As filed with the Securities and Exchange Commission on November 23, 1998
Registration No. 333-______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CNL HOSPITALITY PROPERTIES, INC.
(Exact Name of Registrant as Specified in Charter)
400 East South Street
Orlando, Florida 32801
Telephone: (407) 650-1000
(Address of Principal executive offices)
James M. Seneff, Jr.
Chief Executive Officer
400 East South Street
Orlando, Florida 32801
Telephone: (407) 650-1000
(Name, Address and Telephone
Number of Agent for Service)
COPIES TO:
THOMAS H. McCORMICK, ESQUIRE
PATRICK T. CONNORS, ESQUIRE
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Approximate date of commencement of proposed sale to
the public: As soon as practicable after the
registration statement becomes effective.
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Title of each class of securities to Amount to be Proposed maximum Proposed maximum Amount of
be registered registered offering price per aggregate offering price registration fee
Share
====================================== =============== ======================== ========================= =================
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Common Stock, $0.01 par value 25,000,000 $10.00 $250,000,000 $69,500
Common Stock, $0.01 par value (1) 2,500,000 10.00 25,000,000 6,950
Common Stock, $0.01 par value (2) 1,000,000 12.00 12,000,000 3,336
Soliciting Dealer Warrants (3) 1,000,000 0.0008 800 0
====================================== =============== ======================== ========================= =================
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(1) Represents Shares issuable pursuant to the Company's Reinvestment Plan.
(2) Represents Shares which are issuable upon exercise of warrants issuable to
CNL Securities Corp. or its assignees pursuant to the Warrant Purchase
Agreement dated ______________, 1999.
(3) Represents warrants issuable to the Managing Dealer to purchase 1,000,000
Shares pursuant to the Warrant Purchase Agreement dated ____________, 1999.
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.
<PAGE>
Prospectus
CNL HOSPITALITY PROPERTIES, INC.
Common Stock
Minimum Purchase -- 250 Shares ($2,500)
100 Shares ($1,000) for IRAs and Keogh and Pension Plans
(Minimum Purchase may be higher in certain states)
CNL HOSPITALITY PROPERTIES, INC. is a Maryland corporation which is
qualified for federal income tax purposes as a real estate investment trust, or
a REIT. Our objective is to acquire hotel properties located across the United
States to be leased on a long-term, triple-net basis. We may also provide
mortgage financing and furniture, fixtures and equipment financing to operators
of hotel chains.
We have registered 27,500,000 shares of our common stock for a maximum
of $275,000,000. We are currently offering to investors who meet certain
suitability standards 25,000,000 shares of our common stock at $10.00 per share
($250,000,000). The remaining 2,500,000 shares ($25,000,000) are available only
to investors who purchase our common stock in this offering or to stockholders
who purchased our common stock in our initial offering and choose to participate
in our reinvestment plan.
See "Risk Factors" beginning on page 8 for a discussion of certain
factors that you should consider before you invest in the common stock being
sold with this Prospectus, including:
o We currently own two properties, so you will not have the opportunity to
evaluate all the properties that will be in our portfolio.
o There is currently no public trading market for the shares, and there is no
assurance that one will develop.
o We rely on CNL Hospitality Advisors, Inc., whom we call the Advisor, with
respect to all investment decisions. Not all of the officers of the
Advisor have extensive experience, and our Directors have limited
experience, with acquiring and leasing hotels, which could adversely
affect the Company's business.
o Certain of the officers of the Advisor and its affiliates are or will be
engaged in other activities that will result in potential conflicts of
interest with the services that the Advisor and affiliates will provide to
the Company.
o Market and economic conditions that we cannot control will affect the value
of our investments.
o If the shares are not listed on a national securities exchange or
over-the-counter market by December 31, 2007, we will sell our assets and
distribute the proceeds.
o The secured equipment lease program is dependent upon obtaining financing,
which has not been secured.
---------------------------
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Per Share Total
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Public Offering Price..................................................... $ 10.00 $275,000,000
Selling Commissions....................................................... $ 0.75 $ 20,625,000
Proceeds to the Company................................................... $ 9.25 $254,375,000
</TABLE>
o The managing dealer, CNL Securities Corp., is our affiliate. The managing
dealer is required only to use its best efforts to sell the maximum amount
of securities offered.
o The managing dealer will receive selling commissions of up to 7.5% on sales
of shares. The other broker-dealers it selects to participate in this
offering will be reallowed selling commissions from CNL Securities Corp. of
up to 7.0% on their sales of shares.
o This offering will end no later than ____________, 2000 (one year after the
initial date of this Prospectus), unless we elect to extend it to a date no
later than ______________, 2001 (two years after the initial date of this
Prospectus) in states that permit us to make this extension.
o We will deposit all subscription funds for shares in an interest-bearing
escrow account with SouthTrust Asset Management Company of Florida, N.A.,
which will act as the escrow agent for this offering.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. In addition, neither the Attorney
General of the State of New York nor the Attorney General of the State of New
Jersey or the Bureau of Securities of the State of New Jersey has passed on or
endorsed the merits of this offering. Any representation to the contrary is a
criminal offense.
CNL SECURITIES CORP.
______________, 1999
<PAGE>
We will only accept subscriptions from people who meet the suitability
standards described in this Prospectus. This Prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
This Prospectus sets forth the only authorized disclosure concerning
this offering. No one is authorized to make any statements about the offering
different from those that appear in this Prospectus. You should also be aware
that the description of the Company contained in this Prospectus was accurate on
__________, 19__ but may no longer be accurate. We will amend or supplement this
Prospectus if there is a material change in the affairs of the Company.
It is prohibited for anyone to make forecasts or predictions in
connection with this offering concerning the future performance of an investment
in the common stock.
ii
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TABLE OF CONTENTS
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TABLE OF CONTENTS.........................................................................................iii
QUESTIONS AND ANSWERS ABOUT CNL HOSPITALITY
PROPERTIES, INC.'S PUBLIC OFFERING.....................................................................1
PROSPECTUS SUMMARY........................................................................................5
CNL HOSPITALITY PROPERTIES, INC...........................................................................5
Our Business.......................................................................................5
Our REIT Status....................................................................................5
Our Management and Conflicts of Interest...........................................................5
Our Affiliates.....................................................................................6
Our Investment Objectives..........................................................................6
Risk Factors.......................................................................................7
The Offering.......................................................................................8
RISK FACTORS..............................................................................................10
Offering-Related Risks.............................................................................10
An Unspecified Property Offering............................................................10
Potential Investors Cannot Evaluate Properties Not Yet
Acquired or Identified for Acquisition..............................................10
No Assurance of Obtaining Suitable Investments........................................10
No Independent Review of the Company or the
Prospectus by Managing Dealer.......................................................10
Possible Delays in Investment...............................................................10
No Current Public Market for Shares Which Could Make Sale of
Shares Difficult..........................................................................11
Company-Related Risks..............................................................................11
Limited Operating History...................................................................11
Limited Experience of Management............................................................11
Company is Dependent on Advisor.............................................................11
Conflicts of Interest.......................................................................11
Selection of Properties Acquired......................................................11
Competing Demands on Officers and Directors...........................................11
Timing of Sales and Acquisitions May Favor the Advisor................................12
Property Development by Affiliates....................................................12
We May Invest With Affiliates of the Advisor..........................................12
No Separate Counsel for the Company, Affiliates and Investors.........................12
Company May Not Have Sufficient Working Capital.............................................12
Real Estate Investment Risks.....................................................................12
Possible Lack of Diversification Increases Risk of Investment...............................12
Lack of Control Over Market and Business Conditions.........................................12
Impact of Adverse Trends in the Hotel Industry..............................................13
Company Will Not Control Property Management................................................13
Company May Not Control Joint Ventures......................................................13
Difficulty in Exiting a Joint Venture After an Impasse......................................13
Lack of Control Over Properties Under Construction..........................................13
Ground Lease Property Risks.................................................................14
We Do Not Control Third Party Franchise Agreements..........................................14
Multiple Property Leases or Mortgage Loans with Individual Tenants or
Borrowers Increase Risks..................................................................14
Re-leasing of Properties May Be Difficult...................................................14
Inability to Control the Sale of Certain Properties.........................................14
Limitations on the Ability of the Company to Liquidate......................................14
Seasonality of Hotel Industry...............................................................15
Risks of Mortgage Lending..................................................................15
Real Estate Market Conditions.........................................................15
Investment Subject to Interest Rate Fluctuations......................................15
Delays in Liquidating Defaulted Mortgage Loans Could Reduce Our
Investment Returns..................................................................15
Returns May Be Limited By Regulations.................................................15
Risks of Secured Equipment Leasing..........................................................15
Collateral May Be Inadequate to Secure Leases.........................................15
Returns May be Limited By Regulations.................................................15
Possible Environmental Liabilities..........................................................16
Financing Risks....................................................................................16
Uncertainty of Long-Term Financing..........................................................16
Anticipated Borrowing has Risks.............................................................16
We Can Borrow Money to Make Distributions...................................................17
Miscellaneous Risks................................................................................17
Competition.................................................................................17
Inflation Could Hurt Investment Returns.....................................................17
Lack of Adequate Insurance..................................................................17
Possible Effect of ERISA....................................................................17
Effects of Governing Documents and Maryland Law on
Potential Takeovers.......................................................................17
Ownership Limitations Relating to REIT Status...............................................18
Majority Stockholder Vote May Discourage Changes of Control.................................18
Potential for Dilution......................................................................18
Board of Directors Can Take Many Actions Without Stockholder
Approval..................................................................................18
Reliance on Advisor and Board of Directors; No Management
Rights for Stockholders...................................................................18
Limited Liability of Officers and Directors.................................................18
Tax Risks..........................................................................................18
Failure to Qualify as a REIT for Tax Purposes...............................................18
Risks Associated with Loans Secured by Personal Property....................................19
Risks Associated with Distribution Requirements.............................................19
Limitations on Share Ownership..............................................................19
Other Tax Liabilities.......................................................................19
Changes in Tax Laws.........................................................................20
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE................................................................20
Suitability Standards..............................................................................20
How to Subscribe ..................................................................................21
ESTIMATED USE OF PROCEEDS.................................................................................22
MANAGEMENT COMPENSATION...................................................................................23
CONFLICTS OF INTEREST.....................................................................................29
Prior and Future Programs..........................................................................29
Acquisition of Properties..........................................................................30
Sales of Properties................................................................................31
Joint Investment With An Affiliated Program........................................................31
Competition for Management Time....................................................................31
Compensation of the Advisor........................................................................31
Relationship with Managing Dealer..................................................................31
Legal Representation ..............................................................................32
Certain Conflict Resolution Procedures.............................................................32
SUMMARY OF REINVESTMENT PLAN..............................................................................33
General............................................................................................33
Investment of Distributions........................................................................35
Participant Accounts, Fees, and Allocation of Shares...............................................35
Reports to Participants............................................................................35
Election to Participate or Terminate Participation.................................................36
Federal Income Tax Considerations..................................................................36
Amendments and Termination.........................................................................36
REDEMPTION OF SHARES......................................................................................37
BUSINESS..................................................................................................38
General............................................................................................38
Investment of Offering Proceeds....................................................................41
Property Acquisitions..............................................................................42
Pending Investments................................................................................43
Site Selection and Acquisition of Properties.......................................................45
Standards for Investment in Properties.............................................................48
Description of Properties..........................................................................49
Description of Property Leases.....................................................................50
Joint Venture Arrangements.........................................................................53
Mortgage Loans.....................................................................................54
Management Services................................................................................55
Borrowing..........................................................................................55
Sale of Properties, Mortgage Loans and Secured
Equipment Leases.................................................................................57
Franchise Regulation...............................................................................57
Competition........................................................................................57
Regulation of Mortgage Loans and Secured Equipment
Leases...........................................................................................58
SELECTED FINANCIAL DATA...................................................................................58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY.....................................................................59
Liquidity and Capital Resources....................................................................59
Results of Operations..............................................................................62
MANAGEMENT................................................................................................64
General............................................................................................64
Fiduciary Responsibility of the Board of Directors.................................................64
Directors and Executive Officers...................................................................65
Independent Directors..............................................................................68
Committees of the Board of Directors...............................................................68
Compensation of Directors and Executive Officers...................................................68
Management Compensation............................................................................68
THE ADVISOR AND THE ADVISORY AGREEMENT....................................................................68
The Advisor........................................................................................68
The Advisory Agreement.............................................................................69
CERTAIN TRANSACTIONS......................................................................................71
PRIOR PERFORMANCE INFORMATION.............................................................................72
INVESTMENT OBJECTIVES AND POLICIES........................................................................78
General............................................................................................78
Certain Investment Limitations.....................................................................79
DISTRIBUTION POLICY.......................................................................................81
General............................................................................................81
Distributions......................................................................................81
SUMMARY OF THE ARTICLES OF INCORPORATION
AND BYLAWS.............................................................................................82
General............................................................................................82
Description of Capital Stock.......................................................................82
Board of Directors.................................................................................84
Stockholder Meetings...............................................................................84
Advance Notice for Stockholder Nominations for
Directors and Proposals of New Business..........................................................85
Amendments to the Articles of Incorporation........................................................85
Mergers, Combinations, and Sale of Assets..........................................................85
Control Share Acquisitions.........................................................................86
Termination of the Company and REIT Status.........................................................86
Restriction of Ownership...........................................................................86
Responsibility of Directors........................................................................87
Limitation of Liability and Indemnification........................................................87
Removal of Directors...............................................................................88
Inspection of Books and Records....................................................................89
Restrictions on "Roll-Up" Transactions............................................................89
FEDERAL INCOME TAX CONSIDERATIONS.........................................................................90
Introduction.......................................................................................90
Taxation of the Company............................................................................90
Taxation of Stockholders...........................................................................95
State and Local Taxes..............................................................................98
Characterization of Property Leases................................................................98
Characterization of Secured Equipment Leases.......................................................99
Investment in Joint Ventures.......................................................................100
REPORTS TO STOCKHOLDERS...................................................................................100
THE OFFERING..............................................................................................101
General............................................................................................101
Plan of Distribution...............................................................................102
Subscription Procedures............................................................................105
Escrow Arrangements................................................................................107
ERISA Considerations...............................................................................107
Determination of Offering Price....................................................................108
SUPPLEMENTAL SALES MATERIAL...............................................................................108
LEGAL OPINIONS............................................................................................109
EXPERTS...................................................................................................109
ADDITIONAL INFORMATION....................................................................................109
DEFINITIONS...............................................................................................109
Form of Reinvestment Plan......................................................................Appendix A
Financial Information..........................................................................Appendix B
Prior Performance Tables.......................................................................Appendix C
Subscription Agreement.........................................................................Appendix D
Statement of Estimated Taxable Operating Results
Before Dividends Paid Deduction.............................................................Appendix E
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vi
<PAGE>
Questions and Answers About
CNL Hospitality Properties, Inc.'s Public Offering
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Q: What is CNL Hospitality Properties, Inc.? the time you subscribe. The purchase price will
be placed into escrow with SouthTrust Asset
A: The Company is a real estate investment Management Company of Florida, N.A. SouthTrust
trust, or a REIT, that was formed in 1996 will hold your funds, along with those of other
to acquire hotel properties and lease them subscribers, in an interest-bearing account
on a long-term, triple-net basis to hotel until such time as you are admitted by the
operators. In addition, the Company may Company as a stockholder. Generally, we admit
provide mortgage financing loans and secured stockholders no later than the last day of the
equipment leases to operators of hotel chains. calendar month following acceptance of your
subscription.
As of the date of this Prospectus, the
Company had total assets of approximately Q: How long will the offering last?
$___________.
A: The offering will not last beyond ,
Q: What is a REIT? 2000, unless we decide to extend the offering
until not later than , 2001, in
A: In general, a REIT is a company that: any state that allows us to extend the offering.
o combines the capital of many investors to
acquire or provide financing for real Q: Who can buy shares?
estate,
o offers benefits of a diversified portfolio
under professional management, A: Anyone who receives this Prospectus can buy
o typically is not subject to federal corporate shares provided that they have a net worth (not
income taxes on its net income, provided including home, furnishings and personal
certain income tax requirements are satisfied. automobiles) of at least $45,000 and an annual
This treatment substantially eliminates the gross income of at least $45,000; or, a net
"double taxation" (at both the corporate and worth (not including home, furnishings and
stockholder levels) that generally results from personal automobiles) of at least $150,000.
investments in a corporation, and However, these minimum levels may vary from
o must pay distributions to investors of at state to state, so you should carefully read the
least 95% of its taxable income. more detailed description in the "Suitability
Standards" section of this Prospectus.
Q: What kind of offering is this? Q: Is there any minimum required investment?
A: We are offering up to 25,000,000 shares of A: Yes. Generally, individuals must invest at
common stock on a "best efforts" basis. In least $2,500 and IRA, Keogh or other qualified
addition, we are offering up to 2,500,000 plans must invest at least $1,000. However,
shares of stock to investors who want to these minimum investment levels may vary from
participate in our reinvestment plan. state to state, so you should carefully read the
more detailed description of the minimum
investment requirements appearing later in the
Q: How does a "best efforts" offering work? "Suitability Standards" section of this
Prospectus.
A: When shares are offered to the public on a
"best efforts" basis, we are not guaranteeing
that any minimum number of shares will be
sold. If you choose to purchase stock in
this offering, you will fill out a
Subscription Agreement, like the one attached
to this Prospectus as Appendix D, for a
certain number of shares and pay for the
shares at
<PAGE>
Q: After I subscribe for shares, can I change my and acquisition-related expenses, and the
mind and withdraw my money? remaining proceeds to pay other expenses of
offering. The payment of these fees will not
reduce your Invested Capital. Your initial
A: Once you have subscribed for shares and you Invested Capital amount will be $10 per share.
have deposited the subscription price with
SouthTrust, your subscription is irrevocable, Until we invest the proceeds in real estate assets,
unless the Company elects to permit you to we will invest them in short-term, highly liquid
revoke your subscription. investments. These short-term investments will
not earn as high a return as we expect to earn on
Q: If I buy shares in the offering, how can I our real estate investments, and we cannot know
sell them? how long it will be before we will be able to
fully invest the proceeds in real estate.
A: At the time you purchase them, the shares We commenced our initial public offering of
will not be listed for trading on any common stock in an offering very similar to this
national securities exchange or one on July 9, 1997. We received
over-the-counter market. In fact, we expect approximately $150,000,000 in gross offering
that there will not be any public market for proceeds from the initial public offering, of
the shares when you purchase them, and we which approximately $126,000,000 was or is
cannot be sure if one will ever develop. As expected to be invested in hotel properties and
a result, you may find that it is difficult mortgage loans. Our initial public offering was
to sell your shares and realize a return on completed in ________________, 1999.
your investment.
We plan to list the shares on a national Q: What types of hotels will you invest in?
securities exchange or over-the-counter
market within three to eight years after A: We intend to purchase primarily limited service,
commencement of this offering, if market extended stay and/or full service hotel
conditions are favorable. If we have not properties.
listed the shares on a national securities
exchange or over-the-counter market by Q: What are the terms of your leases?
December 31, 2007, we plan to sell the
properties and other assets and return the A: The leases we have entered into to date, and the
proceeds from the liquidation to our leases we expect to enter into in the future,
stockholders through distributions. are long-term (meaning generally 10 to 20 years,
plus renewal options for an additional 10 to 20
Beginning one year after you receive your years), "triple-net" leases. "Triple-net" means
shares, provided we have sufficient funds that the tenant, not the Company, is generally
available, you may request the Company to responsible for repairs, maintenance, property
redeem at least 25% of the shares you own. taxes, utilities, and insurance. Under our
The redemption procedures are described in leases, the tenant must pay us minimum, base
the "Redemption of Shares" section of this rent on a monthly basis. In addition, our
Prospectus. leases generally require the tenant to pay us
percentage rent or provide for increases in the
As a result, if a public market for the shares base rent at specified times during the term of
never develops, you should be able to obtain a the lease.
return of your investment through the redemption
plan beginning one year from the date on which Q: How well have your investments done so far?
you received your stock or through the
liquidation process. A: As of September 30, 1998, we have purchased two
hotel properties. These purchases were made in
July 1998, so we have only limited information
Q: What will you do with the proceeds from this regarding their performance.
offering?
A: We plan to use approximately 84% of the
proceeds to purchase hotel properties and to
make mortgage loans, approximately 9% to pay
fees and expenses to affiliates for their
services and as reimbursement of offering
this
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<PAGE>
Q: What is the experience of the Company's A: We intend to make quarterly cash distributions
officers and directors? to our stockholders. The amount of distributions
is determined by the Board of Directors and
A: Our management team has extensive previous typically depends on the amount of distributable
experience investing in real estate on a funds, current and projected cash requirements,
triple-net basis. Our Chief Executive tax considerations and other factors. However,
Officer and President each have over 25 years in order to remain qualified as a REIT, we must
of experience with other CNL affiliates. In make distributions equal to at least 95% of
addition, our Chief Operating Officer has our REIT taxable income each year.
extensive previous experience investing in
hotel properties. Historically, we have paid cash distributions
every quarter since our operations commenced.
However, not all of our officers have
extensive experience, and our Board of
Directors and our affiliates have limited Q: Are distributions I receive taxable?
experience, investing in hotel properties.
Our officers, Directors and affiliates have A: Yes. Generally, distributions that you receive
operated several other REITs and partnerships will be considered ordinary income to the extent
in the past. The investment results from they are from current and accumulated earnings
those funds are included in this Prospectus and profits. In addition, because depreciation
under the heading "Prior Performance expense reduces taxable income but does not
Information." However, because those reduce cash available for distribution, we
funds had different goals and the managers expect a portion of your distributions will be
had different amounts of experience considered return of capital for tax purposes.
investing in the types of assets purchased These amounts will not be subject to tax
by those funds, you cannot assume that the immediately but will instead reduce the tax
Company's investment returns will be similar basis of your investment. This in effect defers
to those described in the "Prior Performance a portion of your tax until your investment is
Information" section. sold or the Company is liquidated. However,
because each investors tax implications are
different, we suggest you consult with your tax
advisor.
Q: How will you choose which investments to make?
A: We have hired an investment Advisor. The Q: Do you have a Reinvestment Plan where I reinvest
Advisor has the authority, subject to the my distributions in additional shares?
approval of our Directors, to make all of the
Company's investment decisions. A: Yes. We have adopted a Reinvestment Plan in
which an investor can reinvest their
distributions in additional shares. For
Q: Is the Advisor independent of the Company? information on how to participate in our
Reinvestment Plan, see the section of the
A: No. Some of our officers and Directors are Prospectus entitled "Summary of Reinvestment
officers and directors of the Advisor. The Plan."
conflicts of interest the Company and Advisor
face are discussed under the heading
"Conflicts of Interest" later in this
Prospectus.
Q: If I buy shares, will I receive distributions
and how often?
</TABLE>
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<PAGE>
Who Can Help Answer Your Questions?
If you have more questions about the offering,
you should contact your registered representative or:
CNL Marketing Services Department
400 East South Street
Orlando, Florida 32801
(800) 522-3863
www.cnlgroup.com
If you would like additional copies of this Prospectus, you should
contact your registered representative or:
CNL Marketing Services Department
400 East South Street
Orlando, Florida 32801
(800) 522-3863
-4-
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this Prospectus. It
is not complete and may not contain all of the information that you should
consider before investing in the common stock. To understand the offering fully,
you should read this entire Prospectus carefully, including the documents
attached as appendices.
CNL HOSPITALITY PROPERTIES, INC.
CNL Hospitality Properties, Inc. is a Maryland corporation which is
qualified and operated for federal income tax purposes as a REIT. Our address is
400 East South Street, Orlando, Florida 32801, and our telephone number is (407)
650-1000 or toll free (800) 522-3863.
OUR BUSINESS
Our Company acquires hotel properties to be leased on a long-term
"triple-net" basis, which means that the tenant generally will be responsible
for repairs, maintenance, property taxes, utilities and insurance. We intend to
invest the proceeds of this offering in hotel properties, which may include
furniture, fixtures and equipment, to be leased to operators of national and
regional limited service, extended stay and full service hotel chains, located
across the United States. We may also offer mortgage financing, and, to a lesser
extent, furniture, fixtures and equipment financing to operators of hotel chains
through secured equipment leases as loans or direct financing leases. See the
"Business" section for a description of the hotel properties we currently own,
our pending investments, the types of properties that may be selected by CNL
Hospitality Advisors, Inc, the property selection and acquisition processes and
the nature of the mortgage loans and secured equipment leases.
Under our Articles of Incorporation, the Company will automatically
terminate and dissolve on December 31, 2007, unless the shares of common stock
of the Company, including the shares offered by this Prospectus, are listed on a
national securities exchange or over-the-counter market before that date. If the
shares are listed, the Company automatically will become a perpetual life
entity. If we are not listed by December 31, 2007, we will sell our assets,
distribute the net sales proceeds to stockholders and limit our activities to
those related to the Company's orderly liquidation, unless the stockholders
owning a majority of the shares elect to amend the Articles of Incorporation to
extend the duration of the Company.
OUR REIT STATUS
As a REIT, we generally are not subject to federal income tax on income
that we distribute to our stockholders. Under the Internal Revenue Code of 1986,
as amended, REITs are subject to numerous organizational and operational
requirements, including a requirement that they distribute at least 95% of their
taxable income, as figured on an annual basis. If we fail to qualify for
taxation as a REIT in any year, our income will be taxed at regular corporate
rates, and we may not be able to qualify for treatment as a REIT for that year
and the next four years. Even if we qualify as a REIT for federal income tax
purposes, we may be subject to federal, state and local taxes on our income and
property and to federal income and excise taxes on our undistributed income.
OUR MANAGEMENT AND CONFLICTS OF INTEREST
We have retained the Advisor to provide us with management,
acquisition, advisory and administrative services. The five members of our Board
of Directors oversee the management of the Company. Three of the Directors are
independent of the Advisor and have responsibility for reviewing its
performance. The Directors are elected annually to the Board of Directors by the
stockholders.
All of the officers and directors of the Advisor also are officers or
Directors of the Company. The Advisor has responsibility for (i) selecting the
properties that we will acquire, formulating and evaluating the terms of each
proposed acquisition, and arranging for the acquisition of the property by the
Company; (ii) identifying potential tenants for the properties and potential
borrowers for the mortgage loans, and formulating, evaluating and negotiating
the terms of each lease of a property and each mortgage loan; (iii) locating and
identifying potential lessees and formulating, evaluating and negotiating the
terms of each secured equipment lease;
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and (iv) negotiating the terms of any borrowing by the Company, including lines
of credit and any long-term, permanent financing. All of the Advisor's actions
are subject to approval by the Board of Directors. The Advisor also has the
authority, subject to approval by a majority of the Board of Directors,
including a majority of the independent Directors, to select assets for sale by
the Company.
See the "Management and The Advisor" and "The Advisory Agreement"
sections for a description of the business background of the individuals
responsible for the management of the Company and the Advisor, as well as for a
description of the services the Advisor will provide.
Certain of our officers and Directors, who are also officers or
directors of the Advisor, may experience conflicts of interest in their
management of the Company. These arise principally from their involvement in
other activities that may conflict with our business and interests, including
matters related to (i) allocation of new investments and management time and
services between us and various other entities, (ii) the timing and terms of the
investment in or sale of an asset, (iii) development of our properties by
affiliates, (iv) investments with affiliates of the Advisor, (v) compensation to
the Advisor, (vi) our relationship with the managing dealer, CNL Securities
Corp., which is an affiliate of the Company and the Advisor, and (vii) the fact
that our securities and tax counsel also serves as securities and tax counsel
for some of our affiliates, which means neither the Company nor the stockholders
will have separate counsel. The "Conflicts of Interest" section discusses in
more detail the more significant of these potential conflicts of interest, as
well as the procedures that have been established to resolve a number of these
potential conflicts.
OUR AFFILIATES
The "Prior Performance Information" section of this Prospectus contains
a narrative discussion of the public and private real estate programs sponsored
by our affiliates and affiliates of the Advisor in the past, including 18 public
limited partnerships and one unlisted public REIT. As of June 30, 1998, these
entities, which invest in restaurant properties that are leased on a
"triple-net" basis to operators of restaurant chains, but do not invest in hotel
properties, had purchased 1,033 fast-food, family-style, and casual-dining
restaurants. In addition, an affiliate sponsors an unlisted public REIT that
invests in health care and seniors' housing properties that are leased on a
long-term, triple-net basis to operators of health care facilities. Based on an
analysis of the operating results of the 89 real estate limited partnerships and
two unlisted public REITs in which our principals have served, individually or
with others, as general partners or officers and directors, we believe that each
of these companies has met, or is in the process of meeting, its principal
investment objectives. Statistical data relating to the public limited
partnerships and the unlisted REITs are contained in Appendix C -- Prior
Performance Tables.
OUR INVESTMENT OBJECTIVES
Our Company's primary investment objectives are:
o to preserve, protect, and enhance our assets.
o to make distributions.
o to obtain fixed income through the receipt of base rent, and to
increase our income (and distributions) and provide protection
against inflation through receipt of percentage rent and/or
automatic increases in base rent, and to obtain fixed income
through the receipt of payments on mortgage loans and secured
equipment leases.
o to qualify and remain qualified as a REIT for federal income tax
purposes.
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o to provide you with liquidity for your investment within three to
eight years after commencement of this offering, either through
(i) listing our shares on a national securities exchange or
over-the-counter market or (ii) if listing does not occur within
eight years after commencement of the offering, selling our assets
and distributing the proceeds.
See the "Business -- General," "Business -- Site Selection and
Acquisition of Properties," "Business -- Description of Property Leases" and
"Investment Objectives and Policies" sections of this Prospectus for a more
complete description of the manner in which the structure of our business
facilitates our ability to meet our investment objectives.
RISK FACTORS
An investment in our Company is subject to significant risks. We
summarize some of the more important risks below. A more detailed list of the
risk factors is found in the "Risk Factors" section, which begins on page 10.
You should read and understand all of the risk factors before making your
decision to invest.
o We currently own two properties, so you will not have the opportunity
to evaluate all the properties that will be in our portfolio.
o There is currently no public trading market for the shares, and there
is no assurance that one will develop.
o We rely on the Advisor with respect to all investment decisions. Not
all of the officers of the Advisor have extensive experience, and our
Directors have limited experience, with acquiring and leasing hotels,
which could adversely affect the Company's business.
o The Advisor and its affiliates are or will be engaged in other
activities that will result in potential conflicts of interest with the
services that the Advisor and affiliates will provide to the Company.
o Market and economic conditions that we cannot control will affect the
value of our investments.
o We may make investments that will not appreciate in value over time,
such as mortgage loans and building-only properties, with the land
owned by a third-party.
o We cannot predict the amount of revenues we will receive from tenants,
lessees and borrowers.
o If our tenants, lessees or borrowers default, we will have less income
with which to make distributions.
o If the shares are not listed on a national securities exchange or
over-the-counter market by December 31, 2007, we will sell our assets
and distribute the proceeds.
o We do not yet have a commitment for long-term financing. If we do not
obtain long-term financing, we will not be able to acquire as many
properties or make as many loans and leases as we anticipated, which
could limit the diversification of our investments and our ability to
achieve our investment objectives.
o The secured equipment lease program is dependent upon obtaining
financing, which has not yet been secured.
o In connection with any borrowing, we may mortgage or pledge our assets,
which would put us at risk of losing the assets if we are unable to pay
our debts.
o We may incur debt, including debt to make distributions to
stockholders, in order to maintain our status as a REIT.
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o The vote of stockholders owning at least a majority but less than all
of the shares of common stock will bind all of the stockholders as to
matters such as the election of Directors and amendment of the
Company's governing documents.
o Restrictions on ownership of more than 9.8% of the shares of common
stock by any single stockholder or certain related stockholders may
have the effect of inhibiting a change in control of the Company, even
if such a change is in the interest of a majority of the stockholders.
o We may not remain qualified as a REIT for federal income tax purposes,
which would subject us to federal income tax on our taxable income at
regular corporate rates, thereby reducing the amount of funds available
for paying distributions to you as a stockholder.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Offering Size........................... o Maximum -- $275,000,000
o $250,000,000 worth of common stock to be offered to
investors meeting certain suitability standards and
$25,000,000 worth of common stock available only to
investors who purchased their shares in this offering or our
initial public offering and who choose to participate in our
reinvestment plan.
Minimum Investments..................... o Individuals-- $2,500-- Additional shares may be purchased in ten
dollar increments.
o IRA, Keogh and other Qualified Plans -- $1,000 -- Additional
shares may be purchased in ten dollar increments.
(Note: The amounts apply to most potential investors, but
minimum investments may vary from state to state. Please see
"The Offering" section, which begins on page 101).
Suitability Standards................... o Net worth (not including home, furnishings and personal
automobiles) of at least $45,000 and annual gross income
of at least $45,000; OR
o Net worth (not including home, furnishings and personal
automobiles) of at least $150,000.
(Note: Suitability standards may vary from state to state.
Please see the "Suitability Standards and How to Subscribe"
section, which begins on page 20).
Holding Period.......................... Anticipated to be three to eight years from the commencement of this
offering. If the shares are listed on a national securities exchange
or over-the-counter market, our Company will become a perpetual life
entity, and we will then reinvest proceeds from the sale of assets.
Distribution Policy..................... Consistent with our objective of qualifying as a REIT, we expect to pay
quarterly distributions and distribute at least 95% of our REIT taxable
income.
Our Advisor............................. CNL Hospitality Advisors, Inc. will administer the day-to-day
operations of our Company and select our Company's real estate
investments, mortgage loans and secured equipment leases.
Estimated Use of Proceeds............... o 84%-- To acquire hotel properties and make mortgage loans
o 9%-- To pay fees and expenses to affiliates for their services and
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as reimbursement of offering and acquisition-related expenses
o Remainder -- To pay for other expenses of the offering
Our Reinvestment Plan................... We have adopted a reinvestment plan which will allow our stockholders
to have the full amount of their distributions reinvested in additional
shares that may be available. We have registered 2,500,000 shares of
our common stock for this purpose. See the "Summary of Reinvestment
Plan" and the "Federal Income Tax Considerations-- Taxation of
Stockholders" sections and the Form of Reinvestment Plan accompanying
this Prospectus as Appendix A for more specific information about the
Reinvestment Plan.
</TABLE>
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RISK FACTORS
An investment in our shares involves significant risks and therefore is
suitable only for persons who understand those risks and their consequences and
who are able to lose their investment. You should consider the following risks
in addition to other information set forth elsewhere in this Prospectus before
making your investment decision.
We also caution you that this Prospectus contains forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. Although we believe that our expectations
reflected in the forward-looking statements are based on reasonable assumptions,
these expectations may not prove to be correct. Important factors that could
cause our actual results to differ materially from the expectations reflected in
these forward-looking statements include those set forth below, as well as
general economic, business and market conditions, changes in federal and local
laws and regulations and increased competitive pressures.
OFFERING-RELATED RISKS
An Unspecified Property Offering.
Potential Investors Cannot Evaluate Properties Not Yet
Acquired or Identified for Acquisition. We have established certain criteria for
evaluating hotel chains, particular properties and the operators of the
properties in which we may invest. See the "Business -- Standards for Investment
in Properties" and "Business -- General" sections for a description of these
criteria and the types of properties in which we intend to invest. We have not
set fixed minimum standards relating to creditworthiness of tenants and
therefore the Board of Directors has flexibility in assessing potential tenants.
In addition, as of the date of this Prospectus, we have purchased two hotels and
have entered into commitments for the acquisition of three additional hotel
properties. Accordingly, you have little information to assist you in evaluating
the merits of the additional properties we expect to purchase or develop.
No Assurance of Obtaining Suitable Investments. We cannot be
sure that we will be successful in obtaining suitable investments on financially
attractive terms or that, if we make investments, our objectives will be
achieved. If we are unable to find suitable investments, our financial condition
and ability to pay distributions could be adversely affected.
No Independent Review of the Company or the Prospectus by
Managing Dealer. The managing dealer, CNL Securities Corp., is an affiliate of
the Company and will not make an independent review of the Company or the
offering. Accordingly, you do not have the benefit of an independent review of
the terms of this offering.
Possible Delays in Investment. The offering proceeds may remain
uninvested for up to the later of two years from the initial date of this
Prospectus or one year after termination of the offering; although, we expect to
invest substantially all net offering proceeds by the end of that period. The
"Prior Performance Information" section provides a summary description of the
investment experience of affiliates of the Advisor in prior CNL programs, but
you should be aware that previous experience is not necessarily indicative of
the rate at which the proceeds of this offering will be invested.
We may delay investing the proceeds from this offering, and therefore
delay the receipt of any returns from investments, due to the inability of the
Advisor to find suitable properties or mortgage loans for investment. Until we
invest in properties or make mortgage loans, our investment returns will be
limited to the rates of return available on short-term, highly liquid
investments that provide appropriate safety of principal. We expect these rates
of return, which affect the amount of cash available to make distributions to
stockholders, to be lower than we would receive for property investments or
mortgage loans. Further, if we are required to invest any funds in properties
and mortgage loans and we have not done so or reserved those funds for Company
purposes within the later of two years
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from the initial date of this Prospectus, or one year after the termination of
this offering, we will distribute the remaining funds pro rata to the persons
who are stockholders of the Company at that time.
No Current Public Market for Shares Which Could Make Sale of Shares
Difficult. Currently there is no public market for the shares, so stockholders
may not be able to sell their shares promptly at a desired price. Therefore, you
should consider purchasing the shares as a long-term investment only. We do not
know if we will ever apply to list the Company's shares on a national securities
exchange or over-the-counter market, or, if we do apply for listing, if a public
trading market will develop. In any event, the Articles of Incorporation provide
that the Company will not apply for listing before the completion or termination
of this offering. There can be no assurance that the price you would receive in
a sale on a national securities exchange or over-the-counter market would be
representative of the value of the assets owned by the Company or that it would
equal or exceed the amount you paid for the shares.
COMPANY-RELATED RISKS
Limited Operating History. The Company has purchased two properties and
prior to October 15, 1997, the date our operations commenced, had no previous
performance history. As a result, you cannot be sure how the Company will be
operated, whether it will pursue the objectives described in this Prospectus or
how it will perform financially.
Limited Experience of Management. None of the prior public programs
organized by our affiliates has invested in hotels. The limited experience of
certain of our management in investing in hotel properties may adversely affect
the Company's results of operations and therefore its ability to pay
distributions.
Company is Dependent on Advisor. The Advisor, with approval from the
Board of Directors, will be responsible for the daily management of the Company,
including all acquisitions, dispositions and financings. The Board of Directors
may fire the Advisor, with or without cause, but only subject to payment and
release of the Advisor from all guarantees and other obligations incurred as
Advisor, which are referenced in the "Management Compensation" section of this
Prospectus. We cannot be sure that the Advisor will achieve the Company's
objectives or that the Board of Directors will be able to act quickly to remove
the Advisor if it deems removal necessary. As a result, it is possible that the
Company would be managed for some period by a company that was not acting in our
best interests or not capable of helping us achieve our objectives.
Conflicts of Interest.
We will be subject to conflicts of interest arising out of our
relationships with the Advisor and its affiliates, including the material
conflicts discussed below. The "Conflicts of Interest" section provides a
further discussion of the conflicts of interest between the Company and the
Advisor and its affiliates and our policies to reduce or eliminate certain
potential conflicts.
Selection of Properties Acquired. The Advisor or its
affiliates from time to time may acquire properties on a temporary basis with
the intention of subsequently transferring the properties to the Company. The
selection of properties to be transferred by the Advisor to the Company may be
subject to conflicts of interest. We cannot be sure that the Advisor will act in
the Company's best interests when deciding whether to allocate any particular
property to the Company. You will not have the opportunity to evaluate the
manner in which these conflicts of interest are resolved before making your
investment.
Competing Demands on Officers and Directors. The Directors and
certain of the officers of the Company and the directors and certain of the
officers of the Advisor have management responsibilities for other companies,
including companies that may in the future invest in some of the same types of
assets in which we may invest. For this reason, these officers and Directors
will share their management time and services among those companies and the
Company, will not devote all of their attention to the Company and could take
actions that are more favorable to the other companies than to the Company.
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Timing of Sales and Acquisitions May Favor the Advisor. The
Advisor may immediately realize substantial commissions, fees and other
compensation as a result of any investment in or sale of an asset by the
Company. Our Board of Directors must approve any investments and sales, but the
Advisor's recommendation to the Board may be influenced by the impact of the
transaction on the Advisor's compensation. The agreements between the Company
and the Advisor were not the result of arm's-length negotiations. As a result,
the Advisor may not always act in the Company's best interests, which could
adversely affect our results of operations.
Property Development by Affiliates. Properties acquired by the
Company may require development prior to use by a tenant. Our affiliates may
serve as developer and if so, the affiliates would receive the development fee
that would otherwise be paid to an unaffiliated developer. The Board of
Directors, including the independent Directors, must approve employing an
affiliate of the Company to serve as a developer. There is a risk, however, that
the Company would acquire properties that require development so that an
affiliate would receive the development fee.
We May Invest With Affiliates of the Advisor. We may invest in
joint ventures with another program sponsored by the Advisor or its affiliates.
The Board of Directors, including the independent Directors, must approve the
transaction, but the Advisor's recommendation may be affected by its
relationship with one or more of the co-venturers.
No Separate Counsel for the Company, Affiliates and Investors.
The Company, its affiliates and investors may have interests which conflict with
one another, but none of them currently has the benefit of separate counsel.
Company May Not Have Sufficient Working Capital. There can be no
assurance that the Company will have sufficient working capital. As of September
30, 1998, the Company had stockholders' equity of $24,567,655. If we do not have
sufficient capital, we may not be able to meet our business objectives, which
could decrease the return on your investment.
REAL ESTATE INVESTMENT RISKS
Possible Lack of Diversification Increases Risk of Investment. There is
no limit on the number of properties of a particular hotel chain which we may
acquire, though the Board of Directors, including a majority of the independent
Directors, will review the Company's properties and potential investments in
terms of geographic diversification. At this time, all of the Company's
properties are Marriott-branded hotels. If we continue to concentrate our
acquisitions with Marriott chains or in the future concentrate our acquisitions
on another chain, it will increase the risk that our financial condition will be
adversely affected by a downturn in a particular market sub-segment or by the
poor judgment of a particular management group.
Our profitability and our ability to diversify our investments, both
geographically and by type of properties purchased, will be limited by the
amount of funds at our disposal. If our assets become geographically
concentrated, an economic downturn in one or more of the markets in which we
have invested could have an adverse effect on our financial condition and our
ability to make distributions. We do not know whether we will sell all of the
shares being offered by this Prospectus. If we do not, it is possible that we
will not have the money necessary to diversify our investments or achieve the
highest possible return on our investments.
Lack of Control Over Market and Business Conditions. Changes in general
or local economic or market conditions, increased costs of energy, increased
costs of products, increased costs and shortages of labor, competitive factors,
fuel shortages, quality of management, the ability of a hotel chain to fulfill
any obligations to operators of its hotel business, limited alternative uses for
the building, changing consumer habits, condemnation or uninsured losses,
changing demographics, changing traffic patterns, inability to remodel outmoded
buildings as required by the franchise or lease agreement, voluntary termination
by a tenant of its obligations under a lease, bankruptcy of a tenant or
borrower, and other factors beyond the control of the Company and the Board of
Directors may reduce the value of properties to be acquired by the Company, the
ability of tenants to pay rent on a timely basis, the amount of the rent and the
ability of borrowers to make mortgage loan payments on time. If tenants are
unable to make lease payments or borrowers are unable to make mortgage loan
payments as a result of any of these factors, we might not have cash available
to make distributions to our stockholders.
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Impact of Adverse Trends in the Hotel Industry. The success of our
properties will depend largely on the property operators' ability to adapt to
dominant trends in the hotel industry, including greater competitive pressures,
increased consolidation, industry overbuilding, dependence on consumer spending
patterns and changing demographics, the introduction of new concepts and
products, availability of labor, price levels and general economic conditions.
The "Business - General" section includes a description of the size and nature
of the hotel industry and current trends in this industry. The success of a
particular hotel chain, the ability of a hotel chain to fulfill any obligations
to operators of its business, and trends in the hotel industry may affect the
income of the Company and the funds we have available to distribute to
stockholders.
Company Will Not Control Property Management. Our tenants will be
responsible for maintenance and other day-to-day management of the properties.
Because our revenues will largely be derived from rents, our financial condition
will be dependent on the ability of third-party tenants that we do not control
to operate the properties successfully. We intend to enter into leasing
agreements only with tenants having substantial prior hotel experience. Although
we believe the tenants of the two properties owned, and the three properties
identified as probable acquisitions, as of September 30, 1998, have significant
prior hotel experience, there is no assurance we will be able to make such
arrangements in the future. If our tenants are unable to operate the properties
successfully, they may not be able to pay their rent and they may not generate
significant percentage rent, which could adversely affect our financial
condition.
Company May Not Control Joint Ventures. Our independent Directors must
approve all joint venture or general partnership arrangements to which the
Company is a party. Subject to such approval, we may enter into a joint venture
with an unaffiliated party to purchase a property, and the joint venture or
general partnership agreement relating to that joint venture or partnership may
provide that we will share management control of the joint venture with the
unaffiliated party. In the event the joint venture or general partnership
agreement provides that we will have sole management control of the joint
venture, the agreement may be ineffective as to a third party who has no notice
of the agreement, and we therefore may be unable to control fully the activities
of the joint venture. If we enter into a joint venture with another program
sponsored by an affiliate, we do not anticipate that we will have sole
management control of the joint venture.
Investments in joint ventures involve the risk that the Company's
co-venturer may have economic or business interests or goals which, at a
particular time, are inconsistent with our interests or goals, that such
co-venturer may be in a position to take action contrary to our instructions,
requests, policies or objectives, or that such co-venturer may experience
financial difficulties. Among other things, actions by a co-venturer might
subject property owned by the joint venture to liabilities in excess of those
contemplated by the terms of the joint venture agreement or to other adverse
consequences. If we do not have full control over a joint venture, the value of
our investment will be affected to some extent by a third party that may have
different goals and capabilities than the Company. As a result, joint ownership
of investments may adversely affect our returns on the investments and,
therefore, our ability to pay distributions to our stockholders.
Difficulty in Exiting a Joint Venture After an Impasse. If we enter
into a joint venture, there will be a potential risk of impasse in certain joint
venture decisions since our approval and the approval of each co-venturer will
be required for certain decisions. In any joint venture with an affiliated
program, however, we will have the right to buy the other co-venturer's interest
or to sell our own interest on specified terms and conditions in the event of an
impasse regarding a sale. In the event of an impasse, it is possible that
neither party will have the funds necessary to consummate the buy-out. See
"Business - Joint Venture Arrangements." In addition, we may experience
difficulty in locating a third-party purchaser for our joint venture interest
and in obtaining a favorable sale price for the interest. As a result, it is
possible that we may not be able to exit the relationship if an impasse
develops.
Lack of Control Over Properties Under Construction. We intend to
acquire sites on which a property to be owned by the Company will be built, as
well as sites which have existing properties (including properties which require
renovation). If we acquire a property for development or renovation, we may be
subject to certain risks in connection with a developer's ability to control
construction costs and the timing of completion of construction or a developer's
ability to build in conformity with plans, specifications and timetables. Our
agreements with a developer will provide certain safeguards designed to minimize
these risks. In the event of a default by a developer, we generally will have
the right to require the tenant to repurchase the property that is under
development at a pre-
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established price designed to reimburse us for all acquisition and development
costs. We cannot be sure, however, that the tenants will be willing or able to
fulfill their obligations under these agreements. See "Business - Site Selection
and Acquisition of Properties."
Ground Lease Property Risks. If we invest in ground lease properties,
we will not own, or have a leasehold interest in, the underlying land, unless we
enter into an assignment or other agreement. Thus, with respect to ground lease
properties, the Company will have no economic interest in the land or building
at the expiration of the lease on the underlying land; although, we generally
will retain partial ownership of, and will have the right to remove any
equipment that we may own in the building. As a result, though we will share in
appreciation of the income stream derived from the lease, we will not share in
any appreciation of the land associated with any ground lease property.
We Do Not Control Third Party Franchise Agreements. We will not be a
party to any franchise agreement between a hotel chain and a tenant; so, those
agreements could be modified or canceled without notice to us, or our prior
consent. In that event, we could require the tenant to cease its operations at
the property, although the tenant's obligation to pay rent to the Company would
continue. However, if we removed a tenant due to the cancellation of the
tenant's franchise agreement, we would be required to locate a new tenant
acceptable to the hotel chain. As a result, if a tenant's franchise agreement is
canceled or amended, we may have difficulty removing the tenant and difficulty
realizing our expected return on the property.
Multiple Property Leases or Mortgage Loans with Individual Tenants or
Borrowers Increase Risks. The value of the Company's properties will depend
principally upon the value of the leases of the properties. Minor defaults by a
tenant or borrower may continue for some time before the Advisor or Board of
Directors determines that it is in the interest of the Company to evict the
tenant or foreclose on the property of the borrower. Tenants may lease more than
one property, and borrowers may enter into more than one mortgage loan. As a
result, a default by or the financial failure of a tenant or borrower could
cause more than one property to become vacant or more than one loan to become
non-performing under certain circumstances. Vacancies would reduce our cash
receipts and could decrease the properties' resale value until we are able to
re-lease the affected properties.
Re-leasing of Properties May Be Difficult. If a tenant vacates a
property, we may be unable either to re-lease the property for the rent due
under the prior lease or to re-lease the property without incurring additional
expenditures relating to the property. In addition, we could experience delays
in enforcing our rights against, and collecting rents (and, under certain
circumstances, real estate taxes and insurance costs) due from, a defaulting
tenant. Any delay we experience in re-leasing a property or difficulty in
re-leasing at acceptable rates could affect our ability to pay distributions.
Inability to Control the Sale of Certain Properties. We expect to give
certain tenants the right, but not the obligation, to purchase their property
from the Company commencing a specified number of years after the date of the
lease. The leases also generally provide the tenant with a right of first
refusal on any proposed sale provisions. These policies may lessen the ability
of the Advisor and the Board of Directors to freely control the sale of the
property. See "Business - Description of Property Leases Right of Tenant to
Purchase."
Limitations on the Ability of the Company to Liquidate. For the first
three to eight years after commencement of this offering, we intend to use any
proceeds from the sale of properties or mortgage loans that are not required to
be distributed to stockholders in order to preserve the Company's status as a
REIT to acquire additional properties, make additional mortgage loans and repay
outstanding indebtedness. The proceeds from the sale of secured equipment leases
will be used to fund additional secured equipment leases, or to reduce our
outstanding indebtedness. If the shares are listed on a national securities
exchange or over-the-counter market, we may reinvest the proceeds from sales in
other properties, mortgage loans or secured equipment leases for an indefinite
period of time. If the shares are not listed by December 31, 2007, we will
undertake to sell our assets and distribute the net sales proceeds to
stockholders, and we will engage only in activities related to the orderly
liquidation of the Company, unless the stockholders elect otherwise.
Neither the Advisor nor the Board of Directors may be able to control
the timing of sales due to market conditions, and there can be no assurance that
we will be able to sell our assets so as to return our stockholders' aggregate
invested capital, to generate a profit for the stockholders or to fully satisfy
our debt obligations. We will
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only return all of our stockholders' invested capital if we sell the properties
for more than their original purchase price, although return of capital, for
federal income tax purposes, is not necessarily limited to stockholder
distributions following sales of properties. If we take a purchase money
obligation in partial payment of the sales price of a property, we will realize
the proceeds of the sale over a period of years. Further, any intended
liquidation of the Company may be delayed beyond the time of the sale of all of
the properties until all mortgage loans and secured equipment leases expire or
are sold, because we plan to enter into mortgage loans with terms of 10 to 20
years and secured equipment leases with terms of seven years, and those
obligations may not expire before all of the properties are sold.
Seasonality of Hotel Industry. The hotel industry is seasonal. As a
result, there may be quarterly fluctuations in the amount of percentage rent, if
any, we will receive from our hotel properties. Any reduction in percentage rent
would reduce the amount of cash we could distribute to our stockholders.
Risks of Mortgage Lending.
Real Estate Market Conditions. If we make mortgage loans, we
will be at risk of defaults on those loans caused by many conditions beyond our
control, including local and other economic conditions affecting real estate
values and interest rate levels. We do not know whether the values of the
properties securing the mortgage loans will remain at the levels existing on the
dates of origination of the mortgage loans. If the values of the underlying
properties drop, the risk of the loans to the Company will increase and the
values of our interests may decrease.
Investment Subject to Interest Rate Fluctuations. If we invest
in fixed-rate, long-term mortgage loans and interest rates rise, the mortgage
loans will yield a return lower than then-current market rates. If interest
rates decrease, we will be adversely affected to the extent that mortgage loans
are prepaid, because we will not be able to make new loans at the previously
higher interest rate.
Delays in Liquidating Defaulted Mortgage Loans Could Reduce
Our Investment Returns. If there are defaults under our mortgage loans, we may
not be able to repossess and sell the underlying properties quickly. The
resulting time delay could reduce the value of our investment in the defaulted
loans. An action to foreclose on a mortgaged property securing a loan is
regulated by state statutes and rules and is subject to many of the delays and
expenses of other lawsuits if the defendant raises defenses or counterclaims. In
the event of default by a mortgagor, these restrictions, among other things, may
impede our ability to foreclose on or sell the mortgaged property or to obtain
proceeds sufficient to repay all amounts due to us on the loan.
Returns May Be Limited By Regulations. The mortgage loans may
also be subject to regulation by federal, state and local authorities and
subject to various laws and judicial and administrative decisions. These laws
may directly or indirectly limit the amount of return we can receive on our
mortgage loans, and, therefore, may limit the return on our investment.
Risks of Secured Equipment Leasing.
Collateral May Be Inadequate to Secure Leases. In the event
that a lessee defaults on a secured equipment lease, we may not be able to sell
the subject equipment at a price that would enable us to recover our costs
associated with the equipment. If we cannot recover our costs, it could affect
our results of operations.
Returns May Be Limited By Regulations. The secured equipment
lease program may also be subject to regulation by federal, state and local
authorities and subject to various laws and judicial and administrative
decisions. These laws and regulations may limit the amount of return on our
investment in certain markets and may prevent us from lending in other markets.
"Tax Risks" discusses certain federal income tax risks
associated with the secured equipment lease program.
-16-
<PAGE>
Possible Environmental Liabilities. Under various federal and state
environmental laws and regulations, as an owner or operator of real estate, we
may be required to investigate and clean up certain hazardous or toxic
substances, asbestos-containing materials, or petroleum product releases at our
properties. We may also be held liable to a governmental entity or to third
parties for property damage and for investigation and cleanup costs incurred by
those parties in connection with the contamination. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
The presence of contamination or the failure to remediate contaminations at any
of our properties may adversely affect our ability to sell or lease the
properties or to borrow using the properties as collateral. We could also be
liable under common law to third parties for damages and injuries resulting from
environmental contamination emanating from our properties.
All of our properties will be acquired subject to satisfactory Phase I
environmental assessments, which generally involve the inspection of site
conditions without invasive testing such as sampling or analysis of soil,
groundwater or other media or conditions; or satisfactory Phase II environmental
assessments, which generally involve the testing of soil, groundwater or other
media and conditions. The Board of Directors or the Advisor may determine that a
Phase I or Phase II environmental assessment is satisfactory if a problem exists
and has not been resolved at the time the property is acquired, provided that
the seller has (i) agreed in writing to indemnify the Company and/or (ii)
established in escrow cash funds equal to a predetermined amount greater than
the estimated costs to remediate the problem. We cannot be sure, however, that
any seller will be able to pay under an indemnity we obtain or that the amount
in escrow will be sufficient to pay all remediation costs. Further, we cannot be
sure that all environmental liabilities have been identified or that no prior
owner, operator or current occupant has created an environmental condition not
known to us. Moreover, we cannot be sure (i) future laws, ordinances or
regulations will not impose any material environmental liability or (ii) the
current environmental condition of our properties will not be affected by
tenants and occupants of the properties, by the condition of land or operations
in the vicinity of the properties (such as the presence of underground storage
tanks), or by third parties unrelated to the Company. The imposition on the
Company of environmental liabilities could have an adverse effect on our
financial condition or results of operation.
FINANCING RISKS
Uncertainty of Long-Term Financing. The Company intends to obtain
long-term financing; however, we have not yet obtained a commitment for any
long-term financing, and we cannot be sure that we will be able to obtain any
long-term financing on satisfactory terms. If we do not obtain long-term
financing, we may not be able to acquire as many properties or make as many
loans and leases as we anticipated, which could limit the diversification of our
investments and our ability to achieve our investment objectives.
Anticipated Borrowing has Risks. The Company may borrow money to
acquire assets, to preserve its status as a REIT or for other corporate
purposes. We may mortgage or put a lien on one or more of our assets in
connection with any borrowing. The Board of Directors anticipates that we will
obtain one or more revolving lines of credit in an aggregate amount of up to
$100,000,000 to provide financing for the acquisition of assets. On July 31,
1998, we entered into an initial $30,000,000 line of credit to be used to
acquire hotel properties. We may also obtain long-term, permanent financing. We
do not think that our permanent financing will exceed 30% of the Company's total
assets. The Company may repay the lines of credit with proceeds from this
offering, working capital or permanent financing. We may not borrow more than
300% of the Company's net assets, without showing our independent Directors that
a higher level of borrowing is appropriate. The use of borrowing may be risky if
the cash flow from the Company's real estate and other investments is
insufficient to meet its debt obligations. In addition, lenders to the Company
may seek to impose restrictions on future borrowings, distributions and Company
operating policies. If we mortgage or pledge assets as collateral and we cannot
meet our debt obligations, the lender could take the collateral, and we would
lose both the asset and the income we were deriving from it.
We Can Borrow Money to Make Distributions. We may borrow money as
necessary or advisable to assure that we maintain our qualification as a REIT
for federal income tax purposes. In such an event, it is possible that we could
make distributions in excess of our earnings and profits and, accordingly, that
the distributions could constitute a return of capital for federal income tax
purposes, although such distributions would not reduce stockholders' aggregate
invested capital.
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<PAGE>
MISCELLANEOUS RISKS
Competition. We compete with other companies for the acquisition of
properties. In addition, the hotel industry in which we invest is highly
competitive, and we anticipate that any property we acquire will compete with
other businesses in the vicinity. Our ability to receive rent, in the form of
percentage rent in excess of the base rent (including automatic increases in the
base rent), for our properties will depend in part on the ability of the tenants
to compete successfully with other businesses in the vicinity. In addition, we
will compete with other financing sources for suitable tenants and properties.
If we and our tenants are unable to compete successfully, our results of
operations will be adversely affected.
Inflation Could Hurt Investment Returns. Inflation may decrease the
value of some of our investments. For example, a substantial rise in inflation
over the term of an investment in mortgage loans and secured equipment leases
may reduce the value of those investments, if they do not otherwise provide for
adjustments based upon inflation. Inflation could also reduce the value of our
investments in properties if the inflation rate is high enough that percentage
rent and automatic increases in base rent do not keep up with inflation.
Lack of Adequate Insurance. If we, as landlord, incur any liability
which is not fully covered by insurance, we would be liable for the uninsured
amounts, and returns to the stockholders could be reduced. "Business -
Description of Property Leases Insurance, Taxes Maintenance and Repairs"
describes the types of insurance that the leases of the properties will require
the tenant to obtain.
Possible Effect of ERISA. We believe that our assets will not be
deemed, under the Employee Retirement Income Security Act of 1974, as amended,
to be "plan assets" of any plan that invests in the shares, although we have not
requested an opinion of counsel to that effect. If our assets were deemed to be
"plan assets" under ERISA (i) it is not clear that the exemptions from the
"prohibited transaction" rules under ERISA would be available for our
transactions and (ii) the prudence standards of ERISA would apply to our
investments (and might not be met). ERISA makes plan fiduciaries personally
responsible for any losses resulting to the plan from any breach of fiduciary
duty and the Internal Revenue Code imposes nondeductible excise taxes on
prohibited transactions. If such excise taxes were imposed on the Company, the
amount of funds available for us to make distributions to stockholders would be
reduced.
Effects of Governing Documents and Maryland Law on Potential Takeovers.
Certain provisions of the Company's Articles of Incorporation, including the
ownership limitations, transfer restrictions and ability to issue preferential
preferred stock, may have the effect of preventing, delaying or discouraging
takeovers of the Company by third parties. Certain other provisions of the
Articles of Incorporation which exempt the Company from the application of
Maryland's Business Combinations Statute and Control Share Acquisition Statute,
may have the effect of facilitating (i) business combinations between the
Company and beneficial owners of 10% or more of the voting power of the
outstanding voting stock of the Company and (ii) the acquisition by any person
of shares entitled to exercise or direct the exercise of 20% or more of the
total voting power of the Company. Because we will not be subject to the
provisions of the Business Combinations Statute and the Control Share
Acquisition Statute, it may be more difficult for our stockholders to prevent or
delay business combinations with large stockholders or acquisitions of
substantial blocks of voting power by such stockholders or other persons, should
the ownership restrictions be waived, modified or completely removed. Such
business combinations or acquisitions of voting power could cause the Company to
fail to qualify as a REIT. See "-- Tax Risks -- Failure to Qualify as a REIT for
Tax Purposes," "-- Tax Risks -- Limitations on Share Ownership," "Summary of the
Articles of Incorporation and Bylaws -- General," "Summary of the Articles of
Incorporation and Bylaws -- Mergers, Combinations, and Sale of Assets," "Summary
of the Articles of Incorporation and Bylaws -- Control Share Acquisitions" and
"Summary of the Articles of Incorporation and Bylaws -- Restriction of
Ownership" sections of this Prospectus.
Ownership Limitations Relating to REIT Status. The Articles of
Incorporation generally restrict direct or indirect ownership (applying certain
attribution rules) of the outstanding common stock to no more than 9.8% of the
outstanding common stock or 9.8% of any series of outstanding preferred stock by
one person (as defined in the Articles of Incorporation).
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<PAGE>
Majority Stockholder Vote May Discourage Changes of Control.
Stockholders may take certain actions, including approving amendments to the
Articles of Incorporation and Bylaws, by a vote of a majority of the shares
outstanding and entitled to vote. All actions taken, if approved by the holders
of the requisite number of shares, would be binding on all stockholders. Certain
of these provisions may discourage or make it more difficult for another party
to acquire control of the Company or to effect a change in the operation of the
Company.
Potential for Dilution. Stockholders have no preemptive rights. If we
(i) commence a subsequent public offering of shares or securities convertible
into shares or (ii) otherwise issue additional shares, including shares issuable
upon exercise of warrants issued to CNL Securities Corp. and reallowed to
participating broker-dealers in the managing dealer's sole discretion, investors
purchasing shares in this offering who do not participate in future stock
issuances will experience dilution in the percentage of their equity investment
in the Company. Although the Board of Directors has not yet determined whether
it will engage in future offerings or other issuances of shares, it may do so if
it is determined to be in the best interests of the Company. See "Summary of
Articles of Incorporation and Bylaws -- Description of Capital Stock --
Soliciting Dealer Warrants" and "The Offering -- Plan of Distribution."
Board of Directors Can Take Many Actions Without Stockholder Approval.
The Board of Directors has overall authority to conduct the Company's
operations. This authority includes significant flexibility. For example, the
Board of Directors can (i) prevent the ownership, transfer and/or accumulation
of shares in order to protect our status as a REIT or for any other reason
deemed to be in the best interests of the stockholders (see "Summary of the
Articles of Incorporation and Bylaws - Restriction of Ownership"); (ii) issue
additional shares without obtaining stockholder approval, which could dilute
your ownership; (iii) change the compensation of the Advisor, and employ and
compensate affiliates; (iv) direct our investments toward investments that will
not appreciate over time, such as building only properties, with the land owned
by a third party, and mortgage loans; and (v) change minimum creditworthiness
standards with respect to tenants. Any of these actions could reduce the value
of our assets without giving you, as a stockholder, the right to vote.
Reliance on Advisor and Board of Directors; No Management Rights for
Stockholders. If you invest in the Company, you will be relying entirely on the
management ability of the Advisor and on the oversight of our Board of
Directors. You will have no right or power to take part in the management of the
Company, except through the exercise of your voting rights. Thus, you should not
purchase any of the shares offered by this Prospectus unless you are willing to
entrust all aspects of the management of the Company to the Advisor and the
Board of Directors.
Limited Liability of Officers and Directors. The Articles of
Incorporation and Bylaws provide that an officer or Director's liability for
monetary damages to the Company, its stockholders or third parties may be
limited. Generally, we are obligated under the Articles of Incorporation and the
Bylaws to indemnify our officers and Directors against certain liabilities
incurred in connection with their services. We have executed indemnification
agreements with each officer and Director and agreed to indemnify the officer or
Director for any such liabilities that he or she incurs. These indemnification
agreements could limit the ability of the Company and the stockholders to
effectively take action against the Directors and officers of the Company
arising from their service to the Company. See "Summary of the Articles of
Incorporation and Bylaws - Limitation of Liability and Indemnification."
TAX RISKS
Failure to Qualify as a REIT for Tax Purposes. Our management believes
that we operate in a manner that enables us to meet the requirements for
qualification and to remain qualified as a REIT for federal income tax purposes.
A REIT generally is not taxed at the federal corporate level on income it
distributes to its stockholders, as long as it distributes annually at least 95%
of its income to its stockholders. We have not requested, and do not plan to
request a ruling from the Internal Revenue Service that we qualify as a REIT. We
have, however, received an opinion from our tax counsel, Shaw Pittman Potts &
Trowbridge, that we meet the requirements for qualification as a REIT for the
taxable year ended December 31, 1997 and that we are in a position to continue
such qualification.
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<PAGE>
You should be aware that opinions of counsel are not binding on the
Internal Revenue Service or on any court. Furthermore, the conclusions stated in
the opinion are conditioned on, and our continued qualification as a REIT will
depend on, our management meeting various requirements, which are discussed in
more detail under the heading "Federal Income Tax Considerations -- Taxation of
the Company -- Requirements for Qualification as a REIT" beginning on page 90.
If we fail to qualify as a REIT, we would be subject to federal income
tax at regular corporate rates. In addition to these taxes, we may be subject to
the federal alternative minimum tax. Unless we are entitled to relief under
specific statutory provisions, we could not elect to be taxed as a REIT for four
taxable years following the year during which we were disqualified. Therefore,
if we lose our REIT status, the funds available for distribution to you, as a
stockholder, would be reduced substantially for each of the years involved.
Risks Associated with Loans Secured by Personal Property. In order to
qualify as a REIT, at least 75% of the value of our assets must consist of
investments in real estate, investments in other REITs, cash and cash
equivalents, and government securities. Our secured equipment leases would not
be considered real estate assets for federal income tax purposes. Therefore, the
value of the secured equipment leases, together with any other property that is
not considered a real estate asset for federal income tax purposes, must
represent in the aggregate less than 25% of our total assets.
In addition, we may not own securities in, or make loans to, any one
company (other than a REIT) which have, in the aggregate, a value in excess of
5% of our total assets. For federal income tax purposes, the secured equipment
leases would be considered loans. The value of the secured equipment leases
entered into with any particular tenant under a lease or entered into with any
particular borrower under a mortgage loan must not represent in excess of 5% of
our total assets.
The 25% and 5% tests are determined at the end of each calendar
quarter. If we fail to meet either test at the end of any calendar quarter, we
will cease to qualify as a REIT.
Risks Associated with Distribution Requirements. Subject to certain
adjustments that are unique to REITs, a REIT generally must distribute 95% of
its taxable income. For the purpose of determining taxable income, we may be
required to accrue interest, rent and other items treated as earned for tax
purposes but that we have not yet received. In addition, we may be required not
to accrue as expenses for tax purposes certain items which actually have been
paid or certain of the Company's deductions might be disallowed by the Internal
Revenue Service. As a result, we could have taxable income in excess of cash
available for distribution. If this occurs, we may have to borrow funds or
liquidate some of our assets in order to meet the distribution requirement
applicable to a REIT.
Limitations on Share Ownership. For the purpose of protecting our REIT
status, our Articles of Incorporation limit the ownership by any single
stockholder of any class of our capital stock, including common stock, to 9.8%
of the outstanding shares of such class. The Articles also prohibit anyone from
buying shares if the purchase would result in our losing our REIT status. For
example, we would lose our REIT status if we had fewer than 100 different
stockholders or if five or fewer stockholders, applying certain broad
attribution rules of the Internal Revenue Code, owned 50% or more of the common
stock. These restrictions may discourage a change in control, deter any
attractive tender offers for our common stock or limit the opportunity for you
or other stockholders to receive a premium for your common stock in the event a
stockholder is making purchases of shares of common stock in order to acquire a
block of shares.
Other Tax Liabilities. Even if we qualify as a REIT, we may be subject
to certain federal, state and local taxes on our income and property that could
reduce operating cash flow.
Changes in Tax Laws. As we have previously described, we are treated as
a REIT for federal income tax purposes. However, this treatment is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect our status as a REIT. If
there is a change in the tax laws that prevents us from qualifying as a REIT or
that requires REITs generally to pay corporate level income taxes, we may not be
able to make the same level of distributions to our stockholders.
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<PAGE>
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE
SUITABILITY STANDARDS
The shares of common stock offered hereby (the "Shares") are suitable
only as a long-term investment for persons of adequate financial means who have
no need for liquidity in this investment. Initially, there is not expected to be
any public market for the Shares, which means that it may be difficult to sell
Shares. See the "Summary of the Articles of Incorporation and Bylaws --
Restrictions on Ownership" for a description of the transfer requirements. As a
result, the Company has established suitability standards which require
investors to have either (i) a net worth (not including home, furnishings, and
personal automobiles) of at least $45,000 and an annual gross income of at least
$45,000, or (ii) a net worth (not including home, furnishings, and personal
automobiles) of at least $150,000. The Company's suitability standards also
require that a potential investor (i) can reasonably benefit from an investment
in the Company based on such investor's overall investment objectives and
portfolio structuring; (ii) is able to bear the economic risk of the investment
based on the prospective stockholder's overall financial situation; and (iii)
has apparent understanding of (a) the fundamental risks of the investment, (b)
the risk that such investor may lose the entire investment, (c) the lack of
liquidity of the Company's Shares, (d) the background and qualifications of the
Advisor, and (e) the tax consequences of the investment.
Iowa, Maine, Massachusetts, Missouri, New Hampshire, North Carolina,
Ohio, Pennsylvania and Tennessee have established suitability standards
different from those established by the Company, and Shares will be sold only to
investors in those states who meet the special suitability standards set forth
below.
IOWA, MASSACHUSETTS, MISSOURI, NORTH CAROLINA AND TENNESSEE -- The
investor has either (i) a net worth (not including home, furnishings, and
personal automobiles) of at least $60,000 and an annual gross income of at least
$60,000, or (ii) a net worth (not including home, furnishings, and personal
automobiles) of at least $225,000.
MAINE -- The investor has either (i) a net worth (not including home,
furnishings, and personal automobiles) of at least $50,000 and an annual gross
income of at least $50,000, or (ii) a net worth (not including home,
furnishings, and personal automobiles) of at least $200,000.
NEW HAMPSHIRE -- The investor has either (i) a net worth (not including
home, furnishings, and personal automobiles) of at least $125,000 and an annual
gross income of at least $50,000, or (ii) a net worth (not including home,
furnishings, and personal automobiles) of at least $250,000.
OHIO -- The investor's investment in the Shares shall not exceed 10% of
the investor's net worth (not including home, furnishings, and personal
automobiles).
PENNSYLVANIA -- The investor has (i) a net worth (not including home,
furnishings, and personal automobiles) of at least ten times the investor's
investment in the Company; and (ii) either (a) a net worth (not including home,
furnishings, and personal automobiles) of at least $45,000 and an annual gross
income of at least $45,000, or (b) a net worth (not including home, furnishings,
and personal automobiles) of at least $150,000.
The foregoing suitability standards must be met by the investor who
purchases the Shares. If the investment is being made for a fiduciary account
(such as an IRA, Keogh Plan, or corporate pension or profit-sharing plan), the
beneficiary, the fiduciary account, or any donor or grantor that is the
fiduciary of the account who directly or indirectly supplies the investment
funds must meet such suitability standards.
In addition, under the laws of certain states, investors may transfer
their Shares only to persons who meet similar standards, and the Company may
require certain assurances that such standards are met. Investors should read
carefully the requirements in connection with resales of Shares as set forth in
the Articles of Incorporation and as summarized the "Summary of the Articles of
Incorporation and Bylaws -- Restrictions of Ownership."
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In purchasing Shares, custodians or trustees of employee pension
benefit plans or IRAs may be subject to the fiduciary duties imposed by the
Employee Retirement Income Security Act of 1974 ("ERISA") or other applicable
laws and to the prohibited transaction rules prescribed by ERISA and related
provisions of the Internal Revenue Code (the "Code"). See "Federal Income Tax
Considerations -- Taxation of Stockholders." In addition, prior to purchasing
Shares, the trustee or custodian of an employee pension benefit plan or an IRA
should determine that such an investment would be permissible under the
governing instruments of such plan or account and applicable law. For
information regarding "unrelated business taxable income," see "Federal Income
Tax Considerations -- Taxation of Stockholders -- Tax-Exempt Stockholders."
In order to ensure adherence to the suitability standards described
above, requisite suitability standards must be met, as set forth in the
Subscription Agreement in one of the forms attached hereto as Appendix D. In
addition, soliciting dealers, broker-dealers that are members of the National
Association of Securities Dealers, Inc. or other entities exempt from
broker-dealer registration (collectively, the "Soliciting Dealers"), who are
engaged by CNL Securities Corp. (the "Managing Dealer") to sell Shares, have the
responsibility to make every reasonable effort to determine that the purchase of
Shares is a suitable and appropriate investment for an investor. In making this
determination, the Soliciting Dealers will rely on relevant information provided
by the investor, including information as to the investor's age, investment
objectives, investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. See "The Offering --
Subscription Procedures." Executed Subscription Agreements will be maintained in
the Company's records for six years.
HOW TO SUBSCRIBE
An investor who meets the suitability standards described above may
subscribe for Shares by completing and executing the Subscription Agreement and
delivering it to a Soliciting Dealer, together with a check for the full
purchase price of the Shares subscribed for, payable to "SouthTrust Asset
Management Company of Florida, N.A., Escrow Agent." See "The Offering --
Subscription Procedures." Certain Soliciting Dealers who have "net capital," as
defined in the applicable federal securities regulations, of $250,000 or more
may instruct their customers to make their checks for Shares subscribed for
payable directly to the Soliciting Dealer. Care should be taken to ensure that
the Subscription Agreement is filled out correctly and completely. Partnerships,
individual fiduciaries signing on behalf of trusts, estates, and in other
capacities, and persons signing on behalf of corporations and corporate trustees
may be required to obtain additional documents from Soliciting Dealers. Any
subscription may be rejected by the Company in whole or in part, regardless of
whether the subscriber meets the minimum suitability standards.
Certain Soliciting Dealers may permit investors who meet the
suitability standards described above to subscribe for Shares by telephonic
order to the Soliciting Dealer. This procedure may not be available in certain
states. See "The Offering -- Subscription Procedures" and "The Offering -- Plan
of Distribution."
A minimum investment of 250 Shares ($2,500) is required, except for
Nebraska, New York, and North Carolina investors who must make a minimum
investment of 500 Shares ($5,000). IRAs, Keogh plans, and pension plans must
make a minimum investment of at least 100 Shares ($1,000), except for Iowa
tax-exempt investors who must make a minimum investment of 250 Shares ($2,500).
For Minnesota investors only, IRAs and qualified plans must make a minimum
investment of 200 Shares ($2,000). Following an initial subscription for at
least the required minimum investment, any investor may make additional
purchases in increments of one Share. Maine investors, however, may not make
additional purchases in amounts less than the applicable minimum investment
except with respect to Shares purchased pursuant to the Company's reinvestment
plan (the "Reinvestment Plan"). See "The Offering -- General," "The Offering --
Subscription Procedures," and "Summary of Reinvestment Plan."
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ESTIMATED USE OF PROCEEDS
The table set forth below summarizes certain information relating to
the anticipated use of offering proceeds by the Company, assuming that
25,000,000 Shares are sold. The Company estimates that 84% of gross offering
proceeds computed at $10 per share sold ("Gross Proceeds") will be available for
the purchase of properties (the "Properties") and the making of mortgage loans
(the "Mortgage Loans"), and approximately 9% of Gross Proceeds will be paid in
fees and expenses to affiliates of the Company (the "Affiliates") for their
services and as reimbursement for Offering Expenses incurred on behalf of the
Company. While the estimated use of proceeds set forth in the table below is
believed to be reasonable, this table should be viewed only as an estimate of
the use of proceeds that may be achieved.
<TABLE>
<CAPTION>
Maximum Offering(1)
-------------------
Amount Percent
------ -------
<S> <C> <C>
GROSS PROCEEDS TO THE COMPANY (2).......................................... $250,000,000 100.0%
Less:
Selling Commissions to CNL
Securities Corp. (2)................................................. 18,750,000 7.5%
Marketing Support and Due Diligence
Expense Reimbursement Fee to
CNL Securities Corp. (2)............................................. 1,250,000 0.5%
Offering Expenses (3)................................................... 7,500,000 3.0%
------------ ------
NET PROCEEDS TO THE COMPANY................................................ 222,500,000 89.0%
Less:
Acquisition Fees to the Advisor (4)..................................... 11,250,000 4.5%
Acquisition Expenses (5)................................................ 1,250,000 0.5%
Initial Working Capital Reserve......................................... (6)
------------ ------
CASH PAYMENT FOR PURCHASE OF PROPERTIES
AND THE MAKING OF MORTGAGE LOANS
BY THE COMPANY (7)...................................................... $210,000,000 84.0%
============ ======
</TABLE>
FOOTNOTES:
(1) Excludes 2,500,000 Shares that may be sold pursuant to the Reinvestment
Plan and 1,000,000 shares that may be sold upon the exercise of the
warrants (the "Soliciting Dealer Warrants"). See the "Summary of the
Articles of Incorporation and Bylaws -- Description of Capital Stock --
Soliciting Dealer Warrants" and "The Offering -- Plan of Distribution"
sections for a description of the Soliciting Dealer Warrants.
(2) Gross Proceeds of the offering are calculated as if all Shares are sold at
$10.00 per Share and do not take into account any reduction in selling
commissions. ("Selling Commissions") See "The Offering -- Plan of
Distribution" for a description of the circumstances under which Selling
Commissions may be reduced, including commission discounts available for
purchases by registered representatives or principals of the Managing
Dealer or Soliciting Dealers, certain Directors and officers, and certain
investment advisers. Selling Commissions are calculated assuming that
reduced commissions are not paid in connection with the purchase of any
Shares. The Shares are being offered to the public through CNL Securities
Corp., which will receive Selling Commissions of 7.5% on all sales of
Shares and will act as Managing Dealer. The Managing Dealer is an Affiliate
of the Advisor. Other broker-dealers may be engaged as Soliciting Dealers
to sell Shares and be reallowed Selling Commissions of up to 7%, with
respect to Shares which they sell. In addition, all or a portion of the
marketing support and due diligence expense reimbursement fee may be
reallowed to certain Soliciting Dealers for expenses incurred by them in
selling the Shares, including reimbursement for bona fide expenses incurred
in connection with due diligence activities, with prior written approval
from, and in the sole discretion of, the Managing Dealer. See "The Offering
-- Plan of Distribution" for a more complete description of this fee. The
Company also will issue to the Managing Dealer a Soliciting Dealer Warrant
to purchase one share of common stock for every 25 Shares sold, to be
exercised, if at all, during the five-year period commencing with the date
the offering begins (the "Exercise Period"), at a price of $12.00 per
share. All or any part of such Soliciting Dealer Warrants may be reallowed
to certain Soliciting Dealers with prior written approval of, and in the
sole discretion of, the Managing Dealer, unless prohibited by federal or
state securities laws. See "Summary of Articles of Incorporation and Bylaws
-- Description of Capital Stock -- Soliciting Dealer Warrants" and "The
Offering -- Plan of Distribution."
(3) Offering expenses ("Offering Expenses") include legal, accounting,
printing, escrow, filing, registration, qualification, and other expenses
of the Company and the offering of the Shares, but exclude Selling
Commissions and the marketing support and due diligence expense
reimbursement fee. The Advisor will pay all Offering Expenses which exceed
3% of Gross Proceeds. The Offering Expenses paid by the Company, together
with the 7.5% Selling Commissions and the 0.5% marketing support and due
diligence expense reimbursement fee incurred by the Company will not exceed
13% of the proceeds raised in connection with this offering.
(4) Acquisition fees ("Acquisition Fees") include all fees and commissions paid
by the Company to any person or entity in connection with the selection or
acquisition of any Property or the making of any Mortgage Loan, including
to Affiliates or nonaffiliates. Acquisition Fees do not include Acquisition
Expenses.
(5) Represents acquisition expenses ("Acquisition Expenses") that are neither
reimbursed to the Company nor included in the purchase price of the
Properties, and on which rent is not received, but does not include certain
expenses associated with Property acquisitions that are part of the
purchase price of the Properties, that are included in the basis of the
Properties, and on which rent is received. Acquisition Expenses include any
and all expenses incurred by the Company, the Advisor, or any Affiliate of
the Advisor in connection with the selection or acquisition of any Property
or the making of any Mortgage Loan, whether or not acquired or made,
including, without limitation, legal fees and expenses, travel and
communication expenses, costs of appraisals, nonrefundable option payments
on property not acquired, accounting fees and expenses, taxes, and title
insurance, but exclude Acquisition Fees. The expenses that are attributable
to the seller of the Properties and part of the purchase price of the
Properties is anticipated to range between 1% and 2% of Gross Proceeds.
(6) Because leases generally will be on a "triple-net" basis, it is not
anticipated that a permanent reserve for maintenance and repairs will be
established. However, to the extent that the Company has insufficient funds
for such purposes, the Advisor may, but is not required to contribute to
the Company an aggregate amount of up to 1% of the net offering proceeds
available to the Company for maintenance and repairs. The Advisor also may,
but is not required to establish reserves from offering proceeds, operating
funds, and the available proceeds of any sales of Company assets ("Sale").
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<PAGE>
(7) Offering proceeds designated for investment in Properties or the making of
Mortgage Loans temporarily may be invested in short-term, highly liquid
investments with appropriate safety of principal. The Company may, at its
discretion, use up to $100,000 per calendar quarter of offering proceeds
for redemptions of Shares. See "Redemption of Shares."
MANAGEMENT COMPENSATION
The table below summarizes the types, recipients, methods of
computation, and estimated amounts of all compensation, fees, reimbursements and
distributions to be paid directly or indirectly by the Company to the Advisor
and its Affiliates, exclusive of any distributions to which the Advisor or its
Affiliates may be entitled by reason of their purchase and ownership of Shares.
The table excludes estimated amounts of compensation relating to any Shares
issued pursuant to the Company's Reinvestment Plan and Soliciting Dealer
Warrants. See "The Advisor and the Advisory Agreement." For information
concerning compensation to the Directors, see the "Management" section of this
Prospectus.
A maximum of 25,000,000 Shares ($250,000,000) may be sold. An
additional 2,500,000 Shares ($25,000,000) may be sold to stockholders who
receive a copy of this Prospectus and who purchase Shares through the
reinvestment plan. An additional 1,000,000 shares ($12,000,000) of common stock
also may be sold to the Managing Dealer and reallowed to certain Soliciting
Dealers who may exercise Soliciting Dealer Warrants at an exercise price of
$12.00 per share during the Exercise Period for such shares.
The following arrangements for compensation and fees to the Advisor and
its Affiliates were not determined by arm's-length negotiations. See "Conflicts
of Interest." There is no item of compensation and no fee that can be paid to
the Advisor or its Affiliates under more than one category.
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<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Offering Stage
- --------------------------------------------------------------------------------------------------------------------------------
Selling Commissions to Selling Commissions of 7.5% per Share on all Shares $18,750,000 if 25,000,000
Managing Dealer and sold, subject to reduction under certain circumstances Shares sold.
Soliciting Dealers as described in "The are Offering -- Plan of
Distribution." Soliciting Dealers may be reallowed
Selling Commissions of up to 7% with respect to Shares
they sell. In addition, the Managing Dealer will
receive one Soliciting Dealer Warrant for every 25
Shares sold, all or a portion of which may be
reallowed to Soliciting Dealers, with prior written
approval from, and in the sole discretion of, the
Managing Dealer. See "The Offering -- Plan of
Distribution."
- --------------------------------------------------------------------------------------------------------------------------------
Marketing support and Expense allowance of 0.5% of Gross Proceeds to the $1,250,000 if 25,000,000 Shares
due diligence expense Managing Dealer, all or a portion of which may be are sold.
reimbursement fee to reallowed to Soliciting Dealers with prior written
Managing Dealer and approval from, and in the sole discretion of, the
Soliciting Dealers Managing Dealer. The Managing Dealer will pay all sums
attributable to bona fide due diligence expenses from
this fee, in the Managing Dealer's sole discretion.
- --------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Actual expenses incurred, except that the Advisor will Amount is not determinable at
Advisor and its pay all such expenses in excess of 3% of Gross but will not exceed 3% of
Affiliates for Proceeds. The Offering this time, paid by the Company, Gross Proceeds: $7,500,000
Offering Expenses together with the 7.5% Selling Expenses Commissions if 25,000,000 Shares are sold.
and the 0.5% marketing support and due diligence
expense reimbursement fee incurred by the Company will
not exceed 13% of the proceeds raised in connection
with this offering.
- --------------------------------------------------------------------------------------------------------------------------------
Acquisition Stage
- --------------------------------------------------------------------------------------------------------------------------------
Acquisition Fee to the 4.5% of Gross Proceeds, loan proceeds from permanent $11,250,000 if 25,000,000 Shares
Advisor financing and amounts outstanding on the line are sold plus $4,500,000 if
of credit, if any, at the time of listing the Company's Permanent Financing equals
common stock on a national securities $100,000,000.
exchange or over-the-counter market, but
excluding loan proceeds used to finance
secured equipment leases (collectively,
"Total Proceeds") payable to the Advisor as
Acquisition Fees.
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Other Acquisition Fees Any fees paid to Affiliates of the Advisor in Amount is not determinable at
to Affiliates of the connection with the financing, development, this time.
Advisor construction or renovation of a Property. Such
fees are in addition to 4.5% of Total Proceeds
payable to the Advisor as Acquisition Fees,
and payment of such fees will be subject to
approval by the Board of Directors,
including a majority of the Directors who are
independent of the Advisor (the "Independent
Directors"), not otherwise interested
in the transaction.
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</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reimbursement of Reimbursement to the Advisor and its Affiliates for Acquisition Expenses, which are
Acquisition Expenses to expenses actually incurred. based on a number of factors,
the Advisor and its including the purchase price of
Affiliates The total of all Acquisition Fees and any the Properties, are not
Acquisition Expenses payable to the Advisor determinable at this time.
and its Affiliates shall be reasonable and
shall not exceed an amount equal to 6% of the
Real Estate Asset Value of a Property, or
in the case of a Mortgage Loan, 6% of the
funds advanced, unless a majority of the
Board of Directors, including a majority of
the Independent Directors not otherwise
interested in the transaction, approves fees
in excess of this limit subject to a
determination that the transaction is
commercially competitive, fair and
reasonable to the Company. Acquisition Fees
shall be reduced to the extent that, and
if necessary to limit, the total
compensation paid to all persons involved in
the acquisition of any Property to the
amount customarily charged in arm's-length
transactions by other persons or entities
rendering similar services as an ongoing
public activity in the same geographical
location and for comparable types of
Properties, and to the extent that other
acquisition fees, finder's fees, real estate
commissions, or other similar fees or
commissions are paid by any person in
connection with the transaction. "Real
Estate Asset Value" means the amount actually
paid or allocated to the purchase,
development, construction or improvement of
a Property, exclusive of Acquisition Fees
and Acquisition Expenses.
- --------------------------------------------------------------------------------------------------------------------------------
Operational Stage
- --------------------------------------------------------------------------------------------------------------------------------
Asset Management Fee to A monthly Asset Management Fee in an amount Amount is not determinable at
the Advisor equal to one-twelfth of 0.6% of the this time. The amount of the
Company's Real Estate Asset Value and the outstanding Asset Management Fee will depend
principal amount of any Mortgage Loans, as of the end upon, among other things, the
of the preceding month. Specifically, Real cost of the Properties and the
Estate Asset Value equals the amount invested in the amount invested in Mortgage
Properties wholly owned by the Company, determined on Loans.
the basis of cost, plus, in the case of
Properties owned by any joint venture or
partnership in which the Company is a
co-venturer or partner ("Joint Venture"), the
portion of the cost of such Properties paid by
the Company, exclusive of Acquisition Fees
and Expenses. The Asset Management Fee, which
will not exceed fees which are competitive for
similar services in the same geographic area,
may or may not be taken, in whole or in part
as to any year, in the sole discretion of the
Advisor. All or any portion of the Asset
Management Fee not taken as to any fiscal
year shall be deferred without interest and
may be taken in such other fiscal year as
the Advisor shall determine.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reimbursement to the Operating Expenses (which, in general, are those Amount is not determinable at
Advisor and Affiliates expenses relating to administration this time.
for operating expenses of the Company on an ongoing basis) will be
reimbursed by the Company. To the extent that
Operating Expenses payable or reimbursable by
the Company, in any four consecutive fiscal
quarters (the "Expense Year"), exceed the
greater of 2% of Average Invested Assets or
25% of Net Income (the "2%/25%
Guidelines"), the Advisor shall reimburse
the Company within 60 days after the end of
the Expense Year the amount by which the
total Operating Expenses paid or incurred by
the Company exceed the 2%/25% Guidelines.
"Average Invested Assets" means, for a
specified period, the average of the
aggregate book value of the Properties,
Mortgage Loans, and Secured Equipment
Leases (collectively, the "Assets") of the
Company invested, directly or indirectly, in
equity interests in and loans secured by
real estate before reserves for
depreciation or bad debts or other similar
non-cash reserves, computed by taking the
average of such values at the end of each
month during such period. "Net Income"
means for any period, the total revenues
applicable to such period, less the total
expenses applicable to such period
excluding additions to reserves for
depreciation, bad debts, or other similar
non-cash reserves; provided, however, Net
Income for purposes of calculating total
allowable Operating Expenses shall exclude
the gain from the sale of the Company's
Assets.
- --------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated real estate Amount is not determinable at
real estate disposition disposition fee, payable upon the Sale of one this time. The amount of this
fee payable to the or more Properties, in an amount equal to the fee, if it becomes payable, will
Advisor from a Sale or lesser of (i) one-half of a Competitive depend upon the price at which
Sales of a Property not Real Estate Commission, or (ii) 3% of the Properties are sold.
in liquidation of the sales price of such Property or Properties.
Company Payment of such fee shall be made only if the
Advisor provides a substantial amount of
services in connection with the Sale of a
Property or Properties and shall be
subordinated to receipt by the stockholders of
Distributions equal to the sum of (i) their
aggregate Stockholders' 8% Return (as
defined below) and (ii) their aggregate
investment in the Company ("Invested
Capital"). If, at the time of a Sale,
payment of the disposition fee is deferred
because the subordination conditions have
not been satisfied, then the disposition fee
shall be paid at such later time as the
subordination conditions are satisfied. Upon
listing on a national securities exchange
or over-the-counter market ("Listing"), if
the Advisor has accrued but not been paid
such real estate disposition fee, then for
purposes of determining whether the
subordination conditions have been satisfied,
stockholders will be deemed to have received
a Distribution in the amount equal to the
product of the total number of shares of
Common Stock outstanding and the average
closing price of the shares over a period,
beginning 180 days after Listing, of 30
days during which the shares are traded.
"Stockholders' 8% Return," as of each date,
means an aggregate amount equal to an 8%
cumulative, noncompounded, annual return on
Invested Capital.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Subordinated Incentive At such time, if any, as Listing occurs, the Advisor Amount is not determinable at
Fee payable to the shall be paid the Subordinated Incentive Fee this time.
Advisor at such time, if in an amount equal to 10% of the amount by which
any, as Listing occurs (i) the market value of the Company (as defined
below) plus the total Distributions made to
stockholders from the Company's inception until the
date of Listing exceeds (ii) the sum of (A) 100% of
Invested Capital and (B) the total Distributions
required to be made to the stockholders in order
to pay the Stockholders' 8% Return from inception
through the date the market value is determined. For
purposes of calculating the Subordinated Incentive
Fee, the market value of the Company shall be the
average closing price or average of bid and asked
price, as the case may be, over a period of 30 days
during which the Shares are traded with such period
beginning 180 days after Listing. The Subordinated
Incentive Fee will be reduced by the amount of
any prior payment to the Advisor of a deferred,
subordinated share of Net Sales Proceeds from Sales
of Assets of the Company.
- --------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated share equal to 10% of Net Amount is not determinable at
share of Net Sales Sales Proceeds from Sales of Assets of the Company this time.
Proceeds from Sales of payable after receipt by the stockholders of
Assets of the Company Distributions equal to the sum of (i) the
not in liquidation of Stockholders' 8% Return and (ii) 100% of Invested
the Company payable to Capital. Following Listing, no share of Net Sales
the Advisor Proceeds will be paid to the Advisor.
- --------------------------------------------------------------------------------------------------------------------------------
Secured Equipment Lease A fee paid to the Advisor out of the proceeds of the Amount is not determinable at
Servicing Fee to one or more the revolving line of credit (collectively, this time.
the Advisor the "Line of Credit") or Permanent Financing for
negotiating furniture, fixture and equipment
("Equipment") loans or direct financing
leases (the "Secured Equipment Leases") and
supervising the Secured Equipment Lease program equal
to 2% of the purchase price of the Equipment subject
to each Secured Equipment Lease and paid upon entering
into such lease.
- --------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Repayment by the Company of actual expenses incurred. Amount not determinable at this
Advisor and Affiliates time.
for Secured Equipment
Lease servicing expenses
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- --------------------------------------------------------------------------------------------------------------------------------
Liquidation Stage
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred, subordinated A deferred, subordinated real estate disposition fee, Amount is not determinable at
real estate disposition payable upon Sale of one or more Properties, in an this time. The amount of this
fee payable to the amount equal to the lesser of (i) one-half of a fee, if it becomes payable, will
Advisor from a Sale or Competitive Real Estate Commission, or (ii) 3% of the depend upon the price at which
Sales in liquidation of sales price of such Property or Properties. Payment of Properties are sold.
the Company such fee shall be made only if the Advisor provides a
substantial amount of services in connection with the
Sale of a Property or Properties and shall be
subordinated to receipt by the stockholders of
Distributions equal to the sum of (i) their aggregate
Stockholders' 8% Return and (ii) their aggregate
Invested Capital. If, at the time of a Sale, payment
of the disposition fee is deferred because the
subordination conditions have not been satisfied, then
the disposition fee shall be paid at such later time
as the subordination conditions are satisfied.
- --------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated share equal to 10% of Net Amount is not determinable at
share of Net Sales Proceeds from Sales of Assets of the Company payable this time.
Proceeds from Sales of after receipt by the stockholders of Distributions
Assets of the Company in equal to the sum of (i) the Stockholders' 8% Return
liquidation of the and (ii) 100% of Invested Capital. Following
Company payable to Listing, no share of Net Sales Proceeds will be paid
the Advisor. to the Advisor.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
CONFLICTS OF INTEREST
The Company will be subject to various conflicts of interest
arising out of its relationship to the Advisor and its Affiliates, as
described below.
The following chart indicates the relationship between the
Advisor and those Affiliates that will provide services to the Company.
CNL Group, Inc. (1)
Subsidiaries, Affiliates and Strategic Business Units
Capital Markets Retail
CNL Securities Corp. (2) Commercial Net Lease Realty, Inc. (4)
CNL Investment Company
Restaurant
Corporate Services CNL Fund Advisors, Inc.
CNL Corporate Services, Inc. (3) CNL Restaurant Services, Inc.
Hospitality
CNL Hospitality Advisors, Inc.
(formerly CNL Real Estate Advisors,
Inc.) (5)
CNL Hotel Development Company
Health Care
CNL Health Care Advisors, Inc.
Financial Services
CNL Financial Services, Inc.
CNL Advisory Services, Inc.
Corporate Properties
CNL Corporate Properties, Inc.
- --------------------------
(1) James M. Seneff, Jr., Chairman of the Board and Chief Executive
Officer of the Company, shares ownership and voting control of
CNL Group, Inc. with Dayle L. Seneff, his wife.
(2) CNL Securities Corp. (a subsidiary of CNL Group, Inc.) has
served as managing dealer in the offerings for various CNL
public and private real estate programs, including the Company.
(3) CNL Corporate Services, Inc. (a wholly-owned subsidiary of
CNL Group, Inc.) and other Affiliates provide
administrative and accounting services for various CNL
entities, including the Company.
(4) Commercial Net Lease Realty, Inc. is a REIT listed on the
New York Stock Exchange. Effective January 1, 1998, CNL
Realty Advisors, Inc. and Commercial Net Lease Realty, Inc.
merged, at which time Commercial Net Lease Realty, Inc.
became self advised. James M. Seneff, Jr. continues to hold
the positions of Chief Executive Officer and Chairman of the
Board, and Robert A. Bourne continues to hold the position
of Vice Chairman of the Board of Commercial Net Lease Realty,
Inc.
(5) CNL Hospitality Advisors, Inc. (a subsidiary of CNL
Group, Inc.) provides management and advisory services to
the Company pursuant to the Advisory Agreement.
PRIOR AND FUTURE PROGRAMS
Affiliates of the Advisor have organized over 100 other
real estate investments, currently have other real estate holdings, and
in the future expect to form, offer interests in, and manage other
real estate programs in addition to the Company, and make additional
real estate investments. Although no Affiliate of the Advisor
currently owns,
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<PAGE>
operates, leases or manages properties that would be suitable for the
Company, future real estate programs may involve Affiliates of the
Advisor in the ownership, operation, leasing, and management of
properties that may be suitable for the Company.
Certain public or private real estate programs affiliated
with the Advisor may in the future invest in hotel properties, may
purchase properties concurrently with the Company and may lease
properties to operators who also lease or operate certain of the
Company's Properties. These properties, if located in the vicinity
of, or adjacent to, Properties acquired by the Company may affect the
Properties' gross revenues. Additionally, such other programs may offer
mortgage or equipment financing to the same or similar entities as
those targeted by the Company, thereby affecting the Company's
Mortgage Loan activities or Secured Equipment Lease programs. Such
conflicts between the Company and affiliated programs may affect
the value of the Company's investments as well as its Net Income.
The Company believes that the Advisor has established guidelines to
minimize such conflicts. See "Certain Conflict Resolution
Procedures" below.
ACQUISITION OF PROPERTIES
Affiliates of the Advisor may compete with the Company to
acquire hotel properties or invest in mortgage loans of a type suitable
for acquisition by the Company and may be better positioned to make such
acquisitions or investments as a result of relationships that may
develop with various operators of national and regional limited
service, extended stay and full service hotel chains (the "Hotel
Chains") and their franchisees. See "Business -- General." A purchaser
who wishes to acquire one or more of these properties or invest in one
or more mortgage loans may have to do so within a relatively short
period of time, occasionally at a time when the Company (due to
insufficient funds, for example) may be unable to make the acquisition
or investment.
In an effort to address these situations and preserve the
acquisition and investment opportunities for the Company (and other
entities with which the Advisor or its Affiliates are affiliated),
Affiliates of the Advisor may maintain lines of credit which
enable them to acquire properties or make mortgage loans on an
interim basis. In the event Affiliates acquire such properties,
these properties and or mortgage loans generally will be purchased from
Affiliates of the Advisor, at their cost, by one or more existing or
future public or private programs formed by Affiliates of the Advisor.
The Advisor could experience potential conflicts of
interest in connection with the negotiation of the purchase price
and other terms of the acquisition of a property, as well as the
terms of the lease of a property or investment in a mortgage loan, due
to its relationship with its Affiliates and any business relationship
of its Affiliates that may develop with operators of Hotel Chains.
The Advisor or its Affiliates also may be subject to
potential conflicts of interest at such time as the Company wishes to
acquire a property, make a mortgage loan or enter into a secured
equipment lease that also would be a suitable investment for an
Affiliate of CNL. Affiliates of the Advisor serve as Directors of the
Company and, in this capacity, have a fiduciary obligation to act in
the best interest of the stockholders of the Company and, as general
partners or directors of CNL Affiliates, to act in the best
interests of the investors in other programs with investments that may
be similar to those of the Company and will use their best efforts to
assure that the Company will be treated as favorably as any such
other program. See "Management -- Fiduciary Responsibility of the
Board of Directors." The Company has also developed procedures to
resolve potential conflicts of interest in the allocation of
properties and mortgage loans between the Company and certain of its
Affiliates. See "Certain Conflict Resolution Procedures" below.
The Company will supplement this Prospectus during the
offering period to disclose the acquisition of a Property at such time
as the Advisor believes that a reasonable probability exists that the
Company will acquire the Property, including an acquisition from the
Advisor or its Affiliates. Based upon the experience of management
of the Company and the Advisor and the proposed acquisition
methods, a reasonable probability that the Company will acquire a
Property normally will occur as of the date on which (i) a commitment
letter is executed by a proposed tenant, (ii) a satisfactory credit
underwriting for the proposed tenant has been completed, and (iii) a
satisfactory site inspection has been completed.
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<PAGE>
SALES OF PROPERTIES
A conflict also could arise in connection with the
Advisor's determination as to whether or not to sell a Property, since
the interests of the Advisor and the stockholders may differ as a
result of their distinct financial and tax positions and the
compensation to which the Advisor or its Affiliates may be entitled
upon the Sale of a Property. See "Compensation of the Advisor," below
for a description of these compensation arrangements. In order to
resolve this potential conflict, the Board of Directors will be
required to approve each Sale of a Property.
JOINT INVESTMENT WITH AN AFFILIATED PROGRAM
The Company may invest in Joint Ventures with another program
sponsored by the Advisor or its Affiliates if a majority of the
Directors, including a majority of the Independent Directors, not
otherwise interested in the transaction, determine that the
investment in the Joint Venture is fair and reasonable to the Company
and on substantially the same terms and conditions as those to be
received by the co-venturer or co-venturers. Potential situations may
arise in which the interests of the co-venturer or co-venturers may
conflict with those of the Company. In addition, the Company and the
co-venturer or co-venturers may reach an impasse with regard to
business decisions, such as the purchase or sale of Property, in
which the approval of the Company and each co-venturer is required. In
this event, none of the parties may have the funds necessary to
purchase the interests of the other co-venturers. The Company may
experience difficulty in locating a third party purchaser for its Joint
Venture interest and in obtaining a favorable sales price for such
Joint Venture interest. See "Risk Factors -- Company May Not Control
Joint Ventures."
COMPETITION FOR MANAGEMENT TIME
The directors and certain of the officers of the Advisor
and the Directors and certain of the officers of the Company currently
are engaged, and in the future will engage, in the management of
other business entities and properties and in other business
activities. They will devote only as much of their time to the business
of the Company as they, in their judgment, determine is reasonably
required, which will be substantially less than their full time. These
officers and directors of the Advisor and officers and Directors of
the Company may experience conflicts of interest in allocating
management time, services, and functions among the Company and the
various entities, investor programs (public or private), and any
other business ventures in which any of them are or may become
involved.
COMPENSATION OF THE ADVISOR
The Advisor has been engaged to perform various services
for the Company and will receive fees and compensation for such
services. None of the agreements for such services were the result of
arm's-length negotiations. All such agreements, including the
Advisory Agreement, require approval by a majority of the Board of
Directors, including a majority of the Independent Directors, not
otherwise interested in such transactions, as being fair and
reasonable to the Company and on terms and conditions no less
favorable than those which could be obtained from unaffiliated
entities. The timing and nature of fees and compensation to the
Advisor could create a conflict between the interests of the Advisor
and those of the stockholders. A transaction involving the purchase,
lease, or Sale of any Property, or the entering into or Sale of a
Mortgage Loan or a Secured Equipment Lease by the Company may
result in the immediate realization by the Advisor and its
Affiliates of substantial commissions, fees, compensation, and
other income. Although the Advisory Agreement authorizes the
Advisor to take primary responsibility for all decisions relating
to any such transaction, the Board of Directors must approve all of the
Company's acquisitions and Sales of Properties and the entering into
and Sales of Mortgage Loans or Secured Equipment Leases. Potential
conflicts may arise in connection with the determination by the
Advisor on behalf of the Company of whether to hold or sell a
Property, Mortgage Loan, or Secured Equipment Lease as such
determination could impact the timing and amount of fees payable to the
Advisor. See "The Advisor and the Advisory Agreement."
RELATIONSHIP WITH MANAGING DEALER
The Managing Dealer is CNL Securities Corp., an Affiliate
of the Company. Certain of the officers and Directors of the Company are
also officers, directors, and registered principals of the Managing
Dealer. This relationship may create conflicts in connection with the
fulfillment by the Managing Dealer of its due diligence obligations
under the federal securities laws. Although the Managing Dealer will
examine the information in the
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<PAGE>
Prospectus for accuracy and completeness, the Managing Dealer is an
Affiliate of the Company and will not make an independent review of
the Company or the offering. Accordingly, the investors do not have
the benefit of such independent review. Certain of the Soliciting
Dealers have made, or are expected to make, their own independent due
diligence investigations. The Managing Dealer is not prohibited from
acting in any capacity in connection with the offer and sale of
securities offered by entities that may have some or all investment
objectives similar to those of the Company and is expected to
participate in other offerings sponsored by one or more of the
officers or Directors of the Company.
LEGAL REPRESENTATION
Shaw Pittman Potts & Trowbridge, which serves as securities
and tax counsel to the Company in this offering, also serves as
securities and tax counsel for certain of its Affiliates, including
other real estate programs, in connection with other matters. In
addition, certain members of the firm of Shaw Pittman Potts &
Trowbridge have invested as limited partners or stockholders in prior
programs sponsored by Affiliates of the Advisor in aggregate amounts
which do not exceed one percent of the amounts sold by any of these
programs. Members of the firm also may invest in the Company.
Neither the Company nor the stockholders will have separate counsel.
In the event any controversy arises following the termination of this
offering in which the interests of the Company appear to be in conflict
with those of the Advisor or its Affiliates, other counsel may be
retained for one or both parties.
CERTAIN CONFLICT RESOLUTION PROCEDURES
In order to reduce or eliminate certain potential
conflicts of interest, the Articles of Incorporation contain a
number of restrictions relating to (i) transactions between the
Company and the Advisor or its Affiliates, (ii) certain future
offerings, and (iii) allocation of properties, mortgage loans and
secured equipment leases among certain affiliated entities. These
restrictions include the following:
1. No goods or services will be provided by the Advisor
or its Affiliates to the Company except for transactions in which the
Advisor or its Affiliates provide goods or services to the Company
in accordance with the Articles of Incorporation which provides
that a majority of the Directors (including a majority of the
Independent Directors) not otherwise interested in such transactions
must approve such transactions as fair and reasonable to the Company and
on terms and conditions not less favorable to the Company than those
available from unaffiliated third parties and not less favorable
than those available from the Advisor or its Affiliates in transactions
with unaffiliated third parties.
2. The Company will not purchase or lease Properties in
which the Advisor or its Affiliates has an interest without the
determination, by a majority of the Directors (including a majority of
the Independent Directors) not otherwise interested in such
transaction, that such transaction is competitive and commercially
reasonable to the Company and at a price to the Company no greater than
the cost of the asset to the Advisor or its Affiliate unless there is
substantial justification for any amount that exceeds such cost and
such excess amount is determined to be reasonable. In no event shall
the Company acquire any such asset at an amount in excess of its
appraised value. The Company will not sell or lease Properties to the
Advisor or its Affiliates unless a majority of the Directors
(including a majority of the Independent Directors) not interested in
the transaction determine the transaction is fair and reasonable to
the Company.
3. The Company will not make any loans to Affiliates. Any
loans to the Company by the Advisor or its Affiliates must be approved
by a majority of the Directors (including a majority of the Independent
Directors) not otherwise interested in such transaction as fair,
competitive, and commercially reasonable, and no less favorable to
the Company than comparable loans between unaffiliated parties. It is
anticipated that the Advisor or its Affiliates shall be entitled to
reimbursement, at cost, for actual expenses incurred by the Advisor
or its Affiliates on behalf of the Company or Joint Ventures in which
the Company is a co-venturer, subject to the 2%/25% Guidelines (2% of
Average Invested Assets or 25% of Net Income) described under "The
Advisor and the Advisory Agreement -- The Advisory Agreement."
4. Until completion of this offering, the Advisor and its
Affiliates will not offer or sell interests in any subsequently formed
public program that has investment objectives and structure similar to
those of the Company and that intends to (i) invest, on a cash and/or
leveraged basis, in a diversified portfolio of hotel properties to be
leased on a
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"triple-net" basis to operators of Hotel Chains, (ii) offer mortgage
loans and (iii) offer secured equipment leases. The Advisor and its
Affiliates also will not purchase a property or offer or invest in a
mortgage loan or secured equipment lease for any such subsequently
formed public program that has investment objectives and structure
similar to the Company and that intends to invest on a cash and/or
leveraged basis primarily in a diversified portfolio of hotel properties
to be leased on a "triple-net" basis to operators of Hotel Chains
until substantially all (generally, 80%) of the funds available for
investment (Net Offering Proceeds) by the Company have been invested or
committed to investment. (For purposes of the preceding sentence
only, funds are deemed to have been committed to investment to the
extent written agreements in principle or letters of understanding
are executed and in effect at any time, whether or not any such
investment is consummated, and also to the extent any funds have been
reserved to make contingent payments in connection with any Property,
whether or not any such payments are made.) The Advisor or its
Affiliates currently are and in the future may offer interests in one
or more public or private programs organized to purchase properties
of the type to be acquired by the Company, to offer Mortgage Loans
and/or to offer Secured Equipment Leases.
5. The Board of Directors and the Advisor have agreed that,
in the event that an investment opportunity becomes available which
is suitable for both the Company and a public or private entity with
which the Advisor or its Affiliates are affiliated, for which both
entities have sufficient uninvested funds, then the entity which has
had the longest period of time elapse since it was offered an
investment opportunity will first be offered the investment
opportunity. An investment opportunity will not be considered
suitable for a program if the requirements of Item 4 above could not
be satisfied if the program were to make the investment. In
determining whether or not an investment opportunity is suitable for
more than one program, the Advisor and its Affiliates will examine
such factors, among others, as the cash requirements of each program,
the effect of the acquisition both on diversification of each
program's investments by types of hotels and geographic area,
and on diversification of the tenants of its properties (which also may
affect the need for one of the programs to prepare or produce audited
financial statements for a property or a tenant), the anticipated cash
flow of each program, the size of the investment, the amount of funds
available to each program, and the length of time such funds have been
available for investment. If a subsequent development, such as a delay
in the closing of a property or a delay in the construction of a
property, causes any such investment, in the opinion of the Advisor
and its Affiliates, to be more appropriate for an entity other than
the entity which committed to make the investment, however, the
Advisor has the right to agree that the other entity affiliated with the
Advisor or its Affiliates may make the investment.
6. With respect to Shares owned by the Advisor, the Directors,
or any Affiliate, neither the Advisor, nor the Directors, nor any of
their Affiliates may vote or consent on matters submitted to the
stockholders regarding the removal of the Advisor, Directors, or any
Affiliate or any transaction between the Company and any of them. In
determining the requisite percentage in interest of Shares necessary to
approve a matter on which the Advisor, Directors, and any Affiliate may
not vote or consent, any Shares owned by any of them shall not be
included.
Additional conflict resolution procedures are identified under
"Conflicts of Interest -- Sales of Properties," "-- Joint Investment
With An Affiliated Program," and "-- Legal Representation."
SUMMARY OF REINVESTMENT PLAN
The Company has adopted the Reinvestment Plan pursuant
to which stockholders may elect to have the full amount of their cash
Distributions from the Company reinvested in additional Shares of the
Company. Each prospective investor who wishes to participate in the
Reinvestment Plan should consult with such investor's Soliciting
Dealer as to the Soliciting Dealer's position regarding
participation in the Reinvestment Plan. The following discussion
summarizes the principal terms of the Reinvestment Plan. The
Reinvestment Plan is attached hereto as Appendix A.
GENERAL
An independent agent (the "Reinvestment Agent"), which
currently is MMS Securities, Inc., will act on behalf of the
participants in the Reinvestment Plan (the "Participants"). The
Reinvestment Agent at all times will be registered as a
broker-dealer with the Securities and Exchange Commission (the
"Commission") and each state
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securities commission. At any time that the Company is engaged in an
offering, including the offering described herein, the Reinvestment
Agent will invest all Distributions attributable to Shares owned by
Participants in Shares of the Company at the public offering price
per Share, which is currently $10.00 per Share. At any time that the
Company is not engaged in an offering and until Listing, the price per
Share will be determined by (i) quarterly appraisal updates performed
by the Company based on a review of the existing appraisal and lease of
each Property, focusing on a re-examination of the capitalization rate
applied to the rental stream to be derived from that Property; and (ii)
a review of the outstanding Mortgage Loans and Secured Equipment
Leases focusing on a determination of present value by a
re-examination of the capitalization rate applied to the stream of
payments due under the terms of each Mortgage Loan and Secured
Equipment Lease. The capitalization rate used by the Company and, as
a result, the price per Share paid by the Participants in the
Reinvestment Plan prior to Listing will be determined by the Advisor
in its sole discretion. The factors that the Advisor will use to
determine the capitalization rate include (i) its experience in
selecting, acquiring and managing properties similar to the Properties;
(ii) an examination of the conditions in the market; and (iii)
capitalization rates in use by private appraisers, to the extent that
the Advisor deems such factors appropriate, as well as any other
factors that the Advisor deems relevant or appropriate in making its
determination. The Company's internal accountants will then convert the
most recent quarterly balance sheet of the Company from a "GAAP"
balance sheet to a "fair market value" balance sheet. Based on the
"fair market value" balance sheet, the internal accountants will then
assume a Sale of the Company's Assets and the liquidation of the
Company in accordance with its constitutive documents and applicable
law and compute the appropriate method of distributing the cash
available after payment of reasonable liquidation expenses,
including closing costs typically associated with the sale of assets
and shared by the buyer and seller, and the creation of reasonable
reserves to provide for the payment of any contingent liabilities. All
Shares available for purchase under the Reinvestment Plan either are
registered pursuant to this Prospectus or will be registered under
the Securities Act of 1933 through a separate prospectus relating
solely to the Reinvestment Plan. Until this offering has
terminated, Shares will be available for purchase out of the
additional 2,500,000 Shares registered with the Commission in
connection with this offering. See "The Offering -- Plan of
Distribution." After the offering has terminated, shares will be
available from any additional Shares (not expected to exceed
2,500,000 Shares at any one time) which the Company elects to register
with the Commission for the Reinvestment Plan. The Reinvestment Plan
may be amended or supplemented by an agreement between the Reinvestment
Agent and the Company at any time, including but not limited to an
amendment to the Reinvestment Plan to add a voluntary cash contribution
feature or to substitute a new Reinvestment Agent to act as agent for
the Participants or to increase the administrative charge payable to
the Reinvestment Agent, by mailing an appropriate notice at least
30 days prior to the effective date thereof to each Participant at his
or her last address of record; provided, that any such amendment
must be approved by a majority of the Independent Directors of the
Company. Such amendment or supplement shall be deemed conclusively
accepted by each Participant except those Participants from whom the
Company receives written notice of termination prior to the effective
date thereof.
Stockholders who have received a copy of this
Prospectus and participate in this offering can elect to participate
in and purchase Shares through the Reinvestment Plan at any time and
would not need to receive a separate prospectus relating solely to
the Reinvestment Plan. A person who becomes a stockholder otherwise
than by participating in this offering, or the Initial Offering, may
purchase Shares through the Reinvestment Plan only after receipt of a
separate prospectus relating solely to the Reinvestment Plan.
At any time that the Company is not engaged in an offering,
the price per Share purchased pursuant to the Reinvestment Plan shall
be the fair market value of the Shares based on quarterly appraisal
updates of the Company's assets until such time, if any, as Listing
occurs. Upon Listing, the Shares to be acquired for the Reinvestment
Plan may be acquired either through such market or directly from the
Company pursuant to a registration statement relating to the
Reinvestment Plan, in either case at a per-Share price equal
to the then-prevailing market price on the national securities
exchange or over-the-counter market on which the Shares are listed at
the date of purchase. In the event that, after Listing occurs, the
Reinvestment Agent purchases Shares on a national securities exchange
or over-the-counter market through a registered broker-dealer, the
amount to be reinvested shall be reduced by any brokerage commissions
charged by such registered broker-dealer. In the event that such
registered broker-dealer charges reduced brokerage commissions,
additional funds in the amount of any such reduction shall be left
available for the purchase of Shares. The Company is unable to predict
the effect which such a proposed Listing would have on the price of
the Shares acquired through the Reinvestment Plan.
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INVESTMENT OF DISTRIBUTIONS
Distributions will be used by the Reinvestment Agent, promptly
following the payment date with respect to such Distributions, to purchase
Shares on behalf of the Participants from the Company. All such Distributions
shall be invested in Shares within 30 days after such payment date. Any
Distributions not so invested will be returned to Participants.
At this time, Participants will not have the option to make voluntary
contributions to the Reinvestment Plan to purchase Shares in excess of the
amount of Shares that can be purchased with their Distributions. The Board of
Directors reserves the right, however, to amend the Reinvestment Plan in the
future to permit voluntary contributions to the Reinvestment Plan by
Participants, to the extent consistent with the Company's objective of
qualifying as a REIT.
PARTICIPANT ACCOUNTS, FEES, AND ALLOCATION OF SHARES
For each Participant, the Reinvestment Agent will maintain a record
which shall reflect for each fiscal quarter the Distributions received by the
Reinvestment Agent on behalf of such Participant. The Company shall be
responsible for all administrative charges and expenses charged by the
Reinvestment Agent. Any interest earned on such Distributions will be paid to
the Company to defray certain costs relating to the Reinvestment Plan. The
administrative charge for each fiscal quarter will be the lesser of 5% of the
amount reinvested for the Participant or $2.50, with a minimum charge of $0.50.
The maximum annual charge is $10.00.
The Reinvestment Agent will use the aggregate amount of Distributions
to all Participants for each fiscal quarter to purchase Shares for the
Participants. If the aggregate amount of Distributions to Participants exceeds
the amount required to purchase all Shares then available for purchase, the
Reinvestment Agent will purchase all available Shares and will return all
remaining Distributions to the Participants within 30 days after the date such
Distributions are made. The purchased Shares will be allocated among the
Participants based on the portion of the aggregate Distributions received by the
Reinvestment Agent on behalf of each Participant, as reflected in the records
maintained by the Reinvestment Agent. The ownership of the Shares purchased
pursuant to the Reinvestment Plan shall be reflected on the books of the
Company.
Subject to the provisions of the Articles of Incorporation relating to
certain restrictions on and the effective dates of transfer, Shares acquired
pursuant to the Reinvestment Plan will entitle the Participant to the same
rights and to be treated in the same manner as those purchased by the
Participants in the offering. Accordingly, the Company will pay the Managing
Dealer Selling Commissions of 7.5% (subject to reduction under the circumstances
provided under "The Offering -- Plan of Distribution") and a marketing support
and due diligence fee of 0.5%. The Company will also pay the Advisor Acquisition
Fees of 4.5% of the purchase price of the Shares sold pursuant to the
Reinvestment Plan until the termination of the offering. Thereafter, Acquisition
Fees will be paid by the Company only in the event that proceeds of the sale of
Shares are used to acquire Properties or to invest in Mortgage Loans. As a
result, aggregate fees payable to Affiliates of the Company will total between
8.0% and 12.5% of the proceeds of reinvested Distributions, up to 7.5% of which
may be reallowed to Soliciting Dealers.
The allocation of Shares among Participants may result in the ownership
of fractional Shares, computed to four decimal places.
REPORTS TO PARTICIPANTS
Within 60 days after the end of each fiscal quarter, the Reinvestment
Agent will mail to each Participant a statement of account describing, as to
such Participant, the Distributions reinvested during the quarter, the number of
Shares purchased during the quarter, the per Share purchase price for such
Shares, the total administrative charge paid by the Company on behalf of each
Participant (see "Participant Accounts, Fees, and Allocation of Shares" above),
and the total number of Shares purchased on behalf of the Participant pursuant
to the Reinvestment Plan. Until such time, if any, as Listing occurs, the
statement of account also will report the most recent fair market value of the
Shares, determined as described above. See "General" above.
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Tax information for income earned on Shares under the Reinvestment Plan
will be sent to each participant by the Company or the Reinvestment Agent at
least annually.
ELECTION TO PARTICIPATE OR TERMINATE PARTICIPATION
Stockholders of the Company who purchase Shares in this offering may
become Participants in the Reinvestment Plan by making a written election to
participate on their Subscription Agreements at the time they subscribe for
Shares. Any other stockholder who receives a copy of this Prospectus or a
separate prospectus relating solely to the Reinvestment Plan and who has not
previously elected to participate in the Reinvestment Plan may so elect at any
time by written notice to the Board of Directors of such stockholder's desire to
participate in the Reinvestment Plan. Participation in the Reinvestment Plan
will commence with the next Distribution made after receipt of the Participant's
notice, provided it is received at least ten days prior to the record date for
such Distribution. Subject to the preceding sentence, the election to
participate in the Reinvestment Plan will apply to all Distributions
attributable to the fiscal quarter in which the stockholder made such written
election to participate in the Reinvestment Plan and to all fiscal quarters
thereafter, whether made (i) upon subscription or subsequently for stockholders
who participate in this offering, or (ii) upon receipt of a separate prospectus
relating solely to the Reinvestment Plan for stockholders who do not participate
in this offering. Participants will be able to terminate their participation in
the Reinvestment Plan at any time without penalty by delivering written notice
to the Board of Directors ten business days before the end of a fiscal quarter.
A Participant who chooses to terminate participation in the
Reinvestment Plan must terminate his or her entire participation in the
Reinvestment Plan and will not be allowed to terminate in part. If a Participant
terminates his or her Participation, the Reinvestment Agent will send him or her
a check in payment for any fractional Shares in his or her account based on the
then market price of the Shares, and the Company record books will be revised to
reflect the ownership records of his or her whole Shares. There are no fees
associated with a Participant's terminating his or her interest in the
Reinvestment Plan. A Participant in the Reinvestment Plan who terminates his or
her interest in the Reinvestment Plan will be allowed to participate in the
Reinvestment Plan again upon receipt of the then current version of this
Prospectus or a separate current prospectus relating solely to the Reinvestment
Plan, by notifying the Reinvestment Agent and completing any required forms.
The Board of Directors reserves the right to prohibit Qualified Plans
from participating in the Reinvestment Plan if such participation would cause
the underlying assets of the Company to constitute "plan assets" of Qualified
Plans. See "The Offering -- ERISA Considerations."
FEDERAL INCOME TAX CONSIDERATIONS
Stockholders subject to federal taxation who elect to participate in
the Reinvestment Plan will incur a tax liability for Distributions allocated to
them even though they have elected not to receive their Distributions in cash
but rather to have their Distributions held pursuant to the Reinvestment Plan.
Specifically, stockholders will be treated as if they have received the
Distribution from the Company and then applied such Distribution to purchase
Shares in the Reinvestment Plan. A stockholder designating a Distribution for
reinvestment will be taxed on the amount of such Distribution as ordinary income
to the extent such Distribution is from current or accumulated earnings and
profits, unless the Company has designated all or a portion of the Distribution
as a capital gain dividend. In such case, such designated portion of the
Distribution will be taxed as long-term capital gain.
AMENDMENTS AND TERMINATION
The Company reserves the right to renew, extend, or amend any aspect of
the Reinvestment Plan without the consent of stockholders, provided that notice
of the amendment is sent to Participants at least 30 days prior to the effective
date thereof. The Company also reserves the right to terminate the Reinvestment
Plan for any reason, at any time, by ten days prior written notice of
termination to all Participants.
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REDEMPTION OF SHARES
Prior to such time, if any, as Listing occurs, any stockholder who has
held Shares for not less than one year (other than the Advisor) may present all
or any portion equal to at least 25% of such Shares to the Company for
redemption at any time, in accordance with the procedures outlined herein. At
such time, the Company may, at its sole option, redeem such Shares presented for
redemption for cash to the extent it has sufficient funds available. There is no
assurance that there will be sufficient funds available for redemption and,
accordingly, a stockholder's Shares may not be redeemed. If the Company elects
to redeem Shares, the following conditions and limitations would apply. The full
amount of proceeds from the sale of Shares under the Reinvestment Plan (the
"Reinvestment Proceeds") attributable to any calendar quarter will be used to
redeem Shares presented for redemption during such quarter. In addition, the
Company may, at its discretion, use up to $100,000 per calendar quarter of the
proceeds of any public offering of its common stock for redemptions. Any amount
of offering proceeds which is available for redemptions, but which is unused,
may be carried over to the next succeeding calendar quarter for use in addition
to the amount of offering proceeds and Reinvestment Proceeds that would
otherwise be available for redemptions. At no time during a 12-month period,
however, may the number of shares redeemed by the Company exceed 5% of the
number of shares of the Company's outstanding common stock at the beginning of
such 12-month period.
In the event there are insufficient funds to redeem all of the Shares
for which redemption requests have been submitted, the Company plans to redeem
the Shares in the order in which such redemption requests have been received. A
stockholder whose Shares are not redeemed due to insufficient funds can ask that
the request to redeem the Shares be honored at such time, if any, as there are
sufficient funds available for redemption. In such case, the redemption request
will be retained and such Shares will be redeemed before any subsequently
received redemption requests are honored. Alternatively, a stockholder whose
Shares are not redeemed may withdraw his or her redemption request. Stockholders
will not relinquish their Shares until such time as the Company commits to
redeeming such Shares.
If the full amount of funds available for any given quarter exceeds the
amount necessary for such redemptions, the remaining amount shall be held for
subsequent redemptions unless such amount is sufficient to acquire an additional
Property (directly or through a Joint Venture) or to invest in additional
Mortgage Loans, or is used to repay outstanding indebtedness. In that event, the
Company may use all or a portion of such amount to acquire one or more
additional Properties, to invest in one or more additional Mortgage Loans or to
repay such outstanding indebtedness, provided that the Company (or, if
applicable, the Joint Venture) enters into a binding contract to purchase such
Property or Properties or invests in such Mortgage Loan or Mortgage Loans, or
uses such amount to repay outstanding indebtedness, prior to payment of the next
Distribution and the Company's receipt of requests for redemption of Shares.
A stockholder who wishes to have his or her Shares redeemed must mail
or deliver a written request on a form provided by the Company and executed by
the stockholder, its trustee or authorized agent, to the redemption agent (the
"Redemption Agent"), which is currently MMS Securities, Inc. The Redemption
Agent at all times will be registered as a broker-dealer with the Commission and
each state securities commission. Within 30 days following the Redemption
Agent's receipt of the stockholder's request, the Redemption Agent will forward
to such stockholder the documents necessary to effect the redemption, including
any signature guarantee the Company or the Redemption Agent may require. The
Redemption Agent will effect such redemption for the calendar quarter provided
that it receives the properly completed redemption documents relating to the
Shares to be redeemed from the stockholder at least one calendar month prior to
the last day of the current calendar quarter and has sufficient funds available
to redeem such Shares. The effective date of any redemption will be the last
date during a quarter during which the Redemption Agent receives the properly
completed redemption documents. As a result, the Company anticipates that,
assuming sufficient funds for redemption, the effective date of redemptions will
be no later than thirty days after the quarterly determination of the
availability of funds for redemption.
Upon the Redemption Agent's receipt of notice for redemption of Shares,
the redemption price will be on such terms as the Company shall determine. The
redemption price for Shares redeemed during an offering would equal the then
current offering price, which the Company anticipates will continue to be $10.00
per Share, until such time, if any, as Listing occurs, less a discount of 8%,
for a net redemption price of $9.20 per Share. The
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aforementioned redemption price approximates the per Share net proceeds received
by the Company in the offering, after deducting Selling Commissions of 7.5% and
a 0.5% marketing support and due diligence fee payable to the Managing Dealer
and certain Soliciting Dealers in such offering.
It is not anticipated that there will be a market for the Shares before
Listing occurs (although liquidity is not assured thereby). Accordingly, during
periods when the Company is not engaged in an offering, it is expected that the
purchase price for Shares purchased from stockholders will be determined by
reference to the following factors, as well as any others deemed relevant or
appropriate by the Company: (i) the price at which Shares have been purchased by
stockholders, either pursuant to the Reinvestment Plan or outside of the
Reinvestment Plan (to the extent the Company has information regarding the
prices paid for Shares purchased outside the Reinvestment Plan), (ii) the annual
statement of Share valuation provided to certain stockholders (see "Reports to
Stockholders"), and (iii) the price at which stockholders are willing to sell
their Shares. Shares purchased during any particular period of time therefore
may be purchased at varying prices. The Board of Directors will announce any
price adjustment and the time period of its effectiveness as part of its regular
communications with stockholders. Any Shares acquired pursuant to a redemption
will be retired and no longer available for issuance by the Company.
A stockholder may present fewer than all of his or her Shares to the
Company for redemption, provided, however, that (i) the minimum number of Shares
which must be presented for redemption shall be at least 25% of his or her
Shares, and (ii) if such stockholder retains any Shares, he or she must retain
at least 250 Shares (100 Shares for an IRA, Keogh Plan or pension plan).
The Directors, in their sole discretion, may amend or suspend the
redemption plan at any time they determine that such amendment or suspension is
in the best interest of the Company. The Directors may suspend the redemption of
Shares if (i) they determine, in their sole discretion, that such redemption
impairs the capital or the operations of the Company; (ii) they determine, in
their sole discretion, that an emergency makes such redemption not reasonably
practical; (iii) any governmental or regulatory agency with jurisdiction over
the Company so demands for the protection of the stockholders; (iv) they
determine, in their sole discretion, that such redemption would be unlawful; (v)
they determine, in their sole discretion, that such redemption, when considered
with all other redemptions, sales, assignments, transfers and exchanges of
Shares in the Company, could cause direct or indirect ownership of Shares of the
Company to become concentrated to an extent which would prevent the Company from
qualifying as a REIT under the Code; or (vi) the Directors, in their sole
discretion, deem such suspension to be in the best interest of the Company. For
a discussion of the tax treatment of such redemptions, see "Federal Income Tax
Considerations -- Taxation of Stockholders." The redemption plan will terminate,
and the Company no longer shall accept Shares for redemption, if and when
Listing occurs. See "Risk Factors -- Investment Risks -- Lack of Liquidity of
Shares."
BUSINESS
GENERAL
The Company is a Maryland corporation that was organized on June 12,
1996. On June 15, 1998, the Company formed CNL Hospitality Partners, LP, a
wholly owned Delaware limited partnership (the "Partnership"). Properties
acquired are expected to be held by the Partnership and, as a result, owned by
the Company through the Partnership. The term "Company" includes CNL Hospitality
Properties, Inc. and its subsidiaries, CNL Hospitality GP Corp., CNL Hospitality
LP Corp. and CNL Hospitality Partners, LP.
The Company invests in Properties to be leased on a long-term
(generally, 10 to 20 years, plus renewal options for an additional 10 to 20
years), "triple-net" basis. With proceeds of this offering, the Company intends
to purchase primarily limited service, extended stay and full service hotel
Properties. "Triple-net" means that the tenant generally will be responsible for
repairs, maintenance, property taxes, utilities, and insurance. Some leases may,
however, obligate the tenant to fund, in addition to its lease payment, a
reserve fund up to a pre-determined amount. Generally, money in that fund may be
used by the tenant to pay for replacement of furniture and fixtures. The Company
may be responsible for other capital expenditures or repairs. The tenant
generally is responsible for replenishing the reserve fund and for paying a
specified return on the amount of capital expenditures or repairs paid for
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by the Company in excess of amounts in the reserve fund. The Properties may
consist of land and building, the land underlying the building with the building
owned by the tenant or a third party, or the building only with the land owned
by a third party. The Company may provide Mortgage Loans to operators of Hotel
Chains secured by real estate owned by the operators. To a lesser extent, the
Company may also offer Secured Equipment Leases to operators of Hotel Chains
pursuant to which the Company will finance, through loans or direct financing
leases, the Equipment.
The Properties, which typically will be freestanding and will be
located across the United States, will be leased to operators of Hotel Chains to
be selected by the Advisor and approved by the Board of Directors. Each Property
acquisition and Mortgage Loan will be submitted to the Board of Directors for
approval. Properties purchased by the Company are expected to be leased under
arrangements generally requiring base annual rent equal to a specified
percentage of the Company's cost of purchasing a particular Property, with
percentage rent based on gross sales above specified levels and/or automatic
rent increases. See "Description of Property Leases -- Computation of Lease
Payments," below.
The Company will invest Net Offering Proceeds in Properties of selected
national and regional limited service, extended stay and full service Hotel
Chains. The Company believes that attractive opportunities exist to acquire
limited service, extended stay and full service hotels in urban and resort
locations. According to Smith Travel Research, a leading provider of lodging
industry statistical research, the hotel industry has been steadily improving
its financial performance over the past seven consecutive years. Also according
to Smith Travel Research, in 1997, the industry reached its highest absolute
level of pre-tax profit in its history at approximately $17 billion, an increase
of approximately 36% over 1996.
Pre-Tax Profits
of Hospitality Industry
(in billions)
Year Profitability
---- -------------
1993 $ 2.4
1994 5.5
1995 8.5
1996 12.5
1997 17.0
Source: Smith Travel Research
As indicated in the table below, the average daily room rate increased
6.1% in 1997, from $70.81 in 1996 to $75.16 in 1997, resulting in more than ten
consecutive years of room rate growth.
Hospitality Industry Average
Daily Room Rate By Year
Year Rate
---- ----
1987 $52.58
1988 54.47
1989 56.35
1990 57.96
1991 58.08
1992 58.91
1993 60.53
1994 62.86
1995 65.81
1996 70.81
1997 75.16
Source: Smith Travel Research
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Revenue per available room also increased by 5.3% from $46.03 in 1996
to $48.48 in 1997. In 1997, for the first time since 1991, growth in room supply
exceeded growth in room demand and resulted in a slight dip in occupancy. In
1997, total occupancy fell 0.8% from 65% in 1996 to 64.5%. Growth in room demand
exceeded the growth in new room supply for each year from 1992 through 1996 and
industry-wide occupancy increased from a 20 year low of 61.8% in 1991 to 65% in
1996.
According to American Hotel & Motel Association data, in 1997,
Americans traveling in the United States spent more than $1.38 billion per day,
$57.4 million per hour and $955,800 per minute on travel and tourism. Total
travel expenditures in the United States generated $481.5 billion in sales. In
addition, there were 49,000 hotel properties which included over 3.8 million
hotel rooms recording $85.6 billion in revenue. Hotels are a vital part of
travel and tourism. In the United States, the tourism industry, which globally
is the world's largest industry, is currently ranked third behind auto sales and
retail food sales. In terms of employment, the hotel industry supports over 7
million direct jobs, generating $18.93 billion in wages. Nationally, 13.8% of
total hotel rooms available are located in urban areas, 35.3% in suburban areas,
33.2% in highway locations, 6.4% in airport areas, and the remaining 11.3% in
resort locations.
The Company intends to acquire limited service, extended stay and full
service hotel Properties. Limited service hotels generally minimize non-guest
room space and offer limited food service such as complimentary continental
breakfasts and do not have restaurant or lounge facilities on-site. Extended
stay hotels generally contain guest suites with a kitchen area and living area
separate from the bedroom. Extended stay hotels vary with respect to providing
on-site restaurant facilities. Full service hotels generally have conference or
meeting facilities and on-site food and beverage facilities.
Management intends to structure the Company's investments to allow it
to participate, to the maximum extent possible, in any sales growth in the hotel
industry, as reflected in the Properties that it owns. The Company therefore
intends to generally structure its leases with percentage rent requirements
which are based on gross sales of the hotel located on the Property over
specified levels. Gross sales may increase even absent real growth because
increases in the costs typically are passed on to the consumers through
increased prices, and increased prices are reflected in gross sales. In an
effort to provide regular cash flow to the Company, the Company intends to
structure its leases to provide a minimum level of rent which is payable
regardless of the amount of gross sales at a particular Property. The Company
also will endeavor to maximize growth and minimize risks associated with
ownership and leasing of real estate that operates in these industry segments
through careful selection and screening of its tenants (as described in
"Standards for Investment" below) in order to reduce risks of default;
monitoring statistics relating to hotel chains and continuing to develop
relationships in the industry in order to reduce certain risks associated with
investment in real estate. See "Standards for Investment" below for a
description of the standards which the Board of Directors will employ in
selecting Hotel Chains, operators and particular Properties for investment.
Management expects to acquire Properties in part with a view to
diversification among the geographic location of the Properties. There are no
restrictions on the geographic area or areas within the United States in which
Properties acquired by the Company may be located. It is anticipated that the
Properties acquired by the Company will be located in various states and regions
within the United States.
The Company may provide Mortgage Loans, generally for the purchase of
buildings by tenants that lease the underlying land from the Company. However,
because it prefers to focus on investing in Properties, which have the potential
to appreciate, the Company currently expects to provide Mortgage Loans in the
aggregate principal amount of approximately 5% to 10% of Gross Proceeds.
Mortgage Loans will be secured by the building and improvements on the land. The
Company expects that the interest rate and terms (generally, 10 to 20 years) of
the Mortgage Loans will be similar to those of its leases.
The Company may also offer Secured Equipment Leases to operators of
Hotel Chains. The Secured Equipment Leases will consist primarily of leases of,
and loans for the purchase of, Equipment. As of the date of this Prospectus, the
Company has neither identified any prospective operators of Hotel Chains that
will participate in such financing arrangements nor negotiated any specific
terms of a Secured Equipment Lease. The Company cannot predict terms and
conditions of the Secured Equipment Leases, although the Company expects that
the Secured Equipment Leases will (i) have terms that equal or exceed the useful
life of the subject Equipment (although such terms will not exceed 7 years),
(ii) in the case of the leases, include an option for the lessee to acquire the
subject Equipment at the
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end of the lease term for a nominal fee, (iii) include a stated interest rate,
and (iv) in the case of the leases, provide that the Company and the lessees
will each treat the Secured Equipment Leases as loans secured by personal
property for federal income tax purposes. See "Federal Income Tax Considerations
- -- Characterization of Secured Equipment Leases." In addition, the Company
expects that each of the Secured Equipment Leases will be secured by the
Equipment to which it relates. Payments received from lessees under Secured
Equipment Leases will be treated as payments of principal and interest. All
Secured Equipment Leases will be negotiated by the Advisor and approved by the
Board of Directors including a majority of the Independent Directors.
The Company will borrow money to acquire Assets and to pay certain
fees. The Company intends to encumber Assets in connection with the borrowing.
The Company plans to obtain one or more revolving Lines of Credit in an
aggregate amount up to $100,000,000, and may, in addition, also obtain Permanent
Financing. On July 31, 1998, the Company entered into an initial $30,000,000
revolving Line of Credit to be used to acquire hotel Properties. See "Business
- -- Borrowing" for a description of the $30,000,000 Line of Credit. The Board of
Directors anticipates that the aggregate amount of any Permanent Financing, if
obtained, will not exceed 30% of the Company's total assets. The Permanent
Financing would be used to acquire Properties, Mortgage Loans and Secured
Equipment Leases (collectively, the "Assets") and pay a fee of 4.5% of any
Permanent Financing, excluding amounts to fund Secured Equipment Leases, as
Acquisition Fees, to the Advisor for identifying the Properties, structuring the
terms of the acquisition and leases of the Properties and structuring the terms
of the Mortgage Loans. The Line of Credit may be repaid with offering proceeds,
working capital or Permanent Financing. The Line of Credit and Permanent
Financing are the only source of funds for making Secured Equipment Leases and
for paying the Secured Equipment Lease Servicing Fee to the Advisor. The Company
has not yet received a commitment for any Permanent Financing and there is no
assurance that the Company will obtain any Permanent Financing on satisfactory
terms.
As of September 30, 1998, the Company had acquired two hotel Properties
consisting of land and building, and had initial commitments to acquire three
additional Properties. However, as of September 30, 1998, the Company had not
entered into any arrangements that create a reasonable probability that the
Company will enter into any Mortgage Loan or Secured Equipment Lease.
INVESTMENT OF OFFERING PROCEEDS
The Company has undertaken to supplement this Prospectus during the
offering period to disclose the use of proceeds of this offering to acquire
Properties at such time as the Company believes that a reasonable probability
exists that any such Property will be acquired by the Company. Based upon the
experience and acquisition methods of the Affiliates of the Company and the
Advisor, this normally will occur, with regard to acquisition of Properties, as
of the date on which (i) a commitment letter is executed by a proposed tenant,
(ii) a satisfactory credit underwriting for the proposed tenant has been
completed, and (iii) a satisfactory site inspection has been completed. However,
the initial disclosure of any proposed acquisition cannot be relied upon as an
assurance that the Company ultimately will consummate such proposed acquisition
or that the information provided concerning the proposed acquisition will not
change between the date of such supplement and the actual purchase or extension
of financing. The terms of any borrowing by the Company will also be disclosed
by supplement following receipt by the Company of an acceptable commitment
letter from a potential lender.
Based on the purchase prices of the two Properties acquired by the
Company as of September 30, 1998 and current market conditions, the Company and
the Advisor have estimated an average purchase price of $10,000,000 to
$40,000,000 per hotel Property. Assuming the Company receives the full
$250,000,000 Net Offering Proceeds from this offering, for which there is no
assurance, the Company could invest in approximately 5 to 21 hotel Properties,
with a total of 8 to 33 hotel Properties with the combined proceeds from the
Initial Offering and this offering. In certain cases, the Company may become a
co-venturer in a Joint Venture that will own the Property. In each such case,
the Company's cost to purchase an interest in such Property will be less than
the total purchase price and the Company therefore will be able to acquire
interests in a greater number of Properties. See "Business -- Borrowing."
Management estimates that 10% to 20% of the Company's investment will be for
cost of land and 80% to 90% for the cost of the building. See "Joint Venture
Arrangements" below and "Risk Factors -- Real Estate Investment Risks --
Possible Lack of Diversification Increases Risk of Investment." Management
cannot estimate the number of Mortgage Loans that may be entered into. The
Company may also borrow money to make Mortgage Loans.
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Although management cannot estimate the number of Secured Equipment
Leases that may be entered into, it expects to fund the Secured Equipment Lease
program from the proceeds of the Line of Credit or Permanent Financing in an
amount not to exceed 10% of Gross Proceeds. Management has undertaken,
consistent with its objective of qualifying as a REIT for federal income tax
purposes, to ensure that the total value of all Secured Equipment Leases will
not exceed 25% of the Company's total assets, and that Secured Equipment Leases
to a single lessee, in the aggregate, will not exceed 5% of total assets.
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").
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 landlord, entered into two
separate, long-term lease agreements. The tenant of the Buckhead (Lenox Park)
and the Gwinnett Place Properties is the same unaffiliated tenant. The leases on
both Properties are cross-defaulted. 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 of $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 The tenant of the Buckhead (Lenox Park) and Gwinnett Place Properties will
establish a capital expenditures reserve fund which will be used for the
replacement and renewal of furniture, fixtures and equipment relating to
the hotel Properties (the "FF&E Reserve"). Deposits to the FF&E Reserve
will be made monthly as follows: 3% of gross receipts for the first lease
year; 4% of gross receipts for the second lease year; and 5% of gross
receipts every lease year thereafter. Funds in the FF&E Reserve and all
property purchased with funds from the FF&E Reserve shall be paid, granted
and assigned to the Company as additional rent.
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
approximately $14,700,000 and $11,130,000, respectively.
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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 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. 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. 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
-------------------------------------------------- ---------------------------------------------------
Average Average Daily Revenue per Average Average Revenue per
Occupancy Room Available Occupancy Daily Room Available
Year Rate Rate Room Rate Rate Room
- ------------ ------------- --------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
*1997 42.93% $91.15 $39.13 39.08% $85.97 $33.60
**1998 80.16% 99.39 79.67 81.59% 88.22 71.98
</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 September
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.
On a proforma basis, had the Company owned the Properties as of January 1, 1998,
combined net operating income before subordinated management fees would be 1.24
times base rent on a year-to-date basis.
The Residence Inn chain is a brand of Marriott International. Marriott
International is one of the world's leading hospitality companies. According to
Marriott data as of September 1998, Marriott International had 1,633 units,
offering more than 319,000 rooms worldwide. Although Marriott International is
the franchisor for the Buckhead (Lenox Park) and Gwinnett Place Properties, it
is not affiliated with the tenant and has not guaranteed the payments due under
the leases.
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 September 1998, there were 285 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 September 30, 1998, the Company had initial commitments to
acquire indirectly 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 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 these properties are expected to be entered into on
substantially the same terms described in "Business -- Description of Property
Leases."
Set forth below are summarized terms expected to apply to the leases
for each of the properties.
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<TABLE>
<CAPTION>
Estimated Purchase Lease Term and Minimum Annual
Property Price Renewal Options Rent Percentage Rent
- -------- ------------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Courtyard by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year
Orlando, FL (1) renewal options total cost to purchase after the second lease
(the "Courtyard Little Lake the property year, 7% of revenues in
Bryan Property") excess of revenues for
Hotel to be constructed the second lease year
Fairfield Inn by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year
Orlando, FL (1) renewal options total cost to purchase after the second lease
(the "Fairfield Inn Little the property year, 7% of revenues in
Lake Bryan Property") excess of revenues for
Hotel to be constructed the second lease year
Fairfield Suites by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year
Orlando, FL (1) renewal options total cost to purchase after the second lease
(the "Fairfield Suites Little the property year, 7% of revenues in
Lake Bryan Property") excess of revenues for
Hotel to be constructed the second lease year
</TABLE>
- ------------------------------------
Footnotes:
(1) The leases for the Courtyard Little Lake Bryan, the Fairfield Inn
Little Lake Bryan and the Fairfield Suites Little Lake Bryan Properties
are expected to be with the same unaffiliated tenant.
(2) 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.
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The following chart provides additional information on systemwide
occupancy levels for Marriott lodging brands:
Total Occupancy Rate for 1997
Marriott Brand as Compared to
U.S. Lodging Industry
Occupancy Rate
--------------
U.S. Lodging Industry 64.5%
Courtyard by Marriott 78.2%
Fairfield Inns & Suites 73.0%
Marriott Hotels, Resorts & Suites 76.6%
Residence Inn by Marriott 80.6%
Source: Smith Travel Research (U.S. Lodging Industry only) and
Marriott International, Inc. 1997 Annual Report
SITE SELECTION AND ACQUISITION OF PROPERTIES
General. It is anticipated that the Hotel Chains selected by the
Advisor, and as approved by the Board of Directors, will have full-time
personnel engaged in site selection and evaluation. All new sites must be
approved by the Hotel Chains. The Hotel Chains generally conduct or require the
submission of studies which typically include such factors as traffic patterns,
population trends, commercial and industrial development, office and
institutional development, residential development, per capita or household
median income, per capita or household median age, and other factors. The Hotel
Chains also will review and approve all proposed tenants. The Hotel Chains or
the operators are expected to make their site evaluations and analyses, as well
as financial information regarding proposed tenants, available to the Company.
The Board of Directors, on behalf of the Company, will elect to
purchase and lease Properties based principally on an examination and evaluation
by the Advisor of the potential value of the site, the financial condition and
business history of the proposed tenant, the demographics of the area in which
the property is located or to be located, the proposed purchase price and
proposed lease terms, geographic and market diversification, and potential sales
expected to be generated by the business located on the property. In addition,
the potential tenant must meet at least the minimum standards established by a
Hotel Chain for its operators. The Advisor also will perform an independent
break-even analysis of the potential profitability of a property using
historical data and other data developed by the Company and provided by the
operator.
The Board of Directors will exercise its own judgment as to, and will
be solely responsible for, the ultimate selection of both tenants and
Properties. Therefore, some of the properties proposed and approved by a Hotel
Chain may not be purchased by the Company.
In each Property acquisition, it is anticipated that the Advisor will
negotiate the lease agreement with the tenant. In certain instances, the Advisor
may negotiate an assignment of an existing lease, in which case the terms of the
lease may vary substantially from the Company's standard lease terms, if the
Board of Directors, based on the recommendation of the Advisor, determines that
the terms of an acquisition and lease of a Property, taken as a whole, are
favorable to the Company. It is expected that the structure of the long-term,
"triple-net" lease agreements, which generally provide for monthly rental
payments with automatic increases in base rent at specified times during the
lease terms and/or a percentage of gross sales over specified levels, will
increase the value of the Properties and provide an inflation hedge. See
"Description of Property Leases" below for a discussion of the anticipated terms
of the Company's leases.
Some lease agreements will be negotiated to provide the tenant with the
opportunity to purchase the Property under certain conditions, generally either
at a price not less than fair market value (determined by appraisal or
otherwise) or through a right of first refusal to purchase the Property. In
either case, the lease agreements will provide that the tenant may exercise
these rights only to the extent consistent with the Company's objective of
qualifying as a REIT. See "Sale of Properties, Mortgage Loans and Secured
Equipment Leases" below and "Federal Income Tax Considerations --
Characterization of Property Leases."
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The purchase of each Property will be supported by an appraisal of the
real estate prepared by an independent appraiser. The Advisor, however, will
rely on its own independent analysis and not on such appraisals in determining
whether or not to recommend that the Company acquire a particular property. The
purchase price of each such Property, plus any Acquisition Fees paid by the
Company in connection with such purchase, will not exceed the Property's
appraised value. (In connection with the acquisition of a Property which is to
be constructed or renovated, the comparison of the purchase price and the
appraised value of such Property ordinarily will be based on the "when
constructed" price and value of such Property.) It should be noted that
appraisals are estimates of value and should not be relied upon as measures of
true worth or realizable value. Each appraisal will be maintained in the
Company's records for at least five years and will be available for inspection
and duplication by any stockholder.
The titles to Properties purchased by the Company will be insured by
appropriate title insurance policies and/or abstract opinions consistent with
normal practices in the jurisdictions in which the Properties are located.
Construction and Renovation. In some cases, construction or renovation
will be required after the purchase contract has been entered into, but before
the total purchase price has been paid. In connection with the acquisition of
Properties that are to be constructed or renovated and as to which the Company
will own both the land and the building or building only, the Company generally
will advance funds for construction or renovation costs, as they are incurred,
pursuant to a development agreement with the developer. The developer may be the
tenant or an Affiliate of the Company. An Affiliate may serve as a developer and
enter into the development agreement with the Company if the transaction is
approved by a majority of the Directors, including a majority of the Independent
Directors. The Company believes that the ability to have an Affiliate capable of
serving as the developer provides the Company an advantage by enhancing its
relationship with key tenants and by giving it access to tenant opportunities at
an earlier stage of the development cycle. As a result, the Company believes it
will have a greater number of opportunities for investment presented to it than
it might otherwise have and it will be able to obtain better terms by
negotiating the terms of its investment at an earlier stage in the development
cycle when there are fewer competitive alternatives available to the tenant.
The developer will enter into all construction contracts and will
arrange for and coordinate all aspects of the construction or renovation of the
property improvements. The developer will be responsible for the construction or
renovation of the building improvements, although it may employ co-developers or
sub-agents in fulfilling its responsibilities under the development agreement.
All general contractors performing work in connection with such building
improvements must provide a payment and performance bond or other satisfactory
form of guarantee of performance. All construction and renovation will be
performed or supervised by persons or entities acceptable to the Advisor. The
Company will be obligated, as construction or renovation costs are incurred, to
make the remaining payments due as part of the purchase price for the
Properties, provided that the construction or renovation conforms to definitive
plans, specifications, and costs approved by the Advisor and the Board of
Directors and embodied in the construction contract.
Under the terms of the development agreement, the Company generally
will advance its funds on a monthly basis to meet the construction draw requests
of the developer. The Company, in general, only will advance its funds to meet
the developer's draw requests upon receipt of an inspection report and a
certification of draw requests from an inspecting architect or engineer suitable
to the Company, and the Company may retain a portion of any advance until
satisfactory completion of the project. The certification generally must be
supported by color photographs showing the construction work completed as of the
date of inspection. The total amount of the funds advanced to the developer
(including the purchase price of the land plus closing costs and certain other
costs) generally will not exceed the maximum amount specified in the development
agreement. Such maximum amount will be based on the Company's estimate of the
costs of such construction or renovation.
In some cases, construction or renovation will be required before the
Company has acquired the Property. In this situation, the Company may have made
a deposit on the Property in cash or by means of a letter of credit. The
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renovation or construction may be made by an Affiliate or a third party. The
Company may permit the proposed developer to arrange for a bank or another
lender, including an Affiliate, to provide construction financing to the
developer. In such cases, the lender may seek assurance from the Company that it
has sufficient funds to pay to the developer the full purchase price of the
Property upon completion of the construction or renovation. In the event that
the Company segregates funds as assurance to the lender of its ability to
purchase the Property, the funds will remain the property of the Company, and
the lender will have no rights with respect to such funds upon any default by
the developer under the development agreement or under the loan agreement with
such lender, or if the closing of the purchase of the Property by the Company
does not occur for any reason, unless the transaction is supported by a letter
of credit in favor of the lender.
Under the development agreement, the developer generally will be
obligated to complete the construction or renovation of the building
improvements within a specified period of time from the date of the development
agreement, which generally will be between 12 to 18 months for hotel Properties.
If the construction or renovation is not completed within that time and the
developer fails to remedy this default within 10 days after notice from the
Company, the Company will have the option to grant the developer additional time
to complete the construction, to take over construction or renovation of the
building improvements, or to terminate the development agreement and require the
developer to purchase the Property at a price equal to the sum of (i) the
Company's purchase price of the land, including all fees, costs, and expenses
paid by the Company in connection with its purchase of the land, (ii) all fees,
costs, and expenses disbursed by the Company pursuant to the development
agreement for construction of the building improvements, and (iii) the Company's
"construction financing costs." The "construction financing costs" of the
Company is an amount equal to a return, at the annual percentage rate used in
calculating the minimum annual rent under the lease, on all Company payments and
disbursements described in clauses (i) and (ii) above.
The Company also generally will enter into an indemnification and put
agreement (the "Indemnity Agreement") with the developer. The Indemnity
Agreement will provide for certain additional rights to the Company unless
certain conditions are met. In general, these conditions are (i) the developer's
acquisition of all permits, approvals, and consents necessary to permit
commencement of construction or renovation of the building improvements within a
specified period of time after the date of the Indemnity Agreement (normally, 60
days), or (ii) the completion of construction or renovation of the building as
evidenced by the issuance of a certificate of occupancy, within a specified
period of time after the date of the Indemnity Agreement. If such conditions are
not met, the Company will have the right to grant the developer additional time
to satisfy the conditions or to require the developer to purchase the Property
from the Company at a purchase price equal to the total amount disbursed by the
Company in connection with the acquisition and construction or renovation of the
Property (including closing costs), plus an amount equal to the return described
in item (iii) of the preceding paragraph. Failure of the developer to purchase
the Property from the Company upon demand by the Company under the circumstances
specified above will entitle the Company to declare the developer in default
under the lease and to declare each guarantor in default under any guarantee of
the developer's obligations to the Company.
In certain situations where construction or renovation is required for
a Property, the Company will pay a negotiated maximum amount upon completion of
construction or renovation rather than providing financing to the developer,
with such amount to be based on the developer's actual costs of such
construction or renovation.
Affiliates of the Company also may provide construction financing to
the developer of a Property. In addition, the Company may purchase from an
Affiliate of the Company a Property that has been constructed or renovated by
the Affiliate. Any fees paid to Affiliates of the Company in connection with the
financing, construction or renovation of a Property acquired by the Company will
be considered Acquisition Fees and will be subject to approval by a majority of
the Board of Directors, including a majority of the Independent Directors, not
otherwise interested in the transaction. See "Management Compensation" and
"Conflicts of Interest -- Certain Conflict Resolution Procedures." Any such fees
will be included in the cost of the Property and, therefore, will be included in
the calculation of base rent.
In all situations where construction or renovation of a Property is
required, the Company also will have the right to review the developer's books,
records, and agreements during and following completion of construction to
verify actual costs.
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Interim Acquisitions. The Advisor may regularly have opportunities to
acquire properties that often must be made within a relatively short period of
time, occasionally at a time when the Company may be unable to make the
acquisition. In an effort to address these situations and preserve the
acquisition opportunities of the Company (and other Affiliates of the Advisor),
the Advisor and its Affiliates maintain lines of credit which enable them to
acquire these properties on an interim basis and temporarily own them for the
purpose of facilitating their acquisition by the Company (or other entities with
which the Company is affiliated). At such time as a Property acquired on an
interim basis is determined to be suitable for acquisition by the Company, the
interim owner of the Property will sell its interest in the Property to the
Company at a price equal to the lesser of its cost (which includes carrying
costs and, in instances in which an Affiliate of the Company has provided real
estate brokerage services in connection with the initial purchase of the
Property, indirectly includes fees paid to an Affiliate of the Company) to
purchase such interest in the Property or the Property's appraised value,
provided that a majority of Directors, including a majority of the Independent
Directors, determine that the acquisition is fair and reasonable to the Company.
See "Conflicts of Interest -- Certain Conflict Resolution Procedures."
Appraisals of Properties acquired from such interim owners will be obtained in
all cases.
Acquisition Services. Acquisition services performed by the Advisor may
include, but are not limited to site selection and/or approval; review and
selection of tenants and negotiation of lease agreements and related documents;
monitoring Property acquisitions; and the processing of all final documents
and/or procedures to complete the acquisition of Properties and the commencement
of tenant occupancy and lease payments.
The Company will pay the Advisor a fee of 4.5% of the Total Proceeds as
Acquisition Fees. See "Management Compensation." The total of all Acquisition
Fees and Acquisition Expenses shall be reasonable and shall not exceed an amount
equal to 6% of the Real Estate Asset Value of a Property, or in the case of a
Mortgage Loan, 6% of the funds advanced, unless a majority of the Board of
Directors, including a majority of the Independent Directors, not otherwise
interested in the transaction approves fees in excess of these limits subject to
a determination that the transaction is commercially competitive, fair and
reasonable to the Company. The total of all Acquisition Fees payable to all
persons or entities will not exceed the compensation customarily charged in
arm's-length transactions by others rendering similar services as an ongoing
activity in the same geographical location and for comparable types of
properties.
The Advisor engages counsel to perform legal services, and such counsel
also may provide legal services to the Company in connection with the
acquisition of Properties. The legal fees payable to such counsel by the Company
will not exceed those generally charged for similar services.
STANDARDS FOR INVESTMENT IN PROPERTIES
Selection of Hotel Chains. The selection of Hotel Chains by the
Advisor, as approved by the Board of Directors, will be based on an evaluation
of the operations of the hotels in the Hotel Chains, the number of hotels
operated, the relationship of average revenue per available room to the average
capital cost per room of a hotel, the relative competitive position among the
same type of hotels offering similar types of products, name recognition, and
market penetration. The Hotel Chains will not be affiliated with the Advisor,
the Company or an Affiliate.
Selection of Properties and Tenants. In making investments in
Properties, the Advisor will consider relevant real property and financial
factors, including the condition, use, and location of the Property,
income-producing capacity, the prospects for long-term appreciation, the
relative success of the Hotel Chain in the geographic area in which the Property
is located, and the management capability and financial condition of the tenant.
The Company will obtain an independent appraisal for each Property it purchases.
In selecting tenants, the Advisor will consider the prior experience of the
tenant, the net worth of the tenant, past operating results of other hotels
currently or previously operated by the tenant, and the tenant's prior
experience in managing hotels within a particular Hotel Chain.
In selecting specific Properties within a particular Hotel Chain and in
selecting tenants for the Company's Properties, the Advisor, as approved by the
Board of Directors, will apply the following minimum standards.
1. Each Property will be in what the Advisor believes is a prime
business location for that type of Property.
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2. Base (or minimum) annual rent will provide a specified minimum
return on the Company's cost of purchasing and, if applicable, developing the
Property, and the lease also will generally provide for payment of percentage
rent based on gross sales over specified levels and/or automatic increases in
base rent at specified times during the lease term.
3. The initial lease term typically will be at least 10 to 20 years.
4. The Company will reserve the right to approve or reject any tenant
and site selected by a Hotel Chain.
5. In evaluating prospective tenants, the Company will examine, among
other factors, the tenant's historical financial performance and its current
financial condition.
6. In general, the Company will not acquire a Property if the Board of
Directors, including a majority of the Independent Directors, determines that
the acquisition would adversely affect the Company in terms of geographic,
property type or chain diversification.
DESCRIPTION OF PROPERTIES
The two hotel Properties owned by the Company as of September 30, 1998,
conform, and the Advisor expects that any Properties purchased by the Company
will conform, generally to the following specifications of size, cost, and type
of land and buildings.
Generally, Properties to be acquired by the Company will consist of
both land and building; although, in a number of cases, the Company may acquire
only the land underlying the building with the building owned by the tenant or a
third party, or may acquire the building only with the land owned by a third
party. Lot sizes generally range in size up to 10 acres depending on product,
market and design considerations, and are available at a broad range of pricing.
It is anticipated that hotel sites purchased by the Company will generally be in
primary or secondary urban, suburban, airport, highway or resort markets which
have been evaluated for past and future anticipated lodging demand trends. The
hotel buildings generally will be low to mid rise construction. The Company may
acquire limited service, extended stay or full service hotel Properties. Limited
service hotels generally minimize non-guest room space and offer limited food
service such as complimentary continental breakfasts and do not have restaurant
or lounge facilities on-site. Extended stay hotels generally contain guest
suites with a kitchen area and living area separate from the bedroom. Extended
stay hotels vary with respect to providing on-site restaurant facilities. Full
service hotels generally have conference or meeting facilities and on-site food
and beverage facilities.
Either before or after construction or renovation, the Properties to be
acquired by the Company will be one of a Hotel Chain's approved designs. Prior
to purchase of all Properties, other than those purchased prior to completion of
construction, the Company will receive a copy of the certificate of occupancy
issued by the local building inspector or other governmental authority which
permits the use of the Property as a hotel, and shall receive a certificate from
the Hotel Chain to the effect that (i) the Property is operational and (ii) the
Property and the tenant are in compliance with all of the chain's requirements,
including, but not limited to building plans and specifications approved by the
chain. The Company also will receive a certificate of occupancy for each
Property for which construction has not been completed at the time of purchase,
prior to the Company's payment of the final installment of the purchase price
for the Property.
A tenant generally will be required by the lease agreement to make such
capital expenditures as may be reasonably necessary to refurbish buildings,
premises, signs, and equipment so as to comply with the tenant's obligations
under the franchise agreement to reflect the current commercial image of its
Hotel Chain. These capital expenditures generally will be paid by the tenant
during the term of the lease. Some Property leases may, however, obligate the
tenant to fund, in addition to its lease payment, a reserve fund up to a
pre-determined amount. Generally, money in that fund may be used by the tenant
to pay for replacement of furniture and fixtures. The
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Company may be responsible for other capital expenditures or repairs. The tenant
generally is responsible for replenishing the reserve fund and to pay a
specified return on the amount of capital expenditures or repairs paid for by
the Company in excess of amounts in the reserve fund.
DESCRIPTION OF PROPERTY LEASES
The terms and conditions of any lease entered into by the Company with
regard to a Property may vary from those described below. The Advisor in all
cases will use its best efforts to obtain terms at least as favorable as those
described below. If the Board of Directors determines, based on the
recommendation of the Advisor, that the terms of an acquisition and lease of a
Property, taken as a whole, are favorable to the Company, the Board of Directors
may, in its sole discretion, cause the Company to enter into leases with terms
which are substantially different than the terms described below, but only to
the extent consistent with the Company's objective of qualifying as a REIT. In
making such determination, the Advisor will consider such factors as the type
and location of the Property, the creditworthiness of the tenant, the purchase
price of the Property, the prior performance of the tenant, and the prior
business experience of management of the Company and the Company's Affiliates
with a Hotel Chain, or the operator.
General. In general, the leases are expected to be "triple-net" leases,
which means that the tenants generally will be required to pay for all repairs,
maintenance, property taxes, utilities, and insurance. The tenants also will be
required to pay for special assessments, sales and use taxes, and the cost of
any renovations permitted under the leases. The Company will be the landlord
under each lease except in certain circumstances in which it may be a party to a
Joint Venture which will own the Property. In those cases, the Joint Venture,
rather than the Company, will be the landlord, and all references in this
section to the Company as landlord therefore should be read accordingly. See
"Joint Venture Arrangements" below.
Term of Leases. Properties will be leased for an initial term of 10 to
20 years with up to four, five-year renewal options. Upon termination of the
lease, the tenant will surrender possession of the Property to the Company,
together with any improvements made to the Property during the term of the
lease, except that for Properties in which the Company owns only the building
and not the underlying land, the owner of the land may assume ownership of the
building.
Computation of Lease Payments. During the initial term of the lease,
the tenant will pay the Company, as landlord, minimum annual rent equal to a
specified percentage of the Company's cost of purchasing the Property. In the
case of Properties that are to be constructed or renovated pursuant to a
development agreement, the Company's costs of purchasing the Property will
include the purchase price of the land, including all fees, costs, and expenses
paid by the Company in connection with its purchase of the land, and all fees,
costs, and expenses disbursed by the Company for construction of building
improvements. See "Site Selection and Acquisition of Properties -- Construction
and Renovation" above. In addition to minimum annual rent, the tenant will
generally pay the Company "percentage rent" and/or automatic increases in the
minimum annual rent at predetermined intervals during the term of the lease.
Percentage rent is generally computed as a percentage of the gross sales above a
specified level at a particular Property.
In the case of Properties in which the Company owns only the building,
the Company will structure its leases to recover its investment in the building
by the expiration of the lease.
Assignment and Sublease. In general, leases may not be assigned or
subleased without the Company's prior written consent (which may not be
unreasonably withheld) except to a tenant's corporate franchisor, corporate
affiliate or subsidiary, a successor by merger or acquisition, or in certain
cases, another franchisee, if such assignee or subtenant agrees to operate the
same type of hotel on the premises, but only to the extent consistent with the
Company's objective of qualifying as a REIT. The leases will set forth certain
factors (such as the financial condition of the proposed tenant or subtenant)
that are deemed to be a reasonable basis for the Company's refusal to consent to
an assignment or sublease. In addition, the Company may refuse to permit any
assignment or sublease that would jeopardize the Company's continued
qualification as a REIT. In certain cases, the original tenant will remain fully
liable, however, for the performance of all tenant obligations under the lease
following any such assignment or sublease unless the Company agrees in writing
to release the original tenant from its lease obligations.
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Alterations to Premises. A tenant generally will have the right,
without the prior written consent of the Company and at the tenant's own
expense, to make certain improvements, alterations or modifications to the
Property. Under certain leases, the tenant, at its own expense, may make certain
immaterial structural improvements (with a cost of up to $10,000) without the
prior consent of the Company. Certain leases may require the tenant to post a
payment and performance bond for any structural alterations with a cost in
excess of a specified amount.
Right of Tenant to Purchase. Generally, if the Company wishes at any
time to sell a Property pursuant to a bona fide offer from a third party, the
tenant of that Property will have the right to purchase the Property for the
same price, and on the same terms and conditions, as contained in the offer. In
certain cases, the tenant also may have a right to purchase the Property seven
to 20 years after commencement of the lease at a purchase price equal to the
greater of (i) the Property's appraised value at the time of the tenant's
purchase, or (ii) a specified amount, generally equal to the Company's purchase
price of the Property, plus a predetermined percentage (generally, 15% to 20%)
of such purchase price. See "Federal Income Tax Considerations --
Characterization of Property Leases."
Substitution of Properties. Under certain leases, the tenant of a
Property, at its own expense and with the Company's prior written consent, may
be entitled to operate another form of approved hotel on the Property as long as
such approved hotel has an operating history which reflects an ability to
generate gross revenues and potential revenue growth equal to or greater than
that experienced by the tenant in operating the original hotel.
In addition, certain Property leases will provide the tenant with the
right, to the extent consistent with the Company's objective of qualifying as a
REIT, to offer the substitution of another property selected by the tenant in
the event that (i) the Property that is the subject of the lease is not
producing percentage rent pursuant to the terms of the lease, and (ii) the
tenant determines that the Property has become uneconomic (other than as a
result of an insured casualty loss or condemnation) for the tenant's continued
use and occupancy in its business operation and the tenant's board of directors
has determined to close and discontinue use of the Property. The tenant's
determination that a Property has become uneconomic is to be made in good faith
based on the tenant's reasonable business judgment after comparing the results
of operations of the Property to the results of operations at the majority of
other properties then operated by the tenant. If either of these events occurs,
the tenant will have the right to offer the Company the opportunity to exchange
the Property for another property (the "Substituted Property") with a total cost
for land and improvements thereon (including overhead, construction interest,
and other related charges) equal to or greater than the cost of the Property to
the Company.
Generally, the Company will have 30 days following receipt of the
tenant's offer for exchange of the Property to accept or reject such offer. In
the event that the Company requests an appraisal of the Substituted Property, it
will have at least ten days following receipt of the appraisal to accept or
reject the offer. If the Company accepts such offer, (i) the Substituted
Property will be exchanged for the Property in a transaction designed and
intended to qualify as a "like-kind exchange" within the meaning of section 1031
of the Code with respect to the Company and (ii) the lease of the Property will
be amended to (a) provide for minimum rent in an amount equal to the sum
determined by multiplying the cost of the Substituted Property by the Property
lease rate and (b) provide for the number of five-year lease renewal options
sufficient to permit the tenant, at its option, to continue its occupancy of the
Substituted Property for up to 35 years from the date on which the exchange is
made. The Company will pay the tenant the excess, if any, of the cost of the
Substituted Property over the cost of the Property. If the substitution does not
take place within a specified period of time after the tenant makes the offer to
exchange the Property for the Substituted Property, either party thereafter will
have the right not to proceed with the substitution. If the Company rejects the
Substituted Property offered by the tenant, the tenant is generally required to
offer at least three additional alternative properties for the Company's
acceptance or rejection. If the Company rejects all Substituted Properties
offered to it pursuant to the lease, or otherwise fails or refuses to consummate
a substitution for any reason other than the tenant's failure to fulfill the
conditions precedent to the exchange, then the tenant will be entitled to
terminate the lease on the date scheduled for such exchange by purchasing the
Property from the Company for a price equal to the then-fair market value of the
Property.
Neither the tenant nor any of its subsidiaries, licensees,
concessionaires, or sublicensees or any other affiliate will be permitted to use
the original Property as a business of the same type and style for at least one
year after the closing of the original Property. In addition, in the event the
tenant or any of its affiliates sells the Property
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within twelve months after the Company acquires the Substituted Property, the
Company will receive, to the extent consistent with its objective of qualifying
as a REIT, from the proceeds of the sale the amount by which the selling price
exceeds the cost of the Property to the Company.
Special Conditions. Certain leases may provide that the tenant will not
be permitted to own or operate, directly or indirectly, another Property of the
same or similar type as the leased Property that is or will be located within a
specified distance of the leased Property.
Insurance, Taxes, Maintenance, and Repairs. Tenants of hotel Properties
will be required, under the terms of the leases, to maintain, for the benefit of
the Company and the tenant, insurance that is commercially reasonable given the
size, location and nature of the Property. All tenants, other than those tenants
with a substantial net worth, generally also will be required to obtain "rental
value" or "business interruption" insurance to cover losses due to the
occurrence of an insured event for a specified period, generally six to twelve
months. In general, no lease will be entered into unless, in the opinion of the
Advisor, as approved by the Board of Directors, the insurance required by the
lease adequately insures the Property.
Tenants will be required to maintain such Properties in good order and
repair. Such tenants generally will be required to maintain the Property and
repair any damage to the Property, except damage occurring during the last 24 to
48 months of the lease term (as extended), which in the opinion of the tenant
renders the Property unsuitable for occupancy, in which case the tenant will
have the right instead to pay the insurance proceeds to the Company and
terminate the lease. The nature of the obligations of hotel Property tenants for
maintenance and repairs of the Properties will vary depending upon individual
lease negotiations. In some instances, the Company may be obligated to make
repairs and fund capital improvements. In these instances, the lease will adjust
the lease payments so that the economic terms would be the same as if the tenant
were responsible to make repairs and fund capital improvements.
Events of Default. The leases generally provide that the following
events, among others, will constitute a default under the lease: (i) the
insolvency or bankruptcy of the tenant, provided that the tenant may have the
right, under certain circumstances, to cure such default; (ii) the failure of
the tenant to make timely payment of rent or other charges due and payable under
the lease, if such failure continues for a specified period of time (generally,
five to 30 days) after notice from the Company of such failure; (iii) the
failure of the tenant to comply with any of its other obligations under the
lease (for example, the discontinuance of operations of the leased Property) if
such failure continues for a specified period of time (generally, ten to 45
days); (iv) a default under or termination of the franchise agreement between
the tenant and its franchisor; (v) in cases where the Company enters into a
development agreement relating to the construction or renovation of a building,
a default under the development agreement or the Indemnity Agreement or the
failure to establish the minimum annual rent at the end of the development
period; and (vi) in cases where the Company has entered into other leases with
the same tenant, a default under such lease.
Upon default by the tenant, the Company generally will have the right
under the lease and under most state laws to evict the tenant, re-lease the
Property to others, and hold the tenant responsible for any deficiency in the
minimum lease payments. Similarly, if the Company determined not to re-lease the
Property, it could sell the Property. (However, unless required to do so by the
lease or its investment objectives, the Company does not intend to sell any
Property prior to five to ten years after the commencement of the lease on such
Property. See "Right of Tenant to Purchase" above.) In the event that a lease
requires the tenant to make a security deposit, the Company will have the right
under the lease to apply the security deposit, upon default by the tenant,
towards any payments due from the defaulting tenant. In general, the tenant will
remain liable for all amounts due under the lease to the extent not paid from a
security deposit or by a new tenant.
In the event that a tenant defaults under a lease with the Company, the
Company either will attempt to locate a replacement operator acceptable to the
Hotel Chain involved or will discontinue operation of the hotel. In lieu of
obtaining a replacement operator, some Hotel Chains may have the option and may
elect to operate the hotels themselves. The Company will have no obligation to
operate the hotels, and no Hotel Chain will be obligated to permit the Company
or a replacement operator to operate the hotels.
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JOINT VENTURE ARRANGEMENTS
The Company may enter into a Joint Venture to own and operate a
Property with various unaffiliated persons or entities or with another program
formed by the principals of the Company or the Advisor or their Affiliates, if a
majority of the Directors, including a majority of the Independent Directors,
not otherwise interested in the transaction determine that the investment in the
Joint Venture is fair and reasonable to the Company and on substantially the
same terms and conditions as those to be received by the co-venturer or
co-venturers. The Company may take more or less than a 50% interest in any Joint
Venture, subject to obtaining the requisite approval of the Directors. See "Risk
Factors -- Real Estate Investment Risks -- Company May Not Control Joint
Ventures " and " -- Difficulty in Exiting a Joint Venture After an Impasse."
Under the terms of each Joint Venture agreement, it is anticipated that
the Company and each joint venture partner will be jointly and severally liable
for all debts, obligations, and other liabilities of the Joint Venture, and the
Company and each joint venture partner will have the power to bind each other
with any actions they take within the scope of the Joint Venture's business. In
addition, it is expected that the Advisor or its Affiliates will be entitled to
reimbursement, at cost, for actual expenses incurred by the Advisor or its
Affiliates on behalf of the Joint Venture. Joint Ventures entered into to
purchase and hold a Property for investment generally will have an initial term
of 10 to 20 years (generally the same term as the initial term of the lease for
the Property in which the Joint Venture invests), and, after the expiration of
the initial term, will continue in existence from year to year unless terminated
at the option of either joint venturer or unless terminated by an event of
dissolution. Events of dissolution will include the bankruptcy, insolvency, or
termination of any co-venturer, sale of the Property owned by the Joint Venture,
mutual agreement of the Company and its joint venture partner to dissolve the
Joint Venture, and the expiration of the term of the Joint Venture. The Joint
Venture agreement typically will restrict each venturer's ability to sell,
transfer, or assign its joint venture interest without first offering it for
sale to its co-venturer. In addition, in any Joint Venture with another program
sponsored by the Advisor or its Affiliates, where such arrangements are entered
into for the purpose of purchasing and holding Properties for investment, in the
event that one party desires to sell the Property and the other party does not
desire to sell, either party will have the right to trigger dissolution of the
Joint Venture by sending a notice to the other party. The notice will establish
the price and terms for the sale or purchase of the other party's interest in
the Joint Venture to the other party. The Joint Venture agreement will grant the
receiving party the right to elect either to purchase the other party's interest
on the terms set forth in the notice or to sell its own interest on such terms.
The following paragraphs describe the allocations and distributions
under the expected terms of the joint venture agreement for any Joint Venture in
which the Company and its co-venturer each have a 50% ownership interest. In any
other case, the allocations and distributions are expected to be similar to
those described below, except that allocations and distributions which are
described below as being made 50% to each co-venturer will instead be made in
proportion to each co-venturer's respective ownership interest.
Under the terms of each joint venture agreement, operating profits and
losses generally will be allocated 50% to each co-venturer. Profits from the
sale or other disposition of Joint Venture property first will be allocated to
any co-venturers with negative capital account balances in proportion to such
balances until such capital accounts equal zero, and thereafter 50% to each
co-venturer. Similarly, losses from the sale or other disposition of Joint
Venture property first will be allocated to joint venture partners with positive
capital account balances in proportion to such balances until such capital
accounts equal zero, and thereafter 50% to each co-venturer. Notwithstanding any
other provisions in the Joint Venture agreement, income, gain, loss, and
deductions with respect to any contributed property will be shared in a manner
which takes into account the variation between the basis of such property and
its fair market value at the time of contribution in accordance with section
704(c) of the Code.
Net cash flow from operations of the Joint Venture generally will be
distributed 50% to each joint venture partner. Any liquidation proceeds, after
paying joint venture debts and liabilities and funding reserves for contingent
liabilities, will be distributed first to the joint venture partners with
positive capital account balances in proportion to such balances until such
balances equal zero, and thereafter 50% to each joint venture partner.
In order that the allocations of Joint Venture income, gain, loss, and
deduction provided in Joint Venture agreements may be respected for federal
income tax purposes, it is expected that any Joint Venture agreement (i) will
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contain a "qualified income offset" provision, (ii) will prohibit allocations of
loss or deductions to the extent such allocation would cause or increase an
"Adjusted Capital Account Deficit," and (iii) will require (a) that capital
accounts be maintained for each joint venture partner in a manner which complies
with Treasury Regulation ss.1.704-1(b)(2)(iv) and (b) that distributions of
proceeds from the liquidation of a partner's interest in the Joint Venture
(whether or not in connection with the liquidation of the Joint Venture) be made
in accordance with the partner's positive capital account balance. See "Federal
Income Tax Considerations -- Investment in Joint Ventures."
Prior to entering into any Joint Venture arrangement with any
unaffiliated co-venturer (or the principals of any unaffiliated co-venturer),
the Company will confirm that such person or entity has demonstrated to the
satisfaction of the Company that requisite financial qualifications are met.
The Company may acquire Properties from time to time by issuing limited
partnership units in CNL Hospitality Partners, LP to sellers of such Properties
pursuant to which the seller, as owner, would receive partnership interests
convertible at a later date into Common Stock of the Company. The Company is the
general partner of CNL Hospitality Partners, LP. This structure enables a
property owner to transfer property without incurring immediate tax liability,
and therefore may allow the Company to acquire Properties on more favorable
terms than otherwise.
MORTGAGE LOANS
The Company may provide Mortgage Loans to operators of Hotel Chains, or
their affiliates, to enable them to acquire the building and improvements on
real property. Generally, the Company will acquire the underlying land and will
enter into a long-term ground lease for the Property with the borrower as the
tenant. The Mortgage Loan will be secured by the building and improvements on
the land.
Generally, management believes the interest rate and terms of these
transactions will be substantially the same as those of the Company's Property
leases. The borrower will be responsible for all of the expenses of owning the
property, as with the "triple-net" leases, including expenses for insurance and
repairs and maintenance. Management expects the Mortgage Loans will be fully
amortizing loans over a period of 10 to 20 years (generally, the same term as
the initial term of the Property leases), with payments of principal and
interest due monthly. In addition, management expects the interest rate charged
under the terms of the Mortgage Loan will be fixed over the term of the loan and
generally will be comparable to, or slightly lower than, lease rates charged to
tenants for the Properties.
The Company may combine leasing and financing in connection with a
Property. For example, it may make a Mortgage Loan with respect to the building
and lease the underlying land to the borrower. Management believes that the
combined leasing and financing structure provides the benefit of allowing the
Company to receive, on a fixed income basis, the return of its initial
investment in each financed building, which is generally a depreciating asset,
plus interest. At the same time, the Company retains ownership of the underlying
land, which may appreciate in value, thus providing an opportunity for a capital
gain on the sale of the land. In such cases in which the borrower is also the
tenant under a Property lease for the underlying land, if the borrower does not
elect to exercise its purchase option to acquire the Property under the terms of
the lease, the building and improvements on the Property will revert to the
Company at the end of term of the lease, including any renewal periods. If the
borrower does elect to exercise its purchase option as the tenant of the
underlying land, the Company will generally have the option of selling the
Property at the greater of fair market value or cost plus a specified
percentage.
The Company will not make or invest in Mortgage Loans unless an
appraisal is obtained concerning the property that secures the Mortgage Loan.
Mortgage indebtedness on any property shall not exceed such property's appraised
value. In cases in which the majority of the Independent Directors so determine,
and in all cases in which the Mortgage Loan involves the Advisor, Directors, or
Affiliates, such appraisal must be obtained from an independent expert
concerning the underlying property. Such appraisal shall be maintained in the
Company's records for at least five years, and shall be available for inspection
and duplication by any stockholder. In addition to the appraisal, a mortgagee's
or owner's title insurance policy or commitment as to the priority of the
mortgage or condition of the title must be obtained.
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Management believes that the criteria for investing in such Mortgage
Loans are substantially the same as those involved in the Company's investments
in Properties; therefore, the Company will use the same underwriting criteria as
described above in "Business -- Standards for Investment in Properties." In
addition, the Company will not make or invest in Mortgage Loans on any one
property if the aggregate amount of all mortgage loans outstanding on the
property, including the loans of the Company, would exceed an amount equal to
85% of the appraised value of the property as determined by appraisal unless
substantial justification exists because of the presence of other underwriting
criteria. For purposes of this limitation, the aggregate amount of all mortgage
loans outstanding on the property, including the loans of the Company, shall
include all interest (excluding contingent participation in income and/or
appreciation in value of the mortgaged property), the current payment of which
may be deferred pursuant to the terms of such loans, to the extent that deferred
interest on each loan exceeds 5% per annum of the principal balance of the loan.
Further, the Company will not make or invest in any Mortgage Loans that
are subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or Affiliates of the Company. The Company currently
expects to provide Mortgage Loans in the aggregate principal amount of
approximately 5% to 10% of Gross Proceeds.
MANAGEMENT SERVICES
The Advisor will provide management services relating to the Company,
the Properties, the Mortgage Loans, and the Secured Equipment Lease program
pursuant to an Advisory Agreement between it and the Company. Under this
agreement, the Advisor will be responsible for assisting the Company in
negotiating leases, Mortgage Loans and Secured Equipment Leases; collecting
rental, Mortgage Loan and Secured Equipment Lease payments; inspecting the
Properties and the tenants' books and records; and responding to tenant
inquiries and notices. The Advisor also will provide information to the Company
about the status of the leases, the Properties, the Mortgage Loans, the Line of
Credit, the Permanent Financing and the Secured Equipment Leases. In exchange
for these services, the Advisor will be entitled to receive certain fees from
the Company. For supervision of the Properties and Mortgage Loans, the Advisor
will receive the Asset Management Fee, which generally is payable monthly in an
amount equal to one-twelfth of 0.6% of Real Estate Asset Value and the
outstanding principal amount of the Mortgage Loans, as of the end of the
preceding month. For negotiating Secured Equipment Leases and supervising the
Secured Equipment Lease program, the Advisor will receive, upon entering into
each lease, a Secured Equipment Lease Servicing Fee payable out of the proceeds
of the borrowings equal to 2% of the purchase price of the Equipment subject to
each Secured Equipment Lease. See "Management Compensation."
BORROWING
The Company will borrow money to acquire Assets and to pay certain
related fees. The Company intends to encumber Assets in connection with any
borrowing. The Company plans to obtain one or more revolving Lines of Credit in
an aggregate amount up to $100,000,000, and may also obtain Permanent Financing.
The Line of Credit may be repaid with offering proceeds, working capital or
Permanent Financing. The Line of Credit and Permanent Financing are the only
source of funds for making Secured Equipment Leases and for paying the Secured
Equipment Lease Servicing Fee.
On July 31, 1998, the Company entered into an initial 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 0.5% 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 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. As of September 30, 1998,
the Company had obtained three advances totalling $9,600,000 relating to the
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Line of Credit. In connection with the Line of Credit, the Company incurred a
commitment fee, legal fees and closing costs of $68,762. The proceeds were used
in connection with the purchase of two hotel Properties described in "Business
- -- Property Acquisitions" and in connection with the agreement to acquire three
additional hotel Properties described in "Business -- Pending Investments."
Management believes that any financing obtained during the offering
period will allow the Company to make investments in Assets that the Company
otherwise would be forced to delay until it raised a sufficient amount of
proceeds from the sale of Shares. By eliminating this delay, the Company will
also eliminate the risk that these investments will no longer be available, or
the terms of the investment will be less favorable, when the Company has raised
sufficient offering proceeds. Alternatively, Affiliates of the Advisor could
make such investments, pending receipt by the Company of sufficient offering
proceeds, in order to preserve the investment opportunities for the Company.
However, Assets acquired by the Company in this manner would be subject to
closing costs both on the original purchase by the Affiliate and on the
subsequent purchase by the Company, which would increase the amount of expenses
associated with the acquisition of Assets and reduce the amount of offering
proceeds available for investment in income-producing assets. Management
believes that the use of borrowings will enable the Company to reduce or
eliminate the instances in which the Company will be required to pay duplicate
closing costs, which may be substantial in certain states.
Similarly, management believes that the borrowings will benefit the
Company by allowing it to take advantage of its ability to borrow at favorable
interest rates. Specifically, the Company intends to structure the terms of any
financing so that the lease rates for Properties acquired and the interest rates
for Mortgage Loans and Secured Equipment Leases made with the loan proceeds will
exceed the interest rate payable on the financing. To the extent that the
Company is able to structure the financing on these terms, the Company will
increase its net revenues. In addition, the use of financing will increase the
diversification of the Company's portfolio by allowing it to acquire more Assets
than would be possible using only the Gross Proceeds from the offering.
As a result of existing relationships between Affiliates of the Advisor
and certain financing sources, the Company may have the opportunity to obtain
financing at more favorable interest rates than the Company could otherwise
obtain. In connection with any financing obtained by the Company as a result of
any such relationship, the Company will pay a loan origination fee to the
Affiliate. In addition, certain lenders may require, as a condition of providing
financing to the Company, that the Affiliate with which the lender has an
existing relationship act as a loan servicing agent. In connection with any such
arrangement the Company will pay a loan servicing fee to the Affiliate. Any loan
origination fee or loan servicing fee paid to an Affiliate of the Company is
subject to the approval by a majority of the Board of Directors (including a
majority of the Independent Directors) not otherwise interested in the
transaction as fair and reasonable to the Company and on terms not less
favorable to the Company than those available from unaffiliated third parties
and not less favorable than those available from the Advisor or its Affiliates
in transactions with unaffiliated third parties. See "Conflicts of Interest --
Certain Conflict Resolution Procedures."
The Company may also borrow funds for the purpose of preserving its
status as a REIT. For example, the Company may borrow to the extent necessary to
permit the Company to make Distributions required in order to enable the Company
to qualify as a REIT for federal income tax purposes; however, the Company will
not borrow for the purpose of returning Invested Capital to the stockholders
unless necessary to eliminate corporate-level tax to the Company. The aggregate
borrowing of the Company, secured and unsecured, shall be reasonable in relation
to Net Assets of the Company and shall be reviewed by the Board of Directors at
least quarterly. The Board of Directors anticipates that the aggregate amounts
of any Lines of Credit will be up to $100,000,000 and that the aggregate amount
of the Permanent Financing will not exceed 30% of the Company's total assets.
However, in accordance with the Company's Articles of Incorporation, the maximum
amount of borrowing in relation to Net Assets, in the absence of a satisfactory
showing that a higher level of borrowing is appropriate, shall not exceed 300%
of Net Assets. Any excess in borrowing over such 300% level shall occur only
with approval by a majority of the Independent Directors and will be disclosed
and explained to stockholders in the first quarterly report of the Company
prepared after such approval occurs.
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<PAGE>
SALE OF PROPERTIES, MORTGAGE LOANS AND SECURED EQUIPMENT LEASES
For the first three to eight years after the commencement of this
offering, the Company intends, to the extent consistent with the Company's
objective of qualifying as a REIT, to reinvest in additional Properties or
Mortgage Loans any proceeds of the Sale of a Property or a Mortgage Loan that
are not required to be distributed to stockholders in order to preserve the
Company's REIT status for federal income tax purposes. The Company may also use
such proceeds to reduce its outstanding indebtedness. Similarly, and to the
extent consistent with REIT qualification, the Company plans to use the proceeds
of the Sale of a Secured Equipment Lease to fund additional Secured Equipment
Leases, or to reduce its outstanding indebtedness on the borrowings. At or prior
to the end of such eight-year period, the Company intends to provide
stockholders of the Company with liquidity of their investment, either in whole
or in part, through Listing (although liquidity cannot be assured thereby) or by
commencing the orderly Sale of the Company's Assets. If Listing occurs, the
Company intends to use any Net Sales Proceeds not required to be distributed to
stockholders in order to preserve the Company's status as a REIT to reinvest in
additional Properties, Mortgage Loans and Secured Equipment Leases or to repay
outstanding indebtedness. If Listing does not occur within eight years after the
commencement of this offering, the Company thereafter will undertake the orderly
liquidation of the Company and the Sale of the Company's Assets and will
distribute any Net Sales Proceeds to stockholders. In addition, the Company will
not sell any Assets if such Sale would not be consistent with the Company's
objective of qualifying as a REIT.
In deciding the precise timing and terms of Property Sales, the Advisor
will consider factors such as national and local market conditions, potential
capital appreciation, cash flows, and federal income tax considerations. The
terms of certain leases, however, may require the Company to sell a Property at
an earlier time if the tenant exercises its option to purchase a Property after
a specified portion of the lease term has elapsed. See "Business -- Description
of Property Leases -- Right of Tenant to Purchase." The Company will have no
obligation to sell all or any portion of a Property at any particular time,
except as may be required under property or joint venture purchase options
granted to certain tenants. In connection with Sales of Properties by the
Company, purchase money obligations may be taken by the Company as part payment
of the sales price. The terms of payment will be affected by custom in the area
in which the Property is located and by prevailing economic conditions. When a
purchase money obligation is accepted in lieu of cash upon the Sale of a
Property, the Company will continue to have a mortgage on the Property and the
proceeds of the Sale will be realized over a period of years rather than at
closing of the Sale.
The Company does not anticipate selling the Secured Equipment Leases
prior to expiration of the lease term, except in the event that the Company
undertakes orderly liquidation of its assets. In addition, the Company does not
anticipate selling any Mortgage Loans prior to the expiration of the loan term,
except in the event (i) the Company owns the Property (land only) underlying the
building improvements which secure the Mortgage Loan and the Sale of the
Property occurs, or (ii) the Company undertakes an orderly Sale of its Assets.
FRANCHISE REGULATION
Many states regulate the franchise or license relationship between a
tenant/franchisee and a franchisor. The Company will not be an Affiliate of any
franchisor, and is not currently aware of any states in which the relationship
between the Company as landlord and the tenant will be subjected to those
regulations, but it will comply with such regulations in the future, if so
required. Hotel Chains which franchise their operations are subject to
regulation by the Federal Trade Commission.
COMPETITION
The hotel industry is characterized by intense competition. The
operators of the hotels located on the Properties will compete with
independently owned hotels, hotels which are part of local or regional chains,
and hotels in other well-known national chains, including those offering
different types of accommodations. Many successful hotel "pockets" have
developed in areas of concentrated lodging demand, such as airports, urban
office parks and resort areas where this gathering promotes credibility to the
market as a lodging destination and accords the individual properties
efficiencies such as area transportation, visibility and the promotion of other
support amenities.
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The Company will be in competition with other persons and entities both
to locate suitable Properties to acquire and to locate purchasers for its
Properties. The Company also will compete with other financing sources such as
banks, mortgage lenders, and sale/leaseback companies for suitable Properties,
tenants, Mortgage Loan borrowers and Equipment tenants.
REGULATION OF MORTGAGE LOANS AND SECURED EQUIPMENT LEASES
The Mortgage Loan and Secured Equipment Lease programs may be subject
to regulation by federal, state and local authorities and subject to various
laws and judicial and administrative decisions imposing various requirements and
restrictions, including among other things, regulating credit granting
activities, establishing maximum interest rates and finance charges, requiring
disclosures to customers, governing secured transactions and setting collection,
repossession and claims handling procedures and other trade practices. In
addition, certain states have enacted legislation requiring the licensing of
mortgage bankers or other lenders and these requirements may affect the
Company's ability to effectuate its Mortgage Loan and Secured Equipment Lease
programs. Commencement of operations in these or other jurisdictions may be
dependent upon a finding of financial responsibility, character and fitness of
the Company. The Company may determine not to make Mortgage Loans or enter into
Secured Equipment Leases in any jurisdiction in which it believes the Company
has not complied in all material respects with applicable requirements.
SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the
Company, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements included in Appendix B.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 September 30, 1997 December 31
(Unaudited) (Unaudited) 1997 (1) 1996 (2)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,026,740 $ - $ 46,071 $ -
Net earnings 583,842 - 22,852 -
Cash distributions declared (3) 619,131 - 29,776 -
Funds from operations (4) 737,508 - 22,852 -
Earnings per Share 0.28 - 0.03 -
Cash distributions declared per Share 0.29 - 0.05 -
Weighted average number of Shares outstanding (5) 2,082,845 - 686,063 -
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997 December 31, December 31,
(Unaudited) (Unaudited) 1997 1996
------------------- ------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Total assets $36,387,230 $1,184,711 $9,443,476 $598,190
Total stockholders' equity 24,567,655 200,000 9,233,917 200,000
</TABLE>
(1) No operations commenced until the Company received minimum
offering proceeds and funds were released from escrow on
October 15, 1997.
(2) Selected financial data for 1996 represents the period June 12,
1996 (date of inception) through December 31, 1996.
(3) Approximately 6% and 23% of cash distributions for the nine months
ended September 30, 1998 and the year ended December 31, 1997,
respectively, represent a return of capital in accordance with
generally accepted accounting principles ("GAAP"). Cash distributions
treated as a return of capital on a GAAP basis represent the amount of
cash distributions in excess of accumulated net earnings on a GAAP
basis. The Company has not treated such amount as a return of capital
for purposes of calculating Invested Capital and the Stockholders' 8%
Return.
(4) Funds from operations ("FFO"), based on the revised definition adopted
by the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, means net earnings
determined in accordance with GAAP, excluding gains or losses from debt
restructuring and sales of property, plus depreciation and amortization
of real estate assets and after adjustments for unconsolidated
partnerships and joint ventures. FFO was developed by NAREIT as a
relative measure of performance and liquidity of an equity REIT in
order to recognize that income-producing real estate historically has
not depreciated on the basis determined under GAAP. However, FFO (i)
does not represent cash generated from operating activities determined
in accordance with GAAP (which, unlike FFO, generally reflects all cash
effects of transactions and other events that enter into the
determination of net earnings), (ii) is not necessarily indicative of
cash flow available to fund cash needs, and (iii) should not be
considered as an alternative to net earnings determined in accordance
with GAAP as an indication of the Company's operating performance, or
to cash flow from operating activities determined in accordance with
GAAP as a measure of either liquidity or the Company's ability to make
distributions. Accordingly, the Company believes that in order to
facilitate a clear understanding of the historical operating results of
the Company, FFO should be considered in conjunction with the Company's
net earnings and cash flows as reported in the accompanying financial
statements and notes thereto. See Appendix B -- Financial Information.
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(5) The weighted average number of Shares outstanding is based upon
the period the Company was operational.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY
This information contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Act of 1934. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: changes in general economic conditions, changes in local
and national real estate conditions, continued availability of proceeds from the
Company's offering, the ability of the Company to obtain permanent financing on
satisfactory terms, the ability of the Company to identify suitable investments,
the ability of the Company to locate suitable tenants for its Properties and
borrowers for its Mortgage Loans and Secured Equipment Leases, and the ability
of such tenants and borrowers to make payments under their respective leases,
Mortgage Loans or Secured Equipment Leases.
The Company is a Maryland corporation that was organized on June 12,
1996. On June 15, 1998, the Company formed CNL Hospitality Partners, LP, a
wholly owned Delaware limited partnership (the "Partnership"). Properties
acquired are expected to be held by the Partnership and, as a result, owned by
the Company through the Partnership. The term "Company" includes CNL Hospitality
Properties, Inc. and its subsidiaries, CNL Hospitality GP Corp., CNL Hospitality
LP Corp. and CNL Hospitality Partners, LP.
As of September 30,1998, the Company had acquired two Properties and
had no significant operating history. Since leases generally will be entered
into on a "triple-net" basis, the Company does not expect, although it has the
right, to maintain a working capital reserve for operating expenses. The
Company's Properties, Mortgage Loans and Secured Equipment Leases will not be
readily marketable and their values may be affected by general market
conditions. Nevertheless, management believes that capital and revenues of the
Company will be sufficient to fund the Company's anticipated investments,
proposed operations, and cash Distributions to the stockholders.
LIQUIDITY AND CAPITAL RESOURCES
On July 9, 1997, the Company commenced its Initial Offering of Shares
of common stock. As of September 30, 1998, the Company had received aggregate
subscription proceeds of $28,458,720 (2,845,872 Shares) from the Initial
Offering, including $20,615 (2,062 Shares) through the Company's Reinvestment
Plan. The Company anticipates significant additional sales of Shares prior to
the termination of the Initial Offering. The Company has elected to extend the
Initial Offering of Shares until a date no later than July 9, 1999.
As of September 30, 1998, net proceeds to the Company from its Initial
Offering of Shares and capital contributions from the Advisor and advances on
the Line of Credit, after deduction of Selling Commissions, marketing support
and due diligence expense reimbursement fees and Organizational and Offering
Expenses totalled approximately $34,200,000. As of September 30, 1998, the
proceeds have been invested in two hotel Properties or committed for investment
in three additional hotel Properties and to pay Acquisition Fees and Acquisition
Expenses.
On July 31, 1998, the Company acquired two Residence Inn by Marriott
Properties in the Atlanta Georgia area for a total purchase price of
$27,245,539. In connection therewith, the Company entered into a 19-year lease
for each Property.
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The Company expects to use Net Offering Proceeds it receives in the
future from its Initial Offering to purchase additional Properties and to invest
in Mortgage Loans. See "Investment Objectives and Policies." In addition, the
Company intends to borrow money to acquire Assets and to pay certain related
fees. The Company intends to encumber Assets in connection with such borrowing.
The Company plans to obtain one or more revolving Lines of Credit in an
aggregate amount up to $100,000,000, and may, in addition, also obtain Permanent
Financing. The Line of Credit may be repaid with offering proceeds, working
capital or Permanent Financing. Although the Board of Directors anticipates that
the Line of Credit will be in the amount up to $100,000,000 and that the
aggregate amount of any Permanent Financing will not exceed 30% of the Company's
total assets, the maximum amount the Company may borrow, absent a satisfactory
showing that a higher level of borrowing is appropriate as approved by a
majority of the Independent Directors, is 300% of the Company's Net Assets.
On July 31, 1998, the Company entered into an initial revolving line of
credit and security agreement with a bank to be used by the Company to acquire
hotel Properties. The initial 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 0.5% per advance
will be due and payable to the bank on funds as advanced. Each advance 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 Property during the term of the advance 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. As of September
30, 1998, the Company obtained three advances totalling $9,600,000 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 $68,762. The proceeds were
used in connection with the purchase of the two hotel Properties and the
commitment to acquire three additional Properties. The Company has not yet
received a commitment for any Permanent Financing and there is no assurance that
the Company will obtain any Permanent Financing on satisfactory terms.
As of November 2, 1998, the Company had received subscription proceeds
of $31,268,652 (3,126,865 Shares) from its Initial Offering of Shares. As of
November 2, 1998, net proceeds to the Company from its Initial Offering and
capital contributions from the Advisor, after deduction of Selling Commissions,
marketing support and due diligence expense reimbursement fees and
Organizational and Offering Expenses totalled approximately $27,175,000. In
addition, the Company received an advance of $9,600,000 under its Line of
Credit. The Company has used total net proceeds from its Initial Offering and
borrowing to invest approximately $27,246,000 in two hotel Properties, to pay
$5,000,000 as a deposit on three additional hotel Properties and to pay
approximately $2,214,000 in Acquisition Fees and Acquisition Expenses, leaving
approximately $2,315,000 in Net Offering Proceeds available for investment in
additional Properties and Mortgage Loans.
As of November 2, 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 advances on the Line of Credit. In
connection with these agreements, the Company was required to obtain a letter of
credit, to be used by the seller of the Properties, secured by a $5,000,000
certificate of deposit. In connection with the letter of credit, the Company
incurred $22,500 in closing costs. 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. In addition, as of November 2, 1998,
the Company had not entered into any arrangements creating a reasonable
probability a particular Mortgage Loan or Secured Equipment Lease would be
funded. The Company is presently negotiating to acquire additional Properties,
but as of November 2, 1998, the Company had not acquired any such Properties or
entered into any Mortgage Loans.
The Properties are, and are expected to be, leased on a long-term,
triple-net basis, meaning that tenants are generally required to pay all repairs
and maintenance, property taxes, insurance and utilities. Rental payments under
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the leases are expected to exceed the Company's operating expenses. For these
reasons, no short-term or long-term liquidity problems associated with operating
the Properties are currently anticipated by management.
Until Properties are acquired or Mortgage Loans are entered into, Net
Offering Proceeds are held in short-term, highly liquid investments which
management believes to have appropriate safety of principal. This investment
strategy provides high liquidity in order to facilitate the Company's use of
these funds to acquire Properties at such time as Properties suitable for
acquisition are located or to fund Mortgage Loans. At September 30, 1998, the
Company had $2,012,110 invested in such short-term investments as compared to
$8,869,838 at December 31, 1997. The decrease in the amount invested in
short-term investments reflects funds used to acquire the two Properties
referenced above. The remaining funds will be used primarily to purchase
Properties, to make Mortgage Loans, to pay Offering Expenses and Acquisition
Expenses, to pay Distributions to stockholders, to pay other Company expenses
and, in management's discretion, to create cash reserves.
During the nine months ended September 30, 1998 and 1997, Affiliates of
the Company incurred on behalf of the Company $158,184 and $360,706,
respectively, for certain Organizational and Offering Expenses in connection
with its Initial Offering. In addition, during the nine months ended September
30, 1998, Affiliates of the Company incurred on behalf of the Company $220,575
for certain Acquisition Expenses and $64,422 for certain Operating Expenses. As
of September 30, 1998, the Company owed the Advisor $642,443 for such amounts,
unpaid fees and administrative expenses. The Advisor has agreed to pay or
reimburse to the Company all Organizational and Offering Expenses in excess of
three percent of Gross Proceeds. In addition, the Advisor is required to
reimburse the Company the amount by which total Operating Expenses paid or
incurred by the Company exceed, in any four consecutive fiscal quarters (the
"Expense Year"), the greater of two percent of Average Invested Assets or 25
percent of net income, as defined in the Advisory Agreement (the "Expense Cap").
During the four quarters ended September 30, 1998, the Company's Operating
Expenses exceeded the Expense Cap by $92,733; therefore, the Advisor reimbursed
the Company such amount in accordance with the Advisory Agreement.
During the nine months ended September 30, 1998, the Company generated
cash from operations (which includes cash received from tenants and interest
income received, less cash paid for operating expenses) of $2,047,046. Based on
cash from operations, the Company declared Distributions to its stockholders of
$619,131 during the nine months ended September 30, 1998. No Distributions were
paid or declared for the nine months ended September 30, 1997. In addition, on
October 1, 1998 and November 1, 1998, the Company declared Distributions to its
stockholders totalling $167,846 and $183,405, respectively ($0.0583 per Share)
payable in December 1998. For the nine months ended September 30, 1998, 94
percent of the Distributions received by stockholders were considered to be
ordinary income and approximately 6 percent were considered a return of capital
for federal income tax purposes. No amounts distributed or to be distributed to
the stockholders as of November 2, 1998, were required to be or have been
treated by the Company as a return of capital for purposes of calculating the
Stockholders' 8% Return on Invested Capital.
Management believes that the Properties are adequately covered by
insurance. In addition, the Advisor has obtained contingent liability coverage
for the Company. This insurance policy is intended to reduce the Company's
exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to a Property.
The tenant of the two Properties owned by the Company as of November 2,
1998, has established capital expenditure reserve funds which will be used for
the replacement and renewal of furniture, fixtures and equipment relating to the
hotel Properties (the "FF&E Reserve"). Funds in the FF&E Reserve and all
property purchased with funds from the FF&E Reserve will be paid, granted and
assigned to the Company as additional rent. For the nine months ended September
30, 1998 revenues relating to the FF&E Reserve totalled $41,099. Management has
the right to cause the Company to maintain reserves if, in their discretion,
they determine such reserves are required to meet the Company's working capital
needs.
Management is not aware of any material trends, favorable or
unfavorable, in either capital resources or the outlook for long-term cash
generation, nor does management expect any material changes in the availability
and relative cost of such capital resources, other than as referred to in the
Prospectus.
Management expects that the cash to be generated from operations will
be adequate to pay Operating Expenses and to make Distributions to stockholders.
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RESULTS OF OPERATIONS
No operations commenced until the Company received the minimum offering
proceeds of $2,500,000 on October 15, 1997. As of September 30, 1998, the
Company had acquired two Properties consisting of land, building and equipment,
and entered into long-term, triple-net lease agreements relating to these
Properties.
The Property leases provide for minimum base annual rental payments
ranging from approximately $1,209,000 to $1,651,800, which are payable in
monthly installments. The leases also provide that, commencing in the second
lease year, the annual base rent required under the terms of the leases will
increase. The Company's leases also require the establishment of the FF&E
Reserves. The FF&E Reserves established for the tenant at September 30, 1998 are
owned by the Company and have been reported as additional rent. In connection
therewith, the Company earned $528,499 (including $41,099 in FF&E Reserve
income) from the two Properties during the nine months ended September 30, 1998.
Because the Company has not yet acquired all of its Properties and the
Properties owned were only operational for a portion of the period, revenues for
the nine months ended September 30, 1998, represent only a portion of revenues
which the Company is expected to earn in future periods.
During the quarter and nine months ended September 30, 1998, the
Company earned $127,082 and $498,241, respectively, in interest income from
investments in money market accounts and other short-term, highly liquid
investments. As net offering proceeds from the Company's Initial Offering are
invested in Properties and used to make Mortgage Loans, the percentage of the
Company's total revenues from interest income from investments in money market
accounts or other short term, highly liquid investments is expected to decrease.
Operating Expenses, including depreciation and amortization expense,
were $273,712 and $442,898 for the quarter and nine months ended September 30,
1998, respectively. Operating Expenses represent only a portion of Operating
Expenses which the Company is expected to incur during a full period in which
the Company owns Properties. The dollar amount of Operating Expenses is expected
to increase as the Company acquires additional Properties and invests in
Mortgage Loans. However, general and administrative expenses as a percentage of
total revenues is expected to decrease as the Company acquires additional
Properties and invests in Mortgage Loans.
As of September 30, 1998, the Company has reduced Operating Expenses
payable to the Advisor by $92,733, the amount which such expenses exceeded the
Expense Cap as described above in Liquidity and Capital Resources.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires the reporting of net earnings and all other changes to equity during
the period, except those resulting from investments by owners and distributions
to owners, in a separate statement that begins with net earnings. Currently, the
Company's only component of comprehensive income is net earnings.
In March 1998, the Emerging Issues Task Force of the Financial
Accounting Standards Board ("FASB") reached a consensus in EITF 97-11, entitled
"Accounting for Internal Costs Relating to Real Estate Property Acquisitions."
EITF 97-11 provides that internal costs of identifying and acquiring operating
Property should be expensed as incurred. Due to the fact that the Company does
not have an internal acquisitions function and instead, contracts these services
from the Advisor, the effectiveness of EITF 97-11 had no material effect on the
Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for the Company as of January 1, 1999. This SOP
requires start-up and organization costs to be expensed as incurred and also
requires previously deferred start-up costs to be recognized as a cumulative
effect adjustment in the statement of income. Management of the Company does not
believe that adoption of this SOP will have a material effect on the Company's
financial position or results of operations.
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In May 1998, the Emerging Issues Task Force of the FASB reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the Interim
Financial Periods." Management of the Company does not expect that the consensus
will have a material effect on the Company's financial position or results of
operations.
The Year 2000 problem is the result of information technology systems
and embedded systems (products which are made with microprocessor (computer)
chips such as HVAC systems, physical security systems and elevators) using a
two-digit format, as opposed to four digits, to indicate the year. Such
information technology and embedded systems may be unable to properly recognize
and process date-sensitive information beginning January 1, 2000.
The Company does not have any information technology systems.
Affiliates of the Advisor provide all services requiring the use of information
technology systems pursuant to a management agreement with the Company. The
maintenance of embedded systems, if any, at the Company's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Company's leases. The Advisor and Affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Company, and the information technology and embedded systems
and the Year 2000 compliance plans of the Company's tenants, significant
suppliers, financial institutions and transfer agent.
The information technology infrastructure of the Affiliates of the
Advisor consists of a network of personal computers and servers that were
obtained from major suppliers. The Affiliates utilize various administrative and
financial software applications on that infrastructure to perform the business
functions of the Company. The inability of the Advisor and Affiliates to
identify and timely correct material Year 2000 deficiencies in the software
and/or infrastructure could result in an interruption in, or failure of, certain
of the Company's business activities or operations. Accordingly, the Advisor and
Affiliates have requested and are evaluating documentation from the suppliers of
the affiliates regarding the Year 2000 compliance of their products that are
used in the business activities or operations of the Company. The costs expected
to be incurred by the Advisor and Affiliates to become Year 2000 compliant will
be incurred by the Advisor and affiliates; therefore, these costs will have no
impact on the Company's financial position or results of operations.
The Company has material third party relationships with its tenants,
financial institutions and transfer agent. The Company depends on its tenants
for rents and cash flows, its financial institutions for availability of cash
and its transfer agent to maintain and track investor information. If any of
these third parties are unable to meet their obligations to the Company because
of the Year 2000 deficiencies, such a failure may have a material impact on the
Company. Accordingly, the Advisor has requested and is evaluating documentation
from the Company's tenants, financial institutions, and transfer agent relating
to their Year 2000 compliance plans. At this time, the Advisor has not yet
received sufficient certifications to be assured that the tenants, financial
institutions, and transfer agent have fully considered and mitigated any
potential material impact of the Year 2000 deficiencies. Therefore, Advisor does
not, at this time, know of the potential costs to the Company of any adverse
impact or effect of any Year 2000 deficiencies by these third parties.
The Advisor currently expects that all year 2000 compliance testing and
any necessary remedial measures on the information technology systems used in
the business activities and operations of the Company will be completed prior to
June 30, 1999. Based on the progress the Advisor and Affiliates have made in
identifying and addressing the Company's Year 2000 issues and the plan and
timeline to complete the compliance program, the Advisor does not foresee
significant risks associated with the Company's Year 2000 compliance at this
time. Because the Advisor and Affiliates are still evaluating the status of the
systems used in business activities and operations of the Company and the
systems of the third parties with which the Company conducts its business, the
Advisor has not yet developed a comprehensive contingency plan and is unable to
identify "the most reasonably likely worst case scenario" at this time. As the
Advisor identifies significant risks related to the Company's Year 2000
compliance or if the Company's Year 2000 compliance program's progress deviates
substantially from the anticipated timeline, the Advisor will develop
appropriate contingency plans.
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MANAGEMENT
GENERAL
The Company will operate under the direction of the Board of Directors,
the members of which are accountable to the Company as fiduciaries. As required
by applicable regulations, a majority of the Independent Directors and a
majority of the Directors have reviewed and ratified the Articles of
Incorporation and have adopted the Bylaws.
The Company currently has five Directors; it may have no fewer than
three Directors and no more than 15. Directors will be elected annually, and
each Director will hold office until the next annual meeting of stockholders or
until his successor has been duly elected and qualified. There is no limit on
the number of times that a Director may be elected to office. Although the
number of Directors may be increased or decreased as discussed above, a decrease
shall not have the effect of shortening the term of any incumbent Director.
Any Director may resign at any time and may be removed with or without
cause by the stockholders upon the affirmative vote of at least a majority of
all the Shares outstanding and entitled to vote at a meeting called for this
purpose. The notice of such meeting shall indicate that the purpose, or one of
the purposes, of such meeting is to determine if a Director shall be removed.
FIDUCIARY RESPONSIBILITY OF THE BOARD OF DIRECTORS
The Board of Directors will be responsible for the management and
control of the affairs of the Company; however, the Board of Directors will
retain the Advisor to manage the Company's day-to-day affairs and the
acquisition and disposition of investments, subject to the supervision of the
Board of Directors.
The Directors are not required to devote all of their time to the
Company and are only required to devote such of their time to the affairs of the
Company as their duties require. The Board of Directors will meet quarterly in
person or by telephone, or more frequently if necessary. It is not expected that
the Directors will be required to devote a substantial portion of their time to
discharge their duties as directors. Consequently, in the exercise of their
fiduciary responsibilities, the Directors will rely heavily on the Advisor. In
this regard, the Advisor, in addition to the Directors, will have a fiduciary
duty to the Company.
The Directors will establish written policies on investments and
borrowings and will monitor the administrative procedures, investment
operations, and performance of the Company and the Advisor to assure that such
policies are in the best interest of the stockholders and are fulfilled. Until
modified by the Directors, the Company will follow the policies on investments
set forth in this Prospectus. See "Investment Objectives and Policies."
The Independent Directors are responsible for reviewing the fees and
expenses of the Company at least annually or with sufficient frequency to
determine that the total fees and expenses of the Company are reasonable in
light of the Company's investment performance, Net Assets, Net Income, and the
fees and expenses of other comparable unaffiliated real estate investment
trusts. This determination shall be reflected in the minutes of the meetings of
the Board of Directors. For purposes of this determination, Net Assets are the
Company's total assets (other than intangibles), calculated at cost before
deducting depreciation or other non-cash reserves, less total liabilities, and
computed at least quarterly on a basis consistently applied. Such determination
will be reflected in the minutes of the meetings of the Board of Directors. In
addition, a majority of the Independent Directors and a majority of Directors
not otherwise interested in the transaction must approve each transaction with
the Advisor or its Affiliates. The Board of Directors also will be responsible
for reviewing and evaluating the performance of the Advisor before entering into
or renewing an advisory agreement. The Independent Directors shall determine
from time to time and at least annually that compensation to be paid to the
Advisor is reasonable in relation to the nature and quality of services to be
performed and shall supervise the performance of the Advisor and the
compensation paid to it by the Company to determine that the provisions of the
Advisory Agreement are being carried out. Specifically, the Independent
Directors will consider factors such as the amount of the fee paid to the
Advisor in relation to the size, composition and performance of the Company's
investments, the success of the Advisor in generating appropriate investment
opportunities, rates charged to other comparable REITs and other investors by
advisors performing similar services, additional revenues realized by the
Advisor and its Affiliates through their relationship with the Company, whether
paid by the Company or by others with whom the Company does business, the
quality and extent of service and advice furnished by the Advisor, the
performance of the investment portfolio of the Company and the quality of the
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portfolio of the Company relative to the investments generated by the Advisor,
if any, for its own account. Such review and evaluation will be reflected in the
minutes of the meetings of the Board of Directors. The Board of Directors shall
determine that any successor Advisor possesses sufficient qualifications to (i)
perform the advisory function for the Company and (ii) justify the compensation
provided for in its contract with the Company.
The liability of the officers and Directors while serving in
such capacity is limited in accordance with the Articles of
Incorporation and applicable law. See "Summary of the Articles of
Incorporation and Bylaws -- Limitation of Director and Officer
Liability."
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are listed below:
Name Age Position with the Company
---- --- -------------------------
James M. Seneff, Jr. 52 Director, Chairman of the
Board, and Chief Executive
Officer
Robert A. Bourne 51 Director and President
G. Richard Hostetter 59 Independent Director
J. Joseph Kruse 65 Independent Director
Richard C. Huseman 59 Independent Director
Charles A. Muller 40 Executive Vice President and
Chief Operating Officer
Jeanne A. Wall 40 Executive Vice President
Lynn E. Rose 49 Secretary and Treasurer
C. Brian Strickland 36 Vice President of Finance and
Administration
James M. Seneff, Jr. Director, Chairman of the Board, and Chief
Executive Officer. Mr. Seneff currently holds the position of Chairman of the
Board, Chief Executive Officer and director of CNL Hospitality Advisors, Inc.,
the Advisor. Mr. Seneff also serves as Chairman of the Board, Chief Executive
Officer and a director of CNL American Properties Fund, Inc. and CNL Fund
Advisors, Inc. Mr. Seneff is a principal stockholder of CNL Group, Inc., a
diversified real estate company, and has served as its Chairman of the Board of
Directors, director, and Chief Executive Officer since its formation in 1980.
CNL Group, Inc. is the parent company of CNL Securities Corp., which is acting
as the Managing Dealer in this offering, CNL Investment Company, CNL Fund
Advisors, Inc. and CNL Hospitality Advisors, Inc. Mr. Seneff has been Chairman
of the Board, Chief Executive Officer and a director of CNL Securities Corp.
since its formation in 1979. Mr. Seneff also has held the position of Chairman
of the Board, Chief Executive Officer, President and a director of CNL
Management Company, a registered investment advisor, since its formation in
1976, has served as Chief Executive Officer, Chairman of the Board and a
director of CNL Investment Company, and Chief Executive Officer and Chairman of
the Board of Commercial Net Lease Realty, Inc. since 1992, served as Chief
Executive Officer and Chairman of the Board of CNL Realty Advisors, Inc. from
its inception in 1991 through 1997 at which time such company merged with
Commercial Net Lease Realty, Inc., and has held the position of Chief Executive
Officer, Chairman of the Board and a director of CNL Institutional Advisors,
Inc., a registered investment advisor, since its inception in 1990. Mr. Seneff
previously served on the Florida State Commission on Ethics and is a former
member and past Chairman of the State of Florida Investment Advisory Council,
which recommends to the Florida Board of Administration investments for various
Florida employee retirement funds. The Florida Board of Administration,
Florida's principal investment advisory and money management agency, oversees
the investment of more than $60 billion of retirement funds. Since 1971, Mr.
Seneff has been active in the acquisition, development, and management of real
estate projects and, directly or through an affiliated entity, has served as a
general partner or joint venturer in over 100 real estate ventures involved in
the financing, acquisition, construction, and rental of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Included in these
real estate ventures are approximately 65 privately offered real estate limited
partnerships with investment objectives similar to one or more of the Company's
investment objectives, in which Mr. Seneff, directly or through an affiliated
entity, serves or has served as a general partner. Mr. Seneff received his
degree in Business Administration from Florida State University in 1968.
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Robert A. Bourne. Director and President. Mr. Bourne currently holds
the position of President and director of CNL Hospitality Advisors, Inc., the
Advisor. Mr. Bourne also serves as President and a director of CNL American
Properties Fund, Inc. Mr. Bourne currently holds the position of Vice Chairman
of the Board of Directors, director and Treasurer of CNL Fund Advisors, Inc. Mr.
Bourne served as President of CNL Fund Advisors, Inc. from the date of its
inception through October 1997. Mr. Bourne is President and Treasurer of CNL
Group, Inc., President, Treasurer, a director, and a registered principal of CNL
Securities Corp. (the Managing Dealer of this offering), President, Treasurer, a
director, and a registered principal of CNL Investment Company, and Chief
Investment Officer, a director and Treasurer of CNL Institutional Advisors,
Inc., a registered investment advisor. Mr. Bourne served as President of CNL
Institutional Advisors, Inc. from the date of its inception through June 30,
1997. Mr. Bourne served as President and a director from July 1992 to February
1996, served as Secretary and Treasurer from February 1996 through December
1997, and has served as Vice Chairman of the Board of Directors since February
1996, of Commercial Net Lease Realty, Inc. In addition, Mr. Bourne served as
President of CNL Realty Advisors, Inc. from 1991 to February 1996, and served as
a director of CNL Realty Advisors, Inc. from 1991 through December 1997, and as
Treasurer and Vice Chairman from February 1996 through December 1997, at which
time such company merged with Commercial Net Lease Realty, Inc. Upon graduation
from Florida State University in 1970, where he received a B.A. in Accounting,
with honors, Mr. Bourne worked as a certified public accountant and, from
September 1971 through December 1978 was employed by Coopers & Lybrand,
Certified Public Accountants, where he held the position of tax manager
beginning in 1975. From January 1979 until June 1982, Mr. Bourne was a partner
in the accounting firm of Cross & Bourne and from July 1982 through January 1987
he was a partner in the accounting firm of Bourne & Rose, P.A., Certified Public
Accountants. Mr. Bourne, who joined CNL Securities Corp. in 1979, has
participated as a general partner or joint venturer in over 100 real estate
ventures involved in the financing, acquisition, construction, and rental of
restaurants, office buildings, apartment complexes, hotels, and other real
estate. Included in these real estate ventures are approximately 64 privately
offered real estate limited partnerships with investment objectives similar to
one or more of the Company's investment objectives, in which Mr. Bourne,
directly or through an affiliated entity, serves or has served as a general
partner.
G. Richard Hostetter, Esq. Independent Director. Mr. Hostetter also
serves as a director of CNL American Properties Fund, Inc. Mr. Hostetter was
associated with the law firm of Miller and Martin from 1966 through 1989, the
last ten years of such association as a senior partner. As a lawyer, he served
for more than 20 years as counsel for various corporate real estate groups,
fast-food companies and public companies, including The Krystal Company,
resulting in his extensive participation in transactions involving the sale,
lease, and sale/leaseback of approximately 250 restaurant units. Mr. Hostetter
graduated from the University of Georgia and received his J.D. from Emory Law
School in 1966. He is licensed to practice law in Tennessee and Georgia. From
1989 to date, Mr. Hostetter has served as President and General Counsel of
Mills, Ragland & Hostetter, Inc., the corporate general partner of MRH, L.P., a
holding company involved in corporate acquisitions, in which he also is a
general and limited partner.
J. Joseph Kruse. Independent Director. Mr. Kruse also serves as a
director of CNL American Properties Fund, Inc. From 1993 to the present, Mr.
Kruse has been President and Chief Executive Officer of Kruse & Co., Inc., a
merchant banking company engaged in real estate. Formerly, Mr. Kruse was a
Senior Vice President with Textron, Inc. for twenty years, and then served as
Senior Vice President at G. William Miller & Co., a firm founded by the former
Chairman of the Federal Reserve Board and the Treasury Secretary. Mr. Kruse was
responsible for evaluations of commercial real estate and retail shopping mall
projects and continues to serve of counsel to the firm. Mr. Kruse received a
Bachelors of Science in Education degree from the University of Florida in 1957
and a Masters of Science in Administration in 1958 from Florida State
University. He also graduated from the Advanced Management Program of the
Harvard Graduate School of Business.
Richard C. Huseman. Independent Director. Mr. Huseman also serves as a
director of CNL American Properties Fund, Inc. Mr. Huseman is presently a
professor in the College of Business Administration, and from 1990 through 1995,
served as the Dean of the College of Business Administration of the University
of Central Florida. He has served as a consultant in the area of managerial
strategies to a number of Fortune 500 corporations, including IBM, AT&T, and 3M,
as well as to several branches of the U.S. government, including the U.S.
Department of Health and Human Services, the U.S. Department of Justice, and the
Internal Revenue Service. Mr. Huseman received a B.A. from Greenville College in
1961 and an M.A. and a Ph.D. from the University of Illinois in 1963 and 1965,
respectively.
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Charles A. Muller. Executive Vice President and Chief
Operating Officer. Mr. Muller joined CNL in October 1996 and is
responsible for the planning and implementation of CNL's interest in
hotel industry investments, including acquisitions, development,
project analysis and due diligence. He currently serves as the Chief
Operating Officer of both CNL Hospitality Advisors, Inc., the
Advisor, and of CNL Hotel Development Company. Mr. Muller joined CNL
following more than 15 years of broadbased hotel industry experience
with firms such as Tishman Hotel Corporation, Wyndham Hotels & Resorts,
Pannell Kerr Forster, and AIRCOA Hospitality Services. Mr. Muller's
background includes responsibility for market review and valuation
efforts, property acquisitions and development, capital improvement
planning, hotel operations and project management for renovations and
new construction. Mr. Muller served on the former Market, Finance and
Investment Analysis Committee of the American Hotel & Motel Association
and is a founding member of the Lodging Industry Investment Council. He
holds a bachelor's degree in Hotel Administration from Cornell
University.
Jeanne A. Wall. Executive Vice President. Ms. Wall serves as Executive Vice
President of CNL Hospitality Advisors, Inc., the Advisor. Ms. Wall is also
Executive Vice President of CNL American Properties Fund, Inc. and CNL Fund
Advisors, Inc. Ms. Wall has served as Chief Operating Officer of CNL Investment
Company and of CNL Securities Corp. since November 1994 and has served as
Executive Vice President of CNL Investment Company since January 1991. In 1984,
Ms. Wall joined CNL Securities Corp. In 1985, Ms. Wall became Vice President of
CNL Securities Corp. in 1987, she became a Senior Vice President and in July
1997, she became Executive Vice President of CNL Securities Corp. In this
capacity, Ms. Wall serves as national marketing and sales director and oversees
the national marketing plan for the CNL investment programs. In addition, Ms.
Wall oversees product development, partnership administration and investor
services for programs offered through participating brokers and corporate
communications for CNL Group, Inc. and Affiliates. Ms. Wall also has served as
Senior Vice President of CNL Institutional Advisors, Inc., a registered
investment advisor, from 1990 to 1993, as Vice President of CNL Realty Advisors,
Inc. since its inception in 1991 through 1997, and as Vice President of
Commercial Net Lease Realty, Inc. since 1992 through 1997. Ms. Wall holds a B.A.
in Business Administration from Linfield College and is a registered principal
of CNL Securities Corp. Ms. Wall currently serves as a trustee on the Board of
the Investment Program Association and on the Direct Participation Program
committee for the National Association of Securities Dealers.
Lynn E. Rose. Secretary and Treasurer. Ms. Rose serves as Secretary,
Treasurer and a director of CNL Hospitality Advisors, Inc., the Advisor. Ms.
Rose is also Secretary and Treasurer of CNL American Properties Fund, Inc. and
Secretary and a director of CNL Fund Advisors, Inc. Ms. Rose, a certified public
accountant, has served as Secretary of CNL Group, Inc. since 1987, as Chief
Financial Officer of CNL Group, Inc., since December 1993, and served as
Controller of CNL Group, Inc. from 1987 until December 1993. In addition, Ms.
Rose has served as Chief Financial Officer and Secretary of CNL Securities Corp.
since July 1994. She has served as Chief Operating Officer, Vice President and
Secretary of CNL Corporate Services, Inc. since November 1994. Ms. Rose also has
served as Chief Financial Officer and Secretary of CNL Institutional Advisors,
Inc. since its inception in 1990 as Secretary and a director of CNL Realty
Advisors, Inc. from its inception in 1991 through 1997, and as Treasurer of CNL
Realty Advisors, Inc. from 1991 to February 1996. In addition, Ms. Rose served
as Secretary and Treasurer of Commercial Net Lease Realty, Inc. from 1992 to
February 1996. Ms. Rose also currently serves as Secretary for approximately 50
additional corporations. Ms. Rose oversees the management information services,
administration, legal compliance, accounting, tenant compliance, and reporting
for over 250 corporations, partnerships and joint ventures. Prior to joining
CNL, Ms. Rose was a partner with Robert A. Bourne in the accounting firm of
Bourne & Rose, P.A., Certified Public Accountants. Ms. Rose holds a B.A. in
Sociology from the University of Central Florida. She was licensed as a
certified public accountant in 1979.
C. Brian Strickland. Vice President of Finance and Administration. Mr.
Strickland currently serves as Vice President of Finance and Administration of
CNL Hospitality Advisors, Inc., the Advisor, and Vice President of Finance and
Administration of CNL Hotel Development Company. Mr. Strickland supervises the
companies' financial reporting, financial control and accounting functions as
well as forecasting, budgeting and cash management activities. He is also
responsible for SEC compliance, equity and debt financing activities and
insurance for the companies. Mr. Strickland joined CNL Hospitality Advisors,
Inc. in April 1998 with an extensive accounting background. Prior to joining
CNL, he served as vice president of taxation with Patriot American Hospitality,
Inc., where he was responsible for implementation of tax planning strategies on
corporate mergers and acquisitions and where he performed or assisted in
strategic processes in the REIT industry. From 1989 to 1997, Mr. Strickland
served as director of tax and asset management for Wyndham Hotels & Resorts
where he was integrally involved in structuring acquisitive transactions,
including the roll-up and initial public offering of Wyndham Hotel Corporation
and its subsequent merger with Patriot American Hospitality, Inc. In his
capacity of director of asset management, he was instrumental in the development
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and opening of a hotel and casino in San Juan, Puerto Rico. Prior to 1989, Mr.
Strickland was senior tax accountant for Trammell Crow Company where he provided
tax consulting services to Regional Development Offices. From 1986 to 1988, Mr.
Strickland was tax accountant for Ernst & Whinney where he was a member of the
real estate practice group. Mr. Strickland is a certified public accountant and
holds a bachelor's degree in accounting.
INDEPENDENT DIRECTORS
Under the Articles of Incorporation, a majority of the Board of
Directors must consist of Independent Directors, except for a period of 90 days
after the death, removal or resignation of an Independent Director. The
Independent Directors shall nominate replacements for vacancies in the
Independent Director positions. An Independent Director may not, directly or
indirectly (including through a member of his immediate family), own any
interest in, be employed by, have any present business or professional
relationship with, serve as an officer or director of the Advisor or its
Affiliates, or serve as a director of more than three REITs organized by the
Advisor or its Affiliates. Except to carry out the responsibilities of a
Director, an Independent Director may not perform material services for the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has a standing Audit Committee, the members of which are
selected by the full Board of Directors each year. The Audit Committee makes
recommendations to the Board of Directors in accordance with those of the
independent accountants of the Company. The Board of Directors shall review with
such accounting firm the scope of the audit and the results of the audit upon
its completion.
In addition, the Company has formed a Compensation Committee, the
members of which are selected by the full Board of Directors each year.
At least a majority of the members of each committee of the Company's
Board of Directors must be Independent Directors.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Each Director is entitled to receive $6,000 annually for serving on the
Board of Directors, as well as fees of $750 per meeting attended ($375 for each
telephonic meeting in which the Director participates), including committee
meetings. No executive officer or Director of the Company has received a bonus
from the Company. The Company will not pay any compensation to the officers and
Directors of the Company who also serve as officers and directors of the
Advisor.
MANAGEMENT COMPENSATION
For a description of the types, recipients, methods of computation, and
estimated amounts of all compensation, fees, and distributions to be paid
directly or indirectly by the Company to the Advisor, Managing Dealer, and their
Affiliates, see "Management Compensation."
THE ADVISOR AND THE ADVISORY AGREEMENT
THE ADVISOR
CNL Hospitality Advisors, Inc. (formerly CNL Real Estate Advisors, Inc.) is
a Florida corporation organized in January 1997 to provide management, advisory
and administrative services. The Company entered into the Advisory Agreement
with the Advisor effective July 9, 1997. CNL Hospitality Advisors, Inc., as
Advisor, has a fiduciary responsibility to the Company and the stockholders.
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The directors and officers of the Advisor are as follows:
James M. Seneff, Jr....................Chairman of the Board,
Chief Executive Officer,
and Director
Robert A. Bourne.......................President and Director
Charles A. Muller......................Executive Vice President and
Chief Operating Officer
Jeanne A. Wall.........................Executive Vice President
Lynn E. Rose...........................Secretary, Treasurer and
Director
C. Brian Strickland....................Vice President of Finance and
Administration
The backgrounds of these individuals are described above under
"Management -- Directors and Executive Officers."
The Advisor currently owns 20,000 shares of Common Stock. The Advisor
may not sell these shares while the Advisory Agreement is in effect, although
the Advisor may transfer such shares to Affiliates. Neither the Advisor, a
Director, or any Affiliate may vote or consent on matters submitted to the
stockholders regarding removal of, or any transaction between, the Company and
the Advisor, Directors, or an Affiliate. In determining the requisite percentage
in interest of shares of Common Stock necessary to approve a matter on which the
Advisor, Directors, and any Affiliate may not vote or consent, any shares owned
by any of them will not be included.
THE ADVISORY AGREEMENT
Under the terms of the Advisory Agreement, the Advisor has
responsibility for the day-to-day operations of the Company, administers the
Company's bookkeeping and accounting functions, serves as the Company's
consultant in connection with policy decisions to be made by the Board of
Directors, manages the Company's Properties and Mortgage Loans, administers the
Company's Secured Equipment Lease program and renders other services as the
Board of Directors deems appropriate. The Advisor is subject to the supervision
of the Company's Board of Directors and has only such functions as are delegated
to it.
The Company will reimburse the Advisor for all of the costs it incurs
in connection with the services it provides to the Company, including, but not
limited to: (i) Offering Expenses, which are defined to include expenses
attributable to preparing the documents relating to this offering, the formation
and organization of the Company, qualification of the Shares for sale in the
states, escrow arrangements, filing fees and expenses attributable to selling
the Shares; (ii) Selling Commissions, advertising expenses, expense
reimbursements, and legal and accounting fees; (iii) the actual cost of goods
and materials used by the Company and obtained from entities not affiliated with
the Advisor, including brokerage fees paid in connection with the purchase and
sale of securities; (iv) administrative services (including personnel costs;
provided, however that no reimbursement shall be made for costs of personnel to
the extent that such personnel perform services in transactions for which the
Advisor receives a separate fee, at the lesser of actual cost or 90% of the
competitive rate charged by unaffiliated persons providing similar goods and
services in the same geographic location); (v) Acquisition Expenses, which are
defined to include expenses related to the selection and acquisition of
Properties, for goods and services provided by the Advisor at the lesser of
actual cost or 90% of the competitive rate charged by unaffiliated persons
providing similar goods and services in the same geographic location); and (vi)
expenses related to negotiating and servicing the Mortgage Loans and Secured
Equipment Leases.
The Company shall not reimburse the Advisor at the end of any fiscal
quarter for Operating Expenses that, in the four consecutive fiscal quarters
then ended (the "Expense Year") exceed the greater of 2% of Average Invested
Assets or 25% of Net Income (the "2%/25% Guidelines") for such year. Within 60
days after the end of any fiscal quarter of the Company for which total
Operating Expenses for the Expense Year exceed the 2%/25% Guidelines, the
Advisor shall reimburse the Company the amount by which the total Operating
Expenses paid or incurred by the Company exceed the 2%/25% Guidelines.
The Company will not reimburse the Advisor or its Affiliates for
services for which the Advisor or its Affiliates are entitled to compensation in
the form of a separate fee.
Pursuant to the Advisory Agreement, the Advisor is entitled to receive
certain fees and reimbursements, as listed in "Management Compensation." The
Subordinated Incentive Fee payable to the Advisor under certain circumstances if
Listing occurs may be paid, at the option of the Company, in cash, in Shares, by
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<PAGE>
delivery of a promissory note payable to the Advisor, or by any combination
thereof. In the event the Subordinated Incentive Fee is paid to the Advisor
following Listing, no Performance Fee, as described below, will be paid to the
Advisor under the Advisory Agreement nor will any additional share of Net Sales
Proceeds be paid to the Advisor. The total of all Acquisition Fees and any
Acquisition Expenses payable to the Advisor and its Affiliates shall be
reasonable and shall not exceed an amount equal to 6% of the Real Estate Asset
Value of a Property, or in the case of a Mortgage Loan, 6% of the funds
advanced, unless a majority of the Board of Directors, including a majority of
the Independent Directors not otherwise interested in the transaction, approves
fees in excess of this limit subject to a determination that the transaction is
commercially competitive, fair and reasonable to the Company. The Acquisition
Fees payable in connection with the selection or acquisition of any Property
shall be reduced to the extent that, and if necessary to limit, the total
compensation paid to all persons involved in the acquisition of such Property to
the amount customarily charged in arm's-length transactions by other persons or
entities rendering similar services as an ongoing public activity in the same
geographical location and for comparable types of Properties, and to the extent
that other acquisition fees, finder's fees, real estate commissions, or other
similar fees or commissions are paid by any person in connection with the
transaction.
If the Advisor or a CNL Affiliate performs services that are outside of
the scope of the Advisory Agreement, compensation is at such rates and in such
amounts as are agreed to by the Advisor and the Independent Directors of the
Company.
Further, if Listing occurs, the Company automatically will become a
perpetual life entity. At such time, the Company and the Advisor will negotiate
in good faith a fee structure appropriate for an entity with a perpetual life,
subject to approval by a majority of the Independent Directors. In negotiating a
new fee structure, the Independent Directors shall consider all of the factors
they deem relevant. These are expected to include, but will not necessarily be
limited to: (i) the amount of the advisory fee in relation to the asset value,
composition, and profitability of the Company's portfolio; (ii) the success of
the Advisor in generating opportunities that meet the investment objectives of
the Company; (iii) the rates charged to other REITs and to investors other than
REITs by advisors that perform the same or similar services; (iv) additional
revenues realized by the Advisor and its Affiliates through their relationship
with the Company, including loan administration, underwriting or broker
commissions, servicing, engineering, inspection and other fees, whether paid by
the Company or by others with whom the Company does business; (v) the quality
and extent of service and advice furnished by the Advisor; (vi) the performance
of the investment portfolio of the Company, including income, conservation or
appreciation of capital, and number and frequency of problem investments; and
(vii) the quality of the Property, Mortgage Loan and Secured Equipment Lease
portfolio of the Company in relationship to the investments generated by the
Advisor for its own account. The Board of Directors, including a majority of the
Independent Directors, may not approve a new fee structure that, in its
judgment, is more favorable to the Advisor than the current fee structure.
The Advisory Agreement, which was entered into by the Company with the
unanimous approval of the Board of Directors, including the Independent
Directors, expires one year after the date of execution, on July 10, 1999,
subject to successive one-year renewals upon mutual consent of the parties. In
the event that a new Advisor is retained, the previous Advisor will cooperate
with the Company and the Directors in effecting an orderly transition of the
advisory functions. The Board of Directors (including a majority of the
Independent Directors) shall approve a successor Advisor only upon a
determination that the Advisor possesses sufficient qualifications to perform
the advisory functions for the Company and that the compensation to be received
by the new Advisor pursuant to the new Advisory Agreement is justified.
The Advisory Agreement may be terminated without cause or penalty by
either party, or by the mutual consent of the parties (by a majority of the
Independent Directors of the Company or a majority of the directors of the
Advisor, as the case may be), upon 60 days' prior written notice. At that time,
the Advisor shall be entitled to receive the Performance Fee if performance
standards satisfactory to a majority of the Board of Directors, including a
majority of the Independent Directors, when compared to (a) the performance of
the Advisor in comparison with its performance for other entities, and (b) the
performance of other advisors for similar entities, have been met. If Listing
has not occurred, the Performance Fee, if any, shall equal 10% of the amount, if
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any, by which (i) the appraised value of the assets of the Company on the date
of termination of the Advisory Agreement (the "Termination Date"), less the
amount of all indebtedness secured by the assets of the Company, plus the total
Distributions made to stockholders from the Company's inception through the
Termination Date, exceeds (ii) Invested Capital plus an amount equal to the
Stockholders' 8% Return from inception through the Termination Date. The Advisor
shall be entitled to receive all accrued but unpaid compensation and expense
reimbursements in cash within 30 days of the Termination Date. All other amounts
payable to the Advisor in the event of a termination shall be evidenced by a
promissory note and shall be payable from time to time. The Performance Fee
shall be paid in 12 equal quarterly installments without interest on the unpaid
balance, provided that no payment will be made in any quarter in which such
payment would jeopardize the Company's REIT status, in which case any such
payment or payments will be delayed until the next quarter in which payment
would not jeopardize REIT status. Notwithstanding the preceding sentence, any
amounts which may be deemed payable at the date the obligation to pay the
Performance Fee is incurred which relate to the appreciation of the Company's
Assets shall be an amount which provides compensation to the terminated Advisor
only for that portion of the holding period for the respective Assets during
which such terminated Advisor provided services to the Company. If Listing
occurs, the Performance Fee, if any, payable thereafter will be as negotiated
between the Company and the Advisor. The Advisor shall not be entitled to
payment of the Performance Fee in the event the Advisory Agreement is terminated
because of failure of the Company and the Advisor to establish a fee structure
appropriate for a perpetual-life entity at such time, if any, as the Shares
become listed on a national securities exchange or over-the-counter market. The
Performance Fee, to the extent payable at the time of Listing, will not be paid
in the event that the Subordinated Incentive Fee is paid.
The Advisor has the right to assign the Advisory Agreement to an
Affiliate subject to approval by the Independent Directors of the Company. The
Company has the right to assign the Advisory Agreement to any successor to all
of its assets, rights, and obligations.
The Advisor will not be liable to the Company or its stockholders or
others, except by reason of acts constituting bad faith, fraud, misconduct, or
negligence, and will not be responsible for any action of the Board of Directors
in following or declining to follow any advice or recommendation given by it.
The Company has agreed to indemnify the Advisor with respect to acts or
omissions of the Advisor undertaken in good faith, in accordance with the
foregoing standards and pursuant to the authority set forth in the Advisory
Agreement. Any indemnification made to the Advisor may be made only out of the
net assets of the Company and not from stockholders.
CERTAIN TRANSACTIONS
The Managing Dealer is entitled to receive Selling Commissions
amounting to 7.5% of the total amount raised from the sale of Shares of common
stock for services in connection with the offering of Shares, a substantial
portion of which has been or will be paid as commissions to other
broker-dealers. For the period January 1, 1998 through September 30, 1998, and
the year ended December 31, 1997, the Company incurred $1,284,999 and $849,405,
respectively, of such fees through the Initial Offering, a substantial portion
of which was paid by the Managing Dealer as commissions to other broker-dealers.
In addition, the Managing Dealer is entitled to receive a Marketing
Support and Due Diligence Expense Reimbursement Fee equal to 0.5% of the total
amount raised from the sale of Shares, a portion of which may be reallowed to
other broker-dealers. For the period January 1, 1998 through September 30, 1998,
and the year ended December 31, 1997, the Company incurred $85,667 and $56,627,
respectively, of such fees through the Initial Offering, substantially all of
which were reallowed to other broker-dealers and from which all bona fide due
diligence expenses were paid.
The Advisor is entitled to receive Acquisition Fees for services in
identifying the Properties and structuring the terms of the acquisition and
leases of the Properties and structuring the terms of the Mortgage Loans equal
to 4.5% of the total amount raised from the sale of Shares, loan proceeds from
Permanent Financing and amounts outstanding on the Line of Credit, if any, at
the time of Listing, but excluding that portion of the Permanent Financing used
to finance Secured Equipment Leases. For the period January 1, 1998 through
September 30, 1998, and the year ended December 31, 1997, the Company incurred
$770,999 and $509,643, respectively, of such fees through the Initial Offering.
The Company and the Advisor have entered into an Advisory Agreement
pursuant to which the Advisor will receive a monthly Asset Management Fee of
one-twelfth of 0.60% of the Company's Real Estate Asset Value and the
outstanding principal balance of any Mortgage Loans as of the end of the
preceding month. The Asset Management Fee, which will not exceed fees which are
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competitive for similar services in the same geographic area, may or may not be
taken, in whole or in part as to any year, in the sole discretion of the
Advisor. All or any portion of the Asset Management Fee not taken as to any
fiscal year shall be deferred without interest and may be taken in such other
fiscal year as the Advisor shall determine. During the nine months ended
September 30, 1998, the Company incurred $27,246 of such fees.
The Company has incurred Operating Expenses which, in general, are
those expenses relating to administration of the Company on an ongoing basis.
Pursuant to the Advisory Agreement, the Advisor is required to reimburse the
Company the amount by which the total Operating Expenses paid or incurred by the
Company exceed in any four consecutive fiscal quarters (the "Expense Year"), the
greater of two percent of Average Invested Assets or 25 percent of Net Income
(the "Expense Cap"). During the four quarters ended September 30, 1998, the
Company's Operating Expenses exceeded the Expense Cap by $92,733; therefore the
Advisor reimbursed the Company such amount in accordance with the Advisory
Agreement.
The Advisor and its Affiliates provide administrative services to the
Company (including administrative services in connection with the offering of
Shares) on a day-to-day basis. In connection with the Initial Offering, for the
nine months ended September 30, 1998, the year ended December 31, 1997 and the
period June 12, 1996 (date of inception) through December 31, 1996, the Company
incurred a total of $332,383, $192,224 and $28,665, respectively, for these
services, $236,942, $185,335 and $28,665, respectively, of such costs
representing stock issuance costs and $95,441, $6,889 and $0, respectively,
representing general operating and administrative expenses, including costs
related to preparing and distributing reports required by the Securities and
Exchange Commission.
PRIOR PERFORMANCE INFORMATION
The information presented in this section represents the historical
experience of certain real estate programs organized by certain officers and
directors of the Advisor. Prior public programs have invested only in restaurant
properties and have not invested in hotel properties. Investors in the Company
should not assume that they will experience returns, if any, comparable to those
experienced by investors in such prior public real estate programs. Investors
who purchase Shares in the Company will not thereby acquire any ownership
interest in any partnerships or corporations to which the following information
relates.
Two Directors of the Company, Robert A. Bourne and James M. Seneff,
Jr., individually or with others have served as general partners of 88 and 89
real estate limited partnerships, respectively, including 18 publicly offered
CNL Income Fund partnerships, and as directors and officers of two unlisted
public REITs. None of these limited partnerships or the unlisted REITs have been
audited by the IRS. Of course, there is no guarantee that the Company will not
be audited. Based on an analysis of the operating results of the prior programs,
Messrs. Bourne and Seneff believe that each of such programs has met or is
meeting its principal investment objectives in a timely manner.
CNL Realty Corporation, which was organized as a Florida corporation in
November 1985 and whose sole stockholders are Messrs. Bourne and Seneff,
currently serves as the corporate general partner with Messrs. Bourne and Seneff
as individual general partners of 18 CNL Income Fund limited partnerships, all
of which were organized to invest in fast-food, family-style and in the case of
two of the partnerships, casual-dining restaurant properties. In addition,
Messrs. Bourne and Seneff currently serve as directors and officers of CNL
American Properties Fund, Inc., an unlisted public REIT organized to invest in
fast-food, family-style and casual-dining restaurant properties, mortgage loans
and secured equipment leases; and CNL Health Care Properties, Inc., an unlisted
public REIT organized to invest in health care and seniors' housing facilities.
Both of the unlisted public REITs have investment objectives similar to those of
the Company. As of June 30, 1998, the 18 partnerships and the unlisted REITs had
raised a total of $1,129,500,099 from a total of 72,558 investors, and had
invested in 1,033 fast-food, family-style and casual-dining restaurant
properties. Certain additional information relating to the offerings and
investment history of the 18 public partnerships and the unlisted public REITs
is set forth below.
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<PAGE>
<TABLE>
<CAPTION>
Number of Date 90% of Net
Limited Proceeds Fully
Maximum Partnership Invested or
Name of Offering Units or Shares Committed to
Entity Amount (1) Date Closed Sold Investment (2)
- ------ ---------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
CNL Income $15,000,000 December 31, 1986 30,000 December 1986
Fund, Ltd. (30,000 units)
CNL Income $25,000,000 August 21, 1987 50,000 November 1987
Fund II, Ltd. (50,000 units)
CNL Income $25,000,000 April 29, 1988 50,000 June 1988
Fund III, Ltd. (50,000 units)
CNL Income $30,000,000 December 6, 1988 60,000 February 1989
Fund IV, Ltd. (60,000 units)
CNL Income $25,000,000 June 7, 1989 50,000 December 1989
Fund V, Ltd. (50,000 units)
CNL Income $35,000,000 January 19, 1990 70,000 May 1990
Fund VI, Ltd. (70,000 units)
CNL Income $30,000,000 August 1, 1990 30,000,000 January 1991
Fund VII, Ltd. (30,000,000 units)
CNL Income $35,000,000 March 7, 1991 35,000,000 September 1991
Fund VIII, Ltd. (35,000,000 units)
CNL Income $35,000,000 September 6, 1991 3,500,000 November 1991
Fund IX, Ltd. (3,500,000 units)
CNL Income $40,000,000 April 22, 1992 4,000,000 June 1992
Fund X, Ltd. (4,000,000 units)
CNL Income $40,000,000 October 8, 1992 4,000,000 September 1992
Fund XI, Ltd. (4,000,000 units)
CNL Income $45,000,000 April 15, 1993 4,500,000 July 1993
Fund XII, Ltd. (4,500,000 units)
CNL Income $40,000,000 September 13, 1993 4,000,000 August 1993
Fund XIII, Ltd. (4,000,000 units)
CNL Income $45,000,000 March 23, 1994 4,500,000 May 1994
Fund XIV, Ltd. (4,500,000 units)
CNL Income $40,000,000 September 22, 1994 4,000,000 December 1994
Fund XV, Ltd. (4,000,000 units)
CNL Income $45,000,000 July 18, 1995 4,500,000 August 1995
Fund XVI, Ltd. (4,500,000 units)
CNL Income $30,000,000 October 10, 3,000,000 December 1996
Fund XVII, Ltd. (3,000,000 units) 1996
</TABLE>
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<TABLE>
<CAPTION>
Number of Date 90% of Net
Limited Proceeds Fully
Maximum Partnership Invested or
Name of Offering Units or Shares Committed to
Entity Amount (1) Date Closed Sold Investment (2)
------ ---------- ----------- --------------- --------------
<S> <C> <C> <C>
CNL Income Fund $35,000,000 February 6, 1998 3,500,000 December 1997
XVIII, Ltd. (3,500,000 units)
CNL American $745,000,000 (3) (3) (3)
Properties Fund, Inc. (74,500,000 shares)
CNL Health Care $155,000,000 (4) (4) (4)
Properties, Inc. (15,500,000 shares)
</TABLE>
(1) The amount stated includes the exercise by the general partners of each
partnership of their option to increase by $5,000,000 the maximum size of
the offering of CNL Income Fund, Ltd., CNL Income Fund II, Ltd., CNL
Income Fund III, Ltd., CNL Income Fund IV, Ltd., CNL Income Fund VI, Ltd.,
CNL Income Fund VIII, Ltd., CNL Income Fund X, Ltd., CNL Income Fund XII,
Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XVI, Ltd. and CNL Income
Fund XVIII, Ltd.
(2) For a description of the property acquisitions by these programs, see the
table set forth on the following page.
(3) In April 1995, CNL American Properties Fund, Inc. commenced an offering of
a maximum of 15,000,000 shares of common stock ($150,000,000), excluding
1,500,000 shares ($15,000,000), available to investors participating in
the distribution reinvestment plan. On February 6, 1997, the initial
offering closed upon receipt of subscriptions totalling $150,591,765
(15,059,177 shares), including $591,765 (59,177 shares) through the
reinvestment plan. Following completion of the initial offering on
February 6, 1997, CNL American Properties Fund, Inc. commenced a
subsequent offering (the "1997 Offering") of up to 27,500,000 shares
($275,000,000) of common stock. On March 2, 1998, the 1997 Offering closed
upon receipt of subscriptions totalling $251,872,648 (25,187,265 shares),
including $1,872,648 (187,265 shares) through the reinvestment plan.
Following completion of the 1997 Offering on March 2, 1998, CNL American
Properties Fund, Inc. commenced a subsequent offering (the "1998
Offering") of up to 34,500,000 shares ($345,000,000) of common stock. As
of June 30, 1998, CNL American Properties Fund, Inc. had received
subscriptions totalling $111,880,663 (11,188,006 shares), including
$1,828,291 (182,829 shares) through the reinvestment plan, from the 1998
Offering. As of such date, CNL American Properties Fund, Inc. had
purchased 320 properties.
(4) Effective September 18, 1998, CNL Health Care Properties, Inc.
commenced an offering of up to 15,500,000 shares ($155,000,000) of
common stock. CNL Health Care Properties, Inc. has not yet
acquired any properties.
As of June 30, 1998, Mr. Seneff and Mr. Bourne, directly or through
affiliated entities, also had served as joint general partners of 69 nonpublic
real estate limited partnerships. The offerings of 68 of these 69 nonpublic
limited partnerships had terminated as of June 30, 1998. These 68 partnerships
raised a total of $170,327,353 from approximately 4,241 investors, and
purchased, directly or through participation in a joint venture or limited
partnership, interests in a total of 206 projects as of June 30, 1998. These 206
projects consist of 19 apartment projects (comprising 11% of the total amount
raised by all 68 partnerships), 13 office buildings (comprising 5% of the total
amount raised by all 68 partnerships), 159 fast-food, family-style, or casual
dining restaurant property and business investments (comprising 68% of the total
amount raised by all 68 partnerships), one condominium development (comprising
0.5% of the total amount raised by all 68 partnerships), four hotels/motels
(comprising 5% of the total amount raised by all 68 partnerships), eight
commercial/retail properties (comprising 10% of the total amount raised by all
68 partnerships), and two tracts of undeveloped land (comprising 0.5% of the
total amount raised by all 68 partnerships). The offering of the one remaining
nonpublic limited partnership (offering totalling $15,000,000) had raised
$13,637,500 from 263 investors (approximately 90.91% of the total offering
amount) as of June 30, 1998.
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<PAGE>
Mr. Bourne also has served, without Mr. Seneff, as a general partner of
one additional nonpublic real estate limited partnership program which raised a
total of $600,000 from 13 investors and purchased, through participation in a
limited partnership, one apartment building located in Georgia with a purchase
price of $1,712,000.
Mr. Seneff also has served, without Mr. Bourne, as a general partner of
two additional nonpublic real estate limited partnerships which raised a total
of $240,000 from 12 investors and purchased two office buildings with an
aggregate purchase price of $928,390. Both of the office buildings are located
in Florida.
Of the 89 real estate limited partnerships whose offerings had closed
as of June 30, 1998 (including 18 CNL Income Fund limited partnerships) in which
Mr. Seneff and/or Mr. Bourne serve or have served as general partners in the
past, 38 invested in restaurant properties leased on a "triple-net" basis,
including seven which also invested in franchised restaurant businesses
(accounting for approximately 93% of the total amount raised by all 89 real
estate limited partnerships).
The following table sets forth summary information, as of June 30,
1998, regarding property acquisitions by the 18 limited partnerships and the two
unlisted REITs that have investment objectives similar to those of the Company.
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------- -------- -------- --------- -------
<S> <C> <C> <C>
CNL Income 22 fast-food or AL, AZ, CA, FL, GA, All cash Public
Fund, Ltd. family-style LA, MD, OK, PA, TX,
restaurants VA, WA
CNL Income 49 fast-food or AL, AZ, CO, FL, GA, All cash Public
Fund II, Ltd. family-style IL, IN, KS, LA, MI,
restaurants MN, MO, NC, NM, OH,
TN, TX, WA, WY
CNL Income 37 fast-food or AZ, CA, CO, FL, GA, All cash Public
Fund III, Ltd. family-style IA, IL, IN, KS, KY,
restaurants MD, MI, MN, MO, NC,
NE, OK, TX
CNL Income 45 fast-food or AL, DC, FL, GA, IL, All cash Public
Fund IV, Ltd. family-style IN, KS, MA, MD, MI,
restaurants MS, NC, OH, PA, TN,
TX, VA
CNL Income 35 fast-food or AZ, FL, GA, IL, IN, All cash Public
Fund V, Ltd. family-style MI, NH, NY, OH, SC,
restaurants TN, TX, UT, WA
CNL Income 55 fast-food or AR, AZ, FL, GA, IL, All cash Public
Fund VI, Ltd. family-style IN, KS, MA, MI, MN,
restaurants NC, NE, NM, NY, OH,
OK, PA, TN, TX, VA,
WA, WY
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------- -------- -------- --------- -------
<S> <C> <C> <C> <C>
CNL Income 49 fast-food or AZ, CO, FL, GA, IN, All cash Public
Fund VII, Ltd. family-style LA, MI, MN, NC, OH,
restaurants SC, TN, TX, UT, WA
CNL Income 42 fast-food or AZ, FL, IN, LA, MI, All cash Public
Fund VIII, Ltd. family-style MN, NC, NY, OH, TN,
restaurants TX, VA
CNL Income 43 fast-food or AL, CO, FL, GA, IL, All cash Public
Fund IX, Ltd. family-style IN, LA, MI, MN, MS,
restaurants NC, NH, NY, OH, SC,
TN, TX
CNL Income 51 fast-food or AL, CA, CO, FL, ID, All cash Public
Fund X, Ltd. family-style IL, LA, MI, MO, MT,
restaurants NC, NH, NM, NY, OH,
PA, SC, TN, TX
CNL Income 40 fast-food or AL, AZ, CA, CO, CT, All cash Public
Fund XI, Ltd. family-style FL, KS, LA, MA, MI,
restaurants MS, NC, NH, NM, OH,
OK, PA, SC, TX, VA,
WA
CNL Income 49 fast-food or AL, AZ, CA, FL, GA, All cash Public
Fund XII, Ltd. family-style LA, MO, MS, NC, NM,
restaurants OH, SC, TN, TX, WA
CNL Income 50 fast-food or AL, AR, AZ, CA, CO, All cash Public
Fund XIII, Ltd. family-style FL, GA, IN, KS, LA,
restaurants MD, NC, OH, PA, SC,
TN, TX, VA
CNL Income 64 fast-food or AL, AZ, CO, FL, GA, All cash Public
Fund XIV, Ltd. family-style KS, LA, MN, MO, MS,
restaurants NC, NJ, NV, OH, SC,
TN, TX, VA
CNL Income 55 fast-food or AL, CA, FL, GA, KS, All cash Public
Fund XV, Ltd. family-style KY, MN, MO, MS, NC,
restaurants NJ, NM, OH, OK, PA,
SC, TN, TX, VA
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------- -------- -------- --------- -------
<S> <C> <C> <C> <C>
CNL Income 47 fast-food or AZ, CA, CO, DC, FL, All cash Public
Fund XVI, Ltd. family-style GA, ID, IN, KS, MN,
restaurants MO, NC, NM, NV, OH,
TN, TX, UT, WI
CNL Income 29 fast-food, CA, FL, GA, IL, IN, All cash Public
Fund XVII, Ltd. family-style or MI, NC, NV, OH, SC,
casual-dining TN, TX
restaurant properties
CNL Income 23 fast-food, AZ, CA, FL, GA, IL, All cash Public
Fund XVIII, Ltd. family-style or KY, MD, MN, NC, NV,
casual-dining NY, OH, TN, TX
restaurant properties
CNL American 320 fast-food, AL, AZ, CA, CO, CT, All cash Public REIT
Properties Fund, Inc. family-style or DE, FL, GA, IA, ID,
casual-dining IL, IN, KS, KY, MD,
restaurant properties MI, MN, MO, NC, NE,
NJ, NM, NV, NY, OH,
OK, OR, PA, RI, SC,
TN, TX, UT, VA, WA,
WI, WV
CNL Health Care (1) (1) (1) Public REIT
Properties, Inc.
</TABLE>
- -----------------------
(1) As of June 30, 1998, CNL Health Care Properties, Inc. had not
acquired any properties.
A more detailed description of the acquisitions by real estate limited
partnerships and the two unlisted REITs sponsored by Messrs. Bourne and Seneff
is set forth in prior performance Table VI, included in Part II of the
registration statement filed with the Securities and Exchange Commission for
this offering. A copy of Table VI is available to stockholders from the Company
upon request, free of charge. In addition, upon request to the Company, the
Company will provide, without charge, a copy of the most recent Annual Report on
Form 10-K filed with the Securities and Exchange Commission for CNL Income Fund,
Ltd., CNL Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV,
Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL Income Fund VII,
Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL Income Fund X,
Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL Income Fund XIII,
Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL Income Fund XVI,
Ltd., CNL Income Fund XVII, Ltd., CNL Income Fund XVIII, Ltd. and CNL American
Properties Fund, Inc. as well as a copy, for a reasonable fee, of the exhibits
filed with such reports.
In order to provide potential purchasers of Shares in the Company with
information to enable them to evaluate the prior experience of the Messrs.
Seneff and Bourne as general partners of real estate programs and as directors
and officers of the two unlisted REITs, including those set forth in the
foregoing table, certain financial and other information concerning those
programs and the two unlisted REITs, with investment objectives similar to one
or more of the Company's investment objectives, is provided in the Prior
Performance Tables included as Appendix C. Information about the previous public
partnerships, the offerings of which became fully subscribed
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between July 1993 and June 1998, is included therein. Potential stockholders are
encouraged to examine the Prior Performance Tables attached as Appendix C (in
Table III), which include information as to the operating results of these prior
partnerships, for more detailed information concerning the experience of Messrs.
Seneff and Bourne.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making quarterly Distributions; (ii)
obtaining fixed income through the receipt of base rent and increasing the
Company's income (and Distributions) and providing protection against inflation
through receipt of percentage rent, and/or automatic increases in base rent, and
obtaining fixed income through the receipt of payments on Mortgage Loans and
Secured Equipment Leases; (iii) continuing to qualify as a REIT for federal
income tax purposes; and (iv) providing stockholders of the Company with
liquidity of their investment, either in whole or in part, within three to eight
years after commencement of this offering, through (a) Listing, or (b) if
Listing does not occur within eight years after commencement of this offering,
the commencement of orderly Sales of the Company's assets, outside the ordinary
course of business and consistent with its objective of qualifying as a REIT,
and distribution of the proceeds thereof. The sheltering from tax of income from
other sources is not an objective of the Company. If the Company is successful
in achieving its investment and operating objectives, the stockholders (other
than tax-exempt entities) are likely to recognize taxable income in each year.
While there is no order of priority intended in the listing of the Company's
objectives, stockholders should realize that the ability of the Company to meet
these objectives may be severely handicapped by any lack of diversification of
the Company's investments and the terms of the leases.
The Company intends to meet its objectives through its investment
policies of (i) purchasing carefully selected, well-located Properties and
leasing them on a "triple-net" basis (which means that the tenant will be
responsible for paying the cost of all repairs, maintenance, property taxes, and
insurance) to operators of Hotel Chains under leases generally requiring the
tenant to pay base annual rent, with percentage rent based on gross revenues
and/or automatic increases in base rent, and (ii) offering Mortgage Loans and
Secured Equipment Leases to tenants and operators of Hotel Chains.
In accordance with its investment policies, the Company intends to
invest in Properties whose tenants are franchisors or franchisees of one of the
Hotel Chains to be selected by the Company, based upon recommendations by the
Advisor. Although there is no limit on the number of properties of a particular
Hotel Chain which the Company may acquire, the Company currently does not expect
to acquire a Property if the Board of Directors, including a majority of the
Independent Directors, determines that the acquisition would adversely affect
the Company in terms of geographic, property type or chain diversification.
Potential Mortgage Loan borrowers and Secured Equipment Lease lessees or
borrowers will similarly be operators of Hotel Chains selected by the Company,
following the Advisor's recommendations. The Company has undertaken, consistent
with its objective of qualifying as a REIT for federal income tax purposes, to
ensure that the value of all Secured Equipment Leases, in the aggregate, will
not exceed 25% of the Company's total assets, while Secured Equipment Leases to
any single lessee or borrower, in the aggregate, will not exceed 5% of the
Company's total assets. It is intended that investments will be made in
Properties, Mortgage Loans and Secured Equipment Leases in various locations in
an attempt to achieve diversification and thereby minimize the effect of changes
in local economic conditions and certain other risks. The extent of such
diversification, however, depends in part upon the amount raised in the offering
and the purchase price of each Property. See "Estimated Use of Proceeds" and
"Risk Factors -- Real Estate Investment Risks -- Possible Lack of
Diversification Increases Risk of Investment." For a more complete description
of the manner in which the structure of the Company's business, including its
investment policies, will facilitate the Company's ability to meet its
investment objectives. See "Business."
The investment objectives of the Company may not be changed without the
approval of stockholders owning a majority of the shares of outstanding Common
Stock. The Bylaws of the Company require the Independent Directors to review the
Company's investment policies at least annually to determine that the policies
are in the best interests of the stockholders. The determination shall be set
forth in the minutes of the Board of Directors along with the basis for such
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determination. The Directors (including a majority of the Independent Directors)
have the right, without a stockholder vote, to alter the Company's investment
policies but only to the extent consistent with the Company's investment
objectives and investment limitations. See "Certain Investment Limitations,"
below.
CERTAIN INVESTMENT LIMITATIONS
In addition to other investment restrictions imposed by the Directors
from time to time, consistent with the Company's objective of qualifying as a
REIT, the Articles of Incorporation or the Bylaws provide for the following
limitations on the Company's investments.
1. Not more than 10% of the Company's total assets shall be invested in
unimproved real property or mortgage loans on unimproved real property. For
purposes of this paragraph, "unimproved real property" does not include any
Property under construction, under contract for development or planned for
development within one year.
2. The Company shall not invest in commodities or commodity future
contracts. This limitation is not intended to apply to interest rate futures,
when used solely for hedging purposes.
3. The Company shall not invest in or make Mortgage Loans unless an
appraisal is obtained concerning the underlying property. Mortgage indebtedness
on any property shall not exceed such property's appraised value. In cases in
which the majority of Independent Directors so determine, and in all cases in
which the Mortgage Loan involves the Advisor, Directors, or Affiliates, such
appraisal must be obtained from an independent expert concerning the underlying
property. Such appraisal shall be maintained in the Company's records for at
least five years, and shall be available for inspection and duplication by any
stockholder. In addition to the appraisal, a mortgagee's or owner's title
insurance policy or commitment as to the priority of the mortgage or condition
of the title must be obtained. The Company may not invest in real estate
contracts of sale otherwise known as land sale contracts.
4. The Company may not make or invest in Mortgage Loans, including
construction loans, on any one Property if the aggregate amount of all mortgage
loans outstanding on the Property, including the loans of the Company, would
exceed an amount equal to 85% of the appraised value of the Property as
determined by appraisal unless substantial justification exists because of the
presence of other underwriting criteria. For purposes of this subsection, the
"aggregate amount of all mortgage loans outstanding on the Property, including
the loans of the Company" shall include all interest (excluding contingent
participation in income and/or appreciation in value of the mortgaged property),
the current payment of which may be deferred pursuant to the terms of such
loans, to the extent that deferred interest on each loan exceeds 5% per annum of
the principal balance of the loan.
5. The Company may not invest in indebtedness ("Junior Debt") secured
by a mortgage on real property which is subordinate to the lien or other
indebtedness ("Senior Debt"), except where the amount of such Junior Debt, plus
the outstanding amount of the Senior Debt, does not exceed 90% of the appraised
value of such property, if after giving effect thereto, the value of all such
investments of the Company (as shown on the books of the Company in accordance
with generally accepted accounting principles after all reasonable reserves but
before provision for depreciation) would not then exceed 25% of the Company's
Net Assets. The value of all investments in Junior Debt of the Company which
does not meet the aforementioned requirements is limited to 10% of the Company's
tangible assets (which is included within the 25% limitation).
6. The Company may not engage in any short sale, or borrow on an
unsecured basis, if such borrowing will result in an asset coverage of less than
300%, except that such borrowing limitation shall not apply to a first mortgage
trust. "Asset coverage," for the purpose of this section, means the ratio which
the value of the total assets of an issuer, less all liabilities and
indebtedness except indebtedness for unsecured borrowings, bears to the
aggregate amount of all unsecured borrowings of such issuer.
7. Unless at least 80% of the Company's tangible assets are comprised
of Properties or first mortgage loans, the Company may not incur any
indebtedness which would result in an aggregate amount of indebtedness in excess
of 300% of Net Assets.
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8. The Company may not make or invest in any mortgage loans that are
subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or Affiliates of the Company.
9. The Company will not invest in equity securities unless a majority
of the Directors (including a majority of Independent Directors) not otherwise
interested in such transaction approve the transaction as being fair,
competitive, and commercially reasonable and determine that the transaction will
not jeopardize the Company's ability to qualify and remain qualified as a REIT.
Investments in entities affiliated with the Advisor, a Director, the Company, or
Affiliates thereof are subject to the restrictions on joint venture investments.
In addition, the Company shall not invest in any security of any entity holding
investments or engaging in activities prohibited by the Company's Articles of
Incorporation.
10. The Company will not issue (i) equity securities redeemable solely
at the option of the holder (except that stockholders may offer their Shares to
the Company as described under "Redemption of Shares"); (ii) debt securities
unless the historical debt service coverage (in the most recently completed
fiscal year), as adjusted for known charges, is sufficient to service that
higher level of debt properly; (iii) Shares on a deferred payment basis or under
similar arrangements; (iv) non-voting or assessable securities; or (v) options,
warrants, or similar evidences of a right to buy its securities (collectively,
"Options") unless (1) issued to all of its stockholders ratably, (2) as part of
a financing arrangement, or (3) as part of a stock option plan available to
Directors, officers, or employees of the Company or the Advisor. Options may not
be issued to the Advisor, Directors or any Affiliate thereof except on the same
terms as such Options are sold to the general public. Options may be issued to
persons other than the Advisor, Directors or any Affiliate thereof but not at
exercise prices less than the fair market value of the underlying securities on
the date of grant and not for consideration that in the judgment of the
Independent Directors has a market value less than the value of such Option on
the date of grant. Options issuable to the Advisor, Directors or any Affiliate
thereof shall not exceed 10% of the outstanding Shares on the date of grant.
11. A majority of the Directors shall authorize the consideration to be
paid for each Property, based on the fair market value of the Property. If a
majority of the Independent Directors determine, or if the Property is acquired
from the Advisor, a Director, or Affiliates thereof, such fair market value
shall be determined by a qualified independent real estate appraiser selected by
the Independent Directors.
12. The Company will not engage in underwriting or the agency
distribution of securities issued by others or in trading, as compared to
investment activities.
13. The Company will not invest in real estate contracts of sale unless
such contracts of sale are in recordable form and appropriately recorded in the
chain of title.
14. The Company will not invest in any foreign currency or bullion or
engage in short sales.
15. The Company will not issue senior securities except notes to banks
and other lenders and preferred shares.
16. The Company will not make loans to the Advisor or its Affiliates.
17. The Company will not operate so as to be classified as an
"investment company" under the Investment Company Act of 1940, as amended.
18. The Company will not make any investment that the Company believes
will be inconsistent with its objective of qualifying as a REIT.
The foregoing limitations may not be modified or eliminated without the
approval of a majority of the shares of outstanding Common Stock.
Except as set forth above or elsewhere in this Prospectus, the Company
does not intend to issue senior securities; borrow money; make loans to other
persons; invest in the securities of other issuers for the purpose of exercising
control; underwrite securities of other issuers; engage in the purchase and sale
(or turnover) of investments; offer securities in exchange for property,
repurchase or otherwise reacquire its shares or other securities; or make annual
or other reports to security holders. The Company evaluates investments in
Mortgage Loans on an individual basis and does not have a standard turnover
policy with respect to such investments.
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DISTRIBUTION POLICY
GENERAL
In order to qualify as a REIT for federal income tax purposes, among
other things, the Company must make distributions each taxable year (not
including any return of capital for federal income tax purposes) equal to at
least 95% of its real estate investment trust taxable income, although the Board
of Directors, in its discretion, may increase that percentage as it deems
appropriate. See "Federal Income Tax Considerations -- Taxation of the Company
- -- Distribution Requirements." The declaration of Distributions is within the
discretion of the Board of Directors and depends upon the Company's
distributable funds, current and projected cash requirements, tax considerations
and other factors.
DISTRIBUTIONS
The following table reflects total Distributions and Distributions per
Share declared and paid by the Company for each month since the Company
commenced operations.
<TABLE>
<CAPTION>
Total Distributions
Month Distributions Per Share
- ----- ------------- -------------
<S> <C> <C>
November 1997 $ 10,757 $0.002500
December 1997 19,019 0.002500
January 1998 28,814 0.002500
February 1998 32,915 0.002500
March 1998 39,627 0.002500
April 1998 46,677 0.002500
May 1998 52,688 0.002500
June 1998 56,365 0.002500
July 1998 99,631 0.041700
August 1998 105,707 0.041700
September 1998 157,038 0.058300
</TABLE>
In addition, on October 1, 1998 and November 1, 1998, the Company
declared Distributions totalling $167,846 and $183,405, respectively (each
representing $0.0583 per share). The Company intends to continue to make regular
Distributions to stockholders. The payment of Distributions commenced in
December 1997. Distributions will be made to those stockholders who are
stockholders as of the record date selected by the Directors. Distributions will
be declared monthly during the offering period, declared monthly during any
subsequent offering, paid on a quarterly basis during an offering period, and
declared and paid quarterly thereafter. The Company is required to distribute
annually at least 95% of its real estate investment trust taxable income to
maintain its objective of qualifying as a REIT. Generally, income distributed
will not be taxable to the Company under federal income tax laws if the Company
complies with the provisions relating to qualification as a REIT. If the cash
available to the Company is insufficient to pay such Distributions, the Company
may obtain the necessary funds by borrowing, issuing new securities, or selling
Assets. These methods of obtaining funds could affect future Distributions by
increasing operating costs. To the extent that Distributions to stockholders
exceed earnings and profits, such amounts constitute a return of capital for
federal income tax purposes, although such Distributions will not reduce
stockholders' aggregate Invested Capital. Distributions in kind shall not be
permitted, except for distributions of readily marketable securities;
distributions of beneficial interests in a liquidating trust established for the
dissolution of the Company and the liquidation of its assets in accordance with
the terms of the Articles of
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Incorporation; or distributions of in-kind property as long as the Directors (i)
advise each stockholder of the risks associated with direct ownership of the
property, (ii) offer each stockholder the election of receiving in-kind property
distributions, and (iii) distribute in-kind property only to those stockholders
who accept the Directors' offer.
For the period October 15, 1997 (the date operations of the Company
commenced) through December 31, 1997, 100% of the Distributions declared and
paid were considered ordinary income for federal income tax purposes. Due to the
fact that the Company had not yet acquired any Properties and was still in the
offering stage as of December 31, 1997, the characterization of Distributions
for federal income tax purposes is not necessarily considered by management to
be representative of the characterization of Distributions in future years.
Distributions will be made at the discretion of the Directors,
depending primarily on net cash from operations (which includes cash received
from tenants except to the extent that such cash represents a return of
principal in regard to the lease of a Property consisting of building only,
distributions from joint ventures, and interest income from lessees of Equipment
and borrowers under Mortgage Loans, less expenses paid) and the general
financial condition of the Company, subject to the obligation of the Directors
to cause the Company to qualify and remain qualified as a REIT for federal
income tax purposes. The Company intends to increase Distributions in accordance
with increases in net cash from operations.
SUMMARY OF THE
ARTICLES OF INCORPORATION AND BYLAWS
GENERAL
The Company is organized as a corporation under the laws of the State
of Maryland. As a Maryland corporation, the Company is governed by the Maryland
General Corporation Law. Maryland corporate law deals with a variety of matters
regarding Maryland corporations, including liabilities of the Company,
stockholders, directors, and officers, the amendment of the Articles of
Incorporation, and mergers of a Maryland corporation with other entities. Since
many matters are not addressed by Maryland corporate law, it is customary for a
Maryland corporation to address these matters through provisions in its Articles
of Incorporation.
The Articles of Incorporation and the Bylaws of the Company contain
certain provisions that could make it more difficult to acquire control of the
Company by means of a tender offer, a proxy contest, or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with its Board of Directors.
The Company believes that these provisions increase the likelihood that
proposals initially will be on more attractive terms than would be the case in
their absence and facilitate negotiations which may result in improvement of the
terms of an initial offer.
The Articles of Incorporation also permit Listing by the Board of
Directors after completion or termination of this offering.
The discussion below sets forth material provisions of governing laws,
instruments and guidelines applicable to the Company. For more complete
provisions, reference is made to the Maryland General Corporation Law, the
guidelines for REITs published by the North American Securities Administrators
Association and the Company's Articles of Incorporation and Bylaws.
DESCRIPTION OF CAPITAL STOCK
The Company has authorized a total of 126,000,000 shares of capital
stock, consisting of 60,000,000 shares of Common Stock, $0.01 par value per
share, 3,000,000 shares of Preferred Stock ("Preferred Stock"), and 63,000,000
additional shares of excess stock ("Excess Shares"), $0.01 par value per share.
Of the 63,000,000 Excess Shares, 60,000,000 are issuable in exchange for Common
Stock and 3,000,000 are issuable in exchange for Preferred Stock as described
below at "-- Restriction of Ownership." As of September 30, 1998, the Company
had 2,865,872 shares of Common Stock outstanding (including 20,000 shares issued
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to the Advisor prior to the commencement of this offering and 2,062 Shares
issued pursuant to the Reinvestment Plan) and no Preferred Stock or Excess
Shares outstanding. The Board of Directors may determine to engage in future
offerings of Common Stock of up to the number of unissued authorized shares of
Common Stock available.
The Company will not issue share certificates except to stockholders
who make a written request to the Company. Each stockholder's investment will be
recorded on the books of the Company, and information concerning the
restrictions and rights attributable to Shares (whether in connection with an
initial issuance or a transfer) will be sent to the stockholder receiving Shares
in connection with an issuance or transfer. A stockholder wishing to transfer
his or her Shares will be required to send only an executed form to the Company,
and the Company will provide the required form upon a stockholder's request. The
executed form and any other required documentation must be received by the
Company at least one calendar month prior to the last date of the current
quarter. Subject to restrictions in the Articles of Incorporation, transfers of
Shares shall be effective, and the transferee of the Shares will be recognized
as the holder of such Shares as of the first day of the following quarter on
which the Company receives properly executed documentation. Stockholders who are
residents of New York may not transfer fewer than 250 shares at any time.
Stockholders have no preemptive rights to purchase or subscribe for
securities that the Company may issue subsequently. Each Share is entitled to
one vote per Share, and Shares do not have cumulative voting rights. The
stockholders are entitled to Distributions in such amounts as may be declared by
the Board of Directors from time to time out of funds legally available for such
payments and, in the event of liquidation, to share ratably in any assets of the
Company remaining after payment in full of all creditors.
All of the Shares offered hereby will be fully paid and nonassessable
when issued.
The Articles of Incorporation authorize the Board of Directors to
designate and issue from time to time one or more classes or series of Preferred
Shares without stockholder approval. The Board of Directors may determine the
relative rights, preferences, and privileges of each class or series of
Preferred Stock so issued. Because the Board of Directors has the power to
establish the preferences and rights of each class or series of Preferred Stock,
it may afford the holders of any series or class of Preferred Stock preferences,
powers, and rights senior to the rights of holders of Common Stock; however, the
voting rights for each share of Preferred Stock shall not exceed voting rights
which bear the same relationship to the voting rights of the Shares as the
consideration paid to the Company for each share of Preferred Stock bears to the
book value of the Shares on the date that such Preferred Stock is issued. The
issuance of Preferred Stock could have the effect of delaying or preventing a
change in control of the Company. The Board of Directors has no present plans to
issue any Preferred Stock.
Similarly, the voting rights per share of equity securities of the
Company (other than the publicly held equity securities of the Company) sold in
a private offering shall not exceed the voting rights which bear the same
relationship to the voting rights of the publicly held equity securities as the
consideration paid to the Company for each privately offered Company share bears
to the book value of each outstanding publicly held equity security. The Board
of Directors currently has no plans to offer equity securities of the Company in
a private offering.
For a description of the characteristics of the Excess Shares, which
differ from Common Stock and Preferred Stock in a number of respects, including
voting and economic rights, see "-- Restriction of Ownership," below.
Soliciting Dealer Warrants. The Company has agreed to issue and sell,
as part of an overall compensation package, Soliciting Dealer Warrants to the
Managing Dealer, whereby one warrant to purchase one share of common stock will
be issued for every 25 Shares sold by the Managing Dealer. The Managing Dealer
has agreed to pay the Company $0.0008 for each Soliciting Dealer Warrant. These
warrants will be issued on a quarterly basis commencing 60 days after the date
on which the Shares are first sold pursuant to this offering. All or a portion
of the Soliciting Dealer Warrants may be reallowed to Soliciting Dealers with
prior written approval from, and in the sole discretion of, the Managing Dealer,
except where prohibited by either federal or state securities laws. The Company
will not issue Soliciting Dealer Warrants to the Managing Dealer and the
Managing Dealer will not transfer Soliciting Dealer Warrants in connection with
the sale of Shares to residents of Minnesota or Texas.
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The holder of a Soliciting Dealer Warrant will be entitled to purchase
one share of Common Stock from the Company at a price of $12.00 (120% of the
current public offering price per Share) during the Exercise Period; provided,
Soliciting Dealer Warrants will not be exercisable until one year from the date
of issuance. Holders of Soliciting Dealer Warrants may not exercise the
Soliciting Dealer Warrants to the extent such exercise would jeopardize the
Company's status as a REIT under the Code.
The terms of the Soliciting Dealer Warrants, including the exercise
price and the number and type of securities issuable upon exercise of a
Soliciting Dealer Warrant and the number of such warrants may be adjusted in the
event of stock dividends, certain subdivisions, combinations and
reclassification of shares of Common Stock or the issuance to stockholders of
rights, options or warrants entitling them to purchase shares of Common Stock or
securities convertible into shares of Common Stock. The terms of the Soliciting
Dealer Warrants also may be adjusted if the Company engages in certain merger or
consolidation transactions or if all or substantially all of the Company's
Assets are sold. Soliciting Dealer Warrants are not transferable or assignable
except by the Managing Dealer, the Soliciting Dealers, their successors in
interest, or to individuals who are both officers and directors of such a
person. Exercise of these Soliciting Dealer Warrants will be under the terms and
conditions detailed this Prospectus and in the Warrant Purchase Agreement, which
is an exhibit to the Registration Statement.
As holders of Soliciting Dealer Warrants, persons do not have the
rights of stockholders, may not vote on Company matters and are not entitled to
receive Distributions until such time as such warrants are exercised.
The Company anticipates that it will value the Soliciting Dealer
Warrants using an option pricing model in accordance with the guidance provided
in Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." The option pricing model that the Company will use
will take into consideration the following factors: (i) the exercise price of
the Soliciting Dealer Warrants; (ii) the expected life of the Soliciting Dealer
Warrants; (iii) the price of the Shares; (iv) expected Distributions with
respect to the Shares; (v) the risk-free interest rate for the expected term of
the Soliciting Dealer Warrants; and, to the extent applicable, (vi) the expected
volatility of the Shares. Any difference between the fair value of a Soliciting
Dealer Warrant and the purchase price of the Soliciting Dealer Warrants would be
reflected in the financial statements of the Company as a charge to capital in
excess of par value related to stock issuance costs, with a corresponding credit
to equity relating to the issuance of the Soliciting Dealer Warrants.
BOARD OF DIRECTORS
The Articles of Incorporation provide that the number of Directors of
the Company cannot be less than three nor more than 15. A majority of the Board
of Directors will be Independent Directors. See "Management -- Independent
Directors." Each Director, other than a Director elected to fill the unexpired
term of another Director, will be elected at each annual meeting or at any
special meeting of the stockholders called for that purpose, by a majority of
the shares of Common Stock present in person or by proxy and entitled to vote.
Independent Directors will nominate replacements for vacancies among the
Independent Directors. Under the Articles of Incorporation, the term of office
for each Director will be one year, expiring each annual meeting of
stockholders; however, nothing in the Articles of Incorporation prohibits a
director from being reelected by the stockholders. The Directors may not (a)
amend the Articles of Incorporation, except for amendments which do not
adversely affect the rights, preferences and privileges of stockholders; (b)
sell all or substantially all of the Company's assets other than in the ordinary
course of business or in connection with liquidation and dissolution; (c) cause
the merger or other reorganization of the Company; or (d) dissolve or liquidate
the Company, other than before the initial investment in property. The Directors
may establish such committees as they deem appropriate (provided that the
majority of the members of each committee are Independent Directors).
STOCKHOLDER MEETINGS
An annual meeting will be held for the purpose of electing Directors
and for the transaction of such other business as may come before the meeting,
and will be held not less than 30 days after delivery of the annual report.
Under the Company's Bylaws, a special meeting of stockholders may be called by
the chief executive officer, a majority of the Directors, or a majority of the
Independent Directors. Special meetings of the stockholders also shall be called
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by an officer of the Company upon the written request of stockholders holding in
the aggregate not less than 10% of the outstanding Common Stock entitled to vote
at such meeting. Upon receipt of such a written request, either in person or by
mail, stating the purpose or purposes of the meeting, the Company shall provide
all stockholders, within ten days of receipt of the written request, written
notice, either in person or by mail, of a meeting and its purpose. Such meeting
will be held not less than fifteen nor more than sixty days after distribution
of the notice, at a time and place specified in the request, or if none is
specified, at a time and place convenient to stockholders.
At any meeting of stockholders, each stockholder is entitled to one
vote per share of Common Stock owned of record on the applicable record date. In
general, the presence in person or by proxy of 50% of the shares of Common Stock
then outstanding shall constitute a quorum, and the majority vote of the shares
of Common Stock present in person or by proxy will be binding on all the
stockholders of the Company.
ADVANCE NOTICE FOR STOCKHOLDER NOMINATIONS FOR
DIRECTORS AND PROPOSALS OF NEW BUSINESS
The Bylaws of the Company require notice at least 60 days and not more
than 90 days before the anniversary of the prior annual meeting of stockholders
in order for a stockholder to (a) nominate a Director, or (b) propose new
business other than pursuant to the notice of the meeting or by or on behalf of
the Directors. The Bylaws contain a similar notice requirement in connection
with nominations for Directors at a special meeting of stockholders called for
the purpose of electing one or more Directors. Accordingly, failure to comply
with the notice provisions will make stockholders unable to nominate Directors
or propose new business.
AMENDMENTS TO THE ARTICLES OF INCORPORATION
Pursuant to the Company's Articles of Incorporation, the Directors can
amend the Articles of Incorporation by a two-thirds majority from time to time
if necessary in order to qualify initially or in order to continue to qualify as
a REIT. Except as set forth above, the Articles of Incorporation may be amended
only by the affirmative vote of a majority, and in some cases a two-thirds
majority, of the shares of Common Stock outstanding and entitled to vote. The
stockholders may vote to amend the Articles of Incorporation, terminate or
dissolve the Company, or remove one or more Directors without the necessity of
concurrence by the Board of Directors.
MERGERS, COMBINATIONS, AND SALE OF ASSETS
A merger, combination, sale, or other disposition of all or
substantially all of the Company's Assets other than in the ordinary course of
business must be approved by the Directors and a majority of the shares of
Common Stock outstanding and entitled to vote. In addition, any such transaction
involving an Affiliate of the Company or the Advisor also must be approved by a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction as fair and reasonable to the
Company and on terms and conditions not less favorable to the Company than those
available from unaffiliated third parties.
The Maryland Business Combinations Statute provides that certain
business combinations (including mergers, consolidations, share exchanges or, in
certain circumstances, asset transfers or issuances or reclassifications 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 (an
"Interested Stockholder") or an affiliate thereof, are prohibited for five years
after the most recent date on which the Interested Stockholder became an
Interested Stockholder. Thereafter, any such business combination must be
recommended by the board of directors of such corporation and approved by the
affirmative vote of at least (i) 80% of the votes entitled to be cast by holders
of outstanding shares of voting stock of the corporation and (ii) two-thirds of
the votes entitled to be cast by holders of voting shares of such corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
determined by statute) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares.
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Section 2.8 of the Articles of Incorporation provides that the
prohibitions and restrictions set forth in the Maryland Business Combinations
Statute are inapplicable to any business combination between the Company and any
person. Consequently, business combinations between the Company and Interested
Stockholders can be effected upon the affirmative vote of a majority of the
outstanding Shares entitled to vote thereon and do not require the approval of a
supermajority of the outstanding Shares held by disinterested stockholders.
CONTROL SHARE ACQUISITIONS
The Maryland Control Share Acquisition Statute 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,
officers or directors who are employees of the corporation. Control Shares are
shares which, if aggregated with all other shares of the corporation 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 of such corporation within one of the following ranges of
voting power: (i) one-fifth or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority or more of all voting power.
Control Shares do not include shares the acquiring person is entitled to vote as
a result of having previously obtained stockholder approval. A control share
acquisition means the acquisition of control shares, subject to certain
exceptions.
Section 2.9 of the Articles of Incorporation provides that the Maryland
Control Share Acquisition Statute is inapplicable to any acquisition of
securities of the Company by any person. Consequently, in instances where the
Board of Directors otherwise waives or modifies restrictions relating to the
ownership and transfer of securities of the Company or such restrictions are
otherwise removed, control shares of the Company will have voting rights,
without having to obtain the approval of a supermajority of the outstanding
Shares eligible to vote thereon.
TERMINATION OF THE COMPANY AND REIT STATUS
The Articles of Incorporation provide for the voluntary termination and
dissolution of the Company by the affirmative vote of a majority of the shares
of Common Stock outstanding and entitled to vote at a meeting called for that
purpose. In addition, the Articles of Incorporation permit the stockholders to
terminate the status of the Company as a REIT under the Code only by the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding and entitled to vote.
Under the Articles of Incorporation, the Company automatically will
terminate and dissolve on December 31, 2007, unless Listing occurs, in which
event the Company automatically will become a perpetual life entity.
RESTRICTION OF OWNERSHIP
To qualify as a REIT under the Code (i) not more than 50% of the value
of the REIT's outstanding stock may be owned, directly or indirectly (applying
certain attribution rules), by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of a taxable year, (ii) the
REIT's stock must be beneficially owned (without reference to any attribution
rules) by 100 or more persons during at least 335 days of a taxable year of 12
months or during a proportionate part of a shorter taxable year; and (iii)
certain other requirements must be satisfied. See "Federal Income Tax
Considerations -- Taxation of the Company."
To ensure that the Company satisfies these requirements, the Articles
of Incorporation restrict the direct or indirect ownership (applying certain
attribution rules) of shares of Common Stock and Preferred Stock by any Person
(as defined in the Articles of Incorporation) to no more than 9.8% of the
outstanding shares of such Common Stock or 9.8% of any series of Preferred
Shares (the "Ownership Limit"). However, the Articles of Incorporation provide
that this Ownership Limit may be modified, either entirely or with respect to
one or more Persons, by a vote of a majority of the Directors, if such
modification does not jeopardize the Company's status as a REIT. As a condition
of such modification, the Board of Directors may require opinions of counsel
satisfactory to it and/or an undertaking from the applicant with respect to
preserving the status of the Company as a REIT.
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It is the responsibility of each Person (as defined in the Articles of
Incorporation) owning (or deemed to own) more than 5% of the outstanding shares
of Common Stock or any series of outstanding Preferred Stock to give the Company
written notice of such ownership. In addition, to the extent deemed necessary by
the Directors, the Company can demand that each stockholder disclose to the
Company in writing all information regarding the Beneficial and Constructive
Ownership (as such terms are defined in the Articles of Incorporation) of the
Common Stock and Preferred Stock.
If the ownership, transfer or acquisition of shares of Common or
Preferred Stock, or change in capital structure of the Company or other event or
transaction would result in (i) any Person owning (applying certain attribution
rules) Common Stock or Preferred Stock in excess of the Ownership Limit, (ii)
fewer than 100 Persons owning the Common Stock and Preferred Stock, (iii) the
Company being "closely held" within the meaning of section 856(h) of the Code,
or (iv) the Company failing any of the gross income requirements of section
856(c) of the Code or otherwise failing to qualify as a REIT, then the
ownership, transfer, or acquisition, or change in capital structure or other
event or transaction that would have such effect will be void as to the
purported transferee or owner, and the purported transferee or owner will not
have or acquire any rights to the Common Stock and/or Preferred Stock, as the
case may be, to the extent required to avoid such a result. Common Stock or
Preferred Stock owned, transferred or proposed to be transferred in excess of
the Ownership Limit or which would otherwise jeopardize the Company's status as
a REIT will automatically be converted to Excess Shares. A holder of Excess
Shares is not entitled to Distributions, voting rights, and other benefits with
respect to such shares except for the right to payment of the purchase price for
the shares (or in the case of a devise or gift or similar event which results in
the issuance of Excess Shares, the fair market value at the time of such devise
or gift or event) and the right to certain distributions upon liquidation. Any
Distribution paid to a proposed transferee or holder of Excess Shares shall be
repaid to the Company upon demand. Excess Shares shall be subject to repurchase
by the Company at its election. The purchase price of any Excess Shares shall be
equal to the lesser of (a) the price paid in such purported transaction (or in
the case of a devise or gift or similar event resulting in the issuance of
Excess Shares, the fair market value at the time of such devise or gift or
event) or (b) the fair market value of such Shares on the date on which the
Company or its designee determines to exercise its repurchase right. If the
foregoing transfer restrictions are determined to be void or invalid by virtue
of any legal decision, statute, rule or regulation, then the purported
transferee of any Excess Shares may be deemed, at the option of the Company, to
have acted as an agent on behalf of the Company in acquiring such Excess Shares
and to hold such Excess Shares on behalf of the Company.
For purposes of the Articles of Incorporation, the term "Person" shall
mean an individual, corporation, partnership, estate, trust (including a trust
qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside to be used exclusively for the purposes described in
Section 642(c) of the Code, association, private foundation within the meaning
of Section 509(a) of the Code, joint stock company or other entity, or a group
as that term is used for purposes of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended; but does not include (i) CNL Hospitality Advisors,
Inc., during the period ending on December 31, 1997, or (ii) an underwriter
which participated in a public offering of Shares for a period of sixty (60)
days following the purchase by such underwriter of Shares therein, provided that
the foregoing exclusions shall apply only if the ownership of such Shares by CNL
Hospitality Advisors, Inc. or an underwriter would not cause the Company to fail
to qualify as a REIT by reason of being "closely held" within the meaning of
Section 856(a) of the code or otherwise cause the Company to fail to qualify as
a REIT.
RESPONSIBILITY OF DIRECTORS
Directors serve in a fiduciary capacity and shall have a fiduciary
duty to the stockholders of the Company, which duty shall include a duty to
supervise the relationship of the Company with the Advisor. See "Management --
Fiduciary Responsibilities of the Board of Directors."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to Maryland corporate law and the Company's Articles of
Incorporation, the Company is required to indemnify and hold harmless a present
or former Director, officer, Advisor, or Affiliate and may indemnify and hold
harmless a present or former employee or agent of the Company (the "Indemnitee")
against any or all losses or liabilities reasonably incurred by the Indemnitee
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in connection with or by reason of any act or omission performed or omitted to
be performed on behalf of the Company while a Director, officer, Advisor,
Affiliate, employee, or agent and in such capacity, provided, that the
Indemnitee has determined, in good faith, that the act or omission which caused
the loss or liability was in the best interests of the Company. The Company will
not indemnify or hold harmless the Indemnitee if: (i) the loss or liability was
the result of negligence or misconduct, or if the Indemnitee is an Independent
Director, the loss or liability was the result of gross negligence or willful
misconduct; (ii) the act or omission was material to the loss or liability and
was committed in bad faith or was the result of active or deliberate dishonesty;
(iii) the Indemnitee actually received an improper personal benefit in money,
property, or services; (iv) in the case of any criminal proceeding, the
Indemnitee had reasonable cause to believe that the act or omission was
unlawful; or (v) in a proceeding by or in the right of the Company, the
Indemnitee shall have been adjudged to be liable to the Company. In addition,
the Company will not provide indemnification for any loss or liability arising
from an alleged violation of federal or state securities laws unless one or more
of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular Indemnitee; (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular Indemnitee; or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular Indemnitee and finds that
indemnification of the settlement and the related costs should be made, and the
court considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published position
of any state securities regulatory authority in which securities of the Company
were offered or sold as to indemnification for violations of securities laws.
Pursuant to its Articles of Incorporation, the Company is required to pay or
reimburse reasonable expenses incurred by a present or former Director, officer,
Advisor or Affiliate and may pay or reimburse reasonable expenses incurred by
any other Indemnitee in advance of final disposition of a proceeding if the
following are satisfied: (i) the Indemnitee was made a party to the proceeding
by reasons of his or her service as a Director, officer, Advisor, Affiliate,
employee or agent of the Company; (ii) the Indemnitee provides the Company with
written affirmation of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification by the Company as authorized
by the Articles of Incorporation; (iii) the Indemnitee provides the Company with
a written agreement to repay the amount paid or reimbursed by the Company,
together with the applicable legal rate of interest thereon, if it is ultimately
determined that the Indemnitee did not comply with the requisite standard of
conduct; and (iv) the legal proceeding was initiated by a third party who is not
a stockholder or, if by a stockholder of the Company acting in his or her
capacity as such, a court of competent jurisdiction approves such advancement.
The Company's Articles of Incorporation further provide that any
indemnification, payment, or reimbursement of the expenses permitted by the
Articles of Incorporation will be furnished in accordance with the procedures in
Section 2-418 of the Maryland General Corporation Law.
Any indemnification may be paid only out of Net Assets of the Company,
and no portion may be recoverable from the stockholders.
There are certain defenses under Maryland law available to the
Directors, officers and the Advisor in the event of a stockholder action against
them. One such defense is the "business judgment rule." A Director, officer or
the Advisor can argue that he or she performed the action giving rise to the
stockholder's action in good faith and in a manner he or she reasonably believed
to be in the best interests of the Company, and with such care as an ordinarily
prudent person in a like position would have used under similar circumstances.
The Directors, officers and the Advisor are also entitled to rely on
information, opinions, reports or records prepared by experts (including
accountants, consultants, counsel, etc.) who were selected with reasonable care.
However, the Directors, officers and the Advisor may not invoke the business
judgment rule to further limit the rights of the stockholders to access records
as provided in the Articles of Incorporation.
The Company has entered into indemnification agreements with each of
the Company's officers and Directors. The indemnification agreements will
require, among other things, that the Company indemnify its officers and
Directors to the fullest extent permitted by law, and advance to the officers
and Directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. In accordance
with this agreement, the Company must indemnify and advance all expenses
reasonably incurred by officers and Directors seeking to enforce their rights
under the indemnification agreements. The Company also must cover officers and
Directors under the Company's directors' and officers' liability insurance.
Although these indemnification agreements offer substantially the same scope of
coverage afforded by the indemnification provisions in the Articles of
Incorporation and the Bylaws, it provides greater assurance to Directors and
officers that indemnification will be available because these contracts cannot
be modified unilaterally by the Board of Directors or by the stockholders.
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REMOVAL OF DIRECTORS
Under the Articles of Incorporation, a Director may resign or be
removed with or without cause by the affirmative vote of a majority of the
capital stock of the Company outstanding and entitled to vote.
INSPECTION OF BOOKS AND RECORDS
The Advisor will keep or cause to be kept, on behalf of the Company,
full and true books of account on an accrual basis of accounting, in accordance
with generally accepted accounting principles. All of such books of account,
together with all other records of the Company, including a copy of the Articles
of Incorporation and any amendments thereto, will at all times be maintained at
the principal office of the Company, and will be open to inspection,
examination, and, for a reasonable charge, duplication upon reasonable notice
and during normal business hours by a stockholder or his agent.
As a part of its books and records, the Company will maintain at its
principal office an alphabetical list of names of stockholders, along with their
addresses and telephone numbers and the number of Shares held by each
stockholder. Such list shall be updated at least quarterly and shall be
available for inspection at the Company's home office by a stockholder or his or
her designated agent upon such stockholder's request. Such list also shall be
mailed to any stockholder requesting the list within 10 days of a request. The
copy of the stockholder list shall be printed in alphabetical order, on white
paper, and in readily readable type size that is not smaller than 10-point type.
The Company may impose a reasonable charge for expenses incurred in reproducing
such list. The list may not be sold or used for commercial purposes.
If the Advisor or Directors neglect or refuse to exhibit, produce or
mail a copy of the stockholder list as requested, the Advisor and the Directors
shall be liable to any stockholder requesting the list for the costs, including
attorneys' fees, incurred by that stockholder for compelling the production of
the stockholder list. It shall be a defense that the actual purpose and reason
for the requests for inspection or for a copy of the stockholder list is to
secure such list of stockholders or other information for the purpose of selling
such list or copies thereof, or of using the same for a commercial purpose other
than in the interest of the applicant as a stockholder relative to the affairs
of the Company. The Company may require the stockholder requesting the
stockholder list to represent that the list is not requested for a commercial
purpose unrelated to the stockholder's interest in the Company. The remedies
provided by the Articles of Incorporation to stockholders requesting copies of
the stockholder list are in addition to, and do not in any way limit, other
remedies available to stockholders under federal law, or the law of any state.
RESTRICTIONS ON "ROLL-UP" TRANSACTIONS
In connection with a proposed Roll-Up Transaction, which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity that would be created or would survive after the
successful completion of the Roll-Up Transaction, an appraisal of all Properties
shall be obtained from an Independent Expert. In order to qualify as an
Independent Expert for this purpose(s), the person or entity shall have no
material current or prior business or personal relationship with the Advisor or
Directors and shall be engaged to a substantial extent in the business of
rendering opinions regarding the value of assets of the type held by the
Company. The Properties shall be appraised on a consistent basis, and the
appraisal shall be based on the evaluation of all relevant information and shall
indicate the value of the Properties as of a date immediately prior to the
announcement of the proposed Roll-Up Transaction. The appraisal shall assume an
orderly liquidation of Properties over a 12-month period. The terms of the
engagement of such Independent Expert shall clearly state that the engagement is
for the benefit of the Company and the stockholders. A summary of the
independent appraisal, indicating all material assumptions underlying the
appraisal, shall be included in a report to stockholders in connection with a
proposed Roll-Up Transaction. In connection with a proposed Roll-Up Transaction
which has not been approved by at least two-thirds of the stockholders, the
person sponsoring the Roll-Up Transaction shall offer to stockholders who vote
against the proposal the choice of:
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(i) accepting the securities of the Roll-Up Entity offered in the
proposed Roll-Up Transaction; or
(ii) one of the following:
(A) remaining stockholders of the Company and preserving their
interests therein on the same terms and conditions as existed
previously; or
(B) receiving cash in an amount equal to the stockholder's pro
rata share of the appraised value of the net assets of the Company.
The Company is prohibited from participating in any proposed Roll-Up
Transaction:
(i) which would result in the stockholders having democracy rights in
the Roll-Up Entity that are less than those provided in the Company's Articles
of Incorporation, Sections 8.1, 8.2, 8.4, 8.5, 8.6 and 9.1 and described
elsewhere in this Prospectus, including rights with respect to the election and
removal of Directors, annual reports, annual and special meetings, amendment of
the Articles of Incorporation, and dissolution of the Company. See "Description
of Capital Stock" and "Stockholder Meetings," above;
(ii) which includes provisions that would operate as a material
impediment to, or frustration of, the accumulation of shares by any purchaser of
the securities of the Roll-Up Entity (except to the minimum extent necessary to
preserve the tax status of the Roll-Up Entity), or which would limit the ability
of an investor to exercise the voting rights of its securities of the Roll-Up
Entity on the basis of the number of shares held by that investor;
(iii) in which investor's rights to access of records of the Roll-Up
Entity will be less than those provided in Sections 8.4 and 8.5 of the Company's
Articles of Incorporation and described in "Inspection of Books and Records,"
above; or
(iv) in which any of the costs of the Roll-Up Transaction would be
borne by the Company if the Roll-Up Transaction is not approved by the
stockholders.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
consequences of the ownership of Shares of the Company, prepared by Shaw Pittman
Potts & Trowbridge, as Counsel. This discussion is based upon the laws,
regulations, and reported judicial and administrative rulings and decisions in
effect as of the date of this Prospectus, all of which are subject to change,
retroactively or prospectively, and to possibly differing interpretations. This
discussion does not purport to deal with the federal income or other tax
consequences applicable to all investors in light of their particular investment
or other circumstances, or to all categories of investors, some of whom may be
subject to special rules (including, for example, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States). No ruling on the federal, state or local tax considerations relevant to
the operation of the Company, or to the purchase, ownership or disposition of
the Shares, has been requested from the Internal Revenue Service (the "IRS" or
the "Service") or other tax authority. Counsel has rendered certain opinions
discussed herein and believes that if the Service were to challenge the
conclusions of Counsel, such conclusions should prevail in court. However,
opinions of counsel are not binding on the Service or on the courts, and no
assurance can be given that the conclusions reached by Counsel would be
sustained in court. Prospective investors should consult their own tax advisors
in determining the federal, state, local, foreign and other tax consequences to
them of the purchase, ownership and disposition of the Shares of the Company,
the tax treatment of a REIT and the effect of potential changes in applicable
tax laws.
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TAXATION OF THE COMPANY
General. The Company has elected to be taxed as a REIT for federal
income tax purposes, as defined in Sections 856 through 860 of the Code,
commencing with its taxable year ending December 31, 1997. The Company believes
that it is organized and will operate in such a manner as to qualify as a REIT,
and the Company intends to continue to operate in such a manner, but no
assurance can be given that it will operate in a manner so as to qualify or
remain qualified as a REIT. The provisions of the Code pertaining to REITs are
highly technical and complex. Accordingly, this summary is qualified in its
entirety by the applicable Code sections, rules and regulations issued
thereunder, and administrative and judicial interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its net income that is currently
distributed to holders of Shares. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from an investment in a corporation. However, the Company will be
subject to federal income tax in the following circumstances. First, the Company
will be taxed at regular corporate rates on any undistributed real estate
investment trust taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
alternative minimum tax on its items of tax preference. Third, if the Company
has net income from foreclosure property, it will be subject to tax on such
income at the highest corporate rate. Foreclosure property generally means real
property (and any personal property incident to such real property) which is
acquired as a result of a default either on a lease of such property or on
indebtedness which such property secured and with respect to which an
appropriate election is made. Fourth, if the Company has net income derived from
prohibited transactions, such income will be subject to a 100% tax. A prohibited
transaction generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of business. Fifth, if the Company should fail to satisfy the
75% gross income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% test. Sixth, if, during each calendar year, the Company fails to distribute
at least the sum of (i) 85% of its real estate investment trust ordinary income
for such year; (ii) 95% of its real estate investment trust capital gain net
income for such year; and (iii) any undistributed taxable income from prior
periods, the Company will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
Company acquires any asset from a C corporation (i.e. a corporation generally
subject to full corporate level tax) in a transaction in which the basis of the
asset in the Company's hands is determined by reference to the basis of the
asset (or any other property) in the hands of the corporation, and the Company
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by the Company, then, to
the extent of such property's "built-in gain" (the excess of the fair market
value of such property at the time of acquisition by the Company over the
adjusted basis in such property at such time), such gain will be subject to tax
at the highest regular corporate rate applicable (as provided in regulations
promulgated by the United States Department of Treasury under the Code
("Treasury Regulations") that have not yet been promulgated). (The results
described above with respect to the recognition of "built-in gain" assume that
the Company will make an election pursuant to IRS Notice 88-19.)
If the Company fails to qualify as a REIT for any taxable year and
certain relief provisions do not apply, the Company will be subject to federal
income tax (including alternative minimum tax) as an ordinary corporation on its
taxable income at regular corporate rates without any deduction or adjustment
for distributions to holders of Shares. To the extent that the Company would, as
a consequence, be subject to tax liability for any such taxable year, the amount
of cash available for satisfaction of its liabilities and for distribution to
holders of Shares would be reduced. Distributions made to holders of Shares
generally would be taxable as ordinary income to the extent of current and
accumulated earnings and profits and, subject to certain limitations, would be
eligible for the corporate dividends received deduction, but there can be no
assurance that any such Distributions would be made. The Company would not be
eligible to elect REIT status for the four taxable years after the taxable year
during which it failed to qualify as a REIT, unless its failure to qualify was
due to reasonable cause and not willful neglect and certain other requirements
were satisfied.
Opinion of Counsel. Based upon representations made by officers of the
Company with respect to relevant factual matters, upon the existing Code
provisions, rules and regulations promulgated thereunder (including proposed
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regulations) and reported administrative and judicial interpretations thereof,
upon Counsel's independent review of such documents as Counsel deemed relevant
in the circumstances and upon the assumption that the Company will operate in
the manner described in this Prospectus, Counsel has advised the Company that,
in its opinion, the Company qualified as a REIT under the Code for the taxable
year ending December 31, 1997, the Company is organized in conformity with the
requirements for qualification as a REIT, and the Company's proposed method of
operation will enable it to continue to meet the requirements for qualification
as a REIT. It must be emphasized, however, that the Company's ability to qualify
and remain qualified as a REIT is dependent upon actual operating results and
future actions by and events involving the Company and others, and no assurance
can be given that the actual results of the Company's operations and future
actions and events will enable the Company to satisfy in any given year the
requirements for qualification and taxation as a REIT.
Requirements for Qualification as a REIT. As discussed more fully
below, the Code defines a REIT as a corporation, trust or association (i) which
is managed by one or more trustees or directors; (ii) the beneficial ownership
of which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) which, but for Sections 856 through 860 of the Code,
would be taxable as a domestic corporation; (iv) which is neither a financial
institution nor an insurance company; (v) the beneficial ownership of which is
held (without reference to any rules of attribution) by 100 or more persons;
(vi) which is not closely held as defined in section 856(h) of the Code; and
(vii) which meets certain other tests regarding the nature of its assets and
income and the amount of its distributions.
In the case of a REIT which is a partner in a partnership, Treasury
regulations provide that the REIT 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 assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
asset tests described below. Thus, the Company's proportionate share of the
assets, liabilities and items of income of any Joint Venture, as described in
"Business -- Joint Venture Arrangements," will be treated as assets, liabilities
and items of income of the Company for purposes of applying the asset and gross
income tests described herein.
Ownership Tests. The ownership requirements for qualification as a REIT
are that (i) during the last half of each taxable year not more than 50% in
value of the REIT's outstanding shares may be owned, directly or indirectly
(applying certain attribution rules), by five or fewer individuals (or certain
entities as defined in the Code) and (ii) there must be at least 100
stockholders (without reference to any attribution rules) on at least 335 days
of such 12-month taxable year (or a proportionate number of days of a short
taxable year). These two requirements do not apply to the first taxable year for
which an election is made to be treated as a REIT. In order to meet these
requirements for subsequent taxable years, or to otherwise obtain, maintain, or
reestablish REIT status, the Articles of Incorporation generally prohibit any
person or entity from actually, constructively or beneficially acquiring or
owning (applying certain attribution rules) more than 9.8% of the outstanding
Common Stock or 9.8% of any series of outstanding Preferred Stock. Among other
provisions, the Articles of Incorporation empower the Board of Directors to
redeem, at its option, a sufficient number of Shares to bring the ownership of
Shares of the Company in conformity with these requirements or to assure
continued conformity with such requirements.
Under the Articles of Incorporation, each holder of Shares is required,
upon demand, to disclose to the Board of Directors in writing such information
with respect to actual, constructive or beneficial ownership of Shares of the
Company as the Board of Directors deems necessary to comply with provisions of
the Code applicable to the Company or the provisions of the Articles of
Incorporation, or the requirements of any other appropriate taxing authority.
Certain Treasury regulations govern the method by which the Company is required
to demonstrate compliance with these stock ownership requirements and the
failure to satisfy such regulations could cause the Company to fail to qualify
as a REIT. The Company has represented that it expects to meet these stock
ownership requirements for each taxable year and it will be able to demonstrate
its compliance with these requirements.
Asset Tests. At the end of each quarter of a REIT's taxable year, at
least 75% of the value of its total assets must consist of "real estate assets,"
cash and cash items (including receivables) and certain government securities.
The balance of a REIT's assets generally may be invested without restriction,
except that holdings of securities not within the 75% class of assets generally
must not, with respect to any issuer, exceed 5% of the value of the REIT's
assets or 10% of the issuer's outstanding voting securities. The term "real
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estate assets" includes real property, interests in real property, leaseholds of
land or improvements thereon, and mortgages on the foregoing and any property
attributable to the temporary investment of new capital (but only if such
property is stock or a debt instrument and only for the one-year period
beginning on the date the REIT receives such capital). When a mortgage is
secured by both real property and other property, it is considered to constitute
a mortgage on real property to the extent of the fair market value of the real
property when the REIT is committed to make the loan (or, in the case of a
construction loan, the reasonably estimated cost of construction). Initially,
the bulk of the Company's assets will be real property. However, the Company
will also hold the Secured Equipment Leases. Counsel is of the opinion, based on
certain assumptions, that the Secured Equipment Leases will be treated as loans
secured by personal property for federal income tax purposes. See "Federal
Income Tax Considerations -- Characterization of the Secured Equipment Leases."
Therefore, the Secured Equipment Leases will not qualify as "real estate
assets." However, the Company has represented that at the end of each quarter
the value of the Secured Equipment Leases, together with any personal property
owned by the Company, will in the aggregate represent less than 25% of the
Company's total assets and that the value of the Secured Equipment Leases
entered into with any particular tenant will represent less than 5% of the
Company's total assets. No independent appraisals will be acquired to support
this representation, and Counsel, in rendering its opinion as to the
qualification of the Company as a REIT, is relying on the conclusions of the
Company and its senior management as to the relative values of its assets. There
can be no assurance, however, that the IRS may not contend that either (i) the
value of the Secured Equipment Leases entered into with any particular tenant
represents more than 5% of the Company's total assets, or (ii) the value of the
Secured Equipment Leases, together with any personal property owned by the
Company, exceeds 25% of the Company's total assets.
As indicated in "Business -- Joint Venture Arrangements," the Company
may participate in Joint Ventures. If a Joint Venture were classified for
federal income tax purposes as an association taxable as a corporation rather
than as a partnership, the Company's ownership of a 10% or greater interest in
the Joint Venture would cause the Company to fail to meet the requirement that
it not own 10% or more of an issuer's voting securities. However, Counsel is of
the opinion, based on certain assumptions, that any Joint Ventures will
constitute partnerships for federal income tax purposes. See "Federal Income Tax
Considerations -- Investment in Joint Ventures."
Income Tests. A REIT also must meet two separate tests with respect to
its sources of gross income for each taxable year.
(a) The 75 Percent and 95 Percent Tests. In general, at least 75% of a
REIT's gross income for each taxable year must be from "rents from real
property," interest on obligations secured by mortgages on real property, gains
from the sale or other disposition of real property and certain other sources,
including "qualified temporary investment income." For these purposes,
"qualified temporary investment income" means any income (i) attributable to a
stock or debt instrument purchased with the proceeds received by the REIT in
exchange for stock (or certificates of beneficial interest) in such REIT (other
than amounts received pursuant to a distribution reinvestment plan) or in a
public offering of debt obligations with a maturity of at least five years and
(ii) received or accrued during the one-year period beginning on the date the
REIT receives such capital. In addition, a REIT must derive at least 95% of its
gross income for each taxable year from any combination of the items of income
which qualify under the 75% test, from dividends and interest, and from gains
from the sale, exchange or other disposition of certain stock and securities.
Initially, the bulk of the Company's income will be derived from rents
with respect to the Properties. Rents from Properties received by the Company
qualify as "rents from real property" in satisfying these two tests only if
several conditions are met. First, the rent must not be based in whole or in
part, directly or indirectly, 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. Second, the Code provides that rents
received from a tenant will not qualify as "rents from real property" if the
REIT, or a direct or indirect owner of 10% or more of the REIT owns, directly or
constructively, 10% or more of such tenant (a "Related Party Tenant"). Third, if
rent attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, for rents to qualify as "rents from real
property," a REIT generally must not operate or manage the property or furnish
or render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no revenue, except that a REIT
may directly perform services which are "usually or customarily rendered" in
connection with the rental of space for occupancy, other than services which are
considered to be rendered to the occupant of the property. However, a REIT is
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currently permitted to earn up to one percent of its gross income from tenants,
determined on a property-by-property basis, by furnishing services that are
noncustomary or provided directly to the tenants, without causing the rental
income to fail to qualify as rents from real property.
The Company has represented with respect to its leasing of the
Properties that it will not (i) charge rent for any Property that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a percentage or percentages of receipts or sales, as described
above); (ii) charge rent that will be attributable to personal property in an
amount greater than 15% of the total rent received under the applicable lease;
(iii) directly perform services considered to be rendered to the occupant of a
Property or which are not usually or customarily furnished or rendered in
connection with the rental of real property; or (iv) enter into any lease with a
Related Party Tenant. Specifically, the Company expects that virtually all of
its income will be derived from leases of the type described in "Business --
Description of Property Leases," and it does not expect such leases to generate
income that would not qualify as rents from real property for purposes of the
75% and 95% income tests.
In addition, the Company will be paid interest on the Mortgage Loans.
All interest income qualifies under the 95% gross income test. If a Mortgage
Loan is secured by both real property and other property, all the interest on it
will nevertheless qualify under the 75% gross income test if the amount of the
loan did not exceed the fair market value of the real property at the time of
the loan commitment. The Company has represented that this will always be the
case. Therefore, in the opinion of Counsel, income generated through the
Company's investments in Mortgage Loans will be treated as qualifying income
under the 75% gross income test.
The Company will also receive payments under the terms of the Secured
Equipment Leases. Although the Secured Equipment Leases will be structured as
leases or loans, Counsel is of the opinion that, subject to certain assumptions,
they will be treated as loans secured by personal property for federal income
tax purposes. See "Federal Income Tax Considerations -- Characterization of the
Secured Equipment Leases." If the Secured Equipment Leases are treated as loans
secured by personal property for federal income tax purposes, then the portion
of the payments under the terms of the Secured Equipment Leases that represent
interest, rather than a return of capital for federal income tax purposes, will
not satisfy the 75% gross income test (although it will satisfy the 95% gross
income test). The Company believes, however, that the aggregate amount of such
non-qualifying income will not cause the Company to exceed the limits on
non-qualifying income under the 75% gross income test.
If, contrary to the opinion of Counsel, the Secured Equipment Leases
are treated as true leases, rather than as loans secured by personal property
for federal income tax purposes, the payments under the terms of the Secured
Equipment Leases would be treated as rents from personal property. Rents from
personal property will satisfy either the 75% or 95% gross income tests if they
are received in connection with a lease of real property and the rent
attributable to the personal property does not exceed 15% of the total rent
received from the tenant in connection with the lease. However, if rents
attributable to personal property exceed 15% of the total rent received from a
particular tenant, then the portion of the total rent attributable to personal
property will not satisfy either the 75% or 95% gross income tests.
If, notwithstanding the above, the Company fails to satisfy one or both
of the 75% or 95% tests for any taxable year, it may still qualify as a REIT if
(i) such failure is due to reasonable cause and not willful neglect, (ii) it
reports the nature and amount of each item of its income on a schedule attached
to its tax return for such year, and (iii) the reporting of any incorrect
information is not due to fraud with intent to evade tax. However, even if these
three requirements are met and the Company is not disqualified as a REIT, a
penalty tax would be imposed by reference to the amount by which the Company
failed the 75% or 95% test (whichever amount is greater).
(b) The Impact of Default Under the Secured Equipment Leases. In
applying the gross income tests to the Company, it is necessary to consider the
impact that a default under one or more of the Secured Equipment Leases would
have on the Company's ability to satisfy such tests. A default under one or more
of the Secured Equipment Leases would result in the Company directly holding the
Equipment securing such leases for federal income tax purposes. In the event of
a default, the Company may choose either to lease or sell such Equipment.
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However, any income resulting from a rental or sale of Equipment not
incidental to the rental or sale of real property would not qualify under the
75% and 95% gross income tests. In addition, in certain circumstances, income
derived from a sale or other disposition of Equipment could be considered "net
income from prohibited transactions," subject to a 100% tax. The Company does
not, however, anticipate that its income from the rental or sale of Equipment
would be material in any taxable year.
Distribution Requirements. A REIT must distribute to its stockholders
for each taxable year ordinary income dividends in an amount equal to at least
(a) 95% of the sum of (i) its "real estate investment trust taxable income"
(before deduction of dividends paid and excluding any net capital gains) and
(ii) the excess of net income from foreclosure property over the tax on such
income, minus (b) certain excess non-cash income. Real estate investment trust
taxable income generally is the taxable income of a REIT computed as if it were
an ordinary corporation, with certain adjustments. Distributions must be made in
the taxable year to which they relate or, if declared before the timely filing
of the REIT's tax return for such year and paid not later than the first regular
dividend payment after such declaration, in the following taxable year.
The Company has represented that it intends to make Distributions to
stockholders that will be sufficient to meet the 95% distribution requirement.
Under some circumstances, however, it is possible that the Company may not have
sufficient funds from its operations to make cash Distributions to satisfy the
95% distribution requirement. For example, in the event of the default or
financial failure of one or more tenants or lessees, the Company might be
required to continue to accrue rent for some period of time under federal income
tax principles even though the Company would not currently be receiving the
corresponding amounts of cash. Similarly, under federal income tax principles,
the Company might not be entitled to deduct certain expenses at the time those
expenses are incurred. In either case, the Company's cash available for making
Distributions might not be sufficient to satisfy the 95% distribution
requirement. If the cash available to the Company is insufficient, the Company
might raise cash in order to make the Distributions by borrowing funds, issuing
new securities or selling assets. If the Company ultimately were unable to
satisfy the 95% distribution requirement, it would fail to qualify as a REIT
and, as a result, would be subject to federal income tax as an ordinary
corporation without any deduction or adjustment for dividends paid to holders of
the Shares. If the Company fails to satisfy the 95% distribution requirement, as
a result of an adjustment to its tax returns by the Service, under certain
circumstances, it may be able to rectify its failure by paying a "deficiency
dividend" (plus a penalty and interest) within 90 days after such adjustment.
This deficiency dividend will be included in the Company's deductions for
dividends paid for the taxable year affected by such adjustment. However, the
deduction for a deficiency dividend will be denied, if any part of the
adjustment resulting in the deficiency is attributable to fraud with intent to
evade tax or to willful failure to timely file an income tax return.
TAXATION OF STOCKHOLDERS
Taxable Domestic Stockholders. For any taxable year in which the
Company qualifies as a REIT for federal income tax purposes, Distributions made
by the Company to its stockholders that are United States persons (generally,
any person other than a nonresident alien individual, a foreign trust or estate
or a foreign partnership or corporation) generally will be taxed as ordinary
income. Amounts received by such United States persons that are properly
designated as capital gain dividends by the Company generally will be taxed as
long-term capital gain, without regard to the period for which such person has
held its Shares, to the extent that they do not exceed the Company's actual net
capital gain for the taxable year. Corporate stockholders may be required to
treat up to 20% of certain capital gains dividends as ordinary income. Such
ordinary income and capital gain are not eligible for the dividends received
deduction allowed to corporations. In addition, the Company may elect to retain
and pay income tax on its long-term capital gains. If the Company so elects,
each stockholder will take into income the stockholder's share of the retained
capital gain as long-term capital gain and will receive a credit or refund for
that stockholder's share of the tax paid by the Company. The stockholder will
increase the basis of such stockholder's share by an amount equal to the excess
of the retained capital gain included in the stockholder's income over the tax
deemed paid by such stockholder. Distributions to such United States persons in
excess of the Company's current or accumulated earnings and profits will be
considered first a tax-free return of capital for federal income tax purposes,
reducing the tax basis of each stockholder's Shares, and then, to the extent the
Distribution exceeds each stockholder's basis, a gain realized from the sale of
Shares. The Company will notify each stockholder as to the portions of each
Distribution which, in its judgment, constitute ordinary income, capital gain or
return of capital for federal income tax purposes. Any Distribution that is (i)
declared by the Company in October, November or December of any calendar year
and payable to stockholders of record on a specified date in such months and
(ii) actually paid by the Company in January of the following year, shall be
deemed to have been received by each stockholder on December 31 of such calendar
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year and, as a result, will be includable in gross income of the stockholder for
the taxable year which includes such December 31. Stockholders who elect to
participate in the Reinvestment Plan will be treated as if they received a cash
Distribution from the Company and then applied such Distribution to purchase
Shares in the Reinvestment Plan. Stockholders may not deduct on their income tax
returns any net operating or net capital losses of the Company.
Upon the sale or other disposition of the Company's Shares, a
stockholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the sale or other disposition and the
adjusted basis of the Shares involved in the transaction. Such gain or loss will
be long-term capital gain or loss if, at the time of sale or other disposition,
the Shares involved have been held for more than one year. In addition, if a
stockholder receives a capital gain dividend with respect to Shares which he has
held for six months or less at the time of sale or other disposition, any loss
recognized by the stockholder will be treated as long-term capital loss to the
extent of the amount of the capital gain dividend that was treated as long-term
capital gain.
Generally, the redemption of Shares by the Company will result in
recognition of ordinary income by the stockholder unless the stockholder
completely terminates or substantially reduces his or her interest in the
Company. A redemption of Shares for cash will be treated as a distribution that
is taxable as a dividend to the extent of the Company's current or accumulated
earnings and profits at the time of the redemption under Section 302 of the Code
unless the redemption (a) results in a "complete termination" of the
stockholder's interest in the Company under Section 302(b)(3) of the Code, (b)
is "substantially disproportionate" with respect to the stockholder under
Section 302(b)(2) of the Code, or (c) is "not essentially equivalent to a
dividend" with respect to the stockholder under Section 302(b)(1) of the Code.
Under Code Section 302(b)(2) a redemption is considered "substantially
disproportionate" if the percentage of the voting stock of the corporation owned
by a stockholder immediately after the redemption is less than eighty percent of
the percentage of the voting stock of the corporation owned by such stockholder
immediately before the redemption. In determining whether the redemption is not
treated as a dividend, Shares considered to be owned by a stockholder by reason
of certain constructive ownership rules set forth in Section 318 of the Code, as
well as Shares actually owned, must generally be taken into account. A
distribution to a stockholder will be "not essentially equivalent to a dividend"
if its results in a "meaningful reduction" in the stockholder's interest in the
Company. The Service has published a ruling indicating that a redemption which
results in a reduction in the proportionate interest in a corporation (taking
into account the Section 318 constructive ownership rules) of a stockholder
whose relative stock interest is minimal (an interest of less than 1% should
satisfy this requirement) and who exercises no control over the corporation's
affairs should be treated as being "not essentially equivalent to a dividend."
If the redemption is not treated as a dividend, the redemption of the
Shares for cash will result in taxable gain or loss equal to the difference
between the amount of cash received and the stockholder's tax basis in the
Shares redeemed. Such gain or loss would be capital gain or loss if the Shares
were held as a capital asset and would be long-term capital gain or loss if the
holding period for the Shares exceeds one year.
The Company will report to its U.S. stockholders and the Service the
amount of dividends paid or treated as paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A stockholder that does not
provide the Company with a correct taxpayer identification number may also be
subject to penalties imposed by the Service. Any amount paid to the Service as
backup withholding will be creditable against the stockholder's income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain dividends to any stockholders who fail to certify their non-foreign
status to the Company. See "Foreign Stockholders" below.
The state and local income tax treatment of the Company and its
stockholders may not conform to the federal income tax treatment described
above. As a result, stockholders should consult their own tax advisors for an
explanation of how other state and local tax laws would affect their investment
in Shares.
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Tax-Exempt Stockholders. Dividends paid by the Company to a stockholder
that is a tax-exempt entity generally will not constitute "unrelated business
taxable income" ("UBTI") as defined in Section 512(a) of the Code, provided that
the tax-exempt entity has not financed the acquisition of its Shares with
"acquisition indebtedness" within the meaning of Section 514(c) of the Code and
the Shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity.
Notwithstanding the foregoing, qualified trusts that hold more than 10%
(by value) of the shares of certain REITs may be required to treat a certain
percentage of such REIT's distributions as UBTI. This requirement will apply
only if (i) treating qualified trusts holding REIT shares as individuals would
result in a determination that the REIT is "closely held" within the meaning of
Section 856(h)(1) of the Code and (ii) the REIT is "predominantly held" by
qualified trusts. A REIT is predominantly held if either (i) a single qualified
trust holds more than 25% by value of the REIT interests, or (ii) one or more
qualified trusts, each owning more than 10% by value of the REIT interests, hold
in the aggregate more than 50% of the REIT interests. The percentage of any REIT
dividend treated as UBTI is equal to the ratio of (a) the UBTI earned by the
REIT (treating the REIT as if it were a qualified trust and therefore subject to
tax on UBTI) to (b) the total gross income (less certain associated expenses) of
the REIT. A de minimis exception applies where the ratio set forth in the
preceding sentence is less than 5% for any year. For these purposes, a qualified
trust is any trust described in Section 401(a) of the Code and exempt from tax
under Section 501(a) of the Code. The restrictions on ownership of Shares in the
Articles of Incorporation will prevent application of the provisions treating a
portion of REIT distributions as UBTI to tax-exempt entities purchasing Shares
in the Company, absent a waiver of the restrictions by the Board of Directors.
See "Summary of the Articles of Incorporation and Bylaws -- Restriction of
Ownership."
Assuming that there is no waiver of the restrictions on ownership of
Shares in the Articles of Incorporation and that a tax-exempt stockholder does
not finance the acquisition of its Shares with "acquisition indebtedness" within
the meaning of Section 514(c) of the Code or otherwise use its Shares in an
unrelated trade or business, in the opinion of Counsel the distributions of the
Company with respect to such tax-exempt stockholder will not constitute UBTI.
The tax discussion of distributions by qualified retirement plans,
IRAs, Keogh plans and other tax-exempt entities is beyond the scope of this
discussion, and such entities should consult their own tax advisors regarding
such questions.
Foreign Stockholders. The rules governing United States federal income
taxation of nonresident alien individuals, foreign corporations, foreign
participants and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex, and no attempt will be made herein to provide more
than a summary of such rules. The following discussion assumes that the income
from investment in the Shares will not be effectively connected with the
Non-U.S. Stockholders' conduct of a United States trade or business. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local laws with regard to an investment in
Shares, including any reporting requirements. Non-U.S. Stockholders will be
admitted as stockholders with the approval of the Advisor.
Distributions that are not attributable to gain from sales or exchanges
by the Company of United States real property interests and not designated by
the Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current and accumulated earnings
and profits of the Company. Such dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend, unless an
applicable tax treaty reduces or eliminates that tax. A number of U.S. tax
treaties that reduce the rate of withholding tax on corporate dividends do not
reduce, or reduce to a lesser extent, the rate of withholding applied to
dividends from a REIT. The Company expects to withhold U.S. income tax at the
rate of 30% on the gross amount of any such distributions paid to a Non-U.S.
Stockholder unless (i) a lower treaty rate applies (and, with regard to payments
on or after January 1, 1999, the Non-U.S. Stockholder files IRS Form W-8 with
the Company and, if the Shares are not traded on an established securities
market, acquires a taxpayer identification number from the IRS), or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 (or, with respect to payments on or
after January 1, 1999, files IRS Form W-8 with the Company) with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of the Company's current and accumulated earnings and profits will not be
taxable to a stockholder to the extent that such distributions paid do not
exceed the adjusted basis of the stockholder's Shares, but rather will reduce
the adjusted basis of such Shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Stockholders' Shares, such distributions will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on any
gain from the sale or disposition of the Shares, as described below. If it
cannot be determined at the time a distribution is paid whether or not such
distribution will be in excess of current and accumulated earnings and profits,
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the distributions will be subject to withholding at the rate of 30%. However, a
Non-U.S. Stockholder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of the
Company's current and accumulated earnings and profits. Beginning with payments
made on or after January 1, 1999, the Company will be permitted, but not
required, to make reasonable estimates of the extent to which distributions
exceed current or accumulated earnings and profits. Such distributions will
generally be subject to a 10% withholding tax, which may be refunded to the
extent they exceed the stockholder's actual U.S. tax liability, provided the
required information is furnished to the IRS.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of United
States real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales
of United States real property interests are taxed to a Non-U.S. Stockholder as
if such gain were effectively connected with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. Stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate stockholder not entitled to treaty exemption or
rate reduction. The Company is required by applicable Treasury Regulations to
withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend. This amount is creditable against the Non-U.S.
Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. It is currently anticipated that the Company
will be a "domestically controlled REIT," and in such case the sale of Shares
would not be subject to taxation under FIRPTA. However, gain not subject to
FIRPTA nonetheless will be taxable to a Non-U.S. Stockholder if (i) investment
in the Shares is treated as "effectively connected" with the Non-U.S.
Stockholders' U.S. trade or business, or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain other conditions are met.
Effectively connected gain realized by a foreign corporate shareholder may be
subject to an additional 30% branch profits tax, subject to possible exemption
or rate reduction under an applicable tax treaty. If the gain on the sale of
Shares were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as U.S. Stockholders with respect to such
gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals), and the purchaser of
the Shares would be required to withhold and remit to the Service 10% of the
purchase price.
STATE AND LOCAL TAXES
The Company and its shareholders may be subject to state and local
taxes in various states and localities in which it or they transact business,
own property, or reside. The tax treatment of the Company and the stockholders
in such jurisdictions may differ from the federal income tax treatment described
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws upon an investment in
the Common Stock of the Company.
CHARACTERIZATION OF PROPERTY LEASES
The Company will purchase both new and existing Properties and lease
them to franchisees or corporate franchisors pursuant to leases of the type
described in "Business -- Description of Property Leases." The ability of the
Company to claim certain tax benefits associated with ownership of the
Properties, such as depreciation, depends on a determination that the lease
transactions engaged in by the Company are true leases, under which the Company
is the owner of the leased Property for federal income tax purposes, rather than
a conditional sale of the Property or a financing transaction. A determination
by the Service that the Company is not the owner of the Properties for federal
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income tax purposes may have adverse consequences to the Company, such as the
denying of the Company's depreciation deductions. Moreover, a denial of the
Company's depreciation deductions could result in a determination that the
Company's Distributions to stockholders were insufficient to satisfy the 95%
distribution requirement for qualification as a REIT. However, as discussed
above, if the Company has sufficient cash, it may be able to remedy any past
failure to satisfy the distribution requirements by paying a "deficiency
dividend" (plus a penalty and interest). See "Taxation of the Company --
Distribution Requirements," above. Furthermore, in the event that the Company
was determined not to be the owner of a particular Property, in the opinion of
Counsel the income that the Company would receive pursuant to the
recharacterized lease would constitute interest qualifying under the 95% and 75%
gross income tests by reason of being interest on an obligation secured by a
mortgage on an interest in real property, because the legal ownership structure
of such Property will have the effect of making the building serve as collateral
for the debt obligation.
The characterization of transactions as leases, conditional sales, or
financings has been addressed in numerous cases. The courts have not identified
any one factor as being determinative of whether the landlord or the tenant of
property is to be treated as the owner. Judicial decisions and pronouncements of
the Service with respect to the characterization of transactions as either
leases, conditional sales, or financing transactions have made it clear that the
characterization of leases for tax purposes is a question which must be decided
on the basis of a weighing of many factors, and courts have reached different
conclusions even where characteristics of two lease transactions were
substantially similar.
While certain characteristics of the leases anticipated to be entered
into by the Company suggest the Company might not be the owner of the
Properties, such as the fact that such leases are "triple-net" leases, a
substantial number of other characteristics indicate the bona fide nature of
such leases and that the Company will be the owner of the Properties. For
example, under the types of leases described in "Business -- Description of
Property Leases," the Company will bear the risk of substantial loss in the
value of the Properties, since the Company will acquire its interests in the
Properties with an equity investment, rather than with nonrecourse indebtedness.
Further, the Company, rather than the tenant, will benefit from any appreciation
in the Properties, since the Company will have the right at any time to sell or
transfer its Properties, subject to the tenant's right to purchase the property
at a price not less than the Property's fair market value (determined by
appraisal or otherwise).
Other factors that are consistent with the ownership of the Properties
by the Company are (i) the tenants are liable for repairs and to return the
Properties in reasonably good condition; (ii) insurance proceeds generally are
to be used to restore the Properties and, to the extent not so used, belong to
the Company; (iii) the tenants agree to subordinate their interests in the
Properties to the lien of any first mortgage upon delivery of a nondisturbance
agreement and agree to attorn to the purchaser upon any foreclosure sale; and
(iv) based on the Company's representation that the Properties can reasonably be
expected to have at the end of their lease terms (generally a maximum of 30 to
40 years) a fair market value of at least 20% of the Company's cost and a
remaining useful life of at least 20% of their useful lives at the beginning of
the leases, the Company has not relinquished the Properties to the tenants for
their entire useful lives, but has retained a significant residual interest in
them. Moreover, the Company will not be primarily dependent upon tax benefits in
order to realize a reasonable return on its investments.
Concerning the Properties for which the Company owns the buildings and
the underlying land, on the basis of the foregoing, assuming (i) the Company
leases the Properties on substantially the same terms and conditions described
in "Business -- Description of Property Leases," and (ii) as is represented by
the Company, the residual value of the Properties remaining after the end of
their lease terms (including all renewal periods) may reasonably be expected to
be at least 20% of the Company's cost of such Properties, and the remaining
useful lives of the Properties after the end of their lease terms (including all
renewal periods) may reasonably be expected to be at least 20% of the
Properties' useful lives at the beginning of their lease terms, it is the
opinion of Counsel that the Company will be treated as the owner of the
Properties for federal income tax purposes and will be entitled to claim
depreciation and other tax benefits associated with such ownership. In the case
of Properties for which the Company does not own the underlying land, Counsel
cannot opine that such transactions will be characterized as leases.
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CHARACTERIZATION OF SECURED EQUIPMENT LEASES
The Company will purchase Equipment and lease it to franchisees or
corporate franchisors pursuant to leases of the type described in "Business --
General." The ability of the Company to qualify as a REIT depends on a
determination that the Secured Equipment Leases are financing arrangements,
under which the lessees acquire ownership of the Equipment for federal income
tax purposes. If the Secured Equipment Leases are instead treated as true
leases, the Company may be unable to satisfy the income tests for REIT
qualification. See "Federal Income Tax Considerations -- Taxation of the Company
- -- Income Tests."
While certain characteristics of the Secured Equipment Leases to be
entered into by the Company suggest that the Company retains ownership of the
Equipment, such as the fact that certain of the Secured Equipment Leases are
structured as leases, with the Company retaining title to the Equipment, a
substantial number of other characteristics indicate that the Secured Equipment
Leases are financing arrangements and that the lessees are the owners of the
Equipment for federal income tax purposes. For example, under the types of
Secured Equipment Leases described in "Business -- General," the lease term will
equal or exceed the useful life of the Equipment, and the lessee will have the
option to purchase the Equipment at the end of the lease term for a nominal sum.
Moreover, under the terms of the Secured Equipment Leases, the Company and the
lessees will each agree to treat the Secured Equipment Leases as loans secured
by personal property, rather than leases, for tax purposes.
On the basis of the foregoing, assuming (i) the Secured Equipment
Leases are made on substantially the same terms and conditions described in
"Business -- General," and (ii) as represented by the Company, each of the
Secured Equipment Leases will have a term that equals or exceeds the useful life
of the Equipment subject to the lease, it is the opinion of Counsel that the
Company will not be treated as the owner of the Equipment that is subject to the
Secured Equipment Leases for federal income tax purposes and that the Company
will be able to treat the Secured Equipment Leases as loans secured by personal
property. Counsel's opinion that the Company will be organized in conformity
with the requirements for qualification as a REIT is based, in part, on the
assumption that each of the Secured Equipment Leases will conform to the
conditions outlined in clauses (i) and (ii) of the preceding sentence.
INVESTMENT IN JOINT VENTURES
As indicated in "Business -- Joint Venture Arrangements," the Company
may participate in Joint Ventures which own and lease Properties. Assuming that
the Joint Ventures have the characteristics described in "Business -- Joint
Venture Arrangements," and are operated in the same manner that the Company
operates with respect to Properties that it owns directly, it is the opinion of
Counsel that (i) the Joint Ventures will be treated as partnerships, as defined
in Sections 7701(a)(2) and 761(a) of the Code, and not as associations taxable
as corporations, and that the Company will be subject to tax as a partner
pursuant to Sections 701-761 of the Code; and (ii) all material allocations to
the Company of income, gain, loss and deduction as provided in the Joint Venture
agreements and as discussed in the Prospectus will be respected under Section
704(b) of the Code. The Company has represented that it will not become a
participant in any Joint Venture unless the Company has first obtained advice of
Counsel that the Joint Venture will constitute a partnership for federal income
tax purposes and that the allocations to the Company contained in the Joint
Venture agreement will be respected.
If, contrary to the opinion of Counsel, a Joint Venture were to be
treated as an association taxable as a corporation, the Company would be treated
as a stockholder for tax purposes and would not be treated as owning a pro rata
share of the Joint Venture's assets. In addition, the items of income and
deduction of the Joint Venture would not pass through to the Company. Instead,
the Joint Venture would be required to pay income tax at regular corporate tax
rates on its net income, and distributions to partners would constitute
dividends that would not be deductible in computing the Joint Venture's taxable
income. Moreover, a determination that a Joint Venture is taxable as a
corporation could cause the Company to fail to satisfy the asset tests for
qualification as a REIT. See "Taxation of the Company -- Asset Tests" and
"Taxation of the Company -- Income Tests," above.
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REPORTS TO STOCKHOLDERS
The Company will furnish each stockholder with its audited annual
report within 120 days following the close of each fiscal year. These annual
reports will contain the following: (i) financial statements, including a
balance sheet, statement of operations, statement of stockholders' equity, and
statement of cash flows, prepared in accordance with generally accepted
accounting principles which are audited and reported on by independent certified
public accountants; (ii) the ratio of the costs of raising capital during the
period to the capital raised; (iii) the aggregate amount of advisory fees and
the aggregate amount of other fees paid to the Advisor and any Affiliate of the
Advisor by the Company and including fees or charges paid to the Advisor and any
Affiliate of the Advisor by third parties doing business with the Company; (iv)
the Operating Expenses of the Company, stated as a percentage of the Average
Invested Assets (the average of the aggregate book value of the assets of the
Company, for a specified period, invested, directly or indirectly, in equity
interests in and loans secured by real estate, before reserves for depreciation
or bad debts or other similar non-cash reserves, computed by taking the average
of such values at the end of each month during such period) and as a percentage
of its Net Income; (v) a report from the Independent Directors that the policies
being followed by the Company are in the best interest of its stockholders and
the basis for such determination; (vi) separately stated, full disclosure of all
material terms, factors and circumstances surrounding any and all transactions
involving the Company, Directors, Advisor and any Affiliate thereof occurring in
the year for which the annual report is made, and the Independent Directors
shall be specifically charged with a duty to examine and comment in the report
on the fairness of such transactions; and (vii) Distributions to the
stockholders for the period, identifying the source of such Distributions and if
such information is not available at the time of the distribution, a written
explanation of the relevant circumstances will accompany the Distributions (with
the statement as to the source of Distributions to be sent to stockholders not
later than 60 days after the end of the fiscal year in which the distribution
was made).
Within 75 days following the close of each Company fiscal year, each
stockholder that is a Qualified Plan will be furnished with an annual statement
of Share valuation to enable it to file annual reports required by ERISA as they
relate to its investment in the Company. The statement will report an estimated
value of each Share, prior to the termination of the offering, of $10 per Share
and, after the termination of the offering, based on (i) appraisal updates
performed by the Company based on a review of the existing appraisal and lease
of each Property, focusing on a re-examination of the capitalization rate
applied to the rental stream to be derived from that Property; and (ii) a review
of the outstanding Mortgage Loans and Secured Equipment Leases focusing on a
determination of present value by a re-examination of the capitalization rate
applied to the stream of payments due under the terms of each Mortgage Loan and
Secured Equipment Leases. The Company may elect to deliver such reports to all
stockholders. Stockholders will not be forwarded copies of appraisals or
updates. In providing such reports to stockholders, neither the Company nor its
Affiliates thereby make any warranty, guarantee, or representation that (i) the
stockholders or the Company, upon liquidation, will actually realize the
estimated value per Share, or (ii) the stockholders will realize the estimated
net asset value if they attempt to sell their Shares.
If the Company is required by the Securities Exchange Act of 1934, as
amended, to file quarterly reports with the Securities and Exchange Commission
on Form 10-Q, stockholders will be furnished with a summary of the information
contained in each such report within 60 days after the end of each fiscal
quarter. Such summary information generally will include a balance sheet, a
quarterly statement of income, and a statement of cash flows, and any other
pertinent information regarding the Company and its activities during the
quarter. Stockholders also may receive a copy of any Form 10-Q upon request to
the Company. If the Company is not subject to this filing requirement,
stockholders will be furnished with a semi-annual report within 60 days after
each six-month period containing information similar to that contained in the
quarterly report but applicable to such six-month period.
Stockholders and their duly authorized representatives are entitled to
inspect and copy, at their expense, the books and records of the Company at all
times during regular business hours, upon reasonable prior notice to the
Company, at the location where such reports are kept by the Company.
Stockholders, upon request and at their expense, may obtain full information
regarding the financial condition of the Company, a copy of the Company's
federal, state, and local income tax returns for each fiscal year of the
Company, and, subject to certain confidentiality requirements, a list containing
the name, address, and Shares held by each stockholder.
The fiscal year of the Company will be the calendar year.
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The Company's federal tax return (and any applicable state income tax
returns) will be prepared by the accountants regularly retained by the Company.
Appropriate tax information will be submitted to the stockholders within 30 days
following the end of each fiscal year of the Company. A specific reconciliation
between GAAP and income tax information will not be provided to the
stockholders; however, such reconciling information will be available in the
office of the Company for inspection and review by any interested stockholder.
THE OFFERING
GENERAL
A maximum of 27,500,000 Shares ($275,000,000) are being offered at a
purchase price of $10.00 per share. Included in the 27,500,000 Shares offered,
the Company has registered 2,500,000 Shares ($25,000,000) available only to
stockholders purchasing Shares in this offering who receive a copy of this
Prospectus or to stockholders who purchased Shares in the Initial Offering and
who received a copy of the related prospectus and who elect to participate in
the Reinvestment Plan. Any participation in such plan by a person who becomes a
stockholder otherwise than by participating in this offering will require
solicitation under a separate prospectus. See "Summary of Reinvestment Plan."
The Board of Directors may determine to engage in future offerings of Common
Stock of up to the number of unissued authorized shares of Common Stock
available following termination of this offering.
A minimum investment of 250 Shares ($2,500) is required, except for
Nebraska, New York, and North Carolina investors who must make a minimum
investment of 500 Shares ($5,000). IRAs, Keogh plans, and pension plans must
make a minimum investment of at least 100 Shares ($1,000), except for Iowa
tax-exempt investors who must make a minimum investment of 250 Shares ($2,500).
For Minnesota investors only, IRAs and qualified plans must make a minimum
investment of 200 Shares ($2,000). Any investor who makes the required minimum
investment may purchase additional Shares in increments of one Share. Maine
investors, however, may not purchase additional Shares in amounts less than the
applicable minimum investment except at the time of the initial subscription or
with respect to Shares purchased pursuant to the Reinvestment Plan. See "The
Offering -- General," "The Offering -- Subscription Procedures," and "Summary of
Reinvestment Plan."
PLAN OF DISTRIBUTION
The Shares are being offered to the public on a "best efforts" basis
(which means that no one is guaranteeing that any minimum amount will be sold)
through the Soliciting Dealers, who will be members of the National Association
of Securities Dealers, Inc. (the "NASD") or other persons or entities exempt
from broker-dealer registration, and the Managing Dealer. The Soliciting Dealers
will use their best efforts during the offering period to find eligible persons
who desire to subscribe for the purchase of Shares from the Company. Both James
M. Seneff, Jr. and Robert A. Bourne are Affiliates and licensed principals of
the Managing Dealer, and the Advisor is an Affiliate of the Managing Dealer.
Prior to a subscriber's admission to the Company as a stockholder,
funds paid by such subscriber will be deposited in an interest-bearing escrow
account with SouthTrust Asset Management Company of Florida, N.A. The Company,
within 30 days after the date a subscriber is admitted to the Company, will pay
to such subscriber the interest (generally calculated on a daily basis) actually
earned on the funds of those subscribers whose funds have been held in escrow by
such bank for at least 20 days. Stockholders otherwise are not entitled to
interest earned on Company funds or to receive interest on their Invested
Capital. See "Escrow Arrangements" below.
Subject to the provisions for reduced Selling Commissions described
below, the Company will pay the Managing Dealer an aggregate of 7.5% of the
Gross Proceeds as Selling Commissions. The Managing Dealer, in its sole
discretion, may reallow fees of up to 7% to the Soliciting Dealers with respect
to Shares sold by them. In addition, the Company will pay the Managing Dealer,
as an expense allowance, a marketing support and due diligence expense
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reimbursement fee equal to 0.5% of Gross Proceeds. All or any portion of this
fee may be reallowed to any Soliciting Dealer with the prior written approval
from, and in the sole discretion of, the Managing Dealer, based on such factors
as the number of Shares sold by such Soliciting Dealer, the assistance, if any,
of such Soliciting Dealer in marketing this offering, and bona fide due
diligence expenses incurred. The Company also will issue to the Managing Dealer,
a Soliciting Dealer Warrant to purchase one share of common stock for every 25
Shares sold, to be exercised, if at all, during the Exercise Period, at a price
of $12.00 per share. The Managing Dealer may, in its sole discretion, reallow
all or any part of such Soliciting Dealer Warrant to certain Soliciting Dealers,
unless prohibited by federal or state securities laws. Soliciting Dealer
Warrants will not be exercisable until one year from date of issuance.
Soliciting Dealer Warrants are not transferable or assignable except by the
Managing Dealer, the Soliciting Dealers, their successors in interest, or
individuals who are both officers and directors of such a person. See "Summary
of Articles of Incorporation and Bylaws -- Description of Capital Stock --
Soliciting Dealer Warrants." Stockholders who elect to participate in the
Reinvestment Plan will be charged Selling Commissions and the marketing support
and due diligence fee on Shares purchased for their accounts on the same basis
as investors who purchase Shares in this offering. See "Summary of Reinvestment
Plan."
A registered principal or representative of the Managing Dealer or a
Soliciting Dealer, employees, officers, and Directors of the Company, or
employees, officers and directors of the Advisor, any of their Affiliates and
any Plan established exclusively for the benefit of such persons or entities may
purchase Shares net of 7% commissions, at a per Share purchase price of $9.30.
Clients of an investment adviser registered under the Investment Advisers Act of
1940, as amended, who have been advised by such adviser on an ongoing basis
regarding investments other than in the Company, and who are not being charged
by such adviser or its Affiliates, through the payment of commissions or
otherwise, for the advice rendered by such adviser in connection with the
purchase of the Shares, may purchase the Shares net of 7% commissions. In
addition, Soliciting Dealers that have a contractual arrangement with their
clients for the payment of fees which is consistent with accepting Selling
Commissions, in their sole discretion, may elect not to accept any Selling
Commissions offered by the Company for Shares that they sell. In that event,
such Shares shall be sold to the investor net of all Selling Commissions, at a
per Share purchase price of $9.30. In connection with the purchases of certain
minimum numbers of Shares, the amount of Selling Commissions otherwise payable
to the Managing Dealer or a Soliciting Dealer shall be reduced in accordance
with the following schedule:
<TABLE>
<CAPTION>
Reallowed Commissions on Sales per
Purchase Price for Share on Total Sale for Increment Share
Incremental Share in in Volume Discount Range
Dollar Amount Volume Discount -----------------------------------------
of Shares Purchased Range Per Share Percent Dollar Amount
------------------------------ ----------------------- -------------- -----------------
<S> <C> <C> <C>
$ 10 -- $250,000 $10.00 7.0% $0.70
250,010 -- 500,000 9.85 5.5% 0.55
500,010 -- 750,000 9.70 4.0% 0.40
750,010 -- 1,000,000 9.60 3.0% 0.30
1,000,010 -- 5,000,000 9.50 2.0% 0.20
</TABLE>
Selling Commissions for purchases of $5,000,000 or more will, in the
sole discretion of the Managing Dealer, be reduced to $0.15 per Share or less
but in no event will the proceeds to the Company be less than $9.25 per Share.
For example, if an investor purchases 100,000 Shares, the investor
could pay as little as $978,750 rather than $1,000,000 for the Shares, in which
event the Selling Commissions on the sale of such Shares would be $53,750 ($0.54
per Share). The net proceeds to the Company will not be affected by such
discounts.
Subscriptions may be combined for the purpose of determining the volume
discounts in the case of subscriptions made by any "purchaser," provided all
such Shares are purchased through the same Soliciting Dealer or through the
Managing Dealer. The volume discount will be prorated among the separate
subscribers considered to be a single "purchaser." Shares purchased pursuant to
the Reinvestment Plan on behalf of a Participant in the Reinvestment Plan will
not be combined with other subscriptions for Shares by the investor in
determining the volume discount to which such investor may be entitled. See
"Summary of Reinvestment Plan." Further subscriptions for Shares will not be
combined for purposes of the volume discount in the case of subscriptions by any
purchaser who subscribes for additional Shares subsequent to the purchaser's
initial purchase of Shares.
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Any request to combine more than one subscription must be made in
writing in a form satisfactory to the Company and must set forth the basis for
such request. Any such request will be subject to verification by the Managing
Dealer that all of such subscriptions were made by a single "purchaser." If a
"purchaser" does not reduce the per Share purchase price, the excess purchase
price over the discounted purchase price will be returned to the actual separate
subscribers for Shares.
For purposes of such volume discounts, "purchaser" includes (i) an
individual, his or her spouse, and their children under the age of 21, who
purchase the Shares for his or her or their own accounts, and all pension or
trust funds established by each such individual; (ii) a corporation,
partnership, association, joint-stock company, trust fund, or any organized
group of persons, whether incorporated or not (provided that the entities
described in this clause (ii) must have been in existence for at least six
months before purchasing the Shares and must have formed such group for a
purpose other than to purchase the Shares at a discount); (iii) an employee's
trust, pension, profit-sharing, or other employee benefit plan qualified under
Section 401 of the Code; and (iv) all pension, trust, or other funds maintained
by a given bank. In addition, the Company, in its sole discretion, may aggregate
and combine separate subscriptions for Shares received during the offering
period from (i) the Managing Dealer or the same Soliciting Dealer, (ii)
investors whose accounts are managed by a single investment adviser registered
under the Investment Advisers Act of 1940, (iii) investors over whose accounts a
designated bank, insurance company, trust company, or other entity exercises
discretionary investment responsibility, or (iv) a single corporation,
partnership, trust association, or other organized group of persons, whether
incorporated or not, and whether such subscriptions are by or for the benefit of
such corporation, partnership, trust association, or group. Except as provided
in this paragraph, subscriptions will not be cumulated, combined, or aggregated.
Any reduction in commissions will reduce the effective purchase price
per Share to the investor involved but will not alter the net proceeds payable
to the Company as a result of such sale. All investors will be deemed to have
contributed the same amount per Share to the Company whether or not the investor
receives a discount. Accordingly, for purposes of Distributions, investors who
pay reduced commissions will receive higher returns on their investments in the
Company as compared to investors who do not pay reduced commissions.
In connection with the sale of Shares, certain registered principals or
representatives of the Managing Dealer may perform wholesaling functions for
which they will receive compensation payable by the Managing Dealer in an
aggregate amount not in excess of one percent of Gross Proceeds. The first 0.5%
of Gross Proceeds of any such fee will be paid from the 7.5% of Gross Proceeds
payable to the Managing Dealer as Selling Commissions. In addition, the Advisor
and its Affiliates, including the Managing Dealer and its registered principals
or representatives, may incur due diligence fees and other expenses, including
expenses related to sales seminars and wholesaling activities, a portion of
which may be paid by the Company.
In addition, stockholders may agree with their participating Soliciting
Dealer and the Managing Dealer to have Selling Commissions relating to their
Shares paid over a seven-year period pursuant to a deferred commission
arrangement (the "Deferred Commission Option"). Stockholders electing the
Deferred Commission Option will be required to pay a total of $9.40 per Share
purchased upon subscription, rather than $10.00 per Share, with respect to which
$0.15 per Share will be payable as Selling Commissions due upon subscription,
$0.10 of which may be reallowed to the Soliciting Dealer by the Managing Dealer.
For each of the six years following such subscription on a date to be determined
by the Managing Dealer, $0.10 per Share will be paid by the Company as deferred
Selling Commissions with respect to Shares sold pursuant to the Deferred
Commission Option, which amounts will be deducted from and paid out of
distributions otherwise payable to such stockholders holding such Shares and may
be reallowed to the Soliciting Dealer by the Managing Dealer. The net proceeds
to the Company will not be affected by the election of the Deferred Commission
Option. Under this arrangement, a stockholder electing the Deferred Commission
Option will pay a 1% Selling Commission per year thereafter for the next six
years which will be deducted from and paid by the Company out of distributions
otherwise payable to such stockholder. At such time, if any, as Listing occurs,
the Company shall have the right to require the acceleration of all outstanding
payment obligations under the Deferred Commission Option. All such Selling
Commissions will be paid to the Managing Dealer, whereby a total of up to 7% of
such Selling Commissions may be reallowed to the Soliciting Dealer.
The Company or its Affiliates also may provide incentive items for
registered representatives of the Managing Dealer and the Soliciting Dealers,
which in no event shall exceed an aggregate of $100 per annum per participating
salesperson. In the event other incentives are provided to registered
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representatives of the Managing Dealer or the Soliciting Dealers, they will be
paid only in cash, and such payments will be made only to the Managing Dealer or
the Soliciting Dealers rather than to their registered representatives. Any such
sales incentive program must first have been submitted for review by the NASD,
and must comply with Rule 2710(c)(6)(B)(xii). Costs incurred in connection with
such sales incentive programs, if any, will be considered underwriting
compensation. See "Estimated Use of Proceeds."
The Company will also reimburse the Managing Dealer and the Soliciting
Dealers for bona fide due diligence expenses and certain expenses as incurred in
connection with the offering.
The total amount of underwriting compensation, including commissions
and reimbursement of expenses, paid in connection with the offering will not
exceed 10.5% of Gross Proceeds.
The Managing Dealer and the Soliciting Dealers severally will indemnify
the Company and its officers and Directors, the Advisor and its officers and
directors and their Affiliates, against certain liabilities, including
liabilities under the Securities Act of 1933.
SUBSCRIPTION PROCEDURES
Procedures Applicable to All Subscriptions. In order to purchase
Shares, the subscriber must complete and execute the Subscription Agreement. Any
subscription for Shares must be accompanied by cash or check payable to
"SouthTrust Asset Management Company of Florida, N.A., Escrow Agent" or to the
Company, in the amount of $10.00 per Share. See "Escrow Arrangements" below.
Certain Soliciting Dealers who have "net capital," as defined in the applicable
federal securities regulations, of $250,000 or more may instruct their customers
to make their checks for Shares for which they have subscribed payable directly
to the Soliciting Dealer. In such case, the Soliciting Dealer will issue a check
made payable to the order of the Escrow Agent for the aggregate amount of the
subscription proceeds.
Each subscription will be accepted or rejected by the Company within 30
days after its receipt, and no sale of Shares shall be completed until at least
five business days after the date on which the subscriber receives a copy of
this Prospectus. If a subscription is rejected, the funds will be returned to
the subscriber within ten business days after the date of such rejection,
without interest and without deduction. A form of the Subscription Agreement is
set forth as Appendix D to this Prospectus. The subscription price of each Share
is payable in full upon execution of the Subscription Agreement. A subscriber
whose subscription is accepted shall be sent a confirmation of his or her
purchase.
The Advisor and each Soliciting Dealer who sells Shares on behalf of
the Company have the responsibility to make every reasonable effort to determine
that the purchase of Shares is appropriate for an investor and that the
requisite suitability standards are met. See "Suitability Standards and How to
Subscribe -- Suitability Standards." In making this determination, the
Soliciting Dealers will rely on relevant information provided by the investor,
including information as to the investor's age, investment objectives,
investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. Each investor should be aware
that determining suitability is the responsibility of the Soliciting Dealer.
The Advisor and each Soliciting Dealer shall maintain records of the
information used to determine that an investment in the Shares is suitable and
appropriate for an investor. The Advisor and each Soliciting Dealer shall
maintain these records for at least six years.
Subscribers will be admitted as stockholders not later than the last
day of the calendar month following acceptance of their subscriptions.
Procedures Applicable to Non-Telephonic Orders. Each Soliciting Dealer
receiving a subscriber's check made payable solely to the bank escrow agent
(where, pursuant to such Soliciting Dealer's internal supervisory procedures,
internal supervisory review must be conducted at the same location at which
subscription documents and checks are received from subscribers), will deliver
such checks to the Managing Dealer no later than the close of business of the
first business day after receipt of the subscription documents by the Soliciting
Dealer except that, in any case in which the Soliciting Dealer maintains a
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branch office, and, pursuant to a Soliciting Dealer's internal supervisory
procedures, final internal supervisory review is conducted at a different
location, the branch office shall transmit the subscription documents and check
to the Soliciting Dealer conducting such internal supervisory review by the
close of business on the first business day following their receipt by the
branch office and the Soliciting Dealer shall review the subscription documents
and subscriber's check to ensure their proper execution and form and, if they
are acceptable, transmit the check to the Managing Dealer by the close of
business on the first business day after the check is received by the Soliciting
Dealer. The Managing Dealer will transmit the check to the Escrow Agent by no
later than the close of business on the first business day after the check is
received from the Soliciting Dealer.
Procedures Applicable to Telephonic Orders. Certain Soliciting Dealers
may permit investors to subscribe for Shares by telephonic order to the
Soliciting Dealer. There are no additional fees associated with telephonic
orders. Subscribers who wish to subscribe for Shares by telephonic order to the
Soliciting Dealer may complete the telephonic order either by delivering a check
in the amount necessary to purchase the Shares to be covered by the subscription
agreement to the Soliciting Dealer or by authorizing the Soliciting Dealer to
pay the purchase price for the Shares to be covered by the subscription
agreement from funds available in an account maintained by the Soliciting Dealer
on behalf of the subscriber. A subscriber must specifically authorize the
registered representative and branch manager to execute the subscription
agreement on behalf of the subscriber and must already have made or have agreed
to make payment for the Shares covered by the subscription agreement.
To the extent that customers of any Soliciting Dealer wish to subscribe
and pay for Shares with funds held by or to be deposited with those firms, then
such firms shall, subject to Rule 15c2-4 promulgated under the Securities
Exchange Act of 1934, either (i) upon receipt of an executed subscription
agreement or direction to execute a subscription agreement on behalf of a
customer, to forward the offering price for the Shares covered by the
subscription agreement on or before the close of business of the first business
day following receipt or execution of a subscription agreement by such firms to
the Managing Dealer (except that, in any case in which the Soliciting Dealer
maintains a branch office, and, pursuant to a Soliciting Dealer's internal
supervisory procedures, final internal supervisory review is conducted at a
different location, the branch office shall transmit the subscription documents
and subscriber's check to the Soliciting Dealer conducting such internal
supervisory review by the close of business on the first business day following
their receipt by the branch office and the Soliciting Dealer shall review the
subscription documents and subscriber's check to ensure their proper execution
and form and, if they are acceptable, transmit the check to the Managing Dealer
by the close of business on the first business day after the check is received
by the Soliciting Dealer); or (ii) to solicit indications of interest in which
event (a) such Soliciting Dealers must subsequently contact the customer
indicating interest to confirm the interest and give instructions to execute and
return a subscription agreement or to receive authorization to execute the
subscription agreement on the customer's behalf, (b) such Soliciting Dealers
must mail acknowledgments of receipt of orders to each customer confirming
interest on the business day following such confirmation, (c) such Soliciting
Dealers must debit accounts of such customers on the fifth business day (the
"debit date") following receipt of the confirmation referred to in (a), and (d)
such Soliciting Dealers must forward funds to the Managing Dealer in accordance
with the procedures and on the schedule set forth in clause (i) of this
sentence. If the procedure in (ii) is adopted, subscribers' funds are not
required to be in their accounts until the debit date. The Managing Dealer will
transmit the check to the Escrow Agent by no later than the close of business on
the first business day after the check is received from the Soliciting Dealer.
Investors, however, who are residents of Florida, Iowa, Maine,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico,
North Carolina, Ohio, Oregon, South Dakota, Tennessee or Washington must
complete and sign the Subscription Agreement in order to subscribe for Shares
and, therefore, may not subscribe for Shares by telephone. Representatives of
Soliciting Dealers who accept telephonic orders will execute the Subscription
Agreement on behalf of investors who place such orders. All investors who
telephonically subscribe for Shares will receive, with confirmation of their
subscription, a second copy of the Prospectus.
Residents of California, Oklahoma, and Texas who telephonically
subscribe for Shares will have the right to rescind such subscriptions within
ten days from receipt of the confirmation. Such investors who do not rescind
their subscriptions within such ten-day period shall be deemed to have assented
to all of the terms and conditions of the Subscription Agreement.
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Additional Subscription Procedures. Investors who have questions or who
wish to place orders for Shares by telephone or to participate in the
Reinvestment Plan should contact their Soliciting Dealer. Certain Soliciting
Dealers do not permit telephonic subscriptions or participation in the
Reinvestment Plan. See "Summary of Reinvestment Plan." The form of Subscription
Agreement for certain Soliciting Dealers who do not permit telephonic
subscriptions or participation in the Reinvestment Plan differs slightly from
the form attached hereto as Appendix D, primarily in that it will eliminate one
or both of these options.
Investors who wish to establish an IRA for the purpose of investing
solely in Shares may do so by completing, in addition to the Subscription
Agreement, the special IRA account form attached hereto as a part of Appendix D
appointing Franklin Bank, N.A., an unaffiliated bank, to act as their IRA
custodian. The custodian will not have the authority to vote any of the Shares
held in an IRA except in accordance with written instructions from the
beneficiary of the IRA, although it will hold the Shares on behalf of the
beneficiary and make distributions and, at the direction and in the discretion
of the beneficiary, investments in Shares or in other securities issued by
Affiliates of the Advisor. The custodian will not have authority at any time to
make investments through any such IRA on behalf of the beneficiary if the
investments do not constitute Shares or other securities issued by Affiliates of
the Advisor. The investors will not be required to pay any initial or annual
fees in connection with any such IRA. The fees for establishing and maintaining
all such IRAs will be paid by the Advisor initially and annually up to an
aggregate amount of $5,000, and by the Company above such amount.
ESCROW ARRANGEMENTS
The Escrow Agreement between the Company and the Bank provides that
escrowed funds will be invested by the Bank in an interest-bearing account with
the power of investment in short-term, highly liquid securities issued or
guaranteed by the U.S. Government, other investments permitted under Rule 15c2-4
of the Securities Exchange Act of 1934, as amended, or, in other short-term,
highly liquid investments with appropriate safety of principal. Such
subscription funds will be released periodically (at least once per month) upon
admission of stockholders to the Company.
The interest, if any, earned on subscription proceeds will be payable
only to those subscribers whose funds have been held in escrow by the Bank for
at least 20 days. Stockholders will not otherwise be entitled to interest earned
on Company funds or to receive interest on their Invested Capital.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to prospective investors. This discussion does not purport to deal with
all aspects of ERISA or the Code that may be relevant to particular investors in
light of their particular circumstances.
A prospective investor that is an employee benefit plan subject to
ERISA, a tax-qualified retirement Plan, an IRA, or a governmental, church, or
other Plan that is exempt from ERISA is advised to consult its own legal advisor
regarding the specific considerations arising under applicable provisions of
ERISA, the Code, and state law with respect to the purchase, ownership, or sale
of the Shares by such Plan or IRA.
Fiduciary Duties and Prohibited Transactions. A fiduciary of a pension,
profit-sharing, retirement or other employee benefit plan subject to ERISA (an
"ERISA Plan") should consider the fiduciary standards under ERISA in the context
of the ERISA Plan's particular circumstances before authorizing an investment of
any portion of the ERISA Plan's assets in the Common Stock. Accordingly, such
fiduciary should consider (i) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of ERISA; (ii) whether the
investment is in accordance with the documents and instruments governing the
ERISA Plan as required by Section 404(a)(1)(D) of ERISA; (iii) whether the
investment is prudent under Section 404(a)(1)(B) of ERISA; and (iv) whether the
investment is solely in the interests of the ERISA Plan participants and
beneficiaries and for the exclusive purpose of providing benefits to the ERISA
Plan participants and beneficiaries and defraying reasonable administrative
expenses of the ERISA Plan as required by Section 404(a)(1)(A) of ERISA.
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In addition to the imposition of fiduciary standards, ERISA and Section
4975 of the Code prohibit a wide range of transactions between an ERISA Plan, an
IRA, or certain other plans (collectively, a "Plan") and persons who have
certain specified relationships to the Plan ("parties in interest" within the
meaning of ERISA and "disqualified persons" within the meaning of the Code).
Thus, a Plan fiduciary or person making an investment decision for a Plan also
should consider whether the acquisition or the continued holding of the Shares
might constitute or give rise to a direct or indirect prohibited transaction.
Plan Assets. The prohibited transaction rules of ERISA and the Code
apply to transactions with a Plan and also to transactions with the "plan
assets" of the Plan. The "plan assets" of a Plan include the Plan's interest in
an entity in which the Plan invests and, in certain circumstances, the assets of
the entity in which the Plan holds such interest. The term "plan assets" is not
specifically defined in ERISA or the Code, nor, as of the date hereof, has it
been interpreted definitively by the courts in litigation. On November 13, 1986,
the United States Department of Labor, the governmental agency primarily
responsible for administering ERISA, adopted a final regulation (the "DOL
Regulation") setting out the standards it will apply in determining whether an
equity investment in an entity will cause the assets of such entity to
constitute "plan assets." The DOL Regulation applies for purposes of both ERISA
and Section 4975 of the Code.
Under the DOL Regulation, if a Plan acquires an equity interest in an
entity, which equity interest is not a "publicly-offered security," the Plan's
assets generally would include both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The DOL Regulation defines a publicly-offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the offering occurred). The Shares
are being sold in an offering registered under the Securities Act of 1933, as
amended, and will be registered within the relevant time period under Section
12(b) of the Exchange Act.
The DOL Regulation provides that a security is "widely held" only if it
is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. However, a class of securities
will not fail to be "widely held" solely because the number of independent
investors falls below 100 subsequent to the initial public offering as a result
of events beyond the issuer's control. The Company expects the Shares to be
"widely held" upon completion of the offering.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The DOL Regulation further provides that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with this offering, certain restrictions ordinarily will
not affect, alone or in combination, the finding that such securities are freely
transferable. The Company believes that the restrictions imposed under the
Articles of Incorporation on the transfer of the Common Stock are limited to
restrictions on transfer generally permitted under the DOL Regulation and are
not likely to result in the failure of the Common Stock to be "freely
transferable." See "Summary of the Articles of Incorporation and Bylaws --
Restriction on Ownership." The DOL Regulation only establishes a presumption in
favor of a finding of free transferability and, therefore, no assurance can be
given that the Department of Labor and the U.S. Treasury Department would not
reach a contrary conclusion with respect to the Common Stock.
Assuming that the Shares will be "widely held" and "freely
transferable," the Company believes that the Shares will be publicly-offered
securities for purposes of the DOL Regulation and that the assets of the Company
will not be deemed to be "plan assets" of any Plan that invests in the Shares.
DETERMINATION OF OFFERING PRICE
The offering price per Share was determined by the Company based upon
the estimated costs of investing in the Properties and the Mortgage Loans, the
fees to be paid to the Advisor and its Affiliates, as well as fees to third
parties, and the expenses of this offering.
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SUPPLEMENTAL SALES MATERIAL
Shares are being offered only through this Prospectus. In addition to
this Prospectus, the Company may use certain sales materials in connection with
this offering, although only when accompanied or preceded by the delivery of
this Prospectus. No sales material may be used unless it has first been approved
in writing by the Company. As of the date of this Prospectus, it is anticipated
that the following sales material will be authorized for use by the Company in
connection with this offering: (i) a brochure entitled CNL Hospitality
Properties, Inc., (ii) a fact sheet describing the general features of the
Company, (iii) a cover letter transmitting the Prospectus, (iv) a summary
description of the offering, (v) a slide presentation, (vi) broker updates,
(vii) an audio cassette presentation, (viii) a video presentation, (ix) an
electronic media presentation, (x) a cd-rom presentation, (xi) a script for
telephonic marketing, (xii) seminar advertisements and invitations, and (xiii)
certain third-party articles. All such materials will be used only by registered
broker-dealers which are members of the NASD. The Company also may respond to
specific questions from Soliciting Dealers and prospective investors. Additional
materials relating to the offering may be made available to Soliciting Dealers
for their internal use.
LEGAL OPINIONS
The legality of the Shares being offered hereby has been passed upon
for the Company by Shaw Pittman Potts & Trowbridge. Statements made under "Risk
Factors Tax Risks" and "Federal Income Tax Considerations" have been reviewed by
Shaw Pittman Potts & Trowbridge, who have given their opinion that such
statements as to matters of law are correct in all material respects. Shaw
Pittman Potts & Trowbridge serves as securities and tax counsel to the Company
and to the Advisor and certain of their Affiliates. Certain members of the firm
have invested in prior programs sponsored by the Affiliates of the Company in
aggregate amounts which do not exceed one percent of the amounts sold by any
such program, and members of the firm also may invest in the Company.
EXPERTS
The audited balance sheets of the Company as of December 31, 1997 and
1996, and the related statements of earnings, stockholders' equity and cash
flows for the year ended December 31, 1997, and for the period June 12, 1996
(date of inception) through December 31, 1996, included in this Prospectus, have
been included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement has been filed with the Securities and
Exchange Commission with respect to the securities offered hereby. This
Prospectus does not contain all information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained in this Prospectus as to the
contents of any document are necessarily summaries of such documents, and in
each instance reference is made to the copy of such documents filed with the
Commission, each such statement being qualified in all respects by such
reference. For further information regarding the Company and the Shares,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed or incorporated as a part thereof which may be obtained from the
principal office of the Commission in Washington, D.C., upon payment of the fee
prescribed by the Commission, or examined at the principal office of the
Commission without charge. The Commission maintains a Web site located at
http://www.sec.gov. that contains information regarding registrants that file
electronically with the Commission.
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DEFINITIONS
"Acquisition Expenses" means any and all expenses incurred by the
Company, the Advisor, or any Affiliate of either in connection with the
selection or acquisition of any Property or the making of any Mortgage Loan,
whether or not acquired, including, without limitation, legal fees and expenses,
travel and communication expenses, costs of appraisals, nonrefundable option
payments on property not acquired, accounting fees and expenses, and title
insurance.
"Acquisition Fees" means any and all fees and commissions, exclusive of
Acquisition Expenses, paid by any person or entity to any other person or entity
(including any fees or commissions paid by or to any Affiliate of the Company or
the Advisor) in connection with making or investing in Mortgage Loans or the
purchase, development or construction of a Property, including, without
limitation, real estate commissions, acquisition fees, finder's fees, selection
fees, development fees, construction fees, nonrecurring management fees,
consulting fees, loan fees, points, the Secured Equipment Lease Servicing Fee,
or any other fees or commissions of a similar nature. Excluded shall be
development fees and construction fees paid to any person or entity not
affiliated with the Advisor in connection with the actual development and
construction of any Property.
"Advisor" means CNL Hospitality Advisors, Inc. (formerly CNL Real
Estate Advisors, Inc.), a Florida corporation, any successor advisor to the
Company, or any person or entity to which CNL Hospitality Advisors, Inc. or any
successor advisors subcontracts substantially all of its functions.
"Advisory Agreement" means the Advisory Agreement between the Company
and the Advisor, pursuant to which the Advisor will act as the advisor to the
Company and provide specified services to the Company.
"Affiliate" means (i) any person or entity directly or indirectly
through one or more intermediaries controlling, controlled by, or under common
control with another person or entity; (ii) any person or entity directly or
indirectly owning, controlling, or holding with power to vote ten percent (10%)
or more of the outstanding voting securities of another person or entity; (iii)
any officer, director, partner, or trustee of such person or entity; (iv) any
person ten percent (10%) or more of whose outstanding voting securities are
directly or indirectly owned, controlled or held, with power to vote, by such
other person; and (v) if such other person or entity is an officer, director,
partner, or trustee of a person or entity, the person or entity for which such
person or entity acts in any such capacity.
"Articles of Incorporation" means the Articles of Incorporation, as the
same may be amended from time to time, of the Company.
"Asset Management Fee" means the fee payable to the Advisor for
day-to-day professional management services in connection with the Company and
its investments in Properties and Mortgage Loans pursuant to the Advisory
Agreement.
"Assets" means Properties, Mortgage Loans and Secured Equipment Leases,
collectively.
"Average Invested Assets" means, for a specified period, the average of
the aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
such period.
"Bank" means SouthTrust Asset Management Company of Florida, N.A.,
escrow agent for the offering.
"Board of Directors" means the Directors of the Company.
"Bylaws" means the bylaws of the Company.
"CNL" means CNL Group, Inc., the parent company of the Advisor and the
Managing Dealer.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Common Stock" means the common stock, par value $0.01 per share, of
the Company.
"Competitive Real Estate Commission" means a real estate or brokerage
commission for the purchase or sale of property which is reasonable, customary,
and competitive in light of the size, type, and location of the property. The
total of all real estate commissions paid by the Company to all persons and
entities (including the subordinated real estate disposition fee payable to the
Advisor) in connection with any Sale of one or more of the Company's Properties
shall not exceed the lesser of (i) a Competitive Real Estate Commission or (ii)
six percent of the gross sales price of the Property or Properties.
"Counsel" means tax counsel to the Company.
"Deferred Commission Option" means an agreement between a stockholder,
the participating Soliciting Dealer and the Managing Dealer to have Selling
Commissions paid over a seven year period as described in "The Offering -- Plan
of Distribution."
"Director" means a member of the Board of Directors of the Company.
"Distributions" means any distributions of money or other property by
the Company to owners of shares of Common Stock, including distributions that
may constitute a return of capital for federal income tax purposes.
"Equipment" means the furniture, fixtures and equipment used at Hotel
Chains.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, retirement, or other
employee benefit plan subject to ERISA.
"Excess Shares" means the excess shares exchanged for shares of Common
Stock or Preferred Stock, as the case may be, transferred or proposed to be
transferred in excess of the Ownership Limit or which would otherwise jeopardize
the Company's status as a REIT under the Code.
"Front-End Fees" means fees and expenses paid by any person or entity
to any person or entity for any services rendered in connection with the
organization of the Company and investing in Properties and Mortgage Loans,
including Selling Commissions, marketing support and due diligence expense
reimbursement fees, Offering Expenses, Acquisition Expenses and Acquisition Fees
paid out of Gross Proceeds, and any other similar fees, however designated.
During the term of the Company, Front-End Fees shall not exceed 20% of Gross
Proceeds.
"Gross Proceeds" means the aggregate purchase price of all Shares sold
for the account of the Company through the offering, without deduction for
Selling Commissions, volume discounts, the marketing support and due diligence
expense reimbursement fee or Offering Expenses. For the purpose of computing
Gross Proceeds, the purchase price of any Share for which reduced Selling
Commissions are paid to the Managing Dealer or a Soliciting Dealer (where net
proceeds to the Company are not reduced) shall be deemed to be the full offering
price, currently $10.00.
"Hotel Chains" means the national and regional hotel chains, primarily
limited service, extended stay and full service hotel chains, to be selected by
the Advisor, and who themselves or their franchisees will either (i) lease
Properties purchased by the Company, (ii) become borrowers under Mortgage Loans,
or (iii) become lessees or borrowers under Secured Equipment Leases.
"Independent Director" means a Director who is not and within the last
two years has not been directly or indirectly associated with the Advisor by
virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii)
employment by the Advisor or its Affiliates, (iii) service as an officer or
director of the Advisor or its Affiliates, (iv) the performance of services,
other than as a Director, for the Company, (v) service as a director or trustee
of more than three real estate investment trusts advised by the Advisor, or (vi)
maintenance of a material business or professional relationship with the Advisor
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or any of its Affiliates. An indirect relationship shall include circumstances
in which a Director's spouse, parents, children, siblings, mothers- or
fathers-in-law or sons- or daughters-in-law, or brothers- or sisters-in-law is
or has been associated with the Advisor, any of its affiliates, or the Company.
A business or professional relationship is considered material if the gross
revenue derived by the Director from the Advisor and Affiliates exceeds 5% of
either the Director's annual gross revenue during either of the last two years
or the Director's net worth on a fair market value basis.
"Independent Expert" means a person or entity with no material current
or prior business or personal relationship with the Advisor or the Directors and
who is engaged to a substantial extent in the business of rendering opinions
regarding the value of assets of the type held by the Company.
"Initial Offering" means the initial offering of the Company which
commenced on July 9, 1997 and is expected to terminate in March 1999, at which
time this offering will commence.
"Invested Capital" means the amount calculated by multiplying the total
number of shares of Common Stock purchased by stockholders by the issue price,
reduced by the portion of any Distribution that is attributable to Net Sales
Proceeds and by any amounts paid by the Company to repurchase shares pursuant to
the plan for redemption of shares.
"IRA" means an Individual Retirement Account.
"IRS" means the Internal Revenue Service.
"Joint Ventures" means the joint venture or general partnership
arrangements in which the Company is a co-venturer or general partner which are
established to acquire Properties.
"Leverage" means the aggregate amount of indebtedness of the Company
for money borrowed (including purchase money mortgage loans) outstanding at any
time, both secured and unsecured.
"Line of Credit" means one or more lines of credit in an aggregate
amount up to $100,000,000, the proceeds of which will be used to acquire
Properties and make Mortgage Loans and Secured Equipment Leases and to pay the
Secured Equipment Lease Servicing Fee. The Line of Credit may be in addition to
any Permanent Financing.
"Listing" means the listing of the shares of Common Stock of the
Company on a national securities exchange or over-the-counter market.
"Managing Dealer" means CNL Securities Corp., an Affiliate of the
Advisor, or such other person or entity selected by the Board of Directors to
act as the managing dealer for the offering. CNL Securities Corp. is a member of
the National Association of Securities Dealers, Inc.
"Mortgage Loans" means, in connection with mortgage financing provided
by the Company, notes or other evidences of indebtedness or obligations which
are secured or collateralized by real estate owned by the borrower.
"Net Assets" means the total assets of the Company (other than
intangibles) at cost before deducting depreciation or other non-cash reserves
less total liabilities, calculated quarterly by the Company, on a basis
consistently applied.
"Net Income" means for any period, the total revenues applicable to
such period, less the total expenses applicable to such period excluding
additions to reserves for depreciation, bad debts, or other similar non-cash
reserves; provided, however, Net Income for purposes of calculating total
allowable Operating Expenses (as defined herein) shall exclude the gain from the
sale of the Company's Assets.
"Net Offering Proceeds" means Gross Proceeds less (i) Selling
Commissions, (ii) Offering Expenses, and (iii) the marketing support and due
diligence expense reimbursement fee.
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"Net Sales Proceeds" means, in the case of a transaction described in
clause (i)(A) of the definition of Sale, the proceeds of any such transaction
less the amount of all real estate commissions and closing costs paid by the
Company. In the case of a transaction described in clause (i)(B) of such
definition, Net Sales Proceeds means the proceeds of any such transaction less
the amount of any legal and other selling expenses incurred in connection with
such transaction. In the case of a transaction described in clause (i)(C) of
such definition, Net Sales Proceeds means the proceeds of any such transaction
actually distributed to the Company from the Joint Venture. In the case of a
transaction or series of transactions described in clause (i)(D) of the
definition of Sale, Net Sales Proceeds means the proceeds of any such
transaction less the amount of all commissions and closing costs paid by the
Company. In the case of a transaction described in clause (ii) of the definition
of Sale, Net Sales Proceeds means the proceeds of such transaction or series of
transactions less all amounts generated thereby and reinvested in one or more
Properties within 180 days thereafter and less the amount of any real estate
commissions, closing costs, and legal and other selling expenses incurred by or
allocated to the Company in connection with such transaction or series of
transactions. Net Sales Proceeds shall also include, in the case of any lease of
a Property consisting of a building only, any Mortgage Loan or any Secured
Equipment Lease, any amounts from tenants, borrowers or lessees that the Company
determines, in its discretion, to be economically equivalent to proceeds of a
Sale. Net Sales Proceeds shall not include, as determined by the Company in its
sole discretion, any amounts reinvested in one or more Properties, Mortgage
Loans or Secured Equipment Leases, to repay outstanding indebtedness, or to
establish reserves.
"Offering Expenses" means any and all costs and expenses, other than
Selling Commissions, the Soliciting Dealer Warrants, and the 0.5% marketing
support and due diligence expense reimbursement fee, incurred by the Company,
the Advisor or any Affiliate of either in connection with the qualification and
registration of the Company and the marketing and distribution of Shares,
including, without limitation, the following: legal, accounting, and escrow
fees; printing, amending, supplementing, mailing, and distributing costs;
filing, registration, and qualification fees and taxes; telegraph and telephone
costs; and all advertising and marketing expenses, including the costs related
to investor and broker-dealer sales meetings. The Offering Expenses paid by the
Company in connection with the offering, together with the 7.5% Selling
Commissions, the Soliciting Dealer Warrants, and the 0.5% marketing support and
due diligence expense reimbursement fee, incurred by the Company will not exceed
13% of the proceeds raised in connection with this offering.
"Operating Expenses" includes all costs and expenses incurred by the
Company, as determined under generally accepted accounting principles, which in
any way are related to the operation of the Company or to Company business,
including (a) advisory fees, (b) any soliciting dealer servicing fees, (c) the
Asset Management Fee, (d) the Performance Fee, and (e) the Subordinated
Incentive Fee, but excluding (i) the expenses of raising capital such as
Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing,
registration, and other fees, printing and other such expenses, and tax incurred
in connection with the issuance, distribution, transfer, registration, and
Listing of the Shares, (ii) interest payments, (iii) taxes, (iv) non-cash
expenditures such as depreciation, amortization, and bad debt reserves, (v) the
Advisor's subordinated 10% share of Net Sales Proceeds, and (vi) Acquisition
Fees and Acquisition Expenses, real estate commissions on the sale of property
and other expenses connected with the acquisition and ownership of real estate
interests, mortgage loans, or other property (such as the costs of foreclosure,
insurance premiums, legal services, maintenance, repair, and improvement of
property).
"Ownership Limit" means, with respect to shares of Common Stock and
Preferred Stock, the percent limitation placed on the ownership of Common Stock
and Preferred Stock by any one Person (as defined in the Articles of
Incorporation). As of the initial date of this Prospectus, the Ownership Limit
is 9.8% of the outstanding Common Stock and 9.8% of the outstanding Preferred
Stock.
"Participants" means those stockholders who elect to participate in the
Reinvestment Plan.
"Performance Fee" means the fee payable to the Advisor under certain
circumstances if certain performance standards have been met and the
Subordinated Incentive Fee has not been paid.
-114-
<PAGE>
"Permanent Financing" means financing (i) to acquire Assets, (ii) to
pay the Secured Equipment Lease Servicing Fee, (iii) to pay a fee of 4.5% of any
Permanent Financing, excluding amounts to fund Secured Equipment Leases, as
Acquisition Fees, and (iv) refinance outstanding amounts on the Line of Credit.
Permanent Financing may be in addition to any borrowing under the Line of
Credit.
"Plan" means ERISA Plans, IRAs, Keogh plans, stock bonus plans, and
certain other plans.
"Preferred Stock" means any class or series of preferred stock of the
Company that may be issued in accordance with the terms of the Articles of
Incorporation and applicable law.
"Properties" means (i) the real properties, including the buildings
located thereon and including Equipment; (ii) the real properties only; or (iii)
the buildings only, including Equipment, either directly or through joint
venture arrangements or other partnerships.
"Prospectus" means the final prospectus included in the Company's
Registration Statement filed with the Securities and Exchange Commission,
pursuant to which the Company will offer Shares to the public, as the same may
be amended or supplemented from time to time after the effective date of such
Registration Statement.
"Qualified Plans" means qualified pension, profit-sharing, and stock
bonus plans, including Keogh plans and IRAs.
"Real Estate Asset Value" means the amount actually paid or allocated
to the purchase, development, construction or improvement of a Property,
exclusive of Acquisition Fees and Acquisition Expenses.
"Reinvestment Agent" or "Agent" means the independent agent, which
currently is MMS Securities, Inc., for Participants in the Reinvestment Plan.
"Reinvestment Plan" means the Reinvestment Plan, in the form attached
hereto as Appendix A.
"Reinvestment Proceeds" means net proceeds available from the sale of
Shares under the Reinvestment Plan to redeem Shares or, under certain
circumstances, to invest in additional Properties or Mortgage Loans.
"REIT" means real estate investment trust, as defined pursuant to
Sections 856 through 860 of the Code.
"Related Party Tenant" means a related party tenant, as defined
pursuant to Section 856(d)(2)(B) of the Code.
"Roll-Up Entity" means a partnership, real estate investment trust,
corporation, trust, or similar entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
"Roll-Up Transaction" means a transaction involving the acquisition,
merger, conversion, or consolidation, directly or indirectly, of the Company and
the issuance of securities of a Roll-Up Entity. Such term does not include: (i)
a transaction involving securities of the Company that have been listed on a
national securities exchange or the National Association of Securities Dealers
Automated Quotation National Market System for at least 12 months; or (ii) a
transaction involving the conversion to corporate, trust, or association form of
only the Company if, as a consequence of the transaction, there will be no
significant adverse change in stockholder voting rights, the term of existence
of the Company, compensation to the Advisor, or the investment objectives of the
Company.
"Sale" (i) means any transaction or series of transactions whereby: (A)
the Company sells, grants, transfers, conveys, or relinquishes its ownership of
any Property or portion thereof, including the lease of any Property consisting
of the building only, and including any event with respect to any Property which
gives rise to a significant amount of insurance proceeds or condemnation awards;
(B) the Company sells, grants, transfers, conveys, or relinquishes its ownership
of all or substantially all of the interest of the Company in any Joint Venture
in which it is a co-venturer or partner; (C) any Joint Venture in which the
Company as a co-venturer or partner sells, grants, transfers, conveys, or
relinquishes its ownership of any Property or portion thereof, including any
-115-
<PAGE>
event with respect to any Property which gives rise to insurance claims or
condemnation awards; or (D) the Company sells, grants, conveys or relinquishes
its interest in any Mortgage Loan or Secured Equipment Lease or portion thereof,
including any event with respect to any Mortgage Loan or Secured Equipment Lease
which gives rise to a significant amount of insurance proceeds or similar
awards; but (ii) shall not include any transaction or series of transactions
specified in clause (i)(A), (i)(B) or (i)(C) above in which the proceeds of such
transaction or series of transactions are reinvested in one or more Properties
within 180 days thereafter.
"Secured Equipment Leases" means the Equipment financing made available
by the Company to operators of Hotel Chains pursuant to which the Company will
finance, through loans or direct financing leases, the Equipment.
"Secured Equipment Lease Servicing Fee" means the fee payable to the
Advisor by the Company out of the proceeds of the Line of Credit or Permanent
Financing for negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program equal to 2% of the purchase price of the Equipment
subject to each Secured Equipment Lease and paid upon entering into such lease
or loan.
"Selling Commissions" means any and all commissions payable to
underwriters, managing dealers, or other broker-dealers in connection with the
sale of Shares as described in the Prospectus, including, without limitation,
commissions payable to CNL Securities Corp.
"Shares" means the shares of Common Stock of the Company, including the
up to 27,500,000 shares to be sold in this offering.
"Soliciting Dealers" means those broker-dealers that are members of the
National Association of Securities Dealers, Inc., or that are exempt from
broker-dealer registration, and that, in either case, enter into participating
broker or other agreements with the Managing Dealer to sell Shares.
"Soliciting Dealer Warrants" means warrants to purchase one share of
Common Stock of the Company for every 25 Shares sold through the offering, which
are issuable to the Managing Dealer (all or a portion of which may be reallowed
to Soliciting Dealers, with prior written approval from, and in the sole
discretion of, the Managing Dealer) and are to be exercised during the Exercise
Period, at a price of $12.00 per share.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Company or any person who will control,
manage or participate in the management of the Company, and any Affiliate of
such Person. Not included is any Person whose only relationship with the Company
is that of an independent property manager of Company assets, and whose only
compensation is as such. Sponsor does not include independent third parties such
as attorneys, accountants, and underwriters whose only compensation is for
professional services. A Person may also be deemed a Sponsor of the Company by:
a. taking the initiative, directly or indirectly, in
founding or organizing the business or enterprise of the
Company, either alone or in conjunction with one or more other
Persons;
b. receiving a material participation in the Company in
connection with the founding or organizing of the business of
the Company, in consideration of services or property, or both
services and property;
c. having a substantial number of relationships and contacts with
the Company;
d. possessing significant rights to control Company Properties;
e. receiving fees for providing services to the Company which are
paid on a basis that is not customary in the industry; or
f. providing goods or services to the Company on a basis which
was not negotiated at arm's-length with the Company.
-116-
<PAGE>
"Stockholders' 8% Return," as of each date, shall mean an
aggregate amount equal to an 8% cumulative, noncompounded, annual
return on Invested Capital.
"Subscription Agreement" means the Subscription Agreement in one of the
forms attached hereto as Appendix D.
"Subordinated Incentive Fee" means the fee payable to the Advisor under
certain circumstances if the Shares are listed on a national securities exchange
or over-the-counter market.
"Termination Date" means the date of termination of the Advisory
Agreement.
"Total Proceeds" means Gross Proceeds, loan proceeds from Permanent
Financing and amounts outstanding on the Line of Credit, if any, at the time of
Listing, but excluding loan proceeds used to finance Secured Equipment Leases.
"Triple-Net Lease" means a Property lease pursuant to which the tenant
is responsible for property costs associated with ongoing operations, including
repairs, maintenance, property taxes, utilities and insurance.
"Unimproved Real Property" means Property in which the Company has an
equity interest that is not acquired for the purpose of producing rental or
other operating income, that has no development or construction in process and
for which no development or construction is planned, in good faith, to commence
within one year.
-117-
<PAGE>
APPENDIX A
FORM OF
REINVESTMENT PLAN
<PAGE>
FORM OF
REINVESTMENT PLAN
CNL HOSPITALITY PROPERTIES, INC., a Maryland corporation (the
"Company"), pursuant to its Articles of Incorporation, adopted a Reinvestment
Plan (the "Reinvestment Plan") on the terms and conditions set forth below.
1. Reinvestment of Distributions. MMS Securities, Inc., the agent (the
"Reinvestment Agent") for participants (the "Participants") in the Reinvestment
Plan, will receive all cash distributions made by the Company with respect to
shares of common stock of the Company (the "Shares") owned by each Participant
(collectively, the "Distributions"). The Reinvestment Agent will apply such
Distributions as follows:
(a) At any period during which the Company is making a public
offering of Shares, the Reinvestment Agent will invest Distributions in
Shares acquired from the managing dealer or participating brokers for
the offering at the public offering price per Share. During such
period, commissions and the marketing support and due diligence fee
equal to 0.5% of the total amount raised from sale of the Shares may be
reallowed to the broker who made the initial sale of Shares to the
Participant at the same rate as for initial purchases.
<PAGE>
(b) If no public offering of Shares is ongoing, the Reinvestment
Agent will purchase Shares from any additional shares which the Company
elects to register with the Securities and Exchange Commission (the
"SEC") for the Reinvestment Plan, at a per Share price equal to the
fair market value of the Shares determined by (i) quarterly appraisal
updates performed by the Company based on a review of the existing
appraisal and lease of each Property, focusing on a re-examination of
the capitalization rate applied to the rental stream to be derived from
that Property; and (ii) a review of the outstanding Mortgage Loans and
Secured Equipment Leases focusing on a determination of present value
by a re-examination of the capitalization rate applied to the stream of
payments due under the terms of each Mortgage Loan and Secured
Equipment Lease. The capitalization rate used by the Company and, as a
result, the price per Share paid by Participants in the Reinvestment
Plan prior to Listing will be determined by the Advisor in its sole
discretion. The factors that the Advisor will use to determine the
capitalization rate include (i) its experience in selecting, acquiring
and managing properties similar to the Properties; (ii) an examination
of the conditions in the market; and (iii) capitalization rates in use
by private appraisers, to the extent that the Advisor deems such
factors appropriate, as well as any other factors that the Advisor
deems relevant or appropriate in making its determination. The
Company's internal accountants will then convert the most recent
quarterly balance sheet of the Company from a "GAAP" balance sheet to a
"fair market value" balance sheet. Based on the "fair market value"
balance sheet, the internal accountants will then assume a sale of the
Company's assets and the liquidation of the Company in accordance with
its constitutive documents and applicable law and compute the
appropriate method of distributing the cash available after payment of
reasonable liquidation expenses, including closing costs typically
associated with the sale of assets and shared by the buyer and seller,
and the creation of reasonable reserves to provide for the payment of
any contingent liabilities. Upon listing of the Shares on a national
securities exchange or over-the-counter market, the Reinvestment Agent
may purchase Shares either through such market or directly from the
Company pursuant to a registration statement relating to the
Reinvestment Plan, in either case at a per Share price equal to the
then-prevailing market price on the national securities exchange or
over-the-counter market on which the Shares are listed at the date of
purchase by the Agent. In the event that, after Listing occurs, the
Reinvestment Agent purchases Shares on a national securities exchange
or over-the- counter market through a registered broker-dealer, the
amount to be reinvested shall be reduced by any brokerage commissions
charged by such registered broker-dealer. In the event that such
registered broker-dealer charges reduced brokerage commissions,
additional funds in the amount of any such reduction shall be left
available for the purchase of Shares.
(c) For each Participant, the Reinvestment Agent will maintain a
record which shall reflect for each fiscal quarter the Distributions
received by the Reinvestment Agent on behalf of such Participant. The
Reinvestment Agent will use the aggregate amount of Distributions to
all Participants for each fiscal quarter to purchase Shares for the
Participants. If the aggregate amount of Distributions to Participants
exceeds the amount required to purchase all Shares then available for
purchase, the Reinvestment Agent will purchase all available Shares and
will return all remaining Distributions to the Participants within 30
days after the date such Distributions are made. The purchased Shares
will be allocated among the Participants based on the portion of the
aggregate Distributions received by the Reinvestment Agent on behalf of
each Participant, as reflected in the records maintained by the
Reinvestment Agent. The ownership of the Shares purchased pursuant to
the Reinvestment Plan shall be reflected on the books of the Company.
<PAGE>
(d) Distributions shall be invested by the Reinvestment Agent in
Shares promptly following the payment date with respect to such
Distributions to the extent Shares are available. If sufficient Shares
are not available, Distributions shall be invested on behalf of the
Participants in one or more interest-bearing accounts in Franklin Bank,
N.A., Southfield, Michigan, or in another commercial bank approved by
the Company which is located in the continental United States and has
assets of at least $100,000,000, until Shares are available for
purchase, provided that any Distributions that have not been invested
in Shares within 30 days after such Distributions are made by the
Company shall be returned to Participants.
(e) The allocation of Shares among Participants may result in the
ownership of fractional Shares, computed to four decimal places.
(f) Distributions attributable to Shares purchased on behalf of
the Participants pursuant to the Reinvestment Plan will be reinvested
in additional Shares in accordance with the terms hereof.
(g) No certificates will be issued to a Participant for Shares
purchased on behalf of the Participant pursuant to the Reinvestment
Plan except to Participants who make a written request to the
Reinvestment Agent. Participants in the Reinvestment Plan will receive
statements of account in accordance with Paragraph 7 below.
2. Election to Participate. Any stockholder who participates in a
public offering of Shares and who has received a copy of the related final
prospectus included in the Company's registration statement filed with the SEC
may elect to participate in and purchase Shares through the Reinvestment Plan at
any time by written notice to the Company and would not need to receive a
separate prospectus relating solely to the Reinvestment Plan. A person who
becomes a stockholder otherwise than by participating in a public offering of
Shares may purchase Shares through the Reinvestment Plan only after receipt of a
separate prospectus relating solely to the Reinvestment Plan. Participation in
the Reinvestment Plan will commence with the next Distribution made after
receipt of the Participant's notice, provided it is received more than ten days
prior to the last day of the fiscal month or quarter, as the case may be, to
which such Distribution relates. Subject to the preceding sentence, regardless
of the date of such election, a shareholder will become a Participant in the
Reinvestment Plan effective on the first day of the fiscal month (prior to
termination of the offering of Shares) or fiscal quarter (after termination of
the offering of Shares) following such election, and the election will apply to
all Distributions attributable to the fiscal quarter or month (as the case may
be) in which the shareholder makes thereafter. A Participant who has terminated
his participation in the Reinvestment Plan pursuant to Paragraph 11 will be
allowed to participate in the Reinvestment Plan again upon receipt of a current
version of a final prospectus relating to participation in the Reinvestment Plan
which contains, at a minimum, the following: (i) the minimum investment amount;
(ii) the type or source of proceeds which may be invested; and (iii) the tax
consequences of the reinvestment to the Participant, by notifying the
Reinvestment Agent and completing any required forms.
3. Distribution of Funds. In making purchases for Participants'
accounts, the Reinvestment Agent may commingle Distributions attributable to
Shares owned by Participants in the Reinvestment Plan.
<PAGE>
4. Proxy Solicitation. The Reinvestment Agent will distribute to
Participants proxy solicitation material received by it from the Company which
is attributable to Shares held in the Reinvestment Plan. The Reinvestment Agent
will vote any Shares that it holds for the account of a Participant in
accordance with the Participant's written instructions. If a Participant gives a
proxy to person(s) representing the Company covering Shares registered in the
Participant's name, such proxy will be deemed to be an instruction to the
Reinvestment Agent to vote the full Shares in the Participant's account in like
manner. If a Participant does not direct the Reinvestment Agent as to how the
Shares should be voted and does not give a proxy to person(s) representing the
Company covering these Shares, the Reinvestment Agent will not vote said Shares.
5. Absence of Liability. Neither the Company nor the Reinvestment Agent
shall have any responsibility or liability as to the value of the Company's
Shares, any change in the value of the Shares acquired for the Participant's
account, or the rate of return earned on, or the value of, the interest-bearing
accounts, in which Distributions are invested. Neither the Company nor the
Reinvestment Agent shall be liable for any act done in good faith, or for any
good faith omission to act, including, without limitation, any claims of
liability (a) arising out of the failure to terminate a Participant's
participation in the Reinvestment Plan upon such Participant's death prior to
receipt of notice in writing of such death and the expiration of 15 days from
the date of receipt of such notice and (b) with respect to the time and the
prices at which Shares are purchased for a Participant. Notwithstanding the
foregoing, liability under the federal securities laws cannot be waived.
Similarly, the Company and the Reinvestment Agent have been advised that in the
opinion of certain state securities commissioners, indemnification is also
considered contrary to public policy and therefore unenforceable.
6. Suitability.
(a) Within 60 days prior to the end of each fiscal year, CNL
Securities Corp. ("CSC"), will mail to each Participant a participation
agreement (the "Participation Agreement"), in which the Participant
will be required to represent that there has been no material change in
the Participant's financial condition and confirm that the
representations made by the Participant in the Subscription Agreement
(a form of which shall be attached to the Participation Agreement) are
true and correct as of the date of the Participation Agreement, except
as noted in the Participation Agreement or the attached form of
Subscription Agreement.
<PAGE>
(b) Each Participant will be required to return the executed
Participation Agreement to CSC within 30 days after receipt. In the
event that a Participant fails to respond to CSC or return the
completed Participation Agreement on or before the fifteenth (15th) day
after the beginning of the fiscal year following receipt of the
Participation Agreement, the Participant's Distribution for the first
fiscal quarter of that year will be sent directly to the Participant
and no Shares will be purchased on behalf of the Participant for that
fiscal quarter and, subject to (c) below, any fiscal quarters
thereafter, until CSC receives an executed Participation Agreement from
the Participant.
(c) If a Participant fails to return the executed Participation
Agreement to CSC prior to the end of the second fiscal quarter for any
year of the Participant's participation in the Reinvestment Plan, the
Participant's participation in the Reinvestment Plan shall be
terminated in accordance with Paragraph 11 below.
(d) Each Participant shall notify CSC in the event that, at any
time during his participation in the Reinvestment Plan, there is any
material change in the Participant's financial condition or inaccuracy
of any representation under the Subscription Agreement.
(e) For purposes of this Paragraph 6, a material change shall
include any anticipated or actual decrease in net worth or annual gross
income or any other change in circumstances that would cause the
Participant to fail to meet the suitability standards set forth in the
Company's Prospectus.
7. Reports to Participants. Within 60 days after the end of each fiscal
quarter, the Reinvestment Agent will mail to each Participant a statement of
account describing, as to such Participant, the Distributions received during
the quarter, the number of Shares purchased during the quarter, the per Share
purchase price for such Shares, the total administrative charge to such
Participant, and the total Shares purchased on behalf of the Participant
pursuant to the Reinvestment Plan. Each statement shall also advise the
Participant that, in accordance with Paragraph 6(d) hereof, he is required to
notify CSC in the event that there is any material inaccurate. Tax information
for income earned on Shares under the Reinvestment Plan will be sent to each
participant by the Company or the Reinvestment Agent at least annually.
<PAGE>
8. Administrative Charges, Commissions, and Plan Expenses. The Company
shall be responsible for all administrative charges and expenses charged by the
Reinvestment Agent. The administrative charge for each Participant for each
fiscal quarter shall be the lesser of 5% of the amount reinvested for the
Participant or $2.50, with a minimum charge of $.50. Any interest earned on
Distributions will be paid to the Company to defray costs relating to the
Reinvestment Plan. Additionally, in connection with any Shares purchased from
the Company both prior to and after the termination of a public offering of the
Shares, the Company will pay to CSC selling commissions of 7.5%, a marketing
support and due diligence expense reimbursement fee of .5%, and, in the event
that proceeds of the sale of Shares pursuant to the Reinvestment Plan are used
to acquire Properties or to invest in Mortgage Loans, will pay to CNL
Hospitality Advisors, Inc. acquisition fees of 4.5% of the purchase price of the
Shares sold pursuant to the Reinvestment Plan.
9. No Drawing. No Participant shall have any right to draw checks or
drafts against his account or give instructions to the Company or the
Reinvestment Agent except as expressly provided herein.
10. Taxes. Taxable Participants may incur a tax liability for
Distributions made with respect to such Participant's Shares, even though they
have elected not to receive their Distributions in cash but rather to have their
Distributions held in their account under the Reinvestment Plan.
11. Termination.
(a) A Participant may terminate his participation in the
Reinvestment Plan at any time by written notice to the Company. To be
effective for any Distribution, such notice must be received by the
Company at least ten business days prior to the last day of the fiscal
month or quarter to which such Distribution relates.
(b) The Company or the Reinvestment Agent may terminate a
Participant's individual participation in the Reinvestment Plan, and
the Company may terminate the Reinvestment Plan itself at any time by
ten days' prior written notice mailed to a Participant, or to all
Participants, as the case may be, at the address or addresses shown on
their account or such more recent address as a Participant may furnish
to the Company in writing.
(c) After termination of the Reinvestment Plan or termination of a
Participant's participation in the Reinvestment Plan, the Reinvestment
Agent will send to each Participant (i) a statement of account in
accordance with Paragraph 7 hereof, and (ii) a check for (a) the amount
of any Distributions in the Participant's account that have not been
reinvested in Shares, and (b) the value of any fractional Shares
standing to the credit of a Participant's account based on the market
price of the Shares. The record books of the Company will be revised to
reflect the ownership of record of the Participant's full Shares and
any future Distributions made after the effective date of the
termination will be sent directly to the former Participant.
<PAGE>
12. Notice. Any notice or other communication required or permitted to
be given by any provision of this Reinvestment Plan shall be in writing and
addressed to Investor Services Department, CNL Securities Corp., 400 East South
Street, Orlando, Florida 32801, if to the Company, or to MMS Securities, Inc.,
1845 Maxwell, Suite 101, Troy, Michigan 48084-4510, if to the Reinvestment
Agent, or such other addresses as may be specified by written notice to all
Participants. Notices to a Participant may be given by letter addressed to the
Participant at the Participant's last address of record with the Company. Each
Participant shall notify the Company promptly in writing of any change of
address.
13. Amendment. The terms and conditions of this Reinvestment Plan may
be amended or supplemented by an agreement between the Reinvestment Agent and
the Company at any time, including but not limited to an amendment to the
Reinvestment Plan to add a voluntary cash contribution feature or to substitute
a new Reinvestment Agent to act as agent for the Participants or to increase the
administrative charge payable to the Reinvestment Agent, by mailing an
appropriate notice at least 30 days prior to the effective date thereof to each
Participant at his last address of record; provided, that any such amendment
must be approved by a majority of the Independent Directors of the Company. Such
amendment or supplement shall be deemed conclusively accepted by each
Participant except those Participants from whom the Company receives written
notice of termination prior to the effective date thereof.
14. Governing Law. THIS REINVESTMENT PLAN AND A PARTICIPANT'S ELECTION
TO PARTICIPATE IN THE REINVESTMENT PLAN SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF FLORIDA; PROVIDED, HOWEVER, THAT CAUSES OF ACTION FOR VIOLATIONS OF
FEDERAL OR STATE SECURITIES LAWS SHALL NOT BE GOVERNED BY THIS SECTION 14.
<PAGE>
APPENDIX B
FINANCIAL INFORMATION
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
Page
----
Pro Forma Consolidated Financial Information (unaudited):
Pro Forma Consolidated Balance Sheet as of September 30, 1998 B-2
Pro Forma Consolidated Statement of Earnings for the nine
months ended September 30, 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 nine months ended September 30, 1998 and the
year ended December 31, 1997 B-5
Updated Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 B-7
Condensed Consolidated Statements of Earnings for the
nine months ended September 30, 1998 and 1997 B-8
Condensed Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 1998 and the
year ended December 31, 1997 B-9
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1998 and 1997 B-10
Notes to Condensed Consolidated Financial Statements
for the nine months ended September 30, 1998 and 1997 B-12
Audited Financial Statements:
Report of Independent Accountants B-21
Balance Sheets as of December 31, 1997 and 1996 B-22
Statements of Earnings for the year ended December 31, 1997
and the period June 12, 1996 (date of inception)
through December 31, 1996 B-23
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1997 and the period June 12, 1996 (date of inception)
through December 31, 1996 B-24
Consolidated Statements of Cash Flows for the year ended
December 31, 1997 and the period June 12, 1996
(date of inception) through December 31, 1996 B-25
Notes to Consolidated Financial Statements for the year ended
December 31, 1997 and the period June 12, 1996
(date of inception) through December 31, 1996 B-27
<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 $28,458,720 in gross offering proceeds from the sale of 2,845,872
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 September 30, 1998 (ii) $8,600,000 from borrowings on the
line of credit, from inception through September 30, 1998, and (iii) the
application of such funds to purchase two properties, and to pay offering
expenses, acquisition fees and miscellaneous acquisition expenses. The Pro Forma
Consolidated Balance Sheet as of September 30, 1998, includes the transactions
described in (i), (ii) and (iii) above, from its historical balance sheet.
The Pro Forma Consolidated Statements of Earnings for the nine months
ended September 30, 1998 and the year ended December 31, 1997, include the
historical operating results of the properties described in (iii) above that
were acquired by the Company during the nine months ended September 30, 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.
B-1
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
Pro Forma
ASSETS Historical Adjustments Pro Forma
------ ---------- ----------- ---------
Land, building and equipment on
operating leases, less
accumulated depreciation $28,598,883 $ - $28,598,883
Cash and cash equivalents 2,012,110 - 2,012,110
Certificates of deposit 5,015,822 - 5,015,822
Receivables 41,099 - 41,099
Prepaid expenses 1,893 - 1,893
Organization costs, less
accumulated amortization
of $3,971 21,000 - 21,000
Accrued rental income 28,255 - 28,255
Loan costs, less accumulated
amortization of $3,700 87,562 - 87,562
Other assets 580,606 - 580,606
----------- ----------- -----------
$36,387,230 $ - $36,387,230
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Line of credit $ 9,600,000 $ - $ 9,600,000
Accounts payable and accrued
expenses 28,513 - 28,513
Due to related parties 705,117 - 705,117
Security deposits 1,417,500 - 1,417,500
Other payables 68,445 - 68,445
----------- ----------- -----------
Total liabilities 11,819,575 - 11,819,575
----------- ----------- -----------
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 2,865,872
shares 28,659 - 28,659
Capital in excess of par value 24,581,209 - 24,581,209
Accumulated distributions in
excess of net earnings (42,213) - (42,213)
----------- ----------- -----------
Total stockholders' equity 24,567,655 - 24,567,655
----------- ----------- -----------
$36,387,230 $ - $36,387,230
=========== =========== ===========
See accompanying notes to unaudited pro forma consolidated financial statements.
B-2
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Revenues:
Rental income from
operating leases $ 487,400 $1,706,732 (1) $2,194,132
FF&E reserve income 41,099 140,000 (2) 181,099
Interest income 498,241 (464,377)(3) 33,864
---------- ---------- ----------
1,026,740 1,382,355 2,409,095
---------- ---------- ----------
Expenses:
Interest expense 139,416 441,467 (4) 580,883
General operating and
administrative 212,165 - 212,165
Asset management fees
to related party 27,246 95,359 (5) 122,605
Reimbursement of operating
expenses (92,733) - (92,733)
Depreciation and amortization 156,804 545,376 (6) 702,180
---------- ---------- ----------
442,898 1,082,202 1,525,100
---------- ---------- ----------
Net Earnings $ 583,842 $ 300,153 $ 883,995
========== ========== ==========
Earnings Per Share of
Common Stock (Basic
and Diluted) (7) $ 0.28 $ 0.38
========== ==========
Weighted Average Number of
Shares of Common Stock
Outstanding (7) 2,082,845 2,298,377
========== ==========
</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> <C> <C>
Revenues:
Rental income from
operating leases $ - $ 623,899 (1) $ 623,899
FF&E Reserve Income - 50,000 (2) 50,000
Interest income 46,071 (46,071)(3) -
---------- ---------- ----------
46,071 627,828 673,899
---------- ---------- ----------
Expenses:
General operating and
administrative 22,386 - 22,386
Interest expense - 157,667 (4) 157,667
Asset and mortgage management
fees to related party - 27,245 (5) 27,245
Depreciation and amortization 833 194,777 (6) 195,610
---------- ---------- ----------
23,219 379,689 402,908
---------- ---------- ----------
Net Earnings $ 22,852 $ 248,139 $ 270,991
========== ========== ==========
Earnings Per Share of
Common Stock (Basic
and Diluted) (7) $ 0.03 $ 0.13
========== ==========
Weighted Average Number of
Shares of Common Stock
Outstanding (7) 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
THE YEAR ENDED DECEMBER 31, 1997
Pro Forma Consolidated Statements of Earnings:
(1) Represents rental income from operating leases for the properties acquired
as of September 30, 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
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 nine months ended September 30, 1998 and year ended December 31,
1997.
(2) Represents capital expenditure reserve funds which will be used for the
replacement and renewal of furniture, fixtures and equipment relating to
the Pro Forma Properties (the "FF&E Reserve"). The funds in the FF&E
Reserve and all property purchased with funds from the FF&E Reserve will
be paid, granted and assigned to the Company as additional rent. In
connection therewith, FF&E Reserve income was earned at approximately
$10,000 per month, per Pro Forma Property, respectively.
(3) 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 (i) all of the net offering
proceeds received during the year ended December 31, 1997 and invested in
interest bearing accounts for historical purposes were considered invested
in Pro Forma Properties for pro forma purposes and (ii) interest income
from interest bearing accounts was earned at a rate of approximately four
percent per annum by the Company during the nine months ended September
30, 1998.
(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.
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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
THE YEAR ENDED DECEMBER 31, 1997
Pro Forma Consolidated Statements of Earnings - Continued:
(5) 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 nine
months ended September 30, 1998 and the year ended December 31, 1997), as
defined in the Company's prospectus.
(6) Represents depreciation expense of the building and the furniture, fixture
and equipment ("FF&E") portions of the Pro Forma Properties accounted for
as operating leases using the straight-line method. The buildings and FF&E
are depreciated over useful lives of 40 and seven years, respectively.
Also represents amortization of the loan origination fee of $43,000 (.5%
on the $8,600,000 from borrowings on the line of credit) and $19,149 of
other miscellaneous closing costs, amortized under the straight-line
method over a period of five years.
(7) 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
Company received the minimum offering proceeds and funds were released
from escrow) through December 31, 1997 and the nine months ended September
30, 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 Company 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 September 30, 1998.
B-6
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Land, building and equipment on operating
leases, less accumulated depreciation $28,598,883 $ --
Cash and cash equivalents 2,012,110 8,869,838
Certificate of deposit 5,015,822 --
Receivables 41,099 --
Due from related party -- 7,500
Prepaid expenses 1,893 11,179
Organization costs, less accumulated
amortization of
$3,971 and $833, respectively 21,000 19,167
Loan costs, less accumulated amortization of
$3,700 87,562 --
Accrued rental income 28,255 --
Other assets 580,606 535,792
----------- ----------
$36,387,230 $9,443,476
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $9,600,000 $ --
Accounts payable and accrued expenses 28,513 16,305
Due to related parties 705,117 193,254
Security deposits 1,417,500 --
Other payables 68,445 --
----------- ----------
Total liabilities 11,819,575 209,559
Commitments (Note 11)
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 2,865,872 and
1,152,540 shares, respectively 28,659 11,525
Capital in excess of par value 24,581,209 9,229,316
Accumulated distributions in excess of
net earnings (42,213) (6,924)
----------- ----------
Total stockholders' equity 24,567,655 9,233,917
----------- ----------
$36,387,230 $9,443,476
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
B-7
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from
operating leases $ 487,400 $ -- $ 487,400 $ --
FF&E Reserve Income 41,099 -- 41,099 --
Interest income 127,082 -- 498,241 --
---------- ---------- ------------ ------------
655,581 -- 1,026,740 --
---------- ---------- ------------ ------------
Expenses:
Interest Expense 139,416 -- 139,416 --
General operating and
administrative 44,979 -- 212,165 --
Asset management fees to
related party 27,246 -- 27,246 --
Reimbursement of operating
expenses (92,733) -- (92,733) --
Depreciation and amortization 154,804 -- 156,804 --
---------- ---------- ------------ ------------
273,712 -- 442,898 --
---------- ---------- ------------ ------------
Net Earnings $ 381,869 $ -- $ 583,842 $ --
========== ========== ============ ============
Earnings Per Share of Common
Stock (Basic and Diluted) $ 0.15 $ -- $ 0.28 $ --
========== ========== ============ ============
Weighted Average Number of
Shares of Common Stock
Outstanding 2,599,251 -- 2,082,845 --
========== ========== ============ ============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
B-8
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1998 and Year Ended December 31, 1997
<TABLE>
<CAPTION>
Common stock Accumulated
-------------------- distributions
Number Capital in in excess
of Par excess of of net
Shares value par value earnings Total
--------- ------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 20,000 $ 200 $ 199,800 $ -- $ 200,000
Subscriptions
received for common stock
through public offering and
distribution reinvestment
plan 1,132,540 11,325 11,314,077 -- 11,325,402
Stock issuance costs -- -- (2,284,561) -- (2,284,561)
Net earnings -- -- -- 22,852 22,852
Distributions
declared and paid
($.05 per share) -- -- -- (29,776) (29,776)
--------- ------- ----------- ----------- ----------
Balance at
December 31, 1997 1,152,540 11,525 9,229,316 (6,924) 9,233,917
Subscriptions
received for common stock
through public offering
and distribution
reinvestment plan 1,713,332 17,134 17,116,185 -- 17,133,319
Stock issuance costs -- -- (1,764,292) -- (1,764,292)
Net earnings -- -- -- 583,842 583,842
Distributions
declared and paid
($.29 per share) -- -- -- (619,131) (619,131)
--------- ------- ----------- ----------- -----------
Balance at
September 30, 1998 2,865,872 $28,659 $24,581,209 $ (42,213) $24,567,655
========= ======= =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
B-9
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------ ------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating
Activities $ 2,047,046 $ --
------------ ------------
Cash Flows from Investing Activities:
Additions to land, buildings and
equipment on operating leases (27,245,538) --
Investment in certificate of deposit (5,000,000) --
Increase in other assets (983,305) --
Other -- (68)
------------ ------------
Net cash used in investing
activities (33,228,843) (68)
------------ ------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and
stock issuance costs paid by
related parties on behalf of the
Company (168,369) --
Proceeds from borrowing on
line of credit 9,600,000 --
Subscriptions received from
stockholders 17,133,319 --
Distributions to stockholders (619,131) --
Payment of stock issuance costs (1,634,250) --
Other 12,500 --
============ ============
Net cash provided by
financing activities 24,324,069 --
------------ ------------
Net Decrease in Cash and Cash Equivalents (6,857,728) (68)
Cash and Cash Equivalents at Beginning
of Period 8,869,838 2,084
------------ ------------
Cash and Cash Equivalents at End of
Period $ 2,012,110 $ 2,016
============ ============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
B-10
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------ ------------
<S> <C> <C>
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain
acquisition and stock issuance
costs on behalf of the Company as follows:
Acquisition costs $ 220,575 $ --
Stock issuance costs 158,184 916,478
------------- -------------
$ 378,759 $ 916,478
============= =============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
B-11
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Organization and Nature of Business:
CNL Hospitality Properties, Inc., formerly known as CNL American Realty
Fund, Inc., was organized in Maryland on June 12, 1996. CNL Hospitality
GP Corp. and CNL Hospitality LP Corp. are wholly owned subsidiaries of
CNL Hospitality Properties, Inc., organized in Delaware in June 1998.
CNL Hospitality Partners, LP is a Delaware limited partnership formed in
June 1998. CNL Hospitality GP Corp. and CNL Hospitality LP Corp. are the
general and limited partners, respectively, of CNL Hospitality Partners,
LP. The term "Company" includes, unless the context otherwise requires,
CNL Hospitality Properties, Inc., CNL Hospitality Partners, LP, CNL
Hospitality GP Corp. and CNL Hospitality LP Corp.
The Company was formed primarily to acquire properties (the
"Properties") located across the United States to be leased on a
long-term, triple-net basis. The Company intends to invest the proceeds
from its public offering, after deducting offering expenses, in hotel
Properties to be leased to operators of national and regional limited
service, extended stay and full service hotel chains (the "Hotel
Chains") and in restaurant properties to be leased to operators of
selected national and regional fast-food, family-style and casual dining
restaurant chains (the "Restaurant Chains"). The Company may also
provide mortgage financing (the "Mortgage Loans"). The Company also
intends to offer furniture, fixture and equipment financing ("Secured
Equipment Leases") to operators of Hotel Chains and Restaurant Chains.
2. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
do not include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim period presented. Operating results for
the quarter and nine months ended September 30, 1998, may not be
indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the
financial statements, have been derived from audited financial
statements as of that date.
B-12
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
2. Basis of Presentation - Continued:
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 1997.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company, CNL Hospitality Properties, Inc.,
and its wholly owned subsidiaries, CNL Hospitality GP Corp. and CNL
Hospitality LP Corp., as well as the accounts of CNL Hospitality
Partners, LP. All significant intercompany balances and transactions
have been eliminated.
The Company was a development stage enterprise from June 12, 1996
through October 15, 1997. Since operations had not begun, activities
through October 15, 1997 were devoted to organization of the Company.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires the reporting of net earnings and all other changes
to equity during the period, except those resulting from investments by
owners and distributions to owners, in a separate statement that begins
with net earnings. Currently, the Company's only component of
comprehensive income is net earnings.
In March 1998, the Emerging Issues Task Force of the Financial
Accounting Standards Board ("FASB") reached a consensus in EITF 97-11,
entitled "Accounting for Internal Costs Relating to Real Estate Property
Acquisitions." EITF 97-11 provides that internal costs of identifying
and acquiring Property should be expensed as incurred. Due to the fact
that the Company does not have an internal acquisitions function and
instead, contracts these services from an external advisor, the
effectiveness of EITF 97-11 had no material effect on the Company's
financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities," which will be effective for the Company as of
January 1, 1999. This SOP requires start-up and organization costs to be
expensed as incurred and also requires previously deferred start-up
costs to be recognized as a cumulative effect adjustment in the
statement of earnings. Management of the Company does not believe that
adoption of this SOP will have a material effect on the Company's
financial position or results of operations.
B-13
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
2. Basis of Presentation - Continued:
In May 1998, the Emerging Issues Task Force of the FASB reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the
Interim Financial Periods." Management of the Company does not expect
that the consensus will have a material effect on the Company's
financial position or results of operations.
3. Leases:
The Company leases its land, buildings and equipment to an operator of a
national limited service extended stay hotel chain. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases," and have been classified as
operating leases. The leases are for 19 years, provide for minimum and
contingent rentals and require the tenant to pay executory costs. In
addition, the tenant pays all property taxes and assessments and carries
insurance coverage for public liability, property damage, fire and
extended coverage. The lease options allow the tenants to renew the
lease for three successive five-year periods subject to the same terms
and conditions of the initial lease.
4. Land, Buildings and Equipment on Operating Leases:
Land, buildings and equipment on operating leases consisted of the
following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land $2,926,976 $ --
Buildings 23,476,442 --
Equipment 2,349,131 --
-------------- ------------
28,752,549 --
Less accumulated depreciation (153,666) --
============== ============
$28,598,883 $ --
============== ============
</TABLE>
B-14
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
4. Land, Building and Equipment on Operating Leases - Continued:
The leases provide for automatic increases in the minimum annual rent at
predetermined intervals during the term of the lease. Such amounts are
recognized on a straight-line basis over the terms of the leases
commencing on the date the Property is placed in service. For the
quarter and nine months ended September 30, 1998, the Company recognized
$28,255 of such rental income.
The following is a schedule of future minimum lease payments to be
received on the noncancellable operating leases at September 30, 1998:
1998 $ 715,195
1999 2,889,162
2000 2,928,895
2001 2,928,895
2002 2,928,895
Thereafter 42,957,127
-------------
$55,348,169
=============
Since leases are renewable at the option of the tenant, the above table
only presents future minimum lease payments due during the initial lease
terms. In addition, this table does not include any amounts for future
contingent rents which may be received on the leases based on a
percentage of the tenant's gross sales.
5. Other Assets:
Other assets consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Acquisition fees and miscellaneous
acquisition expenses to be
allocated to future properties $ 555,606 $ 535,792
Deposits on properties 25,000 --
------------ ------------
$ 580,606 $ 535,792
============ ============
</TABLE>
B-15
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS Quarters
and Nine Months Ended September 30, 1998 and 1997
6. Line of Credit:
On July 31, 1998, the Company entered into an initial 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
may 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 London Interbank Offered Rate (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 advance will be due and payable to the bank on funds as
advanced. Each advance 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 advance 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
$62,149. The proceeds were used in connection with the purchase of two
hotel Properties. In addition, on September 9, 1998, the Company
obtained an advance totalling $1,000,000 in connection with the
agreement to acquire the three hotel Properties (see Note 11). In
connection with this advance, the Company incurred legal fees and
closing costs of $6,613. The interest rate of the line of credit at
September 30, 1998 was 8.55%.
7. Stock Issuance Costs:
The Company has incurred certain expenses of its offering of shares,
including commissions, marketing support and due diligence expense
reimbursement fees, filing fees, legal, accounting, printing and escrow
fees, which have been deducted from the gross proceeds of the offering.
Preliminary costs incurred prior to raising capital were advanced by an
affiliate of the Company, CNL Hospitality Advisors, Inc., (formerly
known as CNL Real Estate Advisors, Inc.) (the "Advisor"). The Advisor
has agreed to pay all organizational and offering expenses (excluding
commissions and marketing support and due diligence expense
reimbursement fees) which exceed three percent of the gross offering
proceeds received from the sale of shares of the Company in connection
with the offering.
B-16
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
7. Stock Issuance Costs - Continued:
During the nine months ended September 30, 1998 and the year ended
December 31, 1997, the Company incurred $1,769,263 and $2,304,561,
respectively, in organizational and offering costs, including $1,370,665
and $906,032, respectively, in commissions and marketing support and due
diligence expense reimbursement fees (see Note 9). Of these amounts
$1,764,292 and $2,284,561, respectively, have been treated as stock
issuance costs and $4,971 and $20,000, respectively, have been treated
as organization costs. The stock issuance costs have been charged to
stockholders' equity subject to the three percent cap described above.
8. Distributions:
For the nine months ended September 30, 1998, approximately 94 percent
of the distributions paid to stockholders were considered ordinary
income and approximately six percent were considered a return of capital
to stockholders for federal income tax purposes. No amounts distributed
to the stockholders for the nine months ended September 30, 1998 are
required to be or have been treated by the Company as a return of
capital for purposes of calculating the stockholders' return on their
invested capital. The characterization for tax purposes of distributions
declared for the nine months ended September 30, 1998 may not be
indicative of the results that may be expected for the year ending
December 31, 1998.
9. Related Party Transactions:
During the nine months ended September 30, 1998 and 1997, the Company
incurred $1,284,999 and $86,873, respectively, in selling commissions
due to CNL Securities Corp. for services in connection with the offering
of shares. A substantial portion of these amounts ($1,199,289 and
$81,081, respectively) were or will be paid by CNL Securities Corp. as
commissions to other broker.
In addition, CNL Securities Corp. is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of the
total amount raised from the sale of shares, a portion of which may be
reallowed to other broker-dealers. During the nine months ended
September 30, 1998 and 1997, the Company incurred $85,667 and $5,792,
respectively, of such fees, the majority of which were reallowed to
other broker-dealers and from which all bona fide due diligence expenses
were paid.
B-17
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
9. Related Party Transactions - Continued:
The Advisor is entitled to receive acquisition fees for services in
finding, negotiating the leases of and acquiring Properties on behalf of
the Company equal to 4.5% of gross proceeds, loan proceeds from
permanent financing and amounts outstanding on the line of credit, if
any, at the time of listing, but excluding that portion of the permanent
financing used to finance Secured Equipment Leases. During the nine
months ended September 30, 1998 and 1997, the Company incurred $770,999
and $52,124, respectively, of such fees. Such fees are included in land,
buildings and equipment on operating leases and other assets at
September 30, 1998.
The Company and the Advisor have entered into an advisory agreement
pursuant to which the Advisor will receive a monthly asset management
fee of one-twelfth of 0.60% of the Company's real estate asset value and
the outstanding principal balance of any Mortgage Loans as of the end of
the preceding month. The management fee, which will not exceed fees
which are competitive for similar services in the same geographic area,
may or may not be taken, in whole or in part as to any year, in the sole
discretion of the Advisor. All or any portion of the management fee not
taken as to any fiscal year shall be deferred without interest and may
be taken in such other fiscal year as the Advisor shall determine.
During the nine months ended September 30, 1998, the Company incurred
$27,246 of such fees.
The Company has incurred operating expenses which, in general, are those
expenses relating to administration of the Company on an ongoing basis.
Pursuant to the advisory agreement, the Advisor is required to reimburse
the Company the amount by which the total operating expenses paid or
incurred by the Company exceed in any four consecutive fiscal quarters
(the "Expense Year"), the greater of two percent of average invested
assets or 25 percent of net income (the "Expense Cap"). During the four
quarters ended September 30, 1998, the Company's operating expenses
exceeded the Expense Cap by $92,733; therefore the Advisor reimbursed
the Company such amount in accordance with the advisory agreement.
B-18
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
9. Related Party Transactions - Continued:
The Advisor and its affiliates provide various administrative services
to the Company, including services related to accounting; financial, tax
and regulatory compliance reporting; stockholder distributions and
reporting; due diligence and marketing; and investor relations
(including administrative services in connection with the offering of
shares), on a day-to-day basis. The expenses incurred for these services
were classified as follows for the nine months ended September 30:
1998 1997
----------- -----------
Deferred offering costs $ -- $92,657
Stock issuance costs 236,942 --
General operating and
administrative expenses 95,441 --
=========== ===========
$332,383 $92,657
=========== ===========
As of September 30, 1998, the Company has reversed the amounts above
classified as general operating and administrative expenses which exceed
the Expense Cap.
The amounts due to related parties consisted of the following at:
September 30, December 31,
1998 1997
------------ -----------
Due to CNL Securities Corp.:
Commissions $57,790 $100,709
Marketing support and due
diligence expense reim-
bursement fee 4,884 7,268
------------ -----------
62,674 107,977
------------ -----------
Due to Advisor:
Expenditures incurred on
behalf of the Company
and accounting and
administrative services 155,792 39,105
Acquisition fees 486,651 46,172
------------ -----------
642,443 85,277
============ ===========
$705,117 $193,254
============ ===========
B-19
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
10. Concentration of Credit Risk:
All of the Company's rental income for the nine months ended September
30, 1998 was earned from one lessee, STC Leasing Associates, LLC, which
operates each property as Residence Inn by Marriott.
Although the Company intends to acquire Properties located in various
states and regions and to carefully screen its tenants in order to
reduce risks of default, failure of any one hotel chain or lessee that
contributes more than ten percent of the Company's rental income could
significantly impact the results of operations of the Company. However,
management believes that the risk of such a default is reduced due to
the essential or important nature of these Properties for the ongoing
operations of the lessee.
It is expected that the percentage of total rental income contributed by
this lessee will decrease as additional Properties are acquired and
leased in 1998 and subsequent years.
11. Commitments:
In July 1998, the Company entered into agreements to acquire three hotel
Properties. In connection with these agreements, the Company was
required to obtain a letter of credit, to be used by the seller of the
Properties, secured by a $5,000,000 certificate of deposit. In
connection with the letter of credit, the Company incurred $22,500 in
closing costs.
12. Subsequent Events:
During the period October 1, 1998 through November 2, 1998, the Company
received subscription proceeds for an additional 280,993 shares
($2,809,932) of common stock.
On October 1, 1998 and November 1, 1998, the Company declared
distributions totalling $167,846 and $183,405, respectively, or $.0583
per share of common stock, payable in December 1998, to stockholders of
record on October 1, 1998 and November 1, 1998, respectively.
B-20
<PAGE>
Report of Independent Accountants
To the Board of Directors
CNL American Realty Fund, Inc.
We have audited the accompanying balance sheets of CNL American Realty Fund,
Inc. (a Maryland corporation) as of December 31, 1997 and 1996, and the related
statements of earnings, stockholders' equity, and cash flows for the year ended
December 31, 1997 and for the period June 12, 1996 (date of inception) through
December 31, 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and per-form 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 audits pro-vide 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 CNL American Realty Fund, Inc.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1997 and the period June 12, 1996 (date of
inception) through December 31, 1996, in conformity with generally accepted
accounting principles.
/s/Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Orlando, Florida
January 22, 1998
B-21
<PAGE>
CNL AMERICAN REALTY FUND, INC.
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
ASSETS 1997 1996
------------ --------
<S> <C>
Cash and cash equivalents $8,869,838 $ 2,084
Due from related party 7,500 -
Prepaid expenses 11,179 -
Organization costs, less accumulated
amortization of $833 in 1997 19,167 -
Deferred offering costs - 596,106
Other assets 535,792 -
---------- ---------
$9,443,476 $ 598,190
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 16,305 $ 11,629
Due to related parties 193,254 386,561
---------- ----------
Total liabilities 209,559 398,190
---------- ----------
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000
shares in 1997 - -
Excess shares, $.01 par value per
share. Authorized and unissued
63,000,000 shares in 1997 - -
Common stock, $.01 par value per
share. Authorized 60,000,000
shares and 100,000 shares,
respectively, issued and
outstanding 1,152,540 and 20,000,
respectively 11,525 200
Capital in excess of par value 9,229,316 199,800
Accumulated distributions in excess
of net earnings (6,924) -
---------- ----------
Total stockholders' equity 9,233,917 200,000
---------- ----------
$9,443,476 $ 598,190
========== ==========
</TABLE>
See accompanying notes to financial statements.
B-22
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
June 12, 1996
(Date of Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ ---------
<S> <C>
Interest income $ 46,071 $ -
---------- ---------
Expenses:
General operating and
administrative 22,386 -
Amortization 833 -
---------- ---------
23,219 -
---------- ---------
Net Earnings $ 22,852 $ -
========== =========
Earnings Per Share of Common
Stock (Basic and Diluted) $ 0.03 $ -
========== =========
Weighted Average Number of
Shares of Common Stock
Outstanding 686,063 -
========== =========
</TABLE>
See accompanying notes to financial statements.
B-23
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
Year Ended December 31, 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
<TABLE>
<CAPTION>
Accumulated
distributions
Common stock Capital in in excess
Number Par excess of of net
of shares value par value earnings Total
--------- ----- --------- -------- -----
<S> <C>
Balance at June 12, 1996 -- $ -- $ -- $ -- $ --
Sale of common stock
to related party 20,000 200 199,800 -- 200,000
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 20,000 200 199,800 -- 200,000
Subscriptions received for
common stock through public
offering and distribution
reinvestment plan 1,132,540 11,325 11,314,077 -- 11,325,402
Stock issuance costs -- -- (2,284,561) -- (2,284,561)
Net earnings -- -- -- 22,852 22,852
Distributions declared
($0.05 per share) -- -- -- (29,776) (29,776)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 1,152,540 $ 11,525 $ 9,229,316 $ (6,924) $ 9,233,917
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
B-24
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 12, 1996
(Date of Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ ----------------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Interest received $ 46,071 $ -
Cash paid for expenses (23,602) -
------------ -----------
Net cash provided by operating
activities 22,469 -
------------ -----------
Cash Flows From Investing Activities:
Increase in other assets (463,470) -
------------ -----------
Net cash used in investing
activities (463,470) -
------------ -----------
Cash Flows From Financing Activities:
Reimbursement of acquisition, organi-
zation and stock issuance costs paid
by related parties on behalf of the
Company (1,003,031) (197,916)
Sale of common stock to related party - 200,000
Subscriptions received from stock-
holders 11,327,900 -
Distributions to stockholders (29,776) -
Payment of stock issuance costs (986,338) -
------------ -----------
Net cash provided by financing
activities 9,308,755 2,084
------------ ------------
Net Increase in Cash and Cash Equivalents 8,867,754 2,084
Cash and Cash Equivalents at Beginning of
Period 2,084 -
------------ ------------
Cash and Cash Equivalents at End of Period $ 8,869,838 $ 2,084
============ ============
</TABLE>
See accompanying notes to financial statements.
B-25
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
------------------------------------
<TABLE>
<CAPTION>
June 12, 1996
(Date of Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ --------------
<S> <C>
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
Net earnings $ 22,852 $ -
------------ -----------
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Amortization 833 -
Increase in prepaid expenses (11,179) -
Increase in accounts payable and
accrued expenses 6,141 -
Increase in due to related parties,
excluding reimbursement of acqui-
sition, organization and stock
issuance costs paid on behalf
of the Company 3,822 -
------------ -----------
Total adjustments (383) -
------------ -----------
Net Cash Provided by Operating Activities $ 22,469 $ -
============ ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain acquisition,
organization and stock issuance
costs on behalf of the Company as follows:
Acquisition costs $ 26,149 $ -
Organization costs - 20,000
Deferred offering costs - 535,812
Stock issuance costs 638,274 -
------------ ------------
$ 664,423 $ 555,812
============ ============
</TABLE>
See accompanying notes to financial statements.
B-26
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies:
Organization and Nature of Business - CNL American Realty Fund, Inc.
(the "Company") was organized in Maryland on June 12, 1996 primarily to
acquire properties ("Properties") located across the United States to
be leased on a long-term triple-net basis. The Company intends to
invest the proceeds from its public offering, after deducting offering
expenses, in hotel Properties to be leased to operators of national and
regional limited service, extended stay and full service hotel chains
(the "Hotel Chains") and in restaurant Properties to be leased to
operators of selected national and regional fast-food, family-style and
casual dining restaurant chains (the "Restaurant Chains"). The Company
may also provide mortgage financing ( the "Mortgage Loans"). The
Company also intends to offer furniture, fixture and equipment
financing (the "Secured Equipment Leases") to operators of Hotel Chains
and Restaurant Chains.
The Company was a development stage enterprise from June 12, 1996
through October 15, 1997. Since operations had not begun, activities
through October 15, 1997 were devoted to organization of the Company.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds (some of which are
backed by government securities). Cash equivalents are stated at cost
plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Company has not experienced any losses in such
accounts. The Company limits investment of temporary cash investments
to financial institutions with high credit standing; therefore,
management believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Organization Costs - Organization costs are amortized over five years
using the straight-line method.
B-27
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies - Continued:
Income Taxes - The Company intends to make an election to be taxed as a
real estate investment trust ("REIT") under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended, commencing with its
taxable year ended December 31, 1997. If the Company qualifies for
taxation as a REIT, the Company generally will not be subject to
federal corporate income taxes to the extent it distributes its REIT
taxable income to its stockholders, so long as it distributes at least
95 percent of its REIT taxable income and meets certain other
requirements for qualifying as a REIT. Accordingly, no provision for
federal income taxes has been made in the financial statements. Even if
the Company qualifies for taxation as a REIT, it may be subject to
certain state and local taxes on its income and property, and federal
income and excise taxes on its undistributed income.
Earnings Per Share - Basic earnings per share are calculated based upon
net earnings (income available to common stockholders) divided by the
weighted average number of shares of common stock outstanding during
the reporting period. The Company does not have any dilutive potential
common shares.
Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
New Accounting Standard - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
129, "Disclosure of Information about Capital Structure." The
Statement, which is effective for fiscal years ending after December
15, 1997, provides for disclosure of the Company's capital structure.
At this time, the Company's Board of Directors has not determined the
relative rights, preferences, and privileges of each class or series of
preferred stock authorized. Since the Company has not issued preferred
shares, the disclosures to this Statement are not applicable.
B-28
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies - Continued:
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The Statement, which is effective for fiscal years beginning
after December 15, 1997, requires the reporting of net earnings and all
other changes to equity during the period, except those resulting from
investments by owners and distributions to owners, in a separate
statement that begins with net earnings. Currently, the Company's only
component of comprehensive income is its net earnings. The Company does
not believe that adoption of this Statement will have a material effect
on the Company's financial position or results of operations.
2. Public Offering:
The Company has filed a currently effective registration statement on
Form S-11 with the Securities and Exchange Commission.
A maximum of 16,500,000 shares ($165,000,000) may be sold, including
1,500,000 shares ($15,000,000) which is available only to stockholders
who elect to participate in the Company's reinvestment plan. The
Company has adopted a reinvestment plan pursuant to which stockholders
may elect to have the full amount of their cash distributions from the
Company reinvested in additional shares of common stock of the Company.
As of December 31, 1997, the Company had received subscription proceeds
of $11,325,402 (1,132,540 shares), including $1,056 (106 shares)
through the reinvestment plan.
3. Other Assets:
Other assets at December 31, 1997, consisted of acquisition fees and
miscellaneous acquisition expenses which will be allocated to future
Properties.
B-29
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
4. Stock Issuance Costs:
The Company has incurred certain expenses of its offering of shares,
including commissions, marketing support and due diligence expense
reimbursement fees, filing fees, legal, accounting, printing and escrow
fees, which have been deducted from the gross proceeds of the offering.
Preliminary costs incurred prior to raising capital were advanced by an
affiliate of the Company, CNL Real Estate Advisors, Inc. (the
"Advisor"). The Advisor has agreed to pay all organizational and
offering
B-30
<PAGE>
expenses (excluding commissions and marketing support and due diligence
expense reimbursement fees) which exceed three percent of the gross
offering proceeds received from the sale of shares of the Company.
As of December 31, 1997, the Company had incurred $2,304,561 in
organizational and offering costs, including $906,032 in commissions
and marketing support and due diligence expense reimbursement fees (see
Note 6). Of this amount $2,284,561 has been treated as stock issuance
costs and $20,000 has been treated as organization costs. The stock
issuance costs have been charged to stockholders' equity subject to the
three percent cap described above.
5. Distributions:
For the year ended December 31, 1997, 100 percent of the distributions
were considered to be ordinary income for federal income tax purposes.
No amounts distributed to stockholders for the year ended December 31,
1997, are required to be or have been treated by the Company as a
return of capital for purposes of calculating the stockholders' return
on their invested capital.
6. Related Party Transactions:
Certain affiliates of the Company will receive fees and compensation in
connection with the offering, and the acquisition, management, and sale
of the assets of the Company.
On June 12, 1996 (date of inception), CNL Fund Advisors, Inc.
contributed $200,000 in cash to the Company and became its sole
stockholder. In February 1997, the Advisor purchased the Company's
outstanding common stock from CNL Fund Advisors, Inc. and became the
sole stockholder of the Company.
B-31
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
6. Related Party Transactions - Continued:
CNL Securities Corp. is entitled to receive commissions amounting to
7.5% of the total amount raised from the sale of shares for services in
connection with the offering of the shares, a substantial portion of
which has been or will be paid as commissions to other broker-dealers.
During the year ended December 31, 1997, the Company incurred $849,405
of such fees of which $792,832 were or will be paid by CNL Securities
Corp. as commissions to other broker-dealers.
In addition, CNL Securities Corp. is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of
the total amount raised from the sale of shares, a portion of which may
be reallowed to other broker-dealers. During the year ended December
31, 1997, the Company incurred $56,627 of such fee, the majority of
which were reallowed to other broker-dealers and from which all bona
fide due diligence expenses were paid.
CNL Securities Corp. will also receive a soliciting dealer servicing
fee payable annually by the Company beginning on December 31 of the
year following the year in which the offering is completed in the
amount of 0.20% of the stockholders' investment in the Company. As of
December 31, 1997, no such fees had been incurred.
The Advisor is entitled to receive acquisition fees for services in
finding, negotiating the leases of and acquiring properties on behalf
of the Company equal to 4.5% of gross proceeds, loan proceeds from
permanent financing and amounts outstanding on the line of credit, if
any, at the time of Listing, but excluding that portion of the
permanent financing used to finance Secured Equipment Leases. During
the year ended December 31, 1997, the Company incurred $509,643 of such
fees. Such fees are included in other assets at December 31, 1997.
B-32
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
6. Related Party Transactions - Continued:
The due to related parties consisted of the following at December 31:
1997 1996
---------- ---------
Due to CNL Securities Corp.:
Commissions $100,709 $ -
Marketing support and due
diligence expense reim-
bursement fee 7,268 -
-------- -------
107,977 -
-------- -------
Due to CNL Real Estate Advisors,
Inc.:
Expenditures incurred for
organizational and offering
expenses on behalf of the Company 21,729 357,896
Accounting and administrative
services 17,376 28,665
Acquisition fees 46,172 -
-------- -------
85,277 386,561
-------- --------
$193,254 $386,561
======== ========
B-33
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
6. Related Party Transactions - Continued:
The Advisor and its affiliates provide accounting and administrative
services to the Company (including accounting and administrative
services in connection with the offering of shares) on a day-to-day
basis. For the year ended December 31, 1997 and the period June 12,
1996 (date of inception) through December 31, 1996, the expenses
incurred for these services were classified as follows:
June 12, 1996
(Date of Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ ----------------
Deferred offering costs $ - $ 28,665
Stock issuance costs 185,335 -
General operating and
administrative expenses 6,889 -
-------- -------
$192,224 $ 28,665
======== ========
7. Subsequent Events:
During the period January 1, 1998 through January 22, 1998, the Company
received subscription proceeds of 130,262 shares ($1,302,620) of common
stock.
On January 1, 1998, the Company declared distributions of $28,814 or
$0.025 per share of common stock, payable in March 1998, to
stockholders of record on January 1, 1998.
On January 16, 1998, the Company declared distributions of $0.025 per
share of common stock to stockholders of record on February 1, 1998,
also payable in March 1998.
B-34
<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.
<TABLE>
<CAPTION>
<S> <C>
Updated Financial Statements (unaudited):
Balance Sheet as of June 30, 1998 B-35
Statement of Loss for the six months ended June 30, 1998 B-36
Audited Financial Statements:
Report of Independent Public Accountants B-37
Balance Sheet as of December 31, 1997 B-38
Statement of Loss for the year ended December 31, 1997 B-39
Statement of Member's Equity for the year ended December 31, 1997 B-40
Statement of Cash Flows for the year ended December 31, 1997 B-41
Notes to Financial Statement for the year ended December 31, 1997 B-42
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
Updated Financial Statements (unaudited):
Balance Sheet as of June 30, 1998 B-47
Statement of Loss for the six months ended June 30, 1998 B-48
Audited Financial Statements:
Report of Independent Public Accountants B-49
Balance Sheet as of December 31, 1997 B-50
Statement of Loss for the year ended December 31, 1997 B-51
Statement of Member's Deficit for the year ended December 31, 1997 B-52
Statement of Cash Flows for the year ended December 31,
1997 B-53
Notes to Financial Statement for the year ended December 31, 1997 B-54
</TABLE>
B-35
<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-36
<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-37
<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.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
Atlanta, Georgia
February 27, 1998
B-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
Atlanta, Georgia
February 27, 1998
B-50
<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-51
<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-52
<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-53
<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)
-----------
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
-----------
Total adjustments 558,561
-----------
Net cash provided by operating activities 160,061
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,086,029)
Start-up costs (7,129)
-----------
Net cash used in investing activities (6,093,158)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal received from loans payable 6,142,121
Loan costs (7,129)
-----------
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
-----------
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.
B-54
<PAGE>
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)
B-55
<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 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.
B-56
<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 $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
==========
B-57
<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 $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:
B-58
<PAGE>
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.
B-59
<PAGE>
APPENDIX C
PRIOR PERFORMANCE TABLES
<PAGE>
APPENDIX C
PRIOR PERFORMANCE TABLES
The information in this Appendix C contains certain relevant summary
information concerning certain prior public programs sponsored by two of the
Company's principals (who also serve as the Chairman of the Board and President
of the Company) and their Affiliates (the "Prior Public Programs") which were
formed to invest in restaurant properties leased on a triple-net basis to
operators of national and regional fast-food and family-style restaurant chains
similar to those in which the Company may invest. No Prior Public Programs
sponsored by the Company's Affiliates have invested in hotel properties leased
on a triple-net basis to operators of national and regional limited-service,
extended-stay and full-service hotel chains.
A more detailed description of the acquisitions by the Prior Public
Programs is set forth in Part II of the registration statement filed with the
Securities and Exchange Commission for this Offering and is available from the
Company upon request, without charge. In addition, upon request to the Company,
the Company will provide, without charge, a copy of the most recent Annual
Report on Form 10-K filed with the Securities and Exchange Commission for CNL
Income Fund, Ltd., CNL Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL
Income Fund IV, Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL
Income Fund VII, Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL
Income Fund X, Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL
Income Fund XIII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL
Income Fund XVI, Ltd., CNL Income Fund XVII, Ltd., CNL Income Fund XVIII, Ltd.,
and CNL American Properties Fund, Inc., as well as a copy, for a reasonable fee,
of the exhibits filed with such reports.
The investment objectives of the Prior Public Programs generally
include preservation and protection of capital, the potential for increased
income and protection against inflation, and potential for capital appreciation,
all through investment in restaurant properties. In addition, the investment
objectives of the Prior Public Programs included making partially tax-sheltered
distributions.
STOCKHOLDERS SHOULD NOT CONSTRUE INCLUSION OF THE FOLLOWING TABLES AS
IMPLYING THAT THE COMPANY WILL HAVE RESULTS COMPARABLE TO THOSE REFLECTED IN
SUCH TABLES. DISTRIBUTABLE CASH FLOW, FEDERAL INCOME TAX DEDUCTIONS, OR OTHER
FACTORS COULD BE SUBSTANTIALLY DIFFERENT. STOCKHOLDERS SHOULD NOTE THAT, BY
ACQUIRING SHARES IN THE COMPANY, THEY WILL NOT BE ACQUIRING ANY INTEREST IN ANY
PRIOR PUBLIC PROGRAMS.
Description of Tables
The following Tables are included herein:
Table I - Experience in Raising and Investing Funds
Table II - Compensation to Sponsor
Table III - Operating Results of Prior Programs
Table V - Sales or Disposal of Properties
Unless otherwise indicated in the Tables, all information contained in
the Tables is as of June 30, 1998. The following is a brief description of the
Tables:
Table I - Experience in Raising and Investing Funds
Table I presents information on a percentage basis showing the
experience of two of the principals of the Company and their Affiliates in
raising and investing funds for the Prior Public Programs, the offerings of
which became fully subscribed between July 1993 and June 1998.
C-1
<PAGE>
The Table sets forth information on the offering expenses incurred and
amounts available for investment expressed as a percentage of total dollars
raised. The Table also shows the percentage of property acquisition cost
leveraged, the date the offering commenced, and the time required to raise funds
for investment.
Table II - Compensation to Sponsor
Table II provides information, on a total dollar basis, regarding
amounts and types of compensation paid to the general partners of the Prior
Public Programs.
The Table indicates the total offering proceeds and the portion of such
offering proceeds paid or to be paid to two of the principals of the Company and
their Affiliates in connection with the Prior Public Programs, the offerings of
which became fully subscribed between July 1993 and June 1998. The Table also
shows the amounts paid to two of the principals of the Company and their
Affiliates from cash generated from operations and from cash generated from
sales or refinancing by each of the Prior Public Programs on a cumulative basis
commencing with inception and ending June 30, 1998.
Table III - Operating Results of Prior Programs
Table III presents a summary of operating results for the period from
inception through June 30, 1998, of the Prior Public Programs, the offerings of
which became fully subscribed between July 1993 and June 1998.
The Table includes a summary of income or loss of the Prior Public
Programs, which are presented on the basis of generally accepted accounting
principles ("GAAP"). The Table also shows cash generated from operations, which
represents the cash generated from operations of the properties of the Prior
Public Programs, as distinguished from cash generated from other sources
(special items). The section of the Table entitled "Special Items" provides
information relating to cash generated from or used by items which are not
directly related to the operations of the properties of the Prior Public
Programs, but rather are related to items of a partnership nature. These items
include proceeds from capital contributions of limited partners and
disbursements made from these sources of funds, such as syndication and
organizational costs, acquisition of the properties and other costs which are
related more to the organization of the partnership and the acquisition of
properties than to the actual operations of the partnerships.
The Table also presents information pertaining to investment income,
returns of capital on a GAAP basis, cash distributions from operations, sales
and refinancing proceeds expressed in total dollar amounts as well as
distributions and tax results on a per $1,000 investment basis.
Table IV - Results of Completed Programs
Table IV is omitted from this Appendix C because none of the directors
of the Company or their Affiliates has been involved in completed programs which
made investments similar to those of the Company.
Table V - Sales or Disposal of Properties
Table V provides information regarding the sale or disposal of
properties owned by the Prior Public Programs between July 1993 and June 1998.
The Table includes the selling price of the property, the cost of the
property, the date acquired and the date of sale.
C-2
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
----------- ----------- ----------- -----------
<S> <C>
Dollar amount offered $40,000,000 $45,000,000 $40,000,000 $45,000,000
=========== =========== =========== ===========
Dollar amount raised 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- -----------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5) (8.5) (8.5)
Organizational expenses (3.0) (3.0) (3.0) (3.0)
Marketing support and due
diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) (0.5) (0.5) (0.5) (0.5)
----------- ----------- ----------- -----------
(12.0) (12.0) (12.0) (12.0)
----------- ----------- ----------- -----------
Reserve for operations -- -- -- --
----------- ----------- ----------- -----------
Percent available for
investment 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== ============
Acquisition costs:
Cash down payment 82.5% 82.5% 82.5% 82.5%
Acquisition fees paid
to affiliates 5.5 5.5 5.5 5.5
Loan costs -- -- -- --
----------- ----------- ----------- ------------
Total acquisition costs 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== ============
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- -- --
Date offering began 3/31/93 8/27/93 2/23/94 9/02/94
Length of offering (in
months) 5 6 6 9
Months to invest 90% of
amount available for
investment measured
from date of offering 10 11 10 11
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective March 29, 1995, CNL American
Properties Fund, Inc. ("APF") registered for sale $165,000,000 of
shares of common stock (the "Initial Offering"), including $15,000,000
available only to stockholders participating in the company's
reinvestment plan. The Initial Offering of APF commenced April 19,
1995, and upon completion of the Initial Offering on February 6, 1997,
had received subscription proceeds of $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) issued pursuant to the
reinvestment plan. Pursuant to a Registration Statement on Form S-11
under the Securities Act of 1933, as amended, effective January 31,
1997, APF registered for sale $275,000,000 of shares of common stock
(the "1997 Offering"), including $25,000,000 available only to
stockholders participating in the company's reinvestment plan. The
1997 Offering of APF commenced following the completion of the Initial
Offering on February 6, 1997, and upon completion of the 1997 Offering
on March 2, 1998, had received subscription proceeds of $251,872,648
(25,187,265 shares), including $1,872,648 (187,265 shares) issued
pursuant to the reinvestment plan. Pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933, as amended,
effective May 12, 1998, APF registered for sale $345,000,000 of shares
of common stock (the "1998 Offering"), including $20,000,000 available
only to stockholders participating in the company's reinvestment plan.
The 1998 Offering of APF commenced following the completion of the
1997 Offering on March 2, 1998. As of June 30, 1998, APF had received
subscriptions totalling $111,835,687 from the 1998 Offering, including
$1,823,518 issued pursuant to the company's reinvestment plan.
C-3
<PAGE>
<TABLE>
<CAPTION>
CNL American CNL Income CNL Income
Properties Fund, Fund XVII, Fund XVIII,
Inc. Ltd. Ltd.
(Note 1)
------------ ----------- -----------
<S> <C>
Dollar amount offered $400,000,000 $30,000,000 $35,000,000
============ =========== ===========
Dollar amount raised 100.0% 100.0% 100.0%
------------ ----------- -----------
Less offering expenses:
Selling commissions
and discounts (7.5) (8.5) (8.5)
Organizational expenses (3.0) (3.0) (3.0)
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated
entities) (0.5) (0.5) (0.5)
------------ ----------- -----------
(11.0) (12.0) (12.0)
------------ ----------- -----------
Reserve for operations -- -- --
------------ ----------- ----------
Percent available for
investment 89.0% 88.0% 88.0%
============ =========== ===========
Acquisition costs:
Cash down payment 84.5% 83.5% 83.5%
Acquisition fees paid
to affiliates 4.5 4.5 4.5
Loan costs -- -- --
------------ ----------- ----------
Total acquisition costs 89.0% 88.0% 88.0%
============ =========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- --
Date offering began 4/19/95 and 9/02/95 9/20/96
2/06/97
Length of offering (in
months) 22 and 13 12 17
Months to invest 90% of
amount available for
investment measured
from date of offering 23 and 16 15 17
</TABLE>
C-4
<PAGE>
TABLE II
COMPENSATION TO SPONSOR
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
----------- ----------- ----------- -----------
<S> <C>
Date offering commenced 3/31/93 8/27/93 2/23/94 9/02/94
Dollar amount raised $40,000,000 $45,000,000 $40,000,000 $45,000,000
Amount paid to sponsor from =========== =========== =========== ===========
proceeds of offering:
Selling commissions and
discounts 3,400,000 3,825,000 3,400,000 3,825,000
Real estate commissions - - - -
Acquisition fees 2,200,000 2,475,000 2,200,000 2,475,000
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 200,000 225,000 200,000 225,000
---------- ----------- ----------- -----------
Total amount paid to sponsor 5,800,000 6,525,000 5,800,000 6,525,000
=========== =========== =========== ===========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1998 (6 months) 1,782,788 1,898,767 1,755,734 1,969,826
1997 3,395,200 3,734,726 3,419,967 3,909,781
1996 3,494,528 3,841,163 3,557,073 3,911,609
1995 3,482,461 3,823,939 3,361,477 2,619,840
1994 3,232,046 2,897,432 1,154,454 212,171
1993 1,148,550 329,957 - -
Amount paid to sponsor from
operations (administrative,
accounting and
management fees):
1998 (6 months) 48,887 53,039 44,829 47,605
1997 121,643 128,536 113,372 129,357
1996 126,947 134,867 122,391 157,883
1995 103,083 114,095 122,107 138,445
1994 83,046 84,801 37,620 7,023
1993 27,003 8,220 - -
Dollar amount of property
sales and refinancing
before deducting payments
to sponsor:
Cash (Note 3) 1,769,260 4,770,015 3,312,297 1,385,384
Notes - - - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - - - -
Incentive fees - - - -
Other (Note 2) - - - -
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective March 29, 1995, CNL American
Properties Fund, Inc. ("APF") registered for sale $165,000,000 of
shares of common stock (the "Initial Offering"), including $15,000,000
available only to stockholders participating in the company's
reinvestment plan. The Initial Offering of APF commenced April 19,
1995, and upon completion of the Initial Offering on February 6, 1997,
had received subscription proceeds of $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) issued pursuant to the
reinvestment plan. Pursuant to a Registration Statement on Form S-11
under the Securities Act of 1933, as amended, effective January 31,
1997, APF registered for sale $275,000,000 of shares of common stock
(the "1997 Offering"), including $25,000,000 available only to
stockholders participating in the company's reinvestment plan. The
1997 Offering of APF commenced following the completion of the Initial
Offering on February 6, 1997, and upon completion of the 1997 Offering
on March 2, 1998, had received subscription proceeds of $251,872,648
(25,187,265 shares), including $1,872,648 (187,265 shares) issued
pursuant to the reinvestment plan. Pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933, as amended,
effective May 12, 1998, APF registered for sale $345,000,000 of shares
of common stock (the "1998 Offering"), including $20,000,000 available
only to stockholders participating in the company's reinvestment plan.
The 1998 Offering of APF commenced following the completion of the
1997 Offering on March 2, 1998. As of June 30, 1998, APF had received
subscriptions totalling $111,835,687 from the 1998 Offering, including
$1,823,518 issued pursuant to the company's reinvestment plan. The
amounts shown represent the combined results of the Initial Offering,
the 1997 Offering and the 1998 Offering as of June 30, 1998, including
shares issued pursuant to the company's reinvestment plans.
Note 2: For negotiating secured equipment leases and supervising the secured
equipment lease program, APF is entitled to receive a one-time secured
equipment lease servicing fee of two percent of the purchase price of
the equipment that is the subject of a secured equipment lease. During
the six months ended June 30, 1998 and the years ended December 31,
1997 and 1996, APF incurred $36,899, $366,865 and $70,070,
respectively, in secured equipment lease servicing fees.
Note 3: Excludes properties sold and substituted with replacement properties,
as permitted under the terms of the lease agreements.
C-5
<PAGE>
<TABLE>
<CAPTION>
CNL American CNL Income CNL Income
Properties Fund, Fund XVII, Fund XVIII,
Inc. Ltd. Ltd.
------------ ----------- -----------
(Note 1)
<S> <C>
Date offering commenced 4/19/95 and 2/06/97 9/02/95 9/20/96
Dollar amount raised $514,300,100 $30,000,000 $35,000,000
============ =========== ===========
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts 38,572,508 2,550,000 2,975,000
Real estate commissions - - -
Acquisition fees 23,143,505 1,350,000 1,575,000
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 2,571,501 150,000 175,000
------------ ----------- -----------
Total amount paid to sponsor 64,287,514 4,050,000 4,725,000
============ =========== ===========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1998 (6 months) 17,846,454 1,315,440 1,517,300
1997 18,514,122 2,611,191 1,459,963
1996 6,096,045 1,340,159 30,126
1995 594,425 11,671 -
1994 - - -
1993 - - -
Amount paid to sponsor from
operations (administrative,
accounting and
management fees):
1998 (6 months) 1,245,501 41,356 58,088
1997 1,437,908 116,077 98,207
1996 613,505 107,211 2,980
1995 95,966 2,659 -
1994 - - -
1993 - - -
Dollar amount of property
sales and refinancing
before deducting payments
to sponsor:
Cash (Note 3) 7,894,390 - -
Notes - - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - - -
Incentive fees - - -
Other (Note 2) - - -
</TABLE>
C-6
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIII, LTD.
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ -------------
<S> <C>
Gross revenue $ 0 $ 966,564 $ 3,558,447 $ 3,806,944
Equity in earnings of joint ventures 0 1,305 43,386 98,520
Profit (loss) from sale of properties
(Notes 4, 5 and 6) 0 0 0 (29,560)
Interest income 0 181,568 77,379 51,410
Less: Operating expenses 0 (59,390) (183,311) (214,705)
Interest expense 0 0 0 0
Depreciation and amortization 0 (148,170) (378,269) (393,435)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 941,877 3,117,632 3,319,174
============ ============ ============ ============
Taxable income
- from operations 0 978,535 2,703,252 2,920,859
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,121,547 3,149,000 3,379,378
Cash generated from sales (Notes 4, 5 and 6) 0 0 0 286,411
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,121,547 3,149,000 3,665,789
Less: Cash distributions to investors
(Note 7)
- from operating cash flow 0 (528,364) (2,800,004) (3,350,014)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after
cash distributions 0 593,183 348,996 315,775
Special items (not including sales
and refinancing):
Limited partners' capital
contributions 0 40,000,000 0 0
General partners' capital
contributions 1,000 0 0 0
Syndication costs 0 (3,932,017) (181) 0
Acquisition of land and buildings 0 (19,691,630) (5,764,308) (336,116)
Investment in direct financing leases 0 (6,760,624) (1,365,075) 0
Investment in joint ventures 0 (314,998) (545,139) (140,052)
Increase (decrease) in restricted cash 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIII, Ltd. by related parties 0 (799,980) (25,036) (3,074)
Increase in other assets 0 (454,909) 9,226 0
Loan to tenant 0 0 0 0
Collections on loan to tenant 0 0 0 0
Other 0 0 0 954
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 8,639,025 (7,341,517) (162,513)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 67 72
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4, 5 and 6) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ --------------
<S> <C>
Gross revenue $ 3,685,280 $ 3,654,128 $ 1,488,274
Equity in earnings of joint ventures 60,654 150,417 121,482
Profit (loss) from sale of properties
(Notes 4, 5 and 6) 82,855 (48,538) 0
Interest income 49,820 27,925 22,448
Less: Operating expenses (253,360) (354,206) (122,065)
Interest expense 0 0 0
Depreciation and amortization (393,434) (394,099) (196,413)
------------ ------------ ------------
Net income - GAAP basis 3,231,815 3,035,627 1,313,726
============ ============ ============
Taxable income
- from operations 2,972,159 2,470,268 1,512,381
============ ============ ============
- from gain (loss) on sale 0 (9,715) 0
============ ============ ============
Cash generated from operations
(Notes 2 and 3) 3,367,581 3,273,557 1,733,901
Cash generated from sales (Notes 4, 5 and 6) 550,000 932,849 0
Cash generated from refinancing 0 0 0
------------ ------------ ------------
Cash generated from operations, sales
and refinancing 3,917,581 4,206,406 1,733,901
Less: Cash distributions to investors
(Note 7)
- from operating cash flow (3,367,581) (3,273,557) (1,700,004)
- from sale of properties 0 0 0
- from cash flow from prior period (32,427) (126,451) 0
------------ ------------ ------------
Cash generated (deficiency) after
cash distributions 517,573 806,398 33,897
Special items (not including sales
and refinancing):
Limited partners' capital
contributions 0 0 0
General partners' capital
contributions 0 0 0
Syndication costs 0 0 0
Acquisition of land and buildings 0 0 0
Investment in direct financing leases 0 0 0
Investment in joint ventures 0 (1,482,849) 0
Increase (decrease) in restricted cash (550,000) 550,000 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIII, Ltd. by related parties 0 0 0
Increase in other assets 0 0 0
Loan to tenant 0 (196,980) 0
Collections on loan to tenant 0 127,843 0
Other 0 0 0
Cash generated (deficiency) after cash ------------ ------------ ------------
distributions and special items (32,427) (195,588) 33,897
============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 74 61 37
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) (Notes 4, 5 and 6) 0 0 0
============ ============ ============
</TABLE>
C-8
<PAGE>
TABLE III - CNL INCOME FUND XIII, LTD. (continued)
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ -------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 18 70 82
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 2
- from return of capital 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 7) 0 18 70 84
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 18 70 84
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 7) 0 18 70 84
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 8) 0.00% 5.33% 7.56% 8.44%
Total cumulative cash distributions per
$1,000 investment from inception 0 18 88 172
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Notes 4, 5 and 6) N/A 100% 100% 100%
</TABLE>
Note 1: The registration statement relating to the offering of Units by
CNL Income Fund XIII, Ltd. became effective on March 17, 1993.
Activities through April 15, 1993, were devoted to organization of
the partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint ventures, less cash paid
for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XIII, Ltd.
Note 4: During 1995, the partnership sold one of its properties to a
tenant for its original purchase price, excluding acquisition fees
and miscellaneous acquisition expenses. The net sales proceeds
were used to acquire an additional property. As a result of this
transaction, the partnership recognized a loss for financial
reporting purposes of $29,560 primarily due to acquisition fees
and miscellaneous acquisition expenses the partnership had
allocated to the property and due to the accrued rental income
relating to future scheduled rent increases that the partnership
had recorded and reversed at the time of sale.
Note 5: In November 1996, CNL Income Fund XIII, Ltd. sold one of its
properties and received net sales proceeds of $550,000, resulting
in a gain of $82,855 for financial reporting purposes. In January
1997, the partnership reinvested the net sales proceeds in an
additional property as tenants-in-common with an affiliate of the
general partners.
Note 6: In October 1997, the partnership sold one of its properties and
received net sales proceeds of $932,849, resulting in a loss of
$48,538 for financial reporting purposes. In December 1997, the
partnership reinvested the net sales proceeds in an additional
property as tenants-in-common with affiliates of the general
partners.
Note 7: As a result of the partnership's change in investor services
agents in 1993, distributions are now declared at the end of each
quarter and paid in the following quarter. Since this table
generally presents distributions on a cash basis (rather than
amounts declared), distributions on a cash basis for 1993 only
reflect payments for three quarters. Distributions declared for
the quarters ended December 31, 1993, 1994, 1995, 1996 and 1997,
are reflected in the 1994, 1995, 1996, 1997 and 1998 columns,
respectively, for distributions on a cash basis due to the
payment of such distributions in January 1994, 1995, 1996, 1997
and 1998, respectively. As a result of 1994, 1995, 1996, 1997 and
1998 distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998, are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 8: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 7 above)
Note 9: Certain data for columns representing less than 12 months have
been annualized.
C-9
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ -------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 78 75 33
- from capital gain 2 0 0
- from investment income from prior
period 5 10 4
- from return of capital 0 0 6
------------ ------------ ------------
Total distributions on GAAP basis (Note 7) 85 85 43
============ ============ ============
Source (on cash basis)
- from sales 0 0 0
- from refinancing 0 0 0
- from operations 84 82 43
- from cash flow from prior period 1 3 0
------------ ------------ ------------
Total distributions on cash basis (Note 7) 85 85 43
============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 8) 8.50% 8.50% 8.50%
Total cumulative cash distributions per
$1,000 investment from inception 257 342 385
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Notes 4, 5 and 6) 100% 99% 100%
</TABLE>
C-10
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIV, LTD.
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 256,234 $ 3,135,716 $ 4,017,266
Equity in earnings of joint ventures 0 1,305 35,480 338,717
Profit (Loss) from sale of properties
(Notes 4, 5, 6 and 7) 0 0 0 (66,518)
Interest income 0 27,874 200,499 50,724
Less: Operating expenses 0 (14,049) (181,980) (248,840)
Interest expense 0 0 0 0
Depreciation and amortization 0 (28,918) (257,640) (340,112)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 242,446 2,932,075 3,751,237
============ ============ ============ ============
Taxable income
- from operations 0 278,845 2,482,240 3,162,165
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 321,737 2,812,631 3,709,844
Cash generated from sales (Notes 4, 6,
7 and 8) 0 0 0 696,012
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 321,737 2,812,631 4,405,856
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (9,050) (2,229,952) (3,543,751)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 312,687 582,679 862,105
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 28,785,100 16,214,900 0
General partners' capital
contributions 1,000 0 0 0
Syndication costs 0 (2,771,892) (1,618,477) 0
Acquisition of land and buildings 0 (13,758,004) (11,859,237) (964,073)
Investment in direct financing leases 0 (4,187,268) (5,561,748) (75,352)
Investment in joint ventures 0 (315,209) (1,561,988) (1,087,218)
Return of capital from joint venture 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIV, Ltd. by related parties 0 (706,215) (376,738) (577)
Increase in other assets 0 (444,267) 0 0
Increase in restricted cash 0 0 0 0
Other 0 0 0 5,530
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 6,914,932 (4,180,609) (1,259,585)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 16 56 70
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4, 6, 7 and 8) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ -------------
<S> <C>
Gross revenue $ 3,999,813 $ 3,918,582 $ 1,626,212
Equity in earnings of joint ventures 459,137 309,879 164,631
Profit (Loss) from sale of properties
(Notes 4, 5, 6 and 7) 0 0 112,206
Interest income 44,089 40,232 42,434
Less: Operating expenses (246,621) (262,592) (140,356)
Interest expense 0 0 0
Depreciation and amortization (340,089) (340,161) (170,106)
------------ ------------ ------------
Net income - GAAP basis 3,916,329 3,665,940 1,635,021
============ ============ ============
Taxable income
- from operations 3,236,329 3,048,675 1,742,143
============ ============ ============
- from gain (loss) on sale 0 47,256 33,783
============ ============ ============
Cash generated from operations
(Notes 2 and 3) 3,706,296 3,606,190 1,845,728
Cash generated from sales (Notes 4, 6,
7 and 8) 0 0 1,250,140
Cash generated from refinancing 0 0 0
------------ ------------ ------------
Cash generated from operations, sales
and refinancing 3,706,296 3,606,190 3,095,868
Less: Cash distributions to investors
(Note 5)
- from operating cash flow (3,706,296) (3,606,190) (1,845,728)
- from sale of properties 0 0 0
- from cash flow from prior period (6,226) (106,330) (10,532)
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions (6,226) (106,330) 1,239,608
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 0 0
General partners' capital
contributions 0 0 0
Syndication costs 0 0 0
Acquisition of land and buildings 0 0 0
Investment in direct financing leases 0 0 0
Investment in joint ventures (7,500) (121,855) (310,097)
Return of capital from joint venture 0 51,950 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIV, Ltd. by related parties 0 0 0
Increase in other assets 0 0 0
Increase in restricted cash 0 0 (193,654)
Other 0 0 0
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items (13,726) (176,235) 735,857
============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 71 67 38
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) (Notes 4, 6, 7 and 8) 0 1 1
============ ============ ============
</TABLE>
C-12
<PAGE>
TABLE III - CNL INCOME FUND XIV, LTD. (continued)
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ -------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 51 79
- from capital gain 0 0 0 0
- from return of capital 0 0 0 0
- from investment income from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 0 1 51 79
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from operations 0 1 51 79
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 5) 0 1 51 79
============ ============ ============ ============
Total cash distributions as a percentage of
original $1,000 investment (Note 9) 0.00% 4.50% 6.50% 8.06%
Total cumulative cash distributions
per $1,000 investment from inception 0 1 52 131
Amount (in percentage terms) remaining invest-
ed in program properties at the end of each
year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition
cost of all properties in program)
(Notes 4, 6, 7 and 8) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, CNL Income Fund XIV, Ltd.
("CNL XIV") and CNL Income Fund XIII, Ltd. each registered for
sale $40,000,000 units of limited partnership interests ("Units").
The offering of Units of CNL Income Fund XIII, Ltd. commenced
March 17, 1993. Pursuant to the registration statement, CNL XIV
could not commence until the offering of Units of CNL Income Fund
XIII, Ltd. was terminated. CNL Income Fund XIII, Ltd. terminated
its offering of Units on August 26, 1993, at which time the
maximum offering proceeds of $40,000,000 had been received. Upon
the termination of the offering of Units of CNL Income Fund XIII,
Ltd., CNL XIV commenced its offering of Units. Activities through
September 13, 1993, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint ventures, less cash paid
for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XIV, Ltd.
Note 4: During 1995, the partnership sold two of its properties to a
tenant for its original purchase price, excluding acquisition fees
and miscellaneous acquisition expenses. The net sales proceeds
were used to acquire two additional properties. As a result of
these transactions, the partnership recognized a loss for
financial reporting purposes of $66,518 primarily due to
acquisition fees and miscellaneous acquisition expenses the
partnership had allocated to the property and due to the accrued
rental income relating to future scheduled rent increases that the
partnership had recorded and reversed at the time of sale. In
addition, during 1996, Wood-Ridge Real Estate Joint Venture, in
which the partnership owns a 50% interest, sold its two properties
to the tenant and recognized a gain of approximately $261,100 for
financial reporting purposes. As a result, the partnership's pro
rata share of such gain of approximately $130,550 is included in
equity in earnings of unconsolidated joint ventures for 1996.
Note 5: As a result of the partnership's change in investor services
agents in 1993, distributions are now declared at the end of each
quarter and paid in the following quarter. Since this table
generally presents distributions on a cash basis (rather than
amounts declared), distributions on a cash basis for 1993 only
reflect payments for three quarters. Distributions declared for
the quarters ended December 31, 1993, 1994, 1995, 1996 and 1997,
are reflected in the 1994, 1995, 1996, 1997 and 1998 columns,
respectively, for distributions on a cash basis due to the payment
of such distributions in January 1994, 1995, 1996, 1997 and 1998,
respectively. As a result of 1994, 1995, 1996, 1997 and 1998
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998 are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 6: In January 1998, the partnership sold its property in Madison,
Alabama, to a third party for $740,000 and received net sales
proceeds of $696,486. Due to the fact that during 1997 the
partnership wrote off $13,314 in accrued rental income (non-cash
accounting adjustments relating to the straight-lining of future
scheduled rent increases over the lease term in accordance with
generally accepted accounting principles), no gain or loss was
incurred for financial reporting purposes in January 1998 relating
to this sale. In April 1998, the partnership reinvested a portion
of the net sales proceeds from the sale of the property in
Madison, Alabama in Melbourne Joint Venture, with an affiliate of
the partnership which has the same general partners. The
partnership intends to use the remaining proceeds to invest in an
additional property or for other partnership purposes.
Note 7: In January 1998, the partnership sold one of its properties in
Richmond, Virginia for $512,462 and received net sales proceeds of
$512,246, resulting in a gain of $70,798 for financial reporting
purposes. The partnership intends to reinvest the net sales
proceeds from the sale of the property in Richmond, Virginia in an
additional property.
Note 8: In April 1998, the partnership reached an agreement to accept
$360,000 for the property in Riviera Beach, Florida, which was
taken through a right of way taking in December 1997. The
partnership had received preliminary sales proceeds of $318,592 as
of December 31, 1997. Upon agreement and receipt of the final
sales price of $360,000, the partnership recognized a gain of
$41,408 for financial reporting purposes. The partnership intends
to reinvest the net sales proceeds from the sale of this property
in an additional property.
Note 9: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 5 above)
Note 10: Certain data for columns representing less than 12 months have
been annualized.
C-13
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 83 81 36
- from capital gain 0 0 0
- from return of capital 0 0 0
- from investment income from prior
period 0 2 5
------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 83 83 41
============ ============ ============
Source (on cash basis)
- from sales 0 0 0
- from operations 83 81 41
- from cash flow from prior period 0 2 0
------------ ------------ ------------
Total distributions on cash basis (Note 5) 83 83 41
============ ============ ============
Total cash distributions as a percentage of
original $1,000 investment (Note 9) 8.25% 8.25% 8.25%
Total cumulative cash distributions
per $1,000 investment from inception 214 297 338
Amount (in percentage terms) remaining invest-
ed in program properties at the end of each
year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition
cost of all properties in program)
(Notes 4, 6, 7 and 8) 100% 100% 100%
</TABLE>
C-14
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XV, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 1,143,586 $ 3,546,320 $ 3,632,699
Equity in earnings of joint ventures 0 8,372 280,606 392,862
Profit (Loss) from sale of properties
(Note 4) 0 0 (71,023) 0
Interest income 0 167,734 88,059 43,049
Less: Operating expenses 0 (62,926) (228,319) (235,319)
Interest expense 0 0 0 0
Depreciation and amortization 0 (70,848) (243,175) (248,232)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 1,185,918 3,372,468 3,585,059
============ ============ ============ ============
Taxable income
- from operations 0 1,026,715 2,861,912 2,954,318
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,116,834 3,239,370 3,434,682
Cash generated from sales (Note 4) 0 0 811,706 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,116,834 4,051,076 3,434,682
Less: Cash distributions to investors
(Notes 5, 6 and 8)
- from operating cash flow 0 (635,944) (2,650,003) (3,200,000)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 480,890 1,401,073 234,682
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 40,000,000 0 0
General partners' capital contri-
butions 1,000 0 0 0
Syndication costs 0 (3,892,003) 0 0
Acquisition of land and buildings 0 (22,152,379) (1,625,601) 0
Investment in direct financing
leases 0 (6,792,806) (2,412,973) 0
Investment in joint ventures 0 (1,564,762) (720,552) (129,939)
Return of capital from joint venture 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XV, Ltd. by related parties 0 (1,098,197) (23,507) 0
Increase in other assets 0 (187,757) 0 0
Other (38) (6,118) 25,150 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 962 4,786,868 (3,356,410) 104,743
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 71 73
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Note 4) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-15
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ -----------
<S> <C>
Gross revenue $ 3,622,123 $ 1,498,779
Equity in earnings of joint ventures 239,249 120,294
Profit (Loss) from sale of properties
(Note 4) 0 0
Interest income 46,642 33,275
Less: Operating expenses (224,761) (128,176)
Interest expense 0 0
Depreciation and amortization (248,348) (124,200)
------------ -----------
Net income - GAAP basis 3,434,905 1,399,972
============ ===========
Taxable income
- from operations 2,856,893 1,492,168
============ ===========
- from gain on sale 47,256 0
============ ===========
Cash generated from operations
(Notes 2 and 3) 3,306,595 1,710,905
Cash generated from sales (Note 4) 0 0
Cash generated from refinancing 0 0
------------ -----------
Cash generated from operations, sales
and refinancing 3,306,595 1,710,905
Less: Cash distributions to investors
(Notes 5, 6 and 8)
- from operating cash flow (3,280,000) (1,710,905)
- from sale of properties 0 0
- from cash flow from prior period 0 (89,095)
------------ -------------
Cash generated (deficiency) after cash
distributions 26,595 (89,095)
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 0
General partners' capital contri-
butions 0 0
Syndication costs 0 0
Acquisition of land and buildings 0 0
Investment in direct financing
leases 0 0
Investment in joint ventures 0 (207,986)
Return of capital from joint venture 51,950 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XV, Ltd. by related parties 0 0
Increase in other assets 0 0
Other 0 0
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 78,545 (297,081)
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 71 37
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) (Note 4) 1 0
============ ============
</TABLE>
C-16
<PAGE>
TABLE III - CNL INCOME FUND XV, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ -----------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 21 66 80
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 0 21 66 80
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 21 66 80
- from investment income from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 5) 0 21 66 80
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 6,
7 and 8). 0.00% 5.00% 7.25% 8.20%
Total cumulative cash distributions per
$1,000 investment from inception 0 21 87 167
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Note 4) N/A 100% 100% 100%
</TABLE>
Note 1: The registration statement relating to this offering of Units of
CNL Income Fund XV, Ltd. became effective February 23, 1994.
Activities through March 23, 1994, were devoted to organization of
the partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint venture, less cash paid for
expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XV, Ltd.
Note 4: During 1995, the partnership sold three of its properties to a
tenant for its original purchase price, excluding acquisition fees
and miscellaneous acquisition expenses. The majority of the net
sales proceeds were used to acquire additional properties. As a
result of these transactions, the partnership recognized a loss
for financial reporting purposes of $71,023 primarily due to
acquisition fees and miscellaneous acquisition expenses the
partnership had allocated to the three properties and due to the
accrued rental income relating to future scheduled rent increases
that the partnership had recorded and reversed at the time of
sale. In addition, during 1996, Wood-Ridge Real Estate Joint
Venture, in which the partnership owns a 50% interest, sold its
two properties to the tenant and recognized a gain of
approximately $261,100 for financial reporting purposes. As a
result, the partnership's pro rata share of such gain of
approximately $130,550 is included in equity in earnings of
unconsolidated joint ventures for 1996.
Note 5: Distributions declared for the quarters ended December 31, 1994,
1995, 1996 and 1997 are reflected in the 1995, 1996, 1997 and 1998
columns, respectively, due to the payment of such distributions in
January 1995, 1996, 1997 and 1998, respectively. As a result of
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998 are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 6: On December 31, 1996, CNL Income Fund XV, Ltd. declared a special
distribution of cumulative excess operating reserves equal to .20%
of the total invested capital. Accordingly, the total yield for
1996 was 8.20%
Note 7: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 5 above)
Note 8: Cash distributions for 1998 include an additional amount equal to
0.50% of invested capital which was earned in 1997 or prior years,
but declared payable in the first quarter of 1998
Note 9: Certain data for columns representing less than 12 months have
been annualized.
C-17
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 82 35
- from capital gain 0 0
- from investment income from prior
period 0 10
------------ ------------
Total distributions on GAAP basis (Note 5) 82 45
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 82 43
- from investment income from prior period 0 2
------------ ------------
Total distributions on cash basis (Note 5)
82 45
Total cash distributions as a percentage ============ ============
of original $1,000 investment (Notes 6,
7 and 8). 8.00% 8.50%
Total cumulative cash distributions per
$1,000 investment from inception 249 294
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Note 4) 100% 100%
</TABLE>
C-18
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVI, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 186,257 $ 2,702,504 $ 4,343,390
Equity in earnings from joint venture 0 0 0 19,668
Profit from sale of properties (Notes 4
and 5) 0 0 0 124,305
Interest income 0 21,478 321,137 75,160
Less: Operating expenses 0 (10,700) (274,595) (261,878)
Interest expense 0 0 0 0
Depreciation and amortization 0 (9,458) (318,205) (552,447)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 187,577 2,430,841 3,748,198
============ ============ ============ ============
Taxable income
- from operations 0 189,864 2,139,382 3,239,830
============ ============ ============ ============
- from gain on sale (Notes 4 and 5) 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 205,148 2,481,395 3,753,726
Cash generated from sales (Notes 4 and 5) 0 0 0 775,000
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 205,148 2,481,395 4,528,726
Less: Cash distributions to investors
(Note 6)
- from operating cash flow 0 (2,845) (1,798,921) (3,431,251)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 202,303 682,474 1,097,475
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 20,174,172 24,825,828 0
General partners' capital contri-
butions 1,000 0 0 0
Syndication costs 0 (1,929,465) (2,452,743) 0
Acquisition of land and buildings 0 (13,170,132) (16,012,458) (2,355,627)
Investment in direct financing
leases 0 (975,853) (5,595,236) (405,937)
Investment in joint ventures 0 0 0 (775,000)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVI, Ltd. by related parties 0 (854,154) (405,569) (2,494)
Increase in other assets 0 (443,625) (58,720) 0
Increase (decrease) in restricted cash 0 0 0 0
Reimbursement from developer of
construction costs 0 0 0 0
Other (36) (20,714) 20,714 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 964 2,982,532 1,004,290 (2,441,583)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 17 53 71
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4 and 5) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-19
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ -------------
<S> <C>
Gross revenue $ 4,308,853 $ 1,987,937
Equity in earnings from joint venture 73,507 64,956
Profit from sale of properties (Notes 4
and 5) 41,148 0
Interest income 73,634 34,195
Less: Operating expenses (272,932) (132,020)
Interest expense 0 0
Depreciation and amortization (563,883) (268,997)
------------ ------------
Net income - GAAP basis 3,660,327 1,686,071
============ ============
Taxable income
- from operations 3,178,911 1,629,897
============ ============
- from gain on sale (Notes 4 and 5) 64,912 0
============ ============
Cash generated from operations
(Notes 2 and 3) 3,780,424 1,922,221
Cash generated from sales (Notes 4 and 5) 610,384 0
Cash generated from refinancing 0 0
------------ ------------
Cash generated from operations, sales
and refinancing 4,390,808 1,922,221
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,600,000) (1,890,000)
- from sale of properties 0 0
-------------- -------------
Cash generated (deficiency) after cash
distributions 790,808 32,221
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 0
General partners' capital contri-
butions 0 0
Syndication costs 0 0
Acquisition of land and buildings (23,501) 0
Investment in direct financing
leases (29,257) (31,504)
Investment in joint ventures 0 (607,896)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVI, Ltd. by related parties 0 0
Increase in other assets 0 0
Increase (decrease) in restricted cash (610,384) 610,384
Reimbursement from developer of
construction costs 0 161,204
Other 0 0
-------------- -------------
Cash generated (deficiency) after cash
distributions and special items 127,666 164,409
============== =============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 70 36
============== ==============
- from recapture 0 0
============= ==============
Capital gain (loss) (Notes 4 and 5) 1 0
============= ==============
</TABLE>
C-20
<PAGE>
TABLE III - CNL INCOME FUND XVI, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 45 76
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 6) 0 1 45 76
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 1 45 76
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 6) 0 1 45 76
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 7
and 8) 0.00% 4.50% 6.00% 7.88%
Total cumulative cash distributions per
$1,000 investment from inception 0 1 46 122
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Notes 4 and 5) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, CNL Income Fund XVI, Ltd.
("CNL XVI") and CNL Income Fund XV, Ltd. each registered for sale
$40,000,000 units of limited partnership interests ("Units"). The
offering of Units of CNL Income Fund XV, Ltd. commenced February
23, 1994. Pursuant to the registration statement, CNL XVI could
not commence until the offering of Units of CNL Income Fund XV,
Ltd. was terminated. CNL Income Fund XV, Ltd. terminated its
offering of Units on September 1, 1994, at which time the maximum
offering proceeds of $40,000,000 had been received. Upon the
termination of the offering of Units of CNL Income Fund XV, Ltd.,
CNL XVI commenced its offering of Units. Activities through
September 22, 1994, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XVI, Ltd.
Note 4: In April 1996, CNL Income Fund XVI, Ltd. sold one of its
properties and received net sales proceeds of $775,000, resulting
in a gain of $124,305 for financial reporting purposes. In October
1996, the partnership reinvested the net sales proceeds in an
additional property as tenants-in-common with an affiliate of the
general partners.
Note 5: In March 1997, CNL Income Fund XVI, Ltd. sold one of its
properties and received net sales proceeds of $610,384, resulting
in a gain of $41,148 for financial reporting purposes. In January
1998, the partnership reinvested the net sales proceeds in an
additional property as tenants-in-common with affiliates of the
general partners.
Note 6: Distributions declared for the quarters ended December 31, 1994,
1995, 1996 and 1997 are reflected in the 1995, 1996, 1997 and 1998
columns, respectively, due to the payment of such distributions in
January 1995, 1996, 1997 and 1998, respectively. As a result of
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998 are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 7: Cash distributions for 1998 include an additional amount equal to
0.20% of invested capital which was earned in 1997 but declared
payable in the first quarter of 1998.
Note 8: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 6 above)
Note 9: Certain data for columns representing less than 12 months have
been annualized.
C-21
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 80 37
- from capital gain 0 0
- from investment income from 0 5
prior period ------------ ------------
Total distributions on GAAP basis (Note 6) 80 42
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 80 42
------------ ------------
Total distributions on cash basis (Note 6) 80 42
============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 7
and 8) 8.00% 8.20%
Total cumulative cash distributions per
$1,000 investment from inception 202 244
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Notes 4 and 5) 100% 100%
</TABLE>
C-22
<PAGE>
TABLE III Operating Results
of Prior Programs CNL AMERICAN
PROPERTIES FUND, INC.
<TABLE>
<CAPTION>
1994 1997
(Note 1) 1995 1996 (Note 2)
------------ ------------ ------------ ----------
<S> <C>
Gross revenue $ 0 $ 539,776 $ 4,363,456 $ 15,516,102
Interest income 0 119,355 1,843,228 3,941,831
Less: Operating expenses 0 (186,145) (908,924) (2,066,962)
Interest expense 0 0 0 0
Depreciation and amortization 0 (104,131) (521,871) (1,795,062)
Minority interest in income of
consolidated joint venture 0 (76) (29,927) (31,453)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 368,779 4,745,962 15,564,456
============ ============ ============ ============
Taxable income
- from operations (Note 8) 0 379,935 4,894,262 15,727,311
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 (41,115)
============ ============ ============ ============
Cash generated from operations
(Notes 4 and 5) 0 498,459 5,482,540 17,076,214
Cash generated from sales (Note 7) 0 0 0 6,289,236
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 498,459 5,482,540 23,365,450
Less: Cash distributions to investors (Note 9)
- from operating cash flow 0 (498,459) (5,439,404) (16,854,297)
- from sale of properties 0 0 0 0
- from return of capital (Note 10) 0 (136,827) 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 (136,827) 43,136 6,511,153
Special items (not including sales of
real estate and refinancing):
Subscriptions received from
stockholders 0 38,454,158 100,792,991 222,482,560
Sale of common stock to CNL Fund
Advisors, Inc. 200,000 0 0 0
Contributions from minority interest 0 200,000 97,419 0
Distributions to holder of minority
interest 0 0 (39,121) (34,020)
Stock issuance costs (19) (3,680,704) (8,486,188) (19,542,862)
Acquisition of land and buildings 0 (18,835,969) (36,104,148) (143,542,667)
Investment in direct financing
leases 0 (1,364,960) (13,372,621) (39,155,974)
Proceeds from sale of equipment direct
financing leases 0 0 0 962,274
Investment in joint venture 0 0 0 0
Investment in mortgage notes
receivable 0 0 (13,547,264) (4,401,982)
Collections on mortgage notes
receivable 0 0 133,850 250,732
Investment in notes receivable 0 0 0 (12,521,401)
Collections on notes receivable 0 0 0 0
Investment in certificate of deposit 0 0 0 (2,000,000)
Proceeds of borrowing on line of
credit 0 0 3,666,896 19,721,804
Payment on line of credit 0 0 (145,080) (20,784,577)
Reimbursement of organization, acquisition,
and deferred offering and stock issuance
costs paid on behalf of CNL American
Properties Fund, Inc. by related parties (199,036) (2,500,056) (939,798) (2,857,352)
Increase in other assets 0 (628,142) (1,103,896) 0
Other 0 0 (54,333) 49,001
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 945 11,507,500 30,941,643 5,136,689
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED (Note 6)
Federal income tax results:
Ordinary income (loss) (Note 11)
- from operations (Note 8) 0 20 61 67
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-23
<PAGE>
<TABLE>
<CAPTION>
6 months
1998
(Note 3)
--------------
<S> <C>
Gross revenue $ 13,829,348
Interest income 3,799,730
Less: Operating expenses (1,949,398)
Interest expense 0
Depreciation and amortization (1,648,827)
Minority interest in income of
consolidated joint venture (15,380)
--------------
Net income - GAAP basis 14,015,473
==============
Taxable income
- from operations (Note 8) 13,876,482
==============
- from gain (loss) on sale (108,690)
==============
Cash generated from operations
(Notes 4 and 5) 16,600,953
Cash generated from sales (Note 7) 1,233,679
Cash generated from refinancing 0
---------------
Cash generated from operations, sales
and refinancing 17,834,632
Less: Cash distributions to investors (Note 9)
- from operating cash flow (15,992,806)
- from sale of properties 0
- from return of capital (Note 10) 0
---------------
Cash generated (deficiency) after cash
distributions 1,841,826
Special items (not including sales of
real estate and refinancing):
Subscriptions received from
stockholders 152,570,391
Sale of common stock to CNL Fund
Advisors, Inc. 0
Contributions from minority interest 0
Distributions to holder of minority
interest (16,956)
Stock issuance costs (13,840,339)
Acquisition of land and buildings (36,742,586)
Investment in direct financing
leases (71,360,700)
Proceeds from sale of equipment direct
financing leases 0
Investment in joint venture (112,847)
Investment in mortgage notes
receivable 0
Collections on mortgage notes
receivable 147,051
Investment in notes receivable (2,903,600)
Collections on notes receivable 666,633
Investment in certificate of deposit 0
Proceeds of borrowing on line of
credit 2,979,403
Payment on line of credit 0
Reimbursement of organization, acquisition,
and deferred offering and stock issuance
costs paid on behalf of CNL American
Properties Fund, Inc. by related parties (2,570,126)
Increase in other assets (1,845,005)
Other (30,842)
--------------
Cash generated (deficiency) after cash
distributions and special items 28,782,303
==============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED (Note 6)
Federal income tax results:
Ordinary income (loss) (Note 11)
- from operations (Note 8) 32
==============
- from recapture 0
==============
Capital gain (loss) 0
==============
</TABLE>
C-24
<PAGE>
TABLE III - CNL AMERICAN PROPERTIES FUND, INC. (continued)
<TABLE>
<CAPTION>
1994 1997
(Note 1) 1995 1996 (Note 2)
------------ ------------ ------------ ----------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 19 59 66
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
- from return of capital (Note 10) 0 14 8 6
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 11) 0 33 67 72
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 26 67 72
- from return of capital (Note 10) 0 7 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 11) 0 33 67 72
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 6 and 9) 0.00% 5.34% 7.06% 7.45%
Total cumulative cash distributions per
$1,000 investment from inception 0 33 100 172
Amount (in percentage terms) remaining
invested in program properties at the end of
each year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition cost
of all properties in program) (Note 7) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the
Securities Act of 1933, as amended, effective March 29, 1995, CNL
American Properties Fund, Inc. ("APF") registered for sale
$165,000,000 of shares of common stock (the "Initial Offering"),
including $15,000,000 available only to stockholders participating
in the company's reinvestment plan. The Initial Offering of APF
commenced April 19, 1995, and upon completion of the Initial
Offering on February 6, 1997, had received subscription proceeds
of $150,591,765 (15,059,177 shares), including $591,765 (59,177
shares) issued pursuant to the reinvestment plan. Pursuant to a
Registration Statement on Form S-11 under the Securities Act of
1933, as amended, effective January 31, 1997, APF registered for
sale $275,000,000 of shares of common stock (the "1997 Offering"),
including $25,000,000 available only to stockholders participating
in the company's reinvestment plan. The 1997 Offering of APF
commenced following the completion of the Initial Offering on
February 6, 1997, and upon completion of the 1997 Offering on
March 2, 1998, had received subscription proceeds of $251,872,648
(25,187,265 shares), including $1,872,648 (187,265 shares) issued
pursuant to the reinvestment plan. Pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933, as
amended, effective May 12, 1998, APF registered for sale
$345,000,000 of shares of common stock (the "1998 Offering"),
including $20,000,000 available only to stockholders participating
in the company's reinvestment plan. The 1998 Offering of APF
commenced following the completion of the 1997 Offering on March
2, 1998. As of June 30, 1998, APF had received subscriptions
totalling $111,835,687 from the 1998 Offering, including
$1,823,518 issued pursuant to the company's reinvestment plan.
Activities through June 1, 1995, were devoted to organization of
APF and operations had not begun.
Note 2: The amounts shown represent the combined results of the Initial
Offering and the 1997 Offering. Note 3: The amounts shown
represent the combined results of the Initial Offering, 1997
Offering and 1998 Offering.
Note 4: Cash generated from operations includes cash received from
tenants, less cash paid for expenses, plus interest received.
Note 5: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of APF.
Note 6: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period.
Note 7: In May 1997 and July 1997, APF sold four properties and one
property, respectively, to a tenant for $5,254,083 and $1,035,153,
respectively, which was equal to the carrying value of the
properties at the time of sale. In May 1998, APF sold two
properties to third parties for $1,605,154 (and received net sales
proceeds of approximately $1,233,700 after deduction of
construction costs incurred but not paid by APF as of the date of
the sale) which approximated the carrying value of the properties
at the time of sale. As a result, no gain or loss was recognized
for financial reporting purposes. The company reinvested the
proceeds from the sale of properties in additional properties.
Note 8: Taxable income presented is before the dividends paid deduction.
Note 9: For the six months ended June 30, 1998 and the years ended
December 31, 1997, 1996 and 1995, 86.37%, 93.33%, 90.25% and
59.82%, respectively, of the distributions received by
stockholders were considered to be ordinary income and 13.63%,
6.67%, 9.75% and 40.18%, respectively, were considered a return of
capital for federal income tax purposes. No amounts distributed to
stockholders for the six months ended June 30, 1998 and the years
ended December 31, 1997, 1996 and 1995 are required to be or have
been treated by the company as a return of capital for purposes of
calculating the stockholders' return on their invested capital.
C-25
<PAGE>
<TABLE>
<CAPTION>
6 months
1998
(Note 3)
-------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 32
- from capital gain 0
- from investment income from
prior period 0
- from return of capital (Note 10) 5
------------
Total distributions on GAAP basis (Note 11) 37
============
Source (on cash basis)
- from sales 0
- from refinancing 0
- from operations 37
- from return of capital (Note 10) 0
------------
Total distributions on cash basis (Note 11) 37
============
Total cash distributions as a percentage
of original $1,000 investment (Note 6 and 9) 7.62%
Total cumulative cash distributions per
$1,000 investment from inception 209
Amount (in percentage terms) remaining
invested in program properties at the end of
each year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition cost
of all properties in program) (Note 7) 100%
</TABLE>
Note 10: Cash distributions presented above as a return of capital on a
GAAP basis represent the amount of cash distributions in excess of
accumulated net income on a GAAP basis. Accumulated net income
includes deductions for depreciation and amortization expense and
income from certain non-cash items. This amount is not required to
be presented as a return of capital except for purposes of this
table, and APF has not treated this amount as a return of capital
for any other purpose.
Note 11: Tax and distribution data and total distributions on GAAP basis
were computed based on the weighted average shares outstanding
during each period presented.
C-26
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVII, LTD.
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ -------------
<S> <C>
Gross revenue $ 0 $ 1,195,263 $ 2,643,871 $ 1,417,608
Equity in earnings of unconsolidated
joint ventures 0 4,834 100,918 69,785
Interest income 12,153 244,406 69,779 24,834
Less: Operating expenses (3,493) (169,536) (181,865) (93,411)
Interest expense 0 0 0 0
Depreciation and amortization (309) (179,208) (387,292) (176,959)
Minority interest in income of
consolidated joint venture 0 (41,854) (31,219)
------------ ------------ ------------ ------------
Net income - GAAP basis 8,351 1,095,759 2,203,557 1,210,638
============ ============ ============ ============
Taxable income
- from operations 12,153 1,114,964 2,058,601 1,062,296
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 9,012 1,232,948 2,495,114 1,274,084
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 9,012 1,232,948 2,495,114 1,274,084
Less: Cash distributions to investors
(Note 4)
- from operating cash flow (1,199) (703,681) (2,177,584) (1,200,000)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 7,813 529,267 317,530 74,084
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 5,696,921 24,303,079 0 0
General partners' capital contri-
butions 1,000 0 0 0
Contributions from minority interest 0 140,676 278,170 0
Distribution to holder of minority
interest 0 0 (41,507) (24,426)
Syndication costs (604,348) (2,407,317) 0 0
Acquisition of land and buildings (332,928) (19,735,346) (1,740,491) 0
Investment in direct financing
leases 0 (1,784,925) (1,130,497) 0
Investment in joint ventures 0 (201,501) (1,135,681) (127,807)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVII, Ltd. by related parties (347,907) (326,483) (25,444) 0
Increase in other assets (221,282) 0 0 0
Reimbursement from developer of
construction costs 0 0 0 322,897
Other (410) 410 0 (16,797)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 4,198,859 517,860 (3,477,920) 227,951
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 36 37 69 35
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-27
<PAGE>
TABLE III - CNL INCOME FUND XVII, LTD. (continued)
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 4 23 73 40
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
----------- ------------ ------------ ------------
Total distributions on GAAP basis (Note 4) 0 23 73 40
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 4 23 73 40
------------ ------------ ------------ -------------
Total distributions on cash basis (Note 4) 4 23 73 40
============ ============ ============ =============
Total cash distributions as a percentage
of original $1,000 investment (Note 5) 5.00% 5.50% 7.625% 8.00
Total cumulative cash distributions per
$1,000 investment from inception 4 27 100 140
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 6) N/A 98% 100% 99%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, effective August 11, 1995, CNL
Income Fund XVII, Ltd. ("CNL XVII") and CNL Income Fund XVIII,
Ltd. each registered for sale $30,000,000 units of limited
partnership interests ("Units"). The offering of Units of CNL
Income Fund XVII, Ltd. commenced September 2, 1995. Pursuant to
the registration statement, CNL XVIII could not commence until the
offering of Units of CNL Income Fund XVII, Ltd. was terminated.
CNL Income Fund XVII, Ltd. terminated its offering of Units on
September 19, 1996, at which time subscriptions for the maximum
offering proceeds of $30,000,000 had been received. Upon the
termination of the offering of Units of CNL Income Fund XVII,
Ltd., CNL XVIII commenced its offering of Units. Activities
through November 3, 1995, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint ventures, less cash paid
for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL XVII.
Note 4: Distributions declared for the quarters ended December 31, 1995,
1996 and 1997 are reflected in the 1996, 1997 and 1998
columns, respectively, due to the payment of such distributions in
January 1996, 1997 and 1998, respectively. As a result of
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1996, 1997 and June 30,
1998 are not included in the 1996, 1997 and 1998 totals,
respectively.
Note 5: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 4 above)
Note 6: During 1998, CNL Income Fund XVII, Ltd. received approximately
$322,900 from the developer of the properties in Aiken, South
Carolina and Weatherford, Texas. This represents a reimbursement
from the developer upon final reconciliation of total construction
costs, to the total construction costs funded by the partnership
in accordance with the development agreement. The partnership
intends to reinvest the funds in additional properties.
Note 7: Certain data for columns representing less than 12 months have
been annualized.
C-28
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVIII, LTD.
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ --------
<S> <C>
Gross revenue $ 0 $ 1,373 $ 1,291,416 $ 1,447,579
Equity in earnings of joint venture 0 0 0 0
Interest income 0 30,241 161,826 99,885
Less: Operating expenses 0 (3,992) (156,403) (103,375)
Interest expense 0 0 0 0
Depreciation and amortization 0 (712) (142,079) (178,935)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 26,910 1,154,760 1,265,154
============ ============ ============ ============
Taxable income
- from operations 0 30,223 1,318,750 1,206,888
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 27,146 1,361,756 1,459,212
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 27,146 1,361,756 1,459,212
Less: Cash distributions to investors
(Note 4)
- from operating cash flow 0 (2,138) (855,957) (1,112,150)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 25,008 505,799 347,062
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 8,498,815 25,723,944 854,241
General partners' capital contri-
butions 1,000 0 0 0
Contributions from minority interest 0 0 0 0
Syndication costs 0 (845,657) (2,450,214) (161,141)
Acquisition of land and buildings 0 (1,533,446) (18,581,999) (2,219,267)
Investment in direct financing leases 0 0 (5,962,087) (877,348)
Investment in joint venture 0 0 0 0
Increase in restricted cash 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVIII, Ltd. by related parties 0 (497,420) (396,548) (35,055)
Increase in other assets 0 (276,848) 0 (48,378)
Other (20) (107) (66,893) (10,000)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 980 5,370,345 (1,227,998) (2,149,886)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 6 57 34
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-29
<PAGE>
TABLE III - CNL INCOME FUND XVIII, LTD. (continued)
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ ---------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 0 38 32
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 0
------------ ------------ ------------ -----------
Total distributions on GAAP basis (Note 4) 0 0 38 32
============ ============ ============ ===========
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 0 38 32
------------ ------------ ------------ -----------
Total distributions on cash basis (Note 4) 0 0 38 32
============ ============ ============ ===========
Total cash distributions as a percentage
of original $1,000 investment from
inception 0.00% 5.00% 5.75% 7.25%
Total cumulative cash distributions per
$1,000 investment (Note 5) 0 0 38 70
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 83% 95% 99%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, effective August 11, 1995, CNL
Income Fund XVIII, Ltd ("CNL XVIII") and CNL Income Fund XVII,
Ltd. each registered for sale $30,000,000 units of limited
partnership interest ("Units"). The offering of Units of CNL
Income Fund XVII, Ltd. commenced September 2, 1995. Pursuant to
the registration statement, CNL XVIII could not commence until the
offering of Units of CNL Income Fund XVII, Ltd. was terminated.
CNL Income Fund XVII, Ltd. terminated its offering of Units on
September 19, 1996, at which time the maximum offering proceeds of
$30,000,000 had been received. Upon the termination of the
offering of Units of CNL Income Fund XVII, Ltd., CNL XVIII
commenced its offering of Units. Activities through October 11,
1996, were devoted to organization of the partnership and
operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL XVIII.
Note 4: Distributions declared for the quarters ended December 1996 and
1997 are reflected in the 1997 and 1998 columns, respectively, due
to the payment of such distributions in January 1997 and 1998,
respectively. As a result of distributions being presented on a
cash basis, distributions declared and unpaid as of December 31,
1997 and June 30, 1998 are not included in the 1997 and 1998
totals, respectively.
Note 5: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 4 above)
Note 6: Certain data for columns representing less than 12 months have
been annualized.
C-30
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
==========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
==========================================================================================================================
<S> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA (14) 02/05/87 06/12/92 $1,169,021 0 0 0 $1,169,021
Wendy's -
Fairfield, CA (14) 07/01/87 10/03/94 1,018,490 0 0 0 1,018,490
Wendy's -
Casa Grande, AZ 12/10/86 08/19/97 795,700 0 0 0 795,700
Wendy's -
North Miami, FL (9) 02/18/86 08/21/97 473,713 0 0 0 473,713
Popeye's -
Kissimmee, FL (14) 12/31/86 04/30/98 661,300 0 0 0 661,300
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 05/29/87 07/21/93 746,800 0 0 0 746,800
Pizza Hut -
Graham, TX 08/24/87 07/28/94 261,628 0 0 0 261,628
Golden Corral -
Medina, OH (11) 11/18/87 11/30/94 825,000 0 0 0 825,000
Denny's -
Show Low, AZ (8) 05/22/87 01/31/97 620,800 0 0 0 620,800
KFC -
Eagan, MN 06/01/87 06/02/97 623,882 0 42,000 0 665,882
KFC -
Jacksonville, FL 09/01/87 09/09/97 639,363 0 0 0 639,363
Wendy's -
Farmington Hills, MI (12) 05/18/87 10/09/97 833,031 0 0 0 833,031
Wendy's -
Farmington Hills, MI (13) 05/18/87 10/09/97 1,085,259 0 0 0 1,085,259
Denny's -
Plant City, FL 11/23/87 10/24/97 910,061 0 0 0 910,061
Pizza Hut -
Mathis, TX 12/17/87 12/04/97 297,938 0 0 0 297,938
KFC -
Avon Park, FL 09/02/87 12/10/97 501,975 0 0 0 501,975
CNL Income Fund III, Ltd.:
Wendy's -
Chicago, IL (14) 06/02/88 01/10/97 496,418 0 0 0 496,418
Perkins -
Bradenton, FL 06/30/88 03/14/97 1,310,001 0 0 0 1,310,001
Pizza Hut -
Kissimmee, FL 02/23/88 04/08/97 673,159 0 0 0 673,159
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
Cost of Properties
Including Closing and
Soft Costs
------------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA (14) 0 $955,000 $ 955,000 $214,021
Wendy's -
Fairfield, CA (14) 0 861,500 861,500 156,990
Wendy's -
Casa Grande, AZ 0 667,255 667,255 128,445
Wendy's -
North Miami, FL (9) 0 385,000 385,000 88,713
Popeye's -
Kissimmee, FL (14) 0 475,360 475,360 185,940
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 0 642,800 642,800 104,000
Pizza Hut -
Graham, TX 0 205,500 205,500 56,128
Golden Corral -
Medina, OH (11) 0 743,000 743,000 82,000
Denny's -
Show Low, AZ (8) 0 484,185 484,185 136,615
KFC -
Eagan, MN 0 601,100 601,100 64,782
KFC -
Jacksonville, FL 0 405,000 405,000 234,363
Wendy's -
Farmington Hills, MI (12) 0 679,000 679,000 154,031
Wendy's -
Farmington Hills, MI (13) 0 887,000 887,000 198,259
Denny's -
Plant City, FL 0 820,717 820,717 89,344
Pizza Hut -
Mathis, TX 0 202,100 202,100 95,838
KFC -
Avon Park, FL 0 345,000 345,000 156,975
CNL Income Fund III, Ltd.:
Wendy's -
Chicago, IL (14) 0 591,362 591,362 (94,944)
Perkins -
Bradenton, FL 0 1,080,500 1,080,500 229,501
Pizza Hut -
Kissimmee, FL 0 474,755 474,755 198,404
</TABLE>
C-31
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
==========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
==========================================================================================================================
<S> <C>
Burger King -
Roswell, GA 06/08/88 06/20/97 257,981 0 685,000 0 942,981
Wendy's -
Mason City, IA 02/29/88 10/24/97 217,040 0 0 0 217,040
Taco Bell -
Fernandina Beach, FL (14) 04/09/88 01/15/98 721,655 0 0 0 721,655
Denny's -
Daytona Beach, FL (14) 07/12/88 01/23/98 1,008,976 0 0 0 1,008,976
Wendy's -
Punta Gorda, FL 02/03/88 02/20/98 665,973 0 0 0 665,973
Po' Folks -
Hagerstown, MD 06/21/88 06/10/98 788,884 0 0 0 788,884
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 03/22/89 04/27/94 712,000 0 0 0 712,000
Burger King -
Hastings, MI 08/12/88 12/15/95 518,650 0 0 0 518,650
Wendy's -
Tampa, FL 12/30/88 09/20/96 1,049,550 0 0 0 1,049,550
Checkers -
Douglasville, GA 12/08/94 11/07/97 380,695 0 0 0 380,695
Taco Bell -
Fort Myers, FL (14) 12/22/88 03/02/98 794,690 0 0 0 794,690
Denny's -
Union Township, OH (14) 11/01/88 03/31/98 674,135 0 0 0 674,135
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 02/28/90 08/25/95 0 0 1,040,000 0 1,040,000
Ponderosa -
St. Cloud, FL (6) (14) 06/01/89 10/24/96 73,713 0 1,057,299 0 1,131,012
Franklin National Bank -
Franklin, TN 06/26/89 01/07/97 960,741 0 0 0 960,741
Shoney's -
Smyrna, TN 03/22/89 05/13/97 636,788 0 0 0 636,788
KFC -
Salem, NH 05/31/89 09/22/97 1,272,137 0 0 0 1,272,137
Perkins -
Port St. Lucie, FL 11/14/89 09/23/97 1,216,750 0 0 0 1,216,750
Hardee's -
Richmond, VA 02/17/89 11/07/97 397,785 0 0 0 397,785
Wendy's -
Tampa, FL 02/16/89 12/29/97 805,175 0 0 0 805,175
</TABLE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
=============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
Burger King -
Roswell, GA 0 775,226 775,226 167,755
Wendy's -
Mason City, IA 0 190,252 190,252 26,788
Taco Bell -
Fernandina Beach, FL (14) 0 559,570 559,570 162,085
Denny's -
Daytona Beach, FL (14) 0 918,777 918,777 90,799
Wendy's -
Punta Gorda, FL 0 684,342 684,342 (18,369)
Po' Folks -
Hagerstown, MD 0 1,188,315 1,188,315 (399,431)
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 0 616,501 616,501 95,499
Burger King -
Hastings, MI 0 419,936 419,936 98,714
Wendy's -
Tampa, FL 0 828,350 828,350 221,200
Checkers -
Douglasville, GA 0 363,768 363,768 16,927
Taco Bell -
Fort Myers, FL (14) 0 597,998 597,998 196,692
Denny's -
Union Township, OH (14) 0 872,850 872,850 (198,715)
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 0 986,418 986,418 53,582
Ponderosa -
St. Cloud, FL (6) (14) 0 996,769 996,769 134,243
Franklin National Bank -
Franklin, TN 0 1,138,164 1,138,164 (177,423)
Shoney's -
Smyrna, TN 0 554,200 554,200 82,588
KFC -
Salem, NH 0 1,079,310 1,079,310 192,827
Perkins -
Port St. Lucie, FL 0 1,203,207 1,203,207 13,543
Hardee's -
Richmond, VA 0 695,464 695,464 (297,679)
Wendy's -
Tampa, FL 0 657,800 657,800 147,375
</TABLE>
C-32
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
==========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
===========================================================================================================================
<S> <C>
Denny's -
Port Orange, FL (14) 07/10/89 01/23/98 1,283,096 0 0 0 1,283,096
Shoney's -
Tyler, TX 03/20/89 02/17/98 844,229 0 0 0 894,229
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 11/02/89 05/24/94 791,211 0 0 0 791,211
Hardee's -
Heber Springs, AR 02/13/90 05/24/94 638,270 0 0 0 638,270
Hardee's -
Little Canada, MN 11/28/89 06/29/95 899,503 0 0 0 899,503
Jack in the Box -
Dallas, TX 06/28/94 12/09/96 982,980 0 0 0 982,980
Denny's -
Show Low, AZ (8) 05/22/87 01/31/97 349,200 0 0 0 349,200
KFC -
Whitehall Township, MI 02/26/90 07/09/97 629,888 0 0 0 629,888
Perkins -
Naples, FL 12/26/89 07/09/97 1,487,725 0 0 0 1,487,725
Burger King -
Plattsmouth, NE 01/19/90 07/18/97 699,400 0 0 0 699,400
Shoney's -
Venice, FL 08/03/89 09/17/97 1,206,696 0 0 0 1,206,696
Jack in the Box -
Yuma, AZ (10) 07/14/94 10/31/97 510,653 0 0 0 510,653
Denny's -
Deland, FL 03/22/90 01/23/98 1,236,97 0 0 0 1,236,97
Wendy's -
Liverpool, NY 12/08/89 02/09/98 145,221 0 0 0 145,221
Perkin's -
Melbourne, FL 02/03/90 02/12/98 552,910 0 0 0 552,910
Hardee's
Bellevue, NE 05/03/90 06/05/98 900,000 0 0 0 900,000
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 06/14/90 05/19/92 700,000 0 0 0 700,000
Hardee's -
St. Paul, MN 08/09/90 05/24/94 869,036 0 0 0 869,036
Perkins -
Florence, SC (3) 08/28/90 08/25/95 0 0 1,160,000 0 1,160,000
</TABLE>
<TABLE>
<CAPTION>
===========================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
============================================================================================
<S> <C>
Denny's -
Port Orange, FL (14) 0 1,021,000 1,021,000 262,096
Shoney's -
Tyler, TX 0 770,300 770,300 73,929
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 0 605,500 605,500 185,711
Hardee's -
Heber Springs, AR 0 532,893 532,893 105,377
Hardee's -
Little Canada, MN 0 821,692 821,692 77,811
Jack in the Box -
Dallas, TX 0 964,437 964,437 18,543
Denny's -
Show Low, AZ (8) 0 272,354 272,354 76,846
KFC -
Whitehall Township, MI 0 725,604 725,604 (95,716)
Perkins -
Naples, FL 0 1,083,869 1,083,869 403,856
Burger King -
Plattsmouth, NE 0 561,000 561,000 138,400
Shoney's -
Venice, FL 0 1,032,435 1,032,435 174,261
Jack in the Box -
Yuma, AZ (10) 0 448,082 448,082 62,571
Denny's -
Deland, FL 0 1,000,000 1,000,000 236,971
Wendy's -
Liverpool, NY 0 341,440 341,440 (196,219)
Perkin's -
Melbourne, FL 0 692,850 692,850 (139,940)
Hardee's
Bellevue, NE 0 899,512 899,512 488
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 0 560,202 560,202 139,798
Hardee's -
St. Paul, MN 0 742,333 742,333 126,703
Perkins -
Florence, SC (3) 0 1,084,905 1,084,905 75,095
</TABLE>
C-33
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
=========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
=========================================================================================================================
<S> <C>
Church's Fried Chicken -
Jacksonville, FL (4) (14) 04/30/90 12/01/95 0 0 240,000 0 240,000
Shoney's -
Colorado Springs, CO 07/03/90 07/24/96 1,044,909 0 0 0 1,044,909
Hardee's -
Hartland, MI 07/10/90 10/23/96 617,035 0 0 0 617,035
Hardee's -
Columbus, IN 09/04/90 05/30/97 223,590 0 0 0 223,590
KFC -
Dunnellon, FL 08/02/90 10/07/97 757,800 0 0 0 757,800
Jack in the Box -
Yuma, AZ (10) 07/14/94 10/31/97 471,372 0 0 0 471,372
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 03/16/91 07/31/95 1,184,865 0 0 0 1,184,865
Church's Fried Chicken -
Jacksonville, FL (4) (14) 09/28/90 12/01/95 0 0 240,000 0 240,000
Church's Fried Chicken -
Jacksonville, FL (5) (14) 09/28/90 12/01/95 0 0 220,000 0 220,000
Ponderosa -
Orlando, FL (6) (14) 12/17/90 10/24/96 0 0 1,353,775 0 1,353,775
CNL Income Fund IX, Ltd.:
Burger King -
Woodmere, OH (15) 05/31/91 12/12/96 918,445 0 0 0 918,445
Burger King -
Alpharetta, GA 09/20/91 06/30/97 1,053,571 0 0 0 1,053,571
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 03/04/92 08/11/95 1,050,186 0 0 0 1,050,186
Jack in the Box -
Freemont, CA 03/26/92 09/23/97 1,366,550 0 0 0 1,366,550
Jack in the Box -
Sacramento, CA 12/19/91 01/20/98 1,234,175 0 0 0 1,234,175
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 09/29/92 11/07/96 1,044,750 0 0 0 1,044,750
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 12/28/92 04/10/96 1,640,000 0 0 0 1,640,000
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
================================================================================================
<S> <C>
Church's Fried Chicken -
Jacksonville, FL (4) (14) 0 233,728 233,720 6,272
Shoney's -
Colorado Springs, CO 0 893,739 893,739 151,170
Hardee's -
Hartland, MI 0 841,642 841,642 (224,607)
Hardee's -
Columbus, IN 0 219,676 219,676 3,914
KFC -
Dunnellon, FL 0 546,333 546,333 211,467
Jack in the Box -
Yuma, AZ (10) 0 413,614 413,614 57,758
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 0 949,199 949,199 235,666
Church's Fried Chicken -
Jacksonville, FL (4) (14) 0 238,153 238,153 1,847
Church's Fried Chicken -
Jacksonville, FL (5) (14) 0 215,845 215,845 4,155
Ponderosa -
Orlando, FL (6) (14) 0 1,179,210 1,179,210 174,565
CNL Income Fund IX, Ltd.:
Burger King -
Woodmere, OH (15) 0 918,445 918,445 0
Burger King -
Alpharetta, GA 0 713,866 713,866 339,705
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 0 987,679 987,679 62,507
Jack in the Box -
Freemont, CA 0 1,102,766 1,102,766 263,784
Jack in the Box -
Sacramento, CA 0 969,423 969,423 264,752
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 0 818,850 818,850 225,900
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 0 1,636,643 1,636,643 3,357
</TABLE>
C-34
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
========================================================================================================================
<S> <C>
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 03/31/94 04/24/95 286,411 0 0 0 286,411
Checkers -
Richmond, VA 03/31/94 11/21/96 550,000 0 0 0 550,000
Denny's -
Orlando, FL 09/01/93 10/24/97 932,849 0 0 0 932,849
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 03/31/94 03/01/95 339,031 0 0 0 339,031
Checkers -
Dallas, TX 03/31/94 03/01/95 356,981 0 0 0 356,981
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0 1,753,533
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0 747,058
Hardee's -
Madison, AL 12/14/93 01/08/98 700,950 0 0 0 700,950
Checkers -
Richmond, VA (#548) 03/31/94 01/29/98 512,462 0 0 0 512,462
Checkers -
Riviera Beach, FL 03/31/94 04/14/98 360,000 0 0 0 360,000
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 05/27/94 03/01/95 263,221 0 0 0 263,221
Checkers -
Leavenworth, KS 06/22/94 03/01/95 259,600 0 0 0 259,600
Checkers -
Knoxville, TN 07/08/94 03/01/95 288,885 0 0 0 288,885
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0 1,753,533
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0 747,058
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 06/24/95 04/24/96 775,000 0 0 0 775,000
Checker's -
Oviedo, FL 11/14/94 02/28/97 610,384 0 0 0 610,384
Boston Market -
Madison, TN (16) 05/05/95 05/08/98 774,851 0 0 0 774,851
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
================================================================================================
<S> <C>
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 0 286,411 286,411 0
Checkers -
Richmond, VA 0 413,288 413,288 136,712
Denny's -
Orlando, FL 0 934,120 934,120 (1,271)
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 0 339,031 339,031 0
Checkers -
Dallas, TX 0 356,981 356,981 0
TGI Friday's -
Woodridge, NJ (7) 0 1,510,245 1,510,245 243,288
Wendy's -
Woodridge, NJ (7) 0 672,746 672,746 74,312
Hardee's -
Madison, AL 0 658,977 658,977 41,973
Checkers -
Richmond, VA (#548) 0 382,435 382,435 130,027
Checkers -
Riviera Beach, FL 0 276,409 276,409 83,591
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 0 263,221 263,221 0
Checkers -
Leavenworth, KS 0 259,600 259,600 0
Checkers -
Knoxville, TN 0 288,885 288,885 0
TGI Friday's -
Woodridge, NJ (7) 0 1,510,245 1,510,245 243,288
Wendy's -
Woodridge, NJ (7) 0 672,746 672,746 74,312
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 0 613,838 613,838 161,162
Checker's -
Oviedo, FL 0 506,311 506,311 104,073
Boston Market -
Madison, TN (16) 0 774,851 774,851 0
</TABLE>
C-35
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
======================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
======================================================================================================================
<S> <C>
Boston Market -
Chattanooga, TN (17) 05/05/95 06/16/98 713,386 0 0 0 713,386
CNL Income Fund XVII, Ltd.:
Boston Market -
Troy, OH (18) 07/24/96 06/16/98 857,487 0 0 0 857,487
CNL American Properties Fund, Inc.:
TGI Friday's -
Orange, CT 10/30/95 05/08/97 1,312,799 0 0 0 1,312,799
TGI Friday's -
Hazlet, NJ 07/15/96 05/08/97 1,324,109 0 0 0 1,324,109
TGI Friday's -
Marlboro, NJ 08/01/96 05/08/97 1,372,075 0 0 0 1,372,075
TGI Friday's -
Hamden, CT 08/26/96 05/08/97 1,245,100 0 0 0 1,245,100
Boston Market -
Southlake, TX 07/02/97 07/21/97 1,035,153 0 0 0 1,035,135
Boston Market -
Franklin, TN (19) 08/18/95 04/14/98 950,361 0 0 0 950,361
Boston Market -
Grand Island, NE (20) 09/19/95 04/14/98 837,656 0 0 0 837,656
Burger King -
Indian Head Park, IL 04/03/96 05/05/98 674,320 0 0 0 674,320
Boston Market -
Dubuque, IA (21) 10/04/95 05/08/98 969,159 0 0 0 969,159
Boston Market -
Merced, CA (22) 10/06/96 05/08/98 930,834 0 0 0 930,834
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
Boston Market -
Chattanooga, TN (17) 0 713,386 713,386 0
CNL Income Fund XVII, Ltd.:
Boston Market -
Troy, OH (18) 0 857,487 857,487 0
CNL American Properties Fund, Inc.:
TGI Friday's -
Orange, CT 0 1,310,980 1,310,980 1,819
TGI Friday's -
Hazlet, NJ 0 1,294,237 1,294,237 29,872
TGI Friday's -
Marlboro, NJ 0 1,324,288 1,324,288 47,787
TGI Friday's -
Hamden, CT 0 1,203,136 1,203,136 41,964
Boston Market -
Southlake, TX 0 1,035,135 1,035,135 0
Boston Market -
Franklin, TN (19) 0 950,361 950,361 0
Boston Market -
Grand Island, NE (20) 0 837,656 837,656 0
Burger King -
Indian Head Park, IL 0 670,867 670,867 3,453
Boston Market -
Dubuque, IA (21) 0 969,159 969,159 0
Boston Market -
Merced, CA (22) 0 930,834 930,834 0
</TABLE>
(1) Amounts shown do not include pro rata share of original offering costs or
acquisition fees.
(2) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,006,004 in July 2000.
(3) Amount shown is face value and does not represent discounted current value
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,106,657 in July 2000.
(4) Amounts shown are face value and do not represent discounted current value.
Each mortgage note bears interest at a rate of 10.00% per annum and
provides for a balloon payment of $218,252 in December 2005.
(5) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.00% per annum and provides
for a balloon payment of $200,324 in December 2005.
(6) Amounts shown are face value and do not represent discounted current value.
Each mortgage note bears interest at a rate of 10.75% per annum and
provides for 12 monthly payments of interest only and thereafter, 168 equal
monthly payments of principal and interest.
(7) CNL Income Fund XIV, Ltd. and CNL Income Fund XV, Ltd. each owned a 50
percent interest in Wood-Ridge Real Estate Joint Venture, which owned two
properties. The amounts presented for CNL Income Fund XIV, Ltd. and CNL
Income Fund XV, Ltd. represent each partnership's 50 percent interest in
the properties owned by Wood-Ridge Real Estate Joint Venture.
C-36
<PAGE>
(8) CNL Income Fund II, Ltd. owns a 64 percent interest and CNL Income Fund VI,
Ltd. owns a 36 percent interest in this joint venture. The amounts
presented for CNL Income Fund II, Ltd. and CNL Income Fund VI, Ltd.
represent each partnership's percent interest in the property owned by Show
Low Joint Venture.
(9) CNL Income Fund, Ltd. owns a 50 percent interest in this joint venture. The
amounts presented represent the partnerships percent interest in the
property owned by Seventh Avenue Joint Venture. A third party owns the
remaining 50 percent interest in this joint venture.
(10) CNL Income Fund VI, Ltd. and CNL Income Fund VII, Ltd. own a 52 percent and
48 percent interest, respectively, in the property in Yuma, Arizona. The
amounts presented for CNL Income Fund VI, Ltd. and CNL Income Fund VII,
Ltd. represent each partnership's respective interest in the property.
(11) Cash received net of closing costs includes $198,000 received as a lease
termination fee.
(12) Cash received net of closing costs includes $93,885 received as a lease
termination fee.
(13) Cash received net of closing costs includes $120,115 received as a lease
termination fee.
(14) Closing costs deducted from net sales proceeds do not include deferred,
subordinated real estate disposition fees payable to CNL Fund Advisors or
its affiliates.
(15) The Burger King property in Woodmere, Ohio was exchanged on December 12,
1996 for a Burger King property in Carrboro, NC at the option of the tenant
as permitted under the terms of the lease agreement. Due to the exchange,
the Burger King property in Carrboro, NC is being leased under the same
lease as the Burger King property in Woodmere, OH.
(16) The Boston Market property in Madison, TN was exchanged on May 8, 1998 for
a Boston Market property in Lawrence, KS at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Lawrence, KS is being leased under the same lease
as the Boston Market property in Madison, TN.
(17) The Boston Market property in Chattanooga, TN was exchanged on June 16,
1998 for a Boston Market property in Indianapolis, IN at the option of the
tenant as permitted under the terms of the lease agreement. Due to the
exchange, the Boston Market property in Indianapolis, IN is being leased
under the same lease as the Boston Market property in Chattanooga, TN.
(18) The Boston Market property in Troy, OH was exchanged on June 16, 1998 for a
Boston Market property in Inglewood, CA at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Inglewood, CA is being leased under the same
lease as the Boston Market property in Troy, OH.
(19) The Boston Market property in Franklin, TN was exchanged on April 14, 1998
for a Boston Market property in Glendale, AZ at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Glendale, AZ is being leased under the same terms
as the Boston Market property in Franklin, TN.
(20) The Boston Market property in Grand Island, NE was exchanged on April 14,
1998 for a Boston Market property in Warwick, RI at the option of the
tenant as permitted under the terms of the lease agreement. Due to the
exchange, the Boston Market property in Warwick, RI is being leased under
the same terms as the Boston Market property in Grand Island, NE.
(21) The Boston Market property in Dubuque, IA was exchanged on May 8, 1998 for
a Boston Market property in Columbus, OH at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Columbus, OH is being leased under the same terms
as the Boston Market property in Dubuque, IA.
(22) Cash received net of closing costs includes $362,949 in construction costs
incurred but not paid by CNL American Properties Fund, Inc. as of the
closing date, which were deducted from the actual net sales proceeds
received by CNL American Properties Fund, Inc.
C-37
<PAGE>
APPENDIX D
SUBSCRIPTION AGREEMENT
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
Up to 27,500,000 Shares -- $10.00 per Share
Minimum Purchase -- 250 Shares ($2,500)
100 Shares ($1,000) for IRAs, Keogh, and Qualified Plans
(Minimum purchase may be higher in certain states)
================================================================================
PLEASE READ CAREFULLY this Subscription Agreement and the Notices (on the back
of the Agreement) before completing this document. TO SUBSCRIBE FOR SHARES,
complete and sign, where appropriate, and deliver the Subscription Agreement,
along with your check, to your Registered Representative. YOUR CHECK SHOULD BE
MADE PAYABLE TO:
SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.
ALL ITEMS ON THE SUBSCRIPTION AGREEMENT MUST BE COMPLETED IN ORDER FOR YOUR
SUBSCRIPTION TO BE PROCESSED.
================================================================================
Overnight Packages: Regular Mail Packages:
Attn: Investor Services Attn: Investor Services
400 E. South Street Post Office Box 1033
Orlando, Florida 32801 Orlando, Florida 32802-1033
For Telephone Inquiries:
CNL SECURITIES CORP.
(407) 650-1000 OR (800) 522-3863
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
1.__________INVESTMENT__________________________________________________________
This subscription is in the amount of $ for the purchase of Shares ($10.00 per
Share). The minimum initial subscription is 250 Shares ($2,500); 100 Shares
($1,000) for IRA, Keogh and qualified plan accounts (except in states with
higher minimum purchase requirements).
|_| ADDITIONAL PURCHASE |_| REINVESTMENT PLAN - Investor elects to participate
in Plan (See prospectus for details.)
2.__________SUBSCRIBER INFORMATION______________________________________________
Name (1st)_______________ |_| M |_| F Date of Birth (MM/DD/YY)__________________
Name (2nd)_______________ |_| M |_| F Date of Birth (MM/DD/YY)__________________
Address
------------------------------------------------------------------------
City State Zip Code
----------------------------------- ------------- --------
Custodian Account No. Daytime Phone # ( )
---- ---------------------
|_| U.S. Citizen |_| Resident Alien |_| Foreign Resident Country_________
|_| Check if Subscriber is a U.S. citizen
residing outside the U.S. Income Tax Filing State______
ALL SUBSCRIBERS: State of Residence of Subscriber/Plan Beneficiary (required)
_______________________________________________________________
Taxpayer Identification Number: For most individual taxpayers, it is their
Social Security number. Note: If the purchase is in more than one name, the
number should be that of the first person listed. For IRAs, Keoghs and qualified
plans, enter both the Social Security number and the custodian taxpayer
identification number.
Taxpayer ID# - - Social Security # - -
--- --- ---- ------ --- ------
3.__________INVESTOR MAILING ADDRESS____________________________________________
For the Subscriber of an IRA, Keogh, or qualified plan to receive informational
mailings, please complete if different from address in Section 2.
Name____________________________________________________________________________
Address ________________________________________________________________________
City ______________________________________ State__________ Zip Code____________
Daytime Phone #( ) -
4.__________DIRECT DEPOSIT ADDRESS______________________________________________
Investors requesting direct deposit of distribution checks to another financial
institution or mutual fund, please complete below. In no event will the Company
or Affiliates be responsible for any adverse consequences of direct deposit.
Company ________________________________________________________________________
Address ________________________________________________________________________
City_______________________________________ State _________ Zip Code____________
Account No. ________________________________________ Phone #( )______________
5.__________FORM OF OWNERSHIP___________________________________________________
<TABLE>
<CAPTION>
<S> <C>
|_| JOINT TENANTS WITH RIGHT OF SURVIVORSHIP - all parties must sign (8)
(Select only one)
|_| INDIVIDUAL - one signature required (1) |_| A MARRIED PERSON/SEPARATE PROPERTY - one signature required (34)
|_| HUSBAND AND WIFE, AS COMMUNITY PROPERTY |_| KEOGH (H.R.10) - trustee signature required (24)
two signatures required (15)
|_| CUSTODIAN - custodian signature required (33)
|_| TENANTS IN COMMON - two signatures required (9) |_| PARTNERSHIP (3)
|_| TENANTS BY THE ENTIRETY - two signatures required (9) |_| NON-PROFIT ORGANIZATION (12)
|_| S-CORPORATION (22) |_| PENSION PLAN - trustee signature(s) required (19)
|_| C-CORPORATION (5) |_| PROFIT SHARING PLAN - trustee signature(s) required (27)
|_| IRA - custodian signature required (23) |_| CUSTODIAN UGMA-STATE of ________ - custodian signature required (16)
|_| ROTH IRA - custodian signature required (36) |_| CUSTODIAN UTMA-STATE of ________ - custodian signature required (42)
|_| SEP - custodian signature required (38) |_| ESTATE - Personal Representative signature required (13)
|_| TAXABLE TRUST (7) |_| REVOCABLE GRANTOR TRUST - grantor signature required (25)
|_| TAX-EXEMPT TRUST (20) |_| IRREVOCABLE TRUST - trustee signature required (21)
|_| SUBSCRIBER elects to have the Shares covered by this subscription placed in a new sponsored IRA Account offered by Franklin
Bank as custodian. IRA documents will be sent to subscriber upon receipt of subscription documents. There is no annual fee
involved for CNL Hospitality Properties, Inc. investments.
</TABLE>
<PAGE>
6.__________SUBSCRIBER SIGNATURES_______________________________________________
If the Subscriber is executing the Subscriber Signature Page, the Subscriber
understands that, BY EXECUTING THIS AGREEMENT A SUBSCRIBER DOES NOT WAIVE ANY
RIGHTS HE MAY HAVE UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE
ACT OF 1934 OR UNDER ANY STATE SECURITIES LAW:
X X
--------------------------- ---------- ----------------------------- --------
Signature of 1st Subscriber Date Signature of 2nd Subscriber Date
7.__________BROKER/DEALER INFORMATION___________________________________________
Broker/Dealer NASD Firm Name____________________________________________________
Registered Representative ______________________________________________________
Branch Mail Address_____________________________________________________________
City ______________ State_____ Zip Code _______ |_| Please check if new address
Phone #( ) Fax #( ) |_| Sold CNL before
------ ----------- ----- --------------
Shipping Address _____________ City ______________ State_____ Zip Code _______
|_| Telephonic Subscriptions (check here): If the Registered Representative
and Branch Manager are executing the signature page on behalf of the
Subscriber, both must sign below. Registered Representatives and Branch
Managers may not sign on behalf of residents of Florida, Iowa, Maine,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New
Mexico, North Carolina, Ohio, Oregon, South Dakota, Tennessee, or
Washington. [NOTE: Not to be executed until Subscriber(s) has (have)
acknowledged receipt of final prospectus.] Telephonic subscriptions may
not be completed for IRA accounts.
|_| Registered Investment Advisor (RIA) (check here): This investment is made
through the RIA in its capacity as a RIA and not in its capacity as a
Registered Representative, if applicable. If an owner or principal or any
member of the RIA firm is a NASD licensed Registered Representative
affiliated with a Broker/Dealer, the transaction should be conducted
through that Broker/Dealer, not through the RIA.
PLEASE READ CAREFULLY THE REVERSE SIDE OF THIS SIGNATURE PAGE AND
SUBSCRIPTION AGREEMENT BEFORE COMPLETING
<TABLE>
<CAPTION>
<S> <C>
X
------------------------------------ -------------- -------------------------------
Principal, Branch Manager or Other Date Print or Type Name of Person
Authorized Signature Signing
X
------------------------------------ -------------- -------------------------------
Registered Representative/Investment Date Print or Type Name of Person
Advisor Signature Signing
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------------------------------------------------
Make check payable to : SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A., ESCROW AGENT
Please remit check and For overnight delivery, please send to:
subscription document to: For Office Use Only *
CNL SECURITIES CORP. CNL SECURITIES CORP. Sub. # ___________________
Attn: Investor Services Attn: Investor Services
P. O. Box 1033 400 E. South Street Admit Date _______________
Orlando, FL 32802-1033 Crlando, FL 32801
(800) 522-3863 (407) 650-1000 Amount __________________
(800) 522-3863
Region ___________________
RSVP#_____________________
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTICE TO ALL INVESTORS:
(a) The purchase of Shares by an IRA, Keogh, or other tax-qualified plan does
not, by itself, create the plan.
(b) The Company, in its sole and absolute discretion, may accept or reject the
Subscriber's subscription which if rejected will be promptly returned to the
Subscriber, without interest. Non-U.S. stockholders (as defined in the
Prospectus) will be admitted as stockholders with the approval of the Advisor.
(c) THE SALE OF SHARES SUBSCRIBED FOR HEREUNDER MAY NOT BE COMPLETED UNTIL AT
LEAST FIVE BUSINESS DAYS AFTER THE DATE THE SUBSCRIBER RECEIVES A FINAL
PROSPECTUS. EXCEPT AS PROVIDED IN THIS NOTICE, THE NOTICE BELOW, AND IN THE
PROSPECTUS, THE SUBSCRIBER WILL NOT BE ENTITLED TO REVOKE OR WITHDRAW HIS
SUBSCRIPTION.
The subscriber is asked to refer to the prospectus concerning the Deferred
Commission Option outlined in "The Offering - Plan of Distribution." This option
will only be available with prior authorization by the Broker/Dealer.
NOTICE TO CALIFORNIA RESIDENTS: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER
OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION
THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS
OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
California investors who do not execute the Subscription Agreement will receive
a confirmation of investment accompanied by a second copy of the final
Prospectus, and will have the opportunity to rescind the investment within ten
(10) days from the date of confirmation.
NOTICE TO NORTH CAROLINA RESIDENTS: By signing this Subscription Agreement,
North Carolina investors acknowledge receipt of the Prospectus and represent
that they meet the suitability standards for North Carolina investors listed in
the Prospectus.
BROKER/DEALER AND FINANCIAL ADVISOR:
By signing this subscription agreement, the signers certify that they recognize
and have complied with their obligations under the NASD's Conduct Rules, and
hereby further certify as follows: (i) a copy of the Prospectus, including the
Subscription Agreement attached thereto as Appendix D, as amended and/or
supplemented to date, has been delivered to the Subscriber; (ii) they have
discussed such investor's prospective purchase of Shares with such investor and
have advised such investor of all pertinent facts with regard to the liquidity,
valuation, and marketability of the Shares; and (iii) they have reasonable
grounds to believe that the purchase of Shares is a suitable investment for such
investor, that such investor meets the suitability standards applicable to such
investor set forth in the Prospectus and related supplements, if any, that such
investor is legally capable of purchasing such Shares and will not be in
violation of any laws for having engaged in such purchase, and that such
investor is in a financial position to enable such investor to realize the
benefits of such an investment and to suffer any loss that may occur with
respect thereto and will maintain documentation on which the determination was
based for a period of not less than six years; (iv) under penalties of perjury,
(a) the information provided in this Subscription Agreement to the best of our
knowledge and belief is true, correct, and complete, including, but not limited
to, the number shown above as the Subscriber's taxpayer identification number;
(b) to the best of our knowledge and belief, the Subscriber is not subject to
backup withholding either because the Subscriber has not been notified that the
Subscriber is subject to backup withholding as result of failure to report all
interest or dividends or the Internal Revenue Service has notified the
subscriber that the Subscriber is no longer subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code of 1986, as amended; and (c)
to the best of our knowledge and belief, the Subscriber is not a nonresident
alien, foreign corporation, foreign trust, or foreign estate for U.S. tax
purposes, and we hereby agree to notify the Company if it comes to the attention
of either of us that the Subscriber becomes such a person within sixty (60) days
of any event giving rise to the Subscriber becoming such a person.
<PAGE>
Franklin Bank, N.A.
- --------------------------------------------------------------------------------
FRANKLIN BANK, N.A., INDIVIDUAL RETIREMENT ACCOUNT APPLICATION
ACCOUNTHOLDER INFORMATION: NAME____________________________________________
DISCLAIMER:
Franklin Bank, N.A. is a national bank, not associated with CNL Group,
Inc. or any CNL entity. Franklin Bank, N.A. is a custodian for IRAs and will act
in a custodial capacity for all beneficial owners of IRAs. CNL has no
affiliation with Franklin Bank, N.A.
It is not reasonable to project the growth of your IRA investments
include assets other than bank time deposits or savings accounts. Therefore,
your final account balance will depend upon many factors - the amount of your
contributions, the amount of time the funds are invested, the earnings and/or
losses from the investments, expenses incurred such as brokerage commissions and
trustee's fees and the overall performance of your investments. We expressly
state that the growth in the value of your IRA cannot be guaranteed or
projected.
SIGNATURES IMPORTANT: Please read before signing.
I understand the eligibility requirements for the type of IRA
deposit I am making and I state that I do qualify to make the
deposit. I understand that the terms and conditions which apply to
the Individual Retirement Account are contained in this Application
and Form 5305A (which will be provided within 10 days of our
receipt of this application). I agree to be bound by those terms
and conditions. I understand that I will not be required to pay an
annual fee as long as all investments in this IRA are sponsored by
a CNL entity. Within seven (7) days from the date I establish the
Individual Retirement Account I may revoke it without penalty by
mailing or delivering a written notice to the Custodian.
I assume complete responsibility for:
1. Determining that I am eligible for an IRA each year I make a
contribution.
2. Insuring that all contributions I make are within the limits set
forth by the tax laws.
3. The tax consequences of any contribution (including rollover
contributions) and distributions.
Signature _________________________________________________
Accountholder
___________________________ ______________
Authorized Signature Trustee Date
DESIGNATION OF
BENEFICIARY(IES): I designate the individual(s) named below as my primary and
contingent Beneficiary(ies) of the IRA. I revoke all prior
IRA Beneficiary designations, if any, made by me. I
understand that I may change or add Beneficiaries at any
time by completing and delivering the proper form to the
Custodian. (If you wish to name more than one Beneficiary,
attach a list of each Beneficiary's name, social security
number, relationship to you and percentage share in this
IRA.)
If any primary or contingent Beneficiary dies before me, his
or her interest and the interest of his or her heirs shall
terminate completely, and the percentage share of any
remaining Beneficiary(ies) shall be increased on a pro rata
basis.
<TABLE>
<CAPTION>
<S> <C>
Primary The following individual(s) shall be my Primary Beneficiary(ies):
Beneficiary(ies)
Name_______________________________ Social Security #___________________
Address____________________________ Date of Birth__________ Share______
Relationship________________________
Contingent If none of the Primary Beneficiaries survive me, the following
individual(s) shall be my Beneficiary(ies):
Beneficiary(ies)
Name_______________________________ Social Security #___________________
Address____________________________ Date of Birth__________ Share______
Relationship________________________
</TABLE>
Spousal Consent
I am the spouse of IRA accountholder named above. I agree to
my spouse's naming of a primary Beneficiary other than
myself. I acknowledge that I have received a fair and
reasonable disclosure of my spouse's property and financial
obligation. I also acknowledge that I shall have no claim
whatsoever against the Custodian for any payments to my
spouse's Beneficiary(ies).
__________________________________________ ____________
Spouse's Signature Date
- --------------------------------------------------------------------------------
Custodial Services P.O. Box 7090 Troy, MI 48007-7090
1-800-344-0667
<PAGE>
INVESTMENT OPTIONS:
|_| I would like to receive information regarding mutual fund investments.
|_| I would like to receive information regarding money market accounts.
Note: Franklin Bank, N.A. may consider other investment options for your IRA.
Please provide the following information on your options.
Fund Name_______________________________________________________________________
Sponsor Name____________________________________________________________________
Address ________________________________________________________________________
Account No ___________________________________________ Telephone #____________
Registered Representative information:
Registered Representative's Name _______________________________________________
Company ________________________________________________________________________
Address ________________________________________________________________________
Telephone # ____________________________________________________________________
<PAGE>
APPENDIX E
STATEMENT OF ESTIMATED
TAXABLE OPERATING RESULTS
BEFORE DIVIDENDS PAID DEDUCTION
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
STATEMENT OF ESTIMATED TAXABLE OPERATING RESULTS
BEFORE DIVIDENDS PAID DEDUCTION
PROPERTIES ACQUIRED FROM INCEPTION
THROUGH SEPTEMBER 1, 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 September 1, 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>
E-1
<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 Hospitality 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 $13,459,000 $1,235,000
Gwinnett Place Property 10,017,000 1,114,000
(6) The lessee of the Buckhead (Lenox Park) and the Gwinnett Place
Properties is the same unaffiliated lessee.
E-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 30. Other Expenses of Issuance and Distribution.
Amount
------
SEC registration fee................................ $ 79,786
NASD filing fee..................................... 29,200
Accounting fees and expenses........................ 150,000*
Escrow Agent's Fees................................. 8,500*
Sales and advertising expenses...................... 5,000,000*
Legal fees and expenses............................. 400,000*
Blue Sky fees and expenses.......................... 500,000*
Printing expenses................................... 350,000*
Miscellaneous....................................... 982,514*
------------
Total......................................... $7,500,000
==========
- ---------------------
* Estimated through completion of the offering, assuming sale of
$25,000,000 Shares.
Item 31. Sales to Special Parties.
The registrant was capitalized through the purchase by the Advisor
of 20,000 Shares for aggregate consideration of $200,000.
Item 32. Recent Sales of Unregistered Securities.
See response to Item 31. The offer and sale of the shares is claimed
to be exempt from the registration provisions of the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereunder.
Item 33. Indemnification of Directors and Officers.
Pursuant to Maryland corporate law and the Company's Articles of
Incorporation, the Company is required to indemnify and hold harmless a present
or former Director, officer, Advisor, or Affiliate and may indemnify and hold
harmless a present or former employee or agent of the Company (the "Indemnitee")
against any or all losses or liabilities reasonably incurred by the Indemnitee
in connection with or by reason of any act or omission performed or omitted to
be performed on behalf of the Company while a Director, officer, Advisor,
Affiliate, employee, or agent and in such capacity, provided, that the
Indemnitee has determined, in good faith, that the act or omission which caused
the loss or liability was in the best interests of the Company. The Company will
not indemnify or hold harmless the Indemnitee if: (i) the loss or liability was
the result of negligence or misconduct, or if the Indemnitee is an Independent
Director, the loss or liability was the result of gross negligence or willful
misconduct, (ii) the act or omission was material to the loss or liability and
was committed in bad faith or was the result of active or deliberate dishonesty,
(iii) the Indemnitee actually received an improper personal benefit in money,
property, or services, (iv) in the case of any criminal proceeding, the
Indemnitee had reasonable cause to believe that the act or omission was
unlawful, or (v) in a proceeding by or in the right of the Company, the
Indemnitee shall have been adjudged to be liable to the Company. In addition,
the Company will not provide indemnification for any loss or liability arising
from an alleged violation of federal or state securities laws unless one or more
of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular Indemnitee; (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular Indemnitee; or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular Indemnitee and finds that
indemnification of the settlement and the related costs should be made, and the
court considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published position
of any state securities regulatory authority in which securities of the Company
were offered or sold as to indemnification for violations of securities laws.
Pursuant to its Articles of Incorporation, the Company is required to pay or
reimburse reasonable expenses incurred by a present or former Director, officer,
Advisor or Affiliate and may pay or reimburse reasonable expenses incurred by
any other Indemnitee in advance of final disposition of a proceeding if the
following are satisfied: (i) the Indemnitee was made a party to the proceeding
by reasons of his or her service as a Director, officer, Advisor, Affiliate,
employee or agent of the Company, (ii) the Indemnitee provides the Company with
written affirmation of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification by the Company as authorized
by the Articles of Incorporation, (iii) the Indemnitee provides the Company with
a written agreement to repay the amount paid or reimbursed by the Company,
together with the applicable legal rate of interest thereon, if it is ultimately
determined that the Indemnitee did not comply with the requisite standard of
conduct, and (iv) the legal proceeding was initiated by a third party who is not
a stockholder or, if by a stockholder of the Company acting in his or her
capacity as such, a court of competent jurisdiction approves such advancement.
The Company's Articles of Incorporation further provide that any
indemnification, payment, or reimbursement of the expenses permitted by the
Articles of Incorporation will be furnished in accordance with the procedures in
Section 2-418 of the Maryland General Corporation Law.
Any indemnification may be paid only out of Net Assets of the
Company, and no portion may be recoverable from the stockholders.
The Company has entered into indemnification agreements with each of
the Company's officers and Directors. The indemnification agreements
require, among other things, that the Company indemnify its officers and
Directors to the fullest extent permitted by law, and advance to the officers
and Directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. In accordance
with this agreement, the Company must indemnify and advance all expenses
incurred by officers and Directors seeking to enforce their rights under the
indemnification agreements. The Company must also cover officers and Directors
under the Company's directors' and officers' liability insurance.
Item 34. Treatment of Proceeds from Securities Being Registered.
Not applicable.
Item 35. Financial Statements and Exhibits.
Financial Statements:
<TABLE>
The following financial statements are included in the Prospectus.
<S> <C>
(1) Pro Forma Consolidated Balance Sheet as of September 30, 1998
(2) Pro Forma Consolidated Statement of Earnings for the nine months
ended September 30, 1998
(3) Pro Forma Consolidated Statement of Earnings for the year ended
December 31, 1997
(4) Notes to Pro Forma Consolidated Financial Statements for the nine
months ended September 30, 1998 and the year ended December 31,
1997.
(5) Condensed Balance Sheets as of September 30, 1998 and December
31, 1997
(6) Condensed Statements of Earnings for the nine months ended
September 30, 1998 and 1997
(7) Condensed Statements of Stockholders' Equity for the nine months
ended September 30, 1998 and the year ended December 31, 1997
(8) Condensed Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997
(9) Notes to Condensed Financial Statements for the nine months ended
September 30, 1998 and 1997
(10) Report of Independent Accountants for CNL American Realty Fund,
Inc.
(11) Balance Sheets at December 31, 1997 and 1996
(12) Statements of Earnings for the year ended December 31, 1997 and
the period June 12, 1996 (date of inception) through December 31,
1996
(13) Statements of Stockholders' Equity for the year ended December
31, 1997 and the period June 12, 1996 (date of inception) through
December 31, 1996
(14) Statements of Cash Flows for the year ended December 31, 1997 and
the period June 12, 1996 (date of inception) through December 31,
1996
(15) Notes to Financial Statements for the year ended December 31,
1997 and the period June 12, 1996 (date of inception) through
December 31, 1996
All Schedules have been omitted as the required information is inapplicable or
is presented in the financial statements or related notes.
(b) Exhibits:
1.1 Form of Managing Dealer Agreement (Filed herewith.)
1.2 Form of Participating Broker Agreement (Filed herewith.)
1.3 Form of Warrant Purchase Agreement (Filed herewith.)
3.1 CNL American Realty Fund, Inc. Articles of Incorporation
(Previously filed as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-11 (Registration No.
333-9943) (the "1996 Form S-11") and incorporated herein by
reference.) (1)
3.2 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Previously filed as Exhibit 3.2 to the 1996
Form S-11 and incorporated herein by reference.) (1)
3.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as
Exhibit 3.3 to the 1996 Form S-11 and incorporated herein by
reference.) (1)
3.4 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL American Realty Fund, Inc. dated June 3,
1998. (To change the name of the Company from CNL American Realty
Fund, Inc. to CNL Hospitality Properties, Inc.) (Previously filed
as Exhibit 3.4 to the 1996 Form S-11 and incorporated herein by
reference.) (1)
4.1 CNL American Realty Fund, Inc. Articles of Incorporation
(Previously filed as Exhibit 3.1 and incorporated herein by
reference.)
4.2 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Previously filed as Exhibit 3.2 and incorporated
herein by reference.)
- --------------------
* To be filed by amendment
(1) Filed herewith in connection with state filings only.
4.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as
Exhibit 3.3 and incorporated herein by reference.)
4.4 Form of Reinvestment Plan (Included in the Prospectus as Appendix
A and incorporated herein by reference.)
4.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL American Realty Fund, Inc. dated June 3,
1998. (Previously filed as Exhibit 3.4 to the 1996 Form S-11 and
incorporated herein by reference.)
*5 Opinion of Shaw Pittman Potts & Trowbridge as to the legality of
the securities being registered by CNL Hospitality Properties,
Inc.
*8 Opinion of Shaw Pittman Potts & Trowbridge regarding certain
material tax issues relating to CNL Hospitality Properties, Inc.
10.1 Form of Escrow Agreement between CNL Hospitality Properties, Inc.
and SouthTrust Asset Management Company of Florida, N.A. (Filed
herewith.)
10.2 Form of Advisory Agreement (Previously filed as Exhibit 10.2 to
the 1996 Form S-11 and incorporated herein by reference.) (1)
10.3 Form of Joint Venture Agreement (Filed herewith.)
10.4 Form of Indemnification and Put Agreement (Previously filed as
Exhibit 10.4 to the 1996 Form S-11 and incorporated herein by
reference.) (1)
10.5 Form of Unconditional Guaranty of Payment and Performance
(Previously filed as Exhibit 10.5 to the 1996 Form S-11 and
incorporated herein by reference.) (1)
10.6 Form of Purchase Agreement (Previously filed as Exhibit 10.6 to
the 1996 Form S-11 and incorporated herein by reference.) (1)
10.7 Form of Lease Agreement including Rent Addendum, Construction
Addendum and Memorandum of Lease (Previously filed as Exhibit
10.7 to the 1996 Form S-11 and incorporated herein by reference.)
(1)
10.8 Form of Reinvestment Plan (Included in the Prospectus as Appendix
A and incorporated herein by reference.)
10.9 Form of Indemnification Agreement dated as of July 9, 1997,
between CNL American Realty Fund, Inc. and each of James M.
Seneff, Jr., Robert A. Bourne, G. Richard Hostetter, J. Joseph
Kruse, Richard C. Huseman, Charles A. Muller, Jeanne A. Wall and
Lynn E. Rose and dated as of October 31, 1998, between CNL
Hospitality Properties, Inc. and C. Brian Strickland. (Previously
filed as Exhibit 10.9 to the 1996 Form S-11 and incorporated
herein by reference.) (1)
10.10 Agreement of Limited Partnership of CNL Hospitality Partners, LP
(Previously filed as Exhibit 10.10 to the 1996 Form S-11 and
incorporated herein by reference.) (1)
10.11 Hotel Purchase and Sale Contract between CNL Real Estate
Advisors, Inc. and Gwinnett Residence Associates, LLC, relating
to the Residence Inn - Gwinnett Place (Previously filed as
Exhibit 10.11 to the 1996 Form S-11 and incorporated herein by
reference.) (1)
- --------------------
* To be filed by amendment
(1) Filed herewith in connection with state filings only.
10.12 Assignment and Assumption Agreement between CNL Real Estate
Advisors, Inc. and CNL Hospitality Partners, LP, relating to the
Residence Inn - Gwinnett Place (Previously filed as Exhibit 10.12
to the 1996 Form S-11 and incorporated herein by reference.) (1)
10.13 Hotel Purchase and Sale Contract between CNL Real Estate
Advisors, Inc. and Buckhead Residence Associates, LLC, relating
to the Residence Inn - Buckhead (Lenox Park) (Previously filed as
Exhibit 10.13 to the 1996 Form S-11 and incorporated herein by
reference.) (1)
10.14 Assignment and Assumption Agreement between CNL Real Estate
Advisors, Inc. and CNL Hospitality Partners, LP, relating to the
Residence Inn - Buckhead (Lenox Park) (Previously filed as
Exhibit 10.14 to the 1996 Form S-11 and incorporated herein by
reference.) (1)
10.15 Lease Agreement between CNL Hospitality Partners, LP and STC
Leasing Associates, LLC, dated August 1, 1998, relating to the
Residence Inn - Gwinnett Place (Previously filed as Exhibit 10.15
to the 1996 Form S-11 and incorporated herein by reference.) (1)
10.16 Lease Agreement between CNL Hospitality Partners, LP and STC
Leasing Associates, LLC, dated August 1, 1998, relating to the
Residence Inn - Buckhead (Lenox Park) (Previously filed as
Exhibit 10.16 to the 1996 Form S-11 and incorporated herein by
reference.) (1)
10.17 Master Revolving Line of Credit Loan Agreement with CNL
Hospitality Properties, Inc. and Colonial Bank, dated July 31,
1998 (Previously filed as Exhibit 10.17 to the 1996 Form S-11 and
incorporated herein by reference.) (1)
23.1 Consent of PricewaterhouseCoopers LLP, Certified Public
Accountants, dated November 17, 1998 (Filed herewith.)
23.2 Consent of Shaw, Pittman, Potts & Trowbridge (Contained in its
opinion filed herewith as Exhibit 5 and incorporated herein by
reference.)
23.3 Consent of Arthur Andersen LLP, Certified Public Accountants,
dated November 17, 1998 (Filed herewith.)
</TABLE>
-------------------
* To be filed by Amendment.
(1) Filed herewith in connection with state filings only.
Item 36. Undertakings.
The registrant undertakes (a) to file any prospectus required by
Section 10(a)(3) as post-effective amendments to this registration statement,
(b) during any period in which offers or sales are being made, to file a
post-effective amendment to this registration statement (i) 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, and (ii) 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, (c) that, for the purpose of
determining any liability under the Securities Act of 1933, as amended, each
such post-effective amendment may 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, (d)
that all post-effective amendments will comply with the applicable forms, rules
and regulations of the Commission in effect at the time such post-effective
amendments are filed, and (e) 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 registrant undertakes to send to each stockholder, at least on
an annual basis, a detailed statement of any transactions with the Advisor or
its Affiliates, and of fees, commissions, compensation, and other benefits paid
or accrued to the Advisor or its Affiliates, for the fiscal year completed,
showing the amount paid or accrued to each recipient and the services performed.
The registrant undertakes to provide to the stockholders the
financial statements required by Form 10-K for the first full fiscal year of
operations.
The registrant undertakes to file a sticker supplement pursuant to
Rule 424(b)(3) under the Act during the distribution period describing each
property not identified in the Prospectus at such time as there arises a
reasonable probability that such property will be acquired and to consolidate
all such stickers into a post-effective amendment filed at least once every
three months, with the information contained in such amendment provided
simultaneously to the existing stockholders. Each sticker supplement will
disclose all compensation and fees received by the Advisor and its Affiliates in
connection with any such acquisition. The post-effective amendment will include
audited financial statements meeting the requirements of Rule 3-14 of
Registration S-X only for properties acquired during the distribution period.
The registrant also undertakes to file, after the end of the
distribution period, a current report on Form 8-K containing the financial
statements and any additional information required by Rule 3-14 of Regulation
S-X, to reflect each commitment (i.e., the signing of a binding purchase
agreement) made after the end of the distribution period involving the use of
10% or more (on a cumulative basis) of the net proceeds of the offering and to
provide the information contained in such report to the stockholders at least
once each quarter after the distribution period of the offering has ended.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, 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 such 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 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.
The undersigned registrant hereby undertakes that (a) for purposes
of determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective, and (b) for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus 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.
<PAGE>
TABLE VI
ACQUISITION OF PROPERTIES BY PROGRAMS
Table VI presents information concerning the acquisition of real
properties by the public real estate limited partnerships and the unlisted
public REIT sponsored by Affiliates of the Company through June 30, 1998. The
information includes the gross leasable space or number of units and total
square feet of units, dates of purchase, locations, cash down payment and
contract purchase price plus acquisition fee. This information is intended to
assist the prospective investor in evaluating the terms involved in acquisitions
by such prior programs.
<PAGE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund, Fund II, Fund III, Fund IV,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ---------- ----------
(Note 2) (Note 3) (Note 4) (Note 5)
<S> <C>
AL,AZ,CO,FL, AZ,CA,CO,FL, AL,DC,FL,GA,
GA,IL,IN,KS, GA,IA,IL,IN, IL,IN,KS,MA,
AL,AZ,CA,FL, LA,MI,MN,MO, KS,KY,MD,MI, MD,MI,MS,NC,
GA,LA,MD,OK, NC,NM,OH,TN, MN,MO,NC,NE, OH,PA,TN,TX,
Locations PA,TX,VA,WA TX,WA,WY OK,TX VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 22 units 49 units 37 units 45 units
total square feet
of units 80,314 s/f 185,717 s/f 158,819 s/f 159,196 s/f
Dates of purchase 6/17/86 - 2/11/87- 10/04/87- 6/24/88-
12/31/97 1/13/98 5/1/98 12/31/96
Cash down payment (Note 1) $13,435,137 $26,654,961 $22,413,070 $27,611,441
Contract purchase price
plus acquisition fee $13,361,435 $26,501,721 $22,296,185 $27,506,106
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 73,702 153,240 116,885 105,335
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $13,435,137 $26,654,961 $22,413,070 $27,611,441
=========== =========== =========== ===========
</TABLE>
Note 1: This amount was derived from capital contributions or proceeds from
partners or stockholders, respectively, and net sales proceeds
reinvested in other properties.
Note 2: The partnership owns a 50% interest in three separate joint ventures
which each own a restaurant property. In addition, the partnership owns
a 12.17% interest in one restaurant property held as tenants-in-common
with affiliates.
Note 3: The partnership owns a 49%, 50% and 64% interest in three separate
joint ventures. Each joint venture owns one restaurant property. In
addition, the partnership owns a 33.87%, a 57.77%, a 47%, a 37.01%, a
39.42% and a 13.38% interest in six restaurant properties held
separately as tenants-in-common with affiliates.
Note 4: The partnership owns a 73.4%, 69.07% and 46.89% interest in three
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 32.77%, a 9.84% and a
25.84% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 5: The partnership owns a 51%, 26.6%, 57%, 96.1% and 68.87% interest in
five separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 53.68% interest in one
restaurant property held as tenants-in-common with affiliates.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund V, Fund VI, Fund VII, Fund VIII,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ---------- ----------
(Note 6) (Note 7) (Note 8) (Note 9)
<S> <C>
AR,AZ,FL,GA,
IL,IN,KS,MA,
AZ,FL,GA,IL, MI,MN,NC,NE, AZ,CO,FL,GA,
IN,MI,NH,NY, NM,NY,OH,OK, IN,LA,MI,MN, AZ,FL,IN,LA,
OH,SC,TN,TX, PA,TN,TX,VA, NC,OH,SC,TN, MI,MN,NC,NY,
Locations UT,WA WA,WY TX,UT,WA OH,TN,TX,VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 35 units 55 units 49 units 42 units
total square feet
of units 143,344 s/f 222,003 s/f 184,412 s/f 179,885 s/f
Dates of purchase 2/06/89- 7/13/89- 3/30/90- 9/13/90-
5/1/98 6/16/98 12/31/97 5/31/96
Cash down payment (Note 1) $26,329,791 $39,944,526 $30,416,598 $31,985,071
Contract purchase price
plus acquisition fee $25,946,991 $39,413,526 $29,745,103 $31,450,507
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 382,800 531,000 671,495 534,564
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $26,329,791 $39,944,526 $30,416,598 $31,985,071
=========== =========== =========== ===========
</TABLE>
Note 6: The partnership owns a 43%, 49%, 66.5% and 53.11% interest in four
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 42.23% and a 27.78%
interest in two restaurant properties held separately as
tenants-in-common with affiliates.
Note 7: The partnership owns a 3.9%, 14.5%, 36%, 66.14%, and a 50% interest
in five separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 51.67%, a 17.93%, a
23.04%, a 34.74%, a 46.2% and a 85.07% interest in six restaurant
properties held separately as tenants-in-common with affiliates.
Note 8: The partnership owns a 51%, 83.3%, 4.79%, 18%, and 79% interest in
five separate joint ventures. Four of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties. In addition, the partnership owns a 48.33%, a 53% and a
35.64% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 9: The partnership owns a 85.5%, 87.68%, 36.8% and a 12% interest in
four separate joint ventures. Three of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund IX, Fund X, Fund XI, Fund XII,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ----------- ----------
(Note 10) (Note 11) (Note 12) (Note 13)
<S> <C>
AL,AZ,CA,CO,
AL,CO,FL,GA, AL,CA,CO,FL, CT,FL,KS,LA,
IL,IN,LA,MI, ID,IL,LA,MI, MA,MI,MS,NC, AL,AZ,CA,FL,
MN,MS,NC,NH, MO,MT,NC,NH, NH,NM,OH,OK, GA,LA,MO,MS,
NY,OH,SC,TN, NM,NY,OH,PA, PA,SC,TX,VA, NC,NM,OH,SC,
Locations TX SC,TN,TX WA TN,TX,WA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 43 units 51 units 40 units 49 units
total square feet
of units 185,636 s/f 214,433 s/f 176,062 s/f 206,865 s/f
Dates of purchase 5/31/91- 10/01/91- 5/18/92- 11/20/92-
7/16/97 12/31/97 1/28/97 5/31/96
Cash down payment (Note 1) $32,812,908 $37,444,525 $36,245,591 $40,840,795
Contract purchase price
plus acquisition fee $32,068,289 $36,735,362 $35,644,633 $40,339,796
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 744,619 709,163 600,958 500,999
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $32,812,908 $37,444,525 $36,245,591 $40,840,795
=========== =========== =========== ===========
</TABLE>
Note 10: The partnership owns a 50%, 45.2% and 27.3% interest in three
separate joint ventures. One of the joint ventures owns one
restaurant property and the other two joint ventures own six
restaurant properties each. In addition, the partnership owns a
67.23% interest in one restaurant property held as
tenants-in-common with an affiliate.
Note 11: The partnership owns a 50%, 88.3%, 40.95% and 10.5% interest
in four separate joint ventures. Three of the joint ventures own
one restaurant property each and the other joint venture owns six
restaurant properties. In addition, the partnership owns a 13.37%
and a 6.69% interest in two restaurant properties held separately
as tenants-in-common with affiliates.
Note 12: The partnership owns a 62.2%, 77.33%, 85% and 76.6% interest
in four separate joint ventures. Each joint venture owns one
restaurant property. In addition, the partnership owns a 72.5%
interest in one restaurant property held as tenants-in-common with
an affiliate.
Note 13: The partnership owns a 31.13%, 59.05%, 18.61% and 88% interest
in four separate joint ventures. Each joint venture owns one
restaurant property.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ---------- ----------
(Note 14) (Note 15) (Note 16) (Note 17)
<S> <C>
AL,AR,AZ,CA, AL,AZ,CO,FL, AL,CA,FL,GA, AZ,CA,CO,DC,
CO,FL,GA,IN, GA,KS,LA,MN, KS,KY,MN,MO, FL,GA,ID,IN,
KS,LA,MD,NC, MO,MS,NC,NJ, MS,NC,NJ,NM, KS,MN,MO,NC,
OH,PA,SC,TN, NV,OH,SC,TN, OH,OK,PA,SC, NM,NV,OH,TN,
Locations TX,VA TX,VA TN,TX,VA TX,UT,WI
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 50 units 64 units 55 units 47 units
total square feet
of units 167,286 s/f 190,448 s/f 172,379 s/f 180,110 s/f
Dates of purchase 5/18/93- 9/27/93- 4/28/94- 10/21/94-
12/31/97 4/30/98 6/16/98 6/16/98
Cash down payment (Note 1) $36,388,084 $42,748,602 $38,446,910 $42,394,592
Contract purchase price
plus acquisition fee $36,019,958 $42,321,171 $38,054,069 $42,004,434
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 368,126 427,431 392,841 390,158
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $36,388,084 $42,748,602 $38,446,910 $42,394,592
=========== =========== =========== ===========
</TABLE>
Note 14: The partnership owns a 50% and a 28% interest in two separate
joint ventures. Each joint venture owns one restaurant property.
In addition, the Partnership owns a 66.13%, a 63.03% and a 47.83%
interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 15: The partnership owns a 50% interest in three separate joint
ventures and a 72% and a 39.94% interest in two additional joint
ventures. Three of the joint ventures each own one restaurant
property and the other joint venture owns six restaurant
properties.
Note 16: The partnership owns a 50% interest in a joint venture which
owns six restaurant properties. In addition, the partnership owns
a 15.02% and a 14.93% interest in two restaurant properties held
as tenants-in-common with affiliates.
Note 17: The partnership owns a 80.27% and a 40.42% interest in two
restaurant properties held as tenants-in-common with affiliates.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL American CNL Income CNL Income
Properties Fund, Fund XVII, Fund XVIII,
Inc. Ltd. Ltd.
---------------- ---------- -----------
(Note 18) (Note 19)
<S> <C>
AL,AZ,CA,CO,
CT,DE,FL,GA,
IA,ID,IL,IN,
KS,KY,MD,MI,
MN,MO,NC,NE,
NJ,NM,NV,NY,
OH,OK,OR,PA, AZ,CA,FL,GA,
RI,SC,TN,TX, CA,FL,GA,IL, IL,KY,MD,MN,
UT,VA,WA,WI, IN,MI,NC,NV, NC,NV,NY,OH,
Locations WV OH,SC,TN,TX TN,TX
Type of property Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 320 units 29 units 23 units
total square feet
of units 1,622,754 s/f 119,664 s/f 123,355 s/f
Dates of purchase 6/30/95 - 12/20/95 - 12/27/96 -
6/17/98 6/16/98 06/16/98
Cash down payment (Note 1) $357,943,014 $25,525,954 $29,477,274
Contract purchase price
plus acquisition fee $356,906,132 $25,490,918 $29,369,572
Other cash expenditures
expensed - - -
Other cash expenditures
capitalized 1,036,882 35,036 107,702
------------ ----------- -----------
Total acquisition cost
(Note 1) $357,943,014 $25,525,954 $29,477,274
============ =========== ===========
</TABLE>
Note 18: CNL American Properties Fund, Inc. owns an 85.47% and a 13.11%
interest in two separate joint ventures. Each joint venture owns
one restaurant property.
Note 19: The partnership owns an 80%, a 21% and a 60.06% interest in three
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 19.73%, 27.5% and
36.97% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
SIGNATURES
Pursuant to the requirements 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-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Orlando, State of Florida, on the 17th day of
November, 1998.
CNL HOSPITALITY PROPERTIES, INC.
(Registrant)
By: /s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr.
Chairman of the Board and
Chief Executive Officer
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned hereby
constitutes and appoints Robert A. Bourne and James M. Seneff, Jr. and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, with full power to act alone, to sign any and all
documents (including both pre- and post-effective amendments in connection with
the registration statement), and to file the same, with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ James M. Seneff, Jr. Chairman of the Board and November 17, 1998
- -------------------------- Chief Executive Officer
JAMES M. SENEFF, JR. (Principal Executive Officer)
/s/ Robert A. Bourne Director and President November 17, 1998
- -------------------------- (Principal Financial Officer)
ROBERT A. BOURNE
/s/ G. Richard Hostetter Independent Director November 17, 1998
- --------------------------
G. RICHARD HOSTETTER
/s/ J. Joseph Kruse Independent Director November 17, 1998
- --------------------------
J. JOSEPH KRUSE
/s/ Richard C. Huseman Independent Director November 17, 1998
- ---------------------------
RICHARD C. HUSEMAN
<PAGE>
EXHIBIT INDEX
Exhibits Page
1.1 Form of Managing Dealer Agreement (Filed herewith.)
1.2 Form of Participating Broker Agreement (Filed herewith.)
1.3 Form of Warrant Purchase Agreement (Filed herewith.)
3.1 CNL American Realty Fund, Inc. Articles of Incorporation (Previously
filed as Exhibit 3.1 to the Registrant's Registration Statement on Form
S-11 (Registration No. 333-9943) (the "1996 Form S-11" and incorporated
herein by reference.) (1)
3.2 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Previously filed as Exhibit 3.2 to the 1996 Form S-11
and incorporated herein by reference.) (1)
3.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as Exhibit 3.3
to the 1996 Form S-11 and incorporated herein by reference.) (1)
3.4 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL American Realty Fund, Inc. dated June 3, 1998. (To
change the name of the Company from CNL American Realty Fund, Inc. to
CNL Hospitality Properties, Inc.)(Previously filed as Exhibit 3.4 to
the 1996 Form S-11 and incorporated herein by reference.) (1)
4.1 CNL American Realty Fund, Inc. Articles of Incorporation (Previously
filed as Exhibit 3.1 and incorporated herein by reference.)
4.2 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Previously filed as Exhibit 3.2 and incorporated herein
by reference.)
4.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as Exhibit 3.3
and incorporated herein by reference.)
4.4 Form of Reinvestment Plan (Included in the Prospectus as Appendix A and
incorporated herein by reference.)
4.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL American Realty Fund, Inc. dated June 3, 1998.
(Previously filed as Exhibit 3.4 to the 1996 Form S-11 and incorporated
herein by reference.)
*5 Opinion of Shaw Pittman Potts & Trowbridge as to the legality of the
securities being registered by CNL Hospitality Properties, Inc.
*8 Opinion of Shaw Pittman Potts & Trowbridge regarding certain material
tax issues relating to CNL Hospitality Properties, Inc.
10.1 Form of Escrow Agreement between CNL Hospitality Properties, Inc. and
SouthTrust Asset Management Company of Florida, N.A. (Filed herewith.)
10.2 Form of Advisory Agreement (Previously filed as Exhibit 10.2 to the
1996 Form S-11 and incorporated herein by reference.) (1)
- -------------------
* To be filed by amendment.
(1) Filed herewith in connection with state filings only.
10.3 Form of Joint Venture Agreement (Filed herewith.)
10.4 Form of Indemnification and Put Agreement (Previously filed as Exhibit
10.4 to the 1996 Form S-11 and incorporated herein by reference.) (1)
10.5 Form of Unconditional Guaranty of Payment and Performance (Previously
filed as Exhibit 10.5 to the 1996 Form S-11 and incorporated herein by
reference.) (1)
10.6 Form of Purchase Agreement (Previously filed as Exhibit 10.6 to the
1996 Form S-11 and incorporated herein by reference.) (1)
10.7 Form of Lease Agreement including Rent Addendum, Construction Addendum
and Memorandum of Lease (Previously filed as Exhibit 10.7 to the 1996
Form S-11 and incorporated herein by reference.) (1)
10.8 Form of Reinvestment Plan (Included in the Prospectus as Appendix A and
incorporated herein by reference.)
10.9 Form of Indemnification Agreement dated as of July 9, 1997, between CNL
American Realty Fund, Inc. and each of James M. Seneff, Jr., Robert A.
Bourne, G. Richard Hostetter, J. Joseph Kruse, Richard C. Huseman,
Charles A. Muller, Jeanne A. Wall and Lynn E. Rose and dated as of
October 31, 1998, between CNL Hospitality Properties, Inc. and C. Brian
Strickland.(Previously filed as Exhibit 10.9 to the 1996 Form S-11 and
incorporated herein by reference.) (1)
10.10 Agreement of Limited Partnership of CNL Hospitality Partners, LP
(Previously filed as Exhibit 10.10 to the 1996 Form S-11 and
incorporated herein by reference.) (1)
10.11 Hotel Purchase and Sale Contract between CNL Real Estate Advisors, Inc.
and Gwinnett Residence Associates, LLC, relating to the Residence Inn -
Gwinnett Place (Previously filed as Exhibit 10.11 to the 1996 Form S-11
and incorporated herein by reference.) (1)
10.12 Assignment and Assumption Agreement between CNL Real Estate Advisors,
Inc. and CNL Hospitality Partners, LP, relating to the Residence Inn -
Gwinnett Place (Previously filed as Exhibit 10.12 to the 1996 Form S-11
and incorporated herein by reference.) (1)
10.13 Hotel Purchase and Sale Contract between CNL Real Estate Advisors, Inc.
and Buckhead Residence Associates, LLC, relating to the Residence Inn -
Buckhead (Lenox Park) (Previously filed as Exhibit 10.13 to the 1996
Form S-11 and incorporated herein by reference.) (1)
10.14 Assignment and Assumption Agreement between CNL Real Estate Advisors,
Inc. and CNL Hospitality Partners, LP, relating to the Residence Inn -
Buckhead (Lenox Park) (Previously filed as Exhibit 10.14 to the 1996
Form S-11 and incorporated herein by reference.) (1)
10.15 Lease Agreement between CNL Hospitality Partners, LP and STC Leasing
Associates, LLC, dated August 1, 1998, relating to the Residence Inn -
Gwinnett Place (Previously filed as Exhibit 10.15 to the 1996 Form S-11
and incorporated herein by reference.) (1) ------------------- * To be
filed by amendment. (1) Filed herewith in connection with state filings
only.
<PAGE>
10.16 Lease Agreement between CNL Hospitality Partners, LP and STC Leasing
Associates, LLC, dated August 1, 1998, relating to the Residence Inn -
Buckhead (Lenox Park) (Previously filed as Exhibit 10.16 to the 1996
Form S-11 and incorporated herein by reference.) (1)
10.17 Master Revolving Line of Credit Loan Agreement with CNL Hospitality
Properties, Inc. and Colonial Bank, dated July 31, 1998 (Previously
filed as Exhibit 10.17 to the 1996 Form S-11 and incorporated herein by
reference.) (1)
23.1 Consent of PricewaterhouseCoopers LLP, Certified Public Accountants,
dated November 17, 1998 (Filed herewith.)
23.2 Consent of Shaw, Pittman, Potts & Trowbridge (Contained in its opinion
filed herewith as Exhibit 5 and incorporated herein by reference.)
23.3 Consent of Arthur Andersen LLP, Certified Public Accountants, dated
November 17, 1998 (Filed herewith.)
- -------------------
* To be filed by amendment.
(1) Fled herewith in connection with state filings only.
Exhibit 1.1
Form of Managing Dealer Agreement
<PAGE>
MANAGING DEALER AGREEMENT
THIS AGREEMENT, dated as of ___________, 1998, is made by and between CNL
HOSPITALITY PROPERTIES, INC., a Maryland corporation (the "Company"); and CNL
SECURITIES CORP., a Florida corporation (the "Managing Dealer").
WHEREAS, the Company proposes to offer and sell up to an aggregate of
27,500,000 shares of common stock in the Company (the "Shares") to the public
pursuant to a public offering and 1,000,000 shares of common stock in the
Company issuable upon the exercise of warrants granted to the Managing Dealer;
WHEREAS, the Managing Dealer is registered with the National Association
of Securities Dealers, Inc. as a broker-dealer, and is presently or, prior to
any offers or sales of Shares, will be licensed in all fifty states, the
District of Columbia, and the Commonwealth of Puerto Rico as a broker-dealer
qualified to offer and sell to the public securities of the type represented by
the Shares; and
WHEREAS, the Company desires to retain the Managing Dealer to use its best
efforts to sell the Shares and to manage the sale by others of the Shares, and
the Managing Dealer is willing and desires to serve as the Managing Dealer for
the Company for the sale of the Shares upon the terms and conditions set forth
in this Agreement.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the Company and the Managing
Dealer agree as follows:
SECTION 1
DEFINITIONS
Whenever used in this Agreement, the following terms shall have the
following specified meanings.
1.1 "NASD" means the National Association of Securities Dealers, Inc.
1.2 "Offering" means the offering of up to 27,500,000 Shares of CNL
HOSPITALITY PROPERTIES, INC. to the public pursuant to the terms and conditions
of the Registration Statement.
1.3 "Offering Period" means the period commencing on the effective date of
the Registration Statement and ending on the earliest of the following: (i) the
later of one year after the initial date of the Prospectus or, at the Company's
election, two years after the initial date of the Prospectus; (ii) the
acceptance by the Company of subscriptions for 27,500,000 Shares, with 2,500,000
of such Shares available only to investors who participate in the Company's
dividend reinvestment plan, subject to Paragraph 3.8 hereof; (iii) the
termination of the Offering by the Company; (iv) the termination of the
effectiveness of the Registration Statement; or (v) the termination of the
Company.
1.4 "Participating Brokers" mean those broker-dealers engaged by the
Managing Dealer to participate in the Offering pursuant to Paragraph 3.2.
1.5 "Prospectus" means the final prospectus included in the Registration
Statement, pursuant to which the Company will offer Shares to the public, as the
same may be amended or supplemented from time to time after the effective date
of the Registration Statement.
<PAGE>
1.6 "Registration Statement" means the registration statement pursuant to
which the Company has registered the Shares with the SEC as provided in the
Securities Act of 1933, as amended, as such registration statement may be
amended or supplemented from time to time.
1.7 "SEC" means the Securities and Exchange Commission.
1.8 "Shares" mean the shares of Common Stock of the Company, par value
$0.01 per share, with a purchase price of $10.00 per share. An aggregate of up
to 27,500,000 Shares will be offered pursuant to the Registration Statement.
1.9 "Soliciting Dealer Warrant" means a warrant to purchase one share of
common stock of the Company for every 25 Shares sold through the Offering, which
are issuable to the Managing Dealer (all or a portion of which may be reallowed
to Soliciting Dealers with prior written approval from, and in the sole
discretion of, the Managing Dealer and are to be exercised during the five-year
period commencing with the date the Offering begins (the "Exercise Period"), at
a price of $12.00 per share.
1.10 "State Regulatory Authorities" mean the commissions, departments,
agencies or other authorities in the fifty states, the District of Columbia, and
the Commonwealth of Puerto Rico which regulate the offer and sale of securities.
1.11 "Company" means CNL Hospitality Properties, Inc., a Maryland
corporation.
SECTION 2
APPOINTMENT
Subject to the terms and conditions set forth in this Agreement, including
Paragraph 3.8 hereof, the Company hereby appoints the Managing Dealer as the
managing dealer of the Offering to use its best efforts to sell up to 27,500,000
Shares of the Company and to manage the sale by others of such Shares for the
Company's account. The Managing Dealer hereby accepts such appointment.
SECTION 3
SALE OF SHARES
3.1 Best Efforts. The Managing Dealer shall use its best efforts during
the Offering Period to sell or cause to be sold the Shares in such quantities
and to such persons and in accordance with such terms as are set forth in this
Agreement, the Prospectus and the Registration Statement. Notwithstanding
anything herein to the contrary, the Managing Dealer shall have no obligation
under this Agreement to purchase any of the Shares for its own account.
3.2 Association of Other Broker-Dealers. The Company hereby acknowledges
and agrees that the Managing Dealer may engage Participating Brokers to
participate in the Offering, provided that (i) all Participating Brokers are
registered with the NASD and are duly licensed by the State Regulatory
Authorities in the jurisdictions in which they will offer and sell Shares or
exempt from broker-dealer registration with the NASD and the State Regulatory
Authorities, and (ii) all such engagements are evidenced by written agreements,
the terms and conditions of which substantially conform to the form of
<PAGE>
Participating Broker Agreement approved by the Company and attached hereto as
Exhibit A (the "Participating Broker Agreement"). The Managing Dealer is
authorized to reallow so much of the commissions which it receives under
Paragraph 4.1 to Participating Brokers as it sees fit.
3.3 Telephonic Subscriptions.
(a) The Managing Dealer may permit certain Participating Brokers to
accept telephonic or other oral subscriptions for Shares; provided,
however, that any such Participating Broker agrees that: (i) the
registered representative and branch manager of the Participating Broker
shall execute the subscription agreement on behalf of any investor who
telephonically or orally subscribes for Shares; (ii) the Participating
Broker shall not charge investors who telephonically or orally subscribe
for Shares any additional fees, including but not limited to fees relating
to opening an account with the Participating Broker; and (iii) the
Participating Broker shall not accept telephonic or oral subscriptions for
Shares from any investor unless such investor has received a copy of the
Company's Prospectus prior to making a decision to invest. The Managing
Dealer shall enter into a written agreement with each Participating Broker
who wishes to accept telephonic or other oral subscriptions for Shares
from investors in certain states more particularly identified in the
Prospectus, pursuant to which the Participating Broker shall agree to
explain to such investor that: (i) the investor shall have the right to
rescind such subscription for a period of ten (10) days following the
receipt of the Confirmation (as hereinafter defined); and (ii) unless the
investor rescinds such subscription within the applicable period of time,
the investor shall be bound by the subscription agreement. The Managing
Dealer shall confirm the receipt of subscriptions for Shares which have
been subscribed for by telephone or other oral instructions by written
notice to the investor (the "Confirmation"). Such Confirmation shall be
mailed to the investor not later than seven (7) days after the date on
which the investor's funds are deposited, shall contain a statement that
the investor has a right to rescind his subscription, and shall be
accompanied by a Prospectus and a Subscriber's Signature Page.
(b) Notwithstanding anything to the contrary contained in Paragraph
4.3(a) of this Agreement, in the event that the Company pays any
commission to the Managing Dealer for sale by a Participating Broker of
one or more Shares pursuant to a telephonic or other oral subscription
where representatives of such Participating Broker execute the
subscription agreement relating to such Shares, and the subscription is
rescinded as to one or more of the Shares covered by such subscription,
the Company shall decrease the next payment of commissions or other
compensation otherwise payable to the Managing Dealer by the Company under
this Agreement by an amount equal to the commission rate established in
Paragraph 4.1 of this Agreement, multiplied by the number of Shares as to
which the subscription is rescinded. In the event that no payment of
commissions or other compensation is due to the Managing Dealer after such
withdrawal occurs, the Managing Dealer shall pay the amount specified in
the preceding sentence to the Company within ten (10) days following
receipt of notice by the Managing Dealer from the Company stating the
amount owed as a result of rescinded subscriptions.
3.4 Suitability and Minimum Purchase Requirements.
(a) The Managing Dealer will use every reasonable effort, to the
extent it sells Shares to investors, to assure that any such Shares are
sold only to investors who:
(i) meet the investor suitability standards, including the
minimum income and net worth standard established by the Company,
and minimum purchase requirements set forth in the Registration
Statement;
(ii) can reasonably benefit from the Company based on the
prospective investor's overall investment objectives and portfolio
structure;
<PAGE>
(iii) are able to bear the economic risk of the investment
based on each prospective investor's overall financial situation;
and
(iv) have apparent understanding of: (A) the fundamental risks
of the investment; (B) the risk that the prospective investor may
lose the entire investment; (C) the lack of liquidity of the Shares;
(D) the restrictions on transferability of the Shares; (E) the
background and qualifications of the officers and directors of CNL
Hospitality Advisors, Inc., the advisor to the Company (the
"Advisor"); and (F) the tax consequences of an investment in the
Shares.
(b) The Managing Dealer will make the determinations required to be
made by it pursuant to Paragraph 3.4(a) above based on information it has
obtained from a prospective investor, including, at a minimum, but not
limited to the prospective investor's age, investment objectives,
investment experience, income, net worth, financial situation, other
investments of the prospective investor, as well as any other pertinent
factors deemed by the Managing Dealer to be relevant.
(c) The Managing Dealer shall maintain such records evidencing
compliance with the determination of the investor suitability standards
and minimum purchase requirements set forth in the Registration Statement,
as required by Paragraphs 3.4(a) and 3.4(b) above for a period of not less
than six (6) years, or for such greater time period as shall comply with
all applicable federal, state and other regulatory requirements.
(d) In addition to the foregoing, the Managing Dealer shall comply
fully with all the applicable provisions of the NASD's Conduct Rules and
the following provisions:
(i) the Managing Dealer shall have reasonable grounds to
believe, based upon information provided by the investor concerning
his investment objectives, other investments, financial situation
and needs, and upon any other information known by the Managing
Dealer, that (A) each investor to whom the Managing Dealer sells
Shares is or will be in a financial position appropriate to enable
him to realize to a significant extent the benefits (including tax
benefits) of an investment in the Shares, (B) each investor to whom
the Managing Dealer sells Shares has a fair market net worth
sufficient to sustain the risks inherent in an investment in the
Shares (including potential loss and lack of liquidity), and (C) the
Shares otherwise are or will be a suitable investment for each
investor to whom the Managing Dealer sells Shares, and the Managing
Dealer shall maintain files disclosing the basis upon which the
determination of suitability was made;
(ii) the Managing Dealer shall not execute any transaction
involving the purchase of Shares in a discretionary account without
prior written approval of the transaction by the investor;
(iii) the Managing Dealer shall have reasonable grounds to
believe, based upon the information made available to it, that all
material facts are adequate and accurately disclosed in the
Registration Statement and provide a basis for evaluating the
Shares;
<PAGE>
(iv) in making the determination set forth in item (iii)
above, the Managing Dealer shall evaluate items of compensation,
properties, tax aspects, financial stability and experience of the
sponsor, conflicts of interest and risk factors, and any other
information deemed pertinent by it; and
(v) prior to executing a purchase transaction in the Shares,
the Managing Dealer shall have informed the prospective investor of
all pertinent facts relating to the liquidity and marketability of
the Shares.
(e) The Managing Dealer shall comply with the requirements for
determining the suitability of investors who elect to participate in the
Reinvestment Plan (the "Reinvestment Plan") in accordance with the
procedure set forth in Paragraph 6 of such Reinvestment Plan in the form
of Appendix A to the Prospectus.
3.5 Sales Literature. The Managing Dealer shall use and distribute in
conjunction with the offer and sale of any Shares only the Prospectus and such
sales literature and advertising as shall have been previously approved in
writing by the Company.
3.6 Jurisdictions. The Managing Dealer shall cause Shares to be offered
and sold only in those jurisdictions specified in writing by the Company for
whose account Shares are then offered for sale, and such list of jurisdictions
shall be updated by the Company as additional states are added. The Company
shall specify only such jurisdictions in which the offering and sale of its
Shares has been authorized by appropriate State Regulatory Authorities. No
Shares shall be offered or sold for the account of the Company in any other
states.
3.7 Escrow. All funds received by the Managing Dealer for the sale of
Shares shall be deposited in an escrow account established by the Company at
SouthTrust Asset Management Company of Florida, N.A. (the "Escrow Agent"), by
the close of the first business day following receipt of such funds by the
Managing Dealer. Such escrow account shall be denominated "ESCROW ACCOUNT FOR
THE BENEFIT OF SUBSCRIBERS FOR COMMON STOCK OF CNL HOSPITALITY PROPERTIES, INC."
Until such time (if any) as the funds held in escrow are deliverable to the
Company pursuant to the Escrow Agreement between the Company and the Escrow
Agent, the Managing Dealer shall, and shall cause Participating Brokers to,
instruct subscribers to make checks for subscriptions payable to the order of
"SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A., ESCROW AGENT," and shall
return checks made payable to another party to the Participating Broker or
subscriber who submitted the check. Thereafter, checks may be made payable to
either the Escrow Agent or the Company. The Managing Dealer may authorize
certain Participating Brokers which are "$250,000 broker-dealers" to instruct
their customers to make their checks for Shares subscribed for payable directly
to the Participating Broker. In such case, the Soliciting Dealer will collect
the proceeds of the subscribers' checks and issue a check made payable to the
order of the Escrow Agent for the aggregate amount of the subscription proceeds.
SECTION 4
COMPENSATION
4.1 Commissions.
(a) The Company shall pay to the Managing Dealer, as compensation
for all services to be rendered by the Managing Dealer pursuant to this
Agreement, a commission equal to seven and one-half percent (7.5%) of the
selling price of each Share for which a sale is completed, regardless of
whether such Share is sold by the Managing Dealer or a Participating
Broker; provided, however, that the Company will pay reduced commissions
or may eliminate commissions on certain sales of Shares, including the
reduction or elimination of commissions in accordance with, and on the
<PAGE>
terms set forth in, the Prospectus and the following paragraph of this
Paragraph 4.1, which reduction or elimination of commissions will not
change the net proceeds to the Company. Shareholders who elect to
participate in the Reinvestment Plan will be charged commissions on Shares
purchased for their accounts on the same basis as investors who otherwise
purchase Shares in the Offering.
(b) A registered principal or representative of the Managing Dealer
or a Participating Broker, employees, officers, and directors of the
Company or the Advisor, any of their Affiliates (and the families of any
of the foregoing persons), and any Plan (as defined in the Prospectus)
established exclusively for the benefit of such persons or entities may
purchase Shares net of 7% commissions, at a per Share purchase price of
$9.30. In addition, clients of an investment adviser registered under the
Investment Advisers Act of 1940, as amended, who have been advised by such
adviser on an ongoing basis regarding investments other than in the
Company, and who are not being charged by such adviser or its Affiliates,
through payment of commissions or otherwise, for the advice rendered by
such adviser in connection with the purchase of the Shares, may purchase
the Shares net of commissions. In addition, brokers that have a
contractual arrangement with their clients for the payment of fees which
is consistent with accepting selling commissions, in their sole
discretion, may elect not to accept any selling commissions offered by the
Company for Shares that they sell. In that event, such Shares shall be
sold to the investor net of all selling commissions, at a per share
purchase price of $9.30.
4.2 Marketing Support and Due Diligence. The Company shall pay to the
Managing Dealer a nonaccountable fee for expenses incurred in selling and
marketing the Shares and for bona fide expenses incurred in connection with due
diligence activities. This marketing support and due diligence expense
reimbursement fee shall be equal to one-half of one percent (0.5%) of the
selling price of each Share for which a sale is completed, regardless of whether
such Share is sold by the Managing Dealer or a Participating Broker. All due
diligence expense reimbursements shall be paid by the Managing Dealer from this
fee.
4.3 Completed Sale.
(a) A sale of a Share shall be deemed to be completed under
Paragraph 4.1 if and only if (i) the Company has received a properly
completed and executed subscription agreement, together with payment of
the full purchase price of each purchased Share, from or, in accordance
with Paragraph 3.3(a), on behalf of an investor who satisfies the
applicable suitability standards and minimum purchase requirements set
forth in the Registration Statement as determined by the Managing Dealer
in accordance with the provisions of this Agreement; (ii) the Company has
accepted such subscription; and (iii) such investor has been admitted as a
shareholder of the Company.
(b) The Managing Dealer hereby acknowledges and agrees that the
Company, in its sole and absolute discretion, may accept or reject any
subscription, in whole or in part, for any reason whatsoever, and no
commission will be paid to the Managing Dealer with respect to that
portion of any subscription which is rejected.
4.4 Payment. Except as provided in "The Offering -- Plan of Distribution"
of the Prospectus, the commissions specified in Paragraph 4.1 for the sale of
any Share shall be payable in cash by the Company, as specified in Paragraph
4.1, no later than the end of the calendar month in which the investor
subscribing for the Share is admitted as a shareholder of the Company. Investors
whose subscriptions for Shares are accepted shall be admitted no later than the
end of the calendar month in which such subscriptions are accepted. The Company
will accept or reject all subscriptions within 30 days after receipt.
Notwithstanding anything to the contrary contained herein, in the event that the
Company pays any commission to the Managing Dealer for sale by a Participating
Broker of one or more Shares and the
<PAGE>
subscription is rescinded as to one or more of the Shares covered by such
subscription, the Company shall decrease the next payment of commissions or
other compensation otherwise payable to the Managing Dealer by the Company under
this Agreement by an amount equal to the commission rate established in
Paragraph 4.1 of this Agreement, multiplied by the number of Shares as to which
the subscription is rescinded. In the event that no payment of commissions or
other compensation is due to the Managing Dealer after such withdrawal occurs,
the Managing Dealer shall pay the amount specified in the preceding sentence to
the Company within ten (10) days following receipt of notice by the Managing
Dealer from the Company stating the amount owed as a result of rescinded
subscriptions.
Certain stockholders may agree with their participating Soliciting Dealer
and the Managing Dealer to have Selling Commissions relating to their Shares
paid over a seven year period pursuant to a deferred commission arrangement (the
"Deferred Commission Option"). Stockholders electing the Deferred Commission
Option will be required to pay a total of $9.40 per Share purchased upon
subscription, rather than $10.00 per Share, with respect to which $0.15 per
Share will be payable as Selling Commissions due upon subscription, $0.10 of
which may be reallowed to the Soliciting Dealer by the Managing Dealer. For each
of the six (6) years following such subscription on a date to be determined by
the Managing Dealer, $0.10 per Share will be paid by the Company as deferred
Selling Commissions with respect to Shares sold pursuant to the Deferred
Commission Option, which amounts will be deducted from and paid out of
distributions otherwise payable to such stockholders holding such Shares and may
be reallowed to the Soliciting Dealer by the Managing Dealer. The net proceeds
to the Company will not be affected by the election of the Deferred Commission
Option. Under this arrangement, a stockholder electing the Deferred Commission
Option will pay a one-percent (1%) Selling Commission per year thereafter for
the next six (6) years which will be deducted from and paid by the Company out
of distributions otherwise payable to such stockholder.
4.5 Sales Incentives. The Company or its Affiliates also may provide
incentive items for registered representatives of the Managing Dealer and the
Participating Brokers, which in no event shall exceed an aggregate of $100 per
annum per participating salesperson. In the event other incentives are provided
to registered representatives of the Managing Dealer or the Participating
Brokers, they will only be paid in cash and such payments will only be made to
the Managing Dealer or the Participating Brokers rather than their registered
representatives. Before any such sales incentive program is offered, the Company
agrees to obtain prior approval of the terms of such program from the NASD.
4.6 Wholesaling Compensation. The Company hereby acknowledges that the
Managing Dealer may pay each of its wholesalers one-percent (1%) of the gross
sales price (computed at $10.00 per Share) of all Shares sold in such
wholesaler's geographic territory (as the same may be established from time to
time by agreement between the Managing Dealer and one or more of its
wholesalers) but not in excess, in the aggregate, of one-percent (1%) of the
gross sales price (computed at $10.00 per Share) of all Shares sold, or a
maximum of 27,500,000 Shares. The Company and the Managing Dealer hereby agree
that the Company shall have no obligation to pay any portion of such amounts.
The Company hereby agrees to reimburse reasonable out-of-pocket expenses that
such wholesalers incur in connection with the distribution of its Shares from
and after such time as at least 250,000 Shares have been sold for the account of
the Company; provided, however, that in no event will the Managing Dealer or the
Company pay any amounts to any person if (i) such amounts constitute
"underwriting compensation," and (ii) payment of such amounts could cause total
underwriting compensation paid to underwriters, broker-dealers, or affiliates
thereof from any source, and deemed to be in connection with or related to the
distribution of the Offering, to exceed then-applicable compensation NASD
guidelines.
4.7 Soliciting Dealer Warrants. The Company shall issue to the Managing
Dealer a Soliciting Dealer Warrant for every 25 Shares sold through the
Offering, up to a maximum of 1,000,000 Soliciting Dealer Warrants to purchase an
equivalent number of shares of common stock of the Company. The Soliciting
Dealer Warrants will be issued quarterly commencing 60 days after the date on
which the Shares are first sold pursuant to the Offering. All or any part of
such Soliciting Dealer Warrants may be reallowed
<PAGE>
to certain Soliciting Dealers with prior written approval from, and in the sole
discretion of, the Managing Dealer unless prohibited by federal or state
securities laws. The Company will not issue Soliciting Dealer Warrants to the
Managing Dealer, and the Managing Dealer will not transfer Soliciting Dealer
Warrants, in connection with the sale of Shares to residents of Minnesota or
Texas. Each Soliciting Dealer Warrant will entitle the holder to purchase one
share of common stock from the Company for $12.00 during the five-year period
commencing with the date the Offering begins (the "Exercise Period"); provided
however, that Soliciting Dealer Warrants will not be exercisable until one year
from the date of issuance. Holders of Soliciting Dealer Warrants may not
exercise the Soliciting Dealer Warrants to the extent such exercise would
jeopardize the Company's status as a REIT.
SECTION 5
TERM OF AGREEMENT
5.1 Commencement and Expiration. This Agreement shall commence as of the
date first above written and, unless sooner terminated pursuant to Paragraph 5.2
or by operation of law or otherwise, shall expire at the end of the Offering
Period.
5.2 Termination. Any party may terminate this agreement at any time and
for any reason by giving 30 days prior written notice of intention to terminate
to each other party hereto.
5.3 Obligations Surviving Expiration or Termination.
(a) In addition to any other obligations of the Managing Dealer that
survive the expiration or termination of this Agreement, the Managing
Dealer, upon the expiration or termination of this Agreement, shall (i)
promptly deposit any and all funds in its possession which were received
from investors for the sale of Shares into the appropriate escrow account
specified in Paragraph 3.7 or, if the minimum number of Shares have been
sold and accepted by the Company, into such other account as the Company
may designate; and (ii) promptly deliver to the Company all records and
documents in its possession which relate to the Offering and are not
designated as dealer copies. The Managing Dealer, at its sole expense, may
make and retain copies of all such records and documents, but shall keep
all such information confidential. The Managing Dealer shall use its best
efforts to cooperate with the Company to accomplish an orderly transfer of
management of the Offering to a party designated by the Company.
(b) In addition to any other obligations of the Company that survive
the expiration or termination of this Agreement, the Company, upon
expiration or termination of this Agreement, shall pay to the Managing
Dealer all commissions to which the Managing Dealer is or becomes entitled
under Section 4 at such time or times as such commissions become payable
pursuant to Paragraph 4.3.
SECTION 6
COVENANTS OF THE MANAGING DEALER
The Managing Dealer covenants, warrants and represents, during the full
term of this Agreement, that:
(a) it is (i) a corporation duly organized and validly existing
under the laws of the State of Florida, (ii) a member of the NASD, and
(iii) a broker-dealer registered under the securities laws of all fifty
states, the District of Columbia, and the Commonwealth of Puerto Rico.
(b) it will use its best efforts to assure that all Shares are
offered and sold in accordance with (i) the terms of the Registration
Statement, the Prospectus and this Agreement,
<PAGE>
(ii) the requirements of applicable federal and state securities laws and
regulations, and (iii) the applicable rules of the NASD, including,
without limitation, the NASD's Conduct Rules;
(c) it will cause the Shares to be offered or sold only in those
jurisdictions specified in writing by the Company;
(d) it will not use any offering or selling materials other than
materials furnished or previously approved in writing by the Company; and
(e) it either (i) will not purchase Shares for its own account or
(ii) will hold all such Shares for investment.
SECTION 7
COVENANTS OF THE COMPANY
The Company covenants, warrants and represents, during the full term of
this Agreement, that:
(a) it will use its best efforts to maintain the effectiveness of
the Registration Statement, and will file, or cause to be filed, such
amendments to the Registration Statement as may be reasonably necessary
for that purpose;
(b) it will use its best efforts to (i) prevent the issuance of any
order by the SEC, any State Regulatory Authority or any other regulatory
authority which suspends the effectiveness of the Registration Statement,
prevents the use of the Prospectus, or otherwise prevents or suspends the
Offering, and (ii) obtain the lifting of any such order if issued;
(c) it will give the Managing Dealer written notice when the
Registration Statement becomes effective and shall deliver to the Managing
Dealer a signed copy of the Registration Statement, including its
exhibits, and such number of copies of the Registration Statement, without
exhibits, and the Prospectus, and any supplements and amendments thereto
which are finally approved by the SEC, as the Managing Dealer may
reasonably request for sale of the Shares, which Prospectus shall not
contain any untrue statement of a material fact required to be stated
therein or omit any material statement necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading;
(d) if at any time any event occurs and becomes known to the Company
prior to the end of the Offering Period, as a result of which the
Registration Statement or Prospectus would include an untrue statement of
a material fact or, in view of the circumstances under which they were
made, omit to state any material fact necessary to make the statements
therein not misleading, the Company will effect the preparation of an
amended or supplemented Registration Statement or Prospectus which will
correct such statement or omission;
(e) it will promptly notify the Managing Dealer of any
post-effective amendments or supplements to the Registration Statement or
Prospectus;
(f) it will, during the full term of this Agreement, abide by all
applicable provisions of its governing instruments, as the same may be
amended; and
(g) it will use its best efforts to cause, at or prior to the time
the Registration Statement becomes effective, the qualification or
registration of the Shares for offering and sale under the securities laws
of such jurisdictions as shall be determined by the Company.
<PAGE>
SECTION 8
PAYMENT OF COSTS AND EXPENSES
8.1 Managing Dealer. The Managing Dealer shall pay all costs and expenses
incident to the performance of its obligations under this Agreement which are
not expressly assumed by the Company under Paragraph 8.2 below.
8.2 Company. The Company shall pay all costs and expenses related to:
(a) the registration of the offer and sale of the Shares with the
SEC, including the cost of preparation, printing, filing and delivery of
the Registration Statement and all copies of the Prospectus used in the
Offering, and any amendments or supplements to such documents;
(b) the preparation and printing of the form of subscription
agreement to be used in the sale of the Shares;
(c) the qualification or registration of the Shares under state
securities or "blue sky" laws of states where the Shares are to be offered
or sold;
(d) the filing of the Registration Statement and any related
documents, including any amendments or supplements to such documents, with
the NASD;
(e) any filing fees, and fees and disbursements to counsel,
accountants and escrow agents which are in any way related to any of the
above items; and
(f) the preparation, printing and filing of all advertising
originated by it relating to the sale of Shares.
SECTION 9
INDEMNIFICATION
The Managing Dealer agrees to indemnify, defend and hold harmless the
Company from all losses, claims, demands, liabilities and expenses, including
reasonable legal and other expenses incurred in defending such claims or
liabilities, whether or not resulting in any liability to the Company, which the
Company may incur in connection with the offer or sale of any Shares, either by
the Managing Dealer pursuant to this Agreement or any Participating Broker
acting on the Managing Dealer's behalf pursuant to the Participating Broker
Agreement which arise out of or are based upon (i) an untrue statement or
alleged untrue statement of a material fact, or any omission or alleged omission
of a material fact, other than a statement or omission contained in the
Prospectus, the Registration Statement, or any state securities filing which was
not based on information supplied to the Company by the Managing Dealer or a
Participating Broker; or (ii) the breach by the Managing Dealer or any
Participating Broker acting on its behalf of any of the terms and conditions of
this Agreement or any Participating Broker Agreement, including, but not limited
to, alleged violations of the Securities Act of 1933, as amended.
SECTION 10
MISCELLANEOUS
10.1 Notices. Any notice, approval, request, authorization, direction or
other communication under this Agreement shall be given in writing and shall be
deemed to be delivered when delivered in person or deposited in the United
States mail, properly addressed and stamped with the required postage,
registered or certified mail, return receipt requested, to the intended
recipient as set forth below.
<PAGE>
If to the Company: 400 East South Street
Orlando, Florida 32801
Attention: James M. Seneff, Jr.,
Chairman of the Board
If to the Managing Dealer: CNL Securities Corp.
400 East South Street
Orlando, Florida 32801
Attention: Robert A. Bourne, President
Any party may change its address specified above by giving each other party
notice of such change in accordance with this Paragraph 10.1.
10.2 Invalid Provision. The invalidity or unenforceability of any
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted.
10.3 No Partnership. Nothing in this Agreement shall be construed or
interpreted to constitute the Managing Dealer as in association with or in
partnership with the Company, and instead, this Agreement only shall constitute
the Managing Dealer as a dealer authorized by the Company to sell and to manage
the sale by others of the Shares according to the terms set forth in the
Registration Statement, the Prospectus or this Agreement.
10.4 No Third Party Beneficiaries. No provision of this Agreement is
intended to be for the benefit of any person or entity not a party to this
Agreement, and no third party shall be deemed to be a beneficiary of any
provision of this Agreement. Further, no third party shall by virtue of any
provision of this Agreement have a right of action or an enforceable remedy
against either party to this Agreement.
10.5 Survival. Paragraph 5.3 and Section 9 and all provisions of this
Agreement which may reasonably be interpreted or construed as surviving the
expiration or termination of this Agreement shall survive the expiration or
termination of this Agreement.
10.6 Entire Agreement. This Agreement constitutes the complete
understanding among the parties hereto, and no variation, modification or
amendment to this Agreement shall be deemed valid or effective unless and until
it is signed by all parties hereto.
10.7 Successors and Assigns. No party shall assign (voluntarily, by
operation of law or otherwise) this Agreement or any right, interest or benefit
under this Agreement without the prior written consent of each other party.
Subject to the foregoing, this Agreement shall be fully binding upon, inure to
the benefit of, and be enforceable by, the parties hereto and their respective
successors and assigns.
10.8 Nonwaiver. The failure of any party to insist upon or enforce strict
performance by any other party of any provision of this Agreement or to exercise
any right under this Agreement shall be construed as a waiver or relinquishment
to any extent of such party's right to assert or rely upon any such provision or
right in that or any other instance; rather, such provision or right shall be
and remain in full force and effect.
10.9 Applicable Law. This Agreement shall be interpreted, construed and
enforced in all respects in accordance with the laws of the State of Florida.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
<PAGE>
Company: CNL HOSPITALITY PROPERTIES, INC.
By: __________________________________
JAMES M. SENEFF, JR., Chairman of the Board
Managing Dealer: CNL SECURITIES CORP.
By: __________________________________
ROBERT A. BOURNE, President
EXHIBIT 1.2
Form of Participating Broker Agreement
<PAGE>
PARTICIPATING BROKER AGREEMENT
CNL HOSPITALITY PROPERTIES, INC.
THIS PARTICIPATING BROKER AGREEMENT (the "Agreement") is made and entered
into as of the day indicated on Exhibit A attached hereto and by this reference
incorporated herein, between CNL SECURITIES CORP., a Florida corporation (the
"Managing Dealer"), and the Participating Broker (the "Broker") identified in
Exhibit A hereto.
WHEREAS, CNL HOSPITALITY PROPERTIES, INC. is a Maryland corporation (the
"Company"); and
WHEREAS, the Company proposes to offer and sell up to 27,500,000 shares of
Common Stock of the Company (the "Shares") to the general public, pursuant to a
public offering (the "Offering") of the Shares pursuant to a prospectus (the
"Prospectus") filed with the Securities and Exchange Commission ("SEC"); and
WHEREAS, the Managing Dealer, which has heretofore entered into a Managing
Dealer Agreement with the Company pursuant to which it has been designated the
managing dealer to sell and manage the sale by others of the Shares pursuant to
the terms of such agreement and the Offering, is a corporation incorporated in
and presently in good standing in the State of Florida, and is presently
registered with the Florida Securities Commission and with the National
Association of Securities Dealers, Inc. ("NASD") as a securities broker-dealer
qualified to offer and sell to members of the public securities of the type
represented by the Shares; and
WHEREAS, the Broker is an entity, as designated in Exhibit A hereto,
organized and presently in good standing in the state or states designated in
Exhibit A hereto, presently registered as a broker-dealer with the NASD, and
presently licensed by the appropriate regulatory agency of each state in which
it will offer and sell the Shares as a securities broker-dealer qualified to
offer and sell to members of the public securities of the type represented by
the Shares or exempt from all such registration requirements; and
WHEREAS, the Company has filed with the SEC a registration statement on
Form S-11, including a preliminary or final prospectus, for the registration of
the Shares under the Securities Act of 1933, as amended (such registration
statement, as it may be amended, and the prospectus and exhibits on file with
the SEC at the time the registration statement becomes effective, including any
post-effective amendments or supplements to such registration statement or
prospectus after the effective date of registration, being herein respectively
referred to as the "Registration Statement" and the "Prospectus"); and
WHEREAS, the offer and sale of the Shares shall be made pursuant to the
terms and conditions of the Registration Statement and the Prospectus and,
further, pursuant to the terms and conditions of all applicable securities laws
of all states in which the Shares are offered and sold; and
WHEREAS, the Managing Dealer desires to retain the Broker to use its best
efforts to sell the Shares, and the Broker is willing and desires to serve as a
broker for the Managing Dealer for the sale of the Shares upon the following
terms and conditions;
NOW, THEREFORE, in consideration of the premises and terms and conditions
thereof, it is agreed between the Managing Dealer and the Broker as follows.
1. Employment.
(a) Subject to the terms and conditions herein set forth, the
Managing Dealer hereby employs the Broker to use its best efforts to sell for
the account of the Company a portion of the Shares described in the Registration
Statement, as specified on Exhibit A hereto. The Broker hereby accepts such
employment and covenants, warrants and agrees to sell the Shares according to
all of the terms and conditions of the Registration Statement, all applicable
state and federal laws, including the Securities Act of 1933, as amended, and
any and all regulations and rules pertaining thereto, heretofore or hereafter
issued by the SEC and the NASD. Neither the Broker nor any other person shall
have any authority to give any information or make any representations in
connection with any offer or sale of the Shares other than as contained in the
Prospectus, as amended and supplemented, and as is otherwise expressly
authorized in writing by the Managing Dealer.
(b) The Broker shall use its best efforts, promptly following
receipt of written notice from the Managing Dealer of the effective date of the
Registration Statement, to sell the Shares in such quantities and for the
account of Company as shall be agreed between the Broker and the Managing Dealer
and specified on Exhibit A hereto, and to such persons and according to all such
terms as are contained in the Registration Statement and the Prospectus. The
Broker shall comply with all requirements set forth in the Registration
Statement and the Prospectus. The Broker shall use and distribute, in connection
with the offer and sale of the Shares, only the Prospectus and such sales
literature and advertising as shall conform in all respects to any restrictions
of local law and the applicable requirements of the Securities Act of 1933, as
amended, and which has been approved in writing by the Company or the Managing
Dealer. The Managing Dealer reserves the right to establish such additional
procedures as it may deem necessary to ensure compliance with the requirements
of the Registration Statement, and the Broker shall comply with all such
additional procedures to the extent that it has received written notice thereof.
(c) The Broker shall be permitted to accept subscriptions for the
Shares by telephone from residents of those states identified on Schedule A
attached hereto and made a part hereof provided that: (1) the registered
representative and branch manager of the Broker execute the subscription
agreement on behalf of any investor who subscribes for Shares by telephone; and
(2) the Broker does not charge any additional fees, including, but not limited
to fees relating to opening an account with the Broker, to any investor who
telephonically or orally subscribes for Shares. It is understood and agreed
between the Managing Dealer and the Broker that the Managing Dealer may, in its
discretion, change, modify, add to or delete from the list of states identified
on Schedule A. Any such modification shall be effective ten days from the date
written notice to the Broker has been mailed by the Managing Dealer. The Broker
shall not execute a subscription agreement on behalf of any investor who
subscribes for Shares by telephone unless such investor has specifically
authorized the registered representative and the branch manager of the Broker to
execute the subscription agreement on behalf of such investor and has made or
agreed to make full payment for all Shares covered by such subscription
agreement. Notwithstanding anything contained herein to the contrary, the Broker
shall have no authority to make representations on behalf of an investor or to
initial representations contained in the subscription agreement on behalf of an
investor. In connection with telephonic or other oral subscriptions for Shares,
the Broker represents and warrants as follows: (i) that a Prospectus was
delivered to the investor before the investor made a decision to invest; (ii)
that the investor meets the suitability requirements set forth in the
Prospectus; and (iii) that, in compliance with the NASD's Conduct Rules, the
Broker has reasonable grounds to believe that the investment in the Company is
suitable for the investor, based upon information supplied by the investor to
such Broker. Further, the Broker shall explain to any investor from a state
identified in the Prospectus as having such additional requirements, that: (i)
the investor has the right to rescind such subscription for a period of at least
ten days following the date written confirmation of the subscription has been
received by the investor from the Managing Dealer; and (ii) unless the investor
rescinds such subscription within the applicable period of time, the investor
shall be bound by the subscription agreement.
<PAGE>
(d) Notwithstanding anything to the contrary contained in Section 2
of this Agreement, in the event that the Managing Dealer pays any commission to
the Broker for sale of one or more Shares, including, but not limited to those
Shares sold pursuant to a telephonic or other oral subscription therefor, where
representatives of the Broker execute the subscription agreement relating to
such Shares, and the subscription is rescinded as to one or more of the Shares
covered by such subscription, the Managing Dealer shall decrease the next
payment of commissions or other compensation otherwise payable to the Broker by
the Managing Dealer under this Agreement by an amount equal to the commission
rate established in Section 2 and Exhibit A of this Agreement, multiplied by the
number of Shares as to which the subscription is rescinded. In the event that no
payment of commissions or other compensation is due to the Broker after such
withdrawal occurs, the Broker shall pay the amount specified in the preceding
sentence to the Managing Dealer within ten (10) days following mailing of notice
to the Broker by the Managing Dealer stating the amount owed as a result of
rescinded subscriptions.
(e) All monies received for purchase of any of the Shares shall be
forwarded by the Broker to the Managing Dealer for delivery to SouthTrust Asset
Management Company of Florida, N.A. (the "Escrow Agent"), where such monies will
be deposited in an escrow account established by the Company solely for such
subscriptions. The Broker may accept checks made payable to either the Company
or the Escrow Agent. Subscriptions will be executed as described in the
Registration Statement or as directed by the Managing Dealer. The monies shall
be deposited or transmitted by the Broker to the Managing Dealer no later than
the close of business of the first business day after receipt of the
subscription documents by the Broker; provided, however, that if the Broker
maintains a branch office, the branch office shall transmit the subscription
documents and check to the Broker by the close of business on the first business
day following their receipt by the branch office and the Broker shall review the
subscription documents and check to ensure their proper execution and form and,
if they are acceptable, transmit the check to the Managing Dealer by the close
of business on the first business day after their receipt by the Broker.
Pursuant to the terms of the Managing Dealer Agreement, the Managing Dealer will
transmit the check or monies to the Escrow Agent by no later than the close of
business on the first business day after the check is received from the Broker.
(f) During the full term of this Agreement, the Managing Dealer
shall have full authority to take such action as it may deem advisable in
respect to all matters pertaining to the performance of the Broker under this
Agreement.
(g) The Shares shall be offered and sold by the Broker only where
the Shares may be legally offered and sold, and only to such persons in such
states who shall be legally qualified to purchase the Shares. The Managing
Dealer shall give the Broker written notice at the time of effectiveness of
those states in which the offering and sale of Shares may be made, and shall
amend such notice thereafter as additional states are added; no Shares shall be
offered or sold in any other states.
(h) The Broker shall have no obligation under this Agreement to
purchase any of the Shares for its own account.
(i) The Broker will use every reasonable effort to assure that
Shares are sold only to investors who:
(1) meet the investor suitability standards, including the
minimum income and net worth standard established by the Company, and
minimum purchase requirements set forth in the Registration Statement;
<PAGE>
(2) can reasonably benefit from the Company based on the
prospective investor's overall investment objectives and portfolio
structure;
(3) are able to bear the economic risk of the investment based
on each prospective investor's overall financial situation; and
(4) have apparent understanding of: (a) the fundamental risks
of the investment; (b) the risk that the prospective investor may lose the
entire investment; (c) the lack of liquidity of the Shares; (d) the
restrictions on transferability of the Shares; (e) the background and
qualifications of the officers and directors of CNL Hospitality Advisors,
Inc., the advisor to the Company (the "Advisor"); and (f) the tax
consequences of an investment in the Shares.
The Broker will make the determinations required to be made by
it pursuant to subparagraph (i) based on information it has obtained from
a prospective investor, including, at a minimum, but not limited to, the
prospective investor's age, investment objectives, investment experience,
income, net worth, financial situation, other investments of the
prospective investor, as well as any other pertinent factors deemed by the
Broker to be relevant.
(j) In addition to complying with the provisions of subparagraph (i)
above, and not in limitation of any other obligations of the Broker to determine
suitability imposed by state or federal law, the Broker agrees that it will
comply fully with all of the applicable provisions of the NASD's Conduct Rules,
and the following provisions:
(1) The Broker shall have reasonable grounds to believe, based
upon information provided by the investor concerning his investment
objectives, other investments, financial situation and needs, and upon any
other information known by the Broker, that (A) each investor to whom the
Broker sells Shares is or will be in a financial position appropriate to
enable him to realize to a significant extent the benefits (including tax
benefits) of an investment in the Shares, (B) each investor to whom the
Broker sells Shares has a fair market net worth sufficient to sustain the
risks inherent in an investment in the Shares (including potential loss
and lack of liquidity), and (C) the Shares otherwise are or will be a
suitable investment for each investor to whom it sells Shares, and the
Broker shall maintain files disclosing the basis upon which the
determination of suitability was made;
(2) The Broker shall not execute any transaction involving the
purchase of Shares in a discretionary account without prior written
approval of the transactions by the investor;
(3) The Broker shall have reasonable grounds to believe, based
upon the information made available to it, that all material facts are
adequately and accurately disclosed in the Registration Statement and
provide a basis for evaluating the Shares;
(4) In making the determination set forth in subparagraph (3)
above, the Broker shall evaluate items of compensation, physical
properties, tax aspects, financial stability and experience of the
sponsor, conflicts of interest and risk factors, appraisals, as well as
any other information deemed pertinent by it;
(5) If the Broker relies upon the results of any inquiry
conducted by another member of the NASD with respect to the obligations
set forth in subparagraphs (3) or (4) above, the Broker shall have
reasonable grounds to believe that such inquiry was conducted with due
care, that the member or members conducting or directing the inquiry
consented to the disclosure of the results of the inquiry and that the
person who participated in or conducted the inquiry is not a sponsor or an
affiliate of the sponsor of the Company; and
(6) Prior to executing a purchase transaction in the Shares,
the Broker shall have informed the prospective investor of all pertinent
facts relating to the liquidity and marketability of the Shares.
(k) The Broker agrees that it will comply with Rules 2730, 2740 and
2750 of the NASD's Conduct Rules.
(l) The Broker agrees to retain in its files, for a period of at
least six (6) years, information which will establish that each purchaser of
Shares falls within the permitted class of investors.
(m) The Broker shall not, directly or indirectly, pay or award any
finder's fees, commissions or other compensation to any persons engaged by a
potential investor for investment advice as an inducement to such advisor to
advise the potential investor to purchase Shares in the Company.
(n) The Broker either (i) shall not purchase Shares for its own
account or (ii) shall hold for investment any Shares purchased for its own
account.
(o) The Broker hereby confirms that it is familiar with Securities
Act Release No. 4968 and Rule 15c2-8 under the Securities Exchange Act of 1934,
relating to the distribution of preliminary and final prospectuses, and confirms
that it has and will comply therewith.
(p) The Broker shall deliver a copy of the Articles of Incorporation
of the Company with each Prospectus that is delivered to potential investors in
Mississippi.
(q) The Broker shall not in any way participate in, or effect the
sale or transfer of Shares in connection with, a tender offer with respect to
shares of the Company's common stock, whether or not such offer is subject to
Section 14(d)(1) of the Securities Exchange Act of 1934, as amended, other than
with the written consent of the Company and/or the Managing Dealer.
2. Compensation of Broker.
The Managing Dealer shall pay the Broker, as compensation for all services
to be rendered by the Broker hereunder, a commission equal to 7.0% on sales of
Shares by such Broker, as set forth in Exhibit A hereto, subject to reduction as
specified in this Section 2 and the Prospectus. The Managing Dealer, in its sole
discretion, may reallow to the Broker, from its marketing support and due
diligence expense reimbursement fee, up to an additional 0.5% on sales of Shares
by such Broker, based on such factors as the number of Shares sold by the
Broker, the assistance of the Broker in marketing the Offering, and bona fide
due diligence expenses incurred by the Broker. Such commission rates shall
remain in effect during the full term of this Agreement unless otherwise changed
by a written agreement between the parties hereto. A sale of Shares shall be
deemed to be completed only after the Company receives a properly completed
subscription agreement for Shares from the Broker evidencing the fact that the
investor had received a final Prospectus for a period of not less than five (5)
full business days, together with payment of the full purchase price of each
purchased Share from a buyer who satisfies each of the terms and conditions of
the Registration Statement and Prospectus, and only after such subscription
agreement has been accepted in writing by the Company. Such compensation shall
be payable to the Broker by the Managing Dealer after such acceptance of the
subscription agreement; provided, however, that compensation or commissions
shall not be paid by the Managing Dealer: (i) other than from funds received as
compensation or commissions from the Company for the sale of its Shares; (ii)
until any and all compensation or commissions payable by the Company to the
Managing Dealer have been received by the Managing Dealer; and (iii) if the
commission payable to any broker-dealer or salesman exceeds the amount allowed
by any regulatory agency. The Broker shall not reallow any commissions to
non-NASD members. The Company (and the Managing Dealer) may pay reduced
commissions or may eliminate commissions on certain sales of Shares, including
the reduction or elimination of commissions in accordance with the following
paragraph of this Section 2. Any such reduction or elimination of commissions
will not, however, change the net proceeds to the Company.
The Company also shall issue to the Managing Dealer a warrant (the
"Soliciting Dealer Warrants") for every 25 Shares sold through the Offering, up
to a maximum of 1,000,000 Soliciting Dealer Warrants, to purchase an equivalent
number of shares of common stock of the Company. The Soliciting Dealer Warrants
will be issued quarterly commencing 60 days after the date on which the Shares
are first sold pursuant to the Offering. All or any part of such Soliciting
Dealer Warrants may be reallowed to certain Brokers with prior written approval
from, and in the sole discretion of, the Managing Dealer unless prohibited by
federal or state securities laws. The Company will not issue Soliciting Dealer
Warrants to the Managing Dealer, and the Managing Dealer will not transfer
Soliciting Dealer Warrants, in connection with the sale of Shares to residents
of Minnesota or Texas. Each Soliciting Dealer Warrant will entitle the holder to
purchase one share of common stock from the Company for $12.00 during the
ten-year period commencing with the date the Offering begins (the "Exercise
Period"); provided however, that Soliciting Dealer Warrants will not be
exercisable until one year from the date of issuance. Holders of Soliciting
Dealer Warrants may not exercise the Soliciting Dealer Warrants to the extent
such exercise would jeopardize the Company's status as a REIT. No Soliciting
Dealer Warrants will be issued relating to the Shares sold through the Company's
Reinvestment Plan.
A registered principal or representative of the Managing Dealer or a
Broker, employees, officers, Directors, and directors of the Company or the
Advisor, or any of their Affiliates (and the families of any of the foregoing
persons), and any Plan (as defined in the Prospectus) established exclusively
for the benefit of such persons may purchase Shares net of 7% commissions, at a
per Share purchase price of $9.30. In addition, clients of an investment adviser
registered under the Investment Advisers Act of 1940, as amended, who have been
advised by such adviser on an ongoing basis regarding investments other than in
the Company, and who are not being charged by such adviser or its Affiliates,
through the payment of commissions or otherwise, for the advice rendered by such
adviser in connection with the purchase of the Shares, may purchase the Shares
net of commissions. In addition, brokers that have a
<PAGE>
contractual arrangement with their clients for the payment of fees which is
consistent with accepting selling commissions, in their sole discretion, may
elect not to accept any selling commissions offered by the Company for Shares
that they sell. In that event, such Shares shall be sold to the investor net of
all selling commissions, at a per share purchase price of $9.30.
Certain stockholders may agree with their participating Broker and the
Managing Dealer to have commissions relating to their Shares paid over a seven
year period pursuant to a deferred commission arrangement (the "Deferred
Commission Option"). Stockholders electing the Deferred Commission Option will
be required to pay a total of $9.40 per Share purchased upon subscription,
rather than $10.00 per Share, with respect to which $0.15 per Share will be
payable as commissions due upon subscription, $0.10 of which may be reallowed to
the Broker by the Managing Dealer. For each of the six years following such
subscription on a date to be determined by the Managing Dealer, $0.10 per Share
will be paid by the Company as deferred commissions with respect to Shares sold
pursuant to the Deferred Commission Option, which amounts will be deducted from
and paid out of distributions otherwise payable to such stockholders holding
such Shares and may be reallowed to the Broker by the Managing Dealer. The net
proceeds to the Company will not be affected by the election of the Deferred
Commission Option. Under this arrangement, a stockholder electing the Deferred
Commission Option will pay a 1% Broker commission per year thereafter for the
next six years which will be deducted from and paid by the Company out of
distributions otherwise payable to such stockholder.
The Managing Dealer shall pay the Broker commissions on Shares purchased
pursuant to the Company's Reinvestment Plan on the same basis as commissions
paid for Shares otherwise purchased in the Offering. No Broker commissions will
be paid in connection with shares of common stock issued upon the exercise of
the Soliciting Dealer Warrants.
3. Association with Other Dealers.
It is expressly understood between the Managing Dealer and the Broker that
the Managing Dealer may cooperate with other broker-dealers who are registered
as broker-dealers with the NASD and duly licensed by the appropriate regulatory
agency of each state in which they will offer and sell the Shares or with
broker-dealers exempt from all such registration requirements. Such other
participating broker-dealers may be employed by the Managing Dealer as brokers
on terms and conditions identical or similar to this Agreement and shall receive
such rates of commission as are agreed to between the Managing Dealer and the
respective other participating broker-dealers and as are in accordance with the
terms of the Registration Statement. The Broker understands that, to that
extent, such other participating broker-dealers shall compete with the Broker in
the sale of the Shares.
4. Conditions of the Broker's Obligations.
The Broker's obligations hereunder are subject, during the full term of
this Agreement and the Offering, to (a) the performance by the Managing Dealer
of its obligations hereunder; and (b) the conditions that: (i) the Registration
Statement shall become and remain effective; and (ii) no stop order shall have
been issued suspending the effectiveness of the Offering.
5. Conditions to the Managing Dealer's Obligations.
The obligations of the Managing Dealer hereunder are subject, during the
full term of this Agreement and the Offering, to the conditions that: (a) at the
effective date of the Registration Statement and thereafter during the term of
this Agreement while any Shares remain unsold, the Registration Statement shall
remain in full force and effect authorizing the offer and sale of the Shares;
(b) no stop order suspending the effectiveness of the Offering or other order
restraining the offer or sale of the Shares shall have been issued nor
proceedings therefor initiated or threatened by any state regulatory agency or
the SEC; and (c) the Broker shall have satisfactorily performed all of its
obligations hereunder.
6. Covenants of the Managing Dealer.
The Managing Dealer covenants, warrants and represents, during the full
term of this Agreement, that:
(a) It shall use its best efforts to prevent the sale of the Shares
through persons other than registered NASD broker-dealers.
(b) It shall use its best efforts to cause the Company to maintain
the effectiveness of the Registration Statement and to file such applications or
amendments to the Registration Statement as may be reasonably necessary for that
purpose.
(c) It shall advise the Broker whenever and as soon as it receives
or learns of any order issued by the SEC, any state regulatory agency or any
other regulatory agency which suspends the effectiveness of the Registration
Statement or prevents the use of the Prospectus or which otherwise prevents or
suspends the offering or sale of the Shares, or receives notice of any
proceedings regarding any such order.
(d) It shall use its best efforts to prevent the issuance of any
order described herein at subparagraph (c) hereof and to obtain the lifting of
any such order if issued.
(e) It shall give the Broker written notice when the Registration
Statement becomes effective and shall deliver to the Broker such number of
copies of the Prospectus, and any supplements and amendments thereto, which are
finally approved by the SEC, as the Broker may reasonably request for sale of
the Shares.
(f) It shall promptly notify the Broker of any post-effective
amendments or supplements to the Registration Statement or Prospectus, and shall
furnish the Broker with copies of any revised Prospectus and/or supplements and
amendments to the Prospectus.
(g) To the extent to which the Managing Dealer has knowledge, it
shall keep the Broker fully informed of any material development to which the
Company is a party or which concerns the business and condition of the Company.
(h) In conjunction with the Company, it shall use its best efforts
to cause, at or prior to the time the Registration Statement becomes effective,
the qualification of the Shares for offering and sale under the securities laws
of such states as the Company shall elect.
7. Payment of Costs and Expenses.
The Broker shall pay all costs and expenses incident to the performance of
its obligations under this Agreement, including:
(a) All expenses incident to the preparation, printing and filing of
all advertising originated by it related to the sale of the Shares; and
(b) All other costs and expenses incurred in connection with its
sales efforts related to the sales of the Shares which are not expressly assumed
by the Company in its Managing Dealer Agreement with the Managing Dealer.
8. Indemnification.
The Broker agrees to indemnify, defend and hold harmless the Company, its
affiliates and their or its officers, directors, trustees, employees and agents,
including the Managing Dealer, against all losses, claims, demands, liabilities
and expenses, joint or several, including reasonable legal and other expenses
incurred in defending such claims or liabilities, whether or not resulting in
any liability to the Company, its affiliates and their or its officers,
directors, trustees, employees or agents, which they or any of them may incur
arising out of the offer or sale by the Broker, or any person acting on its
behalf, of any Shares pursuant to this Agreement if such loss, claim, demand,
liability, or expense arises out of or is based upon (i) an untrue statement or
alleged untrue statement of a material fact, or any omission or alleged omission
of a material fact, other than a statement, omission, or alleged omission by the
Broker which is also, as the case may be, contained in or omitted from the
Prospectus or the Registration Statement and which statement or omission was not
based on information supplied to the Company or the Managing Dealer by such
Broker; or (ii) the breach by the Broker, or any person acting on its behalf, of
any of the terms and conditions of this Agreement. This indemnity provision
shall survive the termination of this Agreement.
(a) The Managing Dealer agrees to indemnify, defend and hold
harmless the Broker, its officers, directors, employees and agents, against all
losses, claims, demands, liabilities and expenses, including reasonable legal
and other expenses incurred in defending such claims or liabilities, which they
or any of them may incur, including, but not limited to alleged violations of
the Securities Act of 1933, as amended, but only to the extent that such losses,
claims, demands, liabilities and expenses shall arise out of or be based upon
(i) any untrue statement of a material fact contained in the Prospectus or the
Registration Statement, as filed and in effect with the SEC, or in any amendment
or supplement thereto, or in any application prepared or approved in writing by
counsel to the Company and filed with any state regulatory agency in order to
register or qualify the Shares under the securities laws thereof (the "Blue Sky
applications"); or (ii) any omission or alleged omission to state therein a
material fact required to be stated in the Prospectus or the Registration
Statement or the Blue Sky applications, or necessary to make such statements,
and any part thereof, not misleading; provided, further, that any such untrue
statement, omission or alleged omission is not based on information included in
any such document which was supplied to the Managing Dealer, the Company, or any
officer of the Company by such Broker. This indemnity provision shall survive
the termination of this Agreement.
(b) No indemnifying party shall be liable under the indemnity
agreements contained in subparagraphs (a) and (b) above unless the party to be
indemnified shall have notified such indemnifying party in writing promptly
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the party to be indemnified, but
failure to notify an indemnifying party of any such claim shall not relieve it
from any liabilities which it may have to the indemnified party against whom
action is brought other than on account of its indemnity agreement contained in
subparagraphs (a) and (b) above. In the case of any such claim, if the party to
be indemnified notified the indemnifying party of the commencement thereof as
aforesaid, the indemnifying party shall be entitled to participate at its own
expense in the defense of such claim. If it so elects, in accordance with
arrangements satisfactory to any other indemnifying party or parties similarly
notified, the indemnifying party has the option to assume the entire defense of
the claim, with counsel who shall be satisfactory to such indemnified party and
all other indemnified parties who are defendants in such action; and after
notice from the indemnifying party of its election so to assume the defense
thereof and the retaining of such counsel by the indemnifying party, the
indemnifying party shall not be liable to such indemnified party under
subparagraphs (a) and (b) above for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof, other
than for the reasonable costs of investigation.
9. Term of Agreement.
This Agreement shall become effective at 8:00 A.M. (Eastern Standard Time)
on the first full business day following the day on which the Registration
Statement becomes effective, or if later, the date on which this Agreement is
executed by the Managing Dealer and the Broker. The Broker and the Managing
Dealer may each prevent this Agreement from becoming effective, without
liability to the other, by written notice before the time this Agreement would
otherwise become effective. After this Agreement becomes effective, either party
may terminate it at any time for any reason by giving thirty (30) days' written
notice to the other party; provided, however, that this Agreement shall in any
event automatically terminate at the first occurrence of any of the following
events: (a) the Registration Statement for offer and sale of the Shares shall
cease to be effective; (b) the Company shall be terminated; or (c) the Broker's
license or registration to act as a broker-dealer shall be revoked or suspended
by any federal, self-regulatory or state agency and such revocation or
suspension is not cured within ten (10) days from the date of such occurrence.
In any event, this Agreement shall be deemed suspended during any period for
which such license is revoked or suspended.
10. Notices.
All notices and communications hereunder shall be in writing and shall be
deemed to have been given and delivered when deposited in the United States
mail, postage prepaid, registered or certified mail, to the applicable address
set forth below.
If sent to the Managing Dealer:
CNL SECURITIES CORP.
400 East South Street
Orlando, Florida 32801
Attention: Robert A. Bourne, President
If sent to the Broker: to the person whose name and address are
identified in Exhibit A hereto.
11. Successors.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto, and shall not be assigned or transferred by the Broker by
operation of law or otherwise.
12. Miscellaneous.
(a) This Agreement shall be construed in accordance with the
applicable laws of the State of Florida.
<PAGE>
(b) Nothing in this Agreement shall constitute the Broker as in
association with or in partnership with the Managing Dealer. Instead, this
Agreement shall only authorize the Broker to sell the Shares according to the
terms as expressly set forth herein; provided, further, that the Broker shall
not in any event have any authority to act as the agent or broker of the
Managing Dealer except according to the terms expressly set forth herein.
(c) This Agreement, including Exhibit A and Schedule A hereto,
embodies the entire understanding between the parties to the Agreement, and no
variation, modification or amendment to this Agreement shall be deemed valid or
effective unless it is in writing and signed by both parties hereto.
(d) If any provision of this Agreement shall be deemed void, invalid
or ineffective for any reason, the remainder of the Agreement shall remain in
full force and effect.
(e) This Agreement may be executed in counterpart copies, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument comprising this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
and year indicated on Exhibit A hereto.
MANAGING DEALER FOR:
BROKER: CNL HOSPITALITY PROPERTIES, INC.
_______________________________________ CNL SECURITIES CORP.
(Name of Broker)
By:_____________________________________ By_________________________________
Print Name:_____________________________ Print Name:________________________
Title:__________________________________ Title:_____________________________
Witness:________________________________ Witness:___________________________
<PAGE>
Exhibit A
Page 3 of 3
EXHIBIT A
TO
PARTICIPATING BROKER AGREEMENT
OF
CNL HOSPITALITY PROPERTIES, INC.
This Exhibit A is attached to and made a part of that certain
Participating Broker Agreement, dated as of the ___ day of ___________________,
19__, by and between CNL SECURITIES CORP., as Managing Dealer, and
________________________________, as Broker.
1. Date of Agreement:
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2. Identity of Broker:
Name:_____________________________________________________________________
Firm NASD (CRD) No:_______________________________________________________
Type of Entity____________________________________________________________
(To be completed by Broker, e.g., corporation, partnership or
sole proprietorship.)
State Organized in:_______________________________________________________
(To be completed by Broker)
Qualified To Do Business and in Good Standing in the Following
Jurisdictions (including your state of organization) (Note: Qualification
to do business in any jurisdiction is generally a requirement imposed by
the secretary of state or other authority of jurisdictions in which you do
business, and is not related to your holding a license as a securities
broker-dealer in such jurisdictions. Questions concerning this matter
should be directed to you or your legal counsel.):
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--------------------------------------------------------------------------
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(To be completed by Broker)
Licensed as Broker-Dealer in the Following States:
------------------------
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(To be completed by Broker)
<PAGE>
3. Schedule of Commissions Payable to Participating Broker (see Section 2 of
Agreement):
Number of Shares
Purchased In Sales Price As a Percentage
Individual Order To Subscriber of the Sales Price(1) Dollar Amount
---------------- ------------- ---------------------- -------------
1 or more $10.00 7.0% $0.70
4. Name and Address for Notice Purposes (see Paragraph 10 of Agreement):
Name:
----------------------------------------------------------------
Title:
---------------------------------------------------------------
Company:
---------------------------------------------------------------
Address:
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City, State and Zip Code:_____________________________________________
Telephone Number (including area code):
-------------------------------
5. Please complete the following for our records:
(a) Please name those individuals who hold the following positions:
President:_________________________________________________________
Due Diligence Officer:_____________________________________________
Marketing Director:________________________________________________
In-House Editor:___________________________________________________
(b) Does your company hold national or regional conferences? Yes __ No ___
If so, when?_______________________________________________________
Who is the coordinator?____________________________________________
(c) How many representatives are registered with your broker-dealer?______
PLEASE ENCLOSE A CURRENT LIST. ALL INFORMATION WILL BE HELD IN
CONFIDENCE.
(d) Does your firm publish a newsletter? Yes _____ No _____
- ----------------
(1) Subject to reduction as set forth in Section 2 of the Participating Broker
Agreement.
<PAGE>
What is/are the frequency of the publication(s)?
_____ Weekly _____ Monthly _____ Quarterly
_____ Bi-weekly _____ Bi-monthly _____ Other (please specify)
PLEASE PLACE CNL ON YOUR MAILING LIST AND PROVIDE A SAMPLE OF THE
PUBLICATION IF AVAILABLE.
(e) Does your firm have regular internal mailings, or bulk package
mailings to representatives?
Yes _____ No _____
PLEASE PLACE CNL ON YOUR MAILING LIST AND PROVIDE A SAMPLE OF THE
PUBLICATION IF AVAILABLE.
(f) Does your firm have a computerized electronic mail (E-Mail) system for
your representatives?
Yes _____ No _____
If so, please provide e-mail address:
-------------------------------
(g) Website address:
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Person responsible:
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<PAGE>
SCHEDULE A
TO
PARTICIPATING BROKER AGREEMENT
OF
CNL HOSPITALITY PROPERTIES, INC.
TELEPHONIC SUBSCRIPTION AUTHORIZATION
This Schedule A is attached to and made a part of that certain
Participating Broker Agreement, dated as of the ___ day of ____________________,
19__, by and between CNL SECURITIES CORP., as Managing Dealer, and
_____________________________________________, as Broker.
The list of states in which the Broker is permitted to accept
telephonic subscriptions shall be those states identified by Item 2 of Exhibit
A, as amended from time to time, to the Broker Agreement between the parties
hereto, as states in which the Broker is licensed as a Broker-Dealer, except for
the following states in which the Broker is specifically prohibited from
accepting telephonic subscriptions: Florida, Iowa, Maine, Massachusetts,
Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico, North
Carolina, Ohio, Oregon, South Dakota, Tennessee and Washington.
Initials: ______________ -- CNL SECURITIES CORP.
______________ -- PARTICIPATING BROKER
DEFERRED COMMISSION OPTION AUTHORIZATION
Authorization is hereby given for registered representatives to select, at
the request of the investor, the deferred commission option, as explained in
Section 2, paragraph 4 of the Participating Broker Agreement.
Initials: ______________ -- CNL SECURITIES CORP.
______________ -- PARTICIPATING BROKER
EXHIBIT 1.3
Form of Warrant Purchase Agreement
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
1,000,000 Shares of Common Stock
$0.01 Par Value
[FORM OF]
WARRANT PURCHASE AGREEMENT
___________, 1999
This Warrant Purchase Agreement (the "Agreement") is made by and between
CNL Hospitality Properties, Inc., a Maryland corporation (the "Company"), and
CNL Securities Corp., a Florida corporation (the "Warrantholder").
The Company hereby agrees to issue and sell, and the Warrantholder agrees
to purchase, for the price of $0.0008 per warrant, warrants as hereinafter
described (the "Soliciting Dealer Warrants") to purchase one share of the
Company's Common Stock, $0.01 par value (the "Shares") for each 25 Shares sold
by the Managing Dealer and/or Soliciting Dealers, up to a maximum of 1,000,000
Soliciting Dealer Warrants. The price per Share at which the Soliciting Dealer
Warrants are exercisable and the number of Shares purchasable per Soliciting
Dealer Warrant are subject to adjustment pursuant to Section 8 hereof. The
Soliciting Dealer Warrants are being purchased in connection with a "best
efforts" offering of 25,000,000 Shares (the "Offering"), pursuant to that
certain Managing Dealer Agreement (the "Managing Dealer Agreement"), dated
_______, 1998 between the Company and the Warrantholder as the Managing Dealer
and as representative of the Soliciting Dealers who may receive warrants. Unless
otherwise defined, capitalized terms used herein shall have the same meaning as
in the Registration Statement on Form S-11 relating to the Offering.
The issuance of the Soliciting Dealer Warrants shall occur quarterly
commencing 60 days after the date on which Shares are first sold pursuant to the
Offering and such issuances shall be subject to the terms and conditions set
forth in the Managing Dealer Agreement.
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Soliciting Dealer Warrants and the respective rights
and obligations thereunder, the Company and the Warrantholder, for value
received, hereby agree as follows:
1. FORM AND TRANSFERABILITY OF SOLICITING DEALER WARRANTS.
(a) REGISTRATION. The Soliciting Dealer Warrant(s) shall be numbered
and shall be registered on the books of the Company when issued.
(b) FORM OF SOLICITING DEALER WARRANTS. The text and form of the
Soliciting Dealer Warrants and of the Election to Purchase shall be
substantially as set forth in Exhibit A and Exhibit B respectively, attached
hereto and incorporated herein. The price per Share (the "Warrant Price") and
the number of Shares issuable upon exercise of the Soliciting Dealer Warrants
are subject to adjustment upon the occurrence of certain events, all as
hereinafter provided. The Soliciting Dealer Warrants shall be dated as of the
date of signature thereof by the Company either upon initial issuance or upon
division, exchange, substitution or transfer.
(c) TRANSFER. The Soliciting Dealer Warrants shall be transferable
only on the books of the Company maintained at its principal office or that of
its designated transfer agent, if designated, upon delivery thereof duly
endorsed by the Warrantholder or by its duly authorized attorney or
representative, or accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration of transfer, the Company shall
execute and deliver a new Soliciting Dealer Warrant to the person entitled
thereto. Assignments or transfers shall be made pursuant to the form of
Assignment attached as Exhibit C hereto.
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<PAGE>
(d) LIMITATIONS ON TRANSFER OF SOLICITING DEALER WARRANT. The
Soliciting Dealer Warrants shall not be sold, transferred, assigned, exchanged
or hypothecated (collectively a "Transfer") by the Warrantholder, except to: (i)
one or more persons, each of whom on the date of transfer is an officer or
director of the Warrantholder or an officer or director or partner of a
successor to the Warrantholder as provided in clause (iv) of this Subsection
(d); (ii) a partnership or partnerships, all of the partners of which are a
Warrantholder and one or more persons, each of whom on the date of transfer is
an officer (including an officer-director) of a Warrantholder or an officer
(including an officer-director) or partner of a successor to a Warrantholder;
(iii) broker-dealer firms which have executed, and are not then in default of, a
"Participating Broker Agreement" entered into with the Managing Dealer (the
"Selling Group") and one or more persons, each of whom on the date of transfer
is an officer or partner of a member of the Selling Group or an officer
(including an officer-director) or partner of a successor to a member of the
Selling Group; (iv) a successor to a Warrantholder through merger or
consolidation; (v) a purchaser of all or substantially all of a Warrantholder's
assets; or (vi) stockholders of a Warrantholder or the stockholders or partners
of its transferee in the event of liquidation or dissolution of a Soliciting
Dealer; provided, however, that commencing one year from the date of issuance, a
Transfer may be made to a third party solely for the purpose of immediate
exercise of the Soliciting Dealer Warrant and sale of the underlying Shares by
such third party. The Soliciting Dealer Warrant may be divided or combined, upon
written request to the Company by the Warrantholder, into a certificate or
certificates representing the right to purchase the same aggregate number of
shares.
Unless the context indicates otherwise, the term "Warrantholder"
shall include any transferee of the Soliciting Dealer Warrant, and the term
"Warrant" shall include any and all Soliciting Dealer Warrants outstanding
pursuant to this Agreement, including those evidenced by a certificate or
certificates issued upon division, exchange, substitution or transfer pursuant
to this Agreement.
(e) EXCHANGE OR ASSIGNMENT OF SOLICITING DEALER WARRANT. Any
Soliciting Dealer Warrant certificate may be assigned or exchanged without
expense for another certificate or certificates entitling the Warrantholder to
purchase a like aggregate number of Shares as the certificate or certificates
surrendered then entitled such Warrantholder to purchase. Any Warrantholder
desiring to exchange a Soliciting Dealer Warrant certificate shall make a
request in writing delivered to the Company, and shall surrender the
certificate, properly endorsed, evidencing the Soliciting Dealer Warrant to be
so assigned or exchanged. Thereupon, the Company shall execute and deliver to
the person entitled thereto a new Soliciting Dealer Warrant certificate as so
requested.
Any Warrant holder desiring to assign a Soliciting Dealer Warrant
shall make such request in writing delivered to the Company, and shall surrender
the certificate, properly endorsed, evidencing the Soliciting Dealer Warrant to
be so assigned, with an instrument of assignment duly executed accompanied by
proper evidence of assignment, succession or authority to transfer, and funds
sufficient to pay any transfer tax; whereupon the Company shall, without charge,
execute and deliver a new Soliciting Dealer Warrant certificate in the name of
the assignee named in such instrument of assignment and the original Soliciting
Dealer Warrant certificate shall promptly be canceled.
2. TERMS AND EXERCISE OF SOLICITING DEALER WARRANTS.
(a) EXERCISE PERIOD. Subject to the terms of this Agreement, the
Warrantholder shall have the right to purchase one Share from the Company at a
price of $12.00 (120% of the offering price per Share) during the time period
beginning one year from the date the Soliciting Dealer Warrants are issued and
ending on ___________, 2004 (the "Exercise Period"), or if any such date is a
day on which banking institutions are authorized by law to close, then on the
next succeeding day which shall not be such a day, to purchase from the Company
up to the number of fully paid and nonassessable Shares which the Warrantholder
may at the time be entitled to purchase pursuant to the Soliciting Dealer
Warrant, a form of which is attached hereto as Exhibit A.
(b) METHOD OF EXERCISE. The Soliciting Dealer Warrant shall be
exercised by surrender to the Company, at its principal office in Orlando,
Florida or at the office of the Company's stock transfer agent, if any, or at
such other address as the Company may designate by notice in writing to the
Warrantholder at the address of the Warrantholder appearing on the books of the
Company, of the certificate evidencing the Soliciting Dealer Warrant to be
exercised, together with the form of Election to Purchase, included as Exhibit
B hereto, duly completed and signed, and upon payment to the Company of the
Warrant Price (as determined in accordance with the provisions of Sections 7 and
8 hereof), for the number of Shares with respect to which such Soliciting Dealer
Warrant is then exercised together with all taxes applicable upon such exercise.
Payment of the aggregate Warrant Price shall be made in cash or by certified
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<PAGE>
check or cashier's check, payable to the order of the Company. A Soliciting
Dealer Warrant may not be exercised if the Shares to be issued upon the exercise
of the Soliciting Dealer Warrant have not been registered (or be exempt from
registration) in the state of residence of the holder of the Soliciting Dealer
Warrant or if a Prospectus required under the laws of such state cannot be
delivered to the buyer on behalf of the Company. In addition, holders of
Soliciting Dealer Warrants may not exercise the Soliciting Dealer Warrant to the
extent such exercise will cause them to exceed the ownership limits set forth in
the Company's Articles of Incorporation. If any Soliciting Dealer Warrant has
not been exercised by the end of the Exercise Period, it will terminate and the
Warrantholder will have no further rights thereunder.
(c) PARTIAL EXERCISE. The Soliciting Dealer Warrants shall be
exercisable, at the election of the Warrantholder, either in full or from time
to time in part and, in the event that the Soliciting Dealer Warrant is
exercised with respect to less than all of the Shares specified therein at any
time prior to the Termination Date, a new certificate evidencing the remaining
Soliciting Dealer Warrants shall be issued by the Company.
(d) SHARE ISSUANCE UPON EXERCISE. Upon such surrender of the
Soliciting Dealer Warrant certificate and payment of such Warrant Price, the
Company shall issue and cause to be delivered with all reasonable dispatch to
the Warrantholder in such name or names as the Warrantholder may designate in
writing, a certificate or certificates for the number of full Shares so
purchased upon the exercise of the Soliciting Dealer Warrant, together with
cash, as provided in Section 9 hereof, with respect to any fractional Shares
otherwise issuable upon such surrender. Such certificate or certificates shall
be deemed to have been issued and any person so designated to be named therein
shall be deemed to have become a holder of such Shares as of the close of
business on the date of the surrender of the Soliciting Dealer Warrant and
payment of the Warrant Price, as hereinafter defined, notwithstanding that the
certificates representing such Shares shall not actually have been delivered or
that the stock transfer books of the Company shall then be closed.
3. MUTILATED OR MISSING SOLICITING DEALER WARRANT.
In case the certificate or certificates evidencing the Soliciting Dealer
Warrant shall be mutilated, lost, stolen or destroyed, the Company shall, at the
request of the Warrantholder, issue and deliver in exchange and substitution for
and upon cancellation of the mutilated certificate or certificates, or in lieu
of and in substitution for the certificate or certificates lost, stolen or
destroyed, a new Soliciting Dealer Warrant certificate or certificates of like
tenor and date and representing an equivalent right or interest, but only upon
receipt of evidence satisfactory to the Company of such loss, theft or
destruction of such Soliciting Dealer Warrant, and of reasonable bond of
indemnity, if requested, also satisfactory in form and amount and at the
applicant's cost.
4. RESERVATION OF SHARES.
There has been reserved, and the Company shall at all times keep reserved
so long as the Soliciting Dealer Warrant remains outstanding, out of its
authorized Common Stock, such number of Shares as shall be subject to purchase
under the Soliciting Dealer Warrant.
5. LEGEND ON SOLICITING DEALER WARRANT SHARES.
Each certificate for Shares initially issued upon exercise of the
Soliciting Dealer Warrant, unless at the time of exercise such Shares are
registered with the Securities and Exchange Commission (the "Commission"), under
the Securities Act of 1933, as amended (the "Act"), shall bear the following
legend:
No sale, transfer, pledge or other disposition of these Shares shall be
made except pursuant to registration under the Securities Act of 1933, as
amended, or pursuant to an opinion of counsel satisfactory to the Company
that registration is not required.
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<PAGE>
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the Act of
the securities represented thereby) shall also bear the above legend unless, in
the opinion of such counsel as shall be reasonably approved by the Company, the
securities represented thereby need no longer be subject to such restrictions.
6. PAYMENT OF TAXES.
The Company shall pay all documentary stamp taxes, if any, attributable to
the initial issuance of the Shares; provided, however, that the Company shall
not be required to pay any tax or taxes which may be payable with respect to any
secondary transfer of the Soliciting Dealer Warrant or the Shares.
7. WARRANT PRICE.
The price per Share at which Shares shall be purchasable on the exercise
of the Soliciting Dealer Warrant shall be $12.00 (the "Warrant Price").
8. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES.
The number and kind of securities purchasable upon the exercise of the
Soliciting Dealer Warrant and the Warrant Price shall be subject to adjustment
from time to time upon the happening of certain events, as follows:
(a) In case the Company shall: (i) pay a dividend in Common Stock or
make a distribution in Common Stock; (ii) subdivide its outstanding Common
Stock; (iii) combine its outstanding Common Stock into a smaller number of
shares of Common Stock, or (iv) issue by reclassification of its Common Stock
other securities of the Company, the number and kind of securities purchasable
upon the exercise of the Soliciting Dealer Warrant immediately prior thereto
shall be adjusted so that the Warrantholder shall be entitled to receive the
number and kind of securities of the Company which it would have owned or would
have been entitled to receive after the happening of any of the events described
above had the Soliciting Dealer Warrant been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any adjustment
made pursuant to this Subsection (a) shall become effective on the effective
date of such event retroactive to the record date, if any, for such event.
(b) No adjustment in the number of securities purchasable hereunder
shall be required unless such adjustment would require an increase or decrease
of at least one percent (1%) in the number of securities (calculated to the
nearest full Share thereof) then purchasable upon the exercise of the Soliciting
Dealer Warrant or, if the Soliciting Dealer Warrant is not then exercisable, the
number of securities purchasable upon the exercise of the Soliciting Dealer
Warrant on the first date thereafter that the Soliciting Dealer Warrant becomes
exercisable; provided, however, that any adjustment which by reason of this
Subsection (b) is not required to be made immediately shall be carried forward
and taken into account in any subsequent adjustment.
(c) Whenever the number of Shares purchasable upon the exercise of
the Soliciting Dealer Warrant is adjusted as herein provided, the Warrant Price
shall be adjusted by multiplying such Warrant Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the number of Shares
purchasable upon the exercise of the Soliciting Dealer Warrant immediately prior
to such adjustment, and of which the denominator shall be the number of Shares
so purchasable immediately thereafter.
(d) For the purpose of this Section 8, the term "Common Stock" shall
mean: (i) the class of stock designated as the Common Stock of the Company at
the date of this Agreement; or (ii) any other class of stock resulting from
successive changes or reclassification of such Common Stock consisting solely of
changes in par value, or from par value to no par value, or from no par value to
par value. In the event that at any time, as a result of an adjustment made
pursuant to this Section 8, the Warrantholder shall become entitled to purchase
any shares of the Company other than Common Stock, thereafter the number of such
other shares so purchasable upon the exercise of the Soliciting Dealer Warrant
and the Warrant Price shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Shares contained in this Section 8.
(e) Whenever the number of Shares and/or securities purchasable upon
the exercise of the Soliciting Dealer Warrant or the Warrant Price is adjusted
as herein provided, the Company shall promptly mail to the Warrantholder by
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<PAGE>
first class mail, postage prepaid, notice of such adjustment setting forth the
number of Shares and/or securities purchasable upon the exercise of the
Soliciting Dealer Warrant or the Warrant Price after such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
(f) In case of any reclassification, capital reclassification,
capital reorganization or other change in the outstanding shares of Common Stock
of the Company (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of an issuance of
Common Stock by way of dividend or other distribution, or of a subdivision or
combination of the Common Stock), or in case of any consolidation or merger of
the Company with or into another corporation or entity (other than a merger with
a subsidiary in which merger the Company is the continuing corporation and which
does not result in any reclassification, capital reorganization or other change
in the outstanding shares of Common Stock of the Company) as a result of which
the holders of the Company's Common Stock become holders of other shares of
securities of the Company or of another corporation or entity, or such holders
receive cash or other assets, or in case of any sale or conveyance to another
corporation of the property, assets or business of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
corporation, as the case may be, shall execute with the Warrantholder an
agreement that the Warrantholder shall have the right thereafter upon payment of
the Warrant Price in effect immediately prior to such action to purchase upon
the exercise of the Soliciting Dealer Warrant the kind and number of securities
and property which it would have owned or have been entitled to have received
after the happening of such reclassification, capital reorganization, change in
the outstanding shares of shares of Common Stock of the Company, consolidation,
merger, sale or conveyance had the Soliciting Dealer Warrant been exercised
immediately prior to such action.
The agreement referred to in this Subsection (f) shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 8. The provisions of this Subsection
(f) shall similarly apply to successive reclassification, capital
reorganizations, changes in the outstanding shares of Common Stock of the
Company, consolidations, mergers, sales or conveyances.
(g) Except as provided in this Section 8, no adjustment with respect
to any dividends shall be made during the term of the Soliciting Dealer Warrant
or upon the exercise of the Soliciting Dealer Warrant.
(h) No adjustments shall be made in connection with the public sale
and issuance of the Shares pursuant to the Managing Dealer Agreement or the sale
or issuance of Shares upon the exercise of the Soliciting Dealer Warrant.
(i) Irrespective of any adjustments in the Warrant Price or the
number or kind of securities purchasable upon the exercise of the Soliciting
Dealer Warrant, the Soliciting Dealer Warrant certificate or certificates
theretofore or thereafter issued may continue to express the same price or
number or kind of securities stated in the Soliciting Dealer Warrant initially
issuable pursuant to this Agreement.
9. FRACTIONAL INTEREST.
The Company shall not be required to issue fractional Shares or securities
upon the exercise of the Soliciting Dealer Warrant. If any such fractional Share
would, except for the provisions of this Section 9, be issuable upon the
exercise of the Soliciting Dealer Warrant (or specified portion thereof), the
Company may, at its election, pay an amount in cash equal to the then current
market price multiplied by such fraction. For purposes of this Agreement, the
term "current market price" shall mean: (a) if the Shares are traded in the
over-the-counter market and not on the Nasdaq National Market ("NNM") or on any
national securities exchange, the average between the per share closing bid and
asked prices of the Shares for the 30 consecutive trading days immediately
preceding the date in questions, as reported by the NNM or an equivalent
generally accepted reporting service; or (b) if the Shares are traded on the NNM
or on a national securities exchange, the average for the 30 consecutive trading
days immediately preceding the date in question of the daily per share closing
prices of the Shares on the NNM or on the principal national stock exchange on
which it is listed, as the case may be. The closing price referred to in clause
(b) above shall be the last reported sales price or, in case no such reported
sale takes place on such day, the average of the reported closing bid and asked
prices on the NNM or on the principal national securities exchange on which the
Shares are then listed, as the case may be. If the Shares are not publicly
traded, then the "current market price" shall mean $10 for the first three (3)
years following the termination of the Offering.
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<PAGE>
10. NO RIGHTS AS STOCKHOLDER; NOTICES OF WARRANTHOLDER.
Nothing contained in this Agreement or in the Soliciting Dealer Warrant
shall be construed as conferring upon the Warrantholder or its transferee any
rights as a stockholder of the Company, either at law or in equity, including
the right to vote, receive dividends, consent or notices as a stockholder with
respect to any meeting of stockholders for the election of directors of the
Company or for any other matter.
11. REGISTRATION OF SOLICITING DEALER WARRANTS AND SHARES PURCHASABLE
THEREUNDER.
The Soliciting Dealer Warrants and the Shares purchasable thereunder are
being registered as part of the Offering. The Company undertakes to make
additional filings with the Commission to the extent required to keep the Shares
issuable pursuant to the Soliciting Dealer Warrants referenced in this Section
11 registered through ____________, 2004.
12. INDEMNIFICATION.
In the event of the filing of any registration statement with respect to
the Soliciting Dealer Warrants or the Shares pursuant to Section 11 above, the
Company and the Warrantholder (and/or selling Warrantholder or such holder of
Shares, as the case may be), shall agree to indemnify and hold harmless the
other to the same extent and in the same manner as provided in the Managing
Dealer Agreement.
13. CONTRIBUTION.
In order to provide for just and equitable contribution under the Act in
any case in which: (a) the Warrantholder or any holder of Shares makes a claim
for indemnification pursuant to Section 12 hereof, but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right to appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 12 hereof
provide for indemnification in such case; or (b) contribution under the Act may
be required on the part of the Warrantholder or any holder of Shares, the
Company and the Warrantholder, or such holder of Shares, shall agree to
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (which shall, for all purposes of this Agreement, include, but
not be limited to all costs of defense and investigation and all attorneys'
fees), in either such case (after contribution from others) on the basis of
relative fault as well as any other relevant equitable considerations in the
same manner as provided by the parties in the Managing Dealer Agreement.
14. NOTICES.
Any notice given pursuant to this Agreement by the Company or by the
Warrantholder shall be in writing and shall be deemed to have been duly given if
delivered or mailed by certified mail, return receipt requested:
(a) If to the Warrantholder, addressed to:
CNL Securities Corp.
400 East South Street
Orlando, Florida 32801
Attention: Robert A. Bourne, President
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(b) If to the Company, addressed to:
CNL Hospitality Properties, Inc.
400 East South Street
Orlando, Florida 32801
Attention: James M. Seneff, Jr., Chief Executive Officer
Each party hereto may, from time to time, change the address to which
notices to it are to be delivered or mailed hereunder by notice in accordance
herewith to the other party.
15. PARTIES IN INTEREST.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company, the Warrantholder and, to the extent
expressed, any holder of Shares, any person controlling the Company or the
Warrantholder or any holder of Shares, directors of the Company, nominees for
directors (if any) named in the Prospectus, or officers of the Company who have
signed the registration statement, any legal or equitable right, remedy or claim
under this Agreement, and this Agreement shall be for the sole an exclusive
benefit of the aforementioned parties.
16. SUCCESSORS.
All the covenants and provisions of this Agreement by or for the benefit
of the parties listed in Section 15 above shall bind and inure to the benefit of
their respective executors, administrators, successors and assigns hereunder;
provided, however, that the rights of the Warrantholder or holder of Shares
shall be assignable only to those persons and entities specified in Section 1,
Subsection (d) hereof, in which event such assignee shall be bound by each of
the terms and conditions of this Agreement.
17. MERGER OR CONSOLIDATION OF THE COMPANY.
The Company shall not merge or consolidate with or into any other
corporation or sell all or substantially all of its property to another
corporation, unless it complies with the provisions of Section 8, Subsection
(f).
18. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
All statements contained in any schedule, exhibit, certificate or other
instrument delivered by or on behalf of the parties hereto, or in connection
with the transactions contemplated by this Agreement, shall be deemed to be
representations and warranties hereunder. Notwithstanding any investigations
made by or on behalf of the parties to this Agreement, all representations,
warranties and agreements made by the parties to this Agreement or pursuant
hereto shall survive.
19. CHOICE OF LAW.
This Agreement and the rights of the parties hereunder shall be governed
by and construed in accordance with the laws of the State of Florida, including
all matters of construction, validity, performance and enforcement, and without
giving effect to the principles of conflict of laws.
20. JURISDICTION.
The parties submit to the jurisdiction of the Courts of the State of
Florida or a Federal Court empanelled in the State of Florida for the resolution
of all legal disputes arising under the terms of this Agreement.
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21. ENTIRE AGREEMENT.
Except as provided herein, this Agreement, including exhibits, contains
the entire agreement of the parties, and supersedes all existing negotiations,
representations or agreements and all other oral, written or other
communications between them concerning the subject matter of this Agreement.
22. SEVERABILITY.
If any provision of this Agreement is unenforceable, invalid or violates
applicable law, such provision shall be deemed stricken and shall not affect the
enforceability of any other provisions of this Agreement.
23. CAPTIONS.
The captions in this Agreement are inserted only as a matter of
convenience and for reference and shall not be deemed to define, limit, enlarge
or describe the scope of this Agreement or the relationship of the parties, and
shall not affect this Agreement or the construction of any provisions herein.
24. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
CNL Hospitality Properties, Inc.
a Maryland corporation
By: ______________________________
- -----------------------------------
Name and Title
CNL Securities Corp.,
a Florida corporation
By: _____________________________
- ----------------------------------
Name and Title
-20-
<PAGE>
EXHIBIT A
CNL Hospitality PROPERTIES, INC.
SOLICITING DEALER WARRANT NO. ______
No sale, transfer, pledge or other disposition of this warrant or the
Shares purchasable hereunder shall be made except pursuant to registration
under the Securities Act of 1933, as amended, or pursuant to an opinion of
counsel satisfactory to the issuer that registration is not required.
Transfer of this warrant is also restricted by that certain warrant
purchase agreement dated as of _____________, 1998, a copy of which is
available from the issuer.
Warrant to purchase ________________ Shares of common stock of CNL
Hospitality Properties, Inc.
Exercisable commencing on ___________, 199__
Void after 5:00 P.M. Eastern Standard Time on ____________, 2004 (the
"Exercise Closing Date").
THIS CERTIFIES that, for value received, _________________________ (the
"Warrantholder"), or registered assigns, is entitled, subject to the terms and
conditions set forth in this Warrant (the "Warrant"), to purchase from CNL
Hospitality Properties, Inc., a Maryland corporation (the "Company"), ________
fully paid and nonassessable Shares of common stock (the "Shares") of the
Company at any time during the period commencing on ___________, 199__ and
continuing up to 5:00 P.M. eastern standard time on _____________, 2004 at
$12.00 per Share, and is subject to all the terms thereof, including the
limitations on transferability as set forth in that certain Warrant Purchase
Agreement between CNL Securities Corp. and the Company dated _________________,
1999.
THIS WARRANT may be exercised by the holder thereof, in whole or in part,
by the presentation and surrender of this Warrant with the form of Election to
Purchase duly executed, with signature(s) guaranteed, at the principal office of
the Company (or at such other address as the Company may designate by notice to
the holder hereof at the address of such holder appearing on the books of the
Company), and upon payment to the Company of the purchase price in cash or by
certified check or bank cashier's check. The Shares so purchased shall be deemed
to be issued to the holder hereof as the record owner of such Shares as of the
close of business on the date on which this Warrant shall have been surrendered
and payment made for such Shares. The Shares so purchased shall be registered to
the holder (and, if requested, certificates issued) promptly after this Warrant
shall have been so exercised and unless this Warrant has expired or has been
exercised, in full, a new Warrant identical in form, but representing the number
of Shares with respect to which this Warrant shall not have been exercised,
shall also be issued to the holder hereof.
NOTHING CONTAINED herein shall be construed to confer upon the holder of
this Warrant, as such, any of the rights of a Stockholder of the Company.
CNL Hospitality Properties, Inc.,
a Maryland corporation
By: _________________________________
---------------------------------
Name and Title
<PAGE>
EXHIBIT B
CNL HOSPITALITY PROPERTIES, INC.
ELECTION TO PURCHASE
SOLICITING DEALER WARRANT
CNL Hospitality Properties, Inc.
400 East South Street
Orlando, Florida 32801
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the attached warrant (the "Warrant"), to purchase
thereunder ____ shares of the common stock of CNL Hospitality Properties, Inc.
(the "Shares") provided for therein and hereby tenders $_________ ($12.00 per
Share) in payment of the actual exercise price thereof, and requests that the
Shares be issued in the name of
- --------------------------------------------------------------------------------
(Please Print Name, Address and SSN or EIN of Stockholder below)
- --------------------------------------------------------------------------------
and, if said number of Shares shall not be the total possible number of Shares
purchasable hereunder, that a new Warrant certificate for the balance of the
Shares purchasable under the attached Warrant certificate be registered in the
name of the undersigned Warrantholder or his assignee as indicated below and
delivered at the address stated below:
Dated: ____________________
Name of Warrantholder or Assignee:
- --------------------------------------------------------------
(Please Print)
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature:
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT C
CNL HOSPITALITY PROPERTIES, INC.
SOLICITING DEALER WARRANT
ASSIGNMENT
(To be signed only upon assignment of the Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto:
- --------------------------------------------------------------------------------
(Please Print Name, Address and SSN or EIN of Assignee Below)
- --------------------------------------------------------------------------------
the attached Soliciting Dealer Warrant No. ____, to purchase ________ shares of
common stock of CNL Hospitality Properties, Inc. (the "Company"), hereby
irrevocably constituting and appointing the Company and/or its transfer agent as
its attorney to transfer said Warrant on the books of the Company, with full
power of substitution.
Dated: ____________
--------------------------------------
Signature of Registered Holder
Signature Guaranteed:
----------------------------------------
Note: The above signature must correspond with the name as written upon
the face of the attached Warrant certificate in every particular respect,
without alteration, enlargement or any change whatever, unless this
Warrant has been duly assigned.
Exhibit 10.1
Form of Escrow Agreement between CNL Hospitality Fund, Inc.
and SouthTrust Asset Management Company of Florida, N.A.
<PAGE>
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") is dated this ___ day of
_____________, 1999, by and among CNL HOSPITALITY PROPERTIES, INC., a Maryland
corporation (the "Company"), CNL SECURITIES CORP., a Florida corporation (the
"Managing Dealer"), and SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.
(the "Escrow Agent"). This Agreement shall be effective as of the effective date
of the Company's Registration Statement filed with the Securities and Exchange
Commission (the "Effective Date").
WHEREAS, the Company proposes to offer and sell, on a best-efforts basis
through the Managing Dealer and selected broker-dealers registered with the
National Association of Securities Dealers, Inc. (the Managing Dealer and such
selected broker-dealers are hereinafter referred to collectively as the
"Soliciting Dealers") up to 27,500,000 shares of common stock of the Company
(the "Shares") to investors at $10.00 per Share pursuant to a registration
statement (the "Registration Statement") filed with the Securities and Exchange
Commission; and
WHEREAS, the Company and the Managing Dealer desire to establish an escrow
in which funds received from subscribers will be deposited and the Escrow Agent
is willing to serve as Escrow Agent upon the terms and conditions herein set
forth;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties, the parties covenant and agree as follows.
1. Establishment of Escrow Accounts. On or prior to the Effective Date,
the Company and the Managing Dealer shall establish an interest-bearing escrow
account with the Escrow Agent, which escrow account shall be entitled "ESCROW
ACCOUNT FOR THE BENEFIT OF SUBSCRIBERS FOR COMMON STOCK OF CNL HOSPITALITY
PROPERTIES, INC." (the "Escrow Account"). All monies deposited in the Escrow
Account are hereinafter referred to as the "Escrowed Funds." The Managing Dealer
will, and will cause selected broker-dealers acting as Soliciting Dealers to,
instruct subscribers to make checks for subscriptions payable to either the
Escrow Agent or the Company. The Managing Dealer may authorize certain
Soliciting Dealers which are "$250,000 broker-dealers" to instruct their
customers to make their checks for Shares subscribed for payable directly to the
Soliciting Dealer. In such case, the Soliciting Dealer will collect the proceeds
of the subscribers' checks and issue a check made payable to the order of the
Escrow Agent for the aggregate amount of the subscription proceeds.
2. Deposits into the Escrow Account. The Managing Dealer will promptly
deliver all monies received from subscribers for the payment of Shares to the
Escrow Agent for deposit in the Escrow Account.
3. Collection Procedure.
(a) The Escrow Agent is hereby authorized to forward each check for
collection and, upon collection of the proceeds of each check, to deposit
the collected proceeds in the Escrow Account or, alternatively, the Escrow
Agent may telephone the bank on which the check is drawn to confirm that
the check has been paid.
(b) Any check returned unpaid to the Escrow Agent shall be returned
to the Soliciting Dealer that submitted the check. In such cases the
Escrow Agent will promptly notify the Company of such return.
(c) In the event that (i) the Company rejects any subscription for
Shares or (ii) an investor who has telephonically or orally subscribed for
Shares properly withdraws such subscription within fifteen (15) days from
the date written confirmation has been mailed to the subscriber, and, in
either such event, the Escrow Agent has already collected funds for such
subscription, the Escrow Agent shall promptly issue a refund check to the
drawer of the check submitted by or on behalf of the rejected or
withdrawing subscriber. If either of the events specified in the clauses
(i) or (ii) of the preceding sentence occur and, in either such event, the
Escrow Agent has not yet collected funds for such subscription but has
submitted the check relating to such subscription for collection, the
Escrow Agent shall promptly issue a check in the amount of such check to
the rejected or withdrawing subscriber after the Escrow Agent has cleared
such funds. If the Escrow Agent has not yet submitted the check relating
to the subscription of the rejected or withdrawing subscriber, the Escrow
Agent shall promptly remit such check directly to the drawer of the check
submitted by or on behalf of the subscriber.
4. Investment of Escrowed Funds. The Escrow Agent, immediately upon
receipt of each check remitted to it, shall deposit such check in
interest-bearing savings accounts, in short-term certificates of deposit issued
by a bank, or in other short-term securities directly or indirectly issued or
guaranteed by the United States government, all as directed by the Company.
Interest and dividends earned on such investments shall be similarly reinvested.
5. Distribution of Escrowed Funds. The Escrow Agent shall release from
the Escrow Account to the Company any and all Escrowed Funds therein, together
with all interest earned thereon, upon written request of an officer of the
Company.
<PAGE>
6. Liability of Escrow Agent.
(a) In performing any of its duties under this Agreement, or upon
the claimed failure to perform its duties hereunder, the Escrow Agent
shall not be liable to anyone for any damages, losses, or expenses which
it may incur as a result of the Escrow Agent so acting, or failing to act;
provided, however, the Escrow Agent shall be liable for damages arising
out of its willful default or misconduct or its gross negligence under
this Agreement. Accordingly, the Escrow Agent shall not incur any such
liability with respect to (i) any action taken or omitted to be taken in
good faith upon advice of its counsel or counsel for the Company which is
given with respect to any questions relating to the duties and
responsibilities of the Escrow Agent hereunder, or (ii) any action taken
or omitted to be taken in reliance upon any document, including any
written notice or instructions provided for in this Escrow Agreement, not
only as to its due execution and to the validity and effectiveness of its
provisions but also as to the truth and accuracy of any information
contained therein, if the Escrow Agent shall in good faith believe such
document to be genuine, to have been signed or presented by a proper
person or persons, and to conform with the provisions of this Agreement.
(b) The Company hereby agrees to indemnify and hold harmless the
Escrow Agent against any and all losses, claims, damages, liabilities and
expenses, including, without limitation, reasonable costs of investigation
and counsel fees and disbursements which may be incurred by it resulting
from any act or omission of the Company; provided, however, that the
Company shall not indemnify the Escrow Agent for any losses, claims,
damages, or expenses arising out of the Escrow Agent's willful default,
misconduct, or gross negligence under this Agreement.
(c) If a dispute ensues between any of the parties hereto which, in
the opinion of the Escrow Agent, is sufficient to justify its doing so,
the Escrow Agent shall be entitled to tender into the registry or custody
of any court of competent jurisdiction, including the Circuit Court of
Orange County, Florida, all money or property in its hands under the terms
of this Agreement, and to file such legal proceedings as it deems
appropriate, and shall thereupon be discharged from all further duties
under this Agreement. Any such legal action may be brought in any such
court as the Escrow Agent shall determine to have jurisdiction thereof.
The Company shall indemnify the Escrow Agent against its court costs and
attorneys' fees incurred in filing such legal proceedings.
7. Inability to Deliver. In the event that checks for subscriptions
delivered to the Escrow Agent by the Company pursuant to this Agreement are not
cleared through normal banking channels within 120 days after such delivery, the
Escrow Agent shall deliver such uncleared checks to the Company.
8. Notice. All notices, requests, demands and other communications or
deliveries required or permitted to be given hereunder shall be in writing and
shall be deemed to have been duly given if delivered personally, given by
prepaid telegram or deposited for mailing, first class, postage prepaid,
registered or certified mail, as follows:
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
If to the subscribers for Shares: To their respective addresses as
specified in their Subscription
Agreements.
If to the Company: CNL Hospitality Properties, Inc.
400 East South Street
Orlando, Florida 32801
Attention: Mr. James M. Seneff, Jr.,
Chairman of the Board
If to the Managing Dealer: CNL Securities Corp.
400 East South Street
Orlando, Florida 32801
Attention: Mr. Robert A. Bourne, President
If to the Escrow Agent: SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.
135 West Central Boulevard, Suite 1200
Orlando, Florida 32801
Attention: Mr. William Legg
</TABLE>
9. Fees to Escrow Agent. In consideration of the services to be
provided by the Escrow Agent hereunder, the Company will pay the Escrow Agent a
fee for its services hereunder (the "Escrow Fee"). The Escrow Fee shall be $350
for each month or any portion thereof that the Escrow Account continues for the
Company. Payments by the Company, if any, shall be due and payable no less
frequently than six-month intervals while the escrow continues for the Company.
In no event shall the total Escrow Fees payable by the Company pursuant to this
Agreement be less than $2,100, nor more than $4,200, for any 12-month period.
Notwithstanding anything contained in this Agreement to the contrary, in no
event shall any fee, reimbursement for costs and expenses, indemnification for
any damages incurred by the Escrow Agent, or monies whatsoever be paid out of or
chargeable to the Escrowed Funds in the Escrow Account.
10. General.
(a) This Agreement shall be governed by and construed and enforced
in accordance with the laws of the State of Florida.
(b) The section headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
(c) This Agreement sets forth the entire agreement and understanding
of the parties with regard to this escrow transaction and supersedes all
prior agreements, arrangements and understandings relating to the subject
matter hereof.
(d) This Agreement may be amended, modified, superseded or
cancelled, and any of the terms or conditions hereof may be waived, only
by a written instrument executed by each party hereto or, in the case of a
waiver, by the party waiving compliance. The failure of any party at any
time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. No waiver in
any one or more instances by any party of any condition, or of the breach
of any term contained in this Agreement, whether by conduct or otherwise,
shall be deemed to be, or construed as, a further or continuing waiver of
any such condition or breach, or a waiver of any other condition or of the
breach of any other terms of this Agreement.
(e) This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(f) This Agreement shall inure to the benefit of the parties hereto
and their respective administrators, successors, and assigns.
<PAGE>
11. Representation of the Company. The Company hereby acknowledges that
the status of the Escrow Agent with respect to the offering of the Shares is
that of agent only for the limited purposes herein set forth, and hereby agrees
it will not represent or imply that the Escrow Agent, by serving as the Escrow
Agent hereunder or otherwise, has investigated the desirability or advisability
of an investment in the Shares, or has approved, endorsed or passed upon the
merits of the Shares, nor shall the Company use the name of the Escrow Agent in
any manner whatsoever in connection with the offer or sale of the Shares, other
than by acknowledgement that it has agreed to serve as Escrow Agent for the
limited purposes herein set forth.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
"Company"
CNL HOSPITALITY PROPERTIES, INC.
By: __________________________________
JAMES M. SENEFF, JR.,
Chairman of the Board
"MANAGING DEALER"
CNL SECURITIES CORP.
Attest: _____________ By: ___________________________________
ROBERT A. BOURNE, President
"ESCROW AGENT"
SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.
Attest: _____________ By: ___________________________________
Name: ___________________________________
Title:___________________________________
Exhibit 10.3
Joint Venture Agreement
<PAGE>
JOINT VENTURE AGREEMENT
(For Joint Ventures With
Affiliated Programs)
THIS AGREEMENT made this______ day of___________, 19__, by and between CNL
________________, hereinafter sometimes referred to as "Co-Venturer", and CNL
HOSPITALITY PROPERTIES, INC., a Maryland corporation, hereinafter sometimes
referred to as "CNL"; both Co-Venturer and CNL, being hereinafter sometimes
referred to as "Partner", are undertaking this joint venture (the "Joint
Venture" or the "Venture") with reference to the following:
A. The Joint Venture will acquire that certain real property (the "Real
Property") located in ___________, _________________ County, _______________,
described on Exhibit "A" attached hereto and incorporated herein by reference.
The Real Property shall be acquired in accordance with the terms and conditions
of that certain Real Estate Sale and Leaseback Contract (the "Leaseback
Contract") attached hereto as Exhibit "B".
B. Co-Venturer and CNL believe that the Real Property can be profitably
owned, held, leased, used, sold and otherwise dealt with and that it would be to
the mutual advantage of the Partners to form the Joint Venture for such
purposes.
C. It is further intended by the Partners hereto that the Joint Venture
created by this Agreement shall constitute for federal income tax purposes a
Partnership (as such term is defined under Sub-Chapter K of the Internal Revenue
Code of 1986, as amended).
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements hereinafter contained, the Partners do hereby agree and
covenant with each other as follows:
ARTICLE I
BASIC STRUCTURE
1.1 Form. The Partners hereby agree to associate themselves together as a
Partnership and do hereby form a Partnership pursuant to the provisions of the
Revised Uniform Partnership Act of the State of Florida upon the terms and
conditions herein set forth.
1.2 Name. The business of the Joint Venture shall be conducted under the
name of ____________________.
1.3 Place of Business. The principal office and place of business of the
Venture shall be located at 400 East South Street, Orlando, Florida 32801.
<PAGE>
1.4 Term. The Venture shall commence on the execution of this Agreement
and shall continue for twenty (20) years and thereafter from year to year unless
either Partner shall elect to terminate the Venture by six (6) months prior
written notice to the other Partner, unless earlier terminated in the following
manner:
(a) By the completion of the Venture's purposes, or
(b) Pursuant to this Agreement, or
(c) By applicable law.
1.5 Purpose. The purpose for which the Venture is organized is to own the
Real Property and to lease the same to ____________________________ pursuant
to the Lease attached to the Leaseback Contract, or in the event of termination
thereof, to lease the Real Property to any other appropriate tenant and to
otherwise manage, improve, repair, rent, lease, assign, mortgage, hypothecate,
sell or otherwise deal with the Real Property, its appurtenances, improvements
and fixtures.
1.6 Investment Representations of Partners. Each Partner represents and
warrants that it is acquiring its interest in this Venture for its own account,
for investment and not with a view to the sale, disposition or distribution
thereof. The interests of the Partners represented by this Agreement have not
been registered or qualified under the Securities Act of 1933, as amended, and
may not be sold, assigned, pledged or transferred where permitted by this
Agreement, without an effective registration under said Act, or delivery to the
other Partner of an opinion of counsel acceptable to the other Partner and the
Joint Venture that an exemption from registration under said Act is available.
ARTICLE II
FINANCIAL ARRANGEMENTS
2.1 Capital Contributions. Each of the Partners has contributed capital
(the "Capital Contribution") to the Joint Venture as follows:
Co-Venturer _________________________
CNL ________________________________
2.2 Percentage Interests. Each Partner's undivided percentage interest in
the Venture (individually, "Percentage Interest" and jointly "Percentage
Interests") shall be equal to the ratio that its Capital Contribution bears to
the aggregate Capital Contributions of all Partners in the Joint Venture.
2.3 Capital Accounts. As used herein, the term "Capital Account" shall
mean the book account which shall be maintained and determined for each Partner
in a manner which complies with Treasury Regulation Section 1.704-1(b)(2)(iv),
as amended. Each Partner's Capital Account shall reflect, among other items, (i)
all contributions made by such Partner to the Joint Venture, (ii) all
<PAGE>
allocations of Joint Venture profits and losses to such Partner, and (iii) all
distributions made to such Partner. No Partner shall have the right to withdraw
capital from the Joint Venture without the prior written consent of the other
Partners.
2.4 Allocation of Profits, Losses and Distributions.
(a) Net Operating Profits and Losses. The net operating profits and
losses of the Joint Venture shall be determined as of the end of each fiscal
year and shall be allocated to Co-Venturer and CNL in accordance with their
respective Percentage Interests. The "net operating profits and losses" of the
Joint Venture to be allocated pursuant to this Article 2.4(a) for any fiscal
year or other period shall mean (i) the gross operating income of the Joint
Venture from all sources, excluding all gains and losses recognized by the Joint
Venture with respect to a sale, exchange or other disposition of all or a
substantial part of the Joint Venture's property, as calculated for federal
income tax purposes, plus (ii) any income of the Joint Venture that is exempt
from federal income tax and not otherwise taken into account in computing gross
income for federal income tax purposes, and reduced by (a) all items of expense
or deduction that are allowable as deductions to the Joint Venture for such
period for federal income tax purposes, including, without limitation,
depreciation and amortization, (b) any expenditures of the Joint Venture
described in Section 705(a)(2)(B) of the Internal Revenue Code of 1986, as
amended, or treated as expenditures described in such section pursuant to
Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into
account in computing taxable income, and (c) any income, gain or loss specially
allocated to any Partner under Articles 2.4(d) or (e) below.
(b) Non-operating Profits. Subject to Articles 2.4(d) and (e),
taxable gain recognized by the Joint Venture with respect to a sale, exchange or
other disposition of all or a substantial part of the Joint Venture's property
(as determined for federal income tax purposes in accordance with the Joint
Venture's accounting method and Section 703 of the Internal Revenue Code of
1986, as amended) shall be allocated as follows:
(i) First to the Partners having negative balances in their
Capital Accounts, in the proportion that the negative balance in each such
Partner's Capital Account bears to the aggregate negative balances in the
Capital Accounts of all such Partners, until the balances in their Capital
Accounts are increased to zero; and
(ii) The balance, if any, shall be allocated to Co-Venturer
and CNL in accordance with their respective Percentage Interests.
(c) Non-operating Losses. Subject to Articles 2.4(d) and (e),
taxable loss recognized by the Joint Venture with respect to a sale, exchange or
other disposition of all or a substantial part of the Joint Venture's property
(as determined for federal income tax purposes in accordance with the Joint
Venture's accounting method and Section 703 of the Internal Revenue Code of
1986, as amended) shall be allocated as follows:
<PAGE>
(i) First to the Partners with positive balances in their
Capital Accounts, in the proportion that the positive balance in
each such Partner's Capital Account bears to the aggregate positive
balances in the Capital Accounts of all such Partners, until the
balances in their Capital Accounts are reduced to zero; and
(ii) The balance, if any, shall be allocated to Co-Venturer
and CNL in accordance with their respective Percentage Interest.
(d) General Provisions. Whenever a proportionate part of the Joint
Venture profits, gains or losses is credited or charged to a Partner's Capital
Account, every item of income, gain, loss, deduction or credit entering into the
computation of such profit, gain or loss, as applicable to the period during
which such profit, gain or loss is realized, shall be considered credited or
charged, as the case may be, to such account in the same proportion. For
purposes of allocating gains or losses arising from a sale, exchange or other
disposition of all or a substantial part of the Joint Venture's property, the
Capital Accounts of the Partners shall be determined as if the Joint Venture's
taxable year had ended immediately prior to the sale or other disposition giving
rise to such gains or losses. Notwithstanding anything contained in this
Agreement to the contrary, income, gain, loss and deduction with respect to
property contributed to the Joint Venture by any partner shall be shared between
the Partners so as to take into account the variation between the basis of such
property and its fair market value at the time of contribution in accordance
with Section 704(c) of the Internal Revenue Code of 1986, as amended. As between
a Partner and its transferee, net operating profits and losses for any fiscal
year (or portion thereof, as the case may be), shall be apportioned between the
transferor and transferee in accordance with the ratio that the number of days
in the Joint Venture's fiscal year prior to the effective date of transfer bears
to the number of such days thereafter (including the effective date of
transfer).
(e) Depreciation Recapture. Any depreciation recapture under
Sections 1245 or 1250 of the Internal Revenue Code of 1986, as amended, shall be
allocated to the Partners in the proportions in which the original depreciation
deductions being recaptured were allocated to them.
(f) Distributions of Net Cash Flow. "Net Cash Flow" shall mean all
cash receipts of the Joint Venture (other than Capital Contributions and
proceeds from a sale, exchange or other disposition of all or a substantial part
of the Joint Venture's property in connection with, or which results in, the
liquidation of the Joint Venture pursuant to Article VI below), plus any amounts
which the Partners, in their sole discretion, agree shall be released from
reserves or otherwise made available for distribution, and less all expenses and
current obligations of the Joint Venture (including payments of principal and
interest on any loans, including loans from Partners) and amounts which the
Partners, in their sole discretion, agree shall be added to Joint Venture
reserves. Subject to Article 2.4(g) below, distributions of Net Cash Flow shall
be made from time to time in the discretion of the Partners, but at least
monthly, to CNL and Co-Venturer in accordance with their respective Percentage
Interests.
(g) Limitations on Cash Distributions. Any distributions of Net Cash
Flow shall be subject to the following limitations, restrictions and conditions:
<PAGE>
(i) At the time of any distribution the Joint Venture must
have available to it cash funds sufficient for such distribution
after taking into account the amounts which the Partners agree
should be set aside to provide a reasonable reserve for expenses of
conducting the business of the Joint Venture; and
(ii) No distribution shall be made by the Joint Venture if,
immediately after such distribution, the Joint Venture's assets do
not exceed all of its liabilities, exclusive of liabilities to the
Partners on account of their Capital Contributions.
ARTICLE III
MANAGEMENT AND DUTIES OF PARTNERS
3.1 Rights, Power and Restrictions of Payments. Except as expressly
provided to the contrary in this Article 3.1, no Partner, without the consent of
all the other Partners, shall:
(a) Do any act which would make it impossible to carry on the
ordinary business of the Venture;
(b) Confess judgment against the Venture;
(c) Possess Venture property, or assign its interest or rights in
specific Venture property, for other than a Venture purpose;
(d) Borrow any funds or incur any liability on behalf of the
Venture;
(e) Encumber any Venture property, including, without limitation,
the Real Property;
(f) Sell or lease any Venture property; and
(g) Lend any money on behalf of the Venture.
3.2 Day to Day Management. Because the Real Property will be net leased,
it is not anticipated that substantial management responsibilities on the part
of the Venture will exist. However, the Partners agree that CNL, through its
designee, CNL Hospitality Advisors, Inc., 400 East South Street, Orlando,
Florida 32801, shall receive the monthly rental payments from the tenant and
place such payments into a new bank account established in the name of the Joint
Venture. From such account, distributions shall be made pursuant to Article
2.4(f) hereof. No fees or other charges shall be made by CNL for these
administrative duties except actual out-of-pocket costs for establishing the
bank account and acquisition of checks therefor, service charges and other
charges of like nature.
In addition, CNL shall be responsible for maintaining landlord/tenant
relationships with tenant and for monitoring gross revenues of the tenant and
such other analysis as shall be necessary to determine whether additional rental
is due from tenant, and for performing or supervising all functions incident to
the day-to-day management of the Real Property.
<PAGE>
No charges shall be made by CNL for such services rendered to the Joint
Venture. However, the Joint Venture shall reimburse CNL for its actual
out-of-pocket costs incurred which relate to the management of the Real
Property, and such costs shall be a Venture expense.
3.3 Joint Venture Real Property. The Real Property of the Joint Venture
shall be held in the name of the Joint Venture for the sole exclusive benefit of
the Joint Venture. Any and all leases and amendments thereto, sales tax
application forms, tangible personal property tax returns, Joint Venture income
tax returns or other documents requiring the signature of the Joint Venture
shall be signed by CNL on behalf of the Joint Venture. Additionally, any deed or
other document required to be signed by the Joint Venture with respect to the
sale, lease or mortgaging of the property (only as permitted hereunder) may be
executed in the name of the Joint Venture by CNL, acting by itself and without
the joinder of Co-Venturer or, alternatively, by all Partners.
ARTICLE IV
ACCOUNTING; BANK ACCOUNTS
4.1 Books and Records. At all times during the term hereof, the Venture
shall maintain, at a place mutually agreed by the Partners, accurate books and
records of account in which shall be entered all matters relating to the
Venture, including all income, expenditures, assets and liabilities thereof.
Such books of account shall be maintained on the accrual basis (unless otherwise
agreed by the Partners) and shall be adequate to provide either Partner with all
financial information as may be needed by any Partner or any affiliate of such
Partner for the purpose of satisfying the financial reporting obligations of
such Partner or its respective affiliate or affiliates.
Each Partner shall be entitled to any additional information necessary for
the Partner to adjust his financial basis statement to a tax basis as the
Partner's individual needs may dictate.
Each Partner, its authorized representatives, and any supervisory or
regulatory authority (through its appropriate representatives) shall have the
right to inspect, examine and copy the books, records, files and other documents
of the Venture at all reasonable times at the expense of the party requiring
such information.
4.2 Fiscal Year. The fiscal year of the Venture shall end on December 31
of each year.
4.3 Bank Accounts. Funds of the Venture shall be deposited in an account
in the name of the Venture in a bank approved by the Partners. Subject to the
provisions of Article 3.2, withdrawals from such bank account shall be made upon
the signature of any of the persons designated by the Joint Venture upon the
opening of the account.
4.4 Tax Returns. Tax returns of the Venture shall be prepared by the
certified public accounting firm selected and approved by the Partners. Copies
of tax returns of the Venture shall be furnished for review and approval by each
of the Partners at least thirty (30) days prior to the statutory date for
filing, including extensions thereof, if any. Prompt notice shall be given to
all Partners upon receipt of advice that the Internal Revenue Service intends to
examine the Venture income tax return for any year.
<PAGE>
ARTICLE V
VOLUNTARY WITHDRAWAL, ASSIGNMENT OR SALE OF
PARTNERSHIP INTERESTS
5.1 Right to Withdraw. Except as otherwise provided in Articles 5.2 and
5.3 hereof, either Partner shall have the limited right to withdraw from the
Joint Venture and sell its interest in the Venture to the remaining Partner only
upon such terms and conditions as may be agreed upon in writing by the Partners.
5.2 Bona Fide Third Party Offer. In the event one Partner desires to
withdraw from the Venture but no agreement can be reached between the Partners
as to the terms and conditions of sale for such Partner's interest within ten
(10) days from such time as the Partner desiring to withdraw from the Venture
notifies in writing the remaining Partner of its desire to withdraw and sell its
interest in the Venture, then the Partner desiring to withdraw from the Venture
shall be entitled to solicit and obtain a bona fide offer from an unrelated
third party to purchase its entire interest in the Venture. In such event, the
following provisions shall apply:
(a) If the Partner desiring to withdraw has obtained a bona fide
offer to purchase its interest in the Venture from an unrelated third party, and
if it desires to accept such offer, then that Partner shall cause such offer to
be reduced to writing and delivered to the remaining Partner.
(b) The remaining Partner then, within sixty (60) days after
delivery of such bona fide offer to the remaining Partner, may elect to purchase
the Venture interest of the Partner desiring to withdraw from the Venture at the
price and on the terms set forth in such offer. In the event the remaining
Partner shall fail to timely exercise its option described in the immediately
preceding sentence, then the Partner desiring to dispose of its interest in the
Venture may transfer its interest to the person or persons who made the bona
fide third party offer, provided that such sale is made strictly in accordance
with the terms set forth in such offer and the person or persons or entity so
acquiring such interest shall hold such interest subject to all the terms and
conditions of this Agreement.
(c) In the event of a sale of a Partner's Venture interest to a
third party in accordance with this Article V, a duly executed and acknowledged
instrument of assignment shall be filed with the Joint Venture. Further, the
selling Partner and assignee shall execute and acknowledge such other instrument
or instruments as the other Partner shall deem reasonably necessary or desirable
to effectuate such sale and the admission of the assignee of the interest to the
Joint Venture, including the written acceptance and adoption by the assignee of
all of the terms and conditions of this Agreement as the same may have been
theretofore amended. Further, such assignee shall pay to the Joint Venture all
reasonable expenses incurred by the Venture and the other Partner in connection
with such assignment and substitution. Finally, in the event of such a sale and
substitution, the selling Partner shall pay to the Joint Venture any and all
sums owed by it to the Joint Venture.
(d) If for any reason the sale of a Partner's entire interest in the
Venture which is the subject of a bona fide third party offer is not concluded
by the Partner desiring to withdraw from the Venture and the third party on or
before the closing date which is set forth in the original bona fide third party
<PAGE>
offer, then the provisions contained in this Article V shall be reimposed in
their entirety, and such bona fide third party offer, as well as any other
offer(s) for such Partner's entire interest in the Venture, must again be
submitted to the remaining Partner pursuant to the terms hereof.
(e) For the purpose of this Article V, a bona fide third party offer
shall not include any offer which is assignable by the prospective purchaser.
5.3 Buy-Sell Agreement. In the event that one Partner desires to sell the
Real Property and the other Partner does not desire to sell the Real Property,
then in that event either Partner (sometimes hereinafter referred to as the
"Offering Partner") may deliver a written notice (the "Notification") to the
other Partner (sometimes hereinafter referred to as the "Non-Offering Partner").
The Notification shall state that the Offering Partner intends to purchase the
entire Joint Venture interest of the Non-Offering Partner, the purchase price
(which shall be stated in terms of a specific dollar amount per each one percent
(1%) in Percentage Interest) which the Offering Partner will pay for such Joint
Venture interest, the terms of payment, whether for cash or credit, and if on
credit, the term, dates of payment, interest rate and security or collateral
arrangements, as well as any and all other consideration being received or paid
in connection with the proposed transaction, and any and all other terms,
conditions, and details of such offer. The Notification shall also state that
the Non-Offering Partner shall have ninety (90) days from the date of delivery
of the Notification either to sell its entire Joint Venture interest to the
Offering Partner, or to purchase the entire Joint Venture interest of the
Offering Partner, with such purchase or sale to be consummated strictly upon the
terms and conditions, and for the price per Percentage Interest, set forth in
the Notification.
5.4 No Assignment, Pledge or Encumbrance. Except as otherwise provided in
Sections 5.1, 5.2 and 5.3, no Partner shall have the right to sell, assign,
pledge, encumber or otherwise hypothecate its interest in this Joint Venture
without the prior written consent of the remaining Partner. In the event any
person or entity shall obtain a lien, charging order or similar right as a
creditor against any Partner's Venture interest, the person or entity obtaining
such status shall be in the status of a prospective purchaser of such Partner's
interest but with no right to be admitted to the Venture as a joint venturer or
Partner. In the event the Partner against whom such lien, charging order or
similar right exists shall fail to discharge (by bond, full payment or
otherwise) such lien, charging order or similar right within sixty (60) days
subsequent to its effective date and such Partner's knowledge thereof, the
remaining Partner shall be entitled to purchase such other Partner's Venture
interest for a sum equal to the amount of the lien, charging order or similar
right. Payment of such sum to the creditor by the remaining Partner and
discharge of such lien, charging order or similar right shall simultaneously
cause a termination in full of the Venture interest of the Partner against whom
such lien, charging order or similar right as a creditor existed.
5.5 No Partition. Each of the Partners does hereby waive any and all
rights that it may have to maintain any action for partition with respect to any
Joint Venture property or to compel any sale thereof, it being understood that
this Article 5.5 shall not act to limit the right of any Partner to sell or
convey its interest in accordance with the terms and conditions of this
Agreement.
<PAGE>
ARTICLE VI
DISSOLUTION
6.1 Events. The Joint Venture shall be dissolved upon the occurrence of
any of the following events:
(a) The expiration of the term of the Joint Venture as set forth
herein.
(b) Upon mutual written agreement of the Partners.
(c) Except as otherwise provided in this Agreement, the adjudication
of bankruptcy, insolvency or cessation of the existence as a legal entity of any
of the Partners.
(d) Issuance of a final order by a court of competent jurisdiction
ordering the dissolution of the Joint Venture after time for all rights of
appeal have elapsed or have been finally concluded upholding the dissolution
order.
(e) Sale, exchange or other disposition of all, or any substantial
part, of the Joint Venture's property.
6.2 Liquidation. Upon the dissolution of the Joint Venture, the Partners
shall cause the Joint Venture's affairs to be wound up, its receivables
collected and its assets liquidated within a reasonable period of time, a final
accounting made and the books of the Joint Venture closed, with the proceeds,
after expenses of such liquidation, to be distributed as follows:
(a) First, to the satisfaction of all debts and obligations of the
Joint Venture, other than debts and obligations to Partners;
(b) Next, to the payment of amounts owed the Partners for loans;
(c) Next, to the setting up of any reserves which are reasonably
necessary to satisfy any contingent or unforeseen liabilities or obligations of
the Joint Venture; and
(d) After allocations of all profits, gains and losses (including
both net operating profits and losses and gains and losses arising from the
sale, exchange, or other disposition of all or any substantial part of the Joint
Venture's property) have been made pursuant to Section 2.4 hereof, any proceeds
then remaining shall be distributed to the Partners to the extent of, and in
proportion to, their respective positive Capital Account balances.
<PAGE>
ARTICLE VII
INDEMNIFICATION
Each Partner shall indemnify and hold harmless the other Partner against
any and all claims, demands, losses, damages, liabilities, lawsuits or other
proceedings, judgments or awards, costs and expenses (including but not limited
to reasonable attorneys' fees) arising directly or indirectly by reason of such
indemnifying Partner's breach of this Agreement or acting outside the scope of
its authority hereunder.
ARTICLE VIII
GENERAL PROVISIONS; MISCELLANEOUS
8.1 Separate Businesses. Partners may engage in any other business,
investment or profession, including the investment and the ownership, financing,
development, operation and management of real property, and neither the Joint
Venture nor any other Partner shall have any rights in and to any said business,
profession or investment or the income or the profits derived therefrom by
reason of this Agreement.
8.2 Scope of Authority. Neither of the Partners shall, without the
approval of the other Partner, take any action on behalf of or in the name of
the Venture, or enter into any commitment or obligation binding upon the
Venture, except for actions expressly provided for in this Agreement or actions
authorized by the other Partner in the manner set forth herein.
8.3 Arbitration. No civil action concerning any dispute arising under this
Agreement shall be instituted before any court and all such disputes shall be
submitted to final and binding arbitration under the auspices of the American
Arbitration Association. Such arbitration shall be conducted in accordance with
the rules of such association before a single arbitrator. The Partners agree
that the interests of the Joint Venture cannot be readily sold in the open
market, and for that reason, among others, the Partners will be irreparably
damaged in the event that this Agreement is not specifically enforced.
Therefore, in addition to any award of damages, any such award shall, if the
Partner entitled to the same demands it, grant specific performance of this
Agreement. All costs and expenses of the arbitration, including actual
attorney's fees, shall be allocated among the Partners according to the
arbitrator's discretion. The arbitrator's award resulting from such arbitration
may be confirmed and entered as a final judgment in any court of competent
jurisdiction and enforced accordingly. Further, the Partners hereto expressly
agree that proceeding to arbitration and obtaining an award thereunder shall be
a condition precedent to the bringing or maintaining of any action in any court
with respect to any dispute arising under this Agreement, except for the
institution of a civil action to maintain the status quo during the pendency of
any arbitration proceeding.
8.4 Venture Acts. In no event shall this Agreement grant unto any Partner
the authority to act on behalf of the other Partners with respect to matters not
directly related to the purpose of the Venture as set forth herein. This
Agreement shall not grant unto any Partner any interest, claim or liability
whatsoever with respect to any other assets or liabilities of the other
Partners.
<PAGE>
8.5 Representative of each Partner. CNL is a Florida limited partnership.
Co-Venturer is a Florida limited partnership. The general partner(s) of each
Partner shall designate to the other, in writing, a single individual or entity
to speak on its behalf with respect to all Joint Venture matters. In no event
shall any individual limited partner or general partner not so designated be
entitled to make any independent demands of the Joint Venture whatsoever.
8.6 Notices. All written notices or demands of any kind which any Partner
may be required or may desire to serve on the other in connection with this
Agreement may be served by personal service or by registered or certified mail
and shall be deposited in the United States Mail with postage thereon fully
prepaid, registered or certified, and addressed to the Partners so to be served
as follows:
If the Partner to be served is CNL, address CNL at:
CNL HOSPITALITY PROPERTIES, INC.
400 East South Street
Orlando, Florida 32801
Attention: James M. Seneff, Jr.
If the Partner to be served is Co-Venturer, address Co-Venturer at:
CNL ______________________
400 East South Street
Orlando, Florida 32801
Attention: James M. Seneff, Jr.
Service of any such notice or demand so made by mail shall be deemed
complete on the day of actual delivery as shown by the addressee's registry or
certification receipt or at the expiration of the third day after the date of
mailing, whichever is earlier in time. Either Partner hereto may from time to
time, by notice in writing served on the other as herein set forth, designate a
different mailing address or a different person to which all such notices or
demands are thereafter to be addressed.
8.7 Entire Agreement. This Agreement is the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior oral or written agreements between them with respect hereto. This
Agreement may not be altered or amended except by written agreement duly
executed by all Partners of the Joint Venture.
8.8 Successors and Assigns. The provisions of this Agreement shall,
subject to the terms and conditions hereof, be binding upon and inure to the
benefit of the successors and assigns of each of the Partners.
8.9 Governing Law. This Agreement and the Joint Venture shall be governed
by and construed in accordance with the laws of the State of Florida.
<PAGE>
8.10 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, and such counterparts shall together
constitute one and the same agreement, binding upon each of the Partners hereto,
notwithstanding each of the Partners are not signatory to the original or the
same counterpart.
8.11 Paragraph Titles. Titles of the paragraphs and sub-paragraphs are
placed herein for convenient reference only and shall not to any extent have the
effect of modifying, amending or changing the express terms and provisions of
this Agreement.
8.12 Severability. In the event any of the parts of this Agreement are
found to be void, the remaining provisions of this Agreement shall nevertheless
be binding with the same effect as though the void parts were deleted.
8.13 Effective Date. This Agreement shall be effective upon execution by
both of the Partners.
8.14 Waivers. No waiver of any provision of or obligation under this
Agreement shall be valid unless in writing and signed by the Partner to be
bound.
IN WITNESS WHEREOF, the Partners hereto have executed this Agreement as of
the day and year first above written.
Signed, Sealed and Delivered
in the presence of: "LANDLORD"
________________________, a Florida joint
venture and general partnership
BY: CNL HOSPITALITY PROPERTIES, INC., a
Maryland corporation, as general
partner
By:
Name: Robert A. Bourne, as President
Name:
BY: CNL _________________________, a
______________________, as general
partner
EXHIBIT 23.1
Consent of PricewaterhouseCoopers LLP,
Certified Public Accountants,
dated November 17, 1998
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 (File
No. 333-9943) of our report dated January 22, 1998 on our audit of the financial
statements of CNL American Realty Fund, Inc. We also consent to the reference to
our Firm under the caption "Experts".
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orlando, Florida
November 17, 1998
EXHIBIT 23.3
Consent of Arthur Andersen LLP,
Certified Public Accountants,
dated November 17, 1998
<PAGE>
CONSENT OF THE INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 27, 1998 with respect to the financial statements of Buckhead
Residence Associates, L.L.C. and our report dated February 27, 1998 with respect
to the financial statements of Gwinnett Residence Associates, L.L.C. included in
or made part of this Registration Statement (File No. 333-9943.)
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
November 17, 1998
