at the beginning and at the end of such
taxable year (the "Adjusted Basis Ratio"). With respect to each Hotel (or
interest therein) that the Operating Partnership acquires for cash, the
aggregate initial adjusted bases of the real and personal property generally
will be allocated among real and personal property based on relative fair market
values. The Participating Leases provide that the Adjusted Basis Ratio for each
Hotel shall not exceed 15%. The Participating Leases further provide that the
Lessee will cooperate in good faith and use its best efforts to prevent the
Adjusted Basis Ratio for any Hotel from exceeding 15%, which cooperation
includes the purchase by Lessee at fair market value of enough personal property
at such Hotel so that the Adjusted Basis Ratio for such Hotel is less than 15%.
In the event that the amount of personal property relating to certain of the
Hotels will result in an Adjusted Basis Ratio in excess of 15% and therefore
would cause a portion of the Rents received attributable to such Hotels to not
qualify as rents from real property, the Operating Partnership will sell a
portion of such personal property relating to such Hotels to the Lessee in
exchange for the FF&E Note. In addition, the Participating Leases provide that
if future renovations and refurbishments to a Hotel would cause the Adjusted
Basis Ratio for such Hotel to exceed 15%, the Operating Partnership and/or a
Subsidiary Partnership, if applicable, has the right to sell as much personal
property to the Lessee as necessary so that the Adjusted Basis Ratio does not
exceed 15% for such Hotel. The interest income derived from the FF&E Note will
be qualifying income for the 95% gross income test but not for the 75% gross
income test. Finally, amounts in the Company's reserve for capital expenditures
may not be expended to acquire additional personal
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property for a Hotel to the extent that such acquisition would cause the
Adjusted Basis Ratio for that Hotel to exceed 15%. The Company does not expect
the Adjusted Basis Ratio for any Hotel to exceed 15% and therefore expects that
the portion of rents received attributable to personal property will be treated
as rents from real property. However, there can be no assurance that the IRS
would not assert that the personal property acquired by the Operating
Partnership or a Subsidiary Partnership had a value in excess of the appraised
value, or that a court would not uphold such assertion. If such a challenge were
successfully asserted, a portion of the rents received under the Participating
Leases would not qualify as rents from real property. However, the Company does
not expect such an amount, if any, when combined with any other income that is
nonqualifying income for purposes of the 95% gross income test, to exceed 5% of
the Company's annual gross income, which would cause the Company to lose its
status as a REIT.
As noted earlier, in order to be treated as "rents from real property," the
Participating Rent must not be based in whole or in part on the income or
profits of any person. The Participating Rent, however, will qualify as "rents
from real property" if it is based on percentages of receipts or sales and the
percentages (i) are fixed at the time the Participating Leases are entered into,
(ii) are not renegotiated during the term of the Participating Leases in a
manner that has the effect of basing Participating Rent on income or profits,
and (iii) conform with normal business practice. More generally, the
Participating Rent will not qualify as "rents from real property" if,
considering the Participating Leases and all the surrounding circumstances, the
arrangement does not conform with normal business practice, but is in reality
used as a means of basing the Participating Rent on income or profits. Since the
Participating Rent is based on fixed percentages of the gross revenues from the
Hotels that are established in the Participating Leases, and the Company has
represented that the percentages (i) will not be renegotiated during the terms
of the Participating Leases in a manner that has the effect of basing the
Participating Rent on income or profits and (ii) conform with normal business
practice, the Participating Rent should not be considered based in whole or in
part on the income or profits of any person. Furthermore, the Company has
represented that, with respect to other hotel properties that it acquires in the
future, if any, it will not charge rent for any property that is based in whole
or in part on the income or profits of any person (except by reason of being
based on a fixed percentage of gross revenues, as described above).
As noted above, rent received from a Related Party Tenant does not qualify as
"rents from real property." Thus, the Company must not own, actually or
constructively, 10% or more of the Lessee. Applicable constructive ownership
rules generally provide that, if 10% or more in value of the stock of the
Company is owned, directly or indirectly, by or for any person, the Company is
considered as owning the stock owned, directly or indirectly, by or for such
person. The Limited Partners of the Operating Partnership may acquire Common
Stock (at the Company's option) by exercising their Exchange Rights. In
addition, during the period of the Lessee Distribution Restriction, the Lessee
will be required, subject to compliance with applicable securities laws, to
purchase annually Common Stock on the open market or, if any such purchase would
violate the ownership limitation in the Company's Charter, at the option of the
Operating Partnership, OP Units from the Operating Partnership, in an amount
equal to the Lessee's cash flow attributable to the Participating Leases for the
preceding fiscal year (after establishing a reserve for partner tax
distributions). In addition, Messrs. Jorns and Wiles are required to use 50% of
the after-tax dividends received by them from AGHI that are attributable to
AGHI's earnings from the management of hotels owned by the Company to purchase
annually in the open market shares of Common Stock. The Exchange Agreement
provides that the Company may not satisfy an exchanging Limited Partner's
Exchange Right by delivery of Common Stock, if and to the extent the delivery of
Common Stock upon the exercise of such rights would cause the Company to own,
actually or constructively, 10% or more of the ownership interest in a tenant of
the Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code. The Charter
likewise prohibits a stockholder of the Company from owning Common Stock that
would cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of the Company's, the Operating Partnership's or
a Subsidiary Partnership's real property, within the meaning of section
856(d)(2)(B) of the Code. Thus, the Company should never own, actually or
constructively, 10% of more of the Lessee. However, because the Code's
constructive ownership rules for purposes of the Related Party Tenant rules are
broad and it 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
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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.
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
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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 ending on
or before 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 NonQualifying Income will not exceed 5%
of the Company's annual gross income for any taxable year.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may still qualify as a REIT for such year if the
Company's failure to meet such tests was due to reasonable cause and not to
willful neglect, the Company attaches a schedule of the sources of its income to
its return, and any incorrect information on the schedule was not supplied
fraudulently with the intent to evade tax. It is not possible to specify the
circumstances under which the Company may be entitled to the benefit of these
relief provisions. Even if these relief provisions apply, a 100% tax is imposed
on the net income attributable to the greater of the amount by which the Company
failed the 75% test or the 95% test. Failure to comply with the 30% gross
income test is not excusable; therefore, if the Company fails to meet the
requirements of the 30% gross income test for a taxable year ending on or before
December 31, 1997, its status as a REIT automatically terminates regardless of
the reason for such failure.
Asset Tests. At the close of each quarter of its taxable year, the Company also
must satisfy two tests relating to the nature and diversification of its assets.
First, at least 75% of the value of the Company's total assets must be
represented by real estate assets (including its allocable share of real estate
assets held by the Operating Partnership and the Subsidiary Partnerships), stock
or debt instruments held for not more than one year purchased with the proceeds
of an issuance of stock or long-term (at least five years) debt of the Company,
cash, cash items and government securities. Second, no more than 25% of the
Company's total assets may be represented by securities other than those that
can satisfy the 75% asset test described in the preceding sentence. Of the
investments included in the 25% asset class, the value of any one issuer's
securities (excluding shares in qualified REIT subsidiaries such as AGH GP and
AGH LP or another REIT and excluding partnership interests such as those in the
Operating Partnership and in any Subsidiary Partnerships) owned by the Company
may not exceed 5% of the value of the Company's total assets, and the Company
may not own more than 10% of any one issuer's outstanding voting securities
(excluding securities of a qualified REIT subsidiary or another REIT and
excluding partnership interests). The Company has represented that, as of the
date of the Offering, (i) at least 75% of the value of its total assets will be
represented by real estate assets, cash and cash items (including receivables),
and government securities and (ii) it will not own any securities that do not
satisfy the 25% asset requirement. In addition, the Company has represented
that it will not acquire or dispose, or cause the Operating Partnership or a
Subsidiary Partnership to acquire or dispose, of assets in the future in a way
that would cause it to violate either asset requirement. See "-Other Tax
Considerations-State and Local Taxes.
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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 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.
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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.
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
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respect to foreclosure property, if the Lessee defaults on its obligations under
a Participating Lease for a Hotel, the Company terminates the Participating
Lease, and the Company is unable to find a replacement lessee for such Hotel
within 90 days of such foreclosure, gross income from hotel operations conducted
by the Company from such Hotel would cease to qualify for the 75% and 95% gross
income tests and, thus, the Company would fail to qualify as a REIT. However,
although it is unclear under the Code, if the hotel operations were conducted by
an independent contractor, it may be possible for the Hotel to cease to be
foreclosure property two years after such foreclosure, (which period could be
extended an additional four years).
Alternative Minimum Tax. The Company will be subject to the alternative minimum
tax on undistributed items of tax preference allocable to it. Code Section 59(d)
authorizes the Treasury to issue regulations allocating items of tax preference
between a REIT and its stockholders. Such regulations have not yet been issued;
however, the Company does not anticipate any significant items of tax
preference.
Excise Tax. In addition to the tax on any undistributed income, the Company
would also be subject to a 4% excise tax on the amount if any by which (i) the
sum of (A) 85% of its REIT taxable income for a calendar year, (B) 95% of any
net capital gain for such year and (C) any undistributed amounts (for purpose of
avoiding this excise tax) from prior years, exceeds (ii) the amount actually
distributed by the Company to holders of shares of Common Stock during the
calendar year (or declared as a dividend during the calendar year, if
distributed during the following January) as ordinary income dividends. The
imposition of any excise tax on the Company would reduce the amount of cash
available for distribution to holders of shares of Common Stock. The Company
intends to take all necessary measures within its control to avoid imposition of
the excise tax.
Tax on Built-In Gain of Certain Assets. If a C corporation elects to be taxed as
a REIT, or if assets of a C corporation are transferred to a REIT in a
transaction in which the REIT has a carryover basis in the assets acquired, such
C corporation generally will be treated as if it sold all of its assets to such
REIT at their respective fair market values and liquidated immediately
thereafter, recognizing and paying tax on all gain. However, under such
circumstances under present law, the REIT is permitted to make an election under
which the C corporation will not recognize gain and instead the REIT will be
required to recognize gain and pay any tax thereon only if it disposes of such
assets during the subsequent 10-year period (the "10-Year Rule"). The Company
intends to make the appropriate election to obtain the above-described tax
consequences. Thus, if the Company acquires any asset from a C corporation as a
result of a merger or other nontaxable exchange, and the Company recognizes gain
on the disposition of such asset during the 10-year period following acquisition
of the asset, then such gain will be subject to tax at the highest regular
corporate rate to the extent the Built-In Gain (the excess of (a) the fair
market value of such asset as of the date of acquisition over (b) the Company's
adjusted basis in such asset as of such date) on the sale of such asset exceeds
any Built-In Loss arising from the disposition during the same taxable year of
any other assets acquired in the same transaction, where Built-In Loss equals
the excess of (x) the Company's adjusted basis in such other assets as of the
date of acquisition over (y) the fair market value of such other assets as of
such date.
Taxation of Stockholders
Taxable U.S. Stockholders
Dividend Income. Distributions from the Company (other than distributions
designated as capital gains dividends) will be taxable to holders of shares of
Common Stock which are not tax-exempt entities as ordinary income to the extent
of the current or accumulated earnings and profits of the Company. Distributions
from the Company which are designated (by notice to stockholders within 30 days
after the close of the Company's tax year or with its annual report) as capital
gains dividends by the Company will be taxed as long-term capital gains to
taxable holders of shares of Common Stock to the extent that they do not exceed
the Company's actual net capital gain for the taxable year. Holders of shares of
Common Stock that are corporations may be required to treat up to 20% of any
such capital gains dividends as ordinary income. Such distributions, whether
characterized as ordinary income or as capital gain, are not eligible for the
70% dividends received deduction for corporations.
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Distributions from the Company to holders which are not designated as capital
gains dividends and which are in excess of the Company's current and accumulated
earnings and profits are treated as a return of capital to such holders and
reduce the tax basis of a holder's shares of Common Stock (but not below zero).
Any such distribution in excess of the tax basis is taxable to any such holder
that is not a tax-exempt entity as gain realized from the sale of the shares of
Common Stock, taxable as described below.
The declaration by the Company of a consent dividend would result in taxable
income to consenting holders of shares of Common Stock (other than tax-exempt
entities) without any corresponding cash distributions. See "-Requirements for
Qualification as a REIT-Annual Distribution Requirements."
Portfolio Income. Dividends paid to holders of shares of Common Stock will be
treated as portfolio income. Such income therefore will not be subject to
reduction by losses from passive activities (i.e., any interest in a rental
activity or in a trade or business in which the holder does not materially
participate, such as certain interests held as a limited partner) of any holder
who is subject to the passive activity loss rules. Such distributions will,
however, be considered investment income which may be offset by certain
investment expense deductions.
No Flow-Through of Losses. Holders of shares of Common Stock will not be
permitted to deduct any net operating losses or capital losses of the Company.
Sale of Shares. A holder of shares of Common Stock who sells shares will
recognize taxable gain or loss equal to the difference between (i) the amount of
cash and the fair market value of any property received on such sale or other
disposition and (ii) the holder's adjusted basis in such shares. Gain or loss
recognized by a holder of shares of Common Stock who is not a dealer in
securities and whose shares have been held for more than one year will generally
be taxable as long-term capital gain or loss.
Back-up Withholding. Distributions from the Company will ordinarily not be
subject to withholding of federal income taxes, except as discussed under
"Foreign Stockholders." Withholding of income tax at a rate of 31% may be
required, however, by reason of a failure of a holder of shares of Common Stock
to supply the Company or its agent with the holder's taxpayer identification
number. Such "backup" withholding also may apply to a holder of shares of Common
Stock who is otherwise exempt from backup withholding (including a nonresident
alien of the United States and, generally, a foreign entity) if such holder
fails to properly document his status as an exempt recipient of distributions.
Each holder will therefore be asked to provide and certify his correct taxpayer
identification number or to certify that he is an exempt recipient.
Tax-Exempt Stockholders
Non-taxability of Dividend Income. In general, a holder of shares of Common
Stock which is a tax-exempt entity will not be subject to tax on distributions
from the Company. The IRS has ruled that amounts distributed as dividends by a
qualified REIT do not constitute unrelated business taxable income ("UBTI") when
received by certain tax-exempt entities. Thus, distributions paid to a holder of
shares of Common Stock which is a tax-exempt entity and gain on the sale of
shares of Common Stock by a tax-exempt entity (other than those tax-exempt
entities described below) will not be treated as UBTI, even if the Company
incurs indebtedness in connection with the acquisition of real property (through
its percentage ownership of the Operating Partnership and the Subsidiary
Partnerships) provided that the tax-exempt entity has not financed the
acquisition of its shares of Common Stock of the Company.
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.
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In the case of a "qualified trust" (generally, a pension or profit-sharing
trust) holding shares in a REIT, the beneficiaries of such a trust are treated
as holding shares in the REIT in proportion to their actuarial interests in the
qualified trust, instead of treating the qualified trust as a single individual
(the "look through exception"). A qualified trust that holds more than 10% of
the shares of a REIT is required to treat a percentage of REIT dividends as UBTI
if the REIT incurs debt to acquire or improve real property. This rule applies,
however, only if (i) the qualification of the REIT depends upon the application
of the "look through" exception (described above) to the restriction on REIT
shareholdings by five or fewer individuals, including qualified trusts (see
"Description of Capital Stock--Restrictions on Transfer"), and (ii) the REIT is
"predominantly held" by qualified trusts, i.e., if either (x) a single qualified
trust held more than 25% by value of the interests in the REIT or (y) one or
more qualified trusts, each owning more than 10% by value, held in the aggregate
more than 50% of the interests in the REIT. The percentage of any dividend paid
(or treated as paid) to such a qualified trust that is treated as UBTI is equal
to the amount of modified gross income (gross income less directly connected
expenses) from the unrelated trade or business of the REIT (treating the REIT as
if it were a qualified trust), divided by the total modified gross income of the
REIT. A de minimis exception applies where the percentage is less than 5%.
Because the Company expects the shares of Common Stock to be widely held, this
provision should not result in UBTI to any tax-exempt entity.
Foreign Stockholders
The rules governing United States federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, foreign estates and
foreign trusts (collectively, "Foreign Investors") are complex, and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Foreign Investors should consult their own tax advisors to determine the impact
of federal, state and local income tax laws on an investment in the shares of
Common Stock, including any reporting requirements, as well as the tax treatment
of such an investment under their home country laws.
Foreign Investors which are not engaged in the conduct of a business in the
United States and who purchase shares of Common Stock will generally not be
considered as engaged in the conduct of a trade or business in the United States
by reason of ownership of such shares. The taxation of distributions by the
Company to Foreign Investors will depend upon whether such distributions are
attributable to operating income or are attributable to sales or exchanges by
the Company of its United States Real Property Interests ("USRPIs"). USRPIs are
generally direct interests in real property located in the United States and
interests in domestic corporations in which the fair market value of its USRPIs
exceeds a certain percentage.
The Company anticipates that a substantial portion of the distributions to
holders of shares of Common Stock will be attributable to receipt of Rent by the
Company. To the extent that such distributions do not exceed the current or
accumulated earnings and profits of the Company, they will be treated as
dividends and will be subject to a withholding tax equal to 30% of the gross
amount of the dividend, which tax will be withheld and remitted to the IRS by
the Company. Such 30% rate may be reduced by United States income tax treaties
in effect with the country of residence of the Foreign Investor; however, a
Foreign Investor must furnish a completed IRS Form 1001 to the Company to secure
such a reduction. Distributions in excess of the Company's earnings and profits
will be treated as a nontaxable return of capital to a Foreign Investor to the
extent of the basis of his shares of Common Stock, and any excess amount will be
treated as an amount received in exchange 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
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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 nonforeign status on Form W-8 or Form W-9 to determine
whether withholding is required on gains realized from the disposition of
USRPIs. A domestic person (a "nominee") who holds shares of Common Stock on
behalf of a Foreign Investor will bear the burden of withholding, provided that
the Company has properly designated the appropriate portion of a distribution as
a capital gain dividend.
It is anticipated that the shares owned directly or indirectly by Foreign
Investors will be less than 50% in value of the shares of Common Stock and
therefore the Company will be a "domestically controlled REIT. " Accordingly,
shares of Common Stock held by Foreign Investors in the United States will not
be considered USRPIs and gains on sales of such shares will not be taxed to such
Foreign Investors as long as the seller is not otherwise considered to be
engaged in a trade or business in the United States. (The same rule applies to
gains attributable to distributions in excess of the Foreign Investor's cost for
its shares, discussed above.) Similarly, a foreign corporation not otherwise
subject to United States tax which distributes shares of Common Stock to its
stockholders will not be taxed under this rule.
The IRS is authorized to impose annual reporting requirements on certain United
States and foreign persons directly holding USRPIs. The required reports are in
addition to any necessary income tax returns, and do not displace existing
reporting requirements imposed on Foreign Investors by the Agricultural Foreign
Investment Disclosure Act of 1978 and the International Investment Survey Act of
1976. As of the date of this Prospectus, the IRS has not exercised its authority
to impose reporting under this provision. Furthermore, because shares in a
domestically controlled REIT do not constitute a USRPI, such reporting
requirements are not expected to apply to a Foreign Investor in the Company.
However, the Company is required to file an information return with the IRS
setting forth the name, address and taxpayer identification number of the payee
of distributions from the Company (whether the payee is a nominee or is the
actual beneficial owner).
Statement of Stock Ownership
The Company is required to demand annual written statements from the record
holders of designated percentages of its shares of Common Stock disclosing the
actual owners of the shares of Common Stock. The Company must also maintain,
within the Internal Revenue District in which it is required to file its federal
income tax return, permanent records showing the information it has received as
to the actual ownership of such shares of Common Stock and a list of those
persons failing or refusing to comply with such demand.
Tax Aspects of the Operating Partnership
The following discussion summarizes certain federal income tax considerations
applicable solely to the Company's investment in the Operating Partnership and
the Subsidiary Partnerships. The discussion does not cover state or local tax
laws or any federal tax laws other than income tax laws.
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.
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Under recently issued regulations ("check the box regulations"), an organization
with two or more members will be classified as a partnership on or after January
1, 1997 unless it elects to be treated as an association (and therefore taxable
as a corporation) or falls within one of several specific provisions which
define a corporation. For entities which were in existence prior to January 1,
1997 (such as the Operating Partnership and the Subsidiary Partnerships), the
claimed classification by the entity will be respected for all periods prior to
January 1, 1997 if (i) the entity had a reasonable basis for its claimed
classification under the law prior to January 1, 1997; (ii) the entity and all
members thereof recognized the federal tax consequence of any change in the
entity's classification within the sixty (60) months prior to January 1, 1997;
and (iii) neither the entity nor any member was notified in writing on or before
May 8, 1996 that the classification of the entity was under examination (in
which case the entity's classification would be determined in the examination).
An exception to partnership classification under the "check the box regulations"
exists for a "publicly traded partnership" (i.e., a partnership in which
interests are traded on an established securities market or are readily
tradeable 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 tradeable 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
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change in the partnership status of such entities for tax purposes might be
treated as a taxable event in which case the Company might incur a tax liability
without any related cash distribution. See "-Income Taxation of the Operating
Partnership and Its Partners-Basis in Operating Partnership Interest." Further,
items of income and deduction of such partnerships would not pass through to its
partners (including the Company), and such partners would be treated as
stockholders for tax purposes. The partnerships in which the Company has an
interest would be required to pay income tax at corporate tax rates on their net
income, and distributions to their partners would constitute dividends that
would not be deductible in computing the relevant entities' taxable income.
Under a regulatory "anti-abuse" rule (the "Anti-Abuse Rule"), the IRS may (i)
recast a transaction involving the use of a partnership to reflect the
underlying economic arrangement under the partnership provisions of the Code
(the "Partnership Provisions"), or (ii) prevent the use of a partnership to
circumvent the intended purpose of a Code provision. The Anti-Abuse Rule
contains an example in which a corporation that elects to be treated as a REIT
contributes substantially all of the proceeds from a public offering to a
partnership in exchange for a general partnership interest. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the IRS. However, the
Exchange Rights do not conform in all respects to the exchange rights contained
in the foregoing example. Moreover, the Anti-Abuse Rule is extraordinarily broad
in scope and is applied based on an analysis of all of the facts and
circumstances. As a result, there can be no assurance that the IRS will not
attempt to apply the Anti-Abuse Rule to the Company. If the conditions of the
Anti-Abuse Rule are met, the IRS is authorized to take appropriate enforcement
action, including disregarding the Operating Partnership for federal income tax
purposes or treating one or more of the partners as nonpartners. Any such action
potentially could jeopardize the Company's status as a REIT.
Income Taxation of the Operating Partnership and Its Partners
Operating Partnership Allocations. As noted above, the Company must include in
its REIT taxable income its distributive share of the income and losses of any
partnership in which it has an interest. Although the provisions of a
partnership agreement generally will determine the allocation of income and
losses among partners, such allocations will be disregarded for tax purposes
under Section 704(b) of the Code if they do not have "substantial economic
effect" or otherwise do not comply with the provisions of Section 704(b) of the
Code and Treasury Regulations.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners in respect of such item. The allocations of taxable income and loss of
partnerships in which the Company has an interest are intended to comply with
the requirements of Section 704(b) of the Code and Treasury Regulations.
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
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to the Company. Such distributions and constructive distributions normally would
be characterized as long-term capital gain if the Company's interest in such
partnership has been held for longer than the long-term capital gain holding
period (currently one year).
Depreciation Deductions Available to the Operating Partnership. The Company will
allocate the cash purchase price of newly acquired hotels among land, building
and personal property and will claim depreciation deductions based on prescribed
tax depreciation rates.
Other Tax Considerations
State and Local Taxes. The tax treatment of the Company and holders of shares of
Common Stock in states having taxing jurisdiction over them may differ from the
federal income tax treatment. Accordingly, only a very limited discussion of
state taxation of the Company, the shares of Common Stock or the holders of
shares of Common Stock is provided herein, and no representation is made as to
the tax status of the Company (other than with respect to the Texas franchise
tax, as discussed below), the shares of Common Stock or the holders of shares of
Common Stock in such states. However, holders of shares of Common Stock should
note that certain states impose a withholding obligation on partnerships
carrying on a trade or business in a state having partners who are not resident
in such state. The Partnership Agreement contains a provision which permits the
Operating Partnership to withhold a portion of a non-resident partner's
distribution (e.g., a distribution to the Company) and to pay such withheld
amount to the taxing state as agent for the non-resident partner. Most (but not
all) states follow the Code in their taxation of REITs. In such states, the
Company should generally not be liable for tax and should be able to file a
claim for refund and obtain any withheld amount from the taxing state. However,
due to the time value of money, the requirement of the Operating Partnership to
withhold on distributions to the Company will reduce the yield on an investment
in shares of Common Stock. Each holder of shares of Common Stock should consult
his own tax advisor as to the status of the shares of Common Stock under the
respective state tax laws applicable to him. In particular, Texas imposes a
franchise tax upon corporations that do business in Texas. The Company is
organized as a Maryland corporation and has an office in Texas. AGH LP is
organized as a Nevada corporation and will not have any contacts with Texas
other than ownership of its limited partnership interest in the Operating
Partnership. The Operating Partnership is registered in Texas as a foreign
limited partnership qualified to transact business in Texas.
The Texas franchise tax is imposed on a corporation doing business in Texas with
respect to the corporation's net "taxable capital" (generally, financial
accounting net worth, with certain adjustments) and its net "taxable earned
surplus" (generally, a corporation's federal taxable income, with certain
adjustments) apportioned to Texas. A corporation's taxable capital and taxable
earned surplus are apportioned to Texas based on a fraction, the numerator of
which is the corporation's gross receipts from business transacted in Texas, and
the denominator of which is the corporation's gross receipts from its entire
business, with the amount and timing of such gross receipts being generally
determined in accordance with generally accepted accounting principles (in the
case of "taxable capital") and the Code (in the case of taxable earned surplus).
For purposes of determining the source of gross receipts, dividends and interest
received by a corporation are generally apportioned based upon the state of
incorporation of a corporate payor or a corporate debtor, respectively. A
similar rule applies to receipts by a corporation from a limited liability
company. Thus, interest and dividends received by a corporation from another
corporation or distributions and interest received by a corporation from a
limited liability company will not be treated as gross receipts from business
transacted in Texas unless the payor is incorporated or organized, respectively,
in Texas. To calculate the tax on net taxable capital, receipts reflecting the
corporation's share of net profits from a partnership are apportioned to Texas
if the partnership's principal place of business (the location of its day-to-day
operations) is in Texas; however, if the corporation's share of the gross
receipts from the partnership is treated as revenue of the corporation under
generally accepted accounting principles, then the receipts of the partnership
are apportioned based on normal apportionment rules as if the receipts were
received directly by the corporation. For purposes of the tax on net taxable
earned surplus, receipts are apportioned as though the corporation directly
received the receipts from the underlying activities of the partnership. The
franchise tax on "net taxable capital" "taxable capital" apportioned to Texas)
is imposed at the rate of .25% of a
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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 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
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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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PLAN OF DISTRIBUTION
The Company may sell Securities in or outside the United States to or
through underwriters or dealers, through agents or directly to other purchasers.
The Prospectus Supplement with respect to the Securities will set forth the
terms of the offering of the Securities, including the name or names of any
underwriters, dealers or agents, the initial public offering price, any
underwriting discounts and other items constituting underwriters compensation,
any discounts or concessions allowed or reallowed or paid to dealers, and any
securities exchanges on which the securities may be listed.
Securities may be sold directly by the Company or through agents
designated by the Company from time to time at fixed prices, which may be
changed, or at varying prices determined at the time of sale. Any agent involved
in the offer or sale of the Securities will be named, and any commissions
payable by the Company to such agent will be set forth, in the Prospectus
Supplement relating thereto. Unless otherwise indicated in the Prospectus
Supplement, any such agent will be acting on a best efforts basis for the period
of its appointment.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities, for whom
they may act as agents, in the form of discounts, concessions or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers, and agents that participate in the distribution
of Securities may be deemed to be underwriters under the Securities Act, and any
discounts or commissions they receive from the Company and any profit on the
resale of Securities they realize may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Company will be
described, in the applicable Prospectus Supplement. Unless otherwise set forth
in the Prospectus Supplement relating thereto, the obligations of the
underwriters or agents to purchase the Securities will be subject to conditions
precedent and the underwriters will be obligated to purchase all the Securities
if any are purchased. The initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers may be changed from time to
time.
Unless otherwise specified in the related Prospectus Supplement, the
Common Stock Warrants will be a new issue with no established trading market,
other than the Common Stock which is traded on the NYSE under the symbol "AGT."
Any shares of Common Stock sold pursuant to a Prospectus Supplement will be
approved for trading, upon notice of issuance, on the NYSE. It is possible that
one or more underwriters may make a market in the Common Stock Warrants, but
will not be obligated to do so and may discontinue any market making at any time
without notice. Therefore, no assurance can be given as to the liquidity of, or
the trading market for, the Common Stock Warrants.
Under agreements into which the Company may enter, underwriters, dealers
and agents who participate in the distribution of Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, the Company in the ordinary course of business.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states securities may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and complied with.
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EXPERTS
The Consolidated Financial Statements of American General Hospitality
Corporation as of December 31, 1996 and for the period from July 31, 1996
through December 31, 1996 and the related financial statement schedule; the
Financial Statements of AGH Leasing, L.P. as of December 31, 1996 and for the
period from July 31, 1996 through December 31, 1996 and the Combined Financial
Statements of the AGH Predecessor Hotels as of December 30, 1994, December 29,
1995 and July 30, 1996 and for the period from December 30, 1993 through
December 31, 1993, each of the two years in the period ended December 29, 1995
and for the period from December 30, 1995 through July 30, 1996 and the related
financial statement schedule are incorporated by reference in this Registration
Statement by reference to the Company's Annual Report on Form 10-K. The Combined
Financial Statements of the AKL Acquisition Hotels as of and for the year ended
December 31, 1995 are incorporated by reference in this Registration Statement
by reference to the Company's Report and the related financial statement
schedule on Form 8-K dated March 17, 1997. The Combined Financial Statements of
the MUI Acquisition Hotels as of and for the year ended December 31, 1996 are
incorporated by reference in this Registration Statement by reference to the
Company's Report on Form 8-K/A dated August 4, 1997.
The above said financial statements have been so incorporated in reliance on the
reports of Coopers & Lybrand L.L.P., independent accountants.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Battle Fowler LLP, New York, New York. In addition, the
description of federal income tax consequences contained in the section of the
Prospectus entitled "Federal Income Tax Considerations" is based on the opinion
of Battle Fowler LLP, New York, New York. The description of Texas franchise tax
matters contained in the section of the Prospectus entitled "Federal Income Tax
Considerations--Other Tax Considerations," is based on the opinion of Coopers &
Lybrand L.L.P., Dallas, Texas. Battle Fowler LLP will rely on Ballard Spahr
Andrews & Ingersoll, Baltimore, Maryland as to certain matters of Maryland law.
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement or the Prospectus in connection with the offer made by
this Prospectus Supplement and the Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Underwriter. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell or the solicitation of any offer to buy any
security other than the Common Stock offered by this Prospectus Supplement and
the Prospectus, nor do they constitute an offer to sell or a solicitation of
offer to buy the Common Stock by anyone in any jurisdiction in which such offer
or solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus
Supplement or the Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof.
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TABLE OF CONTENTS
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Page
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Prospectus Supplement
Prospectus Supplement Summary................................. S-2
Risk Factors.................................................. S-6
Use of Proceeds............................................... S-16
Price Range of Common Stock and Distribution Policy........... S-17
Certain Federal Income Tax Considerations..................... S-18
Underwriting.................................................. S-19
Experts....................................................... S-19
Legal Matters................................................. S-20
Incorporation of Certain Documents by Reference............... S-20
Prospectus
Available Information......................................... 2
Incorporation of Certain Documents by Reference............... 2
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation
Reform Act of 1995.......................................... 3
Prospectus Summary............................................ 4
Use of Proceeds............................................... 5
Description of Common Stock................................... 5
Description of Common Stock Warrants.......................... 12
Operating Partnership Agreement............................... 14
Federal Income Tax Considerations............................. 17
Plan of Distribution.......................................... 34
Experts....................................................... 35
Legal Matters................................................. 35
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362,812 Shares
AMERICAN GENERAL
HOSPITALITY CORPORATION
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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Legg Mason Wood Walker
Incorporated
February 24, 1998
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