Rule 424(b)(3)
No. 333-9943
CNL HOSPITALITY PROPERTIES, INC.
(formerly known as CNL American Realty Fund, Inc.)
This Supplement is part of, and should be read in conjunction with, the
Prospectus dated April 21, 1998 and the Supplement dated June 23, 1998.
Capitalized terms used in this Supplement have the same meaning as in the
Prospectus unless otherwise stated herein.
Information as to proposed properties for which the Company has
received initial commitments and as to the number and types of Properties
acquired by the Company is presented as of August 3, 1998, and all references to
commitments should be read in that context. Proposed properties for which the
Company receives initial commitments, as well as property acquisitions that
occur after August 3, 1998, will be reported in a subsequent Supplement.
THE OFFERING
As of October 15, 1997, the Company had received aggregate subscription
proceeds of $2,774,580, which exceeded the minimum offering amount of
$2,500,000, and $2,652,330 of the funds, excluding funds from Pennsylvania
investors, were released from escrow. As of December 4, 1997, the Company had
received aggregate subscription proceeds of $8,253,530, and funds from
Pennsylvania investors were released from escrow. As of August 3, 1998, the
Company had received total subscription proceeds of $25,324,439 (2,532,444
Shares), including $9,704 (970 Shares) issued pursuant to the Reinvestment Plan,
from 1,278 stockholders in connection with this offering. As of August 3, 1998,
the Company had invested or committed for investment approximately $19,800,000
of net offering proceeds and $8,600,000 in advances relating to the Line of
Credit, described in "Business -- Borrowing," in two hotel Properties, and in
paying acquisition fees and certain acquisition expenses. As of August 3, 1998,
approximately $2,000,000 of net offering proceeds was available to invest in
Properties. As of August 3, 1998, $1,139,600 of net offering proceeds had been
incurred as Acquisition Fees to the Advisor.
BUSINESS
GENERAL
Effective June 3, 1998, the Company changed its name to CNL Hospitality
Properties, Inc. The Board of Directors believes that this will provide better
name recognition of the Company in the context of its business.
In addition, on June 15, 1998, the Company formed CNL Hospitality
Partners, LP, a wholly owned Delaware limited partnership (the "Partnership").
All Properties are expected to be held directly or indirectly by the Partnership
and, as a result, owned by the Company through the Partnership. The Company and
the Partnership hereinafter shall be referred to collectively as the Company.
PROPERTY ACQUISITIONS
On July 31, 1998, the Company acquired two hotel Properties. The
Properties are the Residence Inn by Marriott located in the Buckhead (Lenox
Park) area of Atlanta, Georgia (the"Buckhead (Lenox Park) Property"), and the
Residence Inn by Marriott located at Gwinnett Place in Duluth, Georgia (the
"Gwinnett Place Property").
August 14, 1998 Prospectus Dated April 21, 1998
<PAGE>
The Company acquired the Buckhead (Lenox Park) Property for $15,731,414
from Buckhead Residence Associates, L.L.C. and the Gwinnett Place Property for
$11,514,125 from Gwinnett Residence Associates, L.L.C. In connection with the
purchase of the two Properties, the Company, as lessor, entered into two
separate, long-term lease agreements. The lessee of the Buckhead (Lenox Park)
and the Gwinnett Place Properties is the same unaffiliated lessee. The leases on
both Properties are cross-defaulted. The general terms of the lease agreements
are described in the section of the Prospectus entitled "Business -- Description
of Property Leases." The principal features of the leases are as follows:
o The initial term of each lease expires in approximately 19 years, on
August 31, 2017.
o At the end of the initial lease term, the tenant will have three
consecutive renewal options of five years.
o The leases will require minimum rent payments to the Company
aggregating $1,651,798 per year for the Buckhead (Lenox Park) Property
and $1,208,983 per year for the Gwinnett Place Property.
o Minimum rent payments will increase to $1,691,127 per year for the
Buckhead (Lenox Park) Property and $1,237,768 per year for the Gwinnett
Place Property after the first lease year.
o In addition to minimum rent, for each calendar year, the leases will
require percentage rent equal to 15% of the aggregate amount of all
revenues combined, for the Buckhead (Lenox Park) and the Gwinnett Place
Properties, in excess of $8,080,000.
o A security deposit equal to $819,000 for the Buckhead (Lenox Park)
Property and $598,500 for the Gwinnett Place Property will be retained
by the Company as security for the tenant's obligations under the
leases.
o Management fees payable to Stormont Trice Management Corporation for
operation of the Buckhead (Lenox Park) and Gwinnett Place Properties
are subordinated to minimum rents due to the Company.
o Stormont Trice Corporation, Stormont Trice Development Corporation and
Stormont Trice Management Corporation jointly and severally will
guarantee the obligations of the tenant under the leases for the
Buckhead (Lenox Park) and the Gwinnett Place Properties combined. The
guarantee terminates on the earlier of the end of the third lease year
or at such time as the net operating income from the Buckhead (Lenox
Park) and the Gwinnett Place Properties exceeds minimum rent due under
the leases by 25% for any trailing 12 month period. The guarantee is
equal to $2,835,000 for the first two years, and $1,197,000 for the
third year.
The estimated federal income tax basis of the depreciable portion of
the Buckhead (Lenox Park) Property and the Gwinnett Place Property is
$14,400,000 and $11,000,000, respectively. Other lodging facilities located in
proximity to the Buckhead (Lenox Park) Property include an Embassy Suites, a
Summerfield Suites, a Homewood Suites, an Amerisuites, a Courtyard by Marriott
and another Residence Inn by Marriott. Other lodging facilities located in
proximity to the Gwinnett Place Property include a Courtyard by Marriott, an
Amerisuites, a Sumner Suites and a Hampton Inn.
-2-
<PAGE>
The Buckhead (Lenox Park) Property and the Gwinnett Place Property are
newly constructed hotels which commenced operations on August 7, 1997 and July
29, 1997, respectively. The Buckhead (Lenox Park) Property is situated in a
unique 22 acre mixed-use development and has 150 guest suites. The Gwinnett
Place Property is located 30 minutes from downtown Atlanta and has 132 guest
suites. The average occupancy rate and the revenue per available room for the
periods the hotels have been operational are as follows:
<TABLE>
<CAPTION>
Buckhead (Lenox Park) Property Gwinnett Place Property
------------------------------------------------- -------------------------------------------------
<S> <C>
Average Average Revenue Average Average Revenue
Occupancy Daily Room per Occupancy Daily Room per
Year Rate Rate Available Room Rate Rate Available Room
------ ------------ ------------- -------------- ------------ ------------- --------------
*1997 42.93% $91.15 $39.13 39.08% $85.97 $33.60
**1998 75.11% 98.26 73.80 69.77% 87.28 60.89
</TABLE>
* Data for the Buckhead (Lenox Park) Property represents the period
August 7, 1997 through December 31, 1997 and data for the Gwinnett
Place Property represents the period August 1, 1997 through December
31, 1997.
** Data for 1998 represents the period January 1, 1998 through June 30,
1998.
The Company believes that the results achieved by the Properties for
year-end 1997, are not indicative of their long-term operating potential, as
both Properties had been open for less than six months during the reporting
period.
Residence Inn by Marriott is an upscale extended stay hotel brand,
generally appealing to travelers who stay more than five consecutive days. Each
Residence Inn offers complimentary breakfast and newspaper every morning, an
evening hospitality hour, a swimming pool, heated whirlpool and sport court.
Guest suites provide in-room modem jacks, separate living and sleeping areas and
a fully equipped kitchen with appliances and cooking utensils. According to
Marriott, as of April 1998, there were 273 Residence Inn hotels in the United
States and four in Canada and Mexico. The Company believes that the Residence
Inn by Marriott brand is the leading upscale brand in the extended stay segment
of the United States hotel industry.
PENDING INVESTMENTS
As of August 3, 1998, the Company had initial commitments to acquire
three hotel properties. The acquisition of each of these properties is subject
to the fulfillment of certain conditions, including, but not limited to, a
satisfactory environmental survey and property appraisal. In order to acquire
these properties, the Company must obtain additional funds through the receipt
of additional offering proceeds and/or debt financing. There can be no assurance
that any or all of the conditions will be satisfied or, if satisfied, that one
or more of these properties will be acquired by the Company. If acquired, the
leases of all three of these properties are expected to be entered into on
substantially the same terms described in the section of the Prospectus entitled
"Business - Description of Property Leases."
Set forth below are summarized terms expected to apply to the leases
for each of the properties. More detailed information relating to a property and
its related lease will be provided at such time, if any, as the property is
acquired.
-3-
<PAGE>
<TABLE>
<CAPTION>
Estimated Purchase Lease Term and Minimum Annual Option to
Property Price Renewal Options Rent Percentage Rent Purchase
- -------- ------------------ --------------- -------------- --------------- ---------
<S> <C>
Courtyard by Marriott (1) 15 years; two ten-year 10% of the Company's total for each lease None
Orlando, FL renewal options cost to purchase the year after the
(the "Courtyard Little properties second lease year,
Lake Bryan Property") 7% of revenue in
Hotel to be constructed excess of
revenues for the
Fairfield Inn by (1) 15 years; two ten-year second lease year
Marriott renewal options 10% of the Company's total
Orlando, FL cost to purchase the for each lease None
(the "Fairfield Inn properties year after the
Little Lake Bryan second lease year,
Property") 7% of revenue in
Hotel to be constructed (1) 15 years; two ten-year excess of
renewal options revenues for the
Fairfield Suites by 10% of the Company's total second lease year
Marriott cost to purchase the
Orlando, FL properties for each lease None
(the "Fairfield Suites year after the
Little Lake Bryan second lease year,
Property") 7% of revenue in
Hotel to be constructed excess of
revenues for the
second lease year
</TABLE>
- ------------------------------------
FOOTNOTES:
(1) The anticipated aggregate purchase price for the Courtyard Little Lake
Bryan, Fairfield Inn Little Lake Bryan and Fairfield Suites Little Lake
Bryan Properties is between $90 million and $100 million.
-4-
<PAGE>
BORROWING
On July 31, 1998, the Company entered into a revolving line of credit
and security agreement with a bank to be used by the Company to acquire hotel
Properties. The Line of Credit provides that the Company will be able to receive
advances of up to $30,000,000 until July 30, 2003, with an annual review to be
performed by the bank to indicate that there has been no substantial
deterioration, in the bank's reasonable discretion, of the credit quality.
Interest expense on each advance shall be payable monthly, with all unpaid
interest and principal due no later than five years from the date of the
advance. Advances under the Line of Credit will bear interest at either (i) a
rate per annum equal to 318 basis points above the LIBOR or (ii) a rate per
annum equal to 30 basis points above the bank's base rate, whichever the Company
selects at the time advances are made. In addition a fee of .5% per loan will be
due and payable to the bank on funds as advanced. Each loan made under the Line
of Credit will be secured by the assignment of rents and leases. In addition,
the Line of Credit provides that the Company will not be able to further
encumber the applicable hotel Property during the term of the loan without the
bank's consent. The Company will be required, at each closing, to pay all costs,
fees and expenses arising in connection with the Line of Credit. The Company
must also pay the bank's attorneys fees, subject to a maximum cap, incurred in
connection with the Line of Credit and each advance. On July 31, 1998, the
Company obtained two advances totalling $8,600,000 relating to the Line of
Credit. In connection with the Line of Credit, the Company incurred a commitment
fee, legal fees and closing costs of $60,266. The proceeds were used in
connection with the purchase of two hotel Properties described in "Business --
Property Acquisitions."
-5-
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
STATEMENT OF ESTIMATED TAXABLE OPERATING RESULTS
BEFORE DIVIDENDS PAID DEDUCTION
PROPERTIES ACQUIRED FROM INCEPTION
THROUGH AUGUST 3, 1998
For the Year Ended December 31, 1997 (Unaudited)
The following schedule presents unaudited estimated taxable operating
results before dividends paid deduction of each Property acquired by the Company
from inception through August 3, 1998. The statement presents unaudited
estimated taxable operating results for each Property that was operational as if
the Property had been acquired and operational on January 1, 1997 through
December 31, 1997. The schedule should be read in light of the accompanying
footnotes.
These estimates do not purport to present actual or expected operations
of the Company for any period in the future. These estimates were prepared on
the basis described in the accompanying notes which should be read in
conjunction herewith.
<TABLE>
<CAPTION>
Residence Inn by Marriott Residence Inn by Marriott
Buckhead (Lenox Park) (6) Gwinnett Place (6) Total
------------------------- ------------------------- -------
<S> <C>
Estimated Taxable Operating
Results Before Dividends
Paid Deduction:
Rental Income (1) $1,651,798 $1,208,983 $2,860,781
Asset Management Fees (2) (94,388) (69,085) (163,473)
Interest Expense (3) (440,000) (316,800) (756,800)
General and Administrative
Expenses (4) (105,715) (77,375) (183,090)
---------- ---------- ----------
Estimated Cash Available from
Operations 1,011,695 745,723 1,757,418
Depreciation Expense (5) (625,330) (510,408) (1,135,738)
---------- ---------- ----------
Estimated Taxable Operating
Results Before Dividends
Paid Deduction $ 386,365 $ 235,315 $ 621,680
========== ========== ==========
</TABLE>
-6-
<PAGE>
- ----------------------
FOOTNOTES:
(1) Rental income does not include percentage rents which will become due
if specified levels of gross receipts are achieved.
(2) The Properties will be managed pursuant to an advisory agreement
between the Company and CNL Real Estate Advisors, Inc. (the "Advisor"),
pursuant to which the Advisor will receive monthly asset management
fees in an amount equal to one-twelfth of .60% of the Company's Real
Estate Asset Value as of the end of the preceding month as defined in
such agreement. See "Management Compensation."
(3) Estimated at 8.8% per annum based on the bank's base rate as of July
31, 1998, plus 30 basis points.
(4) Estimated at 6.4% of gross rental income, based on the previous
experience of an Affiliate of the Advisor with another public REIT.
Amount does not include soliciting dealer servicing fee due to the fact
that such fee will not be incurred until December 31 of the year
following the year in which the offering terminates.
(5) The estimated federal tax basis of the depreciable portion of each
Property and the number of years the assets have been depreciated on
the straight-line method is as follows:
Furniture and
Buildings Fixtures
(39 years) (5 years)
---------- -------------
Buckhead (Lenox Park) Property $12,977,000 $1,463,000
Gwinnett Place Property 9,647,000 1,315,000
(6) The lessee of the Buckhead (Lenox Park) and the Gwinnett Place
Properties is the same unaffiliated lessee.
-7-
<PAGE>
ADDENDUM TO
EXHIBIT B
FINANCIAL INFORMATION
THE PRO FORMA FINANCIAL INFORMATION OF
CNL HOSPITALITY PROPERTIES, INC. AND
SUBSIDIARIES CONTAINED IN THIS ADDENDUM
SHOULD BE READ IN CONJUNCTION WITH
EXHIBIT B TO THE ATTACHED PROSPECTUS,
DATED APRIL 21, 1998, AND THE SUPPLEMENT
DATED JUNE 23, 1998.
<PAGE>
INDEX TO PRO FORMA FINANCIAL STATEMENTS
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
Page
----
Pro Forma Financial Information (unaudited):
Pro Forma Consolidated Balance Sheet as of March 31, 1998 B-2
Pro Forma Consolidated Statement of Earnings for the
quarter ended March 31, 1998 B-3
Pro Forma Consolidated Statement of Earnings for the year
ended December 31, 1997 B-4
Notes to Pro Forma Consolidated Financial Statements for
the quarter ended March 31, 1998 and the year ended
December 31, 1997 B-5
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Consolidated Balance Sheet of CNL Hospitality
Properties, Inc. and subsidiaries (the "Company") gives effect to (i) the
receipt of $18,398,853 in gross offering proceeds from the sale of 1,839,885
shares of common stock pursuant to a registration statement on Form S-11 under
the Securities Act of 1933, as amended, effective July 9, 1997, for the period
from inception through March 31, 1998 (ii) the receipt of $6,925,586 in gross
offering proceeds from the sale of 692,559 additional shares and $8,600,000 from
borrowings on the line of credit, for the period April 1, 1998 through August 3,
1998, and (iii) the application of such funds to purchase two properties, and to
pay offering expenses, acquisition fees, and miscellaneous acquisition expenses,
all as reflected in the pro forma adjustments described in the related notes.
The Pro Forma Consolidated Balance Sheet as of March 31, 1998, includes the
transactions described in (i) above, from its historical balance sheet, adjusted
to give effect to the transactions in (ii) and (iii) above, as if they had
occurred on March 31, 1998.
The Pro Forma Consolidated Statements of Earnings for the quarter ended
March 31, 1998 and December 31, 1997, include the historical operating results
of the properties described in (iii) above that were acquired by the Company
during the period April 1, 1998 through August 3, 1998, from the later of (1)
the date the property became operational or (2) October 15, 1997, the date the
Company became operational, to the end of the pro forma period presented.
This pro forma financial information is presented for informational
purposes only and does not purport to be indicative of the Company's financial
results or condition if the various events and transactions reflected therein
had occurred on the dates, or been in effect during the periods, indicated. This
pro forma financial information should not be viewed as predictive of the
Company's financial results or conditions in the future.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
Pro Forma
ASSETS Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C>
Net investment in direct
financing leases (b) $ - $ 28,705,899 (a) $28,705,899
Cash and cash equivalents 13,445,934 (13,110,240)(a) 335,694
Certificates of deposit 1,500,000 - 1,500,000
Prepaid expenses 10,432 - 10,432
Organization costs 18,167 18,167
Other assets 860,782 (761,709)(a) 99,073
----------- ----------- -----------
$15,835,315 $14,833,950 $30,669,265
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Line of credit $ - $ 8,600,000 (a) $ 8,600,000
Accounts payable and accrued
expenses 210,816 (192,416)(a) 18,400
Due to related parties 134,034 262,594 (a) 396,628
----------- ------------ -----------
Total liabilities 344,850 8,670,178 9,015,028
----------- ------------ -----------
STOCKHOLDERS' EQUITY
Preferred stock, without par
value. Authorized and
unissued 3,000,000 shares - - -
Excess shares, $.01 par value
per share. Authorized and
unissued 63,000,000 shares - - -
Common stock, $.01 par value
per share. Authorized
60,000,000 shares, issued
and outstanding 1,859,885
shares; issued and outstanding,
as adjusted, 2,552,444 shares 18,599 6,925 (a) 25,524
Capital in excess of par value 15,532,838 6,156,847 (a) 21,689,685
Accumulated distributions in
excess of net earnings (60,972) - (60,972)
----------- ------------ -----------
Total stockholders' equity 15,490,465 6,163,772 21,654,237
----------- ------------ -----------
$15,835,315 $ 14,833,950 $30,669,265
=========== ============ ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated balance sheet.
B-2
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C>
Revenues:
Earned income from
direct financing leases (6) $ - $ 669,200 (1) 669,200
Interest income 139,153 (139,153)(2) -
----------- --------- -----------
139,153 530,047 669,200
----------- --------- -----------
Expenses:
General operating and
administrative 85,393 85,393
Professional fees 5,452 5,452
Asset management fees
to related party - 40,868 (3) 40,868
Interest expense - 189,200 (4) 189,200
Amortization 1,000 2,150 (5) 3,150
----------- --------- -----------
91,845 232,218 324,063
----------- --------- -----------
Net Earnings $ 47,308 $ 297,829 $ 345,137
=========== ========= ===========
Earnings Per Share of
Common Stock (Basic
and Diluted) (6) $ 0.03 $ 0.16
=========== ===========
Weighted Average Number of
Shares of Common Stock
Outstanding (6) 1,474,288 2,115,004
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
B-3
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C>
Revenues:
Earned income from
direct financing leases (7) $ - 564,746 (1) 564,746
Interest income 46,071 (46,071)(2) -
----------- ---------- -----------
46,071 518,675 564,746
----------- ---------- -----------
Expenses:
General operating and
administrative 22,386 22,386
Asset and mortgage management
fees to related party - 27,245 (3) 27,245
Interest expense - 157,667 (4) 157,667
Amortization 833 2,625
----------- ---------- -----------
23,219 186,704 209,923
----------- ---------- -----------
Net Earnings $ 22,852 $ 331,971 $ 354,823
=========== ========== ===========
Earnings Per Share of
Common Stock (Basic
and Diluted) (6) $ 0.03 $ 0.17
=========== ===========
Weighted Average Number of
Shares of Common Stock
Outstanding (6) 686,063 2,115,004
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
B-4
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1998 AND
THE YEAR ENDED DECEMBER 31, 1997
Pro Forma Consolidated Balance Sheet:
(a) Represents gross proceeds of $6,925,586 from the sale of 692,559 shares
during the period April 1, 1998 through August 3, 1998, the receipt of
$8,600,000 on borrowings from the line of credit and $13,110,240 of
cash and cash equivalents used (i) to acquire two properties for
$27,245,539, (ii) to pay acquisition fees and costs of $367,011
($55,360 of which was accrued as due to related parties at March 31,
1998), to accrue acquisition fees of $387,000 relating to the acquired
properties, and reclassify from other assets $761,709 of acquisition
fees previously incurred relating to the acquired properties, and (iii)
to pay selling commissions and offering expenses (syndication costs) of
$1,023,276 which have been netted against stockholders' equity (a total
of $261,462 of which had been incurred as of March 31, 1998).
The pro forma adjustments to net investment in direct financing leases
as a result of the above transactions were as follows:
<TABLE>
<CAPTION>
Estimated Acquisition
purchase price fees
(including allocated
closing costs) to property Total
-------------- ----------- -----
<S> <C>
Residence Inn Buckhead
(Lenox Park) in Atlanta, GA $15,731,414 $ 843,203 $16,574,617
Residence Inn Gwinnett Place
in Duluth, GA 11,514,125 617,157 12,131,282
----------- ---------- -----------
$27,245,539 $1,460,360 $28,705,899
=========== ========== ===========
</TABLE>
(b) In accordance with generally accepted accounting principles, leases in
which the present value of future minimum lease payments equals or
exceeds 90 percent of the value of the related properties are treated
as direct financing leases rather than as land and buildings. The
categorization of the leases has no effect on rental payments received.
Pro Forma Consolidated Statements of Earnings:
- ----------------------------------------------
(1) Represents earned income from direct financing leases for the
properties acquired during the period April 1, 1998 through August 3,
1998, which were operational prior to the acquisition of the property
by the Company (the "Pro Forma Properties"), for the period commencing
the later of (i) the date the Pro Forma Property became operational by
the previous owner or (ii) October 15, 1997, the date the Company
became operational, to the end of the pro forma period presented. The
following presents the actual date the Pro Forma Properties were
acquired or placed in service by the Company as compared to the date
the Pro Forma Properties were treated as becoming operational as a
rental property for purposes of the Pro Forma Consolidated Statement of
Earnings.
Date Pro Forma
Date Placed Property Became
in Service Operational as
By the Company Rental Property
-------------- ---------------
Residence Inn Buckhead (Lenox
Park) in Atlanta, GA July 31, 1998 October 15, 1997
Residence Inn Gwinnett Place
in Duluth, GA July 31, 1998 October 15, 1997
In accordance with generally accepted accounting principles, for
operating leases providing escalating guaranteed minimum rents, income
is reported on a straight-line basis over the terms of the leases. For
leases accounted for as direct financing leases, future minimum lease
payments are recorded as a receivable. The difference between the
receivable and the estimated residual values less the cost of the
properties is
B-5
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE QUARTER ENDED MARCH 31, 1998 AND
THE YEAR ENDED DECEMBER 31, 1997
Pro Forma Consolidated Statements of Earnings - Continued:
recorded as unearned income. The unearned income is amortized over the
lease terms to provide a constant rate of return. Accordingly, pro
forma earned income from direct financing leases does not necessarily
represent rental payments that would have been received if the
properties had been operational for the full pro forma period.
Generally, the leases provide for the payment of percentage rent in
addition to base rental income. However, due to the fact that no
percentage rent was due under the leases for the Pro Forma Properties
during the portion of 1997 and 1998 that the previous owners held the
properties, no pro forma adjustment was made for percentage rental
income for the quarter ended March 31, 1998 and year ended December 31,
1997.
(2) Represents adjustment to interest income due to the decrease in the
amount of cash available for investment in interest bearing accounts
during the periods commencing the later of (i) the dates the Pro Forma
Properties became operational by the previous owners or (ii) October
15, 1997, the date the Company became operational, through the end of
the pro forma period presented, as described in Note (1) above. The
estimated pro forma adjustment is based upon the fact that all of the
net offering proceeds received during the periods presented and
invested in interest bearing accounts for historical purposes were
considered invested in Pro Forma Properties for pro forma purposes.
(3) Represents asset management fees relating to the Pro Forma Properties
for the period commencing the later of (i) the date the Pro Forma
Properties became operational by the previous owners or (ii) October
15, 1997, the date the Company became operational, through the end of
the pro forma period presented, as described in Note (1) above. Asset
management fees are equal to 0.60% of the Company's Real Estate Asset
Value (estimated to be approximately $27,245,539 for the Pro Forma
Properties for the quarter ended March 31, 1998 and the year ended
December 31, 1997), as defined in the Company's prospectus.
(4) Represents interest expense incurred at a rate of 8.8% per annum in
connection with the assumed borrowings from the line of credit of
$8,600,000 on October 15, 1997.
(5) Represents amortization of the loan origination fee of .5% on the
$8,600,000 from borrowings on the line of credit, amortized under the
straight-line method over a period of five years.
(6) Historical earnings per share were calculated based upon the weighted
average number of shares of common stock outstanding during the period
the Company was operational, October 15, 1997 (the date following when
the Coompany received the minimum offering proceeds and funds were
released from escrow) through December 31, 1997 and the quarter ended
March 31, 1998.
As a result of the two Pro Forma Properties being treated in the Pro
Forma Consolidated Statement of Earnings as placed in service on
October 15, 1997 (the date the Company became operational), the
Coompany assumed approximately 2,095,004 shares of common stock were
sold, and the net offering proceeds were available for investment, on
October 15, 1997. Due to the fact that approximately 1,817,546 of these
shares of common stock were actually sold subsequently, during the
period October 15, 1997 through May 1, 1998, the weighted average
number of shares outstanding for the pro forma period was adjusted. Pro
forma earnings per share were calculated based upon the weighted
average number of shares of common stock outstanding, as adjusted,
during the period the Company was operational, October 15, 1997 through
March 31, 1998.
(7) See Note (b) under "Pro Forma Consolidated Balance Sheet" for a
description of direct financing leases.
B-6
<PAGE>
INDEX TO OTHER FINANCIAL STATEMENTS
The following financial information is provided in connection with the Company's
acquisition of the Buckhead (Lenox Park) and the Gwinnett Place Properties. Due
to the fact that the tenant of the Company is a newly formed entity, the
information presented represents the historical financial performance of the
hotel businesses. The Buckhead (Lenox Park) Property and the Gwinnett Place
Property became operational on August 7, 1997 and July 29, 1997, respectively.
This information was obtained from the seller of the Properties. The Company has
acquired the hotel Properties and does not own any interest in the hotel
businesses. For information on the Properties and the long-term, triple-net
leases in which the Company has entered, see "Business -- Property
Acquisitions."
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
Updated Financial Statements (unaudited):
Balance Sheet as of June 30, 1998 B-8
Statement of Loss for the six months ended June 30, 1998 B-9
Audited Financial Statements:
Report of Independent Public Accountants B-10
Balance Sheet as of December 31, 1997 B-11
Statement of Loss for the year ended December 31, 1997 B-12
Statement of Member's Equity for the year ended December 31, 1997 B-13
Statement of Cash Flows for the year ended December 31, 1997 B-14
Notes to Financial Statement for the year ended December 31, 1997 B-15
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
Updated Financial Statements (unaudited):
Balance Sheet as of June 30, 1998 B-20
Statement of Loss for the six months ended June 30, 1998 B-21
Audited Financial Statements:
Report of Independent Public Accountants B-22
Balance Sheet as of December 31, 1997 B-23
Statement of Loss for the year ended December 31, 1997 B-24
Statement of Member's Deficit for the year ended December 31,
1997 B-25
Statement of Cash Flows for the year ended December 31, 1997 B-26
Notes to Financial Statement for the year ended December 31, 1997 B-27
B-7
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' EQUITY
------ -------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $ 1,229,955 Accounts payable $ 711,974
Accounts receivable, net 173,287 Accrued liabilities 427,306
-----------
Prepaid expenses 18,080
------------ Total current liabilities 1,139,280
Total current assets 1,421,322
------------
PROPERTY, at cost: FIRST MORTGAGE LOAN 10,634,958
Land 1,505,591
Buildings 8,842,642
Furniture, fixtures, and equipment 1,470,899 MEZZANINE LOAN 1,601,152
------------ -----------
11,819,132 Total liabilities 13,375,390
Less accumulated depreciation (467,063)
------------
Net property 11,352,069
------------
LOAN COSTS, net of accumulated MEMBERS' EQUITY 62,078
amortization of $109,395 377,910 -----------
------------
ORGANIZATION COSTS, net of Total liabilities and members'
accumulated amortization of equity $13,437,468
$38,269 43,272 ===========
------------
FRANCHISE COSTS, net of
accumulated amortization of
$2,750 57,250
------------
DEVELOPMENT IN PROGRESS 185,645
------------
Total assets $ 13,437,468
============
</TABLE>
B-8
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
REVENUES:
Rooms $ 2,007,424
Telephone 79,188
Other 50,203
-------------
Total revenues 2,136,815
-------------
EXPENSES:
Rooms 453,769
Telephone 18,730
Other operating departments 9,368
Administrative and general 158,036
Credit card commissions 44,111
Franchise fees 80,337
Advertising, marketing, and promotion 141,041
Repairs and maintenance 66,750
Utilities 52,275
Property insurance and taxes 117,165
Management fees 64,098
Other 5,134
Interest 604,186
Depreciation and amortization 337,891
-------------
Total expenses 2,152,891
-------------
NET LOSS $ (16,076)
=============
B-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Buckhead Residence Associates, L.L.C.:
We have audited the accompanying balance sheet of BUCKHEAD RESIDENCE ASSOCIATES,
L.L.C. as of December 31, 1997 and the related statement of loss, members'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Buckhead Residence Associates,
L.L.C. as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Atlanta, Georgia
February 27, 1998
B-10
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' EQUITY
------ -------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and short-term investments, including Accounts payable $ 285,134
restricted cash of $18,387 $ 225,703 Accrued liabilities 140,911
Accounts receivable, net of allowance for doubtful Current portion of mortgage loan 38,522
accounts of $1,973 114,685 -----------
Prepaid expenses 12,398 Total current liabilities 464,567
------------
Total current assets 352,786
------------
PROPERTY, at cost: DEFERRED DEVELOPMENT FEE 619,000
Land 1,505,591
Buildings 8,969,838
Furniture, fixtures, and equipment 1,470,899 FIRST MORTGAGE LOAN, less current portion 9,949,319
------------ (Note 2)
11,946,328
Less accumulated depreciation (211,216)
Net property 11,735,112 MEZZANINE LOAN (Note 2) 1,533,202
------------ -----------
LOAN COSTS, net of accumulated amortization of $49,725 437,580 Total liabilities 12,566,088
------------
ORGANIZATION COSTS, net of accumulated amortization of
$17,395 64,146 COMMITMENTS AND CONTINGENCIES (Note 2)
------------
FRANCHISE COSTS, net of accumulated amortization of
$1,250 58,750 MEMBERS' EQUITY 82,286
------------ -----------
Total assets $ 12,648,374 Total liabilities and members'
============ equity $12,648,374
===========
</TABLE>
The accompanying notes are an integral part of
this balance sheet.
B-11
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1997
REVENUES:
Rooms $ 862,815
Telephone 40,832
Other 15,684
----------
Total revenues 919,331
----------
EXPENSES:
Rooms 280,204
Telephone 8,603
Other operating departments 2,725
Administrative and general 103,471
Credit card commissions 19,124
Franchise fees 34,513
Advertising, marketing, and promotion 88,954
Repairs and maintenance 46,188
Utilities 37,097
Property insurance and taxes 18,758
Management fees 27,580
Other 34,541
Interest 447,026
Depreciation and amortization 279,586
----------
Total expenses 1,428,370
----------
NET LOSS $ (509,039)
==========
The accompanying notes are an integral part of this statement.
B-12
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
Stormont
Trice
Development RI HWE
Corporation Partners IV Total
----------- -------- --- -----
BALANCE, December 31, 1996 $ 193,800 $ 193,800 $ 203,725 $ 591,325
Net loss (193,800) (193,800) (121,439) (509,039)
---------- ---------- --------- ---------
BALANCE, December 31, 1997 $ 0 $ 0 $ 82,286 $ 82,286
========== ========== ========= =========
The accompanying notes are an integral part of this statement.
B-13
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (509,039)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 279,586
Changes in assets and liabilities:
Accounts receivable, net (114,685)
Prepaid expenses (12,398)
Accounts payable 285,134
Accrued liabilities 130,196
-----------
Total adjustments 567,833
-----------
Net cash provided by operating activities 58,794
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,627,218)
Organization costs (7,361)
-----------
Net cash used in investing activities (8,634,579)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal received from loans payable 8,715,244
Loan costs (7,362)
-----------
Net cash provided by financing activities 8,707,882
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 132,097
-----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 93,606
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 225,703
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the year $ 0
===========
The accompanying notes are an integral part of this statement.
B-14
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Buckhead Residence Associates, L.L.C. (the "Company") is a Georgia limited
liability company that was organized for the purpose of constructing,
operating, and owning the Residence Inn Lenox Park (the "Hotel") in
Atlanta, Georgia. The Hotel is comprised of 150 suites and became
operational on August 7, 1997.
The members of the Company (the"Members"), their ownership percentages, and
their initial capital contributions are as follows:
Initial
Ownership Capital
Percentage Contribution
---------- ------------
Members:
Stormont Trice Development
Corporation ("STDC" or the
"Manager ") 40.74% $212,000
RI Partners ( "RI ") 40.74 212,000
HWE IV 18.52 212,000
The operating agreement provides for allocation of profits, losses, and
cash distributions, as follows:
Profits
o To the Members in proportion to their respective ownership
percentage interests, as defined in the agreement
Losses
o First, to the Members in proportion to their respective ownership
percentage interests until any Member's capital account is reduced
to zero
o Second, to the Member, if any, to the extent of its remaining
positive capital account balance (as adjusted to reflect any prior
allocation of loss)
B-15
<PAGE>
o Third, to the partners in proportion to their respective ownership
percentage interests
Notwithstanding the above loss allocations, to the extent losses
allocated to a Member would cause a Member to have an adjusted capital
account deficit, such losses shall not be allocated to such Member but
instead shall be allocated to other Members in proportion to, and to
the extent that, the amounts in which losses may be allocated to the
other Members without causing the other Members to have an adjusted
capital account deficit and then to the Members in proportion to their
respective contribution percentage interests.
Cash Distributions
o First, to the repayment or prepayment of such debts or
liabilities, other than any debts of the Company to any of the
Members, as the Manager shall determine to be in the best interest
of the Company
o Second, to the establishment of such reserves as the Manager deems
appropriate
o Third, to the repayment or prepayment of any back-up loans, as
defined in the agreement
o Fourth, to the repayment or prepayment of any Member loans
o Fifth, to the Members in equal shares until such time as $63,600
has been distributed to the Members
o Sixth, in equal amounts to the Manager and RI until such time as
$50,871 has been distributed to the Members
o Seventh, the balance available to the Members in proportion to
their respective ownership percentage interests
Allocation of profits, losses, and cash distributions from the sale or
refinancing of the property are allocated in a different manner and will be
affected by the terms of notes payable agreements discussed in Note 2.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash on hand,
deposits in banks, and short-term investments with original maturities of
90 days or less to be cash and cash equivalents.
The first mortgage, mezzanine loan, and management agreements require the
Hotel to establish a furniture, fixtures, and equipment reserve, as
follows: 0% in year one, 2% in year two, 3% in year three, 4% in year four,
and 5% in year five of gross revenues, as defined in the loan agreement. As
of December 31, 1997, $18,387 of cash and cash equivalents was designated
as the furniture, fixtures, and equipment reserve.
B-16
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Franchise and Organization Expenses
A franchise application fee has been capitalized and is being amortized
over the 20-year life of the franchise agreement. Organization costs have
been capitalized and are being amortized over 5 years.
Property
Property is recorded at cost, including capitalized interest, and is
depreciated using the straight-line method over the estimated useful lives
of the assets, which are 30 years for buildings and 3 to 7 years for
furniture, fixtures, and equipment. Expenditures for replacements and
betterments are capitalized, while expenditures for maintenance and repairs
are expensed as incurred.
Income Taxes
No provisions for income taxes have been made in the accounts of the
Company, since the Members report their respective shares of taxable income
and loss in their individual tax returns.
2. NOTES PAYABLE
First Mortgage Loan
On August 29, 1996, the Company entered into a loan agreement with Ocwen
Federal Bank FSB ("Ocwen"), formerly Berkeley Federal Bank & Trust FSB, for
a total available amount of $11,262,500 to fund costs of developing and
operating the Hotel. The note bears 10.25% interest until its maturity date
of August 31, 2001. The loan is collateralized by the Company's interest in
the Hotel. Interest accrues monthly and is added to the outstanding balance
until the budgeted interest reserve is depleted or September 1, 1998,
whichever is earlier. Beginning October 1, 1998, interest and principal are
due monthly, with all remaining repaid principal and interest being due on
August 31, 2001. The principal outstanding at December 31, 1997 is
repayable as follows:
1998 $ 38,522
1999 164,304
2000 181,960
2001 9,603,055
-----------
$ 9,987,841
===========
B-17
<PAGE>
In addition, Ocwen receives noncumulative participating interest based on a
percentage of the Company's excess cash flow, as defined in the loan
agreement. These percentages are as follows: 22.5% in year one, 25% in
years two and three, and 30% in years four and five. No amounts were
payable in 1997.
In the event the Company sells the Hotel or refinances the loan, an amount
shall be due to Ocwen as follows: in year one, the greater of $525,000 or
22.5% of the greater of the net proceeds or net economic value, as defined
in the loan; in years two or three, the greater of $525,000 or 25% of the
greater of the net proceeds or net economic value; in year four, the
greater of $800,000 or 30% of the greater of the net proceeds or net
economic value; in year five, the greater of $1,300,000 or 30% of the
greater of the net proceeds or net economic value.
Mezzanine Loan
On August 29, 1996, the Company entered into a loan agreement with Heller
Financial, Inc. ("Heller") for a total available amount of $1,621,800. At
December 31, 1997, $1,533,202 is outstanding, including $181,702 of accrued
interest. The note bears an interest rate of 10% and is interest only until
its maturity date of August 31, 2001. Interest is due monthly, commencing
when the accrued interest exceeds $270,300 or 20% of the outstanding
principal amount of the loan or when distributable cash flow, as defined,
is available. In addition, Heller receives quarterly, as additional
consideration, the excess of the percentage of the Company's excess cash
flow, as defined in the loan agreement, over the amount of interest accrued
during the previous quarter. These percentages are as follows: 42.625% in
year one, 41.25% in years two and three, and 38.5% in years four and five
(effectively, this equals 55% of the cash flow after paying Ocwen's
participating interest).
Through August 31, 2006, upon the occurrence of any participation event, as
defined in the loan agreement, Heller will receive an amount calculated as
follows: in year one, the greater of $800,000 or 55% of the net adjusted
proceeds, as defined in the loan agreement, less $250,000 and the Company's
equity (the "Participation Amount"); in year two, the greater of $1,100,000
or 55% of the Participation Amount; in year three, the greater of
$1,200,000 or 55% of the Participation Amount; in year four, the greater of
$1,400,000 or 55% of the Participation Amount; in year five and thereafter,
the greater of $1,500,000 or 55% of the Participation Amount. In no event
may Heller's participation exceed 49.9% of the total profit of the
participation event.
3. FRANCHISE AND MANAGEMENT AGREEMENTS
The Hotel is operated under a franchise agreement with Marriott
International, Inc. ("Marriott"). The term of the agreement is 20 years
unless otherwise extended or terminated. The Company paid Marriott an
application fee of $60,000. This has been capitalized as franchise costs in
the accompanying balance sheet. Amortization began when the Hotel became
operational, and the cost is being amortized over the life of the franchise
agreement. The agreement provides for the Hotel to reimburse Marriott for
certain common expenses, including, but not limited to, the use of
Marriott's national reservation system. The Hotel also pays Marriott
certain fees, as follows:
B-18
<PAGE>
o Royalty Fee. Percent of the gross sales, as defined in the
agreement. Royalty fees for the year ended December 31, 1997 were
$34,513.
o Marketing Fund Fee. Percent of gross sales. Marketing fund fees
for the year ended December 31, 1997 were $21,571 and are included
in advertising, marketing, and promotion expenses in the
accompanying statement of loss.
The Hotel is operated under a management agreement with Stormont Trice
Management Corporation ("STMC"), an affiliate of STDC. The term of the
management agreement is ten years. Under the terms of the agreement, the
Company pays STMC 3% of gross revenues, as defined in the agreement. At
December 31, 1997, $6,907 in management fees were payable to STMC.
Management fee expense for 1997 was $27,580.
4. RELATED-PARTY TRANSACTIONS
In addition to the management agreement (Note 3), Stormont Trice
Corporation, an affiliate of STDC, provides workers' compensation, group
insurance, and certain employee benefits to all of the Stormont Trice
Corporation group of hotels, and a pro rata portion of the total insurance
and certain employee benefits expense is allocated to each hotel. The
amount allocated to the Company for the year ended December 31, 1997 was
$11,493.
Stormont Trice Corporation also provides property, umbrella, and casualty
insurance to all of the Stormont Trice Corporation group of hotels, and a
pro rata portion of the total insurance expense is allocated to each hotel.
The amount allocated to the Company for the year ended December 31, 1997
was $15,925.
STDC provided development management services to the Company in
construction of the Hotel. The costs for these services in 1997 were
$619,000 and are included in buildings in the accompanying balance sheet.
Amounts due to STDC for these services are $619,000 at December 31, 1997.
In accordance with the terms of the agreement, the fee will not be payable
until the Company repays all of the Ocwen loan obligation and a portion of
the Heller loan obligation, as defined.
STDC also provided the director of design and development for the Hotel.
The cost for these services in 1997 was $34,082 and is included in
buildings in the accompanying balance sheet. Amounts due to STDC for these
services were approximately $14,000 at December 31, 1997 and are included
in accounts payable in the accompanying balance sheet.
B-19
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' DEFICIT
------ --------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $ 768,261 Accounts payable $ 459,653
Accounts receivable, net 106,194 Accrued liabilities 292,461
-----------
Prepaid expenses 18,985
----------- Total current liabilities 752,114
Total current assets 893,440
-----------
PROPERTY, at cost: FIRST MORTGAGE LOAN 7,691,138
Land 800,000
Buildings 6,509,423
Furniture, fixtures, and equipment 1,311,137 MEZZANINE LOAN 1,204,270
----------- -----------
8,620,560 Total liabilities 9,647,522
Less accumulated depreciation (369,063)
-----------
Net property 8,251,497
-----------
LOAN COSTS, net of accumulated MEMBERS' DEFICIT (75,739)
amortization of $86,686 299,461 -----------
-----------
ORGANIZATION COSTS, net of Total liabilities and members'
accumulated amortization of deficit $ 9,571,783
$39,585 44,664 ===========
-----------
FRANCHISE COSTS, net of
accumulated amortization of
$2,420 50,380
-----------
DEVELOPMENT IN PROGRESS 32,341
-----------
Total assets $ 9,571,783
===========
</TABLE>
B-20
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
REVENUES:
Rooms $ 1,454,846
Telephone 66,129
Other 44,609
------------
Total revenues 1,565,584
------------
EXPENSES:
Rooms 290,519
Telephone 10,900
Other operating departments 14,259
Administrative and general 134,926
Credit card commissions 33,083
Franchise fees 58,194
Advertising, marketing, and promotion 120,237
Repairs and maintenance 64,418
Utilities 62,361
Property insurance and taxes 66,783
Management fees 62,623
Other 4,010
Interest 439,034
Depreciation and amortization 272,287
------------
Total expenses 1,633,634
------------
NET LOSS $ (68,050)
============
B-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Gwinnett Residence Associates, L.L.C.:
We have audited the accompanying balance sheet of GWINNETT RESIDENCE ASSOCIATES,
L.L.C. as of December 31, 1997 and the related statement of loss, members'
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gwinnett Residence Associates,
L.L.C. as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Atlanta, Georgia
February 27, 1998
B-22
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' DEFICIT
------ --------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and short-term investments, including Accounts payable $ 311,598
restricted cash of $15,483 $ 212,745 Accrued liabilities 105,740
Accounts receivable, net of allowance for Current portion of mortgage loan 27,736
doubtful accounts of $744 51,372 ----------
Prepaid expenses 24,414 Total current liabilities 445,074
------------
Total current assets 288,531
------------
PROPERTY, at cost: DEFERRED DEVELOPMENT FEE 451,000
Land 800,000
Buildings 6,509,423
Furniture, fixtures, and equipment 1,311,137 FIRST MORTGAGE LOAN, less current portion 7,163,684
------------ (Note 2)
8,620,560
Less accumulated depreciation (166,971)
------------
Net property 8,453,589 MEZZANINE LOAN (Note 2) 1,153,163
------------- ----------
LOAN COSTS, net of accumulated amortization Total liabilities 9,212,921
of $39,403 346,744
------------
ORGANIZATION COSTS, net of accumulated
amortization of $17,993 66,256 COMMITMENTS AND CONTINGENCIES (Note 2)
------------
FRANCHISE COSTS, net of accumulated amortization of
$1,100 51,700 MEMBERS' DEFICIT (6,101)
------------ ----------
Total assets $ 9,206,820 Total liabilities and members' deficit $9,206,820
============ ==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
B-23
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1997
REVENUES:
Rooms $ 691,864
Telephone 32,821
Other 19,473
----------
Total revenues 744,158
----------
EXPENSES:
Rooms 226,612
Telephone 4,079
Other operating departments 3,257
Administrative and general 100,206
Credit card commissions 15,073
Franchise fees 27,675
Advertising, marketing, and promotion 62,531
Repairs and maintenance 46,072
Utilities 46,892
Property insurance and taxes 17,298
Management fees 29,759
Other 9,030
Interest 328,707
Depreciation and amortization 225,467
---------
Total expenses 1,142,658
---------
NET LOSS $(398,500)
=========
The accompanying notes are an integral part of this statement.
B-24
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF MEMBERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
Stormont
Trice
Development RI HWE
Corporation Partners IV Total
----------- -------- --- -----
BALANCE, December 31, 1996 $ 128,197 $ 128,197 $ 136,005 $ 392,399
Net loss (130,703) (130,703) (137,094) (398,500)
--------- --------- --------- ---------
BALANCE, December 31, 1997 $ (2,506) $ (2,506) $ (1,089) $ (6,101)
========= ========= ========= =========
The accompanying notes are an integral part of this statement.
B-25
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (398,500)
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Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 225,467
Changes in assets and liabilities:
Accounts receivable, net (51,372)
Prepaid expenses (24,414)
Accounts payable 311,598
Accrued liabilities 97,282
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Total adjustments 558,561
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Net cash provided by operating activities 160,061
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,086,029)
Start-up costs (7,129)
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Net cash used in investing activities (6,093,158)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal received from loans payable 6,142,121
Loan costs (7,129)
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Net cash provided by financing activities 6,134,992
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 201,895
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,850
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CASH AND CASH EQUIVALENTS AT END OF YEAR $ 212,745
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the year $ 0
===========
The accompanying notes are an integral part of this statement.
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GWINNETT RESIDENCE ASSOCIATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Gwinnett Residence Associates, L.L.C. (the "Company") is a Georgia limited
liability company that was organized for the purpose of constructing,
operating, and owning the Gwinnett Residence Inn (the "Hotel") in Atlanta,
Georgia. The Hotel is comprised of 132 suites and became operational on
July 29, 1997.
The members of the Company (the"Members"), their ownership percentages, and
their initial capital contributions are as follows:
Initial
Ownership Capital
Percentage Contribution
---------- ------------
Members:
Stormont Trice Development
Corporation ("STDC" or the
"Manager ") 41.08% $142,000
RI Partners ( "RI ") 41.08 142,000
HWE IV 17.84 142,000
The operating agreement provides for allocation of profits, losses, and
cash distributions, as follows:
Profits
o To the Members in proportion to their respective ownership
percentage interests, as defined in the agreement
Losses
o First, to the Members in proportion to their respective ownership
percentage interests until any Member's capital account is reduced
to zero
o Second, to the Member, if any, to the extent of its remaining
positive capital account balance (as adjusted to reflect any prior
allocation of loss)
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o Third, to the partners in proportion to their respective ownership
percentage interests
Notwithstanding the above loss allocations, to the extent losses
allocated to a Member would cause a Member to have an adjusted capital
account deficit, such losses shall not be allocated to such Member but
instead shall be allocated to other Members in proportion to, and to
the extent that, the amounts in which losses may be allocated to the
other Members without causing the other Members to have an adjusted
capital account deficit and then to the Members in proportion to their
respective ownership percentage interests.
Cash Distributions
o First, to the repayment or prepayment of such debts or
liabilities, other than any debts of the Company to any of the
Members, as the Manager shall determine to be in the best interest
of the Company
o Second, to the establishment of such reserves as the Manager deems
appropriate
o Third, to the repayment or prepayment of any back-up loans, as
defined in the agreement
o Fourth, to the repayment or prepayment of any Member loans
o Fifth, to the Members in equal shares until such time as $42,600
has been distributed to the Members
o Sixth, in equal amounts to the Manager and RI until such time as
$36,996 has been distributed to the Members
o Seventh, the balance available to the Members in proportion to
their respective ownership percentage interests
Allocation of profits, losses, and cash distributions from the sale or
refinancing of the property are allocated in a different manner and will be
affected by the terms of notes payable agreements discussed in Note 2.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash on hand,
deposits in banks, and short-term investments with original maturities of
90 days or less to be cash and cash equivalents.
The first mortgage, mezzanine loan, and management agreements require the
Hotel to establish a furniture, fixtures, and equipment reserve, as
follows: 0% in year one, 2% in year two, 3% in year three, 4% in year four,
and 5% in year five of gross revenues, as defined in the loan agreement. As
of December 31, 1997, $15,483 of cash and cash equivalents was designated
as the furniture, fixtures, and equipment reserve.
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Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Franchise and Organization Expenses
A franchise application fee has been capitalized and is being amortized
over the 20-year life of the franchise agreement. Organization costs have
been capitalized and are being amortized over 5 years.
Property
Property is recorded at cost, including capitalized interest, and is
depreciated using the straight-line method over the estimated useful lives
of the assets, which are 30 years for buildings and 3 to 7 years for
furniture, fixtures, and equipment. Expenditures for replacements and
betterments are capitalized, while expenditures for maintenance and repairs
are expensed as incurred.
Income Taxes
No provisions for income taxes have been made in the accounts of the
Company since the Members report their respective shares of taxable income
and loss in their individual tax returns.
2. NOTES PAYABLE
First Mortgage Loan
On August 29, 1996, the Company entered into a loan agreement with Ocwen
Federal Bank FSB ("Ocwen"), formerly Berkeley Federal Bank & Trust FSB, for
a total available amount of $8,174,500 to fund costs of developing and
operating the Hotel. The note bears 10.25% interest until its maturity date
of August 31, 2001. The loan is collateralized by the Company's interest in
the Hotel. Interest accrues monthly and is added to the outstanding balance
until the budgeted interest reserve is depleted or September 1, 1998,
whichever is earlier. Beginning October 1, 1998, interest and principal are
due monthly, with all remaining repaid principal and interest being due on
August 31, 2001. The principal outstanding at December 31, 1997 is
repayable as follows:
1998 $ 27,736
1999 118,301
2000 131,014
2001 6,914,369
----------
$7,191,420
==========
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In addition, Ocwen receives noncumulative participating interest based on a
percentage of the Company's excess cash flow, as defined in the loan
agreement. These percentages are as follows: 22.5% in year one, 25% in
years two and three, and 30% in years four and five. No amounts were
payable in 1997.
In the event the Company sells the Hotel or refinances the loan, an amount
shall be due to Ocwen as follows: in year one, the greater of $400,000 or
22.5% of the greater of the net proceeds or net economic value, as defined
in the loan; in years two or three, the greater of $400,000 or 25% of the
greater of the net proceeds or net economic value; in year four, the
greater of $700,000 or 30% of the greater of the net proceeds or net
economic value; in year five, the greater of $1,000,000 or 30% of the
greater of the net proceeds or net economic value.
Mezzanine Loan
On August 29, 1996, the Company entered into a loan agreement with Heller
Financial, Inc. ("Heller") for a total available amount of $1,219,800. At
December 31, 1997, $1,153,163 is outstanding, including $136,663 of accrued
interest. The note bears an interest rate of 10% and is interest only until
its maturity date of August 31, 2001. Interest is due monthly, commencing
when the accrued interest exceeds $203,300 or 20% of the outstanding
principal amount of the loan or when distributable cash flow, as defined,
is available. In addition, Heller receives quarterly, as additional
consideration, the excess of the percentage of the Company's excess cash
flow, as defined in the loan agreement, over the amount of interest accrued
during the previous quarter. These percentages are as follows: 44.175% in
year one, 42.75% in years two and three, and 39.9% in years four and five
(effectively, this equals 57% of the cash flow after paying Ocwen's
participating interest).
Through August 31, 2006, upon the occurrence of any participation event, as
defined in the loan agreement, Heller will receive an amount calculated as
follows: in year one, the greater of $700,000 or 57% of the net adjusted
proceeds, as defined in the loan agreement, less $451,000 and the Company's
equity (the "Participation Amount"); in year two, the greater of $1,000,000
or 57% of the Participation Amount; in year three, the greater of
$1,100,000 or 57% of the Participation Amount; in year four, the greater of
$1,200,000 or 57% of the Participation Amount; in year five and thereafter,
the greater of $1,300,000 or 57% of the Participation Amount. In no event
may Heller's participation exceed 49.9% of the total profit of the
participation event.
3. FRANCHISE AND MANAGEMENT AGREEMENTS
The Hotel is operated under a franchise agreement with Marriott
International, Inc. ("Marriott"). The term of the agreement is 20 years
unless otherwise extended or terminated. The Company paid Marriott an
application fee of $52,800. This has been capitalized as franchise costs in
the accompanying balance sheet. Amortization began when the Hotel became
operational, and the cost is being amortized over the life of the franchise
agreement. The agreement provides for the Hotel to reimburse Marriott for
certain common expenses, including, but not limited to, the use of
Marriott's national reservation system. The Hotel also pays Marriott
certain fees, as follows:
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o Royalty Fee. Percent of the gross sales, as defined in the
agreement. Royalty fees for the year ended December 31, 1997 were
$27,675.
o Marketing Fund Fee. Percent of gross sales. Marketing fund fees
for the year ended December 31, 1997 were $17,296 and are included
in advertising, marketing, and promotion expenses in the
accompanying statement of loss.
The Hotel is operated under a management agreement with Stormont Trice
Management Corporation ("STMC"), an affiliate of STDC. The term of the
management agreement is ten years. Under the terms of the agreement, the
Company pays STMC 4% of gross revenues, as defined in the agreement. At
December 31, 1997, $6,622 in management fees were payable to STMC.
Management fee expense for 1997 was $29,759.
4. RELATED-PARTY TRANSACTIONS
Julian LeCraw & Co, Inc. ("LeCraw"), which is related to one of the Members
through common ownership, provided general contracting services to the
Company in construction of the Hotel. The costs for these services in 1997
were approximately $3,682,183 and are included in buildings in the
accompanying balance sheet. Amounts due to LeCraw for these services are
approximately $20,000 at December 31, 1997 and are included in accounts
payable in the accompanying balance sheet.
In addition to the management agreement (Note 3), Stormont Trice
Corporation, an affiliate of STDC, provides workers' compensation, group
insurance, and certain employee benefits to all of the Stormont Trice
Corporation group of hotels, and a pro rata portion of the total insurance
and certain employee benefits expense is allocated to each hotel. The
amount allocated to the Company for the year ended December 31, 1997 was
$9,388.
Stormont Trice Corporation also provides property, umbrella, and casualty
insurance to all of the Stormont Trice Corporation group of hotels, and a
pro rata portion of the total insurance expense is allocated to each hotel.
The amount allocated to the Company for the year ended December 31, 1997
was $14,379.
STDC provided development management services to the Company in
construction of the Hotel. The costs for these services in 1997 were
$451,000 and are included in buildings in the accompanying balance sheet.
Amounts due to STDC for these services are approximately $451,000 at
December 31, 1997. In accordance with the terms of the agreement, the fee
will not be payable until the Company repays all of the Ocwen loan
obligation and a portion of the Heller loan obligation, as defined.
STDC also provided the director of design and development for the Hotel.
The cost for these services in 1997 was $40,982 and is included in
buildings in the accompanying balance sheet. Amounts due to STDC for these
services were $20,900 at December 31, 1997 and are included in accounts
payable in the accompanying balance sheet.
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