As filed with the Securities and Exchange Commission on April 28, 1999
Registration Statement No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MERISTAR HOSPITALITY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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MARYLAND 75-2648842
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20007
(202) 295-1000
(address, including zip code and telephone number, including area code,
of registrant's principal executive offices)
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PAUL W. WHETSELL
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20007
(202) 295-1000
(name, address, including zip code, and telephone number, including
area code, of agent for service)
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copy to:
RICHARD S. BORISOFF, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 373-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time
to time or at one time after the effective date of this registration statement
as determined by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Title of Each Class Proposed Maximum Proposed Maximum
of Securities to be Amount Offering Price Aggregate Amount of
Registered to be Registered(1) Per Share(2) Offering Price Registration Fee(3)
- ------------------------------------------ ---------------- ------------------ ----------------------- -------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value per share 5,075,725 shares $21.25 $45,570,008.75 $12,668.46
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(1) Includes 2,931,254 shares of common stock of the registrant previously
registered on a Registration Statement on Form S-3, Registration No. 333-66229,
and 2,144,471 shares registered for the first time by this Registration
Statement.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) of the rules and regulations under the Securities
Act of 1933, as amended. Pursuant to Rule 457, the proposed maximum offering
price per share of common stock of the registrant is based upon the average of
the high and low prices of the registrant's common stock on April 23, 1999 on
the New York Stock Exchange Composite Transaction Tape.
(3) Registration Fees totaling $14,640 with respect to 2,931,254 of the
5,075,725 shares registered hereby were previously paid upon the initial
registration of such shares. Pursuant to Rule 429(b), the applicable
registration fee of $12,668.46 with respect to the additional 2,144,471 shares
is being paid herewith.
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The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 under the Securities Act of 1933, this
Registration Statement contains a combined prospectus that also relates to a
Registration Statement on Form S-3 (No. 333-66229) previously filed by the
Registrant and declared effective on November 12, 1998, and collectively they
are referred to herein as the "Registration Statement."
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THE INFORMATION IN THIS DOCUMENT IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS DOCUMENT IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion, dated April 28, 1999
PROSPECTUS
5,075,725 SHARES
MERISTAR HOSPITALITY CORPORATION
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COMMON STOCK
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We are a comprehensive real estate investment trust which owns a
portfolio of primarily upscale, full service hotels, diversified by franchise
and brand affiliation, in the United States and Canada.
This prospectus relates to the offer and sale from time to time by some
of our stockholders, who are listed on page 38 of this document, of up to
5,075,725 shares of our common stock. We have or may issue these shares of our
common stock to the extent these stockholders exchange the units of limited
partnership interest in our subsidiary, MeriStar Hospitality Operating
Partnership, L.P., held by them for an equal number of shares of our common
stock.
These stockholders may sell the shares covered by this prospectus on
the New York Stock Exchange, in other markets where our common stock may be
traded or in negotiated transactions. They may sell their shares at whatever
prices which are current when particular sales take place or at other prices to
which they agree. These stockholders will pay any brokerage fees or commissions
relating to the sales by them. The registration of the stockholders' shares does
not necessarily mean that any of them will sell their shares.
Our company's shares of common stock are traded on the New York Stock
Exchange under the symbol "MHX." On , 1999, our stock price was $ .
We will not receive any proceeds from the sale of any shares covered by
this prospectus. We are paying the costs of preparing and filing the
registration statement of which this prospectus is a part.
SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR CERTAIN FACTORS RELEVANT TO
AN INVESTMENT IN OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE COMMON STOCK TO BE ISSUED IN
CONNECTION WITH THIS DOCUMENT OR DETERMINED THAT THIS DOCUMENT IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 1999
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THE COMPANY
We are a comprehensive real estate investment trust, which owns a
portfolio of primarily upscale, full service hotels, diversified by franchise
and brand affiliations, in the United States and Canada. All of our hotels and
our other assets are held by, and all of our operations are conducted by our
subsidiary, MeriStar Hospitality Operating Partnership, L.P. We are the sole
general partner of the operating partnership and control its operations. On
August 3, 1998, our predecessor, American General Hospitality Corporation,
completed a merger with CapStar Hotel Company pursuant to which we changed our
name to MeriStar Hospitality Corporation.
Prior to the merger, CapStar transferred specific assets and
liabilities to its subsidiary, MeriStar Hotels & Resorts, Inc., so that MeriStar
Hotels would own the hotel management and leasing business previously operated
by CapStar and its subsidiaries. CapStar then through a spin-off distributed to
its stockholders all of the outstanding stock of MeriStar Hotels. Immediately
following the merger, MeriStar Hotels acquired all of the partnership interests
in AGH Leasing, L.P., the third-party lessee that leased most of the hotels
American General owned. MeriStar Hotels also acquired most of the assets and
specific liabilities of American General Hospitality, Inc., the third-party
manager that managed most of the hotels American General owned. MeriStar Hotels
also leases and manages properties for other hotel owners. We share some key
officers and four board members with MeriStar Hotels. An intercompany agreement
aligns our interests with its interests, with the objective of benefiting both
companies' shareholders.
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Our executive offices are located at 1010 Wisconsin Avenue, N.W.,
Washington, D.C. 20007 and our telephone number is (202) 295-1000.
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS TOGETHER WITH
ALL OF THE OTHER INFORMATION INCLUDED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS BEFORE YOU DECIDE TO PURCHASE SHARES OF OUR COMMON STOCK. THIS
SECTION INCLUDES OR REFERS TO FORWARD-LOOKING STATEMENTS. YOU SHOULD REFER TO
THE EXPLANATION OF THE QUALIFICATIONS AND LIMITATIONS ON SUCH FORWARD-LOOKING
STATEMENTS DISCUSSED ON PAGE 12 OF THIS DOCUMENT.
SIGNIFICANT INDEBTEDNESS; REFINANCING RISKS
We currently have significant amounts of debt outstanding and,
accordingly, are subject to the risks normally associated with debt financing,
including the risk that:
o our cash flow from operations will be insufficient to make required
payments of principal and interest;
o existing indebtedness, including secured indebtedness, may not be
refinanced; or
o the terms of any refinancing will not be as favorable as the terms
of existing indebtedness.
If we do not have sufficient funds to repay our indebtedness at
maturity, it may be necessary to refinance such indebtedness through additional
debt financing, private or public offerings of debt securities or additional
equity offerings. If, at the time of any such refinancing, prevailing interest
rates or other factors result in higher interest rates on refinancings,
increases in interest expense could adversely affect our cash flow, and,
consequently, cash available for distribution to stockholders. If we are unable
to refinance our indebtedness on acceptable terms, we might be forced to dispose
of hotels or other assets on disadvantageous terms, potentially resulting in
losses and adverse effects on cash flow from operating activities. If we are
unable to make required payments of principal and interest on indebtedness
secured by our hotels, such properties could be foreclosed upon by the lender
with a consequent loss of income and asset value.
Likewise our credit facility requirements could affect our financial
condition. We have in place a senior secured credit facility that, at inception,
provided for a maximum borrowing amount of up to $1.0 billion. The credit
facility is structured as a $300 million, five-year term loan facility; a $200
million, five-and-a-half year term loan facility; and a $500 million, three-year
revolving credit facility with two one-year optional extensions. Our ability to
borrow under the credit facility is subject to financial covenants, including
leverage and interest rate coverage ratios and minimum net worth requirements.
Our credit facility limits our ability to effect mergers, asset sales and change
of control events and limits dividends to the lesser of (1) 90% of funds from
operations and (2) 100% of funds from operations less a capital reserve equal to
4% of gross room revenues. The credit facility also contains a cross-default
provision which would be triggered by a default or acceleration of (1) $20
million or more of indebtedness secured by our assets or (2) $5 million or more
of any other indebtedness.
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We also have outstanding $205 million of senior subordinated unsecured
notes due 2007 that bear interest at an annual rate of 8.75% and $175 million of
outstanding convertible notes due 2004 that bear interest at 4.75%. The
indentures relating to these notes contain limitations on our ability to effect
mergers and change of control events. The indentures relating to the $205
million of senior subordinated unsecured notes contains financial covenants,
including:
o the limitation on incurring additional indebtedness and the issuance
of capital stock unless an interest coverage ratio is met;
o limitations on the declaration and payment of dividends;
o limitations on the sale of our assets;
o limitations on transactions with our affiliates; and
o limitations on liens.
Our organizational documents do not limit the amount of indebtedness
which we may incur. As of the date of this document, approximately 25% of our
hotel assets, based on the number of guest rooms, are encumbered by mortgage
debt.
RISK OF RISING INTEREST RATES
Some of our borrowings bear interest at a variable rate, including
amounts outstanding under our credit facility. In addition, we may incur
indebtedness in the future that bears interest at a variable rate or we may be
required to retain our existing indebtedness at higher interest rates.
Accordingly, increases in interest rates could increase our interest expense and
adversely affect our cash flow.
DEPENDENCE ON LESSEES AND PAYMENTS UNDER THE HOTEL LEASES
Our revenues and our ability to make distributions to our stockholders
depends solely upon the ability of MeriStar Hotels & Resorts and our other hotel
lessees to make rent payments under hotel leases. We receive both base rent and
a percentage of gross sales above a minimum level under our hotel leases. As a
result, we will participate in the economic operations of our hotels only
through our share of gross revenues. Any failure or delay by MeriStar Hotels or
our other hotel lessees in making rent payments would adversely affect our
ability to make distributions to our stockholders. Such failure or delay by
MeriStar Hotels or our other hotel lessees may be caused by reductions in
revenue from the hotels they lease from us.
MeriStar Hotels and our other hotel lessees will be affected by factors
beyond their control such as changes in the level of demand for such rooms and
related services of our hotels, the ability of MeriStar Hotels and our other
lessees to maintain and increase gross revenues at our hotels and other factors
relating to the operations of our hotels. Although failure on the part of either
MeriStar Hotels or our other lessees to materially comply with the terms of a
hotel lease (including failure to pay rent when due) gives us the non-exclusive
right to terminate such lease, repossess the applicable hotel and enforce the
payment obligations under such lease, we would then be required to find another
lessee to lease such hotel because we cannot operate hotels directly due to
federal income tax restrictions. In addition, it is possible that we will be
unable to enforce the payment obligations under the leases following any such
termination. There can be no assurance that we would be able to find another
lessee or that, if another lessee were found, we would be able to enter into a
new lease on favorable terms to us.
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CONFLICT OF INTEREST IN OUR RELATIONSHIP WITH MERISTAR HOTELS
GENERAL CONFLICTS OF INTEREST
We share four of the nine members of our boards of directors, as well
as two senior executives, with MeriStar Hotels. Our relationship with MeriStar
Hotels is governed by an intercompany agreement, which restricts each party from
taking advantage of business opportunities without first presenting those
opportunities to the other party. We may have conflicting views with MeriStar
Hotels on the manner in which our hotels are operated and managed, and with
respect to lease arrangements, acquisitions and dispositions. As a result, our
directors and senior executives (who serve in similar capacities at MeriStar
Hotels) may well be presented with several decisions which provide them the
opportunity to benefit us to the detriment of MeriStar Hotels or benefit
MeriStar Hotels to our detriment. Such inherent potential conflicts of interest
will be present in all of the numerous transactions between us and MeriStar
Hotels.
RESTRICTIONS ON MERISTAR HOTELS' AND OUR BUSINESS AND FUTURE
OPPORTUNITIES
The certificate of incorporation of MeriStar Hotels provides that, for
so long as the intercompany agreement with us remains in effect, MeriStar Hotels
is prohibited from engaging in activities or making investments that a real
estate investment trust could make unless we are first given the opportunity but
elected not to pursue such activities or investments. Under the intercompany
agreement, MeriStar Hotels has, subject to limited exceptions, agreed not to
acquire or make (1) investments in real estate which, for purposes of the
intercompany agreement, include the provision of services related to real estate
and investment in hotel properties, real estate mortgages, real estate
derivatives or entities that invest in real estate assets, or (2) any other
investments that may be structured in a manner that qualifies under the federal
income tax requirements applicable to real estate investment trusts, unless in
either case it has notified us of the acquisition or investment opportunity, in
accordance with the terms of the intercompany agreement, and we have determined
not to pursue such acquisition or investment.
MeriStar Hotels also has agreed to assist us in structuring and
consummating any such acquisition or investment which we elect to pursue, on
terms determined by us. On the other hand, the intercompany agreement grants
MeriStar Hotels the right of first refusal to become the lessee of any real
property that we acquire and are required, consistent with our status as a real
estate investment trust, to lease to a third party. This lessee opportunity will
be available to MeriStar Hotels only if we determine that MeriStar Hotels is
qualified to be the lessee. Because of the provisions of the intercompany
agreement and the MeriStar Hotels charter, the nature of MeriStar Hotels'
business and the opportunities it may pursue are restricted.
CONFLICTS RELATING TO SALE OF HOTELS SUBJECT TO LEASES
We generally will be obligated under our leases with MeriStar Hotels to
pay a lease termination fee to MeriStar Hotels if we elect to sell a hotel or if
we elect not to restore a hotel after a casualty and do not replace it with
another hotel on terms that would create a leasehold interest in such hotel with
a fair market value equal to the fair market value of MeriStar Hotels' remaining
leasehold interest under the lease to be terminated. Where applicable, the
termination fee is equal to the fair market value of MeriStar Hotels' leasehold
interest in the remaining term of the lease to be terminated. A decision to sell
a hotel may, therefore, have significantly different consequences for us and
MeriStar Hotels.
LACK OF CONTROL OVER MANAGEMENT AND OPERATIONS OF THE HOTELS
We are dependent on the ability of MeriStar Hotels and other lessees of
hotels to operate and manage our hotels. In order to maintain our real estate
investment trust status, we cannot operate our hotels or any subsequently
acquired hotels. As a result, we are unable to directly implement strategic
business decisions for
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the operation and marketing of our hotels, such as decisions with respect to the
setting of room rates, food and beverage operations and similar matters.
POTENTIAL NEGATIVE IMPACT ON OUR ACQUISITIONS
Our relationship with MeriStar Hotels could negatively impact our
ability to acquire additional hotels because hotel management companies,
franchisees and others who would have approached us with acquisition
opportunities in hopes of establishing lessee or management relationships may
not do so knowing that we will rely primarily on MeriStar Hotels to lease and/or
manage the acquired properties. These persons may instead provide such
acquisition opportunities to hotel companies that will allow them to manage the
properties following the sale. This could have a negative impact on our
acquisition activities in the future.
NO ARM'S-LENGTH BARGAINING OF INTERCOMPANY AGREEMENT WITH MERISTAR
HOTELS
The terms of the intercompany agreement with MeriStar Hotels were not
negotiated on an arm's-length basis. Because the two companies share some of the
same executive officers and directors, there is a potential conflict of interest
with respect to the enforcement and termination of the intercompany agreement to
our benefit to the detriment of MeriStar Hotels or to benefit MeriStar Hotels to
our detriment. Because of these conflicts, such executive officers and directors
may have conflicts of interest with respect to their decisions relating to
enforcement of the intercompany agreement.
OPERATIONAL LIMITATIONS ASSOCIATED WITH FRANCHISE AGREEMENTS
Substantially all of our hotels are operated pursuant to existing
franchise or license agreements with nationally recognized hotel brands. The
franchise agreements generally contain specific standards for, and restrictions
and limitations on, the operation and maintenance of a hotel in order to
maintain uniformity within the franchisor system. Those limitations may conflict
with our philosophy, shared with MeriStar Hotels, of creating specific business
plans tailored to each hotel and to each market. Such standards are often
subject to change over time, in some cases at the discretion of the franchisor,
and may restrict a franchisee's ability to make improvements or modifications to
a hotel without the consent of the franchisor. In addition, compliance with such
standards could require a franchisee to incur significant expenses or capital
expenditures. Action or inaction on our part, by MeriStar Hotels or by our 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.
In connection with terminating or changing the franchise affiliation of
a hotel or a subsequently acquired hotel, we may be required to incur
significant expenses or capital expenditures. Moreover, the loss of a franchise
license could have a material adverse effect upon the operations or the
underlying value of the hotel covered by the franchise because of the loss of
associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. The franchise agreements covering the hotels
expire or terminate, without specified renewal rights, at various times and have
differing remaining terms. As a condition to renewal, the franchise agreements
frequently contemplate a renewal application process, which may require
substantial capital improvements to be made to the hotel.
POTENTIAL COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
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 contamination from
hazardous or toxic substances, or the failure to properly remediate such
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contaminated property, may adversely affect the owner's ability to sell or rent
such real property or to borrow funds 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.
The operation and removal of underground storage tanks are also
regulated by federal and state laws. In connection with the ownership and
operation of the hotels, we could be held liable for the costs of remedial
action with respect to such regulated substances and storage tanks and claims
related thereto. Activities have been undertaken to close or remove storage
tanks located on the property of several of the hotels.
All of our hotels have undergone Phase I environmental site
assessments, which generally provide a nonintrusive physical inspection and
database search, but not soil or groundwater analyses, by a qualified
independent environmental engineer. The purpose of a Phase I is to identify
potential sources of contamination for which the hotels may be responsible and
to assess the status of environmental regulatory compliance. The Phase Is have
not revealed any environmental liability or compliance concerns that we believe
would have a material adverse effect on our results of operation or financial
condition, nor are we aware of any such liability or concerns.
In addition, our hotels have been inspected to determine the presence
of asbestos. Federal, state and local environmental laws, ordinances and
regulations also require abatement or removal of asbestos-containing materials
("ACMs") and govern emissions of and exposure to asbestos fibers in the air.
ACMs are present in various building materials such as sprayed-on ceiling
treatments, roofing materials or floor tiles at some of the hotels. Operations
and maintenance programs for maintaining ACMs have been or are in the process of
being designed and implemented, or the ACMs have been scheduled to be or have
been abated, at such hotels. Any liability resulting from non-compliance or
other claims relating to environmental matters could have a material adverse
effect on our results of operations or financial condition.
INVESTMENT IN SINGLE INDUSTRY
Our current strategy is to acquire interests only in hospitality and
lodging. As a result, we are subject to the risks inherent in investing in a
single industry. The effects on cash available for distribution resulting from a
downturn in the hotel industry may be more pronounced than if we had diversified
our investments.
REAL ESTATE INVESTMENT TRUST TAX RISKS
DEPENDENCE ON QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST
We have operated and intend to continue to operate in a manner designed
to permit us to qualify as a real estate investment trust for federal income tax
purposes. Qualification as a real estate investment trust involves the
application of highly technical and complex provisions of the Internal Revenue
Code of 1986 for which there are only limited judicial or administrative
interpretations. The determination of various factual matters and circumstances
not entirely within our control may affect our ability to continue to qualify as
a real estate investment trust. The complexity of these provisions and of the
applicable income tax regulations that have been promulgated under the Internal
Revenue Code is greater in the case of a real estate investment trust that holds
its assets through a partnership, such as we do. Moreover, no assurance can be
given that legislation, new regulations, administrative interpretations or court
decisions will not change the tax laws with respect to qualification as a real
estate investment trust or the federal income tax consequences of such
qualification.
Paul, Weiss, Rifkind, Wharton & Garrison, our special tax counsel, has
delivered to us an opinion to the effect that, based on various assumptions
relating to our operations and representations made by us and others as to
factual matters, commencing with the taxable year ending December 31, 1996, we
have been
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organized and have operated in conformity with the requirements for
qualification as a real estate investment trust within the meaning of the
Internal Revenue Code and we intend to continue to operate so as to meet the
requirements for qualification and taxation as a real estate investment trust
under the Internal Revenue Code. Such legal opinion is not binding on the
Internal Revenue Service. See "Federal Income Tax Considerations."
If (1) our company and MeriStar Hotels were treated as stapled entities
under section 269B(a)(3) of the Internal Revenue Code, (2) the separate
corporate existence of MeriStar Hotels were disregarded or (3) MeriStar Hotels
were treated as our agent for federal income tax purposes, we would not qualify
as a real estate investment trust under the Internal Revenue Code. We have
received an opinion to the effect that our company and MeriStar Hotels are not
stapled entities under section 269(B)(a)(3) of the Internal Revenue Code and
that, based upon the current operations of each entity and other factors and
upon representations made by both companies, MeriStar Hotels is not an agent of
our company for federal income tax purposes.
If we fail to qualify as a real estate investment trust in any taxable
year, we will not be allowed a deduction for distributions to our stockholders
in computing our taxable income and will be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at the
applicable corporate rate. In addition, unless we were entitled to relief under
statutory provisions, we would be disqualified from treatment as a real estate
investment trust for the four taxable years following the year during which
qualification is lost. This disqualification would reduce our funds available
for investment or distribution to our stockholders because of our additional tax
liability for the year or years involved.
If we were to fail to qualify as a real estate investment trust, we no
longer would be subject to the distribution requirements of the Internal Revenue
Code. To the extent that distributions to stockholders would have been made in
anticipation of our qualifying as a real estate investment trust, we might be
required to borrow funds or to liquidate assets to pay the applicable corporate
income tax. Although we currently operate in a manner designed to qualify as a
real estate investment trust, it is possible that future economic, market,
legal, tax or other considerations may cause us to decide to revoke the real
estate investment trust election.
ADVERSE EFFECTS OF REAL ESTATE INVESTMENT TRUST MINIMUM DISTRIBUTION
REQUIREMENTS.
To obtain the favorable tax treatment accorded to real estate
investment trusts under the Internal Revenue Code, we generally will be required
each year to distribute to our stockholders at least 95% of our real estate
investment trust taxable income. We will be subject to income tax on any
undistributed real estate investment trust taxable income and net capital gain,
and to a 4% nondeductible excise tax on the amount, if any, by which
distributions we pay with respect to any calendar year are less than the sum of:
o 85% of our ordinary income for the calendar year;
o 95% of our capital gain net income for such year; and
o 100% of our undistributed income from prior years.
The requirement to distribute a substantial portion of our net taxable income
could cause us to distribute amounts that otherwise would be spent on future
acquisitions, unanticipated capital expenditures or repayment of debt which
would require us to borrow funds or to sell assets to fund the cost of such
items.
We intend to make distributions to our stockholders to comply with the
distribution provisions of the Internal Revenue Code and generally to avoid
federal income taxes and the nondeductible 4% excise tax. Our income will
consist primarily of our share of income of MeriStar Hospitality Operating
Partnership, L.P. and our cash flow will consist primarily of our share of
distributions from the operating partnership. It is possible, however, that
differences in timing between the receipt of income and the payment of expenses
in arriving at
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our taxable income or the taxable income of the operating partnership and the
effect of nondeductible capital expenditures, the creation of reserves or
required debt amortization payments could in the future require us to borrow
funds directly or through the operating partnership on a short or long-term
basis to meet the distribution requirements that are necessary to continue to
qualify as a real estate investment trust and avoid federal income taxes and the
4% nondeductible excise tax. In such circumstances, we might need to borrow
funds directly in order to avoid adverse tax consequences even if we believe
that the then prevailing market conditions generally are not favorable for such
borrowings or that such borrowings are not advisable in the absence of such tax
considerations.
Distributions by the operating partnership will be determined by us and
are dependent on a number of factors, including:
o the amount of cash available for distribution;
o the operating partnership's financial condition;
o our decision to reinvest funds rather than to distribute such funds;
o the operating partnership's capital expenditure requirements;
o the annual distribution requirements under the real estate
investment trust provisions of the Internal Revenue Code; and
o such other factors as we deem relevant.
However, the limited partnership agreement of the operating partnership
generally authorizes us, as the general partner of the operating partnership, to
take any steps necessary to cause the operating partnership to distribute to its
partners an amount needed to meet the real estate investment trust minimum
distribution requirements. Accordingly, although we intend to continue to
satisfy the annual distribution requirement to avoid corporate income taxation
on the earnings that we distribute, there can be no assurance that we will be
able to do so.
CONSEQUENCES OF FAILURE TO QUALIFY AS PARTNERSHIPS
Our special tax counsel has delivered to us an opinion stating that,
based upon the provisions of the partnership agreement of MeriStar Hospitality
Operating Partnership, L.P. and on factual assumptions and representations, the
operating partnership and its subsidiary partnerships and limited liability
companies have been and will be treated as partnerships (or, in the case of
subsidiary limited liability companies that are owned by a single member, have
been and will be disregarded as an entity separate from such member), and not as
corporations, for federal income tax purposes. Such opinion is not binding on
the Internal Revenue Service. If the Internal Revenue Service were successfully
to determine that any such partnership or limited liability company is properly
treated as a corporation, we would cease to qualify as a real estate investment
trust for federal income tax purposes. The imposition of a corporate tax on the
operating partnership or any of the subsidiary partnerships or limited liability
companies, with a concomitant loss of our real estate investment trust status,
would substantially reduce the amount of cash available for distribution.
POTENTIAL CONFLICTS RELATING TO PAPER-CLIP STRUCTURE
Pursuant to the intercompany agreement with MeriStar Hotels, each of us
will provide the other with reciprocal rights to participate in certain
transactions entered into by us. In particular, MeriStar Hotels will generally
have a right of first refusal to become the lessee of any real property we
acquire if we determine that, consistent with our status as a real estate
investment trust, we are required to enter into such a lease
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arrangement. This is only the case, though, if we determine that MeriStar Hotels
or an entity that it controls is qualified to be the lessee. This is known as
the "paper-clip" real estate investment trust structure. However, because of the
independent trading of the two companies, stockholders in each company may
develop divergent interests which could lead to conflicts of interest. This
divergence of interests could also reduce the anticipated benefits of the
"paper-clip" real estate investment trust structure.
DEPENDENCE ON KEY PERSONNEL
We place substantial reliance on the lodging industry knowledge and
experience and the continued services of our senior management, led by Paul W.
Whetsell and Steven D. Jorns. While we believe that, if necessary, we could find
replacements for these key personnel, the loss of their services could have a
material adverse effect on our operations. In addition, Messrs. Whetsell and
Jorns are currently engaged, and in the future will continue to engage, in the
management of MeriStar Hotels. Messrs. Whetsell and Jorns may experience
conflicts of interest in allocating management time, services and functions
between us and MeriStar Hotels.
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATES ON PRICES FOR OUR COMMON
STOCK
One of the factors that may influence the prices for the shares of our
common stock in public trading markets will be the annual yield from our
distributions on the shares of MeriStar common stock as compared to yields on
other financial instruments. An increase in market interest rates will result in
higher yields on some financial instruments, which could adversely affect the
market prices for the shares of our common stock.
POTENTIAL ANTI-TAKEOVER EFFECT OF PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER
AND OUR BYLAWS
Provisions of Maryland law and of our amended and restated articles of
incorporation and bylaws may have the effect of discouraging a third party from
making an acquisition proposal for us and could delay, defer or prevent a change
in control or other transaction under circumstances that could give shareholders
the opportunity to realize a premium over the then-prevailing market prices of
our common stock. Such provisions include the following:
OWNERSHIP LIMITATION
In order for us to maintain our qualification as a real estate
investment trust under the Internal Revenue Code, not more than 50% in value of
our outstanding shares of stock may be owned, directly or indirectly, by five or
fewer individuals, as defined in the Internal Revenue Code to include certain
entities, at any time during the last half of our taxable year. Furthermore, if
any of our stockholders own, actually or under Internal Revenue Code rules that
would result in such stockholders being treated as owning, 10% or more of
MeriStar Hotels, MeriStar Hotels could become a related party tenant to us,
which would result in our loss of real estate investment trust status.
Our charter prohibits direct or indirect ownership, taking into account
applicable ownership provisions of the Internal Revenue Code, of more than 9.8%
of any class of our outstanding stock by any person, subject to an exception
that permits mutual funds and other entities to own as much as 15% of any class
of our stock in appropriate circumstances. Generally, the stock owned by
affiliated owners will be aggregated for purposes of the stock ownership
limitation.
In addition, our charter prohibits any of our stockholders from owning
shares of our common stock if such ownership would cause us to own, actually or
under Internal Revenue Code rules that would result in our being treated as
owning, 10% or more of the ownership interests in a tenant of our real property
or in a tenant of MeriStar Hospitality Operating Partnership's or a subsidiary
partnership's real property. The above
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ownership limitations could have the effect of delaying, deferring or preventing
a change in control or other transaction in which holders of some or a majority
of the shares of our common stock might receive a premium for their shares of
common stock over the then-prevailing market price or which such holders might
believe to be otherwise in their best interests.
STAGGERED BOARD
Our board of directors is divided into three classes. The term of the
first class expires in 2000; the terms of the second and third classes expire in
2001 and 1999, respectively. Directors of each class are elected for three-year
terms. 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. The
staggered terms of directors and the super-majority vote may have the effect of
delaying, deferring or preventing a change in control or other transaction even
though a change in control might be in the best interests of our stockholders.
MARYLAND BUSINESS COMBINATION STATUTE
Under the Maryland General Corporation Law, "business combinations"
including some issuances of equity securities, between a Maryland corporation
such as us and an interested stockholder which is any person who owns 10% or
more of the voting power of the corporation's shares or an affiliate of such
person, 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 shareholders receive a minimum price determined by
Maryland law for their stock and the consideration is received in cash or in the
same form previously paid by the interested stockholder for its shares.
MARYLAND CONTROL SHARE ACQUISITION STATUTE
Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes eligible under the statute
to be cast on the matter. "Control shares" are voting shares of stock, which, if
aggregated with all other such shares of stock previously acquired by the
acquiror or in respect of which the acquiror is able to exercise or direct the
exercise of voting power (except solely by virtue of a revocable proxy), would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power:
o one-fifth or more but less than one-third;
o one-third or more but less than a majority; or
o 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
limited exceptions.
Our bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any persons of our shares of
stock. 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 our bylaws
is rescinded, the control share acquisition statute could have the effect of
delaying, deferring, preventing or otherwise discouraging offers to acquire us
and of increasing the difficulty of consummating any such offer.
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RISK FACTOR RELATING TO YEAR 2000 ISSUE
We are in the process of conducting a review of our computer systems to
identify the systems that could be affected by the "Year 2000" problem and have
initiated an implementation plan to address the problem. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of our programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. If not corrected, this could result in a major systems failure or
miscalculations.
Our leased and managed hotel properties contain various information
technology and embedded technology systems. Both types of systems contain
microprocessors and microcontrollers that must be assessed for Year 2000
compliance. We have developed a comprehensive implementation plan to address the
potential Year 2000 problems caused by such systems. This plan involves six
stages:
o increase awareness of issue;
o assign responsibility for coordinating response to issue;
o information collection;
o analysis;
o modification, repair or replacement; and
o testing.
We recently completed our analysis stage. The following stages are expected to
be completed as follows: modification, repair or replacement--June 1999; and
testing--August 1999. As an additional part of our implementation plan to
address the Year 2000 problem, we have also initiated communications with third
parties with which we have material relationships to determine the extent of
potential Year 2000 problems with these parties' services provided to us.
The most critical of these services involve such items as reservations
systems for our hotels. Without such systems, we could suffer a material decline
in business at many of our properties. We expect to complete our communications
and assessment of third parties' services by May 1999.
We anticipate completing our Year 2000 implementation plan no later
than August 31, 1999. As of December 31, 1998, historical costs incurred to
address the Year 2000 problem approximate $0.8 million. We have not yet
developed a final cost estimate related to fixing Year 2000 issues, but an
initial estimate of these remediation costs for our properties is $10-20
million. This cost estimate is based on our preliminary assessment, and will be
refined and adjusted as we continue to complete the stages of our implementation
plan to address the potential Year 2000 problems.
Although we are in the process of modifying our existing software and
converting to new software, if such modifications and conversions are not
completed timely, the Year 2000 problem could have a material impact on our
financial position and operations. Our operations are highly dependent upon
participating lease revenue earned from the lessees of our properties. These
participating lease revenue amounts are based upon revenues generated at the
leased properties. To the extent that the Year 2000 problems materially affect
the conduct of operations at those properties, it is likely that those lessee's
revenues would be affected, and that our participating lease revenues would
ultimately be affected.
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FORWARD-LOOKING INFORMATION
Information both included and incorporated by reference in this
prospectus may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, and as such may involve risks and uncertainties. Forward-looking
statements, which are based on assumptions and describe our future plans,
strategies and expectations are generally identifiable by use of the words
"may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend"
or "project" or comparable terminology. Actual results, performance or
achievements of our company may differ materially from future results,
performance or achievements expressed or implied by such forward-looking
statements. You should carefully review all information included or incorporated
by reference into this document in evaluating any forward-looking statements
contained or incorporated by reference herein.
THE INTERCOMPANY AGREEMENT AND LEASES
THE INTERCOMPANY AGREEMENT
RIGHTS OF FIRST REFUSAL
Pursuant to the intercompany agreement, MeriStar Hotels has a right of
first refusal to become the lessee of any real property we acquire if we
determine that, consistent with our status as a real estate investment trust, we
are required to enter into a lease. This is only the case, though, if MeriStar
Hotels or an entity controlled by it is qualified to be the lessee based on
experience in the industry and financial and legal qualifications.
As to opportunities for MeriStar Hotels to become the lessee of any
assets under a lease, the intercompany agreement provides that we must provide
MeriStar Hotels with written notice of the lessee opportunity. During the 30
days following such notice, MeriStar Hotels has a right of first refusal with
regard to the offer to become a lessee and the right to negotiate with us on an
exclusive basis regarding the terms and conditions of the lease. If a mutually
satisfactory agreement cannot be reached within the 30-day period, or if
MeriStar Hotels indicates that it is not interested in pursuing the lessee
opportunity, we may offer the opportunity to others for a period of one year
thereafter, at a price and on terms and conditions that are not more favorable
to such other parties than the price and terms and conditions we proposed to
MeriStar Hotels, before we must again offer the opportunity to MeriStar Hotels
in accordance with the procedures specified above.
Each company has established a leasing committee which reviews all
hotel leases that we will enter into. Our leasing committee consists of MeriStar
directors that are not also directors of MeriStar Hotels and MeriStar Hotels'
leasing committee consists of directors of MeriStar Hotels that are not also our
directors.
MeriStar Hotels agreed not to acquire or make (1) investments in real
estate, which, for purposes of the intercompany agreement, includes the
provision of services related to real estate and investments in hotel
properties, real estate mortgages, real estate derivatives or entities that
invest in real estate assets or (2) any other investments that may be structured
in a manner that qualifies under the federal income tax requirements applicable
to real estate investment trusts unless (a) they have notified us of the
material terms and conditions of the acquisition or investment opportunity, and
(b) we have determined not to pursue such acquisitions or investments either by
(x) providing written notice to MeriStar Hotels rejecting the opportunity within
20 days from the date of receipt of notice of the opportunity or (y) by allowing
such 20-day period to lapse. MeriStar Hotels also agreed to assist us in
structuring and consummating any such acquisition or investment which we elect
to pursue, on terms determined by us.
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We have structured our intercompany agreement with MeriStar Hotels to
provide us with a symbiotic relationship so that investors in both companies may
enjoy the economic benefit of the entire enterprise. This is commonly known as
the "paper-clip" real estate investment trust structure.
However, investors should be aware that because of the independent
trading of our shares and the shares of MeriStar Hotels, stockholders of each
company may develop divergent interests which could lead to conflicts of
interest. This divergence of interests could also reduce the anticipated
benefits of the relationship between the two companies. See "Risk
Factors--Potential Conflicts Relating to Paper-Clip Structure."
PROVISION OF SERVICES
MeriStar Hotels provides us with services as we may reasonably request
from time to time, including administrative, corporate, accounting, financial,
insurance, legal, tax, data processing, human resources and operational
services. We compensate MeriStar Hotels for services provided in an amount
determined in good faith by MeriStar Hotels as the amount an unaffiliated third
party would charge us for comparable services.
EQUITY OFFERINGS
If either of the two companies desires to engage in a securities
issuance, such issuing party will give notice to the other party as promptly as
practicable of its desire to engage in a securities issuance. Any such notice
will include the proposed material terms of such issuance, to the extent
determined by the issuing party, including (1) whether such issuance is proposed
to be pursuant to public or private offering, (2) the amount of securities
proposed to be issued and (3) the manner of determining the offering price and
other terms thereof. The non-issuing party will cooperate with the issuing party
in every way to effect any securities issuance of the issuing party by assisting
in the preparation of any registration statement or other document required in
connection with such issuance and providing the issuing party with such
information as may be required to be included in such registration statement or
other document.
TERM
The intercompany agreement will terminate upon the earlier of (1)
August 3, 2008, and (2) a change in ownership or control of MeriStar Hotels.
THE LEASES
We have entered into a lease for each of our hotels. MeriStar Hotels
leases and operates substantially all of our hotels on the following terms and
conditions.
TERM
Each lease of an applicable hotel provides for an initial term of 12
years commencing on the date on which the hotel was acquired. Each lease
provides the lessee with three renewal options of five years each (except in the
case of properties with ground leases having a remaining term of less than 40
years), except that:
o the lessee will not have the right to a renewal if a change in the
tax law has occurred that would permit us to operate the hotel
directly;
o if the lessee has elected not to renew a lease for any applicable
hotel, then we will have the right to reject the exercise of a
renewal right on a lease of a comparable hotel; and
o the rent for each renewal term will be adjusted to reflect the then
fair market rental value of the hotel. If we are unable to agree
upon the then fair market rental value of a hotel, the lease will
terminate upon the expiration of the then current term and MeriStar
Hotels will then have
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a right of first refusal to lease the hotel from us on such terms as
we may have agreed upon with a third-party lessee.
BASE RENT; PARTICIPATING RENT; ADDITIONAL CHARGES
Each lease requires the lessee to pay
o fixed monthly base rent;
o on a monthly basis, the excess of participating rent over base rent,
with participating rent based on percentages of room revenue, food
and beverage revenue and telephone and other revenue at each hotel;
and
o other amounts, including interest accrued on any late payments or
charges.
Base rent and participating rent departmental thresholds (departmental revenue
on which the rent percentage is based) are increased annually by a percentage
equal to the percentage increase in the consumer price index (the consumer price
index percentage increase plus 0.75% in the case of the participating rent
departmental revenue threshold) compared to the previous year. In addition, a
reduced percentage rate may apply to the revenues attributable to "discounted
rates" that the lessee may offer. Base rent is payable monthly in arrears.
Participating rent is payable in arrears based on a monthly schedule adjusted to
reflect the seasonal variations in the hotel's revenue.
Other than real estate and personal property taxes and assessments,
rent payable under ground leases, casualty insurance, including loss of income
insurance, capital impositions and capital replacements and refurbishments, that
are our obligations, the leases require the lessee to pay rent, liability
insurance, all costs and expenses and all utility and other charges incurred in
the operation of the hotels. The leases also provide for rent reductions and
abatements in the event of damage or destruction or a partial taking of any
hotel.
The leases also provide for a rental adjustment under circumstances in
the event of (a) a major renovation of the hotel, or (b) a change in the
franchisor of the hotel.
LESSEE CAPITALIZATION
The leases require MeriStar Hotels' lessee (or MeriStar Hotels as
guarantor of the leases) to maintain a book net worth of not less than $40
million. Further, for so long as the tangible net worth of MeriStar Hotels'
lessee (or MeriStar Hotels as guarantor of the leases during this period) is
less than the greater of (a) $10,000,000 or (b) 17.5% of the aggregate rents
payable under the leases for the prior calendar year, MeriStar Hotels' lessee
(or MeriStar Hotels as guarantor of the leases during this period) is prohibited
from paying dividends or making distributions other than dividends or
distributions made for the purpose of permitting the partners of MeriStar
Hotels' lessee to pay taxes on the taxable income of MeriStar Hotels' lessee
attributable to its partners plus any required preferred distributions existing
to partners.
TERMINATION
We have the right to terminate the applicable lease upon the sale of a
hotel to a third party or, upon our determination not to rebuild after a
casualty, upon payment to the lessee of the fair market value of the leasehold
estate (except for hotels identified at the time of the lease to be sold). The
fair market value of the leasehold estate is determined by discounting to
present value at a discount rate of 10% per annum the cash flow for each
remaining year of the then current lease term, which cash flow will be deemed to
be the cash flow the lessee has realized under the applicable lease for the
12-month period preceding the termination date. We receive as a credit against
any such termination payments an amount equal to any outstanding "New Lease
Credits," which means the projected cash flow (determined on the same basis as
the termination payment) of
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any new leases entered into between us and MeriStar Hotels or MeriStar Hotels'
lessee for the initial term of such new lease amortized on a straight-line basis
over the initial term of the new lease.
PERFORMANCE STANDARDS
We have the right to terminate the applicable lease if, in any calendar
year, the gross revenues from a hotel are less than 95% of the projected gross
revenues for such year as set forth in the applicable budget unless (a) the
lessee can reasonably demonstrate that the gross revenue shortfall was caused by
general market conditions beyond the lessee's control or (b) the lessee "cures"
the shortfall by paying to us the difference between the rent that would have
been paid to us had the property achieved gross revenues of 95% of the budgeted
amounts and the rent paid based on actual gross revenues. The lessee shall not
have such cure right for more than two consecutive years.
The leases also require that the lessee spend in each calendar year at
least 95% of the amounts budgeted for marketing expenses and for repair and
maintenance expenses.
ASSIGNMENT AND SUBLEASING
The lessee does not have the right to assign a lease or sublet a hotel
without our prior written consent. For purposes of the lease, a change in
control of MeriStar Hotels or the lessee shall be deemed an assignment of the
lease and shall require our consent, which may be granted or withheld in our
sole discretion.
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DESCRIPTION OF CAPITAL STOCK
THE FOLLOWING SUMMARY DESCRIPTION OF (I) OUR CAPITAL STOCK AND (II)
PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS IS SUBJECT TO AND
QUALIFIED BY REFERENCE TO THE PROVISIONS OF MARYLAND LAW DESCRIBED IN THIS
DOCUMENT AND TO OUR CHARTER AND BYLAWS.
GENERAL
Under our charter, we have the authority to issue 100,000,000 shares of
our common stock, $0.01 par value per share. We do not currently have the
authority to issue preferred stock. Under Maryland law, stockholders generally
are not liable for a corporation's debts or obligations.
COMMON STOCK
Subject to the provisions of our charter regarding the restrictions on
transfer of stock, each outstanding share of our common stock entitles the
holder to one vote on all matters submitted to a vote of stockholders, including
the election of directors. There is no cumulative voting in the election of
directors, which means that the holders of a majority of the outstanding shares
of our 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 our common stock have no preference, conversion,
exchange, sinking fund redemption or appraisal rights and have no preemptive
rights to subscribe for any our securities. Shares of our common stock have
equal dividend, liquidation and other rights.
Under the Maryland General Corporation Law, a Maryland corporation
generally cannot (1) dissolve, (2) amend its charter, (3) merge, (4) sell all or
substantially all of its assets, (5) engage in a share exchange or (6) 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. Our charter provides that, with the exception of some
amendments to our 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 these transactions.
RESTRICTIONS ON TRANSFER
We must meet requirements concerning the ownership of outstanding
shares of stock in order for us to qualify as a real estate investment trust
under the Internal Revenue Code. Specifically, not more than 50% in value of our
outstanding shares of stock may be owned, directly or indirectly, by five or
fewer individuals, as defined in the Internal Revenue Code to include certain
entities, during the last half of a taxable year, and the shares of our stock
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. In addition, we must meet requirements regarding the nature of our
gross income in order to qualify as a real estate investment trust. One such
requirement is that at least 75% of our company's gross income for each calendar
year must consist of rents from real property and income from other real
property investments. The rents received by our operating partnership and its
subsidiary partnerships and limited liability companies from our hotel lessees
will not qualify as rents from real property, which could result in our loss of
real estate investment trust status, if we own actually or constructively, 10%
or more of the ownership interests in our hotel lessees, within the meaning of
section 856(d)(2)(B) of the Internal Revenue Code. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests."
Because our board believes it is essential for us to continue to
qualify as a real estate investment trust, our charter, subject to exceptions
described below, provides that no person may own, or be deemed to own by virtue
of the attribution provisions of the Internal Revenue Code, more than 9.8% of
the number of outstanding shares of any class of our common stock (subject to a
"look-through" exception that permits mutual funds and
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other entities to own as much as 15% of any class of our stock in appropriate
circumstances). Some types of entities such as some pension trusts, mutual funds
and corporations will be looked through for purposes of the "closely held" test
in section 856(h) of the Internal Revenue Code. Subject to limited exceptions,
our charter will allow such an entity under the "look-through" ownership
limitation to own up to 15% of the shares of any class or series of our stock,
provided that such ownership does not cause any beneficial owner of such entity
to exceed the 9.8% stock ownership limitation described above under "Risk
Factors--Potential Anti-Takeover Effect of Provisions of Maryland Law and of Our
Charter and Our Bylaws--Ownership Limitation" or otherwise result in a violation
of the tests described in clauses (2), (3) and (4) of the succeeding paragraph.
Any transfer of our common stock that would (1) result in any person
owning, directly or indirectly, our common stock in excess of the 9.8% stock
ownership limitation (or the "look-through" ownership limitation, if
applicable), (2) result in our common stock being owned by fewer than 100
persons (determined without reference to any rules of attribution), (3) result
in our company being "closely held" within the meaning of section 856(h) of the
Internal Revenue Code, or (4) cause our company to own, actually or
constructively, 9.9% or more of the ownership interests in a tenant of our
company's, our operating partnership's or a subsidiary partnership's or limited
liability company's real property, within the meaning of section 856(d)(2)(B) of
the Internal Revenue Code, will be void AB INITIO, and the intended transferee
will acquire no rights in such shares of our common stock.
In such event the transferred shares will be designated as
"shares-in-trust" and will be transferred automatically to a trust, effective on
the day before the purported transfer of such shares of our common stock. The
record holder of the shares of our common stock that are designated as
shares-in-trust (the "Prohibited Owner") will be required to submit such number
of shares of our common stock to us for registration in the name of the trustee
of the trust. The trustee will be designated by us but will not be affiliated
with us. The beneficiary of the trust will be one or more charitable
organizations named by us.
Shares-in-trust will remain issued and outstanding shares of our 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 (1) purchases such
shares-in-trust for valuable consideration and (2) 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 (1) that are attributable to any shares-in-trust and (2)
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 our 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. However, if we
have already taken irreversible corporate action based on such vote, then the
trustee shall not have the authority to rescind and recast such vote. The
Prohibited Owner generally will receive from the trustee the lesser of (1) 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 per share on the date of such transfer) or (2) the price per share
received by the trustee from the sale of such shares-in-trust. Any amounts the
trustee receives 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 our
company, or its designee, at a price per share equal to the lesser of (1) 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 (2) the market price per share on the date that we, or our
designee, accepts such offer. Subject to the trustee's ability to designate a
permitted transferee, we will have the right to accept such offer for a period
of 90 days after the later of (1) the date of the purported transfer which
resulted in the creation of such shares-in-trust or (2) the date we determine in
good faith that a transfer resulting in such shares-in-trust occurred.
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All persons who own, directly or indirectly, more than 5% (or such
lower percentages as required pursuant to regulations under the Internal Revenue
Code) of the outstanding shares of our common stock must, within 30 days after
January 1 of each year, provide us with a written statement or affidavit stating
(1) the name and address of such direct or indirect owner, (2) the number of
shares of our common stock owned directly or indirectly and (3) a description of
how such shares are held. In addition, each direct or indirect stockholder shall
provide us with such additional information as we may request in order to
determine the effect, if any, of such ownership on our status as a real estate
investment trust and to ensure compliance with the 9.8% stock ownership
limitation described above.
The 9.8% stock ownership limitation or the "look-through" ownership
limitation, as applicable, generally will not apply to the acquisition of shares
of our common stock by an underwriter that participates in a public offering of
such shares. In addition, our board, upon such conditions as our board may
direct, may exempt a person from the 9.8% stock ownership limitation or the
"look-through" ownership limitation, as applicable.
All certificates representing shares of our common stock will bear a
legend referring to the restrictions described above.
The 9.8% stock 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 our common stock might receive a premium from
their shares of our 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 PROVISIONS OF MARYLAND LAW
NUMBER OF DIRECTORS; CLASSIFICATION OF OUR BOARD
Our 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 our entire board. 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 nine directors,
six of whom are independent directors. The holders of our 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 vote of the remaining
directors, except that a vacancy resulting from an increase in the number of
directors must be filled by a majority vote of our entire board.
Our charter divides our board into three classes of directors. The term
of the first class expires in 2000, the term of the Class II directors expires
in 2001 and the term of the Class III directors expires in 1999. As the term of
each class expires, directors in that class will be elected by our stockholders
for a term of three years and until their successors are duly elected and
qualified. Classification of our board is intended to assure the continuity and
stability of our company's business strategies and policies as determined by our
board. Because holders of our 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 our 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 our company or other transaction, even though such an attempt or
other transaction might be beneficial to our 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 our board. Thus, the classified
board provision could increase the likelihood that incumbent directors will
retain their positions. See "Risk Factors--Potential Anti-Takeover Effect of
Provisions of Maryland Law and of Our Company's Charter and Our Bylaws."
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REMOVAL; FILLING VACANCIES
Our bylaws provide that, unless our board otherwise determines, any
vacancies (except vacancies resulting from an increase in the number of
directors) will be filled by the affirmative vote of a majority of the remaining
directors, though less than a quorum. Any director so elected shall hold office
until the next annual meeting of stockholders. Our charter provides that
directors may be removed, with or without cause, only by the affirmative vote of
the holders of at least 75% of votes entitled to be cast in the election of the
directors. This provision, when coupled with the provision of our bylaws
authorizing the board to fill vacant directorships, precludes stockholders from
removing incumbent directors, except upon a substantial affirmative vote, and
filling the vacancies created by such removal with their own nominees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland General Corporation Law 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 (1) actual receipt of an improper benefit or profit in
money, property or services or (2) active and deliberate dishonesty established
by a final judgment as being material to a cause of action adjudicated in any
proceeding. Our charter contains such a provision which eliminates such
liability to the maximum extent permitted by Maryland law.
Our charter obligates us, to the maximum extent permitted by Maryland
law, to indemnify, and to pay or to reimburse reasonable expenses in advance of
final disposition of a proceeding to, any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding whether or not by or
in our right, and whether civil, criminal, admin istrative, investigative or
otherwise, by reason of the fact that such person is or was our director or
officer, or is or was serving at our request as a director, officer, trustee,
partner, member, agent or employee of another corporation, partnership, limited
liability company, association, joint venture, trust or other enterprise.
Maryland law requires a Maryland corporation (unless its charter
provides otherwise, which our 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. Maryland law 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 (1) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (a) was committed in bad faith or (b) was the result
of active and deliberate dishonesty, (2 the director or officer actually
received an improper personal benefit in money, property or services or (3) 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.
Our 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 our company, whether or not
our company is required or has the power to indemnify them against the same
liability.
BUSINESS COMBINATIONS
Maryland law provides that "business combinations" including a merger,
consolidation, share exchange or, in some circumstances, an asset transfer or
issuance or reclassification of equity securities, between a Maryland
corporation and any person who beneficially owns 10% 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% or more of the voting power of the then-outstanding
voting shares of such corporation or an affiliate thereof, are prohibited for
five years after the most recent date on
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which the 10% beneficial owner became such a 10% beneficial owner. Thereafter,
any such business combination must be recommended by the board of such
corporation and approved by the affirmative vote of at least (1) 80% of the
votes entitled to be cast by holders of outstanding voting shares of such
corporation and (2) two-thirds of the votes entitled to be cast by holders of
voting shares of such corporation other than the shares held by the 10%
beneficial owner 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 Maryland General Corporation Law) for
their shares and the consideration is received in cash or in the same form as
previously paid by the 10% beneficial owner for its shares. These provisions of
the Maryland law do not apply, however, to business combinations that are
approved or exempted by the board of the corporation prior to the time that the
10% beneficial owner becomes such a 10% beneficial owner.
CONTROL SHARE ACQUISITION STATUTE
Maryland law 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: (1) one-fifth or more but less than one-third,
(2) one-third or more but less than a majority, or (3) a majority or more of all
voting power. Control shares do not include shares which 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 exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of conditions, including an undertaking to pay expenses, may
compel the board 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 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 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.
Our bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of our common stock.
There can be no assurance that such provision will not be amended or eliminated
at any time in the future.
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AMENDMENT TO OUR CHARTER
Our charter may be amended by the affirmative vote of holders of shares
entitled to cast a majority of all votes entitled to be cast on such an
amendment. However, (1) no term or provision of our charter may be added,
amended or repealed in any respect that would, in the determination of our
board, cause us not to qualify as a real estate investment trust under the
Internal Revenue Code, (2) provisions of our 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 (3) provisions imposing cumulative voting in the
election of directors, may not be added to our 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 OUR COMPANY
The affirmative vote of the holders of not less than a majority of all
of the votes entitled to be cast on the matter must approve the dissolution of
our company.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
Our bylaws provide that (1) with respect to an annual meeting of
stockholders, nominations of persons for election of our board and the proposal
of business to be considered by stockholders may be made only (a) pursuant to
our notice of the meeting, (b) by our board or (c) by a stockholder who is
entitled to vote at the meeting and has complied with the advance notice
procedures set forth in our bylaws, and (2) with respect to special meetings of
stockholders, only the business specified in our company's notice of meeting may
be brought before the meeting of stockholders and nominations of persons for
election to our board provided that our board 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 our
bylaws.
MEETINGS OF STOCKHOLDERS
Our bylaws provide that annual meetings of stockholders shall be held
on a date and at the time set by our board during the month of May each year
(commencing in May 1997). Special meetings of our stockholders may be called by
our (1) President, (2) Chief Executive Officer or (3) board. As permitted by
Maryland law, our bylaws provide that special meetings must be called by our
Secretary 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
Our charter requires the board generally to use commercially reasonable
efforts to cause our company to qualify as a real estate investment trust.
ANTI-TAKEOVER EFFECT OF PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER
AND OUR BYLAWS
The following provisions could delay, defer or prevent a transaction or
a change in control of our company that might involve a premium price for
holders of our common stock or otherwise be in their best interest:
o the business combination provisions of Maryland law;
o if the applicable provisions in our bylaws are amended or rescinded,
the control share acquisition provisions of Maryland law;
o the provisions of our charter on classification of our board and
removal of directors; and
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o the advance notice provisions of our bylaws.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax matters
relating to the operations of our company that may be relevant to our
prospective stockholders. It is based upon current law and is not tax advice.
This discussion does not address all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or tax
circumstances, or to stockholders subject to special treatment under the federal
income tax laws, such as insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States. It does not give a detailed
discussion of any state, local or foreign tax considerations. In the opinion of
Paul, Weiss, Rifkind, Wharton & Garrison, our special tax counsel, the following
discussion accurately reflects the federal income tax considerations relating to
our operations that are likely to be material to a stockholder of our company.
EACH PROSPECTIVE STOCKHOLDER OF OUR COMPANY IS ENCOURAGED TO CONSULT
ITS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE
PURCHASE, OWNERSHIP AND SALE OF SHARES OF OUR COMMON STOCK AND OF OUR COMPANY'S
ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP,
SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
GENERAL
Our predecessor, American General Hospitality Corporation, made an
election to be taxed as a real estate investment trust for federal income tax
purposes commencing with its taxable year ended December 31, 1996. We believe we
are organized and operated in such a manner as to qualify for taxation as a real
estate investment trust under the Internal Revenue Code. We intend to continue
to operate in such a manner. However, no assurance can be given that we will
operate in a manner so as to qualify or remain qualified.
The requirements relating to the federal income tax treatment of real
estate investment trusts and their stockholders are highly technical and
complex. The following discussion sets forth only the material aspects of those
requirements. This summary is qualified in its entirety by the applicable
Internal Revenue Code provisions, rules and Treasury regulations promulgated
thereunder, and administrative and judicial interpretations thereof.
OPINION OF SPECIAL TAX COUNSEL
In the opinion of our special tax counsel, commencing with the taxable
year ended December 31, 1996, we have been organized and have operated in
conformity with the requirements for qualification as a real estate investment
trust within the meaning of the Internal Revenue Code and our proposed method of
operation will enable us to continue to meet the requirements for qualification
and taxation as a real estate investment trust under the Internal Revenue Code.
It must be emphasized that the opinion of our special tax counsel is based on
various assumptions and is conditioned upon representations made by us as to
factual matters. Such factual assumptions and representations are set forth
below. Moreover, for periods beginning after December 31, 1998, such
qualification and taxation as a real estate investment trust depends upon our
ability to meet, through actual annual operating results, the distribution
levels, diversity of stock ownership and the various other qualification tests
imposed under the Internal Revenue Code that are discussed below, the results of
which have not been and will not be reviewed by our special tax counsel.
Accordingly, no assurance can be given that the actual results of our operations
for any one taxable year will satisfy such requirements.
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TAXATION OF OUR COMPANY
A real estate investment trust generally is not subject to federal
corporate income taxes on that portion of its ordinary income or capital gain
that is distributed currently to stockholders because the real estate investment
trust provisions of the Internal Revenue Code generally allow a real estate
investment trust to deduct dividends paid to its stockholders. This deduction
for dividends paid to stockholders substantially eliminates the federal "double
taxation" on earnings (once at the corporate level and once again at the
stockholder level) that generally results from investment in a corporation.
However, real estate investment trusts may be subject to federal income
tax in the following circumstances:
o A real estate investment trust will be taxed at regular corporate rates
on any undistributed real estate investment trust taxable income and
undistributed net capital gains.
o Under some circumstances, a real estate investment trust may be subject
to the "alternative minimum tax" on its items of tax preference, if
any.
o If the real estate investment trust has (1) net income from the sale or
other disposition of "foreclosure property" which, generally, is
property acquired by reason of a default on a lease or an indebtedness
held by a real estate investment trust that is held primarily for sale
to customers in the ordinary course of business, or (2) other
non-qualifying net income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income.
o If the real estate investment trust has net income from a "prohibited
transaction" which, generally, is a sale or other disposition of
property held primarily for sale to customers in the ordinary course of
business, other than foreclosure property, such income will be subject
to a 100% tax.
o If the real estate investment trust fails to satisfy the 75% gross
income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a real estate investment
trust because it has met other requirements, it will be subject to a
100% tax on the net income attributable to the greater of the amount by
which the real estate investment trust fails the 75% or 95% test,
multiplied by a fraction intended to reflect the real estate investment
trust's profitability.
o If the real estate investment trust fails to distribute with respect to
each calendar year at least the sum of (1) 85% of its real estate
investment trust ordinary income for such year, (2) 95% of its real
estate investment trust capital gain net income for such year and (3)
any undistributed taxable income from prior periods, the real estate
investment trust will be subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed.
o If a real estate investment trust (1) acquires any asset from a C
corporation, which is a corporation generally subject to a full
corporate-level tax, in a transaction in which the basis of the asset
in the real estate investment trust's hands is determined by reference
to the basis of the asset (or any other property) in the hands of the C
corporation, and (2) recognizes gain on the disposition of such asset
during the ten-year period beginning on the date on which such asset
was acquired by the real estate investment trust, then pursuant to
guidelines set forth in Internal Revenue Service Notice 88-19, the
excess of the fair market value of such property at the beginning of
the applicable ten-year period over the real estate investment trust's
adjusted basis in such asset as of the beginning of such ten-year
period will be subject to a tax at the highest regular corporate rate.
The results described above with respect to the recognition of such
excess of fair market value over adjusted basis assume that our company will
make elections pursuant to Internal Revenue Service Notice 88-19 or applicable
future administrative rules or regulations. Legislative proposals, if enacted in
the form proposed, might change Internal Revenue Service Notice 88-19. See
"--Possible Federal Tax Developments."
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REQUIREMENTS FOR QUALIFICATION
To qualify as a real estate investment trust, a corporation must elect
to be so treated and must meet the requirements, discussed below, relating to
(1) its organization, (2) sources of income, (3) nature of assets and (4)
distribution of income to stockholders.
ORGANIZATIONAL REQUIREMENTS
The Internal Revenue Code defines a real estate investment trust as a
corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation but for the real
estate investment trust provisions of the Internal Revenue Code;
(4) that is neither a financial institution as defined under specific
provisions of the Internal Revenue Code nor an insurance company
to which specific provisions of the Internal Revenue Code apply;
(5) the beneficial ownership of which is held by 100 or more persons;
and
(6) during the last half of each taxable year not more than 50% in
value of the outstanding capital stock of which is owned, directly
or indirectly through the application of attribution rules, by
five or fewer individuals, as defined in the Internal Revenue Code
to include certain entities.
In addition, other tests described below, regarding the nature of a
real estate investment trust's income and assets, also must be satisfied. The
Internal Revenue Code provides that conditions (1) through (4) above must be met
during the entire taxable year and that condition (5) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. Conditions (5) and (6) will not apply
until after the first taxable year for which an election is made to be taxed as
a real estate investment trust.
For taxable years beginning after 1997, if a real estate investment
trust complies with regulations that provide procedures for ascertaining the
actual ownership of shares of its stock for such taxable year and the real
estate investment trust did not know (and with the exercise of reasonable
diligence could not have known) that it failed to meet the requirement of
condition (6) above for such taxable year, the real estate investment trust will
be treated as having met the requirement of condition (6) for such year.
Our company has satisfied the requirements set forth in (1) through (4)
above and believes that it has sufficient diversity of share ownership to allow
it to satisfy conditions (5) and (6) above. Our charter includes restrictions
regarding transfers of shares of our common stock that are intended to assist us
in satisfying the share ownership requirements described in (5) and (6) above.
See "Description of Capital Stock--Restrictions on Transfer."
In addition, a corporation may not elect to become a real estate
investment trust unless its taxable year is the calendar year. Our company's
taxable year is the calendar year.
Our company has a number of "qualified REIT subsidiaries." Section
856(i) of the Internal Revenue Code provides that a corporation that is a
"qualified REIT subsidiary" will not be treated as a separate corporation, and
all assets, liabilities and items of income, deduction, and credit of a
"qualified REIT subsidiary" will be treated as assets, liabilities, and such
items (as the case may be) of the real estate investment
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trust. In applying the requirements described herein, our company's "qualified
REIT subsidiaries" will be ignored, and all assets and liabilities, and items of
income, deduction, and credit of such subsidiaries will be treated as assets,
liabilities and items of our company.
In the case of a real estate investment trust that is a partner in a
partnership, the real estate investment trust will be deemed to own its
proportionate share of the assets of the partnership and will be deemed to be
entitled to the income of the partnership attributable to such share. In
addition, the character of the assets and gross income of the partnership will
retain the same character in the hands of the real estate investment trust for
purposes of the real estate investment trust requirements, including satisfying
the income and asset tests described herein. Thus, our company's proportionate
share of the assets, liabilities and items of income of MeriStar Hospitality
Operating Partnership, L.P., and of the partnerships, limited liability
companies, joint ventures and business trusts in which our company or the
operating partnership have and will have an interest are and will be treated as
assets, liabilities and items of income of our company for purposes of applying
the requirements described herein, provided that the operating partnership and
the subsidiary partnerships and other such subsidiary entities are treated as
partnerships for federal income tax purposes. See "--Income Taxation of the
Operating Partnership, the Subsidiary Entities and Their Owners."
TREATMENT OF OUR COMPANY AND MERISTAR HOTELS AS SEPARATE ENTITIES
Section 269B(a)(3) of the Internal Revenue Code provides that if the
shares of a real estate investment trust are stapled with the shares of any
other entity, then the real estate investment trust and the non-real estate
investment trust shall be treated as one entity for purposes of determining
whether the real estate investment trust qualifies as a real estate investment
trust. If section 269B(a)(3) of the Internal Revenue Code applied to our company
and MeriStar Hotels, our company would not be able to satisfy the gross income
tests described below and thus would not be eligible to be taxed as a real
estate investment trust. Section 269B of the Internal Revenue Code treats
entities as stapled if more than 50 percent of the beneficial ownership
interests in each of the entities consists of stapled interests, which are
interests that, by reason of the form of ownership, restrictions on transfer, or
other terms or conditions, are transferred or required to be transferred in
connection with the transfer of the other such interests. The shares of MeriStar
Hotels were issued independently of the shares of our company and are traded
separately as well. In the opinion of our special tax counsel, our company and
MeriStar Hotels are not stapled entities under section 269B(a)(3) of the
Internal Revenue Code.
Even though section 269B(a)(3) of the Internal Revenue Code does not
apply to our company and MeriStar Hotels, because some employees, members of
management and directors of our company and MeriStar Hotels are the same, it is
possible that the Internal Revenue Service could seek to assert that MeriStar
Hotels should be treated as an agent of our company or that our company and
MeriStar Hotels should be treated as one entity for federal income tax purposes.
Currently a majority of the directors of our company are not directors
of MeriStar Hotels and one of the executive officers of our company is not an
executive officer of MeriStar Hotels. MeriStar Hotels enters into contracts,
hires employees and holds itself out to the public as a separate corporate
entity. In addition, MeriStar Hotels manages properties for other owners and
leases a substantial number of properties from persons unrelated to our company
on terms similar to the leases entered into between MeriStar Hotels and our
company. The stockholders of our company and MeriStar Hotels are not identical
and the shares of MeriStar Hotels are traded separately from those of our
company. In addition, our company and MeriStar Hotels do not hold themselves out
to the public as principal and agent and the leases, the Intercompany Agreement
and other material transactions among our company, MeriStar Hotels, the
operating partnership, and any entities in which each of them own an interest
have been and will be negotiated and structured with the intention of achieving
an arm's-length result. Based on the foregoing, our special tax counsel is of
the opinion that the separate corporate identities of our company and MeriStar
Hotels will be respected and that MeriStar Hotels is not an agent of our company
for federal income tax purposes.
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INCOME TESTS
There are two gross income requirements that we must satisfy annually
in order for us to maintain our qualification as a real estate investment trust.
First, at least 75% of our gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property," dividends from qualified real estate investment
trusts and, in some circumstances, interest) or from "qualified temporary
investment income" which, generally, is income attributable to the temporary
investment of new capital received by us. Second, at least 95% of our gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from such real property investments and from dividends,
interest, and gain from the sale or disposition of stock or securities or from
any combination of the foregoing. In addition, for taxable years prior to 1998,
short-term gain from the sale or other disposition of stock or securities, gain
from prohibited transactions and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must have represented less than 30% of the gross
income of our company's predecessor (including gross income from prohibited
transactions) for each taxable year.
Rents received by our company, the operating partnership and the
partnerships, limited liability companies and joint ventures in which our
company or the operating partnership have a direct or indirect interest will
qualify as "rents from real property" only if the following conditions are met:
o The amount of rent must not be based 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 "rents from
real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales.
o Rents received from a tenant will not qualify as "rents from real
property" if our company, or an owner of 10% or more of our
company, directly or constructively (through the application of
stock attribution rules modified, for taxable years beginning after
1997, to attribute stock owned by partners to a partnership only in
the case of partners who own 25% or more of the capital or profits
interest in such partnership), owns 10% or more of such tenant,
making it a related party tenant.
o 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, then the portion of rent
attributable to such personal property will not qualify as "rents
from real property."
o The real estate investment trust 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" who
is adequately compensated and from whom the real estate investment
trust does not derive any income. However, the real estate
investment trust may directly perform customary services, such as
furnishing water, heat, light and air conditioning and cleaning
windows, public entrances and lobbies. But it may not perform
services which are considered rendered to the occupant of the
property, such as renting parking spaces on a reserved basis to
tenants.
We lease substantially all of our hotels to MeriStar Hotels. In order
for the rents payable under the leases to constitute "rents from real property,"
the 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 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 the intent
of the parties, the form of the agreement, 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 is
required simply to use its best efforts to perform its obligations under the
agreement) and the extent to which the
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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, Internal Revenue 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:
o the service recipient is in physical possession of the property;
o the service recipient controls the property;
o the service recipient has a significant economic or possessory
interest in the property. Factors that may establish such an
interest include whether (1) the property's use is likely to be
dedicated to the service recipient for a substantial portion of the
useful life of the property, (2) the service recipient shares the
risk that the property will decline in value, (3) the service
recipient shares in any appreciation in the value of the property,
(4) the service recipient shares in increases in the property's
operating costs or (5) the service recipient bears the risk of
damage to or loss of the property;
o the service provider does not bear any risk of substantially
diminished receipts or substantially increased expenditures if
there is nonperformance under the contract;
o the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service
recipient; and
o the total contract price does not substantially exceed the rental
value of the property for the contract period.
As 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.
Our special tax counsel is of the opinion that the hotel leases are
true leases for federal income tax purposes. Such opinion is based, in part, on
the following facts:
o the operating partnership or other subsidiary entity, as
applicable, and MeriStar Hotels or other applicable lessee intend
for their relationship to be that of a lessor and lessee and such
relationship is documented by lease agreements;
o the lessee will have the right to exclusive possession and use and
quiet enjoyment of the hotels during the term of the lease;
o 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;
o the lessee generally will bear all of the costs and expenses of
operating the hotels during the term of the leases;
o the lessee will benefit from any savings in the costs of operating
the hotels during the term of the lease;
o the lessee will indemnify our company against liabilities imposed
upon or asserted against our company during the term of the lease;
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o the lessee will be obligated to pay substantial fixed rent for the
period of use of the hotels; and
o the lessee stands to incur substantial losses (or reap substantial
gains) depending on how successfully it operates the hotels.
Stockholders should be aware that there are no controlling Treasury
regulations, published rulings or judicial decisions involving leases with terms
substantially the same as the leases that discuss whether such leases constitute
true leases for federal income tax purposes. Therefore, the opinion of our
special tax counsel with respect to the relationship between our operating
partnership or a subsidiary entity, 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. Our special tax
counsel's opinion is not binding upon the Internal Revenue Service or the
courts. If the Internal Revenue Service successfully recharacterized the leases
as service contracts or partnership agreements, rather than true leases, part or
all of the payments that our operating partnership and the subsidiary entities
receive from the lessee would not qualify as "rents from real property." In such
event, we likely would not be able to satisfy either the 75% or 95% gross income
tests and, as a result, would lose our real estate investment trust status.
As noted above, in order to be treated as "rents from real property,"
the rents under the hotel leases must not be based in whole or in part on the
income or profits of any person. The rents will qualify as "rents from real
property" if they are based on percentages of receipts or sales and the
percentages (1) are fixed at the time the leases are entered into, (2) are not
renegotiated during the term of the leases in a manner that has the effect of
basing rent on income or profits, and (3) conform with normal business practice.
We believe that rentals under the hotel leases comply with these requirements.
As noted above, rent received from a related party tenant does not
qualify as "rents from real property." Our charter prohibits a stockholder of
our company from owning our common stock if such ownership would cause our
company to own, actually or constructively, 10% or more of the ownership
interests in a tenant of our company's, our operating partnership's or a
subsidiary entity's real property. As a result, the lessee should not be a
related party tenant of our company.
The hotel leases provide that the rents attributable to leased personal
property are not greater than 15% of the total rents under the hotel lease. The
lessee may be required to purchase any excess personal property at fair market
value.
The fourth requirement noted above for qualification of rents under the
hotel leases as "rents from real property" is that our company cannot furnish or
render non-customary services to the tenants of the hotels or operate or manage
the hotels, other than through an independent contractor who is adequately
compensated and from whom we do not derive any income. Provided that the hotel
leases are treated as true leases, we should not be considered to manage or
operate the hotels, because MeriStar Hotels manages the hotels for its own
account in its capacity as lessee. None of our company, our operating
partnership or any subsidiary entity furnishes or provides any services to a
tenant and none of such entities contracts with any other person to provide such
services.
If we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may nevertheless qualify as a real estate investment
trust for such year if we are entitled to relief under the Internal Revenue
Code. Relief generally will be available if (1) the failure to meet such tests
was due to reasonable cause and not due to willful neglect, (2) a schedule of
the sources of qualifying income is attached to our federal income tax return
for such taxable year and (3) any incorrect information on the schedule was not
due to fraud with intent to evade tax. It is not possible, however, to state
whether in all circumstances our company would be entitled to the benefit of
these relief provisions. As discussed above in "--Taxation of Our Company," even
if these relief provisions apply, a tax would be imposed with respect to the
excess net income. No similar relief provision would apply if the 30% income
test had been failed for a taxable year prior to 1998 and, in such case, our
company would cease to qualify as a real estate investment trust. See--"Failure
to Qualify."
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ASSET TESTS
In order for us to qualify as a real estate investment trust, at the
close of each quarter of our taxable year we must also satisfy three tests
relating to the nature of our assets. First, at least 75% of the value of our
total assets must be represented by cash, cash items and government securities
and by real estate assets, which for this purpose include (1) our allocable
share of real estate assets held by partnerships in which our company or a
"qualified REIT subsidiary" owns an interest, (2) stock or debt instruments
purchased with the proceeds of a stock offering or a long-term (at least five
years) debt offering and held for not more than one year from the date our
company receives such proceeds and (3) shares in qualified real estate
investment trusts. Second, not more than 25% of the total assets of our company
may be represented by securities other than those in the 75% asset class. Third,
of the investments included in the 25% asset class, the value of any one
issuer's securities may not exceed 5% of the value of the total assets of our
company, and our company may not own more than 10% of any one issuer's
outstanding voting securities, excluding securities of a qualified REIT
subsidiary or another real estate investment trust. Currently proposed
legislation, if enacted in the form proposed, would change the 10% requirement.
See "--Possible Federal Tax Developments."
We anticipate that we will be able to comply with these asset tests.
Our company is currently deemed to and will continue to be deemed to hold
directly its proportionate share of all real estate and other assets of our
operating partnership and the partnerships, limited liability companies and
joint ventures in which our company owns an interest and we should be considered
to hold our proportionate share of all assets deemed owned by those entities
through such entities' ownership of interests in other such entities. As a
result, our company plans to hold more than 75% of its assets as real estate
assets. In addition, we do not plan to hold any securities representing more
than 10% of any one issuer's voting securities, other than any qualified REIT
subsidiary, nor securities of any one issuer exceeding 5% of the value of our
company's gross assets determined in accordance with generally accepted
accounting principles.
After initially meeting the asset tests at the close of any quarter,
our company will not lose its status as a real estate investment trust for
failure to satisfy the asset tests at the end of a later quarter solely by
reason of changes in asset values. If the failure to satisfy the asset tests
results from an acquisition of securities or other property during a quarter,
the failure can be cured by disposition of sufficient nonqualifying assets
within 30 days after the close of that quarter. It is intended that our company
will maintain adequate records of the value of its assets to ensure compliance
with the asset tests, and will take such other action within 30 days after the
close of any quarter as may be required to cure any noncompliance. However,
there can be no assurance that such other action always will be successful.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to be taxed as a real estate investment trust, we will be
required to meet annual distribution requirements imposed by the Internal
Revenue Code. We will have to distribute dividends (other than capital gain
dividends) to our stockholders in an amount at least equal to (1) the sum of (a)
95% of our "real estate investment trust taxable income" (computed without
regard to the dividends paid deduction and our net capital gain) and (b) 95% of
the net income, if any, from foreclosure property in excess of the special tax
on income from foreclosure property, minus (2) the sum of specific items of
noncash income. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before we timely file
our tax return for such year and if paid on or before the first regular dividend
payment after such declaration.
To the extent that we do not distribute all of our net capital gain or
distribute at least 95% (but less than 100%) of our real estate investment trust
taxable income, as adjusted, we will be subject to tax on the undistributed
portion, at regular ordinary and capital gains corporate tax rates. Furthermore,
if we fail to distribute for each calendar year at least the sum of (1) 85% of
our real estate investment trust ordinary income for such year, (2) 95% of our
real estate investment trust capital gain net income for such year and (3) any
undistributed ordinary income and capital gain net income from prior periods, we
will be subject to a 4% excise
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tax on the excess of such required distribution over the amounts actually
distributed. We intend to make timely distributions sufficient to satisfy this
annual distribution requirement.
It is expected that our taxable income ordinarily will be less than our
cash flow, due to the allowance of depreciation and other noncash charges in
computing our taxable income. Accordingly, we anticipate that we generally will
have sufficient cash or liquid assets to enable us to satisfy the 95%
distribution requirement.
It is possible that from time to time our company may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
because of timing differences between the actual receipt of income and actual
payment of deductible expenses and the inclusion of such income and deduction of
such expenses in arriving at taxable income of our company or if the amount of
nondeductible expenses such as principal amortization or capital expenditures
exceeds the amount of noncash deductions. In the event that such situation
occurs, in order to meet the 95% distribution requirement, our company may find
it necessary to arrange for short-term, or possibly long-term, borrowings or to
pay dividends in the form of taxable share dividends. If the amount of
nondeductible expenses exceeds noncash deductions, our company may refinance its
indebtedness to reduce principal payments and borrow funds for capital
expenditures.
Under circumstances in which an adjustment is made that affects the
amount that should have been distributed for a prior taxable year, we may be
able to rectify the failure to meet such distribution requirement by paying
"deficiency dividends" to stockholders in the later year, which may be included
in our deduction for dividends paid for the earlier year. Thus, we may be able
to avoid being taxed on amounts distributed as deficiency dividends; however, we
will be required to pay interest based upon the amount of any deduction taken
for deficiency dividends.
FAILURE TO QUALIFY
If we fail to qualify for taxation as a real estate investment trust in
any taxable year, and the relief provisions do not apply, we will be subject to
tax (including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. Distributions to stockholders in any year in which our
company fails to qualify will not be deductible by the corporation nor will they
be required to be made. In such event, to the extent of current or accumulated
earnings and profits, all distributions to stockholders will be taxable as
ordinary income, and subject to limitations of the Internal Revenue Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, we also will be
disqualified from taxation as a real estate investment trust for the four
taxable years following the year during which qualification is lost. It is not
possible to state whether in all circumstances we would be entitled to such
statutory relief.
TAXATION OF U.S. STOCKHOLDERS OF OUR COMPANY
A U.S. stockholder is a holder of shares of stock of our company that,
for United States federal income tax purposes is:
o a citizen or resident of the United States;
o a corporation, partnership, or other entity created or organized in
or under the laws of the United States or of any political
subdivision thereof;
o an estate the income of which is subject to United States federal
income taxation regardless of its source; or
o a trust if either (a) a United States court is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust or (b) the trust has a valid
election in effect under applicable Treasury regulations to be
treated as a United States person.
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For any taxable year for which our company qualifies for taxation as a real
estate investment trust, amounts distributed to taxable U.S. stockholders will
be taxed as follows:
DISTRIBUTIONS GENERALLY
Distributions to U.S. stockholders, other than capital gain dividends
discussed below, will be taxable as ordinary income to such holders up to the
amount of our company's current or accumulated earnings and profits. Such
distributions are not eligible for the dividends-received deduction for
corporations. To the extent that our company makes distributions in excess of
its current or accumulated earnings and profits, such distributions will first
be treated as a tax-free return of capital, reducing the tax basis in the U.S.
stockholders' shares of stock, and distributions in excess of the U.S.
stockholders' tax basis in their respective shares of stock will be taxable as
an amount realized from the sale of such shares. Dividends we declare in
October, November, or December of any year payable to a stockholder of record on
a specified date in any such month will be treated as both paid by our company
and received by the stockholder on December 31 of such year if the dividend is
actually paid by our company during January of the following calendar year.
Stockholders may not include on their own income tax returns any of our tax
losses.
We will be treated as having sufficient earnings and profits to treat
as a dividend any distribution by our company up to the greater of our current
or accumulated earnings and profits. As a result, stockholders may be required
to treat distributions that would otherwise result in a tax-free return of
capital as taxable dividends. Moreover, any "deficiency dividend" will be
treated as a "dividend" (an ordinary dividend or a capital gain dividend, as the
case may be), regardless of our company's earnings and profits.
CAPITAL GAIN DIVIDENDS
Dividends to U.S. stockholders that we properly designate as capital
gain dividends will be treated as long-term capital gain (to the extent they do
not exceed our company's actual net capital gain) for the taxable year without
regard to the period for which the stockholder has held his stock. Corporate
stockholders, however, may be required to treat up to 20% of capital gain
dividends as ordinary income. Capital gain dividends are not eligible for the
dividends-received deduction for corporations.
Individual U.S. stockholders and U.S. stockholders that are estates and
trusts currently are subject to federal income tax on net capital gains at
different tax rates depending upon the nature of the gain and the holding period
of the asset disposed of. Current guidance applicable until the issuance of
regulations provides, subject to limitations, that a real estate investment
trust may designate the tax rate on a capital gain dividend. In the absence of a
designation, such dividend presumably will be treated as a 20%-rate
distribution.
Although a real estate investment trust is taxed on its undistributed
net capital gains, for taxable years beginning after 1997, a real estate
investment trust may elect to include all or a portion of such undistributed net
capital gains in the income of its stockholders. In such event, the stockholder
will receive a credit or refund for the amount of tax paid by the real estate
investment trust on such undistributed net capital gains.
PASSIVE ACTIVITY AND LOSS; INVESTMENT INTEREST LIMITATIONS
Distributions from our company and gain from the disposition of shares
of our common stock ordinarily will not be treated as passive activity income.
Therefore, U.S. stockholders generally will not be able to apply any "passive
losses" against such income. Dividends from our company (to the extent they do
not constitute a return of capital) generally will be treated as investment
income for purposes of the investment interest limitation. Net capital gain from
the disposition of shares of our common stock and capital gain dividends
generally will be excluded from investment income unless the taxpayer elects to
have the gain taxed at ordinary rates.
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DISPOSITIONS OF SHARES OF OUR COMMON STOCK
A U.S. stockholder will recognize gain or loss on the sale or exchange
of shares of our common stock to the extent of the difference between the amount
realized on such sale or exchange and the holder's tax basis in such shares.
Such gain or loss generally will constitute long-term capital gain or loss if
the holder has held such shares for more than one year and, in the case of an
individual, will be taxed at a lower rate. Losses incurred on the sale or
exchange of shares of our common stock held for six months or less (after
applying applicable holding period rules), however, generally will be deemed
long-term capital loss to the extent of any long-term capital gain dividends
received by the U.S. stockholder with respect to such shares.
TREATMENT OF TAX-EXEMPT U.S. STOCKHOLDERS
The Internal Revenue Service has ruled that amounts distributed by a
real estate investment trust out of its earnings and profits to a tax-exempt
pension trust did not constitute unrelated business taxable income. Although
rulings are merely interpretations of law by the Internal Revenue Service and
may be revoked or modified, based on this analysis, indebtedness that we incur
in connection with the acquisition of an investment should not cause any income
derived from the investment to be treated as unrelated business taxable income
upon the distribution of such income as a dividend to a tax-exempt entity
(except certain entities described below). A tax-exempt entity that incurs
indebtedness to finance its purchase of shares, however, will be subject to
unrelated business taxable income by virtue of the debt-financed income rules.
For tax-exempt stockholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts or qualified
group legal services plans under sections 501(c)(7), (c)(9), (c)(17) and (c)(20)
of the Internal Revenue Code, respectively, income from an investment in our
shares will constitute unrelated business taxable income unless the organization
is able to properly deduct amounts set aside or placed in reserve for certain
purposes so as to offset the income generated by its investment in our shares.
These investors should consult their tax advisors concerning these requirements.
In addition, tax-exempt pension and some other tax-exempt trusts that
hold more than 10% (by value) of the interests in a real estate investment trust
are required to treat a percentage of real estate investment trust dividends as
unrelated business taxable income. The requirement applies only if (1) the
qualification of the real estate investment trust depends upon the application
of a "look-through" exception to the restriction on real estate investment trust
stockholdings by five or fewer individuals, including such trusts and (2) the
real estate investment trust is "predominantly held" by such tax-exempt trusts.
It is not anticipated that qualification of our company as a real estate
investment trust will depend upon application of the "look-through" exception or
that our company will be "predominantly held" by such trusts.
SPECIAL TAX CONSIDERATIONS FOR FOREIGN STOCKHOLDERS
The rules governing United States federal income taxation of non-U.S.
stockholders, including non-resident alien individuals, foreign corporations,
foreign partnerships, and foreign trusts and estates, are complex, and the
following discussion is intended only as a summary of such rules. Prospective
non-U.S. stockholders should consult with their own tax advisors to determine
the impact of federal, state, and local income tax laws on an investment in our
company, including any reporting requirements, as well as the tax treatment of
such an investment under their home country laws.
In general, non-U.S. stockholders will be subject to United States
federal income tax with respect to their investment in our company if such
investment is "effectively connected" with the non-U.S. stockholder's conduct of
a trade or business in the United States. A corporate non-U.S. stockholder who
receives income that is (or is treated as) effectively connected with a United
States trade or business also may be subject to the branch profits tax under
section 884 of the Internal Revenue Code, which is payable in addition to United
States corporate income tax.
The following discussion applies to non-U.S. stockholders whose
investment in our company is not so effectively connected. Our company expects
to withhold United States income tax, as described below, on the gross amount of
any distributions paid to a non-U.S. stockholder unless (1) a lower treaty rate
applies and the required form evidencing eligibility for that reduced rate is
filed with our company, or (2) the non-U.S. stockholder files an Internal
Revenue Service Form 4224 or applicable successor form with our company,
claiming that the distribution is "effectively connected" income.
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A distribution by our company that is not attributable to gain from the
sale or exchange by our company of a United States real property interest and
that is not designated by our company as a capital gain dividend will be treated
as an ordinary income dividend to the extent made out of current or accumulated
earnings and profits. Generally, an ordinary income dividend will be subject to
a United States withholding tax equal to 30% of the gross amount of the
distribution unless such tax is reduced or eliminated by an applicable tax
treaty. A distribution of cash in excess of our company's earnings and profits
will be treated first as a return of capital that will reduce a non-U.S.
stockholder's basis in its shares of our company's common stock (but not below
zero) and then as gain from the disposition of such shares, the tax treatment of
which is described under the rules discussed below with respect to dispositions
of shares.
Distributions by our company that are attributable to gain from the
sale or exchange of a United States real property interest will be taxed to a
non-U.S. stockholder under the Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a non-U.S.
stockholder as if such distributions were gains "effectively connected" with a
United States trade or business. Accordingly, a non- U.S. stockholder will be
taxed at the normal capital gain rates applicable to a U.S. stockholder, subject
to any applicable alternative minimum tax and a special alternative minimum tax
in the case of non-resident alien individuals. Distributions subject to FIRPTA
also may be subject to a 30% branch profits tax in the hands of a foreign
corporate stockholder that is not entitled to treaty exemption.
Our company will be required to withhold from distributions to non-U.S.
stockholders, and remit to the Internal Revenue Service, (1) 35% of designated
capital gain dividends (or, if greater, 35% of the amount of any distributions
that could be designated as capital gain dividends) and (2) 30% of ordinary
dividends paid out of earnings and profits. In addition, if our company
designates prior distributions as capital gain dividends, subsequent
distributions, up to the amount of such prior distributions not withheld
against, will be treated as capital gain dividends for purposes of withholding.
A distribution in excess of our company's earnings and profits may be
subject to 30% dividend withholding if at the time of the distribution it cannot
be determined whether the distribution will be in an amount in excess of our
company's current or accumulated earnings and profits. Tax treaties may reduce
our company's withholding obligations. If the amount withheld by our company
with respect to a distribution to a non-U.S. stockholder exceeds the
stockholder's United States tax liability with respect to such distribution (as
determined under the rules described in the two preceding paragraphs), the
non-U.S. Stockholder may file for a refund of such excess from the Internal
Revenue Service. It should be noted that the 35% withholding tax rate on capital
gain dividends currently corresponds to the maximum income tax rate applicable
to corporations, but is higher than the 20% rate generally imposed on capital
gains of individuals.
Unless the shares of our common stock constitute a "United States real
property interest" within the meaning of FIRPTA or are effectively connected
with a U.S. trade or business, a sale of such shares by a non- U.S. stockholder
generally will not be subject to United States taxation. The shares of our
common stock will not constitute a United States real property interest if our
company is a "domestically-controlled real estate investment trust." A
domestically-controlled real estate investment trust is a real estate investment
trust in which at all times during a specified testing period less than 50% in
value of its shares is held directly or indirectly by non-U.S. stockholders. It
is currently believed that our company is a domestically-controlled real estate
investment trust, and therefore that the sale of shares in our company will not
be subject to taxation under FIRPTA. However, because the shares of our common
stock are publicly traded, no assurance can be given that our company will
continue to be a domestically-controlled real estate investment trust.
Notwithstanding the foregoing, capital gain not subject to FIRPTA will
be taxable to a non-U.S. stockholder if the non-U.S. stockholder is a
nonresident alien individual who is present in the United States for 183 days or
more during the taxable year and other conditions apply, in which case the
nonresident alien individual will be subject to a 30% tax on such individual's
capital gains. If our company did not constitute a domestically-controlled real
estate investment trust, whether a non-U.S. stockholder's sale of shares of our
common stock would be subject to tax under FIRPTA as a sale of a United States
real property interest would depend on whether the shares were "regularly
traded" (as defined by applicable regulations) on an established
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securities market, such as the New York Stock Exchange, and on the size of the
selling stockholder's interest in our company.
If the gain on the sale of our company's shares were subject to
taxation under FIRPTA, the non-U.S. stockholder would be subject to the same
treatment as a U.S. stockholder with respect to such gain, subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals. In any event, a purchaser of shares of our common
stock from a non-U.S. stockholder will not be required under FIRPTA to withhold
on the purchase price if the purchased shares of our common stock are "regularly
traded" on an established securities market or if our company is a
domestically-controlled real estate investment trust. Otherwise, under FIRPTA
the purchaser of shares of our common stock may be required to withhold 10% of
the purchase price and remit such amount to the Internal Revenue Service.
Treasury regulations generally effective for payments made after
December 31, 1999 might alter the procedures with respect to claiming the
benefits of an income tax treaty with respect to certain stockholders. Non-U.S.
stockholders should consult their tax advisors concerning the application of the
new Treasury regulations to them.
INCOME TAXATION OF THE OPERATING PARTNERSHIP, THE SUBSIDIARY ENTITIES AND THEIR
OWNERS
The following discussion summarizes federal income tax considerations
applicable to our company's investment in our operating partnership and the
interest of our company in the subsidiary partnerships, limited liability
companies and joint ventures in which our company or the operating partnership
has a direct or indirect interest.
CLASSIFICATION OF THE OPERATING PARTNERSHIP AND THE SUBSIDIARY ENTITIES
Our company will be entitled to include in its income its distributive
share of the income and to deduct its distributive share of the losses of our
operating partnership (including the operating partnership's share of the income
or losses of the subsidiary partnerships, limited liability companies and joint
ventures) only if such organizations are classified for federal income tax
purposes as partnerships or, in the case of the subsidiary entities that are
single-member limited liability companies, are disregarded as an entity separate
from such member, rather than as associations taxable as corporations. With some
exceptions, an unincorporated domestic organization formed on or after January
1, 1997 will be treated as a partnership if it has two or more members or will
be disregarded as an entity separate from its owner if it has a single owner
absent an election by such organization to be treated for federal income tax
purposes as an association taxable as a corporation. An organization with two or
more members formed prior to January 1, 1997 was treated as a partnership for
federal income tax purposes rather than as a corporation for periods prior to
January 1, 1997 only if it had no more than two of the four corporate
characteristics that the Treasury regulations applicable to such organizations
used to distinguish a partnership from a corporation for tax purposes. These
four characteristics were continuity of life, centralization of management,
limited liability, and free transferability of interests. Unless such
organization elects otherwise, the classification claimed by the organization
prior to January 1, 1997 will continue for periods on or after January 1, 1997,
and such classification will be respected for all prior periods if (1) the
organization had a reasonable basis, as defined under the Internal Revenue Code,
for such classification, (2) the organization and all members of the
organization recognized the federal tax consequences of any change in the
organization's classification within the 60 months prior to January 1, 1997 and
(3) neither the organization nor any member was notified in writing on or before
May 8, 1996 that the classification of the organization was under examination.
Our company expects that neither the operating partnership nor any
subsidiary entity formed on and after January 1, 1997 will elect to be treated
as an association for federal income tax purposes. In addition, American General
Hospitality Operating Partnership, L.P. and the subsidiary entities in existence
prior to January 1, 1997 and owned, directly or indirectly, by our company and
its predecessor claimed to be partnerships for all periods prior to January 1,
1997 and were not notified in writing on or before May 8, 1996 that such
classification was under examination.
In the opinion of our special tax counsel, which is based on the
provisions of the partnership agreement of our operating partnership and on
factual assumptions and representations, our operating partnership and the
subsidiary entities have been and continue to be, and the operating partnership
and the subsidiary entities will be, treated as partnerships for federal income
tax purposes or, in the case of those subsidiary entities that are
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<PAGE>
single-member limited liability companies, disregarded as an entity separate
from such member. However, neither our operating partnership nor any of the
subsidiary entities have requested, nor do they intend to request, a ruling from
the Internal Revenue Service that they will be treated as partnerships or
disregarded, as applicable, for federal income tax purposes. Our special tax
counsel's opinion is not binding on the Internal Revenue Service or the courts.
A publicly-traded partnership is a partnership whose 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 will be treated as a corporation for federal income tax purposes
unless at least 90% of such partnership's gross income for each taxable year
consists of "qualifying income," which generally includes any income that is
qualifying income for purposes of the 95% gross income test applicable to real
estate investment trusts (the "Qualifying Income Exception"). See
"--Requirements for Qualification--Income Tests." For this purpose, the related
party tenant test is applied by treating the partnership as owning an interest
in any corporation that is owned directly or indirectly by any 5% partner. The
partnership agreement of our operating partnership contains restrictions
regarding transfers of units in our operating partnership that are intended to
assist the operating partnership in satisfying the related party tenant test
applicable for purposes of the Qualifying Income Exception.
It is unclear whether the right of unit holders in the operating
partnership to exchange their units for shares of our company would be treated
as the "substantial equivalent" of the units being readily tradeable. Although
regulations provide safe harbors that, if applicable, will cause partnership
interests to be treated as interests that are not readily tradeable on a
secondary market or the substantial equivalent thereof, our operating
partnership does not currently qualify for any such safe harbor. However,
because it is anticipated that the operating partnership will meet the
Qualifying Income Exception, it should not be treated as a corporation under the
publicly-traded partnership rules.
If for any reason our operating partnership or one of the subsidiary
entities were taxable as a corporation for federal income tax purposes, we would
not be able to satisfy the requirements for real estate investment trust status.
See "--Requirements for Qualification--Income Tests" and "--Requirements for
Qualification--Asset Tests." In addition, any change in any such organization's
status for tax purposes might be treated as a taxable event, in which case we
might incur a tax liability without any related cash distribution. See
"--Requirements for Qualification--Annual Distribution Requirements." Further,
items of income and deduction of any such organization would not pass through to
its partners or members, and its partners or members would be treated as
stockholders for tax purposes. Any such organization would be required to pay
income tax at corporate tax rates on its net income, and distributions to its
partners or members would constitute dividends that would not be deductible in
computing such organization's taxable income.
PARTNERS, NOT PARTNERSHIPS, SUBJECT TO TAX
A partnership is not a taxable entity for federal income tax purposes.
Rather, a partner is required to take into account its allocable share of a
partnership's income, gains, losses, deductions, and credits for any taxable
year of the partnership ending within or with the taxable year of the partner,
without regard to whether the partner has received or will receive any
distributions from the partnership.
PARTNERSHIP ALLOCATIONS
Although a partnership agreement will generally determine the
allocation of income and losses among partners, such allocations will be
disregarded for tax purposes under section 704(b) of the Internal Revenue Code
if they do not comply with the provisions of section 704(b) of the Internal
Revenue Code and the regulations promulgated thereunder as to substantial
economic effect.
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 with respect
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<PAGE>
to such item. The allocations of taxable income and loss of our operating
partnership and the subsidiary entities are intended to comply with the
requirements of section 704(b) of the Internal Revenue Code and the regulations
promulgated thereunder.
SALE OF PARTNERSHIP PROPERTY
Generally, any gain realized by a partnership on the sale of property
held by the partnership for more than one year and allocated to a corporate
partner will be long-term capital gain, except for any portion of such gain that
is treated as depreciation or cost recovery recapture. However, under the real
estate investment trust requirements imposed by the Internal Revenue Code, our
company's share, as a partner, of any gain realized by our operating partnership
or the subsidiary entities on the sale of any property held as inventory or
other property held primarily for sale to customers in the ordinary course of a
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. See "--Taxation of Our Company."
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
We will report to our U.S. stockholders and the Internal Revenue
Service the amount of distributions paid during each calendar year and the
amount of tax withheld, if any. U.S. stockholders may be subject to backup
withholding at a rate of 31% with respect to distributions paid. Backup
withholding will apply only if the stockholder:
o fails to furnish its taxpayer identification number which, for an
individual, would be such individual's Social Security number;
o furnishes an incorrect taxpayer identification number;
o is notified by the Internal Revenue Service that it has failed
properly to report payments of interest and dividends; or
o in some cases, fails to certify, under penalty of perjury, that it
has furnished a correct taxpayer identification number and has not
been notified by the Internal Revenue Service that it is subject to
backup withholding for failure to report interest and dividend
payments.
Backup withholding will not apply with respect to payments made to exempt
recipients such as corporations and tax-exempt organizations. U.S. stockholders
should consult their own tax advisors regarding their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption.
Backup withholding is not an additional tax. Rather, the amount of any
backup withholding with respect to a payment to a U.S. stockholder will be
allowed as a credit against such U.S. stockholder's United States federal income
tax liability and may entitle such U.S. stockholder to a refund, provided that
the required information is furnished to the Internal Revenue Service.
Additional issues may arise pertaining to information reporting and
backup withholding with respect to non-U.S. stockholders. Non-U.S. stockholders
should consult their tax advisors with respect to any such information reporting
and backup withholding requirements.
STATE AND LOCAL TAX CONSIDERATIONS
Our company is, and our stockholders may be, subject to state or local
taxation in various state or local jurisdictions, including those in which our
company, our stockholders, our operating partnership or the subsidiary
partnerships and other subsidiary entities owned by our company or the operating
partnership transact business or reside. The state and local tax treatment of
our company, our operating partnership, the subsidiary partnerships and other
subsidiary entities and our company's stockholders may not conform to the
federal
36
<PAGE>
income tax consequences discussed above. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and local
tax laws on their investment in our company.
POSSIBLE FEDERAL TAX DEVELOPMENTS
The Internal Revenue Service, the Treasury Department, Congress and the
courts constantly review the rules dealing with federal income taxation. New
federal tax legislation or other provisions may be enacted into law or new
interpretations, rulings or Treasury regulations could be adopted or judicial
decisions rendered, all of which could affect the taxation of our company or of
our stockholders. No prediction can be made as to the likelihood of passage of
any new tax legislation or other provisions either directly or indirectly
affecting our company or its stockholders. Consequently, the tax treatment
described herein may be modified prospectively or retroactively by such
legislative, judicial or administrative action.
Legislation enacted in 1998 limits the ability of existing "stapled
real estate investment trusts" to continue to obtain federal income tax benefits
for which such real estate investment trusts were "grandfathered" under previous
legislation but which are not currently available to other real estate
investment trusts. In a stapled real estate investment trust structure, the
stock of a real estate investment trust and a C corporation trade as a single
unit. Under statutory provisions enacted in 1984, for purposes of determining
whether an entity qualifies as a real estate investment trust, the income,
assets and operations of any other entity to which it is stapled must be taken
into account. These rules did not apply to all stapled real estate investment
trusts in existence at the time such rules were enacted. For purposes of
determining whether such a grandfathered stapled entity is a real estate
investment trust, the new rules treat the real estate investment trust and the C
corporation as one entity with respect to newly-acquired properties and the
activities or services relating to such properties undertaken by either entity.
Because our company is not a grandfathered stapled real estate investment trust
and because the stock of MeriStar Hotels and our company trade separately, these
rules do not apply to either corporation. As a result, the activities of
MeriStar Hotels will not be considered in determining whether our company
qualifies as a real estate investment trust. See "--Treatment of Our Company and
MeriStar Hotels as Separate Entities."
A current legislative proposal, if enacted in the form proposed, would
result in future revisions to Internal Revenue Service Notice 88-19 (see
"--Taxation of Our Company"). Such proposal generally would require a C
corporation to recognize the gain in its assets as of the date preceding the
date of the transfer of such assets to a real estate investment trust in a
transaction in which the basis of the assets in the real estate investment
trust's hands is determined by reference to the basis of the assets (or any
other property) in the hands of the C corporation. Such proposal would be
effective for acquisitions after December 31, 1999.
Another current proposal would amend the 10% asset test described above
under "Requirements for Qualification--Asset Tests" to prohibit a real estate
investment trust from owning more than 10 percent of the vote or value of any
corporate issuer. Limited exceptions to this rule would exist for the ownership
of subsidiaries performing specified activities and services if the value of
such entities did not exceed specified percentages of the total value of the
real estate investment trust's assets. As currently proposed, this provision
would be effective on the date of enactment but transition periods would be
provided with respect to subsidiaries owned at the time of enactment. To the
extent that legislation amending the 10% asset test is enacted and applied to
any securities owned by our company, we intend to take action designed to timely
comply with the legislation.
USE OF PROCEEDS
The selling stockholders listed below will receive all of the proceeds
from the sale of the shares of our common stock offered by this document. We
will not receive any proceeds from the sale of such shares.
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<PAGE>
THE SELLING STOCKHOLDERS
The selling stockholders listed in the table below are persons who
either have received or may receive shares of our common stock in exchange for
units of limited partnership interests in MeriStar Hospitality Operating
Partnership, L.P.
We list below with respect to the selling stockholders, as of April 1,
1999, (1) the number of shares of our common stock beneficially owned, (2) the
maximum number of shares which may be sold in the offering covered by this
prospectus and (3) the number of shares which will be beneficially owned after
the offering, assuming the sale of all the shares set forth in (2) above. Except
as otherwise noted below, none of the selling stockholders has, within the past
three years, had any position, office or other material relationship with our
company.
<TABLE>
<CAPTION>
Maximum Number of Shares Percentage to
Shares Beneficially Number of to Be Beneficially Be Beneficially
Owned Prior to Shares Which Owned After this Owned After
Name this Offering(1) May Be Sold Offering(2) this Offering(2)
- ------------------------------------------ --------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C> <C>
Jackson-Shaw Partners No. 51, Ltd. 4,455 4,455 0 0
Lewis W. Shaw, II 79,259 79,259 0 0
Kenneth W. Shaw 75,424 75,424 0 0
Carole C. Shaw(3) 2,892 2,892 0 0
Monica Jorns(4) 16,190 16,190 0 0
Steven D. Jorns(5) 412,456(6) 63,068 349,388 *
Bruce G. Wiles(7) 150,646(8) 23,823 126,823 *
Kenneth E. Barr(9) 249,865(10) 8,475 241,390 *
John D. Gourley 5,704 5,704 0 0
Louis E. Capt 24,357 24,357 0 0
Richard O. Jacobson Trust 36,537 36,537 0 0
Thomas J. Corcoran, Jr.(11) 36,537 36,537 0 0
Hervey A. Feldman(12) 18,268 18,268 0 0
Jerry R. Jacob 8,525 8,525 0 0
Pin Nien Hwang 6,089 6,089 0 0
Thomas L. Wiese 3,045 3,045 0 0
Steven L. Cobb 3,045 3,045 0 0
Barbara Hess 6,955 6,955 0 0
DFW South Acquisition Corporation 98,041 98,041 0 0
Corporate Property Associates 4, 361,889 361,889 0 0
L.P.
Corporate Property Associates 8, 418,380 418,380 0 0
L.P.
Devlo, Inc. 20,608 20,608 0 0
The Cocoa Beach Company, Inc. 2,278 2,278 0 0
Charles R. Faust 22,340 22,340 0 0
C. Wayne Thompson 44,682 44,682 0 0
S. Ronald Thompson 44,682 44,682 0 0
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Maximum Number of Shares Percentage to
Shares Beneficially Number of to Be Beneficially Be Beneficially
Owned Prior to Shares Which Owned After this Owned After
Name this Offering(1) May Be Sold Offering(2) this Offering(2)
- ------------------------------------------ --------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C> <C>
John D. Monson 55,852 55,852 0 0
Clyde E. Williams Jr. 18,601 18,601 0 0
CW Associates Co. 37,250 37,250 0 0
CapStar Management Company, 1,445,013 1,445,013 0 0
LLC
O/K Associates Limited Partnership 2,083,461 2,083,461 0 0
- --------------------
</TABLE>
(*) Less than 1%.
(1) Beneficial ownership as of April 1, 1999, based upon information
provided by the respective selling stockholders. Unless otherwise noted
in the following footnotes, the shares of our common stock set forth in
this column with respect to a particular selling stockholder have not
also been attributed to the shareholders, limited partners or general
partners of such selling stockholders.
(2) Assumes sale of all shares of our common stock registered hereunder,
even though selling stockholders are under no obligation known to our
company to sell any shares of our common stock at this time. Assumes
that all units of limited partnership interests in MeriStar Hospitality
Operating Partnership, L.P. ("OP Units") held by or attributable to the
person are exchanged for shares of our common stock. The total number
of shares of our common stock outstanding used in calculating this
percentage assumes that none of the OP Units held by other persons are
exchanged for shares of our common stock.
(3) Carole C. Shaw is the wife of Kenneth W. Shaw. Kenneth W. Shaw
disclaims beneficial ownership of the shares of common stock that may
be issued to Mrs. Shaw in exchange for the OP Units held by her.
(4) Monica Jorns is the wife of Steven D. Jorns. Steven D. Jorns disclaims
beneficial ownership of the shares of common stock that may be issued
to Mrs. Jorns in exchange for the OP Units held by her.
(5) Steven D. Jorns is the Vice Chairman of the Board of our company.
(6) Includes (a) 109,141 shares of common stock that have vested under
options granted under the MeriStar Hospitality Corporation Incentive
Plan, (b) 30,000 shares of restricted common stock that constitute
stock awards and (c) 11,837 shares of restricted common stock.
(7) Bruce G. Wiles is our President and Chief Investment Officer.
(8) Includes (a) 23,475 shares of restricted common stock that constitute
stock awards, (b) 39,789 shares of common stock that have vested under
options granted under our Incentive Plan and (c) 5,758 OP Units held by
Mr. Wiles.
(9) Kenneth E. Barr, who was our Executive Vice President, Chief Financial
Officer, Secretary and Treasurer prior to our merger with CapStar Hotel
Company, is a participant in American General Hospitality Inc.'s
Retirement Savings Plan.
(10) Includes (a) 235,432 shares of common stock that have vested under
options granted under the Incentive Plan, (b) 5,085 shares of
restricted common stock that constitute stock awards, (c) 66 shares of
common stock held by the Retirement Plan and attributable to Mr. Barr,
(d) 8,475 OP Units and (e) 807 shares of common stock purchased by Mr.
Barr through open market transactions, 84 of which were purchased as a
custodian on behalf of a family member, with respect to which Mr. Barr
disclaims beneficial ownership.
(11) Thomas J. Corcoran controls 50% of the voting stock of DFW South
Acquisition Corporation.
(12) Hervey A. Feldman controls 50% of the voting stock of DFW South
Acquisition Corporation.
39
<PAGE>
PLAN OF DISTRIBUTION
We are registering 5,075,725 shares of our common stock on behalf of
the selling stockholders who are listed above.
The selling stockholders may choose to sell their shares from time to
time on the New York Stock Exchange, at market prices prevailing at the time of
the sale, at prices related to the then prevailing market prices, in negotiated
transactions or through a combination of these methods. In addition, these
selling stockholders may choose one or more of the following alternatives:
o a block trade in which a broker or dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal in order to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this prospectus; and
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers.
We will pay all costs, expenses and fees in connection with the
registration of the shares of our common stock offered by this prospectus. The
selling stockholders will pay brokerage commissions and similar selling
expenses, if any, attributable to the sale of shares of our common stock offered
by this document.
The selling stockholders and any broker-dealers who act in connection
with the sale of their shares of our common stock under this prospectus may be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act of 1933 and any commissions received by them and profit on any
resale of their shares of our common stock as principals might be deemed to be
underwriting discounts and commissions under the Securities Act. We have agreed
to indemnify the selling stockholders against liabilities under the Securities
Act as underwriters or otherwise. The selling stockholders may also agree to
indemnify any agent, dealer or broker-dealer that participates in transactions
involving sales of the shares of our common stock offered hereby against such
liabilities.
When a selling stockholder elects to make a particular offer of the
shares which are the subject of this prospectus, a prospectus supplement, if
required, will be distributed which will identify any underwriters, dealers or
agents and any discounts, commissions and other terms constituting compensation
from such selling stockholder and any other required information.
EXPERTS
The consolidated financial statements and supplementary schedule of our
company and our subsidiaries as of December 31, 1998 and 1997, and for each of
the years in the three-year period ended December 31, 1998, have been
incorporated by reference in this document and the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference in this document, and upon the authority of said firm
as experts in accounting and auditing.
LEGAL MATTERS
Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland, will issue
an opinion about the legality of the shares of our common stock being offered by
this prospectus. In addition, the description of federal income tax matters
contained in the section of this prospectus entitled "Federal Income Tax
Considerations" is based on the opinion of Paul, Weiss, Rifkind, Wharton &
Garrison, New York, New York.
40
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document that we file at the Securities and Exchange Commission's
Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. Please
call 1-800-SEC-0330 for further information on the operation of the Public
Reference Room. Reports, proxy statements and other information regarding
issuers that file electronically with the Securities and Exchange Commission,
including our filings, are also available to the public from the Securities and
Exchange Commission's Web site at "http://www.sec.gov."
Our common stock is listed on the New York Stock Exchange and such
reports, proxy statements and other information can also be inspected at the
office of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
We have filed with the Securities and Exchange Commission a
registration statement on Form S-3 under the Securities Act of 1933. This
prospectus is a part of the registration statement and constitutes a prospectus
of our company for the shares of our common stock to be sold by the selling
stockholders. As allowed by the Securities and Exchange Commission rules, this
prospectus does not contain all the information you can find in the registration
statement or the exhibits to the registration statement.
THE SECURITIES AND EXCHANGE COMMISSION ALLOWS US TO "INCORPORATE BY
REFERENCE" THE INFORMATION WE FILE WITH THEM, WHICH MEANS THAT WE CAN DISCLOSE
IMPORTANT BUSINESS AND FINANCIAL INFORMATION ABOUT US TO YOU THAT IS NOT
INCLUDED IN OR DELIVERED WITH THIS PROSPECTUS BY REFERRING YOU TO THOSE
DOCUMENTS.
The information incorporated by reference is considered to be part of
this prospectus, and information that we file later with the Securities and
Exchange Commission will automatically update and supersede this information. We
incorporate by reference the documents listed below and any filing we will make
with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 following the date of this
prospectus and prior to the termination of the offering of our company's shares
of common stock:
1. Our Annual Report on Form 10-K filed by us for the fiscal year ended
December 31, 1998; and
2. Our Definitive Proxy Statement on Schedule 14A filed by us on April 2,
1999.
YOU MAY REQUEST A COPY OF THESE FILINGS, AT NO COST, BY WRITING OR
TELEPHONING US AT THE FOLLOWING ADDRESS:
JOHN EMERY, CHIEF FINANCIAL OFFICER
MERISTAR HOSPITALITY CORPORATION
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20007
TELEPHONE REQUESTS MAY BE DIRECTED TO (202) 295-1000.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT OUR COMPANY THAT DIFFERS FROM OR ADDS TO THE INFORMATION IN
THIS PROSPECTUS OR IN OUR DOCUMENTS OR THE DOCUMENTS THAT WE PUBLICLY FILE WITH
THE SECURITIES AND EXCHANGE COMMISSION. THEREFORE, IF ANYONE DOES GIVE YOU
DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT.
THE INFORMATION CONTAINED IN THIS PROSPECTUS SPEAKS ONLY AS OF ITS DATE
UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES.
41
<PAGE>
================================================================================
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this prospectus in
connection with the offering covered by this prospectus. If given or made, such
information or representation must not be relied upon as having been authorized
by our company or the selling stockholders described in this document. This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, our common stock in any jurisdiction where, or to any person to whom, it
is unlawful to make such offer or solicitation. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that there has not been any change in the facts set forth in this
prospectus or in the affairs of our company since the date hereof.
-----------------
TABLE OF CONTENTS
-----------------
PROSPECTUS
Page
----
The Company....................................................................1
Risk Factors...................................................................2
Forward-Looking Information...................................................12
The Intercompany Agreement and Leases.........................................12
Description of Capital Stock..................................................16
Federal Income Tax Considerations.............................................22
Use of Proceeds...............................................................38
The Selling Stockholders......................................................38
Plan of Distribution..........................................................40
Experts.......................................................................40
Legal Matters.................................................................40
Where You Can Find More Information...........................................41
- --------------------------------------------------------------------------------
5,075,725 SHARES
MERISTAR HOSPITALITY
CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees
and expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the shares of
Common Stock.
Securities and Exchange Commission Registration Fee.................... $12,669
Printing and mailing expenses.......................................... 25,000
Accounting fees and expenses........................................... 5,000
Legal fees and expenses................................................ 25,000
Miscellaneous expenses................................................. 10,000
-------
Total.................................................... $77,669
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Maryland General Corporation Law ("MGCL") permits a Maryland
corporation to include in its charter a provision limiting the liability of its
directors and officers to the corporation and its stockholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit or
profit in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. Our
Charter contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
Our Charter obligates us, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding whether or not by or
in the right of our 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 our Company, or is or was serving at the request of our
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. Our Charter also permits us to indemnify and
advance expenses to any person who served a predecessor of our Company in any of
the capacities described above and to any employee or agent of our Company or a
predecessor of our Company.
The Maryland General Corporation Law requires a Maryland corporation
(unless its charter provides otherwise, which our Charter does not) to indemnify
a director or officer who has been successful, on the merits or otherwise, in
the defense of any Maryland proceeding to which he is made a party by reason of
his service in that capacity. The Maryland General Corporation Law permits a
corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities unless it
is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. However, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation. In addition, the
Maryland General Corporation Law requires us, as a condition to advancing
expenses, to obtain (a) a written affirmation by the director or officer of his
good faith belief that he has met the standard of conduct necessary for
indemnification by us as authorized by the Bylaws and (b) a written statement by
or on his behalf to repay the amount paid or reimbursed by us if it shall
ultimately be determined that the standard of conduct was not met.
We have purchased director and officer liability insurance for the
purpose of providing a source of funds to pay any indemnification described
above.
II-1
<PAGE>
ITEM 16. EXHIBITS
A list of exhibits included as part of this Registration Statement is
set forth in the Exhibit Index which immediately precedes such exhibits and is
hereby incorporated by reference herein.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of a
prospectus pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply if the registration
statement is on Form S-3, Form S-8 or Form F-3, and the information required to
be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offering therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referred to in Item 15 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question as to whether such indemnification by it is against public policy
as expressed in the act, and will be governed by the final adjudication of such
issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement, or amendment thereto, to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Washington, District of Columbia, on
the 28th day of April, 1999.
MERISTAR HOSPITALITY CORPORATION
By: /s/ Paul W. Whetsell
--------------------
Paul W. Whetsell
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Paul W. Whetsell and Steven D. Jorns and each or either of them, his
true and lawful attorney-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement (or any registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933) and to cause the same to be filed, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby granting to said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing whatsoever requisite or desirable to be done in and about the premises, as
fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things that said
attorneys-in-fact and agents, or either of them, or their substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement, or amendment thereto, has been signed by the following
persons in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Paul W. Whetsell Chairman of the Board, Chief April 28, 1999
- -------------------- Executive Officer and Director
Paul W. Whetsell
/s/ Steven D. Jorns Vice Chairman of the Board April 28, 1999
- -------------------
Steven D. Jorns
/s/ Bruce G. Wiles President, Chief Investment Officer April 28, 1999
- ------------------ and Director
Bruce G. Wiles
II-3
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ John Emery Chief Financial Officer April 28, 1999
- -------------- (Principal Financial and Accounting
John Emery Officer)
/s/ Daniel L. Doctoroff Director April 28, 1999
- -----------------------
Daniel L. Doctoroff
/s/ William S. Janes Director April 28, 1999
- --------------------
William S. Janes
/s/ James F. Dannhauser Director April 28, 1999
- -----------------------
James F. Dannhauser
/s/ Mahmood Khimji Director April 28, 1999
- ------------------
Mahmood Khimji
/s/ James R. Worms Director April 28, 1999
- ------------------
James R. Worms
/s/ H. Cabot Lodge III Director April 28, 1999
- ----------------------
H. Cabot Lodge III
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT
------ -------
3.1 Amended and Restated Articles of Incorporation of the
Registrant (Articles of Merger between American General
Hospitality Corporation and CapStar Hotel Company)
(incorporated by reference to Exhibit 3.1 to our Registration
Statement on Form S-3, File No. 333-66229).
3.2 Amended and Restated By-laws of the Registrant (incorporated
by reference to Exhibit 3.2 to our Registration Statement on
Form S-3, File No. 333-66229).
4.1 Form of Share Certificate (incorporated by reference to
Exhibit 4.1 to our Registration Statement on Form S-11, File
No. 333-4568).
5.1 Form of Draft Opinion of Ballard Spahr Andrews & Ingersoll,
LLP.
8.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison as to
federal income tax matters.
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in
Exhibit 5.1).
23.2 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included
in Exhibit 8.1).
23.3 Consent of KPMG LLP.
24.1 Power of Attorney (included on signature page hereto).
II-4
Exhibit 5.1
-----------
FILE NUMBER
872437
[Letterhead of Ballard Spahr Andrews & Ingersoll, LLP.]
April ___, 1999
MeriStar Hospitality Corporation
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Re: Registration Statement on Form S-3:
5,075,725 Shares of Common Stock
-----------------------------------
Ladies and Gentlemen:
We have served as Maryland counsel to MeriStar Hospitality Corporation,
a Maryland corporation (the "Company"), in connection with certain matters of
Maryland law arising out of the registration of up to 5,075,725 shares (the
"Shares") of common stock, $.01 par value per share, of the Company (the "Common
Shares"), covered by the above-referenced Registration Statement and all
amendments thereto (the "Registration Statement"), as filed by the Company under
the Securities Act of 1933, as amended (the "1933 Act").
In connection with our representation of the Company, and as a basis
for the opinion hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of the following
documents (collectively, the "Documents"):
1. The Registration Statement, including the related form of prospectus
included therein, in the form in which it was transmitted by the Company to the
Securities and Exchange Commission (the "Commission") under the 1933 Act;
2. The charter of the Company (the "Charter"), certified as of a recent
date by the State Department of Assessments and Taxation of Maryland (the
"SDAT");
<PAGE>
MeriStar Hospitality Corporation
April ___, 1999
Page 2
3. The Amended and Restated Bylaws of the Company, certified as of the
date hereof by an officer of the Company;
4. Resolutions adopted by the Board of Directors of the Company, or a
duly authorized committee thereof, relating to the issuance and registration of
the Shares (the "Resolutions"), certified as of the date hereof by an officer of
the Company;
5. A certificate of the SDAT as of a recent date as to the good
standing of the Company;
6. A certificate executed by an officer of the Company, dated as of the
date hereof; and
7. Such other documents and matters as we have deemed necessary or
appropriate to express the opinion set forth in this letter, subject to the
assumptions, limitations and qualifica tions stated herein.
In expressing the opinion set forth below, we have assumed, and so far
as is known to us there are no facts inconsistent with, the following:
1. Each individual executing any of the Documents, whether on behalf of
such individual or any other person, is legally competent to do so.
2. Each individual executing any of the Documents on behalf of a party
(other than the Company) is duly authorized to do so.
3. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the Documents to
which such party is a signatory, and such party's obligations set forth therein
are legal, valid and binding and are enforceable in accordance with all stated
terms.
4. Any Documents submitted to us as originals are authentic. The form
and content of any Documents submitted to us as unexecuted drafts do not differ
in any respect relevant to this opinion from the form and content of such
Documents as executed and delivered. Any Documents submitted to us as certified
or photostatic copies conform to the original documents. All signatures on all
Documents are genuine. All public records reviewed or relied upon by us or on
our behalf are true and complete. All statements and information contained in
the Documents are true and complete. There has been no oral or
<PAGE>
MeriStar Hospitality Corporation
April ___, 1999
Page 3
written modification of or amendment to any of the Documents, and there has been
no waiver of any provision of any of the Documents, by action or omission of the
parties or otherwise.
5. The Shares will not be transferred in violation of any restriction
or limitation contained in the Charter.
The phrase "known to us" is limited to the actual knowledge, without
independent inquiry, of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
Based upon the foregoing, and subject to the assumptions, limitations
and qualifications stated herein, it is our opinion that:
1. The Company is a corporation duly incorporated and existing under
and by virtue of the laws of the State of Maryland and is in good standing with
the SDAT.
2. The Shares are duly authorized and, when and if issued and delivered
against payment therefor and otherwise in the manner described in the
Resolutions and the Registration Statement, will be (assuming that upon any such
issuance the total number of Common Shares issued and outstanding will not
exceed the total number of Common Shares that the Company is then authorized to
issue under the Charter) validly issued, fully paid and nonassessable.
The foregoing opinion is limited to the substantive laws of the State
of Maryland and we do not express any opinion herein concerning any other law.
We express no opinion as to the applicability or effect of any federal or state
securities (or "blue sky") laws, including the securities laws of the State of
Maryland, any federal or state laws regarding fraudulent transfers, or any real
estate syndication laws of the State of Maryland. To the extent that any matter
as to which our opinion is expressed herein would be governed by any
jurisdiction other than the State of Maryland, we do not express any opinion on
such matter.
We assume no obligation to supplement this opinion if any applicable
law changes after the date hereof or if we become aware of any fact that might
change the opinion expressed herein after the date hereof.
This opinion is being furnished to you for submission to the Commission
as an exhibit to the Registration Statement
<PAGE>
MeriStar Hospitality Corporation
April ___, 1999
Page 4
and, accordingly, may not be relied upon by, quoted in any manner to, or
delivered to any other person or entity (except Paul, Weiss, Rifkind, Wharton &
Garrison, counsel to the Company) without, in each instance, our prior written
consent.
We consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by Section 7 of the
1933 Act.
Very truly yours,
Exhibit 8.1
-----------
[Letterhead of Paul, Weiss, Rifkind, Wharton & Garrison]
(212) 373-3000 April 28, 1999
MeriStar Hospitality Corporation
1010 Wisconsin Avenue, N.W.
Washington, D.C. 20007
Ladies and Gentlemen:
In connection with the offer and sale of shares of common stock of
MeriStar Hospitality Corporation (the "Company", including, where applicable,
American General Hospitality Corporation as predecessor to MeriStar Hospitality
Corporation), as described in the Form S-3 to be filed with the Securities and
Exchange Commission on April 27, 1999 (the "Registration Statement"), you have
requested our opinion concerning the federal income tax matters set forth below.
In rendering the opinion expressed herein, we have examined: (i) the
Limited Partnership Formation Agreement of American General Hospitality
Operating Partnership, L.P. (the "Operating Partnership," including, where
applicable, MeriStar Hospitality Operating Partnership, L.P.), dated as of April
9, 1996 and the Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated as of July 31, 1996 and the amendments thereto;
(ii) the Second Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated as of August 3, 1998, as amended; (iii) the amended
and restated articles of incorporation of the Company; and (iv) the Registration
Statement and all amendments to date. We also have made such other
investigations of fact and law and have examined such other documents, records
and instruments as we have deemed necessary in order to enable us to render the
opinion expressed herein.
In our examination of documents, we have assumed, without independent
investigation, that (i) all documents submitted to us are authentic
<PAGE>
MeriStar Hospitality Corporation 2
originals, or if submitted as photocopies, that they faithfully reproduce the
originals thereof; (ii) all such documents have been or will be duly executed to
the extent required; (iii) all representations and statements set forth in such
documents are true and correct; (iv) any representation or statement made as a
belief or made "to the knowledge of," or similarly qualified is correct and
accurate without such qualification; (v) all obligations imposed by any such
documents on the parties thereto have been or will be performed or satisfied in
accordance with their terms; and (vi) the Company, the Operating Partnership and
those partnerships, joint ventures and limited liability companies in which the
Company or the Operating Partnership has had an interest on or prior to the date
hereof (the "Subsidiary Partnerships") at all times will be organized and
operated in accordance with the terms of such documents. We have further assumed
that the statements and descriptions of the Company's, the Operating
Partnership's, the Subsidiary Partnerships' and MeriStar Hotels & Resorts,
Inc.'s businesses, properties and activities as described in the Registration
Statement are accurate.
For purposes of rendering the opinion expressed herein, we have, with
your permission, assumed the accuracy of the representations contained in the
letter (i) from the Company addressed to us, dated April 27, 1999 and (ii) from
MeriStar Hotels & Resorts, Inc. ("MeriStar Hotels") addressed to us, dated April
27, 1999, in each case relating to the classification and operation of the
Company as a real estate investment trust (a "REIT") and the organization and
operation of the Operating Partnership, the Subsidiary Partnerships and those
other entities owned directly or indirectly by the Company and the Operating
Partnership.
Based upon the foregoing, and subject to the assumptions, exceptions
and qualifications set forth herein, we are of the opinion that:
1. The Company has qualified as a REIT within the meaning of the
Internal Revenue Code for each of its taxable years ended December 31,
1996, December 31, 1997 and December 31, 1998, and commencing with its
taxable year ending December 31, 1999, the Company is organized and has
operated in conformity with the requirements for qualification as a
REIT within the meaning of the Internal Revenue Code and its proposed
method of operation will enable it to continue to meet the requirements
for qualification and taxation as a REIT under the Internal Revenue
Code;
<PAGE>
MeriStar Hospitality Corporation 3
2. The Company and MeriStar Hotels are not stapled entities under
section 269B(a)(3) of the Internal Revenue Code, and MeriStar Hotels is
not an agent of the Company for federal income tax purposes;
3. Commencing with the taxable year of the Company ended December 31,
1996, the Operating Partnership has been and continues to be, the
Subsidiary Partnerships have been and continue to be, and the Operating
Partnership and the Subsidiary Partnerships will be, treated as
partnerships for federal income tax purposes or, in the case of those
Subsidiary Partnerships that are single-member limited liability
companies, each such Subsidiary Partnership has been and will be
disregarded as an entity separate from such member for federal income
tax purposes; and
4. The discussion contained in the Registration Statement under the
caption "Federal Income Tax Considerations" accurately reflects the
federal income tax considerations relating to the operation of the
Company that are likely to be material to a holder of shares of the
common stock of the Company.
This opinion is given as of the date hereof and is based on various
Internal Revenue Code provisions, Treasury regulations promulgated under the
Internal Revenue Code and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters, all of which are
subject to change either prospectively or retroactively. Further, any variation
or difference in the facts from those set forth in the Registration Statement
may affect the conclusions stated herein. Moreover, the Company's qualification
and taxation as a REIT depends upon the Company's ability to meet, through
actual annual operating results, requirements under the Internal Revenue Code
regarding its organization, income, assets, distribution levels and diversity of
stock ownership. Because the Company's satisfaction of these requirements for
periods beginning after December 31, 1998 will depend upon future events, no
assurance can be given that the actual results of the Company's operations for
any one taxable year will satisfy the tests necessary to qualify as or be taxed
as a REIT under the Internal Revenue Code.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as
Exhibit 8.1 to the Registration Statement and to the use of our name under the
caption "Federal Income Tax Considerations" in the Registration Statement and
the prospectus included therein. In giving this consent we do not thereby admit
that we come within the
<PAGE>
MeriStar Hospitality Corporation 4
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
We express no opinion as to any federal income tax issue or other
matter except those set forth or confirmed above.
Very truly yours,
/s/ Paul, Weiss, Rifkind, Wharton & Garrison
--------------------------------------------
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
Exhibit 23.3
------------
[Letterhead of KPMG LLP]
Accountants' Consent
--------------------
We consent to the use of our report on the consolidated financial statements and
schedule of MeriStar Hospitality Corporation and subsidiaries as of December 31,
1998 and 1997 and for each of the years in the three-year period ended December
31, 1998 incorporated herein by reference and to the reference to our firm under
the heading "Experts" in the prospectus.
/s/ KPMG LLP
------------
KPMG LLP
Washington, D.C.
April 27, 1999
