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CNL HOSPITALITY PROPERTIES, INC.
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Supplement No. 1, dated December 18, 1998
to Prospectus, dated October 6, 1998
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This Supplement is part of, and should be read in conjunction with, the
Prospectus dated October 6, 1998. This Supplement replaces all prior Supplements
to the Prospectus. Capitalized terms used in this Supplement have the same
meaning as in the Prospectus unless otherwise stated herein.
Information as to proposed properties for which the Company has
received initial commitments and as to the number and types of Properties
acquired by the Company is presented as of December 2, 1998, and all references
to commitments or Property acquisitions should be read in that context. Proposed
properties for which the Company receives initial commitments, as well as
property acquisitions that occur after December 2, 1998, will be reported in a
subsequent Supplement.
SUMMARY
RECENT DEVELOPMENTS
As described in "The Offering" section of the Prospectus, the Board of
Directors may determine to engage in future offerings of Common Stock. In
connection therewith, the Board of Directors has approved a secondary offering
by the Company (the "Secondary Offering") of 25,000,000 Shares, with an
additional 2,500,000 Shares being reserved for the Reinvestment Plan in
connection with the Secondary Offering. The Secondary Offering is currently
anticipated to be at the same price and on substantially the same terms as this
offering. The Company will not commence the Secondary Offering until after the
completion of this offering.
While the Company may currently invest in both restaurant and hotel
Properties, management believes that over time the Company will focus its
Property investments exclusively on hotel Properties. Therefore, the Company
currently anticipates that any net offering proceeds received from the Secondary
Offering will be invested in hotel Properties or, to a lesser extent, to make
Mortgage Loans to hotel operators. The Company believes that the net proceeds
received from the Secondary Offering and any additional offerings will enable
the Company to continue to grow and take advantage of acquisition opportunities
until such time, if any, that the Company Lists on a national exchange. Under
the Company's Articles of Incorporation, if the Company does not List by
December 31, 2007, it will commence an orderly liquidation of its Assets, and
the distribution of the proceeds therefrom to its stockholders.
THE OFFERING
As of December 2, 1998, the Company had received aggregate subscription
proceeds of $34,324,582 (3,432,458 Shares), including $20,615 (2,062 Shares)
issued pursuant to the Reinvestment Plan. As of December 2, 1998, approximately
$25,000,000 of such proceeds and $9,600,000 of advances from the Line of Credit
had been used to invest in two hotel Properties, to pay deposits relating to the
future acquisition of additional hotel Properties, and to pay approximately
$1,919,000 in Acquisition Fees and certain Acquisition Expenses, leaving
approximately $5,400,000 in Net Offering Proceeds available for investment in
additional Properties and Mortgage Loans.
The Company has elected to extend the offering of Shares until a date
no later than July 9, 1999.
MANAGEMENT COMPENSATION
For information concerning compensation and fees paid to the Advisor
and its Affiliates since the date of inception of the Company, see "Certain
Transactions."
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.
CNL Investment Company (4)
Restaurant:
CNL Fund Advisors, Inc.
CNL Restaurant Services, Inc.
Corporate Services:
CNL Corporate Services, Inc. (3)
Hospitality:
CNL Hospitality Advisors, Inc.
(formerly CNL Real Estate Advisors,
Inc.) (5)
CNL Hotel Development Company
Health Care:
CNL Health Care Advisors, Inc.
CNL Health Care Development, Inc.
Financial Services:
CNL Financial Services, Inc.
CNL Advisory Services, Inc.
Corporate Properties:
CNL Corporate Properties, Inc.
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(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.
<PAGE>
The Advisor and certain other Affiliates of the Company are affiliated
with CNL American Properties Fund, Inc., a public program which invests in
restaurant properties. As of December 2, 1998, CNL American Properties Fund,
Inc. had approximately $166,900,000 available for investment.
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 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.
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 lessor, entered into two
separate, long-term lease agreements. The lessee of the Buckhead (Lenox Park)
and the Gwinnett Place Properties is the same unaffiliated lessee. The leases on
both Properties are cross-defaulted. The general terms of the lease agreements
are described in "Business -- Description of Property Leases." The principal
features of the leases are as follows:
0 The initial term of each lease expires in approximately 19 years, on
August 31, 2017.
0 At the end of the initial lease term, the tenant will have three
consecutive renewal options of five years.
0 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.
0 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.
0 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.
0 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.
0 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.
0 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.
0 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 $11,100,000, respectively.
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:
<PAGE>
<TABLE>
<CAPTION>
Buckhead (Lenox Park) Property Gwinnett Place Property
------------------------------ -----------------------
Average Average Revenue Average Average Revenue
Occupancy Daily Room per Occupancy Daily Room per
Year Rate Rate Available Room Rate Rate Available Room
------ ------------ ------------- -------------- ------------ ------------- --------------
<S> <C>
*1997 42.93% $91.15 $39.13 39.08% $85.97 $33.60
**1998 76.41% 98.29 75.10 74.33% 87.46 65.01
</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 1.23 times base rent on a year-to-date basis.
The Residence Inn chain is a brand of Marriott International, Inc.
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 lessee 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 December 2, 1998, the Company had initial commitments to acquire
three hotel properties upon completion of construction. The Properties are
located in Little Lake Bryan, a 300-acre community planned by the Little Lake
Bryan Company, a subsidiary of the Walt Disney Company. Included in the proposed
acquisition are a 300-room Courtyard by Marriott, a 400-room Fairfield Inn and a
400-room SpringHill Suites (formerly Fairfield Suites). The hotels will be
developed by Marriott International, Inc. with completion scheduled for the year
2000. The 23-acre site is located along Interstate 4, across from Lake Buena
Vista and Downtown Disney. The community is within ten miles of Universal
Studios Florida, Walt Disney World, Sea World and the Orange County Convention
Center.
As shown below, the lodging market in the Lake Buena Vista area
averaged 80% occupancy and an average daily room rate of $116 for year-end 1997.
The Lake Buena Vista lodging market also achieved a 10% growth in room demand on
a compounded annual basis over the last ten years. The following table reflects
the hotel occupancy rates and daily room rates for hotels in the Orlando area:
<PAGE>
<TABLE>
<CAPTION>
ORLANDO AREA HOTEL OCCUPANCY RATES
AND AVERAGE DAILY ROOM RATES
ORLANDO LAKE BUENA VISTA *
AVERAGE DAILY AVERAGE DAILY
YEAR OCCUPANCY RATE ROOM RATE OCCUPANCY RATE ROOM RATE
---- -------------- --------- -------------- ---------
<S> <C>
1993 72.2% $64.61 74.7% $103.09
1994 71.3% 65.85 76.3% 100.26
1995 74.6% 68.55 80.3% 96.99
1996 80.1% 73.04 82.5% 104.65
1997 78.7% 80.99 80.2% 116.18
</TABLE>
* Little Lake Bryan is part of the Lake Buena Vista market area.
Source: Smith Travel Research
The acquisition of each of these properties is subject to the
fulfillment of certain conditions. 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."
Marriott Brand. According to the Marriott International, Inc. 1997
Annual Report, Courtyard by Marriott is a leading moderate-price lodging chain
featuring a residential atmosphere. There are 349 Courtyard hotels across the
United States, Canada and the United Kingdom. Fairfield Inn/SpringHill Suites is
an economy lodging brand appealing to both business and leisure travelers. There
are 344 Fairfield Inn and SpringHill Suites in 47 states.
The following chart provides additional information on systemwide
occupancy levels for Marriott lodging brand:
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 & SpringHill 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
<PAGE>
Orlando. According to the Orlando/Orange County Convention & Visitors
Bureau and their 1998 Research Report, Central Florida is one of the top five
travel destinations in the United States and leisure travel to Orlando continues
to grow. The number of domestic non-Florida leisure travelers visiting Orlando
in 1997 increased 16.1% over 1996. In 1997, the Magic Kingdom, EPCOT and
Disney-MGM Studios welcomed an estimated 39.3 million visitors, Universal
Studios Florida drew an estimated 8.9 million visitors and Sea World had an
estimated 4.9 million visitors. Area attractions continue to grow with new
developments.
Visitor arrivals at Orlando International Airport increased from
approximately 21,500,000 passengers in 1993, to 27,300,000 passengers in 1997.
The number of domestic non-Florida business travelers during 1997 increased
22.1% over 1996. In addition, more than six million international visitors
arrived in Florida in 1997, for a national market share of 25.1%. The Orlando
area claimed 11.5% of the national market share. On average, international
visitors spent $800 per person/per trip, excluding airfare, while visiting
Orlando in 1997.
The Orange County Convention Center recently completed a new phase of
development. With 1.1 million square feet of exhibition space, an independent
study ranked the center as number two in the nation for continuous exhibition
space. The following table reflects the number of events which took place at the
Orange County Convention Center between 1994 and 1997 and attendance levels for
those events:
ORANGE COUNTY CONVENTION
CENTER ATTENDANCE
Year # of Events Attendance
---- ----------- ----------
1994 188 705,824
1995 168 700,429
1996 240 1,017,679
1997 260 930,219
Source: Orlando/Orange County CVB
Leases. Set forth below are summarized terms expected to apply to the
leases for each of the properties. More detailed information relating to a
property and its related lease will be provided at such time, if any, as the
property is acquired.
<PAGE>
-24-
<TABLE>
<CAPTION>
Estimated Purchase Lease Term and Minimum Annual
Property Price Renewal Options Rent Percentage Rent
- -------- ------------------ --------------- --------------------- ---------------
<S> <C>
Courtyard by Marriott (2) 15 years; two ten-year 10% of the Company's total for each lease year
Orlando, FL (1) renewal options cost to purchase the property after the second lease
(the "Courtyard Little Lake 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 total for each lease year
Orlando, FL (1) renewal options cost to purchase the property after the second lease
(the "Fairfield Inn Little year, 7% of revenues in
Lake Bryan Property") excess of revenues for
Hotel to be constructed the second lease year
SpringHill Suites by Marriott (2) 15 years; two ten-year 10% of the Company's total for each lease year
Orlando, FL (1) renewal options cost to purchase the property after the second lease
(the "SpringHill Suites year, 7% of revenues in
Little 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 SpringHill Suites Little Lake Bryan
Properties are expected to be with the same unaffiliated lessee.
(2) The anticipated aggregate purchase price for the Courtyard Little Lake
Bryan, Fairfield Inn Little Lake Bryan and SpringHill Suites Little
Lake Bryan Properties is between $90 million and $100 million.
<PAGE>
BORROWING
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 .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 December 2, 1998, the
Company had 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 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."
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 Exhibit B.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 September 30, 1997 December 31
(Unaudited) (1) (Unaudited) (1) 1997 (1) 1996 (2)
----------------------- ------------------ ------------- --------
<S> <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 -
September 30, 1998 September 30, 1997 December 31, December 31,
(Unaudited) (Unaudited) 1997 1996
-------------------- ------------------ ------------ ------------
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.
Rental income commenced on August 1, 1998.
(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 Exhibit B -- Financial Information.
(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.
LIQUIDITY AND CAPITAL RESOURCES
On July 9, 1997, the Company commenced its 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 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 offering.
The Company has elected to extend the offering of Shares until a date no later
than July 9, 1999.
As of September 30, 1998, net proceeds to the Company from its offering
of Shares , 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 had
been used to invest in two hotel Properties, to pay deposits relating to the
future acquisition of additional hotel Properties and to pay Acquisition Fees
and Acquisition Expenses.
The Company expects to use Net Offering Proceeds from this 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 $45,000,000, 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 $45,000,000 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 .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. As of December
2, 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. As of December 2, 1998, 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 December 2, 1998, the Company had received subscription proceeds
of $34,324,582 (3,432,458 Shares) from its offering of Shares. As of December 2,
1998, net proceeds to the Company from its offering of Shares 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 $30,000,000. In
addition, the Company received advances of $9,600,000 under its Line of Credit.
The Company has used total net proceeds from the 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 $1,919,000
in Acquisition Fees and Acquisition Expenses, leaving approximately $5,400,000
in Net Offering Proceeds available for investment in additional Properties and
Mortgage Loans.
As of December 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 . 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. As of December 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 December 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
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.
<PAGE>
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 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 rental income and interest 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, November 1,
and December 1, 1998, the Company declared Distributions to its stockholders
totalling $167,846, $183,405 and $198,155, 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 December 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 December 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.
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
<PAGE>
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 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.
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 ("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 the Advisory 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 its 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 its 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
its 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 its Affiliates to become Year 2000
compliant will be incurred by the Advisor and its 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, the 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 its 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 its 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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are listed below:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C>
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 66 Independent Director
Richard C. Huseman 59 Independent Director
Charles A. Muller 40 Chief Operating Officer and Executive Vice President
C. Brian Strickland 36 Vice President of Finance and Administration
Jeanne A. Wall 40 Executive Vice President
Lynn E. Rose 50 Secretary and Treasurer
</TABLE>
Charles A. Muller. Executive Vice President and Chief Operating
Officer. Mr. Muller joined CNL Hospitality Advisors, Inc. 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.
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
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.
For information regarding other officers and directors see the section
of the Prospectus entitled "Management."
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.
<TABLE>
<CAPTION>
The directors and officers of the Advisor are as follows:
<S> <C>
James M. Seneff, Jr....................Chairman of the Board, Chief Executive Officer, and Director
Robert A. Bourne.......................President and Director
Charles A. Muller......................Chief Operating Officer and Executive Vice President
C. Brian Strickland....................Vice President of Finance and Administration
Jeanne A. Wall.........................Executive Vice President
Lynn E. Rose...........................Secretary, Treasurer and Director
</TABLE>
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 December 2, 1998, and the
year ended December 31, 1997, the Company incurred $1,724,939 and $849,405,
respectively, of such fees, 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 December 2, 1998,
and the year ended December 31, 1997, the Company incurred $114,996 and $56,627,
respectively, of such fees, 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
December 2, 1998, and the year ended December 31, 1997, the Company incurred
$1,034,963 and $509,643, respectively, of such fees.
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
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. 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 similar to those
that the Company intends to acquire and have investment objectives similar to
those of the Company. 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 similar to those that
the Company may invest in; 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 September 30, 1998, the 18 partnerships and the unlisted
REITs had raised a total of $1,236,110,303 from a total of 76,544 investors, and
had invested in 1,085 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.
<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>
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)
<PAGE>
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)
- ------ ---------- ----------- ---- --------------
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, 1996 3,000,000 December 1996
Fund XVII, Ltd. (3,000,000 units)
CNL Income Fund $35,000,000 February 6, 1998 3,500,000 December 1997
XVIII, Ltd. (3,500,000 units)
CNL American $747,464,413 (3) (3) (3)
Properties Fund, (74,746,441 shares)
Inc.
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 September 30, 1998, CNL American Properties Fund, Inc. had received
subscriptions totalling $218,522,374 (21,852,237 shares), including
$3,107,848 (310,784 shares) through the reinvestment plan, from the 1998
Offering. As of such date, CNL American Properties Fund, Inc. had
purchased 368 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 September 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 all of these 69
nonpublic limited partnerships had terminated as of September 30, 1998. These 69
partnerships raised a total of $185,927,353 from approximately 4,519 investors,
and purchased, directly or through participation in a joint venture or limited
partnership, interests in a total of 216 projects as of September 30, 1998.
These 216 projects consist of 19 apartment projects (comprising 10% of the total
amount raised by all 69 partnerships), 13 office buildings (comprising 5% of the
total amount raised by all 69 partnerships), 169 fast-food , family-style, or
casual dining restaurant property and business investments (comprising 69% of
the total amount raised by all 69 partnerships), one condominium development
(comprising 0.5% of the total amount raised by all 69
<PAGE>
partnerships), four hotels/motels (comprising 5% of the total amount raised by
all 69 partnerships), eight commercial/retail properties (comprising 10% of the
total amount raised by all 69 partnerships), and two tracts of undeveloped land
(comprising 0.5% of the total amount raised by all 69 partnerships).
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 September 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 , 39 invested in restaurant properties leased on a "triple-net" basis,
including eight which also invested in franchised restaurant businesses
(accounting for approximately 93% of the total amount raised by all 90 real
estate limited partnerships).
The following table sets forth summary information, as of September 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>
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 46 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 56 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
<PAGE>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
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 41 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 50 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 56 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
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
<PAGE>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
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 24 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 368 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 September 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 Exhibit C. Information about the previous public
partnerships, the offerings of which became fully subscribed between July 1993
and June 1998, is included therein. Potential stockholders are encouraged to
examine the Prior Performance Tables attached as Exhibit 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.
<PAGE>
DISTRIBUTION POLICY
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.
Total Distributions
Month Distributions Per Share
- ----- ------------- ---------
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
In addition, in October, November and December 1998, the Company
declared Distributions totalling $167,846, $183,405 and $198,155, respectively
(each representing $0.0583 per Share), payable in December 1998. 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
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.
DEFINITIONS
"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.
<PAGE>
"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
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.
"Reinvestment Agent" or "Agent" means the independent agent, which
currently is MMS Securities, Inc., for Participants in the Reinvestment Plan.
EXHIBIT A
FORM OF
REINVESTMENT PLAN
----------------------------------------------
THIS EXHIBIT A UPDATES AND REPLACES EXHIBIT
A TO THE ATTACHED PROSPECTUS, DATED OCTOBER
6, 1998.
----------------------------------------------
<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, or $10.00 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.
(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 Reinvestment 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.
(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 such written election to participate in the
Reinvestment Plan and to all fiscal quarters or months 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.
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
<PAGE>
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.
(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 change in his financial
condition or if any representation under the Subscription Agreement becomes
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.
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.
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.
APPENDIX B
FINANCIAL INFORMATION
-----------------------------------------------
The updated pro forma financial statements
and the unaudited financial statements of
cnl Hospitality Properties, Inc. con-tained
in this addendum should be read in
conjunction with Exhibit B to the attached
prospectus, dated October 6, 1998.
-----------------------------------------------
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 Condensed Consolidated Financial Statements (unaudited):
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
quarters and nine months ended September 30, 1998 and 1997 B-12
B-17
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) the receipt of $5,865,862 in
gross offering proceeds from the sale of 586,586 additional shares for the
period October 1, 1998 through December 2, 1998, and (iii) the application of
such funds to purchase two properties, and to pay offering expenses, acquisition
fees and miscellaneous acquisition expenses, all as reflected in the proforma
adjustments described in the related notes. The Pro Forma Consolidated Balance
Sheet as of September 30, 1998, includes the transactions described in (ii) and
(iii) above, as if they had occurred on September 30, 1998.
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.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Pro Forma
ASSETS Historical Adjustments Pro Forma
------------- -------------- --------------
<S> <C>
Land, building and equipment on operating leases,
less accumulated depreciation of $153,666 $28,598,883 $ - $28,598,883
Cash and cash equivalents 2,012,110 4,412,512 (a) 6,424,622
Certificate 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 580,606 263,964 (a) 844,570
------------- ------------- --------------
$36,387,230 $4,676,476 $41,063,706
============== ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $9,600,000 $ - $9,600,000
Accounts payable and accrued expenses 28,513 (15,000 ) (a) 13,513
Due to related parties 705,117 (705,117 ) (a) -
Security deposits 1,417,500 - 1,417,500
Other payables 68,445 - 68,445
-------------- ------------- --------------
Total liabilities 11,819,575 (720,117 ) 11,099,458
-------------- ------------- --------------
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; issued 28,659 5,866 (a) 34,525
and outstanding, as adjusted, 3,452,458 shares
Capital in excess of par value 24,581,209 5,390,727 (a) 29,971,936
Accumulated distributions in excess of net earnings (42,213 ) - (42,213 )
-------------- ------------- --------------
Total stockholders equity 24,567,655 5,396,593 29,964,248
------------- ------------- --------------
$36,387,230 $4,676,476 $41,063,706
============== ============= ==============
</TABLE>
See accompanying notes to unaudited pro forma
consolidated financial statements.
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>
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 (462,056 )(3) 36,185
------------- ---------------- ----------------
1,026,740 1,384,676 2,411,416
------------- ---------------- ----------------
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 (6) -
Depreciation and amortization 156,804 545,376 (7) 702,180
------------- ---------------- ----------------
442,898 1,174,935 1,617,833
------------- ---------------- ----------------
Net Earnings $ 583,842 $ 209,741 $ 793,583
============= ================ ================
Earnings Per Share of Common
Stock (Basic and Diluted) (8) $ 0.28 $ 0.34
============= ================
Weighted Average Number of
Shares of Common Stock
Outstanding (8) 2,082,845 2,352,223
============= ================
</TABLE>
See accompanying notes to unaudited pro forma
consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
------------ -------------- --------------
<S> <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:
Interest expense - 157,667 (4) 157,667
General operating and
administrative 22,386 - 22,386
Asset management fees to
related party - 27,245 (5) 27,245
Depreciation and amortization 833 194,777 (7) 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) (8) $ 0.03 $ 0.12
============= ================
Weighted Average Number of
Shares of Common Stock
Outstanding (8) 686,063 2,226,573
============= ================
</TABLE>
See accompanying notes to unaudited pro forma
consolidated financial statements
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 Balance Sheet:
(a) Represents gross proceeds of $5,865,862 from the sale of 586,586 shares
during the period October 1, 1998 through December 2, 1998 used (i) to
pay acquisition fees and costs of $841,376 ($577,412 of which was
accrued as due to related parties at September 30, 1998), and to pay
selling commissions and offering expenses of $611,974 which have been
netted against stockholders' equity (a total of $142,705 of which was
accrued as of September 30, 1998), leaving $4,412,512 in cash and cash
equivalents for future investment.
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.
<TABLE>
<CAPTION>
Date Pro Forma
Date Placed Property Became
in Service Operational as
By the Company Rental Property
-------------- ---------------
<S> <C>
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
</TABLE>
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.
(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.
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:
(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 and $1,000,000 on September 10, 1998.
(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) 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, CNL Hospitality Advisors,
Inc. (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. However, as a
result of the increase in pro forma net income for the nine months
ended September 30, 1998, the Company's operating expenses no longer
exceeded the Expense Cap. Therefore, this reimbursement was reversed
for pro forma purposes.
(7) 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 $48,000 (.5% on the $9,600,000 from borrowings on
the line of credit) and $20,762 of other miscellaneous closing costs,
amortized under the straight-line method over a period of five years.
(8) 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 periods were 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.
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>
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 (42,213 ) (6,924 )
earnings
------------- ------------
Total stockholders equity 24,567,655 9,233,917
------------- ------------
$36,387,230 $9,443,476
============= ============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
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>
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.
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>
Accumulated
Common stock distributions
------------------------ Capital in in excess
Number Par excess of of net
of Shares value par value earnings Total
----------- --------- -------------- -------------- -------------
<S> <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.
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>
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.
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>
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.
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.
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.
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 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.
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:
September 30, December 31,
1998 1997
---------------- --------------
Land $2,926,976 $ -
Buildings 23,476,442 -
Equipment 2,349,131 -
----------------- ---------------
28,752,549 -
Less accumulated depreciation (153,666 ) -
================= ===============
$28,598,883 $ -
================= ===============
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:
September 30, December 31,
1998 1997
---------------- ---------------
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
=============== ==============
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
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 - Continued:
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.
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.
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:
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.
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.
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:
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:
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
============== ==============
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.
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
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.
