As filed with the Securities and Exchange Commission on May 28, 1999
Registration No. 333-67787
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
CNL HOSPITALITY PROPERTIES, INC.
(Exact Name of Registrant as Specified in Charter)
400 East South Street
Orlando, Florida 32801
Telephone: (407) 650-1000
(Address of principal executive offices)
James M. Seneff, Jr.
Chief Executive Officer
400 East South Street
Orlando, Florida 32801
Telephone: (407) 650-1000
(Name, Address and Telephone
Number of Agent for Service)
COPIES TO:
THOMAS H. McCORMICK, ESQUIRE
PATRICK T. CONNORS, ESQUIRE
Shaw Pittman
2300 N Street, N.W.
Washington, D.C. 20037
Approximate date of commencement of proposed sale to
the public: As soon as practicable after the
registration statement becomes effective.
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- ------------------------------------- --------------- ------------------------ ------------------------- ------------------
Title of each class of securities to Amount to be Proposed maximum Proposed maximum Amount of
be registered registered offering price per aggregate offering price registration fee
Share
- ------------------------------------- --------------- ------------------------ ------------------------- ------------------
Common Stock, $0.01 par value 25,000,000 $10.00 $250,000,000 $69,500
Common Stock, $0.01 par value (1) 2,500,000 10.00 25,000,000 6,950
Common Stock, $0.01 par value (2) 1,000,000 12.00 12,000,000 3,336
Soliciting Dealer Warrants (3) 1,000,000 0.0008 800 0
- ------------------------------------- --------------- ------------------------ ------------------------- ------------------
(1) Represents Shares issuable pursuant to the Company's Reinvestment Plan.
(2) Represents Shares which are issuable upon exercise of warrants issuable to
CNL Securities Corp. or its assignees pursuant to the Warrant Purchase
Agreement dated ______________, 1999.
(3) Represents warrants issuable to the Managing Dealer to purchase 1,000,000
Shares pursuant to the Warrant Purchase Agreement dated ____________, 1999.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Prospectus
CNL HOSPITALITY PROPERTIES, INC.
27,500,000 Shares of Common Stock
Minimum Purchase -- 250 Shares ($2,500)
100 Shares ($1,000) for IRAs and Keogh and Pension Plans
Minimum Purchase is higher in Nebraska, New York and North Carolina
Of the 27,500,000 shares of common stock that we have registered, we
are offering 25,000,000 shares to investors who meet our suitability standards
and 2,500,000 shares only to participants in our reinvestment plan.
An investment in our shares involves significant risks. See "Risk
Factors" beginning on page 11 for a discussion of material risks that you should
consider before you invest in the common stock being sold with this Prospectus,
including:
o We currently own six properties and have commitments to acquire seven
additional properties, so you will not have the opportunity to evaluate all
the properties that will be in our portfolio.
o There is currently no public trading market for the shares, and there is no
assurance that one will develop. Therefore, you may not be able to sell
your shares at a price equal to or greater than the offering price.
o We rely on CNL Hospitality Advisors, Inc. with respect to all investment
decisions. Not all of the officers and Directors of the Advisor have
extensive experience, and our affiliates have limited experience, with
acquiring and leasing hotels, which could adversely affect the Company's
business.
o Some of the officers of the Advisor and its affiliates are or will be
engaged in other activities that will result in potential conflicts of
interest with the services that the Advisor and affiliates will provide to
the Company.
o If the shares are not listed on a national securities exchange or
over-the-counter market by December 31, 2007, we will sell our assets and
distribute the proceeds.
Per Share Total
--------- -----
Public Offering Price............................. $ 10.00 $275,000,000
Selling Commissions $ 0.75 $ 20,625,000
Proceeds to the Company........................... $ 9.25 $254,375,000
o The managing dealer, CNL Securities Corp., is our affiliate. The
managing dealer is not required to sell any specific number or dollar
amount of shares but will use its best efforts to sell the shares.
o This offering will end no later than , 2000 unless we elect to extend it to
a date no later than , 2001 in states that permit us to make this
extension.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. In addition, the Attorney General of
the State of New York has not passed on or endorsed the merits of this offering.
Any representation to the contrary is a criminal offense.
No one is authorized to make any statements about the offering
different from those that appear in this Prospectus. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted. We will only
accept subscriptions from people who meet the suitability standards described in
this Prospectus. You should also be aware that the description of the Company
contained in this Prospectus was accurate on May 13, 1999, but may no longer be
accurate. We will amend or supplement this Prospectus if there is a material
change in the affairs of the Company.
It is prohibited for anyone to make forecasts or predictions in
connection with this offering concerning the future performance of an investment
in the common stock.
CNL SECURITIES CORP.
____________, 1999
<PAGE>
TABLE OF CONTENTS
TABLE OF CONTENTS............................................................................ii
QUESTIONS AND ANSWERS ABOUT CNL HOSPITALITY
PROPERTIES, INC.'S PUBLIC OFFERING........................................................1
PROSPECTUS SUMMARY...........................................................................5
CNL Hospitality Properties, Inc..............................................................5
Our Business..........................................................................5
Our REIT Status.......................................................................5
Our Management and Conflicts of Interest..............................................5
Risk Factors..........................................................................6
Our Affiliates........................................................................7
Our Investment Objectives.............................................................7
Management Compensation...............................................................8
The Offering..........................................................................10
RISK FACTORS.................................................................................11
Offering-Related Risks................................................................11
An Unspecified Property Offering...............................................11
Potential Investors Cannot Evaluate Properties Not Yet
Acquired or Identified for Acquisition.................................11
No Assurance of Obtaining Suitable Investments...........................11
No Independent Review of the Company or the
Prospectus by Managing Dealer..........................................11
Possible Delays in Investment..................................................11
No Current Public Market for Shares Which Could Make Sale of
Shares Difficult.............................................................12
Company-Related Risks.................................................................12
Limited Operating History......................................................12
Limited Experience of Management...............................................12
Company is Dependent on Advisor................................................12
Conflicts of Interest..........................................................12
Selection of Properties Acquired.........................................12
Competing Demands on Officers and Directors..............................12
Timing of Sales and Acquisitions May Favor the Advisor...................12
Property Development by Affiliates.......................................13
We May Invest With Affiliates of the Advisor.............................13
No Separate Counsel for the Company, Affiliates and Investors............13
Company May Not Have Sufficient Working Capital................................13
Real Estate and Other Investment Risks..............................................13
Possible Lack of Diversification Increases Risk of Investment..................13
Lack of Control Over Market and Business Conditions............................13
Impact of Adverse Trends in the Hotel Industry.................................14
Company Will Not Control Property Management...................................14
Company May Not Control Joint Ventures.........................................14
Difficulty in Exiting a Joint Venture After an Impasse.........................14
Lack of Control Over Properties Under Construction.............................14
Ground Lease Property Risks....................................................15
We Do Not Control Third Party Franchise Agreements.............................15
Multiple Property Leases or Mortgage Loans with Individual Tenants or
Borrowers Increase Risks.....................................................15
Re-leasing of Properties May Be Difficult......................................15
Inability to Control the Sale of Certain Properties............................15
Limitations on the Ability of the Company to Liquidate.........................15
Seasonality of Hotel Industry..................................................16
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Risks of Mortgage Lending.....................................................16
Real Estate Market Conditions............................................16
Investment Subject to Interest Rate Fluctuations.........................16
Delays in Liquidating Defaulted Mortgage Loans Could Reduce Our
Investment Returns.....................................................16
Returns May Be Limited By Regulations....................................16
Risks of Secured Equipment Leasing.............................................16
Collateral May Be Inadequate to Secure Leases............................16
Returns May be Limited By Regulations....................................16
Possible Environmental Liabilities.............................................16
Financing Risks.......................................................................17
Uncertainty of Long-Term Financing.............................................17
Anticipated Borrowing has Risks................................................17
We Can Borrow Money to Make Distributions......................................17
Miscellaneous Risks...................................................................17
Competition....................................................................17
Inflation Could Adversely Affect Investment Returns............................18
Lack of Adequate Insurance.....................................................18
Possible Effect of ERISA.......................................................18
Effects of Governing Documents and Maryland Law on
Potential Takeovers..........................................................18
Ownership Limitations Relating to REIT Status..................................18
Majority Stockholder Vote May Discourage Changes of Control....................18
Potential for Dilution.........................................................18
Board of Directors Can Take Many Actions Without Stockholder
Approval.....................................................................19
Reliance on Advisor and Board of Directors; No Management
Rights for Stockholders......................................................19
Limited Liability of Officers and Directors....................................19
Tax Risks.............................................................................19
Failure to Qualify as a REIT for Tax Purposes..................................19
Risks Relating to Leases of Properties.........................................20
Risks Associated with Loans Secured by Personal Property.......................20
Risks Associated with Distribution Requirements................................20
Limitations on Share Ownership.................................................20
Other Tax Liabilities..........................................................20
Changes in Tax Laws............................................................20
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE...................................................21
Suitability Standards.................................................................21
How to Subscribe......................................................................22
ESTIMATED USE OF PROCEEDS....................................................................23
MANAGEMENT COMPENSATION......................................................................24
CONFLICTS OF INTEREST........................................................................30
Prior and Future Programs.............................................................30
Acquisition of Properties.............................................................31
Sales of Properties...................................................................32
Joint Investment With An Affiliated Program...........................................32
Competition for Management Time.......................................................32
Compensation of the Advisor...........................................................32
Relationship with Managing Dealer.....................................................32
Legal Representation .................................................................32
Certain Conflict Resolution Procedures................................................33
SUMMARY OF REINVESTMENT PLAN.................................................................34
General...............................................................................34
Investment of Distributions...........................................................35
Participant Accounts, Fees, and Allocation of Shares..................................36
Reports to Participants...............................................................36
Election to Participate or Terminate Participation....................................36
Federal Income Tax Considerations.....................................................37
Amendments and Termination............................................................37
REDEMPTION OF SHARES.........................................................................37
BUSINESS.....................................................................................39
General...............................................................................39
Investment of Offering Proceeds.......................................................42
Property Acquisitions.................................................................42
Pending Investments...................................................................48
Site Selection and Acquisition of Properties..........................................52
Standards for Investment in Properties................................................55
Description of Properties.............................................................56
Description of Property Leases........................................................56
Joint Venture Arrangements............................................................59
Mortgage Loans........................................................................61
Management Services...................................................................62
Borrowing.............................................................................62
Sale of Properties, Mortgage Loans and Secured
Equipment Leases....................................................................63
Franchise Regulation..................................................................64
Competition...........................................................................64
Regulation of Mortgage Loans and Secured Equipment
Leases..............................................................................64
SELECTED FINANCIAL DATA......................................................................65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................66
Liquidity and Capital Resources.......................................................66
Results of Operations.................................................................69
MANAGEMENT...................................................................................71
General...............................................................................71
Fiduciary Responsibility of the Board of Directors....................................71
Directors and Executive Officers......................................................72
Independent Directors.................................................................76
Committees of the Board of Directors..................................................76
Compensation of Directors and Executive Officers......................................76
Management Compensation ..........................................................76
THE ADVISOR AND THE ADVISORY AGREEMENT.......................................................77
The Advisor...........................................................................77
The Advisory Agreement................................................................77
CERTAIN TRANSACTIONS.........................................................................79
PRIOR PERFORMANCE INFORMATION................................................................80
INVESTMENT OBJECTIVES AND POLICIES...........................................................86
General...............................................................................86
Certain Investment Limitations........................................................87
DISTRIBUTION POLICY..........................................................................89
General...............................................................................89
Distributions.........................................................................89
SUMMARY OF THE ARTICLES OF INCORPORATION
AND BYLAWS................................................................................90
General...............................................................................90
Description of Capital Stock..........................................................91
Board of Directors....................................................................92
Stockholder Meetings..................................................................93
Advance Notice for Stockholder Nominations for
Directors and Proposals of New Business.............................................93
Amendments to the Articles of Incorporation...........................................93
Mergers, Combinations, and Sale of Assets.............................................93
Control Share Acquisitions ...........................................................94
Termination of the Company and REIT Status............................................94
Restriction of Ownership..............................................................95
Responsibility of Directors...........................................................96
Limitation of Liability and Indemnification...........................................96
Removal of Directors..................................................................97
Inspection of Books and Records.......................................................97
Restrictions on "Roll-Up" Transactions...............................................98
FEDERAL INCOME TAX CONSIDERATIONS............................................................99
Introduction..........................................................................99
Taxation of the Company...............................................................99
Taxation of Stockholders..............................................................104
State and Local Taxes.................................................................107
Characterization of Property Leases...................................................107
Characterization of Secured Equipment Leases..........................................108
Investment in Joint Ventures..........................................................109
REPORTS TO STOCKHOLDERS......................................................................109
THE OFFERING.................................................................................110
General...............................................................................110
Plan of Distribution..................................................................111
Subscription Procedures...............................................................114
Escrow Arrangements...................................................................116
ERISA Considerations..................................................................116
Determination of Offering Price.......................................................117
SUPPLEMENTAL SALES MATERIAL..................................................................117
LEGAL OPINIONS...............................................................................118
EXPERTS......................................................................................118
ADDITIONAL INFORMATION.......................................................................118
DEFINITIONS..................................................................................118
Form of Reinvestment Plan............................................................Appendix A
Financial Information................................................................Appendix B
Prior Performance Tables.............................................................Appendix C
Subscription Agreement...............................................................Appendix D
Statement of Estimated Taxable Operating Results
Before Dividends Paid Deduction...................................................Appendix E
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<PAGE>
Questions and Answers About
CNL Hospitality Properties, Inc.'s Public Offering
Q: What is CNL Hospitality Properties, Inc.?
A: The Company is a real estate investment trust, or a REIT, that was
formed in 1996 to acquire hotel properties and lease them on a
long-term, triple-net basis to hotel operators. In addition, the Company
may provide mortgage financing loans and secured equipment leases to
operators of hotel chains.
As of March 31, 1999, the Company had total assets of $84,706,283.
Q: What is a REIT?
A: In general, a REIT is a company that:
o combines the capital of many investors to acquire or provide financing
for real estate,
o offers benefits of a diversified portfolio under professional
management,
o typically is not subject to federal corporate income taxes on its net
income, provided certain income tax requirements are satisfied. This
treatment substantially eliminates the "double taxation" (at both the
corporate and stockholder levels) that generally results from
investments in a corporation, and
o must pay distributions to investors of at least 95% of its taxable
income.
Q: What kind of offering is this?
A: We are offering up to 25,000,000 shares of common stock on a "best
efforts" basis. In addition, we are offering up to 2,500,000 shares of
common stock to investors who want to participate in our reinvestment
plan.
Q: How does a "best efforts" offering work?
A: When shares are offered to the public on a "best efforts" basis, we are
not guaranteeing that any minimum number of shares will be sold. If you
choose to purchase stock in this offering, you will fill out a
Subscription Agreement, like the one attached to this Prospectus as
Appendix D, for a certain number of shares and pay for the shares at the
time you subscribe. The purchase price will be placed into escrow with
SouthTrust Asset Management Company of Florida, N.A. SouthTrust will
hold your funds, along with those of other subscribers, in an
interest-bearing account until such time as you are admitted by the
Company as a stockholder. Generally, we admit stockholders no later than
the last day of the calendar month following acceptance of your
subscription.
Q: How long will the offering last?
A: The offering will not last beyond ______________, 2000, unless we decide
to extend the offering until not later than _____________, 2001, in any
state that allows us to extend the offering.
Q: Who can buy shares?
A: Anyone who receives this Prospectus can buy shares provided that they
have a net worth (not including home, furnishings and personal
automobiles) of at least $45,000 and an annual gross income of at least
$45,000; or, a net worth (not including home, furnishings and personal
automobiles) of at least $150,000. However, these minimum levels may
vary from state to state, so you should carefully read the more detailed
description in the "Suitability Standards" section of this Prospectus.
Q: Is there any minimum required investment?
A: Yes. Generally, individuals must initially invest at least $2,500 and
IRA, Keogh or other qualified plans must initially invest at least
$1,000. Thereafter, you may purchase additional shares in $10
increments. However, these minimum investment levels may vary from state
to state, so you should carefully read the more detailed description of
the minimum investment requirements appearing later in the "Suitability
Standards" section of this Prospectus.
Q: After I subscribe for shares, can I change my mind and withdraw my
money?
A: Once you have subscribed for shares and you have deposited the
subscription price with SouthTrust, your subscription is irrevocable,
unless the Company elects to permit you to revoke your subscription.
Q: If I buy shares in the offering, how can I sell them?
A: At the time you purchase shares, they will not be listed for trading on
any national securities exchange or over-the-counter market. In fact, we
expect that there will not be any public market for the shares when you
purchase them, and we cannot be sure if one will ever develop. As a
result, you may find that if you wish to sell your shares, you may not
be able to do so promptly or at a price equal to or greater than the
offering price.
We plan to list the shares on a national securities exchange or
over-the-counter market within three to eight years after commencement
of this offering, if market conditions are favorable. Listing does not
assure liquidity. If we have not listed the shares on a national
securities exchange or over-the-counter market by December 31, 2007, we
plan to sell the properties and other assets and return the proceeds
from the liquidation to our stockholders through distributions.
Beginning one year after you receive your shares, provided we have
sufficient funds available, you may request the Company to redeem at
least 25% of the shares you own. The redemption procedures are described
in the "Redemption of Shares" section of this Prospectus.
As a result, if a public market for the shares never develops, you may
be able to redeem your shares through the redemption plan beginning one
year from the date on which you received your stock . If we have not
listed and we liquidate our assets, you will receive proceeds through
the liquidation process.
Q: What will you do with the proceeds from this offering?
A: We plan to use approximately 84% of the proceeds to purchase hotel
properties and to make mortgage loans, approximately 9% to pay fees and
expenses to affiliates for their services and as reimbursement of
offering and acquisition-related expenses, and the remaining proceeds to
pay other expenses of this offering. The payment of these fees will not
reduce your invested capital. Your initial invested capital amount will
be $10 per share.
Until we invest the proceeds in real estate assets, we will invest them
in short-term, highly liquid investments. These short-term investments
will not earn as high a return as we expect to earn on our real estate
investments, and we cannot know how long it will be before we will be
able to fully invest the proceeds in real estate.
We commenced our initial public offering of common stock in an offering
very similar to this one on July 9, 1997. Of the $150,000,000 shares
registered for sale, as of May 13, 1999, the Company had received
subscription proceeds of $121,591,634. We anticipate selling the
remaining shares and therefore completing the initial offering in June
1999. Assuming 15,000,000 shares are sold in the initial offering,
approximately $126,000,000 is expected to be invested in hotel
properties and mortgage loans.
Q: What types of hotels will you invest in?
A: We intend to purchase primarily limited service, extended stay and/or
full service hotel properties.
Q: What are the terms of your leases?
A: The leases we have entered into to date, and the leases we expect to
enter into in the future, are long-term (meaning generally 10 to 20
years, plus renewal options for an additional 10 to 20 years),
"triple-net" leases. "Triple-net" means that the tenant, not the
Company, is generally responsible for repairs, maintenance, property
taxes, utilities, and insurance. Under our leases, the tenant must pay
us minimum base rent on a monthly basis. In addition, our leases
generally require the tenant to pay us percentage rent or provide for
increases in the base rent at specified times during the term of the
lease.
<PAGE>
Q: How well have your investments done so far?
A: As of May 13, 1999, we have purchased, directly or indirectly, six newly
constructed hotel properties. Two of these purchases were made in July
1998 and four were made in February 1999, so we have only limited
information regarding their performance.
Q: What is the experience of the Company's officers and directors?
A: Our management team has extensive previous experience investing in real
estate on a triple-net basis. Our Chief Executive Officer and President
each have over 25 and 20 years, respectively, of experience with other
CNL affiliates. In addition, our Chief Operating Officer and our Vice
President of Finance and Administration have extensive previous
experience investing in hotel properties. The majority of our Directors
have extensive experience investing in hotels and/or other types of real
estate.
Certain of our officers, Directors and affiliates have operated several
other REITs and partnerships in the past, although our affiliates have
limited experience investing in hotel properties. The investment results
from certain of those funds are included in this Prospectus under the
heading "Prior Performance Information." Because those funds had
different goals and the managers had different amounts of experience
investing in the types of assets purchased by those funds, you cannot
assume that the Company's investment returns will be similar to those
described in the "Prior Performance Information" section.
Q: How will you choose which investments to make?
A: We have hired CNL Hospitality Advisors, Inc. as our advisor. The Advisor
has the authority, subject to the approval of our Directors, to make all
of the Company's investment decisions.
Q: Is the Advisor independent of the Company?
A: No. Some of our officers and Directors are officers and directors of the
Advisor. The conflicts of interest the Company and Advisor face are
discussed under the heading "Conflicts of Interest" later in this
Prospectus.
Q: If I buy shares, will I receive distributions and how often?
A: Historically, we have paid cash distributions every quarter since our
operations commenced.
We intend to continue to make quarterly cash distributions to our
stockholders. The amount of distributions is determined by the Board of
Directors and typically depends on the amount of distributable funds,
current and projected cash requirements, tax considerations and other
factors. However, in order to remain qualified as a REIT, we must make
distributions equal to at least 95% of our REIT taxable income each
year.
Q: Are distributions I receive taxable?
A: Yes. Generally, distributions that you receive will be considered
ordinary income to the extent they are from current and accumulated
earnings and profits. In addition, because depreciation expense reduces
taxable income but does not reduce cash available for distribution, we
expect a portion of your distributions will be considered return of
capital for tax purposes. These amounts will not be subject to tax
immediately but will instead reduce the tax basis of your investment.
This in effect defers a portion of your tax until your investment is
sold or the Company is liquidated. However, because each investor's tax
implications are different, we suggest you consult with your tax
advisor.
Q: Do you have a reinvestment plan where I can reinvest my distributions in
additional shares?
A: Yes. We have adopted a reinvestment plan in which some investors can
reinvest their distributions in additional shares. For information on
how to participate in our reinvestment plan, see the section of the
Prospectus entitled "Summary of Reinvestment Plan."
Who Can Help Answer Your Questions?
If you have more questions about the offering or
if you would like additional copies of this
Prospectus, you should contact your registered
representative or:
CNL Marketing Services Department
400 East South Street
Orlando, Florida 32801
(800) 522-3863
(407) 650-1000
www.cnlgroup.com
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this Prospectus. It
is not complete and may not contain all of the information that you should
consider before investing in the common stock. To understand the offering fully,
you should read this entire Prospectus carefully, including the documents
attached as appendices.
CNL HOSPITALITY PROPERTIES, INC.
CNL Hospitality Properties, Inc., which we sometimes refer to as the
"Company," is a Maryland corporation which is qualified and operated for federal
income tax purposes as a REIT. Our address is 400 East South Street, Orlando,
Florida 32801, and our telephone number is (407) 650-1000 or toll free (800)
522-3863.
OUR BUSINESS
Our Company acquires hotel properties to be leased on a long-term
"triple-net" basis, which means that the tenant generally will be responsible
for repairs, maintenance, property taxes, utilities and insurance. We intend to
invest the proceeds of this offering in hotel properties, which may include
furniture, fixtures and equipment, to be leased to operators of national and
regional limited service, extended stay and full service hotel chains, located
across the United States. We may also offer mortgage financing, and, to a lesser
extent, furniture, fixtures and equipment financing to operators of hotel chains
through secured equipment leases as loans or direct financing leases. See the
"Business" section for a description of the hotel properties we currently own,
our pending investments, the types of properties that may be selected by CNL
Hospitality Advisors, Inc, the property selection and acquisition processes and
the nature of the mortgage loans and secured equipment leases.
Under our Articles of Incorporation, the Company will automatically
terminate and dissolve on December 31, 2007, unless the shares of common stock
of the Company, including the shares offered by this Prospectus, are listed on a
national securities exchange or over-the-counter market before that date. If the
shares are listed, the Company automatically will become a perpetual life
entity. If we are not listed by December 31, 2007, we will sell our assets,
distribute the net sales proceeds to stockholders and limit our activities to
those related to the Company's orderly liquidation, unless the stockholders
owning a majority of the shares elect to amend the Articles of Incorporation to
extend the duration of the Company.
OUR REIT STATUS
As a REIT, we generally are not subject to federal income tax on income
that we distribute to our stockholders. Under the Internal Revenue Code of 1986,
as amended, REITs are subject to numerous organizational and operational
requirements, including a requirement that they distribute at least 95% of their
taxable income, as figured on an annual basis. If we fail to qualify for
taxation as a REIT in any year, our income will be taxed at regular corporate
rates, and we may not be able to qualify for treatment as a REIT for that year
and the next four years. Even if we qualify as a REIT for federal income tax
purposes, we may be subject to federal, state and local taxes on our income and
property and to federal income and excise taxes on our undistributed income.
OUR MANAGEMENT AND CONFLICTS OF INTEREST
We have retained the Advisor to provide us with management,
acquisition, advisory and administrative services. The members of our Board of
Directors oversee the management of the Company. The majority of the Directors
are independent of the Advisor and have responsibility for reviewing its
performance. The Directors are elected annually to the Board of Directors by the
stockholders.
All of the executive officers and directors of the Advisor also are
officers or Directors of the Company. The Advisor has responsibility for (i)
selecting the properties that we will acquire, formulating and evaluating the
terms of each proposed acquisition, and arranging for the acquisition of the
property by the Company; (ii) identifying potential tenants for the properties
and potential borrowers for the mortgage loans, and formulating, evaluating and
negotiating the terms of each lease of a property and each mortgage loan; (iii)
locating and identifying potential lessees and formulating, evaluating and
negotiating the terms of each secured equipment lease; and (iv) negotiating the
terms of any borrowing by the Company, including lines of credit and any
long-term, permanent financing. All of the Advisor's actions are subject to
approval by the Board of Directors. The Advisor also has the authority, subject
to approval by a majority of the Board of Directors, including a majority of the
independent Directors, to select assets for sale by the Company in keeping with
the Company's investment objectives and based on an analysis of economic
conditions both nationally and in the vicinity of the assets being considered
for sale.
See the "Management" and "The Advisor and The Advisory Agreement"
sections for a description of the business background of the individuals
responsible for the management of the Company and the Advisor, as well as for a
description of the services the Advisor will provide.
Certain of our officers and Directors, who are also officers or
directors of the Advisor, may experience conflicts of interest in their
management of the Company. These arise principally from their involvement in
other activities that may conflict with our business and interests, including
matters related to (i) allocation of new investments and management time and
services between us and various other entities, (ii) the timing and terms of the
investment in or sale of an asset, (iii) development of our properties by
affiliates, (iv) investments with affiliates of the Advisor, (v) compensation to
the Advisor, (vi) our relationship with the managing dealer, CNL Securities
Corp., which is an affiliate of the Company and the Advisor, and (vii) the fact
that our securities and tax counsel also serves as securities and tax counsel
for some of our affiliates, which means neither the Company nor the stockholders
will have separate counsel. The "Conflicts of Interest" section discusses in
more detail the more significant of these potential conflicts of interest, as
well as the procedures that have been established to resolve a number of these
potential conflicts.
RISK FACTORS
An investment in our Company is subject to significant risks. We
summarize some of the more important risks below. A more detailed list of the
risk factors is found in the "Risk Factors" section, which begins on page 11.
You should read and understand all of the risk factors before making your
decision to invest.
o As of May 13, 1999, we currently own, directly or indirectly, six
hotels and have commitments to acquire, directly or indirectly, seven
additional hotel properties. The acquisition of the seven properties is
subject to the fulfillment of certain conditions and there can be no
assurance that any or all of the conditions will be satisfied or, if
satisfied, that one or more of these properties will be acquired by the
Company. In addition, the Board of Directors may approve future
offerings, the proceeds of which may be invested in additional
properties; therefore, you will not have the opportunity to evaluate
all the properties that will be in our portfolio.
o There is currently no public trading market for the shares, and there
is no assurance that one will develop. Prior to listing, if at all, if
you wish to sell your shares, you may not be able to do so promptly or
at a price equal to or greater than the offering price.
o We rely on the Advisor, subject to approval by the Board of Directors,
with respect to all investment decisions. Not all of the officers and
Directors of the Advisor have extensive experience, and our affiliates
have limited experience, with acquiring and leasing hotels, which could
adversely affect the Company's business.
o The Advisor and its affiliates are or will be engaged in other
activities that will result in potential conflicts of interest with the
services that the Advisor and affiliates will provide to the Company.
o Market and economic conditions that we cannot control will affect the
value of our investments.
o We may make investments that will not appreciate in value over time,
such as mortgage loans and building only properties, with the land
owned by a third-party.
o We cannot predict the amount of revenues we will receive from tenants
and borrowers.
o If our tenants or borrowers default, we will have less income with
which to make distributions.
o If the shares are not listed on a national securities exchange or
over-the-counter market by December 31, 2007, we will sell our assets
and distribute the proceeds.
o We do not yet have a commitment for long-term financing for the
Company. If we do not obtain long-term financing, we will not be able
to acquire as many properties or make as many mortgage loans and
secured equipment leases as we anticipated, which could limit the
diversification of our investments and our ability to achieve our
investment objectives.
o The secured equipment lease program is dependent upon obtaining
financing, which has not yet been secured.
o In connection with any borrowing, we may mortgage or pledge our assets,
which would put us at risk of losing the assets if we are unable to pay
our debts.
o We may incur debt, including debt to make distributions to
stockholders, in order to maintain our status as a REIT.
o The vote of stockholders owning at least a majority but less than all
of the shares of common stock will bind all of the stockholders as to
matters such as the election of Directors and amendment of the
Company's governing documents.
o Restrictions on ownership of more than 9.8% of the shares of common
stock by any single stockholder or certain related stockholders may
have the effect of inhibiting a change in control of the Company, even
if such a change is in the interest of a majority of the stockholders.
o We may not remain qualified as a REIT for federal income tax purposes,
which would subject us to federal income tax on our taxable income at
regular corporate rates, thereby reducing the amount of funds available
for paying distributions to you as a stockholder.
OUR AFFILIATES
The "Prior Performance Information" section of this Prospectus contains
a narrative discussion of the public and private real estate programs sponsored
by our affiliates and affiliates of the Advisor in the past, including 18 public
limited partnerships and one unlisted public REIT. As of December 31, 1998,
these entities, which invest in restaurant properties that are leased on a
"triple-net" basis to operators of restaurant chains, but do not invest in hotel
properties, had purchased 1,139 fast-food, family-style, and casual-dining
restaurants. In addition, an affiliate sponsors an unlisted public REIT that
invests in health care and seniors' housing properties that are leased on a
long-term, triple-net basis to operators of health care facilities. Based on an
analysis of the operating results of the 90 real estate limited partnerships and
two unlisted public REITs in which our principals have served, individually or
with others, as general partners or officers and directors, we believe that each
of these companies has met, or is in the process of meeting, its principal
investment objectives. Statistical data relating to the public limited
partnerships and the unlisted REITs are contained in Appendix C -- Prior
Performance Tables.
OUR INVESTMENT OBJECTIVES
Our Company's primary investment objectives are to preserve, protect,
and enhance our assets, while:
o making distributions.
o obtaining fixed income through the receipt of base rent, and
increasing our income (and distributions) and providing protection
against inflation through receipt of percentage rent and/or
automatic increases in base rent, and obtaining fixed income
through the receipt of payments on mortgage loans and secured
equipment leases.
o remaining qualified as a REIT for federal income tax purposes.
o providing you with liquidity for your investment within three to
eight years after commencement of this offering, either through
(i) listing our shares on a national securities exchange or
over-the-counter market or (ii) if listing does not occur within
eight years after commencement of the offering, selling our assets
and distributing the proceeds.
See the "Business -- General," "Business -- Site Selection and
Acquisition of Properties," "Business -- Description of Property Leases" and
"Investment Objectives and Policies" sections of this Prospectus for a more
complete description of the manner in which the structure of our business
facilitates our ability to meet our investment objectives.
MANAGEMENT COMPENSATION
We will pay the Advisor, CNL Securities Corp. (which is the managing
dealer for this offering), and other affiliates of the Advisor compensation for
services they will perform. The Company will also reimburse them for expenses
they pay on behalf of the Company. The following paragraphs summarize the more
significant items of compensation and reimbursement. See "Management
Compensation" for a complete description.
Offering Stage.
Selling Commissions and Marketing Support and Due Diligence
Expense Reimbursement Fee. The Company will pay the managing dealer selling
commissions of 7.5% (a maximum of $18,750,000 if 25,000,000 shares are sold) and
a marketing support and due diligence expense reimbursement fee of 0.5% (a
maximum of $1,250,000 if 25,000,000 shares are sold). The managing dealer in
turn may pass along selling commissions of up to 7% on shares sold, and all or a
portion of the 0.5% marketing support and due diligence expense reimbursement
fee, to soliciting dealers who are not affiliates of the Company.
Soliciting Dealer Warrants. The Company will issue and sell to
the managing dealer one soliciting dealer warrant for every 25 shares sold
through this offering, up to a maximum of 1,000,000 soliciting dealer warrants,
to purchase an equivalent number of shares of common stock of the Company. The
managing dealer, in its sole discretion, may pass along all or any number of the
soliciting dealer warrants to soliciting dealers who are members of the selling
group, unless prohibited by federal or state securities laws. Each soliciting
dealer warrant will entitle the holder to purchase one share of common stock
from the Company for $12.00 during a period beginning one year from the date the
Soliciting Dealer Warrant is issued and ending on the fifth anniversary of the
commencement of this offering. Holders of soliciting dealer warrants may not
exercise the soliciting dealer warrants to the extent such exercise would
jeopardize the Company's status as a REIT. See "Summary of the Articles of
Incorporation and Bylaws -- Description of Capital Stock -- Soliciting Dealer
Warrants."
Acquisition Stage.
Acquisition Fees. The Company will pay the Advisor a fee equal
to 4.5% of the proceeds of this offering, loan proceeds from permanent financing
and amounts outstanding on the line of credit, if any, at the time of listing,
but excluding amounts used to finance secured equipment leases ($11,250,000 if
25,000,000 shares are sold and up to an additional $4,500,000 if permanent
financing equals $100,000,000) for identifying the properties, structuring the
terms of the acquisition and leases of the properties and structuring the terms
of the mortgage loans.
Operational Stage.
Asset Management Fee. The Company will pay the Advisor a
monthly asset management fee of one-twelfth of 0.60% of an amount equal to the
total amount invested in the properties (exclusive of acquisition fees and
acquisition expenses) plus the total outstanding principal amounts of the
mortgage loans, as of the end of the preceding month, for managing the
properties and mortgage loans.
Secured Equipment Lease Servicing Fee. The Company will pay
the Advisor a one-time secured equipment lease servicing fee of 2% of the
purchase price of the equipment that is the subject of a secured equipment lease
for negotiating secured equipment leases and supervising the secured equipment
lease program.
Operational or Liquidation Stage.
The Company will not pay the following fees until it has paid
distributions to stockholders equal to the sum of an aggregate, annual,
cumulative, noncompounded 8% return on their invested capital plus 100% of the
stockholders' aggregate invested capital, which is what we mean when we call a
fee "subordinated." In general, the Company calculates the stockholders'
invested capital by multiplying the number of shares owned by stockholders by
the offering price per share and reducing the product by the portion of all
prior distributions received by stockholders from the sale of assets of the
Company and by any amounts paid by the Company to repurchase shares pursuant to
the redemption plan.
Deferred, Subordinated Real Estate Disposition Fee. The
Company may pay the Advisor a real estate disposition fee equal to the lesser of
one-half of a competitive real estate commission or 3% of the gross sales price
of the property for providing substantial services in connection with the sale
of any of its properties. See "The Advisor and the Advisory Agreement -- The
Advisory Agreement."
Deferred, Subordinated Share of Net Sales Proceeds from the
Sale of Assets. The Company will pay to the Advisor a deferred, subordinated
share of net sales proceeds from the sale of assets of the Company in an amount
equal to 10% of net sales proceeds.
The Company's obligation to pay certain fees may be subject to
conditions and restrictions or to change. The Company may reimburse the Advisor
and its affiliates for out-of-pocket expenses that they incur on behalf of the
Company, subject to certain expense limitations, and pay a subordinated
incentive fee if listing of the Company's common stock on a national securities
exchange or over-the-counter market occurs.
<PAGE>
THE OFFERING
Offering Size........................... o Maximum -- $275,000,000
o $250,000,000 worth of common
stock to be offered to
investors meeting certain
suitability standards and
$25,000,000 worth of common
stock available only to
investors who purchased their
shares in this offering or our
initial public offering and who
choose to participate in our
reinvestment plan.
Minimum Investments..................... o Individuals--$2,500--Additional
shares may be purchased in ten
dollar increments.
o IRA, Keogh and other qualified
plans -- $1,000 -- Additional
shares may be purchased in ten
dollar increments.
(Note: The amounts apply to
most potential investors, but
minimum investments may vary
from state to state. Please see
"The Offering" section, which
begins on page 113).
Suitability Standards................... o Net worth (not including home,
furnishings and personal
automobiles) of at least
$45,000 and annual gross income
of at least $45,000; or
o Net worth (not including home,
furnishings and personal
automobiles) of at least
$150,000.
(Note: Suitability standards
may vary from state to state.
Please see the "Suitability
Standards and How to Subscribe"
section, which begins on page
21).
Duration and Listing.................... Anticipated to be three to eight years
from the commencement of this
offering. If the shares are listed on
a national securities exchange or
over-the-counter market, our Company
will become a perpetual life entity,
and we will then reinvest proceeds
from the sale of assets.
Distribution Policy..................... Consistent with our objective of
qualifying as a REIT, we expect to
continue to pay quarterly
distributions and distribute at least
95% of our REIT taxable income.
Our Advisor...............................CNL Hospitality Advisors, Inc. will
administer the day-to-day operations
of our Company and select our
Company's real estate investments,
mortgage loans and secured equipment
leases.
Estimated Use of Proceeds............... o 84%-- To acquire hotel properties
and make mortgage loans
o 9%-- To pay fees and expenses to
affiliates for their services and
as reimbursement of offering and
acquisition-related expenses
o 7% -- To pay for other expenses
of the offering
Our Reinvestment Plan................... We have adopted a reinvestment plan
which will allow some stockholders to
have the full amount of their
distributions reinvested in additional
shares that may be available. We have
registered 2,500,000 shares of our
common stock for this purpose. See the
"Summary of Reinvestment Plan" and the
"Federal Income Tax Considerations --
Taxation of Stockholders" sections and
the Form of Reinvestment Plan
accompanying this Prospectus as
Appendix A for more specific
information about the reinvestment
plan.
<PAGE>
RISK FACTORS
An investment in our shares involves significant risks and therefore is
suitable only for persons who understand those risks and their consequences and
who are able to bear the risk of loss of their investment. You should consider
the following risks in addition to other information set forth elsewhere in this
Prospectus before making your investment decision.
We also caution you that this Prospectus contains forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. Although we believe that our expectations
reflected in the forward-looking statements are based on reasonable assumptions,
these expectations may not prove to be correct. Important factors that could
cause our actual results to differ materially from the expectations reflected in
these forward-looking statements include those set forth below, as well as
general economic, business and market conditions, changes in federal and local
laws and regulations and increased competitive pressures.
OFFERING-RELATED RISKS
An Unspecified Property Offering.
Potential Investors Cannot Evaluate Properties Not Yet
Acquired or Identified for Acquisition. We have established certain criteria for
evaluating hotel chains, particular properties and the operators of the
properties in which we may invest. See the "Business -- Standards for Investment
in Properties" and "Business -- General" sections for a description of these
criteria and the types of properties in which we intend to invest. We have not
set fixed minimum standards relating to creditworthiness of tenants and
therefore the Board of Directors has flexibility in assessing potential tenants.
In addition, as of the date of this Prospectus, we have purchased, directly or
indirectly, six hotels and have entered into commitments for the direct or
indirect acquisition of seven additional hotel properties. The acquisition of
the seven properties is subject to the fulfillment of certain conditions and
there can be no assurance that any or all of the conditions will be satisfied
or, if satisfied, that one or more of these properties will be acquired by the
Company. In addition, the Board of Directors may approve future offerings, the
proceeds of which may be invested in additional properties; therefore, you will
not have the opportunity to evaluate all the properties that will be in our
portfolio.
No Assurance of Obtaining Suitable Investments. We cannot be
sure that we will be successful in obtaining suitable investments on financially
attractive terms or that, if we make investments, our objectives will be
achieved. If we are unable to find suitable investments, our financial condition
and ability to pay distributions could be adversely affected.
No Independent Review of the Company or the Prospectus by
Managing Dealer. The managing dealer, CNL Securities Corp., is an affiliate of
the Company and will not make an independent review of the Company or the
offering. Accordingly, you do not have the benefit of an independent review of
the terms of this offering.
Possible Delays in Investment. The offering proceeds may remain
uninvested for up to the later of two years from the initial date of this
Prospectus or one year after termination of the offering; although, we expect to
invest substantially all net offering proceeds by the end of that period. The
"Prior Performance Information" section provides a summary description of the
investment experience of affiliates of the Advisor in prior CNL programs, but
you should be aware that previous experience is not necessarily indicative of
the rate at which the proceeds of this offering will be invested.
We may delay investing the proceeds from this offering, and therefore
delay the receipt of any returns from such investments, due to the inability of
the Advisor to find suitable properties or mortgage loans for investment. Until
we invest in properties or make mortgage loans, our investment returns will be
limited to the rates of return available on short-term, highly liquid
investments that provide appropriate safety of principal. We expect these rates
of return, which affect the amount of cash available to make distributions to
stockholders, to be lower than we would receive for property investments or
mortgage loans. Further, if we are required to invest any funds in properties
and
<PAGE>
mortgage loans and we have not done so or reserved those funds for Company
purposes within the later of two years from the initial date of this Prospectus,
or one year after the termination of this offering, we will distribute the
remaining funds pro rata to the persons who are stockholders of the Company at
that time.
No Current Public Market for Shares Which Could Make Sale of Shares
Difficult. Currently there is no public market for the shares, so stockholders
may not be able to sell their shares promptly at a desired price. Therefore, you
should consider purchasing the shares as a long-term investment only. We do not
know if we will ever apply to list the Company's shares on a national securities
exchange or over-the-counter market, or, if we do apply for listing, when such
application would be made or whether it would be accepted. If our shares are
listed, we cannot assure you a public trading market will develop. In any event,
the Articles of Incorporation provide that the Company will not apply for
listing before the completion or termination of this offering. There can be no
assurance that the price you would receive in a sale on a national securities
exchange or over-the-counter market would be representative of the value of the
assets owned by the Company or that it would equal or exceed the amount you paid
for the shares.
COMPANY-RELATED RISKS
Limited Operating History. As of the date of this Prospectus, the
Company has purchased, directly or indirectly, six properties, and prior to
October 15, 1997, the date our operations commenced, had no previous performance
history. As a result, you cannot be sure how the Company will be operated,
whether it will pursue the objectives described in this Prospectus or how it
will perform financially.
Limited Experience of Management. None of the prior public programs
organized by our affiliates has invested in hotels. The limited experience of
certain of our management in investing in hotel properties may adversely affect
the Company's results of operations and therefore its ability to pay
distributions.
Company is Dependent on Advisor. The Advisor, with approval from the
Board of Directors, will be responsible for the daily management of the Company,
including all acquisitions, dispositions and financings. The Board of Directors
may fire the Advisor, with or without cause, but only subject to payment and
release of the Advisor from all guarantees and other obligations incurred as
Advisor, which are referenced in the "Management Compensation" section of this
Prospectus. We cannot be sure that the Advisor will achieve the Company's
objectives or that the Board of Directors will be able to act quickly to remove
the Advisor if it deems removal necessary. As a result, it is possible that the
Company would be managed for some period by a company that was not acting in our
best interests or not capable of helping us achieve our objectives.
Conflicts of Interest.
We will be subject to conflicts of interest arising out of our
relationships with the Advisor and its affiliates, including the material
conflicts discussed below. The "Conflicts of Interest" section provides a
further discussion of the conflicts of interest between the Company and the
Advisor and its affiliates and our policies to reduce or eliminate certain
potential conflicts.
Selection of Properties Acquired. The Advisor or its
affiliates from time to time may acquire properties on a temporary basis with
the intention of subsequently transferring the properties to the Company. The
selection of properties to be transferred by the Advisor to the Company may be
subject to conflicts of interest. We cannot be sure that the Advisor will act in
the Company's best interests when deciding whether to allocate any particular
property to the Company. You will not have the opportunity to evaluate the
manner in which these conflicts of interest are resolved before making your
investment.
Competing Demands on Officers and Directors. The Directors and
certain of the officers of the Company and the directors and certain of the
officers of the Advisor have management responsibilities for other companies,
including companies that may in the future invest in some of the same types of
assets in which we may invest. For this reason, these officers and Directors
will share their management time and services among those companies and the
Company, will not devote all of their attention to the Company and could take
actions that are more favorable to the other companies than to the Company.
Timing of Sales and Acquisitions May Favor the Advisor. The
Advisor may immediately realize substantial commissions, fees and other
compensation as a result of any investment in or sale of an asset by the
Company. Our Board of Directors must approve any investments and sales, but the
Advisor's recommendation to the Board may be influenced by the impact of the
transaction on the Advisor's compensation. The agreements between the Company
and the Advisor were not the result of arm's-length negotiations. As a result,
the Advisor may not always act in the Company's best interests, which could
adversely affect our results of operations.
Property Development by Affiliates. Properties acquired by the
Company may require development prior to use by a tenant. Our affiliates may
serve as developer and if so, the affiliates would receive the development fee
that would otherwise be paid to an unaffiliated developer. The Board of
Directors, including the independent Directors, must approve employing an
affiliate of the Company to serve as a developer. There is a risk, however, that
the Company would acquire properties that require development so that an
affiliate would receive the development fee.
We May Invest With Affiliates of the Advisor. We may invest in
joint ventures with another program sponsored by the Advisor or its affiliates.
The Board of Directors, including the independent Directors, must approve the
transaction, but the Advisor's recommendation may be affected by its
relationship with one or more of the co-venturers.
No Separate Counsel for the Company, Affiliates and Investors.
The Company, its affiliates and investors may have interests which conflict with
one another, but none of them currently has the benefit of separate counsel.
Company May Not Have Sufficient Working Capital. There can be no
assurance that the Company will have sufficient working capital. As of March 31,
1999, the Company had stockholders' equity of $79,083,113. If we do not have
sufficient capital, we may not be able to meet our business objectives, which
could decrease the return on your investment.
REAL ESTATE AND OTHER INVESTMENT RISKS
Possible Lack of Diversification Increases Risk of Investment. There is
no limit on the number of properties of a particular hotel chain which we may
acquire. However, under investment guidelines established by the Board of
Directors, no single hotel chain may represent more than 50% of the total
portfolio unless approved by the Board of Directors, including a majority of the
independent Directors. The Board of Directors, including a majority of the
independent Directors, will review the Company's properties and potential
investments in terms of geographic and hotel chain diversification. At this
time, all of the Company's properties are Marriott-branded hotels. If we
continue to concentrate our acquisitions with Marriott chains or in the future
concentrate our acquisitions on another chain, it will increase the risk that
our financial condition will be adversely affected by a downturn in a particular
market sub-segment or by the poor judgment of a particular management group.
Our profitability and our ability to diversify our investments, both
geographically and by type of properties purchased, will be limited by the
amount of funds at our disposal. If our assets become geographically
concentrated, an economic downturn in one or more of the markets in which we
have invested could have an adverse effect on our financial condition and our
ability to make distributions. We do not know whether we will sell all of the
shares being offered by this Prospectus. If we do not, it is possible that we
will not have the money necessary to diversify our investments or achieve the
highest possible return on our investments.
Lack of Control Over Market and Business Conditions. Changes in general
or local economic or market conditions, increased costs of energy, increased
costs of products, increased costs and shortages of labor, competitive factors,
fuel shortages, quality of management, the ability of a hotel chain to fulfill
any obligations to operators of its hotel business, limited alternative uses for
the building, changing consumer habits, condemnation or uninsured losses,
changing demographics, changing traffic patterns, inability to remodel outmoded
buildings as required by the franchise or lease agreement, voluntary termination
by a tenant of its obligations under a lease, bankruptcy of a tenant or
borrower, and other factors beyond the control of the Company and the Board of
Directors may reduce the value of properties to be acquired by the Company, the
ability of tenants to pay rent on a timely basis, the amount of the rent and the
ability of borrowers to make mortgage loan payments on time. If tenants are
unable to make lease payments or borrowers are unable to make mortgage loan
payments as a result of any of these factors, we might not have cash available
to make distributions to our stockholders.
<PAGE>
Impact of Adverse Trends in the Hotel Industry. The success of our
properties will depend largely on the property operators' ability to adapt to
dominant trends in the hotel industry, including greater competitive pressures,
increased consolidation, industry overbuilding, dependence on consumer spending
patterns and changing demographics, the introduction of new concepts and
products, availability of labor, price levels and general economic conditions.
The "Business - General" section includes a description of the size and nature
of the hotel industry and current trends in this industry. The success of a
particular hotel chain, the ability of a hotel chain to fulfill any obligations
to operators of its business, and trends in the hotel industry may affect the
income of the Company and the funds we have available to distribute to
stockholders.
Company Will Not Control Property Management. Our tenants will be
responsible for maintenance and other day-to-day management of the properties.
Because our revenues will largely be derived from rents, our financial condition
will be dependent on the ability of third-party tenants that we do not control
to operate the properties successfully. We intend to enter into leasing
agreements only with tenants having substantial prior hotel experience. Although
we believe the tenants of the six properties directly or indirectly owned, and
the seven properties identified as probable acquisitions, as of May 13, 1999,
have significant prior hotel experience, there is no assurance we will be able
to make such arrangements in the future. If our tenants are unable to operate
the properties successfully, they may not be able to pay their rent and they may
not generate significant percentage rent, which could adversely affect our
financial condition.
Company May Not Control Joint Ventures. Our independent Directors must
approve all joint venture or general partnership arrangements to which the
Company is a party. Subject to such approval, we may enter into a joint venture
with an unaffiliated party to purchase a property, and the joint venture or
general partnership agreement relating to that joint venture or partnership may
provide that we will share management control of the joint venture with the
unaffiliated party. In the event the joint venture or general partnership
agreement provides that we will have sole management control of the joint
venture, the agreement may be ineffective as to a third party who has no notice
of the agreement, and we therefore may be unable to control fully the activities
of the joint venture. If we enter into a joint venture with another program
sponsored by an affiliate, we do not anticipate that we will have sole
management control of the joint venture.
Investments in joint ventures involve the risk that the Company's
co-venturer may have economic or business interests or goals which, at a
particular time, are inconsistent with our interests or goals, that such
co-venturer may be in a position to take action contrary to our instructions,
requests, policies or objectives, or that such co-venturer may experience
financial difficulties. Among other things, actions by a co-venturer might
subject property owned by the joint venture to liabilities in excess of those
contemplated by the terms of the joint venture agreement or to other adverse
consequences. If we do not have full control over a joint venture, the value of
our investment will be affected to some extent by a third party that may have
different goals and capabilities than the Company. As a result, joint ownership
of investments may adversely affect our returns on the investments and,
therefore, our ability to pay distributions to our stockholders.
Difficulty in Exiting a Joint Venture After an Impasse. If we enter
into a joint venture, there will be a potential risk of impasse in certain joint
venture decisions since our approval and the approval of each co-venturer will
be required for certain decisions. In any joint venture with an affiliated
program, however, we will have the right to buy the other co-venturer's interest
or to sell our own interest on specified terms and conditions in the event of an
impasse regarding a sale. In the event of an impasse, it is possible that
neither party will have the funds necessary to consummate the buy-out. See
"Business - Joint Venture Arrangements." In addition, we may experience
difficulty in locating a third-party purchaser for our joint venture interest
and in obtaining a favorable sale price for the interest. As a result, it is
possible that we may not be able to exit the relationship if an impasse
develops.
Lack of Control Over Properties Under Construction. We intend to
acquire sites on which a property to be owned by the Company will be built, as
well as sites which have existing properties (including properties which require
renovation). If we acquire a property for development or renovation, we may be
subject to certain risks in connection with a developer's ability to control
construction costs and the timing of completion of construction or a developer's
ability to build in conformity with plans, specifications and timetables. Our
agreements with a developer will provide certain safeguards designed to minimize
these risks. In the event of a default by a developer, we generally will have
the right to require the tenant to purchase the property that is under
development at a pre-
<PAGE>
established price designed to reimburse us for all acquisition and development
costs. We cannot be sure, however, that the tenants will have sufficient funds
to fulfill their obligations under these agreements. See "Business - Site
Selection and Acquisition of Properties."
Ground Lease Property Risks. If we invest in ground lease properties,
we will not own, or have a leasehold interest in, the underlying land, unless we
enter into an assignment or other agreement. Thus, with respect to ground lease
properties, the Company will have no economic interest in the land or building
at the expiration of the lease on the underlying land; although, we generally
will retain partial ownership of, and will have the right to remove any
equipment that we may own in the building. As a result, though we will share in
the income stream derived from the lease, we will not share in any increase in
value of the land associated with any ground lease property.
We Do Not Control Third Party Franchise Agreements. We will not be a
party to any franchise agreement between a hotel chain and a tenant; so, those
agreements could be modified or canceled without notice to us, or our prior
consent. In that event, we could require the tenant to cease its operations at
the property, although the tenant's obligation to pay rent to the Company would
continue. However, if we removed a tenant due to the cancellation of the
tenant's franchise agreement, we would be required to locate a new tenant
acceptable to the hotel chain. As a result, if a tenant's franchise agreement is
canceled or amended, we may have difficulty removing the tenant and difficulty
realizing our expected return on the property.
Multiple Property Leases or Mortgage Loans with Individual Tenants or
Borrowers Increase Risks. The value of the Company's properties will depend
principally upon the value of the leases of the properties. Minor defaults by a
tenant or borrower may continue for some time before the Advisor or Board of
Directors determines that it is in the interest of the Company to evict the
tenant or foreclose on the property of the borrower. Tenants may lease more than
one property, and borrowers may enter into more than one mortgage loan. As a
result, a default by or the financial failure of a tenant or borrower could
cause more than one property to become vacant or more than one loan to become
non-performing under certain circumstances. Vacancies would reduce our cash
receipts and could decrease the properties' resale value until we are able to
re-lease the affected properties.
Re-leasing of Properties May Be Difficult. If a tenant vacates a
property, we may be unable either to re-lease the property for the rent due
under the prior lease or to re-lease the property without incurring additional
expenditures relating to the property. In addition, we could experience delays
in enforcing our rights against, and collecting rents (and, under certain
circumstances, real estate taxes and insurance costs) due from, a defaulting
tenant. Any delay we experience in re-leasing a property or difficulty in
re-leasing at acceptable rates could affect our ability to pay distributions.
Inability to Control the Sale of Certain Properties. We expect to give
certain tenants the right, but not the obligation, to purchase their property
from the Company commencing a specified number of years after the date of the
lease. The leases also generally provide the tenant with a right of first
refusal on any proposed sale provisions. These policies may lessen the ability
of the Advisor and the Board of Directors to freely control the sale of the
property. See "Business - Description of Property Leases - Right of Tenant to
Purchase."
Limitations on the Ability of the Company to Liquidate. For the first
three to eight years after commencement of this offering, we intend to use any
proceeds from the sale of properties or mortgage loans that are not required to
be distributed to stockholders in order to preserve the Company's status as a
REIT to acquire additional properties, make additional mortgage loans and repay
outstanding indebtedness. The proceeds from the sale of secured equipment leases
will be used to fund additional secured equipment leases, or to reduce our
outstanding indebtedness. If the shares are listed on a national securities
exchange or over-the-counter market, we may reinvest the proceeds from sales in
other properties, mortgage loans or secured equipment leases for an indefinite
period of time. If the shares are not listed by December 31, 2007, we will
undertake to sell our assets and distribute the net sales proceeds to
stockholders, and we will engage only in activities related to the orderly
liquidation of the Company, unless the stockholders elect otherwise.
Neither the Advisor nor the Board of Directors may be able to control
the timing of sales due to market conditions, and there can be no assurance that
we will be able to sell our assets so as to return our stockholders' aggregate
invested capital, to generate a profit for the stockholders or to fully satisfy
our debt obligations. We will only return all of our stockholders' invested
capital if we sell the properties for more than their original purchase price,
although return of capital, for federal income tax purposes, is not necessarily
limited to stockholder distributions following sales of properties. If we take a
purchase money obligation in partial payment of the sales price of a property,
we will realize the proceeds of the sale over a period of years. Further, any
intended liquidation of the Company may be delayed beyond the time of the sale
of all of the properties until all mortgage loans and secured equipment leases
expire or are sold, because we plan to enter into mortgage loans with terms of
10 to 20 years and secured equipment leases with terms of seven years, and those
obligations may not expire before all of the properties are sold.
Seasonality of Hotel Industry. The hotel industry is seasonal. As a
result, there may be quarterly fluctuations in the amount of percentage rent, if
any, we will receive from our hotel properties. Any reduction in percentage rent
would reduce the amount of cash we could distribute to our stockholders.
Risks of Mortgage Lending.
Real Estate Market Conditions. If we make mortgage loans, we
will be at risk of defaults on those loans caused by many conditions beyond our
control, including local and other economic conditions affecting real estate
values and interest rate levels. We do not know whether the values of the
properties securing the mortgage loans will remain at the levels existing on the
dates of origination of the mortgage loans. If the values of the underlying
properties drop, the risk of the loans to the Company will increase and the
values of our interests may decrease.
Investment Subject to Interest Rate Fluctuations. If we invest
in fixed-rate, long-term mortgage loans and interest rates rise, the mortgage
loans will yield a return lower than then-current market rates. If interest
rates decrease, we will be adversely affected to the extent that mortgage loans
are prepaid, because we will not be able to make new loans at the previously
higher interest rate.
Delays in Liquidating Defaulted Mortgage Loans Could Reduce
Our Investment Returns. If there are defaults under our mortgage loans, we may
not be able to repossess and sell the underlying properties quickly. The
resulting time delay could reduce the value of our investment in the defaulted
loans. An action to foreclose on a mortgaged property securing a loan is
regulated by state statutes and rules and is subject to many of the delays and
expenses of other lawsuits if the defendant raises defenses or counterclaims. In
the event of default by a mortgagor, these restrictions, among other things, may
impede our ability to foreclose on or sell the mortgaged property or to obtain
proceeds sufficient to repay all amounts due to us on the loan.
Returns May Be Limited By Regulations. The mortgage loans may
also be subject to regulation by federal, state and local authorities and
subject to various laws and judicial and administrative decisions. We may
determine not to make mortgage loans in any jurisdiction in which we believe we
have not complied in all material respects with applicable requirements. If we
decide not to make mortgage loans in several jurisdictions, it could reduce the
amount of income we would receive.
Risks of Secured Equipment Leasing.
Collateral May Be Inadequate to Secure Leases. In the event
that a lessee defaults on a secured equipment lease, we may not be able to sell
the subject equipment at a price that would enable us to recover our costs
associated with the equipment. If we cannot recover our costs, it could affect
our results of operations.
Returns May Be Limited By Regulations. The secured equipment
lease program may also be subject to regulation by federal, state and local
authorities and subject to various laws and judicial and administrative
decisions. We may determine not to operate the secured equipment lease program
in any jurisdiction in which we believe we have not complied in all material
respects with applicable requirements. If we decide not to operate the secured
equipment lease program in several jurisdictions, it could reduce the amount of
income we would receive.
"Tax Risks" discusses certain federal income tax risks
associated with the secured equipment lease program.
Possible Environmental Liabilities. Under various federal and state
environmental laws and regulations, as an owner or operator of real estate, we
may be required to investigate and clean up certain hazardous or toxic
substances, asbestos-containing materials, or petroleum product releases at our
properties. We may also be held liable to a governmental entity or to third
parties for property damage and for investigation and cleanup costs incurred by
those parties in connection with the contamination. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
The presence of contamination or the failure to remediate contaminations at any
of our properties may adversely affect our ability to sell or lease the
properties or to borrow using the properties as collateral. We could also be
liable under common law to third parties for damages and injuries resulting from
environmental contamination emanating from our properties.
All of our properties will be acquired subject to satisfactory Phase I
environmental assessments, which generally involve the inspection of site
conditions without invasive testing such as sampling or analysis of soil,
groundwater or other media or conditions; or satisfactory Phase II environmental
assessments, which generally involve the testing of soil, groundwater or other
media and conditions. The Board of Directors and the Advisor may determine that
we will acquire a property in which a Phase I or Phase II environmental
assessment indicates that a problem exists and has not been resolved at the time
the property is acquired, provided that the seller has (i) agreed in writing to
indemnify the Company and/or (ii) established in escrow cash funds equal to a
predetermined amount greater than the estimated costs to remediate the problem.
We cannot be sure, however, that any seller will be able to pay under an
indemnity we obtain or that the amount in escrow will be sufficient to pay all
remediation costs. Further, we cannot be sure that all environmental liabilities
have been identified or that no prior owner, operator or current occupant has
created an environmental condition not known to us. Moreover, we cannot be sure
(i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of our
properties will not be affected by tenants and occupants of the properties, by
the condition of land or operations in the vicinity of the properties (such as
the presence of underground storage tanks), or by third parties unrelated to the
Company. The imposition on the Company of environmental liabilities could have
an adverse effect on our financial condition or results of operation.
FINANCING RISKS
Uncertainty of Long-Term Financing. The Company intends to obtain
long-term financing; however, we have not yet obtained a commitment for any
long-term financing, and we cannot be sure that we will be able to obtain any
long-term financing on satisfactory terms. If we do not obtain long-term
financing, we may not be able to acquire as many properties or make as many
loans and leases as we anticipated, which could limit the diversification of our
investments and our ability to achieve our investment objectives.
Anticipated Borrowing has Risks. The Company may borrow money to
acquire assets, to preserve its status as a REIT or for other corporate
purposes. We may mortgage or put a lien on one or more of our assets in
connection with any borrowing. The Board of Directors anticipates that we will
obtain one or more revolving lines of credit in an aggregate amount of up to
$100,000,000 to provide financing for the acquisition of assets. On July 31,
1998, we entered into an initial $30,000,000 line of credit to be used to
acquire hotel properties. We may also obtain long-term, permanent financing. We
do not think that our permanent financing will exceed 30% of the Company's total
assets. The Company may repay the lines of credit with proceeds from this
offering, working capital or permanent financing. We may not borrow more than
300% of the Company's net assets, without showing our independent Directors that
a higher level of borrowing is appropriate. The use of borrowing may be risky if
the cash flow from the Company's real estate and other investments is
insufficient to meet its debt obligations. In addition, lenders to the Company
may seek to impose restrictions on future borrowings, distributions and Company
operating policies. If we mortgage or pledge assets as collateral and we cannot
meet our debt obligations, the lender could take the collateral, and we would
lose both the asset and the income we were deriving from it.
We Can Borrow Money to Make Distributions. We may borrow money as
necessary or advisable to assure that we maintain our qualification as a REIT
for federal income tax purposes. In such an event, it is possible that we could
make distributions in excess of our earnings and profits and, accordingly, that
the distributions could constitute a return of capital for federal income tax
purposes, although such distributions would not reduce stockholders' aggregate
invested capital.
MISCELLANEOUS RISKS
Competition. We compete with other companies for the acquisition of
properties. In addition, the hotel industry in which we invest is highly
competitive, and we anticipate that any property we acquire will compete with
other businesses in the vicinity. Our ability to receive rent, in the form of
percentage rent in excess of the base rent (including automatic increases in the
base rent), for our properties will depend in part on the ability of the tenants
to
<PAGE>
compete successfully with other businesses in the vicinity. In addition, we will
compete with other financing sources for suitable tenants and properties. If we
and our tenants are unable to compete successfully, our results of operations
will be adversely affected.
Inflation Could Adversely Affect Investment Returns. Inflation may
decrease the value of some of our investments. For example, a substantial rise
in inflation over the term of an investment in mortgage loans and secured
equipment leases may reduce the actual return on those investments, if they do
not otherwise provide for adjustments based upon inflation. Inflation could also
reduce the value of our investments in properties if the inflation rate is high
enough that percentage rent and automatic increases in base rent do not keep up
with inflation.
Lack of Adequate Insurance. If we, as landlord, incur any liability
which is not fully covered by insurance, we would be liable for the uninsured
amounts, and returns to the stockholders could be reduced. "Business -
Description of Property Leases - Insurance, Taxes Maintenance and Repairs"
describes the types of insurance that the leases of the properties will require
the tenant to obtain.
Possible Effect of ERISA. We believe that our assets will not be
deemed, under the Employee Retirement Income Security Act of 1974, as amended,
to be "plan assets" of any plan that invests in the shares, although we have not
requested an opinion of counsel to that effect. If our assets were deemed to be
"plan assets" under ERISA (i) it is not clear that the exemptions from the
"prohibited transaction" rules under ERISA would be available for our
transactions and (ii) the prudence standards of ERISA would apply to our
investments (and might not be met). ERISA makes plan fiduciaries personally
responsible for any losses resulting to the plan from any breach of fiduciary
duty and the Internal Revenue Code imposes nondeductible excise taxes on
prohibited transactions. If such excise taxes were imposed on the Company, the
amount of funds available for us to make distributions to stockholders would be
reduced.
Effects of Governing Documents and Maryland Law on Potential Takeovers.
Certain provisions of the Company's Articles of Incorporation, including the
ownership limitations, transfer restrictions and ability to issue preferential
preferred stock, may have the effect of preventing, delaying or discouraging
takeovers of the Company by third parties. Certain other provisions of the
Articles of Incorporation which exempt the Company from the application of
Maryland's Business Combinations Statute and Control Share Acquisition Statute,
may have the effect of facilitating (i) business combinations between the
Company and beneficial owners of 10% or more of the voting power of the
outstanding voting stock of the Company and (ii) the acquisition by any person
of shares entitled to exercise or direct the exercise of 20% or more of the
total voting power of the Company. Because we will not be subject to the
provisions of the Business Combinations Statute and the Control Share
Acquisition Statute, it may be more difficult for our stockholders to prevent or
delay business combinations with large stockholders or acquisitions of
substantial blocks of voting power by such stockholders or other persons, should
the ownership restrictions be waived, modified or completely removed. Such
business combinations or acquisitions of voting power could cause the Company to
fail to qualify as a REIT. See "-- Tax Risks -- Failure to Qualify as a REIT for
Tax Purposes," "-- Tax Risks -- Limitations on Share Ownership," "Summary of the
Articles of Incorporation and Bylaws -- General," "Summary of the Articles of
Incorporation and Bylaws -- Mergers, Combinations, and Sale of Assets," "Summary
of the Articles of Incorporation and Bylaws -- Control Share Acquisitions" and
"Summary of the Articles of Incorporation and Bylaws -- Restriction of
Ownership" sections of this Prospectus.
Ownership Limitations Relating to REIT Status. The Articles of
Incorporation generally restrict direct or indirect ownership (applying certain
attribution rules) of the outstanding common stock to no more than 9.8% of the
outstanding common stock or 9.8% of any series of outstanding preferred stock by
one person (as defined in the Articles of Incorporation). If the ownership,
transfer, acquisition or change in our corporate structure would jeopardize our
REIT status, that ownership, transfer, acquisition or change in our corporate
structure would be void as to the intended transferee or owner and the intended
transferee or owner would not have or acquire any rights to the common stock.
Majority Stockholder Vote May Discourage Changes of Control.
Stockholders may take certain actions, including approving amendments to the
Articles of Incorporation and Bylaws, by a vote of a majority of the shares
outstanding and entitled to vote. All actions taken, if approved by the holders
of the requisite number of shares, would be binding on all stockholders. Certain
of these provisions may discourage or make it more difficult for another party
to acquire control of the Company or to effect a change in the operation of the
Company.
Potential for Dilution. Stockholders have no preemptive rights. If we
(i) commence a subsequent public offering of shares or securities convertible
into shares or (ii) otherwise issue additional shares, including shares issuable
upon exercise of the soliciting dealer warrants, investors purchasing shares in
this offering who do not participate in future stock issuances will experience
dilution in the percentage of their equity investment in the Company. Although
the Board of Directors has not yet determined whether it will engage in future
offerings or other issuances of shares, it may do so if it is determined to be
in the best interests of the Company. See "Summary of the Articles of
Incorporation and Bylaws -- Description of Capital Stock -- Soliciting Dealer
Warrants" and "The Offering -- Plan of Distribution."
Board of Directors Can Take Many Actions Without Stockholder Approval.
The Board of Directors has overall authority to conduct the Company's
operations. This authority includes significant flexibility. For example, the
Board of Directors can (i) prevent the ownership, transfer and/or accumulation
of shares in order to protect our status as a REIT or for any other reason
deemed to be in the best interests of the stockholders (see "Summary of the
Articles of Incorporation and Bylaws - Restriction of Ownership"); (ii) issue
additional shares without obtaining stockholder approval, which could dilute
your ownership; (iii) change the compensation of the Advisor, and employ and
compensate affiliates; (iv) direct our investments toward investments that will
not appreciate over time, such as building only properties, with the land owned
by a third party, and mortgage loans; and (v) change minimum creditworthiness
standards with respect to tenants. Any of these actions could reduce the value
of our assets without giving you, as a stockholder, the right to vote.
Reliance on Advisor and Board of Directors; No Management Rights for
Stockholders. If you invest in the Company, you will be relying entirely on the
management ability of the Advisor and on the oversight of our Board of
Directors. You will have no right or power to take part in the management of the
Company, except through the exercise of your voting rights. Thus, you should not
purchase any of the shares offered by this Prospectus unless you are willing to
entrust all aspects of the management of the Company to the Advisor and the
Board of Directors.
Limited Liability of Officers and Directors. The Articles of
Incorporation and Bylaws provide that an officer or Director's liability for
monetary damages to the Company, its stockholders or third parties may be
limited. Generally, we are obligated under the Articles of Incorporation and the
Bylaws to indemnify our officers and Directors against certain liabilities
incurred in connection with their services. We have executed indemnification
agreements with each officer and Director and agreed to indemnify the officer or
Director for any such liabilities that he or she incurs. These indemnification
agreements could limit the ability of the Company and the stockholders to
effectively take action against the Directors and officers of the Company
arising from their service to the Company. See "Summary of the Articles of
Incorporation and Bylaws - Limitation of Liability and Indemnification."
TAX RISKS
Failure to Qualify as a REIT for Tax Purposes. Our management believes
that we operate in a manner that enables us to meet the requirements for
qualification and to remain qualified as a REIT for federal income tax purposes.
A REIT generally is not taxed at the federal corporate level on income it
distributes to its stockholders, as long as it distributes annually at least 95%
of its income to its stockholders. We have not requested, and do not plan to
request a ruling from the Internal Revenue Service that we qualify as a REIT. We
have, however, received an opinion from our tax counsel, Shaw Pittman , that we
meet the requirements for qualification as a REIT for the taxable years ending
through December 31, 1998 and that we are in a position to continue such
qualification.
You should be aware that opinions of counsel are not binding on the
Internal Revenue Service or on any court. Furthermore, the conclusions stated in
the opinion are conditioned on, and our continued qualification as a REIT will
depend on, our management meeting various requirements, which are discussed in
more detail under the heading "Federal Income Tax Considerations -- Taxation of
the Company -- Requirements for Qualification as a REIT."
If we fail to qualify as a REIT, we would be subject to federal income
tax at regular corporate rates. In addition to these taxes, we may be subject to
the federal alternative minimum tax. Unless we are entitled to relief under
specific statutory provisions, we could not elect to be taxed as a REIT for four
taxable years following the year during which we were disqualified. Therefore,
if we lose our REIT status, the funds available for distribution to you, as a
stockholder, would be reduced substantially for each of the years involved.
Risks Relating to Leases of Properties. Our tax counsel, Shaw Pittman ,
is of the opinion, based upon certain assumptions, that the leases of hotels
where we own the underlying land constitute leases for federal income tax
purposes. However, with respect to the hotels where we do not own the underlying
land, Shaw Pittman is unable to render this opinion. If the lease of a hotel
does not constitute a lease for federal income tax purposes, it will be treated
as a financing arrangement. In the opinion of Shaw Pittman, the income derived
from such a financing arrangement would satisfy the 75% and the 95% gross income
tests for REIT qualification because it would be considered to be interest on a
loan secured by real property. Nevertheless, the recharacterization of a lease
in this fashion may have adverse tax consequences for us, in particular that we
would not be entitled to claim depreciation deductions with respect to the hotel
(although we would be entitled to treat part of the payments we would receive
under the arrangement as the repayment of principal). In such event, in certain
taxable years our taxable income, and the corresponding obligation to distribute
95% of such income, would be increased. Any increase in our distribution
requirements may limit our ability to invest in additional hotels and to make
additional mortgage loans.
Risks Associated with Loans Secured by Personal Property. In order to
qualify as a REIT, at least 75% of the value of our assets must consist of
investments in real estate, investments in other REITs, cash and cash
equivalents, and government securities. Our secured equipment leases would not
be considered real estate assets for federal income tax purposes. Therefore, the
value of the secured equipment leases, together with any other property that is
not considered a real estate asset for federal income tax purposes, must
represent in the aggregate less than 25% of our total assets.
In addition, we may not own securities in, or make loans to, any one
company (other than a REIT) which have, in the aggregate, a value in excess of
5% of our total assets. For federal income tax purposes, the secured equipment
leases would be considered loans. The value of the secured equipment leases
entered into with any particular tenant under a lease or entered into with any
particular borrower under a loan must not represent in excess of 5% of our total
assets.
The 25% and 5% tests are determined at the end of each calendar
quarter. If we fail to meet either test at the end of any calendar quarter, we
will cease to qualify as a REIT.
Risks Associated with Distribution Requirements. Subject to certain
adjustments that are unique to REITs, a REIT generally must distribute 95% of
its taxable income. For the purpose of determining taxable income, we may be
required to accrue interest, rent and other items treated as earned for tax
purposes but that we have not yet received. In addition, we may be required not
to accrue as expenses for tax purposes certain items which actually have been
paid or certain of the Company's deductions might be disallowed by the Internal
Revenue Service. As a result, we could have taxable income in excess of cash
available for distribution. If this occurs, we may have to borrow funds or
liquidate some of our assets in order to meet the distribution requirement
applicable to a REIT.
Limitations on Share Ownership. For the purpose of protecting our REIT
status, our Articles of Incorporation generally limit the ownership by any
single stockholder of any class of our capital stock, including common stock, to
9.8% of the outstanding shares of such class. The Articles also prohibit anyone
from buying shares if the purchase would result in our losing our REIT status.
For example, we would lose our REIT status if we had fewer than 100 different
stockholders or if five or fewer stockholders, applying certain broad
attribution rules of the Internal Revenue Code, owned 50% or more of the common
stock. These restrictions may discourage a change in control, deter any
attractive tender offers for our common stock or limit the opportunity for you
or other stockholders to receive a premium for your common stock in the event a
stockholder is making purchases of shares of common stock in order to acquire a
block of shares.
Other Tax Liabilities. Even if we qualify as a REIT, we may be subject
to certain federal, state and local taxes on our income and property that could
reduce operating cash flow.
Changes in Tax Laws. As we have previously described, we are treated as
a REIT for federal income tax purposes. However, this treatment is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect our status as a REIT. If
there is a change in the tax laws that prevents us from qualifying as a REIT or
that requires REITs generally to pay corporate level income taxes, we may not be
able to make the same level of distributions to our stockholders.
<PAGE>
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE
SUITABILITY STANDARDS
The shares of common stock offered hereby (the "Shares") are suitable
only as a long-term investment for persons of adequate financial means who have
no need for liquidity in this investment. Initially, there is not expected to be
any public market for the Shares, which means that it may be difficult to sell
Shares. See the "Summary of the Articles of Incorporation and Bylaws --
Restriction of Ownership" for a description of the transfer requirements. As a
result, the Company has established suitability standards which require
investors to have either (i) a net worth (not including home, furnishings, and
personal automobiles) of at least $45,000 and an annual gross income of at least
$45,000, or (ii) a net worth (not including home, furnishings, and personal
automobiles) of at least $150,000. The Company's suitability standards also
require that a potential investor (i) can reasonably benefit from an investment
in the Company based on such investor's overall investment objectives and
portfolio structuring; (ii) is able to bear the economic risk of the investment
based on the prospective stockholder's overall financial situation; and (iii)
has apparent understanding of (a) the fundamental risks of the investment, (b)
the risk that such investor may lose the entire investment, (c) the lack of
liquidity of the Company's Shares, (d) the background and qualifications of the
Advisor, and (e) the tax consequences of the investment.
Iowa, Maine, Massachusetts, Missouri, New Hampshire, North Carolina,
Ohio, Pennsylvania and Tennessee have established suitability standards
different from those established by the Company, and Shares will be sold only to
investors in those states who meet the special suitability standards set forth
below.
IOWA, MASSACHUSETTS, MISSOURI, NORTH CAROLINA AND TENNESSEE -- The
investor has either (i) a net worth (not including home, furnishings, and
personal automobiles) of at least $60,000 and an annual gross income of at least
$60,000, or (ii) a net worth (not including home, furnishings, and personal
automobiles) of at least $225,000.
MAINE -- The investor has either (i) a net worth (not including home,
furnishings, and personal automobiles) of at least $50,000 and an annual gross
income of at least $50,000, or (ii) a net worth (not including home,
furnishings, and personal automobiles) of at least $200,000.
NEW HAMPSHIRE -- The investor has either (i) a net worth (not including
home, furnishings, and personal automobiles) of at least $125,000 and an annual
gross income of at least $50,000, or (ii) a net worth (not including home,
furnishings, and personal automobiles) of at least $250,000.
OHIO AND PENNSYLVANIA -- The investor has (i) a net worth (not
including home, furnishings, and personal automobiles) of at least ten times the
investor's investment in the Company; and (ii) either (a) a net worth (not
including home, furnishings, and personal automobiles) of at least $45,000 and
an annual gross income of at least $45,000, or (b) a net worth (not including
home, furnishings, and personal automobiles) of at least $150,000.
The foregoing suitability standards must be met by the investor who
purchases the Shares. If the investment is being made for a fiduciary account
(such as an IRA, Keogh Plan, or corporate pension or profit-sharing plan), the
beneficiary, the fiduciary account, or any donor or grantor that is the
fiduciary of the account who directly or indirectly supplies the investment
funds must meet such suitability standards.
In addition, under the laws of certain states, investors may transfer
their Shares only to persons who meet similar standards, and the Company may
require certain assurances that such standards are met. Investors should read
carefully the requirements in connection with resales of Shares as set forth in
the Articles of Incorporation and as summarized under "Summary of the Articles
of Incorporation and Bylaws -- Restriction of Ownership."
In purchasing Shares, custodians or trustees of employee pension
benefit plans or IRAs may be subject to the fiduciary duties imposed by the
Employee Retirement Income Security Act of 1974 ("ERISA") or other applicable
laws and to the prohibited transaction rules prescribed by ERISA and related
provisions of the Internal Revenue Code (the "Code"). See "The Offering -- ERISA
Considerations ." In addition, prior to purchasing Shares, the trustee or
custodian of an employee pension benefit plan or an IRA should determine that
such an
<PAGE>
investment would be permissible under the governing instruments of such plan or
account and applicable law. For information regarding "unrelated business
taxable income," see "Federal Income Tax Considerations -- Taxation of
Stockholders -- Tax-Exempt Stockholders."
In order to ensure adherence to the suitability standards described
above, requisite suitability standards must be met, as set forth in the
Subscription Agreement in one of the forms attached hereto as Appendix D. In
addition, soliciting dealers, broker-dealers that are members of the National
Association of Securities Dealers, Inc. or other entities exempt from
broker-dealer registration (collectively, the "Soliciting Dealers"), who are
engaged by CNL Securities Corp. (the "Managing Dealer") to sell Shares, have the
responsibility to make every reasonable effort to determine that the purchase of
Shares is a suitable and appropriate investment for an investor. In making this
determination, the Soliciting Dealers will rely on relevant information provided
by the investor, including information as to the investor's age, investment
objectives, investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. See "The Offering --
Subscription Procedures." Executed Subscription Agreements will be maintained in
the Company's records for six years.
HOW TO SUBSCRIBE
An investor who meets the suitability standards described above may
subscribe for Shares by completing and executing the Subscription Agreement and
delivering it to a Soliciting Dealer, together with a check for the full
purchase price of the Shares subscribed for, payable to "SouthTrust Asset
Management Company of Florida, N.A., Escrow Agent." See "The Offering --
Subscription Procedures." Certain Soliciting Dealers who have "net capital," as
defined in the applicable federal securities regulations, of $250,000 or more
may instruct their customers to make their checks for Shares subscribed for
payable directly to the Soliciting Dealer. Care should be taken to ensure that
the Subscription Agreement is filled out correctly and completely. Partnerships,
individual fiduciaries signing on behalf of trusts, estates, and in other
capacities, and persons signing on behalf of corporations and corporate trustees
may be required to obtain additional documents from Soliciting Dealers. Any
subscription may be rejected by the Company in whole or in part, regardless of
whether the subscriber meets the minimum suitability standards.
Certain Soliciting Dealers may permit investors who meet the
suitability standards described above to subscribe for Shares by telephonic
order to the Soliciting Dealer. This procedure may not be available in certain
states. See "The Offering -- Subscription Procedures" and "The Offering -- Plan
of Distribution."
A minimum investment of 250 Shares ($2,500) is required, except for
Nebraska, New York, and North Carolina investors who must make a minimum
investment of 500 Shares ($5,000). IRAs, Keogh plans, and pension plans must
make a minimum investment of at least 100 Shares ($1,000), except for Iowa
tax-exempt investors who must make a minimum investment of 250 Shares ($2,500).
For Minnesota investors only, IRAs and qualified plans must make a minimum
investment of 200 Shares ($2,000). Following an initial subscription for at
least the required minimum investment, any investor may make additional
purchases in increments of one Share. Maine investors, however, may not make
additional purchases in amounts less than the applicable minimum investment
except with respect to Shares purchased pursuant to the Company's reinvestment
plan (the "Reinvestment Plan"). See "The Offering -- General," "The Offering --
Subscription Procedures," and "Summary of Reinvestment Plan."
<PAGE>
ESTIMATED USE OF PROCEEDS
The table set forth below summarizes certain information relating to
the anticipated use of offering proceeds by the Company, assuming that
25,000,000 Shares are sold. The Company estimates that 84% of gross offering
proceeds computed at $10 per share sold ("Gross Proceeds") will be available for
the purchase of properties (the "Properties") and the making of mortgage loans
(the "Mortgage Loans"), and approximately 9% of Gross Proceeds will be paid in
fees and expenses to affiliates of the Company (the "Affiliates") for their
services and as reimbursement for offering expenses ("Offering Expenses") and
acquisition expenses incurred on behalf of the Company. While the estimated use
of proceeds set forth in the table below is believed to be reasonable, this
table should be viewed only as an estimate of the use of proceeds that may be
achieved.
<TABLE>
<CAPTION>
<S> <C>
Maximum Offering(1)
-------------------
Amount Percent
------ -------
GROSS PROCEEDS TO THE COMPANY (2).......................................... $250,000,000 100.0%
Less:
Selling Commissions to CNL
Securities Corp. (2)................................................. 18,750,000 7.5%
Marketing Support and Due Diligence
Expense Reimbursement Fee to
CNL Securities Corp. (2)............................................. 1,250,000 0.5%
Offering Expenses (3)................................................... 7,500,000 3.0%
------------ ------
NET PROCEEDS TO THE COMPANY................................................ 222,500,000 89.0%
Less:
Acquisition Fees to the Advisor (4)..................................... 11,250,000 4.5%
Acquisition Expenses (5)................................................ 1,250,000 0.5%
Initial Working Capital Reserve......................................... (6)
-------------- ------
CASH PAYMENT FOR PURCHASE OF PROPERTIES
AND THE MAKING OF MORTGAGE LOANS
BY THE COMPANY (7)...................................................... $210,000,000 84.0%
============ ======
</TABLE>
FOOTNOTES:
(1) Excludes 2,500,000 Shares that may be sold pursuant to the Reinvestment
Plan and 1,000,000 shares that may be sold upon the exercise of the
warrants (the "Soliciting Dealer Warrants"). See the "Summary of the
Articles of Incorporation and Bylaws -- Description of Capital Stock --
Soliciting Dealer Warrants" and "The Offering -- Plan of Distribution"
sections for a description of the Soliciting Dealer Warrants.
(2) Gross Proceeds of the offering are calculated as if all Shares are sold at
$10.00 per Share and do not take into account any reduction in selling
commissions. ("Selling Commissions") See "The Offering-- Plan of
Distribution" for a description of the circumstances under which Selling
Commissions may be reduced, including commission discounts available for
purchases by registered representatives or principals of the Managing
Dealer or Soliciting Dealers, certain Directors and officers, and certain
investment advisers. Selling Commissions are calculated assuming that
reduced commissions are not paid in connection with the purchase of any
Shares. The Shares are being offered to the public through CNL Securities
Corp., which will receive Selling Commissions of 7.5% on all sales of
Shares and will act as Managing Dealer. The Managing Dealer is an Affiliate
of the Advisor. Other broker-dealers may be engaged as Soliciting Dealers
to sell Shares and be reallowed Selling Commissions of up to 7%, with
respect to Shares which they sell. In addition, all or a portion of the
marketing support and due diligence expense reimbursement fee may be
reallowed to certain Soliciting Dealers for expenses incurred by them in
selling the Shares, including reimbursement for bona fide expenses incurred
in connection with due diligence activities, with prior written approval
from, and in the sole discretion of, the Managing Dealer. See "The
Offering-- Plan of Distribution" for a more complete description of this
fee. The Company also will issue to the Managing Dealer a Soliciting Dealer
Warrant to purchase one share of common stock for every 25 Shares sold, to
be exercised, if at all, during the five-year period commencing with the
date the offering begins (the "Exercise Period"), at a price of $12.00 per
share. All or any part of such Soliciting Dealer Warrants may be reallowed
to certain Soliciting Dealers with prior written approval of, and in the
sole discretion of, the Managing Dealer, unless prohibited by federal or
state securities laws. See "Summary of the Articles of Incorporation and
Bylaws-- Description of Capital Stock-- Soliciting Dealer Warrants" and
"The Offering-- Plan of Distribution."
(3) Offering Expenses include legal, accounting, printing, escrow, filing,
registration, qualification, and other expenses of the Company and the
offering of the Shares, but exclude Selling Commissions and the marketing
support and due diligence expense reimbursement fee. The Advisor will pay
all Offering Expenses which exceed 3% of Gross Proceeds. The Offering
Expenses paid by the Company, together with the 7.5% Selling Commissions
and the 0.5% marketing support and due diligence expense reimbursement fee
incurred by the Company will not exceed 13% of the proceeds raised in
connection with this offering.
(4) Acquisition fees ("Acquisition Fees") include all fees and commissions paid
by the Company to any person or entity in connection with the selection or
acquisition of any Property or the making of any Mortgage Loan, including
to Affiliates or nonaffiliates. Acquisition Fees do not include acquisition
expenses ("Acquisition Expenses").
(5) Represents Acquisition Expenses that are neither reimbursed to the Company
nor included in the purchase price of the Properties, and on which rent is
not received, but does not include certain expenses associated with
Property acquisitions that are part of the purchase price of the
Properties, that are included in the basis of the Properties, and on which
rent is received. Acquisition Expenses include any and all expenses
incurred by the Company, the Advisor, or any Affiliate of the Advisor in
connection with the selection or acquisition of any Property or the making
of any Mortgage Loan, whether or not acquired or made, including, without
limitation, legal fees and expenses, travel and communication expenses,
costs of appraisals, nonrefundable option payments on property not
acquired, accounting fees and expenses, taxes, and title insurance, but
exclude Acquisition Fees. The expenses that are attributable to the seller
of the Properties and part of the purchase price of the Properties are
anticipated to range between 1% and 2% of Gross Proceeds.
(6) Because leases generally will be on a "triple-net" basis, it is not
anticipated that a permanent reserve for maintenance and repairs will be
established. However, to the extent that the Company has insufficient funds
for such purposes, the Advisor may, but is not required to contribute to
the Company an aggregate amount of up to 1% of the net offering proceeds
available to the Company for maintenance and repairs. The Advisor also may,
but is not required to establish reserves from offering proceeds, operating
funds, and the available proceeds of any sales of Company assets ("Sale").
(7) Offering proceeds designated for investment in Properties or the making of
Mortgage Loans temporarily may be invested in short-term, highly liquid
investments with appropriate safety of principal. The Company may, at its
discretion, use up to $100,000 per calendar quarter of offering proceeds
for redemptions of Shares. See "Redemption of Shares."
<PAGE>
MANAGEMENT COMPENSATION
The table below summarizes the types, recipients, methods of
computation, and estimated amounts of all compensation, fees, reimbursements and
distributions to be paid directly or indirectly by the Company to the Advisor
and its Affiliates, exclusive of any distributions to which the Advisor or its
Affiliates may be entitled by reason of their purchase and ownership of Shares.
The table excludes estimated amounts of compensation relating to any Shares
issued pursuant to the Company's Reinvestment Plan and Soliciting Dealer
Warrants. See "The Advisor and the Advisory Agreement." For information
concerning compensation and fees paid to the Advisor and its Affiliates since
the date of inception of the Company, see "Certain Transactions." For
information concerning compensation to the Directors, see "Management."
A maximum of 25,000,000 Shares ($250,000,000) may be sold. An
additional 2,500,000 Shares may be sold to stockholders who receive a copy of
this Prospectus and who purchase Shares through the Reinvestment Plan. An
additional 1,000,000 Shares ($12,000,000) of common stock also may be sold to
the Managing Dealer and reallowed to certain Soliciting Dealers who may exercise
Soliciting Dealer Warrants at an exercise price of $12.00 per share during the
Exercise Period for such shares.
The following arrangements for compensation and fees to the Advisor and
its Affiliates were not determined by arm's-length negotiations. See "Conflicts
of Interest." There is no item of compensation and no fee that can be paid to
the Advisor or its Affiliates under more than one category.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Offering Stage
- ------------------------------------------------------------------------------------------------------------------------------------
Selling Commissions to Selling Commissions of 7.5% per Share on all Shares sold, subject $18,750,000 if 25,000,000 Shares
Managing Dealer and to reduction under certain circumstances as described in "The are sold.
Soliciting Dealers Offering -- Plan of Distribution." Soliciting Dealers may be
reallowed Selling Commissions of up to 7% with
respect to Shares they sell. In addition, the
Managing Dealer will receive one Soliciting Dealer
Warrant for every 25 Shares sold, all or a portion
of which may be reallowed to Soliciting Dealers,
with prior written approval from, and in the sole
discretion of, the Managing Dealer. See "The
Offering -- Plan of Distribution."
- ------------------------------------------------------------------------------------------------------------------------------------
Marketing support and Expense allowance of 0.5% of Gross Proceeds to the Managing $1,250,000 if 25,000,000 Shares
due diligence expense Dealer, all or a portion of which may be reallowed to Soliciting are sold.
reimbursement fee to Dealers with prior written approval from, and in the sole
Managing Dealer and discretion of, the Managing Dealer. The Managing Dealer will pay
Soliciting Dealers all sums attributable to bona fide due diligence expenses from
this fee, in the Managing Dealer's sole discretion.
- ------------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Actual expenses incurred, except that the Advisor will pay all Amount is not determinable at
Advisor and its such expenses in excess of 3% of Gross Proceeds. The Offering this time, but will not exceed
Affiliates for Offering Expenses paid by the Company, together with the 7.5% Selling 3% of Gross Proceeds:$7,500,000
Expenses Commissions and the 0.5% marketing support and due diligence if 25,000,000 Shares are sold.
expense reimbursement fee incurred by the Company
will not exceed 13% of the proceeds raised in
connection with this offering.
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition Stage
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition Fee to the 4.5% of Gross Proceeds, loan proceeds from permanent financing and $11,250,000 if 25,000,000
Advisor and amounts outstanding on the line of credit, if any, at the time of Shares are sold plus $4,500,000
listing the Company's common stock on a national securities if Permanent Financing equals
exchange or over-the-counter market ("Listing"), but excluding $100,000,000.
loan proceeds used to finance secured equipment leases
(collectively, "Total Proceeds") payable to the Advisor as
Acquisition Fees.
- ------------------------------------------------------------------------------------------------------------------------------------
Other Acquisition Fees Any fees paid to Affiliates of the Advisor in connection with the Amount is not determinable at
to Affiliates of the financing, development, construction or renovation of a Property. this time.
Advisor Such fees are in addition to 4.5% of Total Proceeds payable to the
Advisor as Acquisition Fees, and payment of such fees will be
subject to approval by the Board of Directors, including a
majority of the Directors who are independent of the Advisor (the
"Independent Directors"), not otherwise interested in the
transaction.
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Reimbursement of Reimbursement to the Advisor and its Affiliates for expenses Acquisition Expenses, which are
Acquisition Expenses to actually incurred. based on a number of factors,
the Advisor and its including the purchase price of
Affiliates The total of all Acquisition Fees and any Acquisition Expenses the Properties, are not
payable to the Advisor and its Affiliates shall be reasonable and determinable at this time.
shall not exceed an amount equal to 6% of the Real Estate Asset
Value of a Property, or in the case of a Mortgage Loan, 6% of the
funds advanced, unless a majority of the Board of Directors,
including a majority of the Independent Directors not otherwise
interested in the transaction, approves fees in excess of this
limit subject to a determination that the transaction is
commercially competitive, fair and reasonable to the Company.
Acquisition Fees shall be reduced to the extent that, and if
necessary to limit, the total compensation paid to all persons
involved in the acquisition of any Property to the amount
customarily charged in arm's-length transactions by other persons
or entities rendering similar services as an ongoing public
activity in the same geographical location and for comparable
types of Properties, and to the extent that other acquisition
fees, finder's fees, real estate commissions, or other similar
fees or commissions are paid by any person in connection with the
transaction. "Real Estate Asset Value" means the amount actually
paid or allocated to the purchase, development, construction or
improvement of a Property, exclusive of Acquisition Fees and
Acquisition Expenses.
- ------------------------------------------------------------------------------------------------------------------------------------
Operational Stage
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Management Fee to A monthly Asset Management Fee in an amount equal to one-twelfth Amount is not determinable at
the Advisor of 0.6% of the Company's Real Estate Asset Value and the this time. The amount of the
outstanding principal amount of any Mortgage Loans, as of the end Asset Management Fee will depend
of the preceding month. Specifically, Real Estate Asset Value upon, among other things, the
equals the amount invested in the Properties wholly owned by the cost of the Properties and the
Company, determined on the basis of cost, plus, in the case of amount invested in Mortgage
Properties owned by any joint venture or partnership in which the Loans.
Company is a co-venturer or partner ("Joint Venture"), the portion
of the cost of such Properties paid by the Company, exclusive of
Acquisition Fees and Acquisition Expenses. The Asset Management
Fee, which will not exceed fees which are competitive for similar
services in the same geographic area, may or may not be taken, in
whole or in part as to any year, in the sole discretion of the
Advisor. All or any portion of the Asset Management Fee not taken
as to any fiscal year shall be deferred without interest and may
be taken in such other fiscal year as the Advisor shall determine.
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Operating Expenses (which, in general, are those expenses relating Amount is not determinable at
Advisor and Affiliates to administration of the Company on an ongoing basis) will be this time.
for operating expenses reimbursed by the Company. To the extent that Operating Expenses
payable or reimbursable by the Company, in any four
consecutive fiscal quarters (the "Expense Year"),
exceed the greater of 2% of Average Invested Assets
or 25% of Net Income (the "2%/25% Guidelines"), the
Advisor shall reimburse the Company within 60 days
after the end of the Expense Year the amount by
which the total Operating Expenses paid or incurred
by the Company exceed the 2%/25% Guidelines.
"Average Invested Assets" means, for a specified
period, the average of the aggregate book value of
the assets of the Company invested, directly or
indirectly, in equity interests in and loans
secured by real estate before reserves for
depreciation or bad debts or other similar non-cash
reserves, computed by taking the average of such
values at the end of each month during such period.
"Net Income" means for any period, the total
revenues applicable to such period, less the total
expenses applicable to such period excluding
additions to reserves for depreciation, bad debts,
or other similar non-cash reserves; provided,
however, Net Income for purposes of calculating
total allowable Operating Expenses shall exclude
the gain from the sale of the Company's assets.
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated real estate disposition fee, payable upon Amount is not determinable at
real estate disposition the Sale of one or more Properties, in an amount equal to the this time. The amount of this
fee payable to the lesser of (i) one-half of a Competitive Real Estate Commission, or fee, if it becomes payable,
Advisor from a Sale or (ii) 3% of the sales price of such Property or Properties. depend upon the price at
Sales of a Property not Payment of such fee shall be made only if the Advisor provides a which Properties are sold.
in liquidation of the substantial amount of services in connection with the Sale of a Property
Company or Properties and shall be subordinated to receipt by the stockholders
of Distributions equal to the sum of (i) their aggregate
Stockholders' 8% Return (as defined below) and (ii) their
aggregate investment in the Company ("Invested Capital"). In general,
Invested Capital is the amount of cash paid by the
stockholders to the Company for their Shares,
reduced by certain prior Distributions to the
stockholders from the sales of assets. If, at the
time of a Sale, payment of the disposition fee is
deferred because the subordination conditions have
not been satisfied, then the disposition fee shall
be paid at such later time as the subordination
conditions are satisfied. Upon Listing, if the
Advisor has accrued but not been paid such real
estate disposition fee, then for purposes of
determining whether the subordination conditions
have been satisfied, stockholders will be deemed to
have received a Distribution in the amount equal to
the product of the total number of Shares of Common
Stock outstanding and the average closing price of
the Shares over a period, beginning 180 days after
Listing, of 30 days during which the Shares are
traded. "Stockholders' 8% Return," as of each date,
means an aggregate amount equal to an 8%
cumulative, noncompounded, annual return on
Invested Capital.
- ------------------------------------------------------------------------------------------------------------------------------------
Subordinated incentive At such time, if any, as Listing occurs, the Advisor shall be paid Amount is not determinable at
fee payable to the the subordinated incentive fee ("Subordinated Incentive Fee") in this time.
Advisor at such time, if amount equal to 10% of the amount by which (i) the market value of
any, as Listing occurs the Company (as defined below) plus the total Distributions
made to stockholders from the Company's inception until the date
of Listing exceeds (ii) the sum of (A) 100% of Invested Capital
and (B) the total Distributions required to be made to the
stockholders in order to pay the Stockholders' 8% Return from
inception through the date the market value is determined. For
purposes of calculating the Subordinated Incentive Fee, the market
value of the Company shall be the average closing price or average
of bid and asked price, as the case may be, over a period of 30
days during which the Shares are traded with such period beginning
180 days after Listing. The Subordinated Incentive Fee will be
reduced by the amount of any prior payment to the Advisor of a
deferred, subordinated share of Net Sales Proceeds
from Sales of assets of the Company.
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated share equal to 10% of Net Sales Proceeds Amount is not determinable at
share of Net Sales from Sales of assets of the Company payable after receipt by the this time.
Proceeds from Sales of stockholders of Distributions equal to the sum of (i) the
assets of the Company Stockholders' 8% Return and (ii) 100% of Invested Capital.
not in liquidation of Following Listing, no share of Net Sales Proceeds will be paid to
the Company payable to the Advisor.
the Advisor
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Performance Fee Upon termination of the Advisory Agreement, if Listing has not Amount is not determinable at
payable to the Advisor occurred and the Advisor has met applicable performance standards, this time.
the Advisor shall be paid the Performance Fee in the amount equal
to 10% of the amount by which (i) the appraised value of the
Company's assets on the date of termination of the Advisory
Agreement (the "Termination Date"), less any indebtedness secured
by such assets, plus total Distributions paid to stockholders from
the Company's inception through the Termination Date, exceeds (ii)
the sum of 100% of Invested Capital plus an amount equal to the
Stockholders' 8% Return from inception through the Termination
Date. The Performance Fee, to the extent payable at the time of
Listing, will not be payable in the event the Subordinated
Incentive Fee is paid.
- ------------------------------------------------------------------------------------------------------------------------------------
Secured Equipment Lease A fee paid to the Advisor out of the proceeds of the one or more Amount is not determinable at
Servicing Fee to revolving lines of credit (collectively, the "Line of Credit") or this time.
the Advisor Permanent Financing for negotiating furniture, fixture and
equipment ("Equipment") loans or direct financing
leases (the "Secured Equipment Leases") and
supervising the Secured Equipment Lease program
equal to 2% of the purchase price of the Equipment
subject to each Secured Equipment Lease and paid
upon entering into such lease.
- ------------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Repayment by the Company of actual expenses incurred. Amount not determinable at this
Advisor and Affiliates time.
for Secured Equipment
Lease servicing
expenses
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidation Stage
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated real estate disposition fee, payable upon Amount is not determinable at
real estate disposition Sale of one or more Properties, in an amount equal to the lesser this time. The amount of this
fee payable to the of (i) one-half of a Competitive Real Estate Commission, or (ii) fee, if it becomes payable, will
Advisor from a Sale or 3% of the sales price of such Property or Properties. Payment of depend upon the price at which
Sales in liquidation of such fee shall be made only if the Advisor provides a substantial Properties are sold.
the Company amount of services in connection with the Sale of a Property or
Properties and shall be subordinated to receipt by
the stockholders of Distributions equal to the sum
of (i) their aggregate Stockholders' 8% Return and
(ii) their aggregate Invested Capital. If, at the
time of a Sale, payment of the disposition fee is
deferred because the subordination conditions have
not been satisfied, then the disposition fee shall
be paid at such later time as the subordination
conditions are satisfied.
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated share equal to 10% of Net Sales Proceeds Amount is not determinable at
share of Net Sales from Sales of assets of the Company payable after receipt by the this time.
Proceeds from Sales of stockholders of Distributions equal to the sum of (i) the
assets of the Company in Stockholders' 8% Return and (ii) 100% of Invested Capital.
liquidation of the Following Listing, no share of Net Sales Proceeds will be paid to
Company payable to the the Advisor.
Advisor
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONFLICTS OF INTEREST
The Company will be subject to various conflicts of interest arising
out of its relationship to the Advisor and its Affiliates, as described below.
The following chart indicates the relationship between the Advisor and
those Affiliates that will provide services to the Company.
CNL Group, Inc. (1)
Subsidiaries, Affiliates and Strategic Business Units
<TABLE>
<CAPTION>
<S> <C>
Capital Markets Retail
--------------- ------
CNL Securities Corp. (2) Commercial Net Lease Realty, Inc. (4)
CNL Investment Company
Restaurant
----------
CNL Fund Advisors, Inc.
Corporate Services
------------------
CNL Shared Services, Inc. (3)
Hospitality
-----------
CNL Hospitality 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.
</TABLE>
- --------------------------
(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 wholly owned 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 Shared Services, Inc. (formerly 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 majority owned subsidiary of CNL
Group, Inc.) provides management and advisory services to the Company
pursuant to the Advisory Agreement.
PRIOR AND FUTURE PROGRAMS
In the past, affiliates of the Advisor have organized over 100 other
real estate investments, currently have other real estate holdings, and in the
future expect to form, offer interests in, and manage other real estate programs
in addition to the Company, and make additional real estate investments.
Although no Affiliate of the Advisor currently owns, operates, leases or manages
properties that would be suitable for the Company, future real estate programs
may involve Affiliates of the Advisor in the ownership, financing, operation,
leasing, and management of properties that may be suitable for the Company.
Certain of these affiliated public or private real estate programs may
in the future invest in hotel properties, may purchase properties concurrently
with the Company and may lease properties to operators who also lease or operate
certain of the Company's Properties. These properties, if located in the
vicinity of, or adjacent to, Properties acquired by the Company may affect the
Properties' gross revenues. Additionally, such other programs may offer mortgage
or equipment financing to the same or similar entities as those targeted by the
Company, thereby affecting the Company's Mortgage Loan activities or Secured
Equipment Lease program. Such conflicts between the Company and affiliated
programs may affect the value of the Company's investments as well as its Net
Income. The Company believes that the Advisor has established guidelines to
minimize such conflicts. See "Certain Conflict Resolution Procedures" below.
ACQUISITION OF PROPERTIES
Affiliates of the Advisor may compete with the Company to acquire hotel
properties or invest in mortgage loans of a type suitable for acquisition by the
Company and may be better positioned to make such acquisitions or investments as
a result of relationships that may develop with various operators of national
and regional limited service, extended stay and full service hotel chains (the
"Hotel Chains") and their franchisees. See "Business -- General." A purchaser
who wishes to acquire one or more of these properties or invest in one or more
mortgage loans may have to do so within a relatively short period of time,
occasionally at a time when the Company (due to insufficient funds, for example)
may be unable to make the acquisition or investment.
In an effort to address these situations and preserve the acquisition
and investment opportunities for the Company (and other entities with which the
Advisor or its Affiliates are affiliated), Affiliates of the Advisor may
maintain lines of credit which enable them to acquire properties or make
mortgage loans on an interim basis. In the event Affiliates acquire such
properties, these properties and/or mortgage loans generally will be purchased
from Affiliates of the Advisor, at their cost or carrying value, by one or more
existing or future public or private programs formed by Affiliates of the
Advisor.
The Advisor could experience potential conflicts of interest in
connection with the negotiation of the purchase price and other terms of the
acquisition of a property, as well as the terms of the lease of a property or
investment in a mortgage loan, due to its relationship with its Affiliates and
any business relationship of its Affiliates that may develop with operators of
Hotel Chains.
The Advisor or its Affiliates also may be subject to potential
conflicts of interest at such time as the Company wishes to acquire a property,
make a mortgage loan or enter into a secured equipment lease that also would be
a suitable investment for an Affiliate of CNL. Affiliates of the Advisor serve
as Directors of the Company and, in this capacity, have a fiduciary obligation
to act in the best interest of the stockholders of the Company and, as general
partners or directors of CNL Affiliates, to act in the best interests of the
investors in other programs with investments that may be similar to those of the
Company and will use their best efforts to assure that the Company will be
treated as favorably as any such other program. See "Management -- Fiduciary
Responsibility of the Board of Directors." The Company has also developed
procedures to resolve potential conflicts of interest in the allocation of
properties and mortgage loans between the Company and certain of its Affiliates.
See "Certain Conflict Resolution Procedures" below.
The Company will supplement this Prospectus during the offering period
to disclose the acquisition of a Property at such time as the Advisor believes
that a reasonable probability exists that the Company will acquire the Property,
including an acquisition from the Advisor or its Affiliates. Based upon the
experience of management of the Company and the Advisor and the proposed
acquisition methods, a reasonable probability that the Company will acquire a
Property normally will occur as of the date on which (i) a commitment letter is
executed by a proposed tenant, (ii) a satisfactory credit underwriting for the
proposed tenant has been completed, and (iii) a satisfactory site inspection has
been completed.
<PAGE>
SALES OF PROPERTIES
A conflict also could arise in connection with the Advisor's
determination as to whether or not to sell a Property, since the interests of
the Advisor and the stockholders may differ as a result of their distinct
financial and tax positions and the compensation to which the Advisor or its
Affiliates may be entitled upon the Sale of a Property. See "Compensation of the
Advisor," below for a description of these compensation arrangements. In order
to resolve this potential conflict, the Board of Directors will be required to
approve each Sale of a Property.
JOINT INVESTMENT WITH AN AFFILIATED PROGRAM
The Company may invest in Joint Ventures with another program sponsored
by the Advisor or its Affiliates if a majority of the Directors, including a
majority of the Independent Directors, not otherwise interested in the
transaction, determine that the investment in the Joint Venture is fair and
reasonable to the Company and on substantially the same terms and conditions as
those to be received by the co-venturer or co-venturers. Potential situations
may arise in which the interests of the co-venturer or co-venturers may conflict
with those of the Company. In addition, the Company and the co-venturer or
co-venturers may reach an impasse with regard to business decisions, such as the
purchase or sale of Property, in which the approval of the Company and each
co-venturer is required. In this event, none of the parties may have the funds
necessary to purchase the interests of the other co-venturers. The Company may
experience difficulty in locating a third party purchaser for its Joint Venture
interest and in obtaining a favorable sales price for such Joint Venture
interest. See "Risk Factors -- Real Estate and Other Investment Risks -- Company
May Not Control Joint Ventures."
COMPETITION FOR MANAGEMENT TIME
The directors and certain of the officers of the Advisor and the
Directors and certain of the officers of the Company currently are engaged, and
in the future will engage, in the management of other business entities and
properties and in other business activities. They will devote only as much of
their time to the business of the Company as they, in their judgment, determine
is reasonably required, which will be substantially less than their full time.
These officers and directors of the Advisor and officers and Directors of the
Company may experience conflicts of interest in allocating management time,
services, and functions among the Company and the various entities, investor
programs (public or private), and any other business ventures in which any of
them are or may become involved.
COMPENSATION OF THE ADVISOR
The Advisor has been engaged to perform various services for the
Company and will receive fees and compensation for such services. None of the
agreements for such services were the result of arm's-length negotiations. All
such agreements, including the Advisory Agreement, require approval by a
majority of the Board of Directors, including a majority of the Independent
Directors, not otherwise interested in such transactions, as being fair and
reasonable to the Company and on terms and conditions no less favorable than
those which could be obtained from unaffiliated entities. The timing and nature
of fees and compensation to the Advisor could create a conflict between the
interests of the Advisor and those of the stockholders. A transaction involving
the purchase, lease, or Sale of any Property, or the entering into or Sale of a
Mortgage Loan or a Secured Equipment Lease by the Company may result in the
immediate realization by the Advisor and its Affiliates of substantial
commissions, fees, compensation, and other income. Although the Advisory
Agreement authorizes the Advisor to take primary responsibility for all
decisions relating to any such transaction, the Board of Directors must approve
all of the Company's acquisitions and Sales of Properties and the entering into
and Sales of Mortgage Loans or Secured Equipment Leases. Potential conflicts may
arise in connection with the determination by the Advisor on behalf of the
Company of whether to hold or sell a Property, Mortgage Loan, or Secured
Equipment Lease as such determination could impact the timing and amount of fees
payable to the Advisor. See "The Advisor and the Advisory Agreement."
RELATIONSHIP WITH MANAGING DEALER
The Managing Dealer is CNL Securities Corp., an Affiliate of the
Company. Certain of the officers and Directors of the Company are also officers,
directors, and registered principals of the Managing Dealer. This relationship
may create conflicts in connection with the fulfillment by the Managing Dealer
of its due diligence obligations under the federal securities laws. Although the
Managing Dealer will examine the information in the Prospectus for accuracy and
completeness, the Managing Dealer is an Affiliate of the Company and will not
make an independent review of the Company or the offering. Accordingly, the
investors do not have the benefit of such independent review. Certain of the
Soliciting Dealers have made, or are expected to make, their own independent due
diligence investigations. The Managing Dealer is not prohibited from acting in
any capacity in connection with the offer and sale of securities offered by
entities that may have some or all investment objectives similar to those of the
Company and is expected to participate in other offerings sponsored by one or
more of the officers or Directors of the Company.
LEGAL REPRESENTATION
Shaw Pittman, which serves as securities and tax counsel to the
Company in this offering, also serves as securities and tax counsel for certain
of its Affiliates, including other real estate programs, in connection with
other matters. In addition, certain members of the firm of Shaw Pittman have
invested as limited partners or stockholders in prior programs sponsored by
Affiliates of the Advisor in aggregate amounts which do not exceed one percent
of the amounts sold by any of these programs, and members of the firm also may
invest in the Company. Neither the Company nor the stockholders will have
separate counsel. In the event any controversy arises following the termination
of this offering in which the interests of the Company appear to be in conflict
with those of the Advisor or its Affiliates, other counsel may be retained for
one or both parties.
CERTAIN CONFLICT RESOLUTION PROCEDURES
In order to reduce or eliminate certain potential conflicts of
interest, the Articles of Incorporation contain a number of restrictions
relating to (i) transactions between the Company and the Advisor or its
Affiliates, (ii) certain future offerings, and (iii) allocation of properties,
mortgage loans and secured equipment leases among certain affiliated entities.
These restrictions include the following:
1. No goods or services will be provided by the Advisor or its
Affiliates to the Company except for transactions in which the Advisor or its
Affiliates provide goods or services to the Company in accordance with the
Articles of Incorporation , or if a majority of the Directors (including a
majority of the Independent Directors) not otherwise interested in such
transactions approve such transactions as fair and reasonable to the Company and
on terms and conditions not less favorable to the Company than those available
from unaffiliated third parties and not less favorable than those available from
the Advisor or its Affiliates in transactions with unaffiliated third parties.
2. The Company will not purchase or lease Properties in which the
Advisor or its Affiliates has an interest without the determination, by a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction, that such transaction is
competitive and commercially reasonable to the Company and at a price to the
Company no greater than the cost of the asset to the Advisor or its Affiliate
unless there is substantial justification for any amount that exceeds such cost
and such excess amount is determined to be reasonable. In no event shall the
Company acquire any such asset at an amount in excess of its appraised value.
The Company will not sell or lease Properties to the Advisor or its Affiliates
unless a majority of the Directors (including a majority of the Independent
Directors) not interested in the transaction determine the transaction is fair
and reasonable to the Company.
3. The Company will not make any loans to Affiliates. Any loans to the
Company by the Advisor or its Affiliates must be approved by a majority of the
Directors (including a majority of the Independent Directors) not otherwise
interested in such transaction as fair, competitive, and commercially
reasonable, and no less favorable to the Company than comparable loans between
unaffiliated parties. It is anticipated that the Advisor or its Affiliates shall
be entitled to reimbursement, at cost, for actual expenses incurred by the
Advisor or its Affiliates on behalf of the Company or Joint Ventures in which
the Company is a co-venturer, subject to the 2%/25% Guidelines (2% of Average
Invested Assets or 25% of Net Income) described under "The Advisor and the
Advisory Agreement -- The Advisory Agreement."
4. Until completion of this offering, the Advisor and its Affiliates
will not offer or sell interests in any subsequently formed public program that
has investment objectives and structure similar to those of the Company and that
intends to (i) invest, on a cash and/or leveraged basis, in a diversified
portfolio of hotel properties to be leased on a "triple-net" basis to operators
of Hotel Chains, (ii) offer mortgage loans and (iii) offer secured equipment
leases. The Advisor and its Affiliates also will not purchase a property or
offer or invest in a mortgage loan or secured equipment lease for any such
subsequently formed public program that has investment objectives and structure
similar to the Company and that intends to invest on a cash and/or leveraged
basis primarily in a diversified portfolio of hotel properties to be leased on a
"triple-net" basis to operators of Hotel Chains until substantially all
(generally, 80%) of the funds available for investment (Net Offering Proceeds)
by the Company have been invested or committed to investment. (For purposes of
the preceding sentence only, funds are deemed to have been committed to
investment to the extent written agreements in principle or letters of
understanding are executed and in effect at any time, whether or not any such
investment is consummated, and also to the extent any funds have been reserved
to make contingent payments in connection with any Property, whether or not any
such payments are made.) The Advisor or its Affiliates in the future may offer
interests in one or more public or private programs organized to purchase
properties of the type to be acquired by the Company, to offer Mortgage Loans
and/or to offer Secured Equipment Leases.
5. The Board of Directors and the Advisor have agreed that, in the
event that an investment opportunity becomes available which is suitable for
both the Company and a public or private entity with which the Advisor or its
Affiliates are affiliated, for which both entities have sufficient uninvested
funds, then the entity which has had the longest period of time elapse since it
was offered an investment opportunity will first be offered the investment
opportunity. An investment opportunity will not be considered suitable for a
program if the requirements of Item 4 above could not be satisfied if the
program were to make the investment. In determining whether or not an investment
opportunity is suitable for more than one program, the Advisor and its
Affiliates will examine such factors, among others, as the cash requirements of
each program, the effect of the acquisition both on diversification of each
program's investments by types of hotels and geographic area, and on
diversification of the tenants of its properties (which also may affect the need
for one of the programs to prepare or produce audited financial statements for a
property or a tenant), the anticipated cash flow of each program, the size of
the investment, the amount of funds available to each program, and the length of
time such funds have been available for investment. If a subsequent development,
such as a delay in the closing of a property or a delay in the construction of a
property, causes any such investment, in the opinion of the Advisor and its
Affiliates, to be more appropriate for an entity other than the entity which
committed to make the investment, however, the Advisor has the right to agree
that the other entity affiliated with the Advisor or its Affiliates may make the
investment.
6. With respect to Shares owned by the Advisor, the Directors, or any
Affiliate, neither the Advisor, nor the Directors, nor any of their Affiliates
may vote or consent on matters submitted to the stockholders regarding the
removal of the Advisor, Directors, or any Affiliate or any transaction between
the Company and any of them. In determining the requisite percentage in interest
of Shares necessary to approve a matter on which the Advisor, Directors, and any
Affiliate may not vote or consent, any Shares owned by any of them shall not be
included.
Additional conflict resolution procedures are identified under
"Conflicts of Interest -- Sales of Properties," "-- Joint Investment With An
Affiliated Program," and "-- Legal Representation."
SUMMARY OF REINVESTMENT PLAN
The Company has adopted the Reinvestment Plan pursuant to which some
stockholders may elect to have the full amount of their cash Distributions from
the Company reinvested in additional Shares of the Company. Each prospective
investor who wishes to participate in the Reinvestment Plan should consult with
such investor's Soliciting Dealer as to the Soliciting Dealer's position
regarding participation in the Reinvestment Plan. The following discussion
summarizes the principal terms of the Reinvestment Plan. The Reinvestment Plan
is attached hereto as Appendix A.
GENERAL
An independent agent (the "Reinvestment Agent"), which currently is MMS
Securities, Inc., will act on behalf of the participants in the Reinvestment
Plan (the "Participants"). The Reinvestment Agent at all times will be
registered as a broker-dealer with the Securities and Exchange Commission (the
"Commission") and each state securities commission. At any time that the Company
is engaged in an offering, including the offering described herein, the
Reinvestment Agent will invest all Distributions attributable to Shares owned by
Participants in Shares of the Company at the public offering price per Share,
which is currently $10.00 per Share. At any time that the Company is not engaged
in an offering and until Listing, the price per Share will be determined by (i)
quarterly appraisal updates performed by the Company based on a review of the
existing appraisal and lease of each Property, focusing on a re-examination of
the capitalization rate applied to the rental stream to be derived from that
Property; and (ii) a review of the outstanding Mortgage Loans and Secured
Equipment Leases focusing on a determination of present value by a
re-examination of the capitalization rate applied to the stream of payments due
under the terms of each Mortgage Loan and Secured Equipment Lease. The
capitalization rate used by the Company and, as a result, the price per Share
paid by the Participants in the Reinvestment Plan prior to Listing will be
determined by the Advisor in its sole discretion. The factors that the Advisor
will use to determine the capitalization rate include (i) its experience in
selecting, acquiring and managing properties similar to the Properties; (ii) an
examination of the conditions in the market; and (iii) capitalization rates in
use by private appraisers, to the extent that the Advisor deems such factors
appropriate, as well as any other factors that the Advisor deems relevant or
appropriate in making its determination. The Company's internal accountants will
then convert the most recent quarterly balance sheet of the Company from a
"GAAP" balance sheet to a "fair market value" balance sheet. Based on the "fair
market value" balance sheet, the internal accountants will then assume a Sale of
the Company's Assets and the liquidation of the Company in accordance with its
constitutive documents and applicable law and compute the appropriate method of
distributing the cash available after payment of reasonable liquidation
expenses, including closing costs typically associated with the sale of assets
and shared by the buyer and seller, and the creation of reasonable reserves to
provide for the payment of any contingent liabilities. All Shares available for
purchase under the Reinvestment Plan either are registered pursuant to this
Prospectus or will be registered under the Securities Act of 1933 through a
separate prospectus relating solely to the Reinvestment Plan. Until this
offering has terminated, Shares will be available for purchase out of the
additional 2,500,000 Shares registered with the Commission in connection with
this offering. See "The Offering -- Plan of Distribution." After the offering
has terminated, Shares will be available from any additional Shares (not
expected to exceed 2,500,000 Shares at any one time) which the Company elects to
register with the Commission for the Reinvestment Plan. The Reinvestment Plan
may be amended or supplemented by an agreement between the Reinvestment Agent
and the Company at any time, including but not limited to an amendment to the
Reinvestment Plan to add a voluntary cash contribution feature or to substitute
a new Reinvestment Agent to act as agent for the Participants or to increase the
administrative charge payable to the Reinvestment Agent, by mailing an
appropriate notice at least 30 days prior to the effective date thereof to each
Participant at his or her last address of record; provided, that any such
amendment must be approved by a majority of the Independent Directors of the
Company. Such amendment or supplement shall be deemed conclusively accepted by
each Participant except those Participants from whom the Company receives
written notice of termination prior to the effective date thereof.
Stockholders who have received a copy of this Prospectus and
participate in this offering can elect to participate in and purchase Shares
through the Reinvestment Plan at any time and would not need to receive a
separate prospectus relating solely to the Reinvestment Plan. A person who
becomes a stockholder otherwise than by participating in this offering, or the
initial public offering (the "Initial Offering"), may purchase Shares through
the Reinvestment Plan only after receipt of a separate prospectus relating
solely to the Reinvestment Plan.
At any time that the Company is not engaged in an offering, the price
per Share purchased pursuant to the Reinvestment Plan shall be the fair market
value of the Shares based on quarterly appraisal updates of the Company's assets
until such time, if any, as Listing occurs. Upon Listing, the Shares to be
acquired for the Reinvestment Plan may be acquired either through such market or
directly from the Company pursuant to a registration statement relating to the
Reinvestment Plan, in either case at a per-Share price equal to the
then-prevailing market price on the national securities exchange or
over-the-counter market on which the Shares are listed at the date of purchase.
In the event that, after Listing occurs, the Reinvestment Agent purchases Shares
on a national securities exchange or over-the-counter market through a
registered broker-dealer, the amount to be reinvested shall be reduced by any
brokerage commissions charged by such registered broker-dealer. In the event
that such registered broker-dealer charges reduced brokerage commissions,
additional funds in the amount of any such reduction shall be left available for
the purchase of Shares. The Company is unable to predict the effect which such a
proposed Listing would have on the price of the Shares acquired through the
Reinvestment Plan.
INVESTMENT OF DISTRIBUTIONS
Distributions will be used by the Reinvestment Agent, promptly
following the payment date with respect to such Distributions, to purchase
Shares on behalf of the Participants from the Company. All such Distributions
shall be invested in Shares within 30 days after such payment date. Any
Distributions not so invested will be returned to Participants.
<PAGE>
At this time, Participants will not have the option to make voluntary
contributions to the Reinvestment Plan to purchase Shares in excess of the
amount of Shares that can be purchased with their Distributions. The Board of
Directors reserves the right, however, to amend the Reinvestment Plan in the
future to permit voluntary contributions to the Reinvestment Plan by
Participants, to the extent consistent with the Company's objective of
qualifying as a REIT.
PARTICIPANT ACCOUNTS, FEES, AND ALLOCATION OF SHARES
For each Participant, the Reinvestment Agent will maintain a record
which shall reflect for each fiscal quarter the Distributions received by the
Reinvestment Agent on behalf of such Participant. The Company shall be
responsible for all administrative charges and expenses charged by the
Reinvestment Agent. Any interest earned on such Distributions will be paid to
the Company to defray certain costs relating to the Reinvestment Plan. The
administrative charge for each fiscal quarter will be the lesser of 5% of the
amount reinvested for the Participant or $2.50, with a minimum charge of $0.50.
The maximum annual charge is $10.00.
The Reinvestment Agent will use the aggregate amount of Distributions
to all Participants for each fiscal quarter to purchase Shares for the
Participants. If the aggregate amount of Distributions to Participants exceeds
the amount required to purchase all Shares then available for purchase, the
Reinvestment Agent will purchase all available Shares and will return all
remaining Distributions to the Participants within 30 days after the date such
Distributions are made. The purchased Shares will be allocated among the
Participants based on the portion of the aggregate Distributions received by the
Reinvestment Agent on behalf of each Participant, as reflected in the records
maintained by the Reinvestment Agent. The ownership of the Shares purchased
pursuant to the Reinvestment Plan shall be reflected on the books of the
Company.
Subject to the provisions of the Articles of Incorporation relating to
certain restrictions on and the effective dates of transfer, Shares acquired
pursuant to the Reinvestment Plan will entitle the Participant to the same
rights and to be treated in the same manner as those purchased by the
Participants in the offering. Accordingly, the Company will pay the Managing
Dealer Selling Commissions of 7.5% (subject to reduction under the circumstances
provided under "The Offering -- Plan of Distribution") and a marketing support
and due diligence fee of 0.5%. The Company will also pay the Advisor Acquisition
Fees of 4.5% of the purchase price of the Shares sold pursuant to the
Reinvestment Plan until the termination of the offering. Thereafter, Acquisition
Fees will be paid by the Company only in the event that proceeds of the sale of
Shares are used to acquire Properties or to invest in Mortgage Loans. As a
result, aggregate fees payable to Affiliates of the Company will total between
8.0% and 12.5% of the proceeds of reinvested Distributions, up to 7.5% of which
may be reallowed to Soliciting Dealers.
The allocation of Shares among Participants may result in the ownership
of fractional Shares, computed to four decimal places.
REPORTS TO PARTICIPANTS
Within 60 days after the end of each fiscal quarter, the Reinvestment
Agent will mail to each Participant a statement of account describing, as to
such Participant, the Distributions reinvested during the quarter, the number of
Shares purchased during the quarter, the per Share purchase price for such
Shares, the total administrative charge paid by the Company on behalf of each
Participant (see "Participant Accounts, Fees, and Allocation of Shares" above),
and the total number of Shares purchased on behalf of the Participant pursuant
to the Reinvestment Plan. Until such time, if any, as Listing occurs, the
statement of account also will report the most recent fair market value of the
Shares, determined as described above. See "General" above.
Tax information for income earned on Shares under the Reinvestment Plan
will be sent to each participant by the Company or the Reinvestment Agent at
least annually.
ELECTION TO PARTICIPATE OR TERMINATE PARTICIPATION
Stockholders of the Company who purchase Shares in this offering may
become Participants in the Reinvestment Plan by making a written election to
participate on their Subscription Agreements at the time they subscribe for
Shares. Any other stockholder who receives a copy of this Prospectus or a
separate prospectus relating solely to the Reinvestment Plan and who has not
previously elected to participate in the Reinvestment Plan may so elect at any
time by written notice to the Board of Directors of such stockholder's desire to
participate in the Reinvestment Plan. Participation in the Reinvestment Plan
will commence with the next Distribution made after receipt of the Participant's
notice, provided it is received at least ten days prior to the record date for
such Distribution. Subject to the preceding sentence, the election to
participate in the Reinvestment Plan will apply to all Distributions
attributable to the fiscal quarter in which the stockholder made such written
election to participate in the Reinvestment Plan and to all fiscal quarters
thereafter, whether made (i) upon subscription or subsequently for stockholders
who participate in this offering, or (ii) upon receipt of a separate prospectus
relating solely to the Reinvestment Plan for stockholders who do not participate
in this offering. Participants will be able to terminate their participation in
the Reinvestment Plan at any time without penalty by delivering written notice
to the Board of Directors ten business days before the end of a fiscal quarter.
A Participant who chooses to terminate participation in the
Reinvestment Plan must terminate his or her entire participation in the
Reinvestment Plan and will not be allowed to terminate in part. If a Participant
terminates his or her Participation, the Reinvestment Agent will send him or her
a check in payment for any fractional Shares in his or her account based on the
then market price of the Shares, and the Company's record books will be revised
to reflect the ownership records of his or her whole Shares. There are no fees
associated with a Participant's terminating his or her interest in the
Reinvestment Plan. A Participant in the Reinvestment Plan who terminates his or
her interest in the Reinvestment Plan will be allowed to participate in the
Reinvestment Plan again upon receipt of the then current version of this
Prospectus or a separate current prospectus relating solely to the Reinvestment
Plan, by notifying the Reinvestment Agent and completing any required forms.
The Board of Directors reserves the right to prohibit Qualified Plans
from participating in the Reinvestment Plan if such participation would cause
the underlying assets of the Company to constitute "plan assets" of Qualified
Plans. See "The Offering -- ERISA Considerations."
FEDERAL INCOME TAX CONSIDERATIONS
Stockholders subject to federal taxation who elect to participate in
the Reinvestment Plan will incur a tax liability for Distributions allocated to
them even though they have elected not to receive their Distributions in cash
but rather to have their Distributions held pursuant to the Reinvestment Plan.
Specifically, stockholders will be treated as if they have received the
Distribution from the Company and then applied such Distribution to purchase
Shares in the Reinvestment Plan. A stockholder designating a Distribution for
reinvestment will be taxed on the amount of such Distribution as ordinary income
to the extent such Distribution is from current or accumulated earnings and
profits, unless the Company has designated all or a portion of the Distribution
as a capital gain dividend. In such case, such designated portion of the
Distribution will be taxed as long-term capital gain.
AMENDMENTS AND TERMINATION
The Company reserves the right to renew, extend, or amend any aspect of
the Reinvestment Plan without the consent of stockholders, provided that notice
of the amendment is sent to Participants at least 30 days prior to the effective
date thereof. The Company also reserves the right to terminate the Reinvestment
Plan for any reason, at any time, by ten days prior written notice of
termination to all Participants.
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 -- Offering-Related Risks -- No Current Public
Market for Shares Which Could Make Sale of Shares Difficult."
BUSINESS
GENERAL
The Company is a Maryland corporation that was organized on June 12,
1996. On June 15, 1998, the Company formed CNL Hospitality Partners, LP, a
wholly owned Delaware limited partnership (the "Partnership"). Properties
acquired are expected to be held by the Partnership and, as a result, owned by
the Company through the Partnership. The term "Company" includes CNL Hospitality
Properties, Inc. and its subsidiaries, CNL Hospitality GP Corp., CNL Hospitality
LP Corp. and CNL Hospitality Partners, LP.
The Company invests in Properties to be leased on a long-term
(generally, 10 to 20 years, plus renewal options for an additional 10 to 20
years), "triple-net" basis. With proceeds of this offering, the Company intends
to purchase primarily limited service, extended stay and full service hotel
Properties. "Triple-net" means that the tenant generally will be responsible for
repairs, maintenance, property taxes, utilities, and insurance. Some leases may,
however, obligate the tenant to fund, in addition to its lease payment, a
reserve fund up to a pre-determined amount. Generally, money in that fund may be
used by the tenant to pay for replacement of furniture and fixtures. The Company
may be responsible for other capital expenditures or repairs. The tenant
generally is responsible for replenishing the reserve fund and for paying a
specified return on the amount of capital expenditures paid for by the Company
in excess of amounts in the reserve fund. The Properties may consist of land and
building, the land underlying the building with the building owned by the tenant
or a third party, or the building only with the land owned by a third party. The
Company may provide Mortgage Loans to operators of Hotel Chains secured by real
estate owned by the operators. To a lesser extent, the Company may also offer
Secured Equipment Leases to operators of Hotel Chains pursuant to which the
Company will finance, through loans or direct financing leases, the Equipment.
The Properties, which typically will be freestanding and will be
located across the United States, will be leased to operators of Hotel Chains to
be selected by the Advisor and approved by the Board of Directors. Each Property
acquisition and Mortgage Loan will be submitted to the Board of Directors for
approval. Properties purchased by the Company are expected to be leased under
arrangements generally requiring base annual rent equal to a specified
percentage of the Company's cost of purchasing a particular Property, with
percentage rent based on gross sales above specified levels and/or automatic
rent increases. See "Description of Property Leases -- Computation of Lease
Payments," below.
The Company will invest Net Offering Proceeds in Properties of selected
national and regional limited service, extended stay and full service Hotel
Chains. The Company believes that attractive opportunities exist to acquire
limited service, extended stay and full service hotels in urban and resort
locations. According to Smith Travel Research, a leading provider of lodging
industry statistical research, the hotel industry has been steadily improving
its financial performance over the past seven consecutive years. Also according
to Smith Travel Research, in 1997, the industry reached its highest absolute
level of pre-tax profit in its history at approximately $17 billion, higher than
the original estimate of $14.6 billion, an increase of approximately 36% over
1996.
Pre-Tax Profits
of Hospitality Industry
(in billions)
Year Profitability
---- -------------
1993 $ 2.4
1994 5.5
1995 8.5
1996 12.5
1997 17.0
Source: Smith Travel Research
As indicated in the table below, the average daily room rate increased
4.4% in 1998, from $75.31 in 1997 to $78.62 in 1998, resulting in 11 consecutive
years of room rate growth.
Hospitality Industry Average
Daily Room Rate By Year
Year Rate
---- ----
1987 $52.58
1988 54.47
1989 56.35
1990 57.96
1991 58.08
1992 58.91
1993 60.53
1994 62.86
1995 65.81
1996 70.81
1997 75.31
1998 78.62
Source: Smith Travel Research
Revenue per available room also increased by 3.6% from $48.57 in 1997
to $50.32 in 1998. In 1998, growth in room supply exceeded growth in room demand
and resulted in a slight dip in occupancy. In 1998, total occupancy fell 0.8%
from 64.5% in 1997 to 64.0%. Growth in room demand exceeded the growth in new
room supply for each year from 1992 through 1996 and industry-wide occupancy
increased from a 20 year low of 61.8% in 1991 to 65% in 1996.
According to American Hotel & Motel Association data, in 1997,
Americans traveling in the United States spent more than $1.38 billion per day,
$57.4 million per hour and $955,800 per minute on travel and tourism. Total
travel expenditures in the United States generated $481.5 billion in sales. In
addition, there were 49,000 hotel properties which included over 3.8 million
hotel rooms recording $85.6 billion in revenue. Hotels are a vital part of
travel and tourism. In the United States, the tourism industry, which globally
is the world's largest industry, is currently ranked third behind auto sales and
retail food sales. In terms of employment, the hotel industry supports over 7
million direct jobs, generating $18.93 billion in wages. Nationally, 13.8% of
total hotel rooms available are located in urban areas, 35.3% in suburban areas,
33.2% in highway locations, 6.4% in airport areas, and the remaining 11.3% in
resort locations.
The Company intends to acquire limited service, extended stay and full
service hotel Properties. Limited service hotels generally minimize non-guest
room space and offer limited food service such as complimentary continental
breakfasts and do not have restaurant or lounge facilities on-site. Extended
stay hotels generally contain guest suites with a kitchen area and living area
separate from the bedroom. Extended stay hotels vary with respect to providing
on-site restaurant facilities. Full service hotels generally have conference or
meeting facilities and on-site food and beverage facilities.
Management intends to structure the Company's investments to allow it
to participate, to the maximum extent possible, in any sales growth in the hotel
industry, as reflected in the Properties that it owns. The Company therefore
intends to generally structure its leases with percentage rent requirements
which are based on gross sales of the hotel located on the Property over
specified levels. Gross sales may increase even absent real growth because
increases in the costs typically are passed on to the consumers through
increased prices, and increased prices are reflected in gross sales. In an
effort to provide regular cash flow to the Company, the Company intends to
structure its leases to provide a minimum level of rent which is payable
regardless of the amount of gross sales at a particular Property. The Company
also will endeavor to maximize growth and minimize risks associated with
ownership and leasing of real estate that operates in these industry segments
through careful selection and screening of its tenants (as described in
"Standards for Investment in Properties" below) in order to reduce risks of
default; monitoring statistics relating to hotel chains and continuing to
develop relationships in the industry in order to reduce certain risks
associated with investment in real estate. See "Standards for Investment in
Properties" below for a description of the standards which the Board of
Directors will employ in selecting Hotel Chains, operators and particular
Properties for investment.
Management expects to acquire Properties in part with a view to
diversification among the geographic location of the Properties. There are no
restrictions on the geographic area or areas within the United States in which
Properties acquired by the Company may be located. It is anticipated that the
Properties acquired by the Company will be located in various states and regions
within the United States.
The Company may provide Mortgage Loans, generally for the purchase of
buildings by tenants that lease the underlying land from the Company. However,
because it prefers to focus on investing in Properties, which have the potential
to appreciate, the Company currently expects to provide Mortgage Loans in the
aggregate principal amount of approximately 5% to 10% of Gross Proceeds.
Mortgage Loans will be secured by the building and improvements on the land. The
Company expects that the interest rate and terms (generally, 10 to 20 years) of
the Mortgage Loans will be similar to those of its leases.
The Company may also offer Secured Equipment Leases to operators of
Hotel Chains. The Secured Equipment Leases will consist primarily of leases of,
and loans for the purchase of, Equipment. As of the date of this Prospectus, the
Company has neither identified any prospective operators of Hotel Chains that
will participate in such financing arrangements nor negotiated any specific
terms of a Secured Equipment Lease. The Company cannot predict terms and
conditions of the Secured Equipment Leases, although the Company expects that
the Secured Equipment Leases will (i) have terms that equal or exceed the useful
life of the subject Equipment (although such terms will not exceed 7 years),
(ii) in the case of the leases, include an option for the lessee to acquire the
subject Equipment at the end of the lease term for a nominal fee, (iii) include
a stated interest rate, and (iv) in the case of the leases, provide that the
Company and the lessees will each treat the Secured Equipment Leases as loans
secured by personal property for federal income tax purposes. See "Federal
Income Tax Considerations -- Characterization of Secured Equipment Leases." In
addition, the Company expects that each of the Secured Equipment Leases will be
secured by the Equipment to which it relates. Payments received from lessees
under Secured Equipment Leases will be treated as payments of principal and
interest. All Secured Equipment Leases will be negotiated by the Advisor and
approved by the Board of Directors including a majority of the Independent
Directors.
The Company will borrow money to acquire Assets and to pay certain
fees. The Company intends to encumber Assets in connection with the borrowing.
The Company plans to obtain one or more revolving Lines of Credit in an
aggregate amount up to $100,000,000, and may, in addition, also obtain Permanent
Financing. On July 31, 1998, the Company entered into an initial $30,000,000
revolving Line of Credit to be used to acquire hotel Properties. See "Business
- -- Borrowing" for a description of the $30,000,000 Line of Credit. The Board of
Directors anticipates that the aggregate amount of any Permanent Financing, if
obtained, will not exceed 30% of the Company's total assets. The Permanent
Financing would be used to acquire Assets and pay a fee of 4.5% of any Permanent
Financing, excluding amounts to fund Secured Equipment Leases, as Acquisition
Fees, to the Advisor for identifying the Properties, structuring the terms of
the acquisition and leases of the Properties and structuring the terms of the
Mortgage Loans. The Line of Credit may be repaid with offering proceeds, working
capital or Permanent Financing. The Line of Credit and Permanent Financing are
the only source of funds for making Secured Equipment Leases and
<PAGE>
for paying the Secured Equipment Lease Servicing Fee to the Advisor. The Company
has not yet received a commitment for any Permanent Financing and there is no
assurance that the Company will obtain any Permanent Financing on satisfactory
terms.
As of May 13, 1999, the Company had acquired, directly or indirectly,
six hotel Properties consisting of land, building and equipment and had initial
commitments to acquire, directly or indirectly, seven additional Properties.
However, as of May 13, 1999, the Company had not entered into any arrangements
that create a reasonable probability that the Company will enter into any
Mortgage Loan or Secured Equipment Lease.
INVESTMENT OF OFFERING PROCEEDS
The Company has undertaken to supplement this Prospectus during the
offering period to disclose the use of proceeds of this offering to acquire
Properties at such time as the Company believes that a reasonable probability
exists that any such Property will be acquired by the Company. Based upon the
experience and acquisition methods of the Affiliates of the Company and the
Advisor, this normally will occur, with regard to acquisition of Properties, as
of the date on which (i) a commitment letter is executed by a proposed tenant,
(ii) a satisfactory credit underwriting for the proposed tenant has been
completed, and (iii) a satisfactory site inspection has been completed. However,
the initial disclosure of any proposed acquisition, cannot be relied upon as an
assurance that the Company ultimately will consummate such proposed acquisition
or that the information provided concerning the proposed acquisition will not
change between the date of such supplement and the actual purchase or extension
of financing. The terms of any borrowing by the Company will also be disclosed
by supplement following receipt by the Company of an acceptable commitment
letter from a potential lender.
Based on the purchase prices of the six Properties acquired directly or
indirectly by the Company as of May 13, 1999 and current market conditions, the
Company and the Advisor have estimated an average purchase price of $10,000,000
to $40,000,000 per hotel Property. Assuming the Company receives the full
$250,000,000 Net Offering Proceeds from this offering, for which there is no
assurance, the Company could invest in a total of approximately 13 to 34 hotel
Properties (including 5 to 21 Properties to be acquired with the proceeds of
this offering and 2 to 7 additional Properties to be acquired with the proceeds
of the Initial Offering). In certain cases, the Company may become a co-venturer
in a Joint Venture that will own the Property. In each such case, the Company's
cost to purchase an interest in such Property will be less than the total
purchase price and the Company therefore will be able to acquire interests in a
greater number of Properties. The Company may also borrow to acquire Assets. See
"Business -- Borrowing." Management estimates that 10% to 20% of the Company's
investment for each hotel Property will be for the cost of land and 80% to 90%
for the cost of the building. See "Joint Venture Arrangements" below and "Risk
Factors -- Real Estate and Other Investment Risks -- Possible Lack of
Diversification Increases Risk of Investment." Management cannot estimate the
number of Mortgage Loans that may be entered into. The Company may also borrow
money to make Mortgage Loans.
Although management cannot estimate the number of Secured Equipment
Leases that may be entered into, it expects to fund the Secured Equipment Lease
program from the proceeds of the Line of Credit or Permanent Financing in an
amount not to exceed 10% of Gross Proceeds. Management has undertaken,
consistent with its objective of qualifying as a REIT for federal income tax
purposes, to ensure that the total value of all Secured Equipment Leases will
not exceed 25% of the Company's total assets, and that Secured Equipment Leases
to a single lessee, in the aggregate, will not exceed 5% of total assets.
PROPERTY ACQUISITIONS
Atlanta Portfolio. On July 31, 1998, the Company acquired two hotel
Properties. The Properties are the Residence Inn(R) by Marriott(R) located in
the Buckhead (Lenox Park) area of Atlanta, Georgia (the "Buckhead (Lenox Park)
Property"), and the Residence Inn by Marriott located at Gwinnett Place in
Duluth, Georgia (the "Gwinnett Place Property").
The Company acquired the Buckhead (Lenox Park) Property for $15,731,414
from Buckhead Residence Associates, L.L.C. and the Gwinnett Place Property for
$11,514,125 from Gwinnett Residence Associates, L.L.C. In connection with the
purchase of the two Properties, the Company, as landlord, entered into two
separate, long-term
<PAGE>
lease agreements. The tenant of the Buckhead (Lenox Park) and the Gwinnett Place
Properties is the same unaffiliated tenant. The leases on both Properties are
cross-defaulted. The general terms of the lease agreements are described in
"Business -- Description of Property Leases." The principal features of the
leases are as follows:
o The initial term of each lease expires in approximately 19 years, on
August 31, 2017.
o At the end of the initial lease term, the tenant will have three
consecutive renewal options of five years.
o The leases will require minimum rent payments to the Company of
$1,651,798 per year for the Buckhead (Lenox Park) Property and
$1,208,983 per year for the Gwinnett Place Property.
o Minimum rent payments will increase to $1,691,127 per year for the
Buckhead (Lenox Park) Property and $1,237,768 per year for the Gwinnett
Place Property after the first lease year.
o In addition to minimum rent, for each calendar year, the leases will
require percentage rent equal to 15% of the aggregate amount of all
revenues combined, for the Buckhead (Lenox Park) and the Gwinnett Place
Properties, in excess of $8,080,000.
o A security deposit equal to $819,000 for the Buckhead (Lenox Park)
Property and $598,500 for the Gwinnett Place Property will be retained
by the Company as security for the tenant's obligations under the
leases.
o Management fees payable to Stormont Trice Management Corporation for
operation of the Buckhead (Lenox Park) and Gwinnett Place Properties
are subordinated to minimum rents due to the Company.
o The tenant of the Buckhead (Lenox Park) and Gwinnett Place Properties
will establish a reserve fund which will be used for the replacement
and renewal of furniture, fixtures and equipment relating to the hotel
Properties (the "FF&E Reserve"). Deposits to the FF&E Reserve will be
made monthly as follows: 3% of gross receipts for the first lease year;
4% of gross receipts for the second lease year; and 5% of gross
receipts every lease year thereafter. Funds in the FF&E Reserve and all
property purchased with funds from the FF&E Reserve shall be paid,
granted and assigned to the Company as additional rent.
o Stormont Trice Corporation, Stormont Trice Development Corporation and
Stormont Trice Management Corporation jointly and severally will
guarantee the obligations of the tenant under the leases for the
Buckhead (Lenox Park) and the Gwinnett Place Properties combined. The
guarantee terminates on the earlier of the end of the third lease year
or at such time as the net operating income from the Buckhead (Lenox
Park) and the Gwinnett Place Properties exceeds minimum rent due under
the leases by 25% for any trailing 12 month period. The guarantee is
equal to $2,835,000 for the first two years, and $1,197,000 for the
third year.
Pursuant to the purchase agreement in connection with the acquisition
of the two Properties directly owned by the Company, the Company may be required
to make an additional payment of up to $1 million, contingent upon these
Properties achieving certain gross earnings before interest, taxes, depreciation
and amortization, as compared to the original purchase price pursuant to a
formula during a 36 month period ending July 31, 2001. Rental income will be
adjusted upward in accordance with the lease agreements for any such amount
paid.
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(R) by Marriott(R) and another Residence Inn by
Marriott. Other lodging facilities located in
<PAGE>
proximity to the Gwinnett Place Property include a Courtyard by Marriott, an
Amerisuites, a Sumner Suites and a Hampton Inn. The average occupancy rate, the
average daily room rate and the revenue per available room for the periods the
hotels have been operational are as follows:
<TABLE>
<CAPTION>
<S> <C>
Buckhead (Lenox Park) Property Gwinnett Place Property
-------------------------------------------------------- -------------------------------------------------
Average Average Revenue Average Average Revenue
Occupancy Daily Room per Available Occupancy Daily Room per Available
Year Rate Rate Room Rate Rate Room
- ------------- ------------- --------------- ------------------ ------------- ------------- ---------------
*1997 42.93% $ 91.15 $39.13 39.08% $85.97 $33.60
=
**1998 75.20% 99.70 75.01 74.10% 87.36 64.73
***1999 79.10% 105.88 83.75 80.20% 88.17 70.71
</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 December
31, 1998.
*** Data for 1999 represents the period January 1, 1999 through March 31,
1999.
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
have been 1.19 times base rent for the 12 months ended December 31, 1998. Actual
combined net income before subordinated management fees for the period January
1, 1999 through March 31, 1999, was 1.32 times base rent.
Western International Portfolio. In February 1999, the Company executed
a series of agreements with Five Arrows Realty Securities II L.L.C. ("Five
Arrows"), pursuant to which the Company and Five Arrows formed a jointly-owned
real estate investment trust, CNL Hotel Investors, Inc. ("Hotel Investors"), for
the purpose of acquiring up to eight hotels from various sellers affiliated with
Western International (the "Hotels"). The eight Hotels are either newly
constructed or in various stages of completion. When fully built, four of eight
Hotels will operate as Courtyard by Marriott hotels, three will operate as
Residence Inn by Marriott hotels, and one will operate as a Marriott Suites(R).
The Advisor will act as the advisor to Hotel Investors pursuant to a
separate advisory agreement. However, in no event will the Company pay the
Advisor fees, including the Company's pro rata portion of Hotel Investors'
advisory fees, in excess of amounts payable under its Advisory Agreement. The
Advisor has entered into separate purchase agreements for each of the eight
Hotels, which agreements include customary closing conditions, including
inspection of and due diligence on the completed properties. The aggregate
purchase price of all eight Hotels, once acquired, will be approximately $184
million, excluding closing costs.
In order to fund these purchases, Five Arrows has committed to make an
investment of up to $50.9 million in Hotel Investors. The Company has committed
to make an investment of up to $40 million in Hotel Investors, which investment
will be made through one of the Company's wholly owned subsidiaries, CNL
Hospitality Partners, LP ("Hospitality Partners"). Hotel Investors expects to
fund the remaining amount of approximately $96.6 million with permanent
financing from Jefferson-Pilot Life Insurance Company, secured by Hotel
Investors' interests in the properties (the "Hotel Investors Loan"). Hotel
Investors intends to use funds from Five Arrows, the Company, and the Hotel
Investors Loan proportionately to fund each property acquisition.
In return for their respective funding commitments, Five Arrows will
receive a 51% common stock interest and Hospitality Partners will receive a 49%
common stock interest in Hotel Investors. As funds are advanced to Hotel
Investors, Five Arrows will receive up to 50,886 shares of Hotel Investors' 8%
Class A cumulative, preferred stock ("Class A Preferred Stock"), and Hospitality
Partners will receive up to 39,982 shares of Hotel Investors' 9.76% Class B
cumulative, preferred stock ("Class B Preferred Stock"). The Class A Preferred
Stock is exchangeable upon demand into Common Stock of the Company, as
determined pursuant to a formula that is intended to make the conversion not
dilutive to funds from operations (based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts which means net earnings determined in accordance with generally accepted
accounting principles, 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) per share
of the Company's common stock.
Five Arrows has also committed to invest up to $15 million in the
Company through the purchase of Common Stock pursuant to the Company's Initial
Offering and this offering, the proceeds of which will be used by the Company to
fund approximately 38% of its funding commitment to Hotel Investors. Five Arrows
will purchase the Company's Shares as Properties are acquired by Hotel
Investors, as described above. In addition to the above investments, Five Arrows
purchased a 10% interest in the Advisor.
Cash flow from operations of Hotel Investors is expected to be
distributed first to Five Arrows with respect to distributions payable on the
Class A Preferred Stock. Such distributions are calculated based on Five Arrows'
"special investment amount" which is $1,294.78 per share, representing the sum
of its investment in Hotel Investors and its $15,000,000 investment in the
Company on a per share basis, adjusted for any distributions received from the
Company. Then, cash flow from operations is expected to be distributed to the
Company with respect to its Class B Preferred Stock. Next, cash flow will be
distributed to 100 CNL associates who each own one share of Class C preferred
stock in Hotel Investors, to provide a quarterly, cumulative, compounded 8%
return. All remaining cash flow from operations will be distributed pro rata
with respect to the interest in the common shares.
On February 25, 1999, Hotel Investors purchased four of the eight
Hotels for an aggregate purchase price of $90,448,000 (the "Initial Hotels") and
paid $10,000,000 as a deposit on the four remaining Hotels. The Initial Hotels
are the Courtyard by Marriott located in Plano, Texas (the "Legacy Park
Property"), the Marriott Suites located in Dallas, Texas (the "Market Center
Property"), the Residence Inn by Marriott located in Las Vegas, Nevada (the
"Hughes Center Property") and the Residence Inn by Marriott located in Plano,
Texas (the "Dallas Plano Property"). As a result of these purchases and the
deposit, Five Arrows has funded $31,536,824 of its $50,890,000 commitment to
Hotel Investors and purchased 31,537 shares of Class A Preferred Stock. In
addition, Five Arrows has invested $9,297,056 of its $15 million commitment to
the Company. Due to the stock ownership limitations specified in the Company's
Articles of Incorporation at the time of Five Arrows' investment, $5,612,311 was
invested in the Company's Common Stock through the purchase of 590,770 Shares
and $3,684,745 was advanced to the Company as a convertible loan, which bears
interest at a rate of eight percent per annum. On April 30, 1999, the
convertible loan was converted to 387,868 Shares of the Company's Common Stock.
In connection with the acquisitions and the deposit, the Company has funded
$24,778,933 of its $40 million commitment to Hotel Investors and purchased
24,779 shares of Class B Preferred Stock. Hotel Investors has obtained an
advance of $47,863,052 relating to the Hotel Investors Loan in order to
facilitate the acquisition of the Initial Hotels.
In connection with Five Arrows' commitment to invest $15 million in the
Company, the Advisor and certain Affiliates have agreed to waive certain fees
otherwise payable to them by the Company.
Hotel Investors acquired the Legacy Park Property for $12,694,000 from
PLC Hotel Property, Ltd., the Market Center Property for $32,973,000 from Marcen
Property, Ltd., the Hughes Center Property for $33,097,000 from LVHC Hotel
Property, Ltd. and the Dallas Plano Property for $11,684,000 from PLR1 Hotel
Property, Ltd. In connection with the purchase of the four Properties, Hotel
Investors, as lessor, entered into four separate, long-term lease agreements.
The lessee of the Initial Hotels is the same unaffiliated lessee. The leases on
all four 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:
o The initial term of each lease expires in approximately 20 years, on
December 28, 2018.
o At the end of the initial lease term, the tenant will have three
consecutive renewal options of fifteen years.
o The leases will require minimum rent payments as follows.
<PAGE>
Minimum Annual Rent
---------------------------------------
Year 2 and
Property Year 1 Thereafter
----------------------------- ---------------- ----------------
Legacy Park Property $1,308,673 $1,341,390
Market Center Property 3,399,319 3,484,302
Hughes Center Property 3,412,068 3,497,369
Dallas Plano Property 1,204,485 1,234,597
o In addition to minimum rent, for lease years one and two, the leases
will require percentage rent equal to 7.75% of the aggregate amount of
all room revenues combined, for the Initial Hotels, in excess of a
combined quarterly threshold of $26,672,000. For lease year three and
thereafter, the leases will require percentage rent equal to 7.75% of
the aggregate amount of all room revenues combined, for the Initial
Hotels, in excess of lease year two actual room revenues.
o The tenant of the Initial Hotels will establish a FF&E Reserve which
will be used for the replacement and renewal of furniture, fixtures and
equipment relating to the hotel Properties. Deposits to the FF&E
Reserve will be made once every four weeks as follows: (i) for the
Legacy Park, Hughes Center and Dallas Plano Properties, 1% of gross
receipts for the first lease year; 3% of gross receipts for the second
lease year; and 5% of gross receipts every lease year thereafter and
(ii) for the Market Center Property, 1% of gross receipts for the first
lease year; 2% of gross receipts for the second lease year; 3% of gross
receipts for the third through fifth lease years; 4% of gross receipts
for the sixth through tenth lease years; and 5% of gross receipts for
the eleventh lease year and 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.
o The tenant under each lease is required to maintain, for up to three
years from the commencement of the last lease for the Hotels to be
executed (but in no event earlier than December 31, 2003), a liquid net
worth equal to a minimum amount (the "Net Worth Requirement"), which
may be used solely to make payments under the leases. The Net Worth
Requirement may be reduced after twelve months to the extent by which
payment of rent exceeds cash available for lease payments (gross
revenues less property expenses) derived from the leased Hotels during
the one-year period. In addition, providing that all of the Hotels have
been opened for one year, the Net Worth Requirement will terminate at
such time that cash available for lease payments for all of the leased
Hotels equals 125% of total minimum rent due under the leases; or that
the lease is terminated pursuant to its terms (other than for an event
of default).
The estimated federal income tax basis of the depreciable portion of
the Initial Hotels is as follows.
Legacy Park Property $11,224,000
Market Center Property 30,623,000
Hughes Center Property 29,788,000
Dallas Plano Property 10,470,000
Each of the Initial Hotels are newly constructed hotels which recently
commenced operations. The Legacy Park Property is located approximately 25 miles
north of the city of Dallas and has 153 guest rooms and five suites. The Market
Center Property is approximately two miles northwest of the Dallas central
business district and has 266 guest suites. The Hughes Center Property is in a
commercial park located east of the Las Vegas strip and has 256 guest suites.
The Dallas Plano Property is located approximately 25 miles north of the city of
Dallas and has 126 guest suites. Other lodging facilities located in proximity
to the Legacy Park Property include a Hampton Inn, a Fairfield Inn by Marriott,
a LaQuinta Inn & Suites and another Courtyard by Marriott. Other lodging
facilities located in proximity to the Market Center Property include a
Renaissance(R) Hotel, an Embassy Suites, a Sheraton Suites, a Wyndham Garden
Hotel and a Courtyard by Marriott. Other lodging facilities located in proximity
to the Hughes Center Property include an AmeriSuites, a Hawthorn Suites and
another Residence Inn by Marriott. Other lodging facilities located in proximity
to the Dallas Plano Property include a Homewood Suites, a Bradford Suites, a
Mainstay Suites, a La Quinta Inn & Suites, a Courtyard by Marriott and another
Residence Inn by Marriott.
Since the Initial Hotels are newly constructed properties, limited
operating history is available. Of the Initial Hotels, the Hughes Center
Property and the Dallas Plano Property were the earliest to commence operations,
in October 1998. Based on information provided to the Company by Western
International for the period ended December 31, 1998, the hotel located on these
Properties generated gross operating profits of $690,000 and $188,000,
respectively, which resulted in
<PAGE>
net operating profits (earnings before interest, taxes and depreciation) of
$394,000 and $55,000 respectively. The average occupancy rate, the average daily
room rate and the revenue per available room for the periods the hotels have
been operational are as follows:
<TABLE>
<CAPTION>
<S> <C>
Average Average Revenue
Occupancy Daily Room per
Property Year Rate Rate Available Room
----------------------------- ---------- ------------- --------------- -------------------
Legacy Park Property *1998 8.20% $45.28 $ 3.70
**1999 51.70% 100.26 51.83
Market Center Property *1998 37.90% $100.95 $ 38.26
**1999 72.00% 124.17 89.40
Hughes Center Property *1998 47.30% $107.86 $ 51.00
**1999 68.90% 108.62 74.84
Dallas Plano Property *1998 46.70% $ 88.79 $ 41.47
**1999 48.30% 92.82 44.83
</TABLE>
* Data for the Legacy Park Property represents the period December 23,
1998 through January 1, 1999, data for the Market Center Property
represents the period November 11, 1998 through January 1, 1999, data
for the Hughes Center Property represents the period October 1, 1998
through January 1, 1999 and data for the Dallas Plano Property
represents the period October 12, 1998 through January 1, 1999.
** Data for 1999 represents the period January 2, 1999 through March 26,
1999.
The Company believes that the results achieved by the Initial Hotels
for the period ended December 31, 1998, are not indicative of their long-term
operating potential since they each had been open for three months or less
during the reporting period.
The brands, Residence Inn by Marriott, Courtyard by Marriott and
Marriott Hotels, Resorts and Suites(R) are part of Marriott International's
portfolio of brands. According to data obtained in February 1999 from Marriott's
Market Planning & Feasibility department, Marriott International is one of the
world's leading hospitality companies, managing the most hotels worldwide and is
ranked as the sixth largest hotel company overall by brand (based on number of
rooms in 1997). According to Marriott data, as of January 1999, Marriott
International had more than 1,800 units (or properties), for an aggregate of
more than 325,000 rooms worldwide. Although Marriott International has entered
into a management agreement relating to the Initial Hotels, it has not
guaranteed the payments due under the leases.
Each Residence Inn by Marriott hotel typically offers daily
complimentary breakfast and newspaper, an evening hospitality hour, a swimming
pool, heated whirlpool and Sport Court(R). 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 January 1999,
there were over 294 Residence Inn by Marriott hotels in the United States and
four in Canada and Mexico. With a usage rate of more than 83% among extended
stay chains, Residence Inn by Marriott is the top U.S. extended stay lodging
brand, appealing to travelers who need a room for five or more consecutive
nights, according to data obtained in February 1999 from Marriott's Marketing
Planning & Feasibility department.
Each Courtyard by Marriott features a residential atmosphere, a
restaurant, lounge, meeting space, exercise room and swimming pool. According to
data obtained in February 1999 from Marriott's Marketing Planning & Feasibility
department, Courtyard by Marriott is a leading moderate price lodging chain
featuring a residential atmosphere. According to Marriott, as of January 1999,
there were more than 415 Courtyard by Marriott hotels across the United States,
Canada and abroad.
Marriott Hotels, Resorts and Suites is Marriott International's
flagship brand of upscale, full-service hotels and resorts. Each of the Marriott
Hotels, Resorts and Suites features multiple restaurants and lounges, health
club, swimming pool, gift shop, concierge level, business center and meeting
facilities. According to Marriott, as of January 1999, there were over 351
Marriott Hotels, Resorts and Suites worldwide.
In connection with the acquisition of certain of the Properties, the
Company and Hotel Investors have entered into agreements with Marriott
International or one of its affiliates. Among other things, these agreements
require under certain circumstances that the Company or Hotel Investors obtain
the consent of, or offer the Property to, Marriott International or one of its
affiliates in the event that the Company or Hotel Investors wishes to sell the
Property to a third party. The Company believes that these agreements and the
terms thereof are consistent with standard practices in the hospitality
industry.
PENDING INVESTMENTS
As of May 13, 1999, the Company had initial commitments to acquire,
directly or indirectly, seven hotel properties. Three of the Properties are
located in Little Lake Bryan, a 300-acre community planned by The Little Lake
Bryan Company. Included in the proposed acquisition are a 314-room Courtyard by
Marriott, a 389-room Fairfield Inn(R) by Marriott(R) and a 398-room SpringHill
Suites(R) by Marriott(R) (formerly Fairfield Suites(R) by Marriott(R)). The
hotels will be developed by Marriott International, Inc. with completion
scheduled for the year 2000. The community is less than five miles from the WALT
DISNEY WORLD(R) Resort and less than ten miles from SeaWorld(R) Orlando,
Universal Studios Escape(R) and the Orange County Convention Center.
As shown below, the lodging market in the Lake Buena Vista area
averaged 77% occupancy and an average daily room rate of $121 for year-end 1998.
The Lake Buena Vista lodging market also achieved a 9.6% 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:
<TABLE>
<CAPTION>
<S> <C>
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
---- -------------- --------- -------------- ---------
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
1998 74.7% 84.64 76.9% 121.48
</TABLE>
* Little Lake Bryan is part of the Lake Buena Vista market area.
Source: Smith Travel Research
Orlando. According to the Orlando/Orange County Convention & Visitors
Bureau 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, Universal Studios Escape(R) drew an
estimated 8.9 million visitors and SeaWorld(R) Orlando had an estimated 4.9
million visitors. Area attractions continue to grow with new developments.
In addition, according to the Orlando/Orange County Convention &
Visitors Bureau 1998 Research report, 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.
<PAGE>
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 Number of Events Attendance
---- ---------------- ----------
1994 188 705,824
1995 168 700,429
1996 240 1,017,679
1997 260 930,219
1998 244 967,363
Source: Orlando/Orange County CVB
Fairfield Inn by Marriott is an economy lodging brand appealing to both
business and leisure travelers. According to Marriott, as of January 1999, there
are more than 376 Fairfield Inn by Marriott hotels in 47 states.
SpringHill Suites by Marriott is Marriott's new moderately priced
all-suite lodging brand, with guest suites that are up to 25 percent larger than
standard hotel rooms. All SpringHill Suites feature complimentary continental
breakfast, indoor swimming pool and exercise room. According to Marriott, as of
January 1999, SpringHill Suites by Marriott is projected to grow to 115
properties by 2002.
The four remaining hotel properties which the Company has initial
commitments to acquire indirectly, are the following: the 176-room Courtyard by
Marriott is located in Addison, Texas, a northern suburb of Dallas, in close
proximity to high-rise office buildings, retail centers and restaurants. The
180-room Courtyard by Marriott is located in Scottsdale, Arizona, in central
Scottsdale, within close proximity to office and retail developments in addition
to galleries and upscale shops. The 250-room Courtyard by Marriott is located in
Seattle, Washington, in the Lake Union district which is considered the northern
boundary of the downtown area. The 200-room Residence Inn by Marriott is located
in Phoenix, Arizona, approximately four miles from Sky Harbor International
Airport.
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 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."
The following chart provides additional information on systemwide
occupancy levels for Marriott lodging brands:
Total Occupancy Rate for 1998
Marriott Brand as Compared to
U.S. Lodging Industry
Occupancy Rate
--------------
U.S. Lodging Industry 64.0%
Courtyard by Marriott 77.6%
Fairfield Inns by Marriott 72.4%
Marriott Hotels, Resorts and Suites 75.9%
Residence Inn by Marriott 80.6%
Source: Smith Travel Research (U.S. Lodging Industry only) and Marriott
International, Inc. 1998 Form 10-K
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>
<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 for each lease year after
Orlando, FL (1) renewal options total cost to purchase the second lease year, 7%
(the "Courtyard Little Lake Bryan the property of revenues in excess of
Property") revenues for the second
Hotel to be constructed lease year
Fairfield Inn by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year after
Orlando, FL (1) renewal options total cost to purchase the second lease year, 7%
(the "Fairfield Inn Little Lake the property of revenues in excess of
Bryan Property") revenues for the second
Hotel to be constructed lease year
SpringHill Suites by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year after
Orlando, FL (1) renewal options total cost to purchase the second lease year, 7%
(the "SpringHill Suites Little the property of revenues in excess of
Lake Bryan Property") revenues for the second
Hotel to be constructed lease year
Courtyard by Marriott $17,085,000 approximately 20 years; 10.309% of the total cost for the first and second
Addison, TX (3)(4)(5)(6) three 15-year renewal to purchase the Property; lease years, 7.75% of room
(the "Courtyard Addison options increases to 10.567% revenues in excess of the
Property") after the first lease year second year pro forma
Hotel to be constructed revenues; and for the third
lease year and thereafter,
7.75% of room revenues in
excess of the second year
actual revenues
Courtyard by Marriott $19,614,000 approximately 20 years; 10.309% of the total cost for the first and second
Scottsdale, AZ (3)(4)(5)(6) three 15-year renewal to purchase the Property; lease years, 7.75% of room
(the "Courtyard Scottsdale options increases to 10.567% revenues in excess of the
Property") after the first lease year second year pro forma
Hotel to be constructed revenues; and for the third
lease year and thereafter,
7.75% of room revenues in
excess of the second year
actual revenues
<PAGE>
Estimated
Purchase Lease Term and Minimum Annual
Property Price Renewal Options Rent Percentage Rent
- -------- --------- --------------- -------------- ---------------
Courtyard by Marriott $35,801,000 approximately 20 years; 10.309% of the total cost for the first and second lease
Seattle, WA (3)(4)(5)(6) three 15-year renewal to purchase the Property; years, 7.75% of room revenues in
(the "Courtyard Seattle options increases to 10.567% after excess of the second year pro
Property") the first lease year forma revenues; and for the third
Hotel to be constructed lease year and thereafter, 7.75%
of room revenues in excess of the
second year actual revenues
Residence Inn by Marriott $21,352,000 approximately 20 years; 10.309% of the total cost for the first and second lease
Phoenix, AZ (3)(4)(5)(6) three 15-year renewal to purchase the Property; years, 7.75% of room revenues in
(the "Residence Inn Phoenix options increases to 10.567% after excess of the second year pro
Property") the first lease year forma revenues; and for the third
Hotel to be constructed lease year and thereafter, 7.75%
of room revenues in excess of the
second year actual revenues
</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 approximately $100 million.
(3) The leases for the Courtyard Addison, the Courtyard Scottsdale, the
Courtyard Seattle, and the Residence Inn Phoenix Properties (in
addition to the Initial Hotels) are expected to be with the same
unaffiliated lessee.
(4) The Company, together with an institutional investor, will indirectly
acquire these four hotel properties (in addition to the Initial Hotels)
through Hotel Investors. (See "Property Acquisitions.")
(5) In connection with the acquisition of the four properties (in addition
to the Initial Hotels), Hotel Investors is expected to obtain
approximately $96,567,500 in long-term, permanent financing to be used
to fund a portion of the purchase prices. Such financing will be
secured by the properties, bear interest at a market rate and be
nonrecourse to Hotel Investors. (See "Property Acquisitions.")
(6) In connection with the acquisition of the four hotel properties (in
addition to the Initial Hotels), an investment of $15,000,000 in the
Company and the acquisition of a ten percent interest in the Advisor by
the institutional investor, the Advisor and certain of its Affiliates
intend to waive or reduce certain fees otherwise payable by the
Company.
<PAGE>
SITE SELECTION AND ACQUISITION OF PROPERTIES
General. It is anticipated that the Hotel Chains selected by the
Advisor, and as approved by the Board of Directors, will have full-time
personnel engaged in site selection and evaluation. All new sites must be
approved by the Hotel Chains. The Hotel Chains generally conduct or require the
submission of studies which typically include such factors as traffic patterns,
population trends, commercial and industrial development, office and
institutional development, residential development, per capita or household
median income, per capita or household median age, and other factors. The Hotel
Chains also will review and approve all proposed tenants and business sites. The
Hotel Chains or the operators are expected to make their site evaluations and
analyses, as well as financial information regarding proposed tenants, available
to the Company.
The Board of Directors, on behalf of the Company, will elect to
purchase and lease Properties based principally on an examination and evaluation
by the Advisor of the potential value of the site, the financial condition and
business history of the proposed tenant, the demographics of the area in which
the property is located or to be located, the proposed purchase price and
proposed lease terms, geographic and market diversification, and potential sales
expected to be generated by the business located on the property. In addition,
the potential tenant must meet at least the minimum standards established by a
Hotel Chain for its operators. The Advisor also will perform an independent
break-even analysis of the potential profitability of a property using
historical data and other data developed by the Company and provided by the
operator.
The Board of Directors will exercise its own judgment as to, and will
be solely responsible for, the ultimate selection of both tenants and
Properties. Therefore, some of the properties proposed and approved by a Hotel
Chain may not be purchased by the Company.
In each Property acquisition, it is anticipated that the Advisor will
negotiate the lease agreement with the tenant. In certain instances, the Advisor
may negotiate an assignment of an existing lease, in which case the terms of the
lease may vary substantially from the Company's standard lease terms, if the
Board of Directors, based on the recommendation of the Advisor, determines that
the terms of an acquisition and lease of a Property, taken as a whole, are
favorable to the Company. It is expected that the structure of the long-term,
"triple-net" lease agreements, which generally provide for monthly rental
payments with automatic increases in base rent at specified times during the
lease terms and/or a percentage of gross sales over specified levels, will
increase the value of the Properties and provide an inflation hedge. See
"Description of Property Leases" below for a discussion of the anticipated terms
of the Company's leases.
Some lease agreements will be negotiated to provide the tenant with the
opportunity to purchase the Property under certain conditions, generally either
at a price not less than fair market value (determined by appraisal or
otherwise) or through a right of first refusal to purchase the Property. In
either case, the lease agreements will provide that the tenant may exercise
these rights only to the extent consistent with the Company's objective of
qualifying as a REIT. See "Sale of Properties, Mortgage Loans and Secured
Equipment Leases" below and "Federal Income Tax Considerations --
Characterization of Property Leases."
The purchase of each Property will be supported by an appraisal of the
real estate prepared by an independent appraiser. The Advisor, however, will
rely on its own independent analysis and not on such appraisals in determining
whether or not to recommend that the Company acquire a particular property. The
purchase price of each such Property, plus any Acquisition Fees paid by the
Company in connection with such purchase, will not exceed the Property's
appraised value. (In connection with the acquisition of a Property which is to
be constructed or renovated, the comparison of the purchase price and the
appraised value of such Property ordinarily will be based on the "when
constructed" price and value of such Property.) It should be noted that
appraisals are estimates of value and should not be relied upon as measures of
true worth or realizable value. Each appraisal will be maintained in the
Company's records for at least five years and will be available for inspection
and duplication by any stockholder.
The titles to Properties purchased by the Company will be insured by
appropriate title insurance policies and/or abstract opinions consistent with
normal practices in the jurisdictions in which the Properties are located.
Construction and Renovation. In some cases, construction or renovation
will be required after the purchase contract has been entered into, but before
the total purchase price has been paid. In connection with the acquisition of
Properties that are to be constructed or renovated and as to which the Company
will own both the land and the building or building only, the Company generally
will advance funds for construction or renovation costs, as they are incurred,
pursuant to a development agreement with the developer. The developer may be the
tenant or an Affiliate of the Company. An Affiliate may serve as a developer and
enter into the development agreement with the Company if the transaction is
approved by a majority of the Directors, including a majority of the Independent
Directors. The Company believes that the ability to have an Affiliate capable of
serving as the developer provides the Company an advantage by enhancing its
relationship with key tenants and by giving it access to tenant opportunities at
an earlier stage of the development cycle. As a result, the Company believes it
has a greater number of opportunities for investment presented to it than it
might otherwise have and it is able to obtain better terms by negotiating the
terms of its investment at an earlier stage in the development cycle when there
are fewer competitive alternatives available to the tenant.
The developer will enter into all construction contracts and will
arrange for and coordinate all aspects of the construction or renovation of the
property improvements. The developer will be responsible for the construction or
renovation of the building improvements, although it may employ co-developers or
sub-agents in fulfilling its responsibilities under the development agreement.
All general contractors performing work in connection with such building
improvements must provide a payment and performance bond or other satisfactory
form of guarantee of performance. All construction and renovation will be
performed or supervised by persons or entities acceptable to the Advisor. The
Company will be obligated, as construction or renovation costs are incurred, to
make the remaining payments due as part of the purchase price for the
Properties, provided that the construction or renovation conforms to definitive
plans, specifications, and costs approved by the Advisor and the Board of
Directors and embodied in the construction contract.
Under the terms of the development agreement, the Company generally
will advance its funds on a monthly basis to meet the construction draw requests
of the developer. The Company, in general, only will advance its funds to meet
the developer's draw requests upon receipt of an inspection report and a
certification of draw requests from an inspecting architect or engineer suitable
to the Company, and the Company may retain a portion of any advance until
satisfactory completion of the project. The certification generally must be
supported by color photographs showing the construction work completed as of the
date of inspection. The total amount of the funds advanced to the developer
(including the purchase price of the land plus closing costs and certain other
costs) generally will not exceed the maximum amount specified in the development
agreement. Such maximum amount will be based on the Company's estimate of the
costs of such construction or renovation.
In some cases, construction or renovation will be required before the
Company has acquired the Property. In this situation, the Company may have made
a deposit on the Property in cash or by means of a letter of credit. The
renovation or construction may be made by an Affiliate or a third party. The
Company may permit the proposed developer to arrange for a bank or another
lender, including an Affiliate, to provide construction financing to the
developer. In such cases, the lender may seek assurance from the Company that it
has sufficient funds to pay to the developer the full purchase price of the
Property upon completion of the construction or renovation. In the event that
the Company segregates funds as assurance to the lender of its ability to
purchase the Property, the funds will remain the property of the Company, and
the lender will have no rights with respect to such funds upon any default by
the developer under the development agreement or under the loan agreement with
such lender, or if the closing of the purchase of the Property by the Company
does not occur for any reason, unless the transaction is supported by a letter
of credit in favor of the lender.
Under the development agreement, the developer generally will be
obligated to complete the construction or renovation of the building
improvements within a specified period of time from the date of the development
agreement, which generally will be between 12 to 18 months for hotel Properties.
If the construction or renovation is not completed within that time and the
developer fails to remedy this default within 10 days after notice from the
Company, the Company will have the option to grant the developer additional time
to complete the construction, to take over construction or renovation of the
building improvements, or to terminate the development agreement and require the
developer to purchase the Property at a price equal to the sum of (i) the
Company's purchase price of the land, including all fees, costs, and expenses
paid by the Company in connection with its purchase of the land, (ii) all fees,
costs, and expenses disbursed by the Company pursuant to the development
agreement for construction of the building improvements, and (iii) the Company's
"construction financing costs." The "construction financing costs" of the
Company is an amount equal to a return, at the annual percentage rate used in
calculating the minimum annual rent under the lease, on all Company payments and
disbursements described in clauses (i) and (ii) above.
The Company also generally will enter into an indemnification and put
agreement (the "Indemnity Agreement") with the developer. The Indemnity
Agreement will provide for certain additional rights to the Company unless
certain conditions are met. In general, these conditions are (i) the developer's
acquisition of all permits, approvals, and consents necessary to permit
commencement of construction or renovation of the building improvements within a
specified period of time after the date of the Indemnity Agreement (normally, 60
days), or (ii) the completion of construction or renovation of the building as
evidenced by the issuance of a certificate of occupancy, within a specified
period of time after the date of the Indemnity Agreement. If such conditions are
not met, the Company will have the right to grant the developer additional time
to satisfy the conditions or to require the developer to purchase the Property
from the Company at a purchase price equal to the total amount disbursed by the
Company in connection with the acquisition and construction or renovation of the
Property (including closing costs), plus an amount equal to the return described
in item (iii) of the preceding paragraph. Failure of the developer to purchase
the Property from the Company upon demand by the Company under the circumstances
specified above will entitle the Company to declare the developer in default
under the lease and to declare each guarantor in default under any guarantee of
the developer's obligations to the Company.
In certain situations where construction or renovation is required for
a Property, the Company will pay a negotiated maximum amount upon completion of
construction or renovation rather than providing financing to the developer,
with such amount to be based on the developer's actual costs of such
construction or renovation.
Affiliates of the Company also may provide construction financing to
the developer of a Property. In addition, the Company may purchase from an
Affiliate of the Company a Property that has been constructed or renovated by
the Affiliate. Any fees paid to Affiliates of the Company in connection with the
financing, construction or renovation of a Property acquired by the Company will
be considered Acquisition Fees and will be subject to approval by a majority of
the Board of Directors, including a majority of the Independent Directors, not
otherwise interested in the transaction. See "Management Compensation" and
"Conflicts of Interest -- Certain Conflict Resolution Procedures." Any such fees
will be included in the cost of the Property and, therefore, will be included in
the calculation of base rent.
In all situations where construction or renovation of a Property is
required, the Company also will have the right to review the tenant's books,
records, and agreements during and following completion of construction to
verify actual costs.
Interim Acquisitions. The Advisor may regularly have opportunities to
acquire properties that often must be made within a relatively short period of
time, occasionally at a time when the Company may be unable to make the
acquisition. In an effort to address these situations and preserve the
acquisition opportunities of the Company (and other Affiliates of the Advisor),
the Advisor and its Affiliates maintain lines of credit which enable them to
acquire these properties on an interim basis and temporarily own them for the
purpose of facilitating their acquisition by the Company (or other entities with
which the Company is affiliated). At such time as a Property acquired on an
interim basis is determined to be suitable for acquisition by the Company, the
interim owner of the Property will sell its interest in the Property to the
Company at a price equal to the lesser of its cost (which includes carrying
costs and, in instances in which an Affiliate of the Company has provided real
estate brokerage services in connection with the initial purchase of the
Property, indirectly includes fees paid to an Affiliate of the Company) to
purchase such interest in the Property or the Property's appraised value,
provided that a majority of Directors, including a majority of the Independent
Directors, determine that the acquisition is fair and reasonable to the Company.
See "Conflicts of Interest -- Certain Conflict Resolution Procedures."
Appraisals of Properties acquired from such interim owners will be obtained in
all cases.
Acquisition Services. Acquisition services performed by the Advisor may
include, but are not limited to site selection and/or approval; review and
selection of tenants and negotiation of lease agreements and related documents;
monitoring Property acquisitions; and the processing of all final documents
and/or procedures to complete the acquisition of Properties and the commencement
of tenant occupancy and lease payments.
The Company will pay the Advisor a fee of 4.5% of the Total Proceeds as
Acquisition Fees. See "Management Compensation." The total of all Acquisition
Fees and Acquisition Expenses shall be reasonable and shall not exceed an amount
equal to 6% of the Real Estate Asset Value of a Property, or in the case of a
Mortgage Loan, 6% of the funds advanced, unless a majority of the Board of
Directors, including a majority of the Independent Directors, not otherwise
interested in the transaction approves fees in excess of these limits subject to
a determination that the transaction is commercially competitive, fair and
reasonable to the Company. The total of all Acquisition Fees payable to all
persons or entities will not exceed the compensation customarily charged in
arm's-length transactions by others rendering similar services as an ongoing
activity in the same geographical location and for comparable types of
properties.
The Advisor engages counsel to perform legal services, and such counsel
also may provide legal services to the Company in connection with the
acquisition of Properties. The legal fees payable to such counsel by the Company
will not exceed those generally charged for similar services.
STANDARDS FOR INVESTMENT IN PROPERTIES
Selection of Hotel Chains. The selection of Hotel Chains by the
Advisor, as approved by the Board of Directors, will be based on an evaluation
of the operations of the hotels in the Hotel Chains, the number of hotels
operated, the relationship of average revenue per available room to the average
capital cost per room of a hotel, the relative competitive position among the
same type of hotels offering similar types of products, name recognition, and
market penetration. The Hotel Chains will not be affiliated with the Advisor,
the Company or an Affiliate.
Selection of Properties and Tenants. In making investments in
Properties, the Advisor will consider relevant real property and financial
factors, including the condition, use, and location of the Property,
income-producing capacity, the prospects for long-term appreciation, the
relative success of the Hotel Chain in the geographic area in which the Property
is located, and the management capability and financial condition of the tenant.
The Company will obtain an independent appraisal for each Property it purchases.
In selecting tenants, the Advisor will consider the prior experience of the
tenant, the net worth of the tenant, past operating results of other hotels
currently or previously operated by the tenant, and the tenant's prior
experience in managing hotels within a particular Hotel Chain.
In selecting specific Properties within a particular Hotel Chain and in
selecting tenants for the Company's Properties, the Advisor, as approved by the
Board of Directors, will apply the following minimum standards.
1. Each Property will be in what the Advisor believes is a prime
business location for that type of Property.
2. Base (or minimum) annual rent will provide a specified minimum
return on the Company's cost of purchasing and, if applicable, developing the
Property, and the lease also will generally provide for payment of percentage
rent based on gross sales over specified levels and/or automatic increases in
base rent at specified times during the lease term.
3. The initial lease term typically will be at least 10 to 20 years.
4. The Company will reserve the right to approve or reject any tenant
and site selected by a Hotel Chain.
5. In evaluating prospective tenants, the Company will examine, among
other factors, the tenant's historical financial performance and its current
financial condition.
6. In general, the Company will not acquire a Property if the Board of
Directors, including a majority of the Independent Directors, determines that
the acquisition would adversely affect the Company in terms of geographic,
property type or chain diversification.
<PAGE>
DESCRIPTION OF PROPERTIES
The six hotel Properties directly or indirectly owned by the Company as
of May 13, 1999, conform, and the Advisor expects that any Properties purchased
by the Company will conform generally to the following specifications of size,
cost, and type of land and buildings.
Generally, Properties to be acquired by the Company will consist of
both land and building; although, in a number of cases, the Company may acquire
only the land underlying the building with the building owned by the tenant or a
third party, or may acquire the building only with the land owned by a third
party. Lot sizes generally range in size up to 10 acres depending on product,
market and design considerations, and are available at a broad range of pricing.
It is anticipated that hotel sites purchased by the Company will generally be in
primary or secondary urban, suburban, airport, highway or resort markets which
have been evaluated for past and future anticipated lodging demand trends. The
hotel buildings generally will be low to mid rise construction. The Company may
acquire limited service, extended stay or full service hotel Properties. Limited
service hotels generally minimize non-guest room space and offer limited food
service such as complimentary continental breakfasts and do not have restaurant
or lounge facilities on-site. Extended stay hotels generally contain guest
suites with a kitchen area and living area separate from the bedroom. Extended
stay hotels vary with respect to providing on-site restaurant facilities. Full
service hotels generally have conference or meeting facilities and on-site food
and beverage facilities. The Properties may include equipment.
Either before or after construction or renovation, the Properties to be
acquired by the Company will be one of a Hotel Chain's approved designs. Prior
to purchase of all Properties, other than those purchased prior to completion of
construction, the Company will receive a copy of the certificate of occupancy
issued by the local building inspector or other governmental authority which
permits the use of the Property as a hotel, and shall receive a certificate from
the Hotel Chain to the effect that (i) the Property is operational and (ii) the
Property and the tenant are in compliance with all of the chain's requirements,
including, but not limited to building plans and specifications approved by the
chain. The Company also will receive a certificate of occupancy for each
Property for which construction has not been completed at the time of purchase,
prior to the Company's payment of the final installment of the purchase price
for the Property.
A tenant generally will be required by the lease agreement to make such
capital expenditures as may be reasonably necessary to refurbish buildings,
premises, signs, and equipment so as to comply with the tenant's obligations
under the franchise agreement to reflect the current commercial image of its
Hotel Chain. These capital expenditures generally will be paid by the tenant
during the term of the lease. Some Property leases may, however, obligate the
tenant to fund, in addition to its lease payment, a reserve fund up to a
pre-determined amount. Generally, money in that fund may be used by the tenant
to pay for replacement of furniture and fixtures. The Company may be responsible
for other capital expenditures or repairs. The tenant generally is responsible
for replenishing the reserve fund and to pay a specified return on the amount of
capital expenditures or repairs paid for by the Company in excess of amounts in
the reserve fund.
DESCRIPTION OF PROPERTY LEASES
The terms and conditions of any lease entered into by the Company with
regard to a Property may vary from those described below. The Advisor in all
cases will use its best efforts to obtain terms at least as favorable as those
described below. If the Board of Directors determines, based on the
recommendation of the Advisor, that the terms of an acquisition and lease of a
Property, taken as a whole, are favorable to the Company, the Board of Directors
may, in its sole discretion, cause the Company to enter into leases with terms
which are substantially different than the terms described below, but only to
the extent consistent with the Company's objective of qualifying as a REIT. In
making such determination, the Advisor will consider such factors as the type
and location of the Property, the creditworthiness of the tenant, the purchase
price of the Property, the prior performance of the tenant, and the prior
business experience of management of the Company and the Company's Affiliates
with a Hotel Chain, or the operator.
<PAGE>
General. In general, the leases are expected to be "triple-net" leases,
which means that the tenants generally will be required to pay for all repairs,
maintenance, property taxes, utilities, and insurance. The tenants also will be
required to pay for special assessments, sales and use taxes, and the cost of
any renovations permitted under the leases. The Company will be the landlord
under each lease except in certain circumstances in which it may be a party to a
Joint Venture which will own the Property. In those cases, the Joint Venture,
rather than the Company, will be the landlord, and all references in this
section to the Company as landlord therefore should be read accordingly. See
"Joint Venture Arrangements" below.
Term of Leases. Properties will be leased for an initial term of 10 to
20 years with up to four, five-year renewal options. Upon termination of the
lease, the tenant will surrender possession of the Property to the Company,
together with any improvements made to the Property during the term of the
lease, except that for Properties in which the Company owns only the building
and not the underlying land, the owner of the land may assume ownership of the
building.
Computation of Lease Payments. During the initial term of the lease,
the tenant will pay the Company, as landlord, minimum annual rent equal to a
specified percentage of the Company's cost of purchasing the Property. In the
case of Properties that are to be constructed or renovated pursuant to a
development agreement, the Company's costs of purchasing the Property will
include the purchase price of the land, including all fees, costs, and expenses
paid by the Company in connection with its purchase of the land, and all fees,
costs, and expenses disbursed by the Company for construction of building
improvements. See "Site Selection and Acquisition of Properties -- Construction
and Renovation" above. In addition to minimum annual rent, the tenant will
generally pay the Company "percentage rent" and/or automatic increases in the
minimum annual rent at predetermined intervals during the term of the lease.
Percentage rent is generally computed as a percentage of the gross sales above a
specified level at a particular Property.
In the case of Properties in which the Company owns only the building,
the Company will structure its leases to recover its investment in the building
by the expiration of the lease.
Assignment and Sublease. In general, leases may not be assigned or
subleased without the Company's prior written consent (which may not be
unreasonably withheld) except to a tenant's corporate franchisor, corporate
affiliate or subsidiary, a successor by merger or acquisition, or in certain
cases, another franchisee, if such assignee or subtenant agrees to operate the
same type of hotel on the premises, but only to the extent consistent with the
Company's objective of qualifying as a REIT. The leases will set forth certain
factors (such as the financial condition of the proposed tenant or subtenant)
that are deemed to be a reasonable basis for the Company's refusal to consent to
an assignment or sublease. In addition, the Company may refuse to permit any
assignment or sublease that would jeopardize the Company's continued
qualification as a REIT. In certain cases, the original tenant will remain fully
liable, however, for the performance of all tenant obligations under the lease
following any such assignment or sublease unless the Company agrees in writing
to release the original tenant from its lease obligations.
Alterations to Premises. A tenant generally will have the right,
without the prior written consent of the Company and at the tenant's own
expense, to make certain improvements, alterations or modifications to the
Property. Under certain leases, the tenant, at its own expense, may make certain
immaterial structural improvements (with a cost of up to $10,000) without the
prior consent of the Company. Certain leases may require the tenant to post a
payment and performance bond for any structural alterations with a cost in
excess of a specified amount.
Right of Tenant to Purchase. In some cases, if the Company wishes at
any time to sell a Property pursuant to a bona fide offer from a third party,
the tenant of that Property will have the right to purchase the Property for the
same price, and on the same terms and conditions, as contained in the offer. In
certain cases, the tenant also may have a right to purchase the Property seven
to 20 years after commencement of the lease at a purchase price equal to the
greater of (i) the Property's appraised value at the time of the tenant's
purchase, or (ii) a specified amount, generally equal to the Company's purchase
price of the Property, plus a predetermined percentage (generally, 15% to 20%)
of such purchase price. See "Federal Income Tax Considerations --
Characterization of Property Leases."
<PAGE>
Substitution of Properties. Under certain leases, the tenant of a
Property, at its own expense and with the Company's prior written consent, may
be entitled to operate another form of approved hotel on the Property as long as
such approved hotel has an operating history which reflects an ability to
generate gross revenues and potential revenue growth equal to or greater than
that experienced by the tenant in operating the original hotel.
In addition, certain Property leases will provide the tenant with the
right, to the extent consistent with the Company's objective of qualifying as a
REIT, to offer the substitution of another property selected by the tenant in
the event that (i) the Property that is the subject of the lease is not
producing percentage rent pursuant to the terms of the lease, and (ii) the
tenant determines that the Property has become uneconomic (other than as a
result of an insured casualty loss or condemnation) for the tenant's continued
use and occupancy in its business operation and the tenant's board of directors
has determined to close and discontinue use of the Property. The tenant's
determination that a Property has become uneconomic is to be made in good faith
based on the tenant's reasonable business judgment after comparing the results
of operations of the Property to the results of operations at the majority of
other properties then operated by the tenant. If either of these events occurs,
the tenant will have the right to offer the Company the opportunity to exchange
the Property for another property (the "Substituted Property") with a total cost
for land and improvements thereon (including overhead, construction interest,
and other related charges) equal to or greater than the cost of the Property to
the Company.
Generally, the Company will have 30 days following receipt of the
tenant's offer for exchange of the Property to accept or reject such offer. In
the event that the Company requests an appraisal of the Substituted Property, it
will have at least ten days following receipt of the appraisal to accept or
reject the offer. If the Company accepts such offer, (i) the Substituted
Property will be exchanged for the Property in a transaction designed and
intended to qualify as a "like-kind exchange" within the meaning of section 1031
of the Code with respect to the Company and (ii) the lease of the Property will
be amended to (a) provide for minimum rent in an amount equal to the sum
determined by multiplying the cost of the Substituted Property by the Property
lease rate and (b) provide for the number of five-year lease renewal options
sufficient to permit the tenant, at its option, to continue its occupancy of the
Substituted Property for up to 35 years from the date on which the exchange is
made. The Company will pay the tenant the excess, if any, of the cost of the
Substituted Property over the cost of the Property. If the substitution does not
take place within a specified period of time after the tenant makes the offer to
exchange the Property for the Substituted Property, either party thereafter will
have the right not to proceed with the substitution. If the Company rejects the
Substituted Property offered by the tenant, the tenant is generally required to
offer at least three additional alternative properties for the Company's
acceptance or rejection. If the Company rejects all Substituted Properties
offered to it pursuant to the lease, or otherwise fails or refuses to consummate
a substitution for any reason other than the tenant's failure to fulfill the
conditions precedent to the exchange, then the tenant will be entitled to
terminate the lease on the date scheduled for such exchange by purchasing the
Property from the Company for a price equal to the then-fair market value of the
Property.
Neither the tenant nor any of its subsidiaries, licensees,
concessionaires, or sublicensees or any other affiliate will be permitted to use
the original Property as a business of the same type and style for at least one
year after the closing of the original Property. In addition, in the event the
tenant or any of its affiliates sells the Property within twelve months after
the Company acquires the Substituted Property, the Company will receive, to the
extent consistent with its objective of qualifying as a REIT, from the proceeds
of the sale the amount by which the selling price exceeds the cost of the
Property to the Company.
Special Conditions. Certain leases may provide that the tenant will not
be permitted to own or operate, directly or indirectly, another Property of the
same or similar type as the leased Property that is or will be located within a
specified distance of the leased Property.
Insurance, Taxes, Maintenance, and Repairs. Tenants will be required,
under the terms of the leases, to maintain, for the benefit of the Company and
the tenant, insurance that is commercially reasonable given the size, location
and nature of the Property. Tenants, other than those tenants with a substantial
net worth, generally also will be required to obtain "rental value" or "business
interruption" insurance to cover losses due to the occurrence of an insured
event for a specified period, generally six to twelve months. In general, no
lease will be entered into unless, in the opinion of the Advisor, as approved by
the Board of Directors, the insurance required by the lease adequately insures
the Property.
Tenants will be required to maintain such Properties in good order and
repair. Such tenants generally will be required to maintain the Property and
repair any damage to the Property, except damage occurring during the last 24 to
48 months of the lease term (as extended), which in the opinion of the tenant
renders the Property unsuitable for occupancy, in which case the tenant will
have the right instead to pay the insurance proceeds to the Company and
terminate the lease. The nature of the obligations of tenants for maintenance
and repairs of the Properties will vary depending upon individual lease
negotiations. In some instances, the Company may be obligated to make repairs
and fund capital improvements. In these instances, the lease will adjust the
lease payments so that the economic terms would be the same as if the tenant
were responsible to make repairs and fund capital improvements.
Events of Default. The leases generally provide that the following
events, among others, will constitute a default under the lease: (i) the
insolvency or bankruptcy of the tenant, provided that the tenant may have the
right, under certain circumstances, to cure such default; (ii) the failure of
the tenant to make timely payment of rent or other charges due and payable under
the lease, if such failure continues for a specified period of time (generally,
five to 30 days) after notice from the Company of such failure; (iii) the
failure of the tenant to comply with any of its other obligations under the
lease (for example, the discontinuance of operations of the leased Property) if
such failure continues for a specified period of time (generally, ten to 45
days); (iv) a default under or termination of the franchise agreement between
the tenant and its franchisor; (v) in cases where the Company enters into a
development agreement relating to the construction or renovation of a building,
a default under the development agreement or the Indemnity Agreement or the
failure to establish the minimum annual rent at the end of the development
period; and (vi) in cases where the Company has entered into other leases with
the same tenant, a default under such lease.
Upon default by the tenant, the Company generally will have the right
under the lease and under most state laws to evict the tenant, re-lease the
Property to others, and hold the tenant responsible for any deficiency in the
minimum lease payments. Similarly, if the Company determined not to re-lease the
Property, it could sell the Property. (However, unless required to do so by the
lease or its investment objectives, the Company does not intend to sell any
Property prior to five to ten years after the commencement of the lease on such
Property. See "Right of Tenant to Purchase" above.) In the event that a lease
requires the tenant to make a security deposit, the Company will have the right
under the lease to apply the security deposit, upon default by the tenant,
towards any payments due from the defaulting tenant. In general, the tenant will
remain liable for all amounts due under the lease to the extent not paid from a
security deposit or by a new tenant.
In the event that a tenant defaults under a lease with the Company, the
Company either will attempt to locate a replacement operator acceptable to the
Hotel Chain involved or will discontinue operation of the hotel. In lieu of
obtaining a replacement operator, some Hotel Chains may have the option and may
elect to operate the hotels themselves. The Company will have no obligation to
operate the hotels, and no Hotel Chain will be obligated to permit the Company
or a replacement operator to operate the hotels.
JOINT VENTURE ARRANGEMENTS
The Company may enter into a Joint Venture to own and operate a
Property with various unaffiliated persons or entities or with another program
formed by the principals of the Company or the Advisor or their Affiliates, if a
majority of the Directors, including a majority of the Independent Directors,
not otherwise interested in the transaction determine that the investment in the
Joint Venture is fair and reasonable to the Company and on substantially the
same terms and conditions as those to be received by the co-venturer or
co-venturers. The Company may take more or less than a 50% interest in any Joint
Venture, subject to obtaining the requisite approval of the Directors. See "Risk
Factors -- Real Estate and Other Investment Risks -- Company May Not Control
Joint Ventures " and " -- Difficulty in Exiting a Joint Venture After an
Impasse."
Under the terms of each Joint Venture agreement, it is anticipated that
the Company and each joint venture partner will be jointly and severally liable
for all debts, obligations, and other liabilities of the Joint Venture, and the
Company and each joint venture partner will have the power to bind each other
with any actions they take within the scope of the Joint Venture's business. In
addition, it is expected that the Advisor or its Affiliates will be entitled to
reimbursement, at cost, for actual expenses incurred by the Advisor or its
Affiliates on behalf of the Joint Venture. Joint Ventures entered into to
purchase and hold a Property for investment generally will have an initial term
of 10 to 20 years (generally the same term as the initial term of the lease for
the Property in which the Joint Venture invests), and, after the expiration of
the initial term, will continue in existence from year to year unless terminated
at the option of either joint venturer or unless terminated by an event of
dissolution. Events of dissolution will include the bankruptcy, insolvency, or
termination of any co-venturer, sale of the Property owned by the Joint Venture,
mutual agreement of the Company and its joint venture partner to dissolve the
Joint Venture, and the expiration of the term of the Joint Venture. The Joint
Venture agreement typically will restrict each venturer's ability to sell,
transfer, or assign its joint venture interest without first offering it for
sale to its co-venturer. In addition, in any Joint Venture with another program
sponsored by the Advisor or its Affiliates, where such arrangements are entered
into for the purpose of purchasing and holding Properties for investment, in the
event that one party desires to sell the Property and the other party does not
desire to sell, either party will have the right to trigger dissolution of the
Joint Venture by sending a notice to the other party. The notice will establish
the price and terms for the sale or purchase of the other party's interest in
the Joint Venture to the other party. The Joint Venture agreement will grant the
receiving party the right to elect either to purchase the other party's interest
on the terms set forth in the notice or to sell its own interest on such terms.
The following paragraphs describe the allocations and distributions
under the expected terms of the joint venture agreement for any Joint Venture in
which the Company and its co-venturer each have a 50% ownership interest. In any
other case, the allocations and distributions are expected to be similar to
those described below, except that allocations and distributions which are
described below as being made 50% to each co-venturer will instead be made in
proportion to each co-venturer's respective ownership interest.
Under the terms of each joint venture agreement, operating profits and
losses generally will be allocated 50% to each co-venturer. Profits from the
sale or other disposition of Joint Venture property first will be allocated to
any co-venturers with negative capital account balances in proportion to such
balances until such capital accounts equal zero, and thereafter 50% to each
co-venturer. Similarly, losses from the sale or other disposition of Joint
Venture property first will be allocated to joint venture partners with positive
capital account balances in proportion to such balances until such capital
accounts equal zero, and thereafter 50% to each co-venturer. Notwithstanding any
other provisions in the Joint Venture agreement, income, gain, loss, and
deductions with respect to any contributed property will be shared in a manner
which takes into account the variation between the basis of such property and
its fair market value at the time of contribution in accordance with section
704(c) of the Code.
Net cash flow from operations of the Joint Venture generally will be
distributed 50% to each joint venture partner. Any liquidation proceeds, after
paying joint venture debts and liabilities and funding reserves for contingent
liabilities, will be distributed first to the joint venture partners with
positive capital account balances in proportion to such balances until such
balances equal zero, and thereafter 50% to each joint venture partner.
In order that the allocations of Joint Venture income, gain, loss, and
deduction provided in Joint Venture agreements may be respected for federal
income tax purposes, it is expected that any Joint Venture agreement (i) will
contain a "qualified income offset" provision, (ii) will prohibit allocations of
loss or deductions to the extent such allocation would cause or increase an
"Adjusted Capital Account Deficit," and (iii) will require (a) that capital
accounts be maintained for each joint venture partner in a manner which complies
with Treasury Regulation ss.1.704-1(b)(2)(iv) and (b) that distributions of
proceeds from the liquidation of a partner's interest in the Joint Venture
(whether or not in connection with the liquidation of the Joint Venture) be made
in accordance with the partner's positive capital account balance. See "Federal
Income Tax Considerations -- Investment in Joint Ventures."
Prior to entering into any Joint Venture arrangement with any
unaffiliated co-venturer (or the principals of any unaffiliated co-venturer),
the Company will confirm that such person or entity has demonstrated to the
satisfaction of the Company that requisite financial qualifications are met.
The Company may acquire Properties from time to time by issuing limited
partnership units in CNL Hospitality Partners, LP to sellers of such Properties
pursuant to which the seller, as owner, would receive partnership interests
convertible at a later date into Common Stock of the Company. The Company is the
general partner of CNL Hospitality Partners, LP. This structure enables a
property owner to transfer property without incurring immediate tax liability,
and therefore may allow the Company to acquire Properties on more favorable
terms than otherwise.
MORTGAGE LOANS
The Company may provide Mortgage Loans to operators of Hotel Chains, or
their affiliates, to enable them to acquire the building and improvements on
real property. Generally, in these cases, the Company will acquire the
underlying land and will enter into a long-term ground lease for the Property
with the borrower as the tenant. The Mortgage Loan will be secured by the
building and improvements on the land.
Generally, management believes the interest rate and terms of these
transactions will be substantially the same as those of the Company's Property
leases. The borrower will be responsible for all of the expenses of owning the
property, as with the "triple-net" leases, including expenses for insurance and
repairs and maintenance. Management expects the Mortgage Loans will be fully
amortizing loans over a period of 10 to 20 years (generally, the same term as
the initial term of the Property leases), with payments of principal and
interest due monthly. In addition, management expects the interest rate charged
under the terms of the Mortgage Loan will be fixed over the term of the loan and
generally will be comparable to, or slightly lower than, lease rates charged to
tenants for the Properties.
The Company may combine leasing and financing in connection with a
Property. For example, it may make a Mortgage Loan with respect to the building
and lease the underlying land to the borrower. Management believes that the
combined leasing and financing structure provides the benefit of allowing the
Company to receive, on a fixed income basis, the return of its initial
investment in each financed building, which is generally a depreciating asset,
plus interest. At the same time, the Company retains ownership of the underlying
land, which may appreciate in value, thus providing an opportunity for a capital
gain on the sale of the land. In such cases in which the borrower is also the
tenant under a Property lease for the underlying land, if the borrower does not
elect to exercise its purchase option to acquire the Property under the terms of
the lease, the building and improvements on the Property will revert to the
Company at the end of term of the lease, including any renewal periods. If the
borrower does elect to exercise its purchase option as the tenant of the
underlying land, the Company will generally have the option of selling the
Property at the greater of fair market value or cost plus a specified
percentage.
The Company will not make or invest in Mortgage Loans unless an
appraisal is obtained concerning the property that secures the Mortgage Loan.
Mortgage indebtedness on any property shall not exceed such property's appraised
value. In cases in which the majority of the Independent Directors so determine,
and in all cases in which the Mortgage Loan involves the Advisor, Directors, or
Affiliates, such appraisal must be obtained from an independent expert
concerning the underlying property. Such appraisal shall be maintained in the
Company's records for at least five years, and shall be available for inspection
and duplication by any stockholder. In addition to the appraisal, a mortgagee's
or owner's title insurance policy or commitment as to the priority of the
mortgage or condition of the title must be obtained.
Management believes that the criteria for investing in such Mortgage
Loans are substantially the same as those involved in the Company's investments
in Properties; therefore, the Company will use the same underwriting criteria as
described above in "Business -- Standards for Investment in Properties." In
addition, the Company will not make or invest in Mortgage Loans on any one
property if the aggregate amount of all mortgage loans outstanding on the
property, including the loans of the Company, would exceed an amount equal to
85% of the appraised value of the property as determined by appraisal unless
substantial justification exists because of the presence of other underwriting
criteria. For purposes of this limitation, the aggregate amount of all mortgage
loans outstanding on the property, including the loans of the Company, shall
include all interest (excluding contingent participation in income and/or
appreciation in value of the mortgaged property), the current payment of which
may be deferred pursuant to the terms of such loans, to the extent that deferred
interest on each loan exceeds 5% per annum of the principal balance of the loan.
Further, the Company will not make or invest in any Mortgage Loans that
are subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or Affiliates of the Company. The Company currently
expects to provide Mortgage Loans in the aggregate principal amount of
approximately 5% to 10% of Gross Proceeds.
<PAGE>
MANAGEMENT SERVICES
The Advisor will provide management services relating to the Company,
the Properties, the Mortgage Loans, and the Secured Equipment Lease program
pursuant to an Advisory Agreement between it and the Company. Under this
agreement, the Advisor will be responsible for assisting the Company in
negotiating leases, Mortgage Loans and Secured Equipment Leases; collecting
rental, Mortgage Loan and Secured Equipment Lease payments; inspecting the
Properties and the tenants' books and records; and responding to tenant
inquiries and notices. The Advisor also will provide information to the Company
about the status of the leases, the Properties, the Mortgage Loans, the Line of
Credit, the Permanent Financing and the Secured Equipment Leases. In exchange
for these services, the Advisor will be entitled to receive certain fees from
the Company. For supervision of the Properties and Mortgage Loans, the Advisor
will receive the Asset Management Fee, which generally is payable monthly in an
amount equal to one-twelfth of 0.6% of Real Estate Asset Value and the
outstanding principal amount of the Mortgage Loans, as of the end of the
preceding month. For negotiating Secured Equipment Leases and supervising the
Secured Equipment Lease program, the Advisor will receive, upon entering into
each lease, a Secured Equipment Lease Servicing Fee payable out of the proceeds
of the borrowings equal to 2% of the purchase price of the Equipment subject to
each Secured Equipment Lease. See "Management Compensation."
BORROWING
The Company will borrow money to acquire Assets and to pay certain
related fees. The Company intends to encumber Assets in connection with any
borrowing. The Company plans to obtain one or more revolving Lines of Credit in
an aggregate amount up to $100,000,000, and may also obtain Permanent Financing.
The Line of Credit may be repaid with offering proceeds, working capital or
Permanent Financing. The Line of Credit and Permanent Financing are the only
source of funds for making Secured Equipment Leases and for paying the Secured
Equipment Lease Servicing Fee.
On July 31, 1998, the Company entered into a revolving line of credit
and security agreement with a bank to be used by the Company to acquire hotel
Properties. The Line of Credit provides that the Company will be able to receive
advances of up to $30,000,000 until July 30, 2003, with an annual review to be
performed by the bank to indicate that there has been no substantial
deterioration, in the bank's reasonable discretion, of the credit quality.
Interest expense on each advance shall be payable monthly, with all unpaid
interest and principal due no later than five years from the date of the
advance. Advances under the Line of Credit will bear interest at either (i) a
rate per annum equal to 318 basis points above the LIBOR or (ii) a rate per
annum equal to 30 basis points above the bank's base rate, whichever the Company
selects at the time advances are made. In addition a fee of 0.5% per loan will
be due and payable to the bank on funds as advanced. Each loan made under the
Line of Credit will be secured by the assignment of rents and leases. In
addition, the Line of Credit provides that the Company will not be able to
further encumber the applicable Property during the term of the loan without the
bank's consent. The Company will be required, at each closing, to pay all costs,
fees and expenses arising in connection with the Line of Credit. The Company
must also pay the bank's attorneys fees, subject to a maximum cap, incurred in
connection with the Line of Credit and each advance. As of May 13, 1999, the
Company had obtained and repaid 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."
Management believes that any financing obtained during the offering
period will allow the Company to make investments in Assets that the Company
otherwise would be forced to delay until it raised a sufficient amount of
proceeds from the sale of Shares. By eliminating this delay, the Company will
also eliminate the risk that these investments will no longer be available, or
the terms of the investment will be less favorable, when the Company has raised
sufficient offering proceeds. Alternatively, Affiliates of the Advisor could
make such investments, pending receipt by the Company of sufficient offering
proceeds, in order to preserve the investment opportunities for the Company.
However, Assets acquired by the Company in this manner would be subject to
closing costs both on the original purchase by the Affiliate and on the
subsequent purchase by the Company, which would increase the
<PAGE>
amount of expenses associated with the acquisition of Assets and reduce the
amount of offering proceeds available for investment in income-producing assets.
Management believes that the use of borrowings will enable the Company to reduce
or eliminate the instances in which the Company will be required to pay
duplicate closing costs, which may be substantial in certain states.
Similarly, management believes that the borrowings will benefit the
Company by allowing it to take advantage of its ability to borrow at favorable
interest rates. Specifically, the Company intends to structure the terms of any
financing so that the lease rates for Properties acquired and the interest rates
for Mortgage Loans and Secured Equipment Leases made with the loan proceeds will
exceed the interest rate payable on the financing. To the extent that the
Company is able to structure the financing on these terms, the Company will
increase its net revenues. In addition, the use of financing will increase the
diversification of the Company's portfolio by allowing it to acquire more Assets
than would be possible using only the Gross Proceeds from the offering.
As a result of existing relationships between Affiliates of the Advisor
and certain financing sources, the Company may have the opportunity to obtain
financing at more favorable interest rates than the Company could otherwise
obtain. In connection with any financing obtained by the Company as a result of
any such relationship, the Company will pay a loan origination fee to the
Affiliate. In addition, certain lenders may require, as a condition of providing
financing to the Company, that the Affiliate with which the lender has an
existing relationship act as a loan servicing agent. In connection with any such
arrangement the Company will pay a loan servicing fee to the Affiliate. Any loan
origination fee or loan servicing fee paid to an Affiliate of the Company is
subject to the approval by a majority of the Board of Directors (including a
majority of the Independent Directors) not otherwise interested in the
transaction as fair and reasonable to the Company and on terms not less
favorable to the Company than those available from unaffiliated third parties
and not less favorable than those available from the Advisor or its Affiliates
in transactions with unaffiliated third parties. See "Conflicts of Interest --
Certain Conflict Resolution Procedures."
The Company may also borrow funds for the purpose of preserving its
status as a REIT. For example, the Company may borrow to the extent necessary to
permit the Company to make Distributions required in order to enable the Company
to qualify as a REIT for federal income tax purposes; however, the Company will
not borrow for the purpose of returning Invested Capital to the stockholders
unless necessary to eliminate corporate-level tax to the Company. The aggregate
borrowing of the Company, secured and unsecured, shall be reasonable in relation
to Net Assets of the Company and shall be reviewed by the Board of Directors at
least quarterly. The Board of Directors anticipates that the aggregate amounts
of any Lines of Credit will be up to $100,000,000 . The Line of Credit may be
increased at the discretion of the Board of Directors and may be repaid with
proceeds of the offering. The aggregate amount of the Permanent Financing will
not exceed 30% of the Company's total assets. However, in accordance with the
Company's Articles of Incorporation, the maximum amount of borrowing in relation
to Net Assets, in the absence of a satisfactory showing that a higher level of
borrowing is appropriate, shall not exceed 300% of Net Assets. Any excess in
borrowing over such 300% level shall occur only with approval by a majority of
the Independent Directors and will be disclosed and explained to stockholders in
the first quarterly report of the Company prepared after such approval occurs.
SALE OF PROPERTIES, MORTGAGE LOANS AND SECURED EQUIPMENT LEASES
For the first three to eight years after the commencement of this
offering, the Company intends, to the extent consistent with the Company's
objective of qualifying as a REIT, to reinvest in additional Properties or
Mortgage Loans any proceeds of the Sale of a Property or a Mortgage Loan that
are not required to be distributed to stockholders in order to preserve the
Company's REIT status for federal income tax purposes. The Company may also use
such proceeds to reduce its outstanding indebtedness. Similarly, and to the
extent consistent with REIT qualification, the Company plans to use the proceeds
of the Sale of a Secured Equipment Lease to fund additional Secured Equipment
Leases, or to reduce its outstanding indebtedness on the borrowings. At or prior
to the end of such eight-year period, the Company intends to provide
stockholders of the Company with liquidity of their investment, either in whole
or in part, through Listing (although liquidity cannot be assured thereby) or by
commencing the orderly Sale of the Company's Assets. If Listing occurs, the
Company intends to use any Net Sales Proceeds not required to be distributed to
stockholders in order to preserve the Company's status as a REIT to reinvest in
additional Properties, Mortgage Loans and Secured Equipment Leases or to repay
outstanding
<PAGE>
indebtedness. If Listing does not occur within eight years after the
commencement of this offering, the Company thereafter will undertake the orderly
liquidation of the Company and the Sale of the Company's Assets and will
distribute any Net Sales Proceeds to stockholders. In addition, the Company will
not sell any Assets if such Sale would not be consistent with the Company's
objective of qualifying as a REIT.
In deciding the precise timing and terms of Property Sales, the Advisor
will consider factors such as national and local market conditions, potential
capital appreciation, cash flows, and federal income tax considerations. The
terms of certain leases, however, may require the Company to sell a Property at
an earlier time if the tenant exercises its option to purchase a Property after
a specified portion of the lease term has elapsed. See "Business -- Description
of Property Leases -- Right of Tenant to Purchase." The Company will have no
obligation to sell all or any portion of a Property at any particular time,
except as may be required under property or joint venture purchase options
granted to certain tenants. In connection with Sales of Properties by the
Company, purchase money obligations may be taken by the Company as part payment
of the sales price. The terms of payment will be affected by custom in the area
in which the Property is located and by prevailing economic conditions. When a
purchase money obligation is accepted in lieu of cash upon the Sale of a
Property, the Company will continue to have a mortgage on the Property and the
proceeds of the Sale will be realized over a period of years rather than at
closing of the Sale.
The Company does not anticipate selling the Secured Equipment Leases
prior to expiration of the lease term, except in the event that the Company
undertakes orderly liquidation of its assets. In addition, the Company does not
anticipate selling any Mortgage Loans prior to the expiration of the loan term,
except in the event (i) the Company owns the Property (land only) underlying the
building improvements which secure the Mortgage Loan and the Sale of the
Property occurs, or (ii) the Company undertakes an orderly Sale of its Assets.
FRANCHISE REGULATION
Many states regulate the franchise or license relationship between a
tenant/franchisee and a franchisor. The Company will not be an Affiliate of any
franchisor, and is not currently aware of any states in which the relationship
between the Company as landlord and the tenant will be subjected to those
regulations, but it will comply with such regulations in the future, if so
required. Hotel Chains which franchise their operations are subject to
regulation by the Federal Trade Commission.
COMPETITION
The hotel industry is characterized by intense competition. The
operators of the hotels located on the Properties will compete with
independently owned hotels, hotels which are part of local or regional chains,
and hotels in other well-known national chains, including those offering
different types of accommodations. Many successful hotel "pockets" have
developed in areas of concentrated lodging demand, such as airports, urban
office parks and resort areas where this gathering promotes credibility to the
market as a lodging destination and accords the individual properties
efficiencies such as area transportation, visibility and the promotion of other
support amenities.
The Company will be in competition with other persons and entities both
to locate suitable Properties to acquire and to locate purchasers for its
Properties. The Company also will compete with other financing sources such as
banks, mortgage lenders, and sale/leaseback companies for suitable Properties,
tenants, Mortgage Loan borrowers and Equipment tenants.
REGULATION OF MORTGAGE LOANS AND SECURED EQUIPMENT LEASES
The Mortgage Loan and Secured Equipment Lease programs may be subject
to regulation by federal, state and local authorities and subject to various
laws and judicial and administrative decisions imposing various requirements and
restrictions, including among other things, regulating credit granting
activities, establishing maximum interest rates and finance charges, requiring
disclosures to customers, governing secured transactions and setting collection,
repossession and claims handling procedures and other trade practices. In
addition, certain states have enacted legislation requiring the licensing of
mortgage bankers or other lenders and these requirements may affect the
Company's ability to effectuate its Mortgage Loan and Secured Equipment Lease
programs. Commencement of operations in these or other jurisdictions may be
dependent upon a finding of financial responsibility, character and fitness of
the Company. The Company may determine not to make Mortgage Loans or enter into
Secured Equipment Leases in any jurisdiction in which it believes the Company
has not complied in all material respects with applicable requirements.
SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the
Company, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements included in Appendix B.
<TABLE>
<CAPTION>
<S> <C>
Quarter Ended Year Ended
March 31, 1999 March 31, 1998 December 31,
(Unaudited) (Unaudited) 1998 1997 (1) 1996 (2)
----------- ----------- ---- -------- --------
Revenues $1,333,352 $139,153 $1,955,461 $ 46,071$ -
Net earnings 430,280 47,308 958,939 22,852 -
Cash distributions declared (3) 998,652 101,356 1,168,145 29,776 -
Funds from operations (4) 787,347 47,308 1,343,105 22,852 -
Earnings per Share -
Basic 0.07 0.03 0.40 0.03
Diluted 0.06 0.03 0.40 0.03
Cash distributions declared per Share 0.17 0.075 0.46 0.05 -
Weighted average number of Share
outstanding (5) 2 -
Basic 6,419,548 1,474,288 2,402,344 686,063
Diluted 8,244,160 1,474,288 2,402,344 686,063
March 31, 1999 March 31, 1998 December 31,
(Unaudited) (Unaudited) 1998 1997 1996
----------- ----------- ---- ---- -----
Total assets $84,706,283 $15,835,315 $48,856,690 $9,443,476 $598,190
Total stockholders' equity 79,083,113 15,490,465 37,116,491 9,233,917 200,000
</TABLE>
(1) No operations commenced until the Company received minimum offering
proceeds and funds were released from escrow on October 15, 1997.
(2) Selected financial data for 1996 represents the period June 12, 1996
(date of inception) through December 31, 1996.
(3) Approximately 57%, 53%, 18% and 23% of cash distributions for the
quarters ended March 31, 1999 and 1998, and the years ended December
31, 1998 and 1997, respectively, represent a return of capital in
accordance with generally accepted accounting principles ("GAAP"). Cash
distributions treated as a return of capital on a GAAP basis represent
the amount of cash distributions in excess of accumulated net earnings
on a GAAP basis. The Company has not treated such amount as a return of
capital for purposes of calculating Invested Capital and the
Stockholders' 8% Return.
(4) Funds from operations ("FFO"), based on the revised definition adopted
by the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, means net earnings
determined in accordance with GAAP, excluding gains or losses from debt
restructuring and sales of property, plus depreciation and amortization
of real estate assets and after adjustments for unconsolidated
partnerships and joint ventures. FFO was developed by NAREIT as a
relative measure of performance and liquidity of an equity REIT in
order to recognize that income-producing real estate historically has
not depreciated on the basis determined under GAAP. However, FFO (i)
does not represent cash generated from operating activities determined
in accordance with GAAP (which, unlike FFO, generally reflects all cash
effects of transactions and other events that enter into the
determination of net earnings), (ii) is not necessarily indicative of
cash flow available to fund cash needs and (iii) should not be
considered as an alternative to net earnings determined in accordance
with GAAP as an indication of the Company's operating performance, or
to cash flow from operating activities determined in accordance with
GAAP as a measure of either liquidity or the Company's ability to make
distributions. Accordingly, the Company believes that in order to
facilitate a clear understanding of the historical operating results of
the Company, FFO should be considered in conjunction with the Company's
net earnings and cash flows as reported in the accompanying financial
statements and notes thereto. See Appendix B-- Financial Information.
(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 AND RESULTS OF OPERATIONS
The following information, including, without limitation, the Year 2000
Compliance disclosure, that are not historical facts may be 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. 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 to acquire Properties located across the United
States to be leased on a long-term, "triple-net" basis to operators of selected
national and regional limited service, extended stay and full service Hotel
Chains. The Company may also provide Mortgage Loans in the aggregate principal
amount of approximately 5% to 10% of the gross offering proceeds. The Company
also may offer Secured Equipment Leases to operators of Hotel Chains. Secured
Equipment Leases will be funded from the proceeds of financing to be obtained by
the Company. The aggregate outstanding principal amount of Secured Equipment
Leases will not exceed 10% of gross proceeds from the Company's offerings of
Shares of Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
On July 9, 1997, the Company commenced its Initial Offering of Shares
of Common Stock. As of March 31, 1999 and December 31, 1998, the Company had
received aggregate subscription proceeds of $90,749,397 (9,074,940 Shares) and
$43,019,080 (4,301,908 Shares), respectively, from the Initial Offering,
including $72,754 (7,275 Shares) and $37,299 (3,730 Shares), respectively,
through the Company's Reinvestment Plan. The Company anticipates significant
additional sales of Shares prior to the termination of the Initial Offering. The
Company has elected to extend the Initial Offering of Shares until a date no
later than July 9, 1999.
As of March 31, 1999, net proceeds to the Company from its Initial
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 $80,143,000. In addition, $3,684,745 was advanced to the Company
as a convertible loan in connection with Five Arrows' investment in the Company
as described in "Business -- Property Acquisitions." The Company has used net
proceeds from the Initial Offering and loan proceeds to invest directly or
indirectly, approximately $51,230,000 in six hotel Properties, to pay $5,000,000
as a deposit on three additional hotel Properties and to pay approximately
$5,174,000 in acquisition fees and expenses leaving approximately $22,424,000
available for investment in Properties and Mortgage Loans.
During the period April 1, 1999 through May 13, 1999, the Company
received additional subscription proceeds of $30,914,991 (3,091,499 Shares) from
its Initial Offering of Shares. During this period, the Company paid
approximately $1,373,000 in additional stock issuance costs, leaving
approximately $46,119,000 in Net Offering Proceeds available for investment in
additional Properties and Mortgage Loans.
The Company expects to use net proceeds it receives in the future from
its Initial Offering, plus any net proceeds from the sale of Shares in this
offering, to purchase additional Properties and, to a lesser extent, make
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 currently has a $30,000,000 initial Line of Credit, as described
below, and plans to obtain one or more revolving Lines of Credit in an aggregate
amount up to $100,000,000 and may, in addition, also obtain Permanent Financing.
The Lines of Credit may be repaid with offering proceeds, working capital or
Permanent Financing. Although the Board of Directors anticipates that the Lines
of Credit will be in an amount up to $100,000,000 and that the aggregate amount
of any Permanent Financing will not exceed 30% of the Company's total assets,
the maximum amount the Company may borrow, absent a satisfactory showing that a
higher level of borrowing is appropriate as approved by a majority of the
Independent Directors, is 300% of the Company's Net Assets.
On July 31, 1998, the Company entered into an initial 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 London Interbank Offered Rate
(LIBOR) or (ii) a rate per annum equal to 30 basis points above the bank's base
rate, whichever the Company selects at the time advances are made. In addition,
a fee of 0.5% per advance will be due and payable to the bank on funds as
advanced. Each advance made under the Line of Credit will be collateralized by
an 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 May 13, 1999, the Company obtained and repaid
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 and the commitment to acquire three
additional Properties. The Company has not yet received a commitment for any
Permanent Financing and there is no assurance that the Company will obtain any
Permanent Financing on satisfactory terms.
In February 1999, the Company executed a series of agreements with Five
Arrows pursuant to which the Company and Five Arrows formed a jointly-owned real
estate investment trust, Hotel Investors, for the purpose of acquiring up to
eight Hotels. The eight Hotels are either newly constructed or in various stages
of completion. Upon completion, four of eight Hotels will operate as
Courtyard(R) by Marriott(R) hotels, three will operate as Residence Inn(R) by
Marriott(R) hotels, and one will operate as a Marriott Suites(R).
The Advisor of the Company is also the advisor to Hotel Investors
pursuant to a separate advisory agreement. However, in no event has or will the
Company pay the Advisor fees, including the Company's pro rata portion of Hotel
Investors' advisory fees, in excess of amounts payable under its Advisory
Agreement. The Advisor entered into separate purchase agreements for each of the
eight Hotels, which agreements include customary closing conditions, including
inspection of and due diligence on the completed Properties. The aggregate
purchase price of all eight Hotels, once acquired, will be approximately $184
million, excluding closing costs.
In order to fund these purchases, Five Arrows committed to make an
investment of up to $50.9 million in Hotel Investors. The Company committed to
make an investment of up to $40 million in Hotel Investors, which investment has
been and will be made through the Company's wholly owned subsidiary, CNL
Hospitality Partners, LP. Hotel Investors expects to fund the remaining amount
of approximately $96.6 million (including closing costs) with permanent
financing from Jefferson-Pilot Life Insurance Company consisting of eight
separate loans, collateralized by the Hotel Investors Loan.
On February 25, 1999, Hotel Investors purchased the four Initial Hotels
for an aggregate purchase price of approximately $90,448,000 and paid
$10,000,000 as a deposit on the four remaining Hotels. The Initial Hotels are
the Courtyard by Marriott located in Plano, Texas, the Marriott Suites located
in Dallas, Texas, the Residence Inn by Marriott located in Las Vegas, Nevada and
the Residence Inn by Marriott located in Plano, Texas. As a result of these
purchases and the deposit, Five Arrows has funded $31,536,824 of its $50,890,000
commitment to Hotel Investors and purchased 31,537 shares of Hotel Investors'
Class A Preferred Stock. The Company has funded $24,778,933 of its $40 million
commitment to Hotel Investors and purchased 24,779 shares of Hotel Investors'
Class B Preferred Stock. Hotel Investors obtained advances of $47,863,052
relating to the Hotel Investors Loan in order to facilitate the acquisition of
the Initial Hotels. In connection with the Hotel Investors Loan, the Company was
required by Jefferson Pilot Life Insurance Company to obtain a letter of credit
on behalf of Hotel Investors. The letter of credit was collateralized by four
certificates of deposit totalling $730,567. Each certificate of deposit will be
allocated at the time of purchase of the remaining four Hotels. In connection
with the letter of credit, the Company incurred $4,383 in closing costs. As of
May 13, 1999, Hotel Investors had reimbursed the Company for the certificates of
deposit and closing costs. Hotel Investors has and intends to use future funds
from Five Arrows, the Company, and the Hotel Investors Loan proportionately to
fund each property acquisition.
In return for their respective funding commitments, Five Arrows
received a 51% common stock interest and Hospitality Partners, LP received a 49%
common stock interest in Hotel Investors. As funds are continually advanced to
Hotel Investors, Five Arrows will receive up to 50,886 shares of Class A
Preferred Stock, and CNL Hospitality Partners, LP will receive up to 39,982
shares of Class B Preferred Stock. The Class A Preferred Stock is exchangeable
upon demand into Common Stock of the Company, as determined pursuant to a
formula that is intended to make the conversion not dilutive to funds from
operations (based on the revised definition adopted by the Board of Governors of
the National Association of Real Estate Investment Trusts which means net
earnings determined in accordance with generally accepted accounting principles,
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) per share of the Company's
common stock.
Five Arrows also committed to invest up to $15 million in the Company
through the purchase of Common Stock pursuant to the Company's Initial Offering
and this offering, the proceeds of which has been and will be used by the
Company to fund approximately 38% of its funding commitment to Hotel Investors.
Five Arrows has purchased and will purchase the Company's stock as Properties
are acquired by Hotel Investors, as described above. Five Arrows has invested
$9,297,056 of its $15 million commitment to the Company. Due to the stock
ownership limitations specified in the Company's Articles of Incorporation at
the time of Five Arrows' investment, $5,612,311 was invested in the Company's
Common Stock through the purchase of 590,770 shares and $3,684,745 was advanced
to the Company as a convertible loan, which bears interest at a rate of eight
percent per annum. On April 30, 1999, the convertible loan was converted to
387,868 shares of the Company's Common Stock. In addition to the above
investments, Five Arrows purchased a 10% interest in the Advisor.
Cash flow from operations of Hotel Investors will be distributed first
to Five Arrows with respect to dividends payable on the Class A Preferred Stock.
Such dividends are calculated based on Five Arrows' "special investment amount,"
or $1,294.78 per share, which represents the sum of its investment in Hotel
Investors and its $15,000,000 investment in the Company on a per share basis,
adjusted for any dividends received from the Company. Then, cash flow from
operations will be distributed to the Company with respect to its Class B
Preferred Stock. Next, cash flow will be distributed to 100 CNL associates who
each own one share of Class C preferred stock in Hotel Investors, to provide a
quarterly, cumulative, compounded 8% return. All remaining cash flow from
operations will be distributed pro rata with respect to the interest in the
common shares.
In connection with Five Arrows' commitment to invest $15 million in the
Company, the Advisor and certain Affiliates have agreed to waive certain fees
otherwise payable to them by the Company.
As of May 13, 1999, the Company had initial commitments to acquire,
directly or indirectly, seven 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 three of these agreements, the Company was required by the
seller to obtain a letter of credit. The letter of credit was collateralized by
a $5,000,000 certificate of deposit. In connection with the letter of credit,
the Company incurred $22,500 in closing costs. In connection with the four
remaining agreements, Hotel Investors was required by the seller to pay a
deposit of $10,000,000 which is being held in escrow by the title company. Of
this amount, Five Arrows contributed $5,600,00 and the Company contributed
$4,400,000. 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 May 13, 1999, 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 May 13, 1999, 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 December 31, 1998, the
Company had $13,228,923 invested in such short-term investments as compared to
$8,869,838 at December 31, 1997. The increase in the amount invested in
short-term investments reflects proceeds received from the sale of Shares and
advances on the Line of Credit during the year ended December 31, 1998, net of
the investment in Properties. At March 31, 1999, the Company had $22,840,847
invested in such short-term investments. The increase in the amount invested
in short-term investments since December 31, 1998, primarily reflects proceeds
received from the sale of Shares. The remaining funds will be used primarily to
purchase additional Properties, to make Mortgage Loans, to pay Offering Expenses
and Acquisition Expenses, to pay Distributions to stockholders, to pay other
Company expenses and, in management's discretion, to create cash reserves.
During the quarter ended March 31, 1999, the years ended December 31,
1998 and 1997 and the period June 12, 1996 (date of inception) through December
31, 1996, Affiliates of the Company incurred on behalf of the Company $587,948,
$459,250, $638,274 and $555,812, respectively, for certain Organizational and
Offering Expenses in connection with its Initial Offering. In addition, during
the quarter ended March 31, 1999, and the years ended December 31, 1998 and
1997, Affiliates of the Company incurred on behalf of the Company $351,291,
$392,863 and $26,149, respectively, for certain Acquisition Expenses and
$62,145, $98,212 and $11,003, respectively, for certain Operating Expenses. As
of March 31, 1999 and December 31, 1998, the Company owed the Advisor $305,346
and $318,937, respectively, 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
offering 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 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 year ended December 31, 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 years ended December 31, 1998 and 1997, the Company
generated cash from operations (which includes cash received from tenants and
interest and other income received less cash paid for operating expenses and
interest expense) of $663,437, $2,776,965 and $22,469, respectively. Based on
current and anticipated future cash from operations, the Company declared
Distributions to its stockholders of $998,652, $1,168,145 and $29,776 during the
quarter ended March 31, 1999, the year ended December 31, 1998 and the period
October 15, 1997 (the date operations commenced) through December 31, 1997,
respectively. In addition, on April 1, 1999 and May 1, 1999, the Company
declared Distributions to stockholders of record on April 1, 1999 and May 1,
1999, totalling $554,793 and $688,077, respectively ($0.0604 per share) payable
in June 1999. For the quarter ended March 31, 1999 and the years ended December
31, 1998 and 1997, 41 percent, 76 percent and 100 percent, respectively, of the
Distributions received by stockholders were considered to be ordinary income and
for the quarter ended March 31, 1999 and the year ended December 31, 1998,
approximately 59 percent and 24 percent, respectively, was considered a return
of capital for federal income tax purposes. No amounts distributed or to be
distributed to the stockholders as of May 13, 1999, 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 tenants of the Properties owned by the Company, either directly or
indirectly, as of May 13, 1999, have established FF&E Reserve funds which will
be used for the replacement and renewal of furniture, fixtures and equipment
relating to the hotel Properties. Funds in the FF&E Reserve have been paid,
granted and assigned to the Company, or in the case of the four Properties owned
indirectly, to Hotel Investors. Due to the fact that the Properties are leased
on a long term, triple-net basis, management does not believe that other working
capital reserves are necessary at this time. Management has the right to cause
the Company to maintain additional 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. In addition, the Company did not
acquire its first Properties until July 31, 1998.
As of March 31, 1999 and December 31, 1998, the Company had acquired
six and two Properties, respectively, either directly or indirectly, consisting
of land, building and equipment, and had 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 $1,204,000 to
$3,412,000, 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. In addition to annual base rent, the
tenant pays a percentage rent computed as a percentage of the gross sales of the
Property. The Company's leases also require the establishment of the FF&E
Reserves. The FF&E Reserves established for the tenant are owned by the lessor
and have been reported as additional rent.
In connection with the two Properties owned directly by the Company
during the quarter ended March 31, 1999 and the year ended December 31, 1998,
the Company earned $798,645 and $1,316,599, respectively (including $61,027 and
$98,099, respectively, in FF&E Reserve income). 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 quarter ended March 31, 1999 and
the year ended December 31, 1998, represent only a portion of revenues which the
Company is expected to earn in future periods.
In addition, during the quarter ended March 31, 1999, the Company owned
and leased four Properties indirectly through the investment in Hotel Investors,
as described above. In connection therewith, the Company recorded $241,843 in
dividend income and an equity in loss of $184,539 resulting in net income of
$57,304 recognized during the quarter ended March 31, 1999, attributable to this
investment.
During the quarter ended March 31, 1999 and the years ended December
31, 1998 and 1997, the Company also earned $292,864, $638,862 and $46,071,
respectively, in interest income from investments in money market accounts and
other short-term, highly liquid investments. Interest income is expected to
increase as the Company invests subscription proceeds received in the future in
highly liquid investments pending investment in Properties and Mortgage Loans.
However, as Net Offering Proceeds from the Company's Initial Offering and this
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 interest expense and depreciation and
amortization expense, were $718,533, $996,522 and $23,219 for the quarter ended
March 31, 1999 and the years ended December 31, 1998 and 1997, respectively.
Operating expenses increased during the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1998, and the year ended December 31,
1998, as compared to the year ended December 31, 1997, primarily as a result of
the fact that the Company did not commence operations until October 15, 1997 and
due to the fact that the Company did not acquire any Properties or receive
advances under the Line of Credit until July 31, 1998. Operating Expenses,
including asset management fees and depreciation and amortization expense,
represent only a portion of Operating Expenses which the Company is expected to
incur during a full year 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.
During the year ended December 31, 1998, the Company reduced Operating
Expenses by $92,733 as a result of Operating Expenses reimbursed by the Advisor
due to such expenses exceeding the Expense Cap as defined in the Advisory
Agreement as described above in "Liquidity and Capital Resources."
The Company has made an election under Section 856(c) of the Internal
Revenue Code of 1986, as amended (the "Code"), to be taxed as a REIT under the
Code beginning with its taxable year ended December 31, 1997. As a REIT, for
federal income tax purposes, the Company generally will not be subject to
federal income tax on income that it distributes to its stockholders. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to
federal income tax on its taxable income at regular corporate rates and will not
be permitted to qualify for treatment as a REIT for federal income tax purposes
for four years following the year during which qualification is lost. Such an
event could materially affect the Company's net earnings. However, the Company
believes that it is organized and operates in such a manner as to qualify for
treatment as a REIT for the years ended December 31, 1998 and 1997. In addition,
the Company intends to continue to operate the Company so as to remain qualified
as a REIT for federal income tax purposes.
The Company anticipates that its leases will be triple-net leases and
will contain provisions that management believes will mitigate the effect of
inflation. Such provisions will include clauses requiring the payment of
percentage rent based on certain gross sales above a specified level and/or
automatic increases in base rent at specified times during the term of the
lease. Management expects that increases in gross sales volumes due to inflation
and real sales growth should result in an increase in rental income over time.
Continued inflation also may cause capital appreciation of the Company's
Properties. Inflation and changing prices, however, also may have an adverse
impact on the sales of the Properties and on potential capital appreciation of
the Properties.
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. The adoption of this SOP did not
have a material effect on the Company.
Market Risk
The Company is subject to interest rate risk through outstanding
balances on its variable rate Line of Credit. The Company may mitigate this risk
by paying down the Line of Credit from offering proceeds should interest rates
rise substantially.
Year 2000 Compliance
The Year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The Company does not have any information or
non-information technology systems. The Advisor and Affiliates of the Advisor
provide all services requiring the use of information and non-information
technology systems pursuant to a management agreement with the Company. The
information technology system of the Affiliates of the Advisor consists of a
network of personal computers and servers built using hardware and software from
mainstream suppliers. The non-information technology systems of the Affiliates
of the Advisor are primarily facility related and include building security
systems, elevators, fire suppressions, HVAC, electrical systems and other
utilities. The Affiliates of the Advisor have no internally generated programmed
software coding to correct, as substantially all of the software utilized by the
Advisor and Affiliates is purchased or licensed from external providers. The
non-information technology systems located on the Properties owned by the
Company are generally the responsibility of the tenant and any repairs or
replacements will be paid out of the FF&E Reserve. To the extent that such
expenditures are in excess of the amounts available in the FF&E Reserve, the
Company will be required to fund such amounts. Rental income will be adjusted
upward in accordance with the lease agreements for any such amount paid.
In early 1998, the Advisor and Affiliates formed a Year 2000 committee
(the "Y2K Team") for the purpose of identifying, understanding and addressing
the various issues associated with the Year 2000 problems. The Y2K Team consists
of members from the Advisor and its Affiliates , including representatives from
senior management, information systems, telecommunications, legal, office
management, accounting and property management. The Y2K Team's initial step in
assessing the Company's Year 2000 ("Y2K") readiness consists of identifying any
systems that are date sensitive and, accordingly, could have potential Y2K
problems. The Y2K Team is in the process of conducting inspections, interviews
and tests to identify which of the Company's systems could have a potential Y2K
problem.
The information system of the Advisor and its Affiliates is comprised
of hardware and software applications from mainstream suppliers; accordingly,
the Y2K Team is in the process of contacting the respective vendors and
manufacturers to verify the Y2K compliance of their products. In addition, the
Y2K Team has also requested and is evaluating documentation from other companies
with which the Company has a material third party relationship, including the
Company's tenants, major vendors, financial institutions and the Company's
transfer agent. The Company depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and financing and its transfer
agent to maintain and track investor information. The Y2K Team has also
requested and is evaluating documentation from the non-information technology
systems providers of the Advisor and Affiliates. Although the Advisor continues
to receive positive responses from its third party relationships regarding their
Y2K compliance, the Advisor cannot be assured that the tenants, financial
institutions, transfer agent, other vendors and non-information technology
system providers have adequately considered the impact of the Year 2000 . The
Advisor is not able to measure the effect on the operations of the Advisor and
its affiliates of any third party's failure to adequately address the impact of
the Year 2000.
The Advisor and its Affiliates have identified and have implemented
upgrades for certain hardware equipment. In addition, the Advisor and its
Affiliates have identified certain software applications which will require
upgrades to become Year 2000 compliant. The Advisor expects all of these
upgrades as well as any other necessary remedial measures on the information
technology systems used in the business activities and operations of the Company
to be completed by September 30, 1999, although, the Advisor cannot be assured
that the upgrade solutions provided by the vendors have addressed all possible
Year 2000 issues. The Advisor does not expect the aggregate cost of the Year
2000 remedial measures to be material to the results of operations of the
Company.
The Advisor and Affiliates have received certification from the
Company's transfer agent of its Y2K compliance. Due to the material relationship
of the Company with its transfer agent, the Y2K Team is evaluating the Year 2000
compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, the Advisor cannot be assured that the transfer agent has addressed all
possible Year 2000 issues. In the event that the systems of the transfer agent
are not Y2K compliant, the worst case scenario of the Advisor would be that the
Advisor would have to allocate resources to internally perform the functions of
the transfer agent. The Advisor does not anticipate that the additional cost of
these resources would have a material impact on the Company.
Based upon the progress the Advisor and Affiliates have made in
addressing the Year 2000 issues and their plan and timeline to complete the
compliance program, the Advisor does not foresee significant risks associated
with its Year 2000 compliance at this time. The Advisor plans to address its
significant Y2K issues prior to being affected by them; therefore, it has not
developed a comprehensive contingency plan . However, if the Advisor identifies
significant risks related to its Year 2000 compliance or if its progress
deviates from the anticipated timeline, the Advisor will develop contingency
plans as deemed necessary at that time.
MANAGEMENT
GENERAL
The Company will operate under the direction of the Board of Directors,
the members of which are accountable to the Company as fiduciaries. As required
by applicable regulations, a majority of the Independent Directors and a
majority of the Directors have reviewed and ratified the Articles of
Incorporation and have adopted the Bylaws.
The Company currently has seven Directors; it may have no fewer than
three Directors and no more than 15. Directors will be elected annually, and
each Director will hold office until the next annual meeting of stockholders or
until his successor has been duly elected and qualified. There is no limit on
the number of times that a Director may be elected to office. Although the
number of Directors may be increased or decreased as discussed above, a decrease
shall not have the effect of shortening the term of any incumbent Director.
Any Director may resign at any time and may be removed with or without
cause by the stockholders upon the affirmative vote of at least a majority of
all the Shares outstanding and entitled to vote at a meeting called for this
purpose. The notice of such meeting shall indicate that the purpose, or one of
the purposes, of such meeting is to determine if a Director shall be removed.
FIDUCIARY RESPONSIBILITY OF THE BOARD OF DIRECTORS
The Board of Directors will be responsible for the management and
control of the affairs of the Company; however, the Board of Directors will
retain the Advisor to manage the Company's day-to-day affairs and the
acquisition and disposition of investments, subject to the supervision of the
Board of Directors.
The Directors are not required to devote all of their time to the
Company and are only required to devote such of their time to the affairs of the
Company as their duties require. The Board of Directors will meet quarterly in
person or by telephone, or more frequently if necessary. It is not expected that
the Directors will be required to devote a substantial portion of their time to
discharge their duties as directors. Consequently, in the exercise of their
fiduciary responsibilities, the Directors will rely heavily on the Advisor. In
this regard, the Advisor, in addition to the Directors, will have a fiduciary
duty to the Company.
The Directors will establish written policies on investments and
borrowings and will monitor the administrative procedures, investment
operations, and performance of the Company and the Advisor to assure that such
policies are in the best interest of the stockholders and are fulfilled. Until
modified by the Directors, the Company will follow the policies on investments
set forth in this Prospectus. See "Investment Objectives and Policies."
The Independent Directors are responsible for reviewing the fees and
expenses of the Company at least annually or with sufficient frequency to
determine that the total fees and expenses of the Company are reasonable in
light of the Company's investment performance, Net Assets, Net Income, and the
fees and expenses of other comparable unaffiliated real estate investment
trusts. For purposes of this determination, Net Assets are the Company's total
assets (other than intangibles), calculated at cost before deducting
depreciation or other non-cash reserves, less total liabilities, and computed at
least quarterly on a basis consistently applied. Such determination will be
reflected in the minutes of the meetings of the Board of Directors. In addition,
a majority of the Independent Directors and a majority of Directors not
otherwise interested in the transaction must approve each transaction with the
Advisor or its Affiliates. The Board of Directors also will be responsible for
reviewing and evaluating the performance of the Advisor before entering into or
renewing an advisory agreement. The Independent Directors shall determine from
time to time and at least annually that compensation to be paid to the Advisor
is reasonable in relation to the nature and quality of services to be performed
and shall supervise the performance of the Advisor and the compensation paid to
it by the Company to determine that the provisions of the Advisory Agreement are
being carried out. Specifically, the Independent Directors will consider factors
such as the amount of the fee paid to the Advisor in relation to the size,
composition and performance of the Company's investments, the success of the
Advisor in generating appropriate investment opportunities, rates charged to
other comparable REITs and other investors by advisors performing similar
services, additional revenues realized by the Advisor and its Affiliates through
their relationship with the Company, whether paid by the Company or by others
with whom the Company does business, the quality and extent of service and
advice furnished by the Advisor, the performance of the investment portfolio of
the Company and the quality of the portfolio of the Company relative to the
investments generated by the Advisor, if any, for its own account. Such review
and evaluation will be reflected in the minutes of the meetings of the Board of
Directors. The Board of Directors shall determine that any successor Advisor
possesses sufficient qualifications to (i) perform the advisory function for the
Company and (ii) justify the compensation provided for in its contract with the
Company.
The liability of the officers and Directors while serving in such
capacity is limited in accordance with the Articles of Incorporation and
applicable law. See "Summary of the Articles of Incorporation and Bylaws --
Limitation of Liability and Indemnification."
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are listed below:
Name Age Position with the Company
---- --- -------------------------
James M. Seneff, Jr. 52 Director, Chairman of the Board, and
Chief Executive Officer
Robert A. Bourne 52 Director, Vice Chairman of the Board,
and President
Matthew W. Kaplan 36 Director
Charles E. Adams 36 Independent Director
Lawrence A. Dustin 53 Independent Director
John A. Griswold 50 Independent Director
Craig M. McAllaster 47 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
James M. Seneff, Jr. Director, Chairman of the Board and Chief
Executive Officer. Mr. Seneff currently holds the position of director, Chairman
of the Board and Chief Executive Officer of CNL Hospitality Advisors, Inc., the
Advisor. Mr. Seneff also serves as a director, Chairman of the Board and Chief
Executive Officer of CNL American Properties Fund, Inc. and CNL Health Care
Properties, Inc., public, unlisted real estate investment trusts, and CNL Fund
Advisors, Inc. and CNL Health Care Advisors, Inc., their advisors, respectively.
Mr. Seneff is a principal stockholder of CNL Group, Inc., a diversified real
estate company, and has served as a director, Chairman of the Board and Chief
Executive Officer since its formation in 1980. CNL Group, Inc. is the parent
company of CNL Securities Corp., which is acting as the Managing Dealer in this
offering, CNL Investment Company, CNL Fund Advisors, Inc. and CNL Hospitality
Advisors, Inc. Mr. Seneff has been a director, Chairman of the Board and Chief
Executive Officer of CNL Securities Corp. since its formation in 1979. Mr.
Seneff also has held the position of a director, Chairman of the Board, Chief
Executive Officer and President of CNL Management Company, a registered
investment advisor, since its formation in 1976. In addition, Mr. Seneff serves
as a director, Chairman of the Board and Chief Executive Officer of CNL
Investment Company. Mr. Seneff has served as Chairman of the Board and Chief
Executive Officer of Commercial Net Lease Realty, Inc. since 1992, and served as
Chairman of the Board and Chief Executive Officer of CNL Realty Advisors, Inc.
from its inception in 1991 through 1997 at which time such company merged with
Commercial Net Lease Realty, Inc., a public real estate investment trust that is
listed on the New York Stock Exchange. Mr. Seneff has also held the position of
a director, Chairman of the Board and Chief Executive Officer of CNL
Institutional Advisors, Inc., a registered investment advisor, since its
inception in 1990. Mr. Seneff also serves as a director of First Union National
Bank of Florida, N.A. Mr. Seneff previously served on the Florida State
Commission on Ethics and is a former member and past Chairman of the State of
Florida Investment Advisory Council, which recommends to the Florida Board of
Administration investments for various Florida employee retirement funds. The
Florida Board of Administration, Florida's principal investment advisory and
money management agency, oversees the investment of more than $60 billion of
retirement funds. Since 1971, Mr. Seneff has been active in the acquisition,
development, and management of real estate projects and, directly or through an
affiliated entity, has served as a general partner or joint venturer in over 100
real estate ventures involved in the financing, acquisition, construction, and
rental of restaurants, office buildings, apartment complexes, hotels, and other
real estate. Included in these real estate ventures are approximately 65
privately offered real estate limited partnerships with investment objectives
similar to one or more of the Company's investment objectives, in which Mr.
Seneff, directly or through an affiliated entity, serves or has served as a
general partner. Mr. Seneff received his degree in Business Administration from
Florida State University in 1968.
Robert A. Bourne. Director, Vice Chairman of the Board and President.
Mr. Bourne currently holds the position of director, Vice Chairman of the Board
and President of CNL Hospitality Advisors, Inc., the Advisor. Mr. Bourne has
also served as Vice Chairman of the Board and Treasurer of CNL American
Properties Fund, Inc. since February 1999 and serves as a director and President
of CNL Health Care Properties, Inc., public, unlisted real estate investment
trusts. Mr. Bourne has served as a director of CNL American Properties Fund,
Inc. since May 1994, and previously served as President from May 1994 through
February 1999. In addition, Mr. Bourne serves as a director, Vice Chairman of
the Board and Treasurer of CNL Fund Advisors, Inc. and a director and President
of CNL Health Care Advisors, Inc., the advisors to the two REITs above,
respectively. Mr. Bourne served as President of CNL Fund Advisors, Inc. from the
date of its inception in 1994 through October 1997. Mr. Bourne is President and
Treasurer of CNL Group, Inc., a director, President, Treasurer and a registered
principal of CNL Securities Corp. (the Managing Dealer of this offering), a
director, President and Treasurer of CNL Investment Company, and a director,
Treasurer and Chief Investment Officer of CNL Institutional Advisors, Inc., a
registered investment advisor. Mr. Bourne served as President of CNL
Institutional Advisors, Inc. from the date of its inception through June 30,
1997. In addition, Mr. Bourne served as President from July 1992 to February
1996, served as Secretary and Treasurer from February 1996 through December
1997, and has served as a director since July 1992 and Vice Chairman of the
Board since February 1996, of Commercial Net Lease Realty, Inc., a public real
estate investment trust that is listed on the New York Stock Exchange. Mr.
Bourne also served as President from 1991 to February 1996, as a director from
1991 through December 1997, and as Vice Chairman of the Board and Treasurer from
February 1996 through December 1997, of CNL Realty Advisors, Inc. at which time
such company merged with Commercial Net Lease Realty, Inc. Upon graduation from
Florida State University in 1970, where he received a B.A. in Accounting, with
honors, Mr. Bourne worked as a certified public accountant and, from September
1971 through December 1978 was employed by Coopers & Lybrand, Certified Public
Accountants, where he held the position of tax manager beginning in 1975. From
January 1979 until June 1982, Mr. Bourne was a partner in the accounting firm of
Cross & Bourne and from July 1982 through January 1987 he was a partner in the
accounting firm of Bourne & Rose, P.A., Certified Public Accountants. Mr.
Bourne, who joined CNL Securities Corp. in 1979, has participated as a general
partner or joint venturer in over 100 real estate ventures involved in the
financing, acquisition, construction, and rental of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Included in these
real estate ventures are approximately 64 privately offered real estate limited
partnerships with investment objectives similar to one or more of the Company's
investment objectives, in which Mr. Bourne, directly or through an affiliated
entity, serves or has served as a general partner.
Matthew W. Kaplan. Director. Mr. Kaplan serves as a director of the
Advisor, Hotel Investors, CNL Financial Services, Inc. and CNL Financial
Corporation. Mr. Kaplan is a managing director of Rothschild Realty Inc. where
he has served since 1992, and where he is responsible for securities investment
activities including acting as portfolio manager of Five Arrows Realty
Securities LLC, a $900 million private investment fund. From 1990 to 1992, Mr.
Kaplan served in the corporate finance department of Rothschild Inc., an
affiliate of Rothschild Realty Inc. Mr. Kaplan served as a director of
Ambassador Apartments Inc. from August 1996 through May 1998 and is a member of
the Urban Land Institute. Mr. Kaplan received a B.A. with honors from Washington
University in 1984 and a M.B.A. from the Wharton School of Finance and Commerce
at the University of Pennsylvania in 1988.
Charles E. Adams. Independent Director. Mr. Adams is the president and
a founding principal with Celebration Associates, Inc., a real estate advisory
and development firm with offices in Celebration, Florida and Charlotte, North
Carolina. Celebration Associates specializes in large-scale master planned
communities, seniors' housing and specialty commercial developments. Mr. Adams
joined The Walt Disney Company in 1990 and from 1996 until May 1997 served as
vice president of community business development for The Celebration Company and
Walt Disney Imagineering. He was responsible for Celebration Education,
Celebration Network, Celebration Health and Celebration Foundation, as well as
new business development, strategic alliances, retail sales and leasing,
commercial sales and leasing, the development of Little Lake Bryan and
Celebration. Previously, Mr. Adams was responsible for the initial residential,
amenity, sales and marketing, consumer research and master planning efforts for
Celebration. Additionally, Mr. Adams participated in the planning for
residential development at EuroDisney in Paris, France. He was a founding member
of the Celebration School Board of Trustees and served as president and founding
member of the Celebration Foundation Board of Directors. Mr. Adams is a founding
member of the Health Magic Steering Committee and council member on the
Recreation Development Council for the Urban Land Institute. Before joining The
Walt Disney Company in 1990, Mr. Adams worked with Trammell Crow Residential
developing luxury apartment communities in the Orlando and Jacksonville, Florida
areas. Mr. Adams received a B.A. from Northeast Louisiana University in 1984 and
a M.B.A. from Harvard Graduate School of Business in 1989.
Lawrence A. Dustin. Independent Director. Mr. Dustin is a principal of
BBT, an advisory company specializing in hotel operations, marketing and
development. Mr. Dustin has 29 years of experience in the hospitality industry.
From 1994 to September 1998, Mr. Dustin served as senior vice president of
lodging of Universal Studios Recreation Group, where he was responsible for
matters related to hotel development, marketing, operations and management. Mr.
Dustin supervised the overall process of developing the five highly themed
hotels and related recreational amenities within Universal Studios Escape and
provided guidance for hotel projects in Universal City, California, Japan and
Singapore. From 1989 to 1994, Mr. Dustin served as a shareholder, chief
executive officer and director of AspenCrest Hospitality, Inc., a professional
services firm which helped hotel owners enhance both the operating performance
and asset value of their properties. From 1969 to 1989, Mr. Dustin held various
positions in the hotel industry, including 14 years in management with Westin
Hotels & Resorts. Mr. Dustin received a B.A. from Michigan State University in
1968.
John A. Griswold. Independent Director. Mr. Griswold serves as
president of Tishman Hotel Corporation, an operating unit of Tishman Realty &
Construction Co., Inc., founded in 1898. Tishman Hotel Corporation is a hotel
developer, owner and operator, and has provided such services for more than 85
hotels, totalling more than 30,000 rooms. Mr. Griswold joined Tishman Hotel
Corporation 1985. From 1981 to 1985, Mr. Griswold served as general manager of
the Buena Vista Palace Hotel in The Walt Disney World Village. From 1978 to
1981, he served as vice president and general manager of the Homestead Resort, a
luxury condominium resort in Glen Arbor, Michigan. Mr. Griswold served as an
operations manager for The Walt Disney Company from 1971 to 1978. He was
responsible for operational, financial and future planning for multi-unit dining
facilities in Walt Disney World Village and Lake Buena Vista Country Club. He is
a member of the board of directors of the Florida Hotel & Motel Association and
the First Orlando Foundation. Mr. Griswold received a B.S. from the School of
Hotel Administration at Cornell University in Ithaca, New York.
Craig M. McAllaster. Independent Director. Dr. McAllaster has served as
director of the executive MBA program at the Roy E. Crummer Graduate School of
Business at Rollins College since 1994. Besides his duties as director, he is on
the management faculty and serves as executive director of the international
consulting practicum programs at the Crummer School. Prior to Rollins College,
Dr. McAllaster was on the faculty at the School of Industrial and Labor
Relations and the Johnson Graduate School of Management, both at Cornell
University, and the University of Central Florida. Dr. McAllaster spent over ten
years in the consumer services and electronics industry in management,
organizational and executive development positions. He is a consultant to many
domestic and international companies in the areas of strategy and leadership.
Dr. McAllaster received a B.S. from the University of Arizona in 1973, a M.S.
from Alfred University in 1981 and a M.A. and Doctorate from Columbia University
in 1987.
Charles A. Muller. Chief Operating Officer and Executive Vice
President. 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 and Executive
Vice President of CNL Hospitality Advisors, Inc., the Advisor, and Executive
Vice President 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. 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.
Jeanne A. Wall. Executive Vice President. Ms. Wall serves as Executive
Vice President and director of CNL Hospitality Advisors, Inc., the Advisor. Ms.
Wall is also Executive Vice President of CNL American Properties Fund, Inc. and
CNL Health Care Properties, Inc., public, unlisted real estate investment
trusts, and Executive Vice President of CNL Fund Advisors, Inc. and CNL Health
Care Advisors, Inc., their advisors, respectively. Ms. Wall currently serves as
Executive Vice President of CNL Group, Inc., a diversified real estate company.
Ms. Wall has served as Chief Operating Officer of CNL Investment Company and of
CNL Securities Corp. since November 1994 and has served as Executive Vice
President of CNL Investment Company since January 1991. In 1984, Ms. Wall joined
CNL Securities Corp. and in 1985, became Vice President . In 1987, she became a
Senior Vice President and in July 1997, became Executive Vice President of CNL
Securities Corp. In this capacity, Ms. Wall serves as national marketing and
sales director and oversees the national marketing plan for the CNL investment
programs. In addition, Ms. Wall oversees product development and communications
and investor services for programs offered through participating brokers. Ms.
Wall also has served as Senior Vice President of CNL Institutional Advisors,
Inc., a registered investment advisor, from 1990 to 1993, as Vice President of
CNL Realty Advisors, Inc. since its inception in 1991 through 1997, and as Vice
President of Commercial Net Lease Realty, Inc., a public real estate investment
trust that is listed on the New York Stock Exchange, from 1992 through 1997. Ms.
Wall holds a B.A. in Business Administration from Linfield College and is a
registered principal of CNL Securities Corp. Ms. Wall currently serves as a
trustee on the Board of the Investment Program Association and is a member of
the Corporate Advisory Council for the International Association for Financial
Planning and previously served on the Direct Participation Program committee for
the National Association of Securities Dealers, Inc.
Lynn E. Rose. Secretary and Treasurer. Ms. Rose serves as Secretary,
Treasurer and a director of CNL Hospitality Advisors, Inc., the Advisor. Ms.
Rose is also Secretary of CNL American Properties Fund, Inc. and Secretary and
Treasurer of CNL Health Care Properties, Inc., public, unlisted real estate
investment trusts, and Secretary and a director of CNL Fund Advisors, Inc. and
Secretary, Treasurer and a director of CNL Health Care Advisors, Inc., their
advisors, respectively. Ms. Rose, a certified public accountant, has served as
Secretary since 1987, as Chief Financial Officer since December 1993, and
previously served as Controller from 1987 until December 1993 of CNL Group, Inc.
In addition, Ms. Rose has served as Chief Financial Officer and Secretary of CNL
Securities Corp. since July 1994. She also previously served as Chief Operating
Officer and Vice President of CNL Shared Services, Inc. (formerly CNL Corporate
Services, Inc.) from November 1994 to January 1999 and has served as Secretary
since November 1994. Ms. Rose also has served as Chief Financial Officer and
Secretary of CNL Institutional Advisors, Inc. since its inception in 1990. In
addition, she served as Secretary and a director of CNL Realty Advisors, Inc.
from its inception in 1991 through 1997, and as Treasurer of CNL Realty
Advisors, Inc. from 1991 to February 1996. In addition, Ms. Rose served as
Secretary and Treasurer of Commercial Net Lease Realty, Inc., a public real
estate investment trust listed on the New York Stock Exchange, from 1992 to
February 1996. Ms. Rose also currently serves as Secretary for approximately 50
additional corporations. Ms. Rose oversees the legal compliance, accounting,
tenant compliance, and reporting for over 250 corporations, partnerships and
joint ventures. Prior to joining CNL, Ms. Rose was a partner with Robert A.
Bourne in the accounting firm of Bourne & Rose, P.A., Certified Public
Accountants. Ms. Rose holds a B.A. in Sociology from the University of Central
Florida. She was licensed as a certified public accountant in 1979.
INDEPENDENT DIRECTORS
Under the Articles of Incorporation, a majority of the Board of
Directors must consist of Independent Directors, except for a period of 90 days
after the death, removal or resignation of an Independent Director. The
Independent Directors shall nominate replacements for vacancies in the
Independent Director positions. An Independent Director may not, directly or
indirectly (including through a member of his immediate family), own any
interest in, be employed by, have any present business or professional
relationship with, serve as an officer or director of the Advisor or its
Affiliates, or serve as a director of more than three REITs organized by the
Advisor or its Affiliates. Except to carry out the responsibilities of a
Director, an Independent Director may not perform material services for the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has a standing Audit Committee, the members of which are
selected by the full Board of Directors each year. The Audit Committee makes
recommendations to the Board of Directors in accordance with those of the
independent accountants of the Company. The Board of Directors shall review with
such accounting firm the scope of the audit and the results of the audit upon
its completion.
At such time as necessary, the Company will form a Compensation
Committee, the members of which will be selected by the full Board of Directors
each year.
At least a majority of the members of each committee of the Company's
Board of Directors must be Independent Directors.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Each Director is entitled to receive $6,000 annually for serving on the
Board of Directors, as well as fees of $750 per meeting attended ($375 for each
telephonic meeting in which the Director participates), including committee
meetings. No executive officer or Director of the Company has received a bonus
from the Company. The Company will not pay any compensation to the officers and
Directors of the Company who also serve as officers and directors of the
Advisor.
MANAGEMENT COMPENSATION
For a description of the types, recipients, methods of computation, and
estimated amounts of all compensation, fees, and distributions to be paid
directly or indirectly by the Company to the Advisor, Managing Dealer, and their
Affiliates, see "Management Compensation."
THE ADVISOR AND THE ADVISORY AGREEMENT
THE ADVISOR
CNL Hospitality Advisors, Inc. (formerly CNL Real Estate Advisors,
Inc.) is a Florida corporation organized in January 1997 to provide management,
advisory and administrative services. The Company originally 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.
The directors and officers of the Advisor are as follows:
James M. Seneff, Jr....................Chairman of the Board, Chief
Executive Officer, and Director
Robert A. Bourne.......................Vice Chairman of the Board,
President, and Director
Matthew W. Kaplan......................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 and
Director
Lynn E. Rose...........................Secretary, Treasurer and
Director
The backgrounds of these individuals are described above under
"Management -- Directors and Executive Officers."
The Advisor currently owns 20,000 shares of Common Stock. The Advisor
may not sell these shares while the Advisory Agreement is in effect, although
the Advisor may transfer such shares to Affiliates. Neither the Advisor, a
Director, or any Affiliate may vote or consent on matters submitted to the
stockholders regarding removal of, or any transaction between, the Company and
the Advisor, Directors, or an Affiliate. In determining the requisite percentage
in interest of shares of Common Stock necessary to approve a matter on which the
Advisor, Directors, and any Affiliate may not vote or consent, any shares of
Common Stock owned by any of them will not be included.
THE ADVISORY AGREEMENT
Under the terms of the Advisory Agreement, the Advisor has
responsibility for the day-to-day operations of the Company, administers the
Company's bookkeeping and accounting functions, serves as the Company's
consultant in connection with policy decisions to be made by the Board of
Directors, manages the Company's Properties and Mortgage Loans, administers the
Company's Secured Equipment Lease program and renders other services as the
Board of Directors deems appropriate. The Advisor is subject to the supervision
of the Company's Board of Directors and has only such functions as are delegated
to it.
The Company will reimburse the Advisor for all of the costs it incurs
in connection with the services it provides to the Company, including, but not
limited to: (i) Offering Expenses, which are defined to include expenses
attributable to preparing the documents relating to this offering, the formation
and organization of the Company, qualification of the Shares for sale in the
states, escrow arrangements, filing fees and expenses attributable to selling
the Shares; (ii) Selling Commissions, advertising expenses, expense
reimbursements, and legal and accounting fees; (iii) the actual cost of goods
and materials used by the Company and obtained from entities not affiliated with
the Advisor, including brokerage fees paid in connection with the purchase and
sale of securities; (iv) administrative services (including personnel costs;
provided, however that no reimbursement shall be made for costs of personnel to
the extent that such personnel perform services in transactions for which the
Advisor receives a separate fee, at the lesser of actual cost or 90% of the
competitive rate charged by unaffiliated persons providing similar goods and
services in the same geographic location); (v) Acquisition Expenses, which are
defined to include expenses related to the selection and acquisition of
Properties, for goods and services provided by the Advisor at the lesser of
actual cost or 90% of the competitive rate charged by unaffiliated persons
providing similar goods and services in the same geographic location); and (vi)
expenses related to negotiating and servicing the Mortgage Loans and Secured
Equipment Leases.
The Company shall not reimburse the Advisor at the end of any fiscal
quarter for Operating Expenses that, in the four consecutive fiscal quarters
then ended (the "Expense Year") exceed the greater of 2% of Average Invested
Assets or 25% of Net Income (the "2%/25% Guidelines") for such year. Within 60
days after the end of any fiscal quarter of the Company for which total
Operating Expenses for the Expense Year exceed the 2%/25% Guidelines, the
Advisor shall reimburse the Company the amount by which the total Operating
Expenses paid or incurred by the Company exceed the 2%/25% Guidelines.
The Company will not reimburse the Advisor or its Affiliates for
services for which the Advisor or its Affiliates are entitled to compensation in
the form of a separate fee.
Pursuant to the Advisory Agreement, the Advisor is entitled to receive
certain fees and reimbursements, as listed in "Management Compensation." The
Subordinated Incentive Fee payable to the Advisor under certain circumstances if
Listing occurs may be paid, at the option of the Company, in cash, in Shares, by
delivery of a promissory note payable to the Advisor, or by any combination
thereof. In the event the Subordinated Incentive Fee is paid to the Advisor
following Listing, no Performance Fee, as described below, will be paid to the
Advisor under the Advisory Agreement nor will any additional share of Net Sales
Proceeds be paid to the Advisor. The total of all Acquisition Fees and any
Acquisition Expenses payable to the Advisor and its Affiliates shall be
reasonable and shall not exceed an amount equal to 6% of the Real Estate Asset
Value of a Property, or in the case of a Mortgage Loan, 6% of the funds
advanced, unless a majority of the Board of Directors, including a majority of
the Independent Directors not otherwise interested in the transaction, approves
fees in excess of this limit subject to a determination that the transaction is
commercially competitive, fair and reasonable to the Company. The Acquisition
Fees payable in connection with the selection or acquisition of any Property
shall be reduced to the extent that, and if necessary to limit, the total
compensation paid to all persons involved in the acquisition of such Property to
the amount customarily charged in arm's-length transactions by other persons or
entities rendering similar services as an ongoing public activity in the same
geographical location and for comparable types of Properties, and to the extent
that other acquisition fees, finder's fees, real estate commissions, or other
similar fees or commissions are paid by any person in connection with the
transaction.
If the Advisor or a CNL Affiliate performs services that are outside of
the scope of the Advisory Agreement, compensation is at such rates and in such
amounts as are agreed to by the Advisor and the Independent Directors of the
Company.
Further, if Listing occurs, the Company automatically will become a
perpetual life entity. At such time, the Company and the Advisor will negotiate
in good faith a fee structure appropriate for an entity with a perpetual life,
subject to approval by a majority of the Independent Directors. In negotiating a
new fee structure, the Independent Directors shall consider all of the factors
they deem relevant. These are expected to include, but will not necessarily be
limited to: (i) the amount of the advisory fee in relation to the asset value,
composition, and profitability of the Company's portfolio; (ii) the success of
the Advisor in generating opportunities that meet the investment objectives of
the Company; (iii) the rates charged to other REITs and to investors other than
REITs by advisors that perform the same or similar services; (iv) additional
revenues realized by the Advisor and its Affiliates through their relationship
with the Company, including loan administration, underwriting or broker
commissions, servicing, engineering, inspection and other fees, whether paid by
the Company or by others with whom the Company does business; (v) the quality
and extent of service and advice furnished by the Advisor; (vi) the performance
of the investment portfolio of the Company, including income, conservation or
appreciation of capital, and number and frequency of problem investments; and
(vii) the quality of the Property, Mortgage Loan and Secured Equipment Lease
portfolio of the Company in relationship to the investments generated by the
Advisor for its own account. The Board of Directors, including a majority of the
Independent Directors, may not approve a new fee structure that, in its
judgment, is more favorable to the Advisor than the current fee structure.
The Advisory Agreement, which was entered into by the Company with the
unanimous approval of the Board of Directors, including the Independent
Directors, expires one year after the date of execution, subject to successive
one-year renewals upon mutual consent of the parties. The current Advisory
Agreement expires on July 10, 1999. In the event that a new Advisor is retained,
the previous Advisor will cooperate with the Company and the Directors in
effecting an orderly transition of the advisory functions. The Board of
Directors (including a majority of the Independent Directors) shall approve a
successor Advisor only upon a determination that the Advisor possesses
sufficient qualifications to perform the advisory functions for the Company and
that the compensation to be received by the new Advisor pursuant to the new
Advisory Agreement is justified.
The Advisory Agreement may be terminated without cause or penalty by
either party, or by the mutual consent of the parties (by a majority of the
Independent Directors of the Company or a majority of the directors of the
Advisor, as the case may be), upon 60 days' prior written notice. At that time,
the Advisor shall be entitled to receive the Performance Fee if performance
standards satisfactory to a majority of the Board of Directors, including a
majority of the Independent Directors, when compared to (a) the performance of
the Advisor in comparison with its performance for other entities, and (b) the
performance of other advisors for similar entities, have been met. If Listing
has not occurred, the Performance Fee, if any, shall equal 10% of the amount, if
any, by which (i) the appraised value of the assets of the Company on the
Termination Date, less the amount of all indebtedness secured by the assets of
the Company, plus the total Distributions made to stockholders from the
Company's inception through the Termination Date, exceeds (ii) Invested Capital
plus an amount equal to the Stockholders' 8% Return from inception through the
Termination Date. The Advisor shall be entitled to receive all accrued but
unpaid compensation and expense reimbursements in cash within 30 days of the
Termination Date. All other amounts payable to the Advisor in the event of a
termination shall be evidenced by a promissory note and shall be payable from
time to time. The Performance Fee shall be paid in 12 equal quarterly
installments without interest on the unpaid balance, provided, however, that no
payment will be made in any quarter in which such payment would jeopardize the
Company's REIT status, in which case any such payment or payments will be
delayed until the next quarter in which payment would not jeopardize REIT
status. Notwithstanding the preceding sentence, any amounts which may be deemed
payable at the date the obligation to pay the Performance Fee is incurred which
relate to the appreciation of the Company's Assets shall be an amount which
provides compensation to the terminated Advisor only for that portion of the
holding period for the respective Assets during which such terminated Advisor
provided services to the Company. If Listing occurs, the Performance Fee, if
any, payable thereafter will be as negotiated between the Company and the
Advisor. The Advisor shall not be entitled to payment of the Performance Fee in
the event the Advisory Agreement is terminated because of failure of the Company
and the Advisor to establish a fee structure appropriate for a perpetual-life
entity at such time, if any, as the Shares become listed on a national
securities exchange or over-the-counter market. The Performance Fee, to the
extent payable at the time of Listing, will not be paid in the event that the
Subordinated Incentive Fee is paid.
The Advisor has the right to assign the Advisory Agreement to an
Affiliate subject to approval by the Independent Directors of the Company. The
Company has the right to assign the Advisory Agreement to any successor to all
of its assets, rights, and obligations.
The Advisor will not be liable to the Company or its stockholders or
others, except by reason of acts constituting bad faith, fraud, misconduct, or
negligence, and will not be responsible for any action of the Board of Directors
in following or declining to follow any advice or recommendation given by it.
The Company has agreed to indemnify the Advisor with respect to acts or
omissions of the Advisor undertaken in good faith, in accordance with the
foregoing standards and pursuant to the authority set forth in the Advisory
Agreement. Any indemnification made to the Advisor may be made only out of the
net assets of the Company and not from stockholders.
<PAGE>
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, 1999 through May 13, 1999, and the
years ended December 31, 1998 and 1997, the Company incurred $5,898,398,
$2,377,026 and $849,405, respectively, of such fees through the Initial
Offering, of which $2,927,797, $2,200,516 and $792,832, respectively, 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, 1999 through May 13, 1999, and
the years ended December 31, 1998 and 1997, the Company incurred $393,227,
$158,468 and $56,627, respectively, of such fees through the Initial Offering,
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
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, 1999 through May
13, 1999, and the years ended December 31, 1998 and 1997, the Company incurred
$3,539,039, $1,426,216 and $509,643, respectively, of such fees through the
Initial Offering.
The Company and the Advisor have entered into an Advisory Agreement
pursuant to which the Advisor will receive a monthly Asset Management Fee of
one-twelfth of 0.60% of the Company's Real Estate Asset Value and the
outstanding principal balance of any Mortgage Loans as of the end of the
preceding month. The Asset Management Fee, which will not exceed fees which are
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 quarter ended March 31,
1999 and the year ended December 31, 1998, the Company incurred $49,565 and
$68,114, respectively, of such fees.
The Company incurs Operating Expenses which, in general, are those
expenses relating to administration of the Company on an ongoing basis. Pursuant
to the Advisory Agreement described above, 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 2% of Average Invested Assets or 25 % of Net Income (the "Expense
Cap"). During the year ended December 31, 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 accounting and administrative
services to the Company (including accounting and administrative services in
connection with the offering of Shares) on a day-to-day basis. In connection
with the Initial Offering, for the quarter ended March 31, 1999 and the years
ended December 31, 1998 and 1997, the Company incurred a total of $973,418,
$644,189 and $192,224, respectively, for these services, $883,881, $494,729 and
$185,335, respectively, of such costs representing stock issuance costs, $3,806,
$9,084 and $0, respectively, representing acquisition related costs and $85,731,
$140,376 and $6,889, respectively, representing general operating and
administrative expenses, including costs related to preparing and distributing
reports required by the Securities and Exchange Commission.
All amounts paid by the Company to Affiliates are believed by the
Company to be fair and comparable to amounts that would be paid for similar
services provided by unaffiliated third parties.
PRIOR PERFORMANCE INFORMATION
The information presented in this section represents the historical
experience of certain real estate programs organized by certain officers and
directors of the Advisor. Prior public programs have invested only in restaurant
properties and have not invested in hotel properties. Investors in the Company
should not assume that they will experience returns, if any, comparable to those
experienced by investors in such prior public real estate programs. Investors
who purchase Shares in the Company will not thereby acquire any ownership
interest in any partnerships or corporations to which the following information
relates.
Two Directors of the Company, Robert A. Bourne and James M. Seneff,
Jr., individually or with others have served as general partners of 88 and 89
real estate limited partnerships, respectively, including 18 publicly offered
CNL Income Fund partnerships, and as directors and officers of two unlisted
public REITs. None of these limited partnerships or the unlisted REITs have been
audited by the IRS. Of course, there is no guarantee that the Company will not
be audited. Based on an analysis of the operating results of the prior programs,
Messrs. Bourne and Seneff believe that each of such programs has met or is
meeting its principal investment objectives in a timely manner.
CNL Realty Corporation, which was organized as a Florida corporation in
November 1985 and whose sole stockholders are Messrs. Bourne and Seneff,
currently serves as the corporate general partner with Messrs. Bourne and Seneff
as individual general partners of 18 CNL Income Fund limited partnerships, all
of which were organized to invest in fast-food, family-style and in the case of
two of the partnerships, casual-dining restaurant properties. In addition,
Messrs. Bourne and Seneff currently serve as directors and officers of CNL
American Properties Fund, Inc., an unlisted public REIT organized to invest in
fast-food, family-style and casual-dining restaurant properties, mortgage loans
and secured equipment leases; and CNL Health Care Properties, Inc., an unlisted
public REIT organized to invest in health care and seniors' housing facilities.
Both of the unlisted public REITs have investment objectives similar to those of
the Company. As of December 31, 1998, the 18 partnerships and the unlisted REITs
had raised a total of $1,361,784,035 from a total of 80,985 investors, and had
invested in 1,139 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>
<S> <C>
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 $15,000,000 December 31, 1986 30,000 December 1986
Fund, Ltd. (30,000 units)
CNL Income $25,000,000 August 21, 1987 50,000 November 1987
Fund II, Ltd. (50,000 units)
CNL Income $25,000,000 April 29, 1988 50,000 June 1988
Fund III, Ltd. (50,000 units)
CNL Income $30,000,000 December 6, 1988 60,000 February 1989
Fund IV, Ltd. (60,000 units)
CNL Income $25,000,000 June 7, 1989 50,000 December 1989
Fund V, Ltd. (50,000 units)
CNL Income $35,000,000 January 19, 1990 70,000 May 1990
Fund VI, Ltd. (70,000 units)
CNL Income $30,000,000 August 1, 1990 30,000,000 January 1991
Fund VII, Ltd. (30,000,000 units)
CNL Income $35,000,000 March 7, 1991 35,000,000 September 1991
Fund VIII, Ltd. (35,000,000 units)
CNL Income $35,000,000 September 6, 1991 3,500,000 November 1991
Fund IX, Ltd. (3,500,000 units)
CNL Income $40,000,000 April 22, 1992 4,000,000 June 1992
Fund X, Ltd. (4,000,000 units)
CNL Income $40,000,000 October 8, 1992 4,000,000 September 1992
Fund XI, Ltd. (4,000,000 units)
CNL Income $45,000,000 April 15, 1993 4,500,000 July 1993
Fund XII, Ltd. (4,500,000 units)
CNL Income $40,000,000 September 13, 1993 4,000,000 August 1993
Fund XIII, Ltd. (4,000,000 units)
CNL Income $45,000,000 March 23, 1994 4,500,000 May 1994
Fund XIV, Ltd. (4,500,000 units)
CNL Income $40,000,000 September 22, 1994 4,000,000 December 1994
Fund XV, Ltd. (4,000,000 units)
CNL Income $45,000,000 July 18, 1995 4,500,000 August 1995
Fund XVI, Ltd. (4,500,000 units)
CNL Income $30,000,000 October 10, 3,000,000 December 1996
Fund XVII, Ltd. (3,000,000 units) 1996
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, Inc. (74,746,441 shares)
CNL Health Care $155,000,000 (4) (4) (4)
Properties, Inc. (15,500,000 shares)
</TABLE>
(1) The amount stated includes the exercise by the general partners of each
partnership of their option to increase by $5,000,000 the maximum size of
the offering of CNL Income Fund, Ltd., CNL Income Fund II, Ltd., CNL
Income Fund III, Ltd., CNL Income Fund IV, Ltd., CNL Income Fund VI, Ltd.,
CNL Income Fund VIII, Ltd., CNL Income Fund X, Ltd., CNL Income Fund XII,
Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XVI, Ltd.
and CNL Income Fund XVIII, Ltd.
(2) For a description of the property acquisitions by these programs, see the
table set forth on the following page.
(3) In April 1995, CNL American Properties Fund, Inc. commenced an offering of
a maximum of 16,500,000 shares of common stock ($165,000,000). 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
December 31, 1998, CNL American Properties Fund, Inc. had received
subscriptions totalling $345,000,000 (34,500,000 shares), including
$3,107,848 (310,785 shares) through the reinvestment plan, from the 1998
Offering and had purchased 409 properties. As of December 31, 1998, net
proceeds to CNL American Properties Fund, Inc. from its Initial Offering,
1997 Offering, 1998 Offering and capital contributions from its advisor,
after deduction of stock issuance costs, totalled $670,336,817.
Approximately $549,917,000 of such amount had been invested or committed
for investment. The 1998 Offering closed in January 1999, upon receipt of
the proceeds from the last subscriptions.
(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. As
of December 31, 1998, CNL Health Care Properties, Inc. had not yet
acquired any properties.
As of December 31, 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 December 31, 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 December 31, 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 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 90 real estate limited partnerships whose offerings had closed
as of December 31, 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 December 31,
1998, regarding property acquisitions by the 18 limited partnerships and the two
unlisted REITs .
<TABLE>
<CAPTION>
<S> <C>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
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
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 52 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 65 fast-food or AL, AZ, CO, FL, GA, All cash Public
Fund XIV, Ltd. family-style KS, LA, MN, MO, MS,
restaurants NC, NJ, NV, OH, SC,
TN, TX, VA
CNL Income 55 fast-food or AL, CA, FL, GA, KS, All cash Public
Fund XV, Ltd. family-style KY, MN, MO, MS, NC,
restaurants NJ, NM, OH, OK, PA,
SC, TN, TX, VA
CNL Income 48 fast-food or AZ, CA, CO, DC, FL, All cash Public
Fund XVI, Ltd. family-style GA, ID, IN, KS, MN,
restaurants MO, NC, NM, NV, OH,
TN, TX, UT, WI
CNL Income 29 fast-food, CA, FL, GA, IL, IN, All cash Public
Fund XVII, Ltd. family-style or MI, NC, NV, OH, SC,
casual-dining TN, TX
restaurant properties
CNL Income 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 409 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, MS, 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 December 31, 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., CNL American
Properties Fund, Inc. and CNL Health Care Properties, 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 limited partnerships 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
limited partnerships and the two unlisted REITs, with investment objectives
similar to one or more of the Company's investment objectives, is provided in
the Prior Performance Tables included as Appendix C. Information about the
previous public partnerships, the offerings of which became fully subscribed
between January 1994 and December 1998, is included therein. Potential
stockholders are encouraged to examine the Prior Performance Tables attached as
Appendix C (in Table III), which include information as to the operating results
of these prior partnerships, for more detailed information concerning the
experience of Messrs. Seneff and Bourne.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making quarterly Distributions; (ii)
obtaining fixed income through the receipt of base rent, and increasing the
Company's income (and Distributions) and providing protection against inflation
through receipt of percentage rent and/or automatic increases in base rent, and
obtaining fixed income through the receipt of payments on Mortgage Loans and
Secured Equipment Leases; (iii) continuing to qualify as a REIT for federal
income tax purposes; and (iv) providing stockholders of the Company with
liquidity of their investment, either in whole or in part, within three to eight
years after commencement of this offering, through (a) Listing, or (b) if
Listing does not occur within eight years after commencement of this offering,
the commencement of orderly Sales of the Company's assets, outside the ordinary
course of business and consistent with its objective of qualifying as a REIT,
and distribution of the proceeds thereof. The sheltering from tax of income from
other sources is not an objective of the Company. If the Company is successful
in achieving its investment and operating objectives, the stockholders (other
than tax-exempt entities) are likely to recognize taxable income in each year.
While there is no order of priority intended in the listing of the Company's
objectives, stockholders should realize that the ability of the Company to meet
these objectives may be severely handicapped by any lack of diversification of
the Company's investments and the terms of the leases.
The Company intends to meet its objectives through its investment
policies of (i) purchasing carefully selected, well-located Properties and
leasing them on a "triple-net" basis (which means that the tenant will be
responsible for paying the cost of all repairs, maintenance, property taxes, and
insurance) to operators of Hotel Chains under leases generally requiring the
tenant to pay base annual rent, with percentage rent based on gross revenues
and/or automatic increases in base rent, and (ii) offering Mortgage Loans and
Secured Equipment Leases to tenants and operators of Hotel Chains.
In accordance with its investment policies, the Company intends to
invest in Properties whose tenants are franchisors or franchisees of one of the
Hotel Chains to be selected by the Company, based upon recommendations by the
Advisor. There is no limit on the number of properties of a particular Hotel
Chain which the Company may acquire. However, under investment guidelines
established by the Board of Directors, no single Hotel Chain may represent more
than 50% of the total portfolio unless approved by the Board of Directors,
including a majority of the Independent Directors. In addition, the Company
currently does not expect to acquire a Property if the Board of Directors,
including a majority of the Independent Directors, determines that the
acquisition would adversely affect the Company in terms of geographic, property
type or chain diversification. Potential Mortgage Loan borrowers and Secured
Equipment Lease lessees or borrowers will similarly be operators of Hotel Chains
selected by the Company, following the Advisor's recommendations. The Company
has undertaken, consistent with its objective of qualifying as a REIT for
federal income tax purposes, to ensure that the value of all Secured Equipment
Leases, in the aggregate, will not exceed 25% of the Company's total assets,
while Secured Equipment Leases to any single lessee or borrower, in the
aggregate, will not exceed 5% of the Company's total assets. It is intended that
investments will be made in Properties, Mortgage Loans and Secured Equipment
Leases in various locations in an attempt to achieve diversification and thereby
minimize the effect of changes in local economic conditions and certain other
risks. The extent of such diversification, however, depends in part upon the
amount raised in the offering and the purchase price of each Property. See
"Estimated Use of Proceeds" and "Risk Factors -- Real Estate and Other
Investment Risks -- Possible Lack of Diversification Increases Risk of
Investment." For a more complete description of the manner in which the
structure of the Company's business, including its investment policies, will
facilitate the Company's ability to meet its investment objectives. See
"Business."
The investment objectives of the Company may not be changed without the
approval of stockholders owning a majority of the shares of outstanding Common
Stock. The Bylaws of the Company require the Independent Directors to review the
Company's investment policies at least annually to determine that the policies
are in the best interests of the stockholders. The determination shall be set
forth in the minutes of the Board of Directors along with the basis for such
determination. The Directors (including a majority of the Independent Directors)
have the right, without a stockholder vote, to alter the Company's investment
policies but only to the extent consistent with the Company's investment
objectives and investment limitations. See "Certain Investment Limitations,"
below.
CERTAIN INVESTMENT LIMITATIONS
In addition to other investment restrictions imposed by the Directors
from time to time, consistent with the Company's objective of qualifying as a
REIT, the Articles of Incorporation or the Bylaws provide for the following
limitations on the Company's investments.
1. Not more than 10% of the Company's total assets shall be invested in
unimproved real property or mortgage loans on unimproved real property. For
purposes of this paragraph, "unimproved real property" does not include any
Property under construction, under contract for development or planned for
development within one year.
2. The Company shall not invest in commodities or commodity future
contracts. This limitation is not intended to apply to interest rate futures,
when used solely for hedging purposes.
3. The Company shall not invest in or make Mortgage Loans unless an
appraisal is obtained concerning the underlying property. Mortgage indebtedness
on any property shall not exceed such property's appraised value. In cases in
which the majority of Independent Directors so determine, and in all cases in
which the Mortgage Loan involves the Advisor, Directors, or Affiliates, such
appraisal must be obtained from an independent expert concerning the underlying
property. Such appraisal shall be maintained in the Company's records for at
least five years, and shall be available for inspection and duplication by any
stockholder. In addition to the appraisal, a mortgagee's or owner's title
insurance policy or commitment as to the priority of the mortgage or condition
of the title must be obtained. The Company may not invest in real estate
contracts of sale otherwise known as land sale contracts.
4. The Company may not make or invest in Mortgage Loans, including
construction loans, on any one Property if the aggregate amount of all mortgage
loans outstanding on the Property, including the loans of the Company, would
exceed an amount equal to 85% of the appraised value of the Property as
determined by appraisal unless substantial justification exists because of the
presence of other underwriting criteria. For purposes of this subsection, the
"aggregate amount of all mortgage loans outstanding on the Property, including
the loans of the Company" shall include all interest (excluding contingent
participation in income and/or appreciation in value of the mortgaged property),
the current payment of which may be deferred pursuant to the terms of such
loans, to the extent that deferred interest on each loan exceeds 5% per annum of
the principal balance of the loan.
5. The Company may not invest in indebtedness ("Junior Debt") secured
by a mortgage on real property which is subordinate to the lien or other
indebtedness ("Senior Debt"), except where the amount of such Junior Debt, plus
the outstanding amount of the Senior Debt, does not exceed 90% of the appraised
value of such property, if after giving effect thereto, the value of all such
investments of the Company (as shown on the books of the Company in accordance
with generally accepted accounting principles after all reasonable reserves but
before provision for depreciation) would not then exceed 25% of the Company's
Net Assets. The value of all investments in Junior Debt of the Company which
does not meet the aforementioned requirements is limited to 10% of the Company's
tangible assets (which is included within the 25% limitation).
6. The Company may not engage in any short sale, or borrow on an
unsecured basis, if such borrowing will result in an asset coverage of less than
300%, except that such borrowing limitation shall not apply to a first mortgage
trust. "Asset coverage," for the purpose of this section, means the ratio which
the value of the total assets of an issuer, less all liabilities and
indebtedness except indebtedness for unsecured borrowings, bears to the
aggregate amount of all unsecured borrowings of such issuer.
7. Unless at least 80% of the Company's tangible assets are comprised
of Properties or first mortgage loans, the Company may not incur any
indebtedness which would result in an aggregate amount of indebtedness in excess
of 300% of Net Assets.
8. The Company may not make or invest in any mortgage loans that are
subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or Affiliates of the Company.
9. The Company will not invest in equity securities unless a majority
of the Directors (including a majority of Independent Directors) not otherwise
interested in such transaction approve the transaction as being fair,
competitive, and commercially reasonable and determine that the transaction will
not jeopardize the Company's ability to qualify and remain qualified as a REIT.
Investments in entities affiliated with the Advisor, a Director, the Company, or
Affiliates thereof are subject to the restrictions on joint venture investments.
In addition, the Company shall not invest in any security of any entity holding
investments or engaging in activities prohibited by the Company's Articles of
Incorporation.
10. The Company will not issue (i) equity securities redeemable solely
at the option of the holder (except that stockholders may offer their Shares to
the Company as described under "Redemption of Shares"); (ii) debt securities
unless the historical debt service coverage (in the most recently completed
fiscal year), as adjusted for known charges, is sufficient to service that
higher level of debt properly; (iii) Shares on a deferred payment basis or under
similar arrangements; (iv) non-voting or assessable securities; or (v) options,
warrants, or similar evidences of a right to buy its securities (collectively,
"Options") unless (1) issued to all of its stockholders ratably, (2) as part of
a financing arrangement, or (3) as part of a stock option plan available to
Directors, officers, or employees of the Company or the Advisor. Options may not
be issued to the Advisor, Directors or any Affiliate thereof except on the same
terms as such Options are sold to the general public. Options may be issued to
persons other than the Advisor, Directors or any Affiliate thereof but not at
exercise prices less than the fair market value of the underlying securities on
the date of grant and not for consideration that in the judgment of the
Independent Directors has a market value less than the value of such Option on
the date of grant. Options issuable to the Advisor, Directors or any Affiliate
thereof shall not exceed 10% of the outstanding Shares on the date of grant.
11. A majority of the Directors shall authorize the consideration to be
paid for each Property, based on the fair market value of the Property. If a
majority of the Independent Directors determine, or if the Property is acquired
from the Advisor, a Director, or Affiliates thereof, such fair market value
shall be determined by a qualified independent real estate appraiser selected by
the Independent Directors.
12. The Company will not engage in underwriting or the agency
distribution of securities issued by others or in trading, as compared to
investment activities.
13. The Company will not invest in real estate contracts of sale unless
such contracts of sale are in recordable form and appropriately recorded in the
chain of title.
14. The Company will not invest in any foreign currency or bullion or
engage in short sales.
15. The Company will not issue senior securities except notes to banks
and other lenders and preferred shares.
16. The Company will not make loans to the Advisor or its Affiliates.
17. The Company will not operate so as to be classified as an
"investment company" under the Investment Company Act of 1940, as amended.
18. The Company will not make any investment that the Company believes
will be inconsistent with its objective of qualifying as a REIT.
The foregoing limitations may not be modified or eliminated without the
approval of a majority of the shares of outstanding Common Stock.
Except as set forth above or elsewhere in this Prospectus, the Company
does not intend to issue senior securities; borrow money; make loans to other
persons; invest in the securities of other issuers for the purpose of exercising
control; underwrite securities of other issuers; engage in the purchase and sale
(or turnover) of investments; offer securities in exchange for property,
repurchase or otherwise reacquire its shares or other securities; or make annual
or other reports to security holders. The Company evaluates investments in
Mortgage Loans on an individual basis and does not have a standard turnover
policy with respect to such investments.
DISTRIBUTION POLICY
GENERAL
In order to qualify as a REIT for federal income tax purposes, among
other things, the Company must make distributions each taxable year (not
including any return of capital for federal income tax purposes) equal to at
least 95% of its real estate investment trust taxable income, although the Board
of Directors, in its discretion, may increase that percentage as it deems
appropriate. See "Federal Income Tax Considerations -- Taxation of the Company
- -- Distribution Requirements." The declaration of Distributions is within the
discretion of the Board of Directors and depends upon the Company's
distributable funds, current and projected cash requirements, tax considerations
and other factors.
DISTRIBUTIONS
The following table reflects total Distributions and Distributions per
Share declared and paid by the Company for each month since the Company
commenced operations.
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 99,589 0.041700
August 1998 105,708 0.041700
September 1998 156,747 0.058300
October 1998 167,848 0.058300
November 1998 183,302 0.058300
December 1998 197,865 0.058300
January 1999 251,967 0.058300
February 1999 314,928 0.058300
March 1999 431,757 0.058300
In addition, in April and May 1999, the Company declared Distributions
totalling $554,793 and $688,077, respectively (each representing $0.0604 per
Share). The Company intends to continue to make regular Distributions to
stockholders. The payment of Distributions commenced in December 1997.
Distributions will be made to those stockholders who are stockholders as of the
record date selected by the Directors. Distributions will be declared monthly
during the offering period, declared monthly during any subsequent offering,
paid on a quarterly basis during an offering period, and declared and paid
quarterly thereafter. The Company is required to distribute annually at least
95% of its real estate investment trust taxable income to maintain its objective
of qualifying as a REIT. Generally, income distributed will not be taxable to
the Company under federal income tax laws if the Company complies with the
provisions relating to qualification as a REIT. If the cash available to the
Company is insufficient to pay such Distributions, the Company may obtain the
necessary funds by borrowing, issuing new securities, or selling Assets. These
methods of obtaining funds could affect future Distributions by increasing
operating costs. To the extent that Distributions to stockholders exceed
earnings and profits, such amounts constitute a return of capital for federal
income tax purposes, although such Distributions will not reduce stockholders'
aggregate Invested Capital. Distributions in kind shall not be permitted, except
for distributions of readily marketable securities; distributions of beneficial
interests in a liquidating trust established for the dissolution of the Company
and the liquidation of its assets in accordance with the terms of the Articles
of 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 quarter ended March 31, 1999, the year ended December 31, 1998,
and the period October 15, 1997 (the date operations of the Company commenced)
through December 31, 1997, approximately 41%, 76% and 100%, respectively, of the
Distributions declared and paid were considered to be ordinary income and for
the quarter ended March 31, 1999 and the year ended December 31, 1998,
approximately 59% and 24%, respectively, were considered a return of capital for
federal income tax purposes. Due to the fact that the Company had not yet
acquired all of its Properties and was still in the offering stage as of
December 31, 1998 and March 31, 1999, the characterization of Distributions for
federal income tax purposes is not necessarily considered by management to be
representative of the characterization of Distributions in future years.
Distributions will be made at the discretion of the Directors,
depending primarily on net cash from operations (which includes cash received
from tenants except to the extent that such cash represents a return of
principal in regard to the lease of a Property consisting of building only,
distributions from joint ventures, and interest income from lessees of Equipment
and borrowers under Mortgage Loans, less expenses paid) and the general
financial condition of the Company, subject to the obligation of the Directors
to cause the Company to qualify and remain qualified as a REIT for federal
income tax purposes. The Company intends to increase Distributions in accordance
with increases in net cash from operations.
SUMMARY OF THE
ARTICLES OF INCORPORATION AND BYLAWS
GENERAL
The Company is organized as a corporation under the laws of the State
of Maryland. As a Maryland corporation, the Company is governed by the Maryland
General Corporation Law. Maryland corporate law deals with a variety of matters
regarding Maryland corporations, including liabilities of the Company,
stockholders, directors, and officers, the amendment of the Articles of
Incorporation, and mergers of a Maryland corporation with other entities. Since
many matters are not addressed by Maryland corporate law, it is customary for a
Maryland corporation to address these matters through provisions in its Articles
of Incorporation.
The Articles of Incorporation and the Bylaws of the Company contain
certain provisions that could make it more difficult to acquire control of the
Company by means of a tender offer, a proxy contest, or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with its Board of Directors.
The Company believes that these provisions increase the likelihood that
proposals initially will be on more attractive terms than would be the case in
their absence and facilitate negotiations which may result in improvement of the
terms of an initial offer.
The Articles of Incorporation also permit Listing by the Board of
Directors after completion or termination of this offering.
The discussion below sets forth material provisions of governing laws,
instruments and guidelines applicable to the Company. For more complete
provisions, reference is made to the Maryland General Corporation Law, the
guidelines for REITs published by the North American Securities Administrators
Association and the Company's Articles of Incorporation and Bylaws.
DESCRIPTION OF CAPITAL STOCK
The Company has authorized a total of 126,000,000 shares of capital
stock, consisting of 60,000,000 shares of Common Stock, $0.01 par value per
share, 3,000,000 shares of Preferred Stock ("Preferred Stock"), and 63,000,000
additional shares of excess stock ("Excess Shares"), $0.01 par value per share.
Of the 63,000,000 Excess Shares, 60,000,000 are issuable in exchange for Common
Stock and 3,000,000 are issuable in exchange for Preferred Stock as described
below at "-- Restriction of Ownership." As of May 13, 1999, the Company had
12,186,439 shares of Common Stock outstanding (including 20,000 shares issued to
the Advisor prior to the commencement of the Initial Offering and 7,275 Shares
issued pursuant to the Reinvestment Plan) and no Preferred Stock or Excess
Shares outstanding. The Board of Directors may determine to engage in future
offerings of Common Stock of up to the number of unissued authorized shares of
Common Stock available.
The Company will not issue share certificates except to stockholders
who make a written request to the Company. Each stockholder's investment will be
recorded on the books of the Company, and information concerning the
restrictions and rights attributable to Shares (whether in connection with an
initial issuance or a transfer) will be sent to the stockholder receiving Shares
in connection with an issuance or transfer. A stockholder wishing to transfer
his or her Shares will be required to send only an executed form to the Company,
and the Company will provide the required form upon a stockholder's request. The
executed form and any other required documentation must be received by the
Company at least one calendar month prior to the last date of the current
quarter. Subject to restrictions in the Articles of Incorporation, transfers of
Shares shall be effective, and the transferee of the Shares will be recognized
as the holder of such Shares as of the first day of the following quarter on
which the Company receives properly executed documentation. Stockholders who are
residents of New York may not transfer fewer than 250 shares at any time.
Stockholders have no preemptive rights to purchase or subscribe for
securities that the Company may issue subsequently. Each Share is entitled to
one vote per Share, and Shares do not have cumulative voting rights. The
stockholders are entitled to Distributions in such amounts as may be declared by
the Board of Directors from time to time out of funds legally available for such
payments and, in the event of liquidation, to share ratably in any assets of the
Company remaining after payment in full of all creditors.
All of the Shares offered hereby will be fully paid and nonassessable
when issued.
The Articles of Incorporation authorize the Board of Directors to
designate and issue from time to time one or more classes or series of Preferred
Shares without stockholder approval. The Board of Directors may determine the
relative rights, preferences, and privileges of each class or series of
Preferred Stock so issued. Because the Board of Directors has the power to
establish the preferences and rights of each class or series of Preferred Stock,
it may afford the holders of any series or class of Preferred Stock preferences,
powers, and rights senior to the rights of holders of Common Stock; however, the
voting rights for each share of Preferred Stock shall not exceed voting rights
which bear the same relationship to the voting rights of the Shares as the
consideration paid to the Company for each share of Preferred Stock bears to the
book value of the Shares on the date that such Preferred Stock is issued. The
issuance of Preferred Stock could have the effect of delaying or preventing a
change in control of the Company. The Board of Directors has no present plans to
issue any Preferred Stock.
Similarly, the voting rights per share of equity securities of the
Company (other than the publicly held equity securities of the Company) sold in
a private offering shall not exceed the voting rights which bear the same
relationship to the voting rights of the publicly held equity securities as the
consideration paid to the Company for each privately offered Company share bears
to the book value of each outstanding publicly held equity security. The Board
of Directors currently has no plans to offer equity securities of the Company in
a private offering.
For a description of the characteristics of the Excess Shares, which
differ from Common Stock and Preferred Stock in a number of respects, including
voting and economic rights, see "-- Restriction of Ownership," below.
Soliciting Dealer Warrants. The Company has agreed to issue and sell,
as part of an overall compensation package, Soliciting Dealer Warrants to the
Managing Dealer, whereby one warrant to purchase one share of Common Stock will
be issued for every 25 Shares sold by the Managing Dealer. The Managing Dealer
has agreed to pay the Company $0.0008 for each Soliciting Dealer Warrant. These
warrants will be issued on a quarterly basis commencing 60 days after the date
on which the Shares are first sold pursuant to this offering. All or a portion
of the Soliciting Dealer Warrants may be reallowed to Soliciting Dealers with
prior written approval from, and in the sole discretion of, the Managing Dealer,
except where prohibited by either federal or state securities laws. The Company
will not issue Soliciting Dealer Warrants to the Managing Dealer and the
Managing Dealer will not transfer Soliciting Dealer Warrants in connection with
the sale of Shares to residents of Minnesota or Texas.
The holder of a Soliciting Dealer Warrant will be entitled to purchase
one share of Common Stock from the Company at a price of $12.00 (120% of the
current public offering price per Share) during the Exercise Period, provided,
Soliciting Dealer Warrants will not be exercisable until one year from the date
of issuance. Holders of Soliciting Dealer Warrants may not exercise the
Soliciting Dealer Warrants to the extent such exercise would jeopardize the
Company's status as a REIT under the Code.
The terms of the Soliciting Dealer Warrants, including the exercise
price and the number and type of securities issuable upon exercise of a
Soliciting Dealer Warrant and the number of such warrants may be adjusted in the
event of stock dividends, certain subdivisions, combinations and
reclassification of shares of Common Stock or the issuance to stockholders of
rights, options or warrants entitling them to purchase shares of Common Stock or
securities convertible into shares of Common Stock. The terms of the Soliciting
Dealer Warrants also may be adjusted if the Company engages in certain merger or
consolidation transactions or if all or substantially all of the Company's
assets are sold. Soliciting Dealer Warrants are not transferable or assignable
except by the Managing Dealer, the Soliciting Dealers, their successors in
interest, or to individuals who are officers or partners of such a person.
Exercise of these Soliciting Dealer Warrants will be under the terms and
conditions detailed in this Prospectus and in the Warrant Purchase Agreement,
which is an exhibit to the Registration Statement.
As holders of Soliciting Dealer Warrants, persons do not have the
rights of stockholders, may not vote on Company matters and are not entitled to
receive Distributions until such time as such warrants are exercised.
The Company anticipates that it will value the Soliciting Dealer
Warrants using an option pricing model in accordance with the guidance provided
in Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." The option pricing model that the Company will use
will take into consideration the following factors: (i) the exercise price of
the Soliciting Dealer Warrants; (ii) the expected life of the Soliciting Dealer
Warrants; (iii) the price of the Shares; (iv) expected Distributions with
respect to the Shares; (v) the risk-free interest rate for the expected term of
the Soliciting Dealer Warrants; and, to the extent applicable, (vi) the expected
volatility of the Shares. Any difference between the fair value of the
Soliciting Dealer Warrants and the purchase price of the Soliciting Dealer
Warrants would be reflected in the financial statements of the Company as a
charge to capital in excess of par value related to stock issuance costs, with a
corresponding credit to equity relating to the issuance of the Soliciting Dealer
Warrants.
BOARD OF DIRECTORS
The Articles of Incorporation provide that the number of Directors of
the Company cannot be less than three nor more than 15. A majority of the Board
of Directors will be Independent Directors. See "Management -- Independent
Directors." Each Director, other than a Director elected to fill the unexpired
term of another Director, will be elected at each annual meeting or at any
special meeting of the stockholders called for that purpose, by a majority of
the shares of Common Stock present in person or by proxy and entitled to vote.
Independent Directors will nominate replacements for vacancies among the
Independent Directors. Under the Articles of Incorporation, the term of office
for each Director will be one year, expiring each annual meeting of
stockholders; however, nothing in the Articles of Incorporation prohibits a
director from being reelected by the stockholders. The Directors may not (a)
amend the Articles of Incorporation, except for amendments which do not
adversely affect the rights, preferences and privileges of stockholders; (b)
sell all or substantially all of the Company's assets other than in the ordinary
course of business or in connection with liquidation and dissolution; (c) cause
the merger or other reorganization of the Company; or (d) dissolve or liquidate
the Company, other than before the initial investment in property. The Directors
may establish such committees as they deem appropriate (provided that the
majority of the members of each committee are Independent Directors).
STOCKHOLDER MEETINGS
An annual meeting will be held for the purpose of electing Directors
and for the transaction of such other business as may come before the meeting,
and will be held not less than 30 days after delivery of the annual report.
Under the Company's Bylaws, a special meeting of stockholders may be called by
the chief executive officer, a majority of the Directors, or a majority of the
Independent Directors. Special meetings of the stockholders also shall be called
by an officer of the Company upon the written request of stockholders holding in
the aggregate not less than 10% of the outstanding Common Stock entitled to vote
at such meeting. Upon receipt of such a written request, either in person or by
mail, stating the purpose or purposes of the meeting, the Company shall provide
all stockholders, within ten days of receipt of the written request, written
notice, either in person or by mail, of a meeting and its purpose. Such meeting
will be held not less than fifteen nor more than sixty days after distribution
of the notice, at a time and place specified in the request, or if none is
specified, at a time and place convenient to stockholders.
At any meeting of stockholders, each stockholder is entitled to one
vote per share of Common Stock owned of record on the applicable record date. In
general, the presence in person or by proxy of 50% of the shares of Common Stock
then outstanding shall constitute a quorum, and the majority vote of the shares
of Common Stock present in person or by proxy will be binding on all the
stockholders of the Company.
ADVANCE NOTICE FOR STOCKHOLDER NOMINATIONS FOR
DIRECTORS AND PROPOSALS OF NEW BUSINESS
The Bylaws of the Company require notice at least 60 days and not more
than 90 days before the anniversary of the prior annual meeting of stockholders
in order for a stockholder to (a) nominate a Director, or (b) propose new
business other than pursuant to the notice of the meeting or by or on behalf of
the Directors. The Bylaws contain a similar notice requirement in connection
with nominations for Directors at a special meeting of stockholders called for
the purpose of electing one or more Directors. Accordingly, failure to comply
with the notice provisions will make stockholders unable to nominate Directors
or propose new business.
AMENDMENTS TO THE ARTICLES OF INCORPORATION
Pursuant to the Company's Articles of Incorporation, the Directors can
amend the Articles of Incorporation by a two-thirds majority from time to time
if necessary in order to qualify initially or in order to continue to qualify as
a REIT. Except as set forth above, the Articles of Incorporation may be amended
only by the affirmative vote of a majority, and in some cases a two-thirds
majority, of the shares of Common Stock outstanding and entitled to vote. The
stockholders may vote to amend the Articles of Incorporation, terminate or
dissolve the Company, or remove one or more Directors without the necessity of
concurrence by the Board of Directors.
MERGERS, COMBINATIONS, AND SALE OF ASSETS
A merger, combination, sale, or other disposition of all or
substantially all of the Company's assets other than in the ordinary course of
business must be approved by the Directors and a majority of the shares of
Common Stock outstanding and entitled to vote. In addition, any such transaction
involving an Affiliate of the Company or the Advisor also must be approved by a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction as fair and reasonable to the
Company and on terms and conditions not less favorable to the Company than those
available from unaffiliated third parties.
The Maryland Business Combinations Statute provides that certain
business combinations (including mergers, consolidations, share exchanges or, in
certain circumstances, asset transfers or issuances or reclassifications of
equity securities) between a Maryland corporation and any person who
beneficially owns 10% or more of the voting power of such corporation's shares
or an affiliate of such corporation who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10% or more of the
voting power of the then-outstanding voting shares of such corporation (an
"Interested Stockholder") or an affiliate thereof, are prohibited for five years
after the most recent date on which the Interested Stockholder became an
Interested Stockholder. Thereafter, any such business combination must be
recommended by the board of directors of such corporation and approved by the
affirmative vote of at least (i) 80% of the votes entitled to be cast by holders
of outstanding shares of voting stock of the corporation and (ii) two-thirds of
the votes entitled to be cast by holders of voting shares of such corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
determined by statute) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares.
Section 2.8 of the Articles of Incorporation provides that the
prohibitions and restrictions set forth in the Maryland Business Combinations
Statute are inapplicable to any business combination between the Company and any
person. Consequently, business combinations between the Company and Interested
Stockholders can be effected upon the affirmative vote of a majority of the
outstanding Shares entitled to vote thereon and do not require the approval of a
supermajority of the outstanding Shares held by disinterested stockholders.
CONTROL SHARE ACQUISITIONS
The Maryland Control Share Acquisition Statute provides that control
shares of a Maryland corporation acquired in a control share acquisition have no
voting rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares owned by the acquiror,
officers or directors who are employees of the corporation. Control Shares are
shares which, if aggregated with all other shares of the corporation previously
acquired by the acquiror, or in respect of which the acquiror is able to
exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise voting power in
electing directors of such corporation within one of the following ranges of
voting power: (i) one-fifth or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority or more of all voting power.
Control Shares do not include shares the acquiring person is entitled to vote as
a result of having previously obtained stockholder approval. A control share
acquisition means the acquisition of control shares, subject to certain
exceptions.
Section 2.9 of the Articles of Incorporation provides that the Maryland
Control Share Acquisition Statute is inapplicable to any acquisition of
securities of the Company by any person. Consequently, in instances where the
Board of Directors otherwise waives or modifies restrictions relating to the
ownership and transfer of securities of the Company or such restrictions are
otherwise removed, control shares of the Company will have voting rights,
without having to obtain the approval of a supermajority of the outstanding
Shares eligible to vote thereon.
TERMINATION OF THE COMPANY AND REIT STATUS
The Articles of Incorporation provide for the voluntary termination and
dissolution of the Company by the affirmative vote of a majority of the shares
of Common Stock outstanding and entitled to vote at a meeting called for that
purpose. In addition, the Articles of Incorporation permit the stockholders to
terminate the status of the Company as a REIT under the Code only by the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding and entitled to vote.
Under the Articles of Incorporation, the Company automatically will
terminate and dissolve on December 31, 2007, unless Listing occurs, in which
event the Company automatically will become a perpetual life entity.
RESTRICTION OF OWNERSHIP
To qualify as a REIT under the Code (i) not more than 50% of the value
of the REIT's outstanding stock may be owned, directly or indirectly (applying
certain attribution rules), by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of a taxable year, (ii) the
REIT's stock must be beneficially owned (without reference to any attribution
rules) by 100 or more persons during at least 335 days of a taxable year of 12
months or during a proportionate part of a shorter taxable year; and (iii)
certain other requirements must be satisfied. See "Federal Income Tax
Considerations -- Taxation of the Company."
To ensure that the Company satisfies these requirements, the Articles
of Incorporation restrict the direct or indirect ownership (applying certain
attribution rules) of shares of Common Stock and Preferred Stock by any Person
(as defined in the Articles of Incorporation) to no more than 9.8% of the
outstanding shares of such Common Stock or 9.8% of any series of Preferred
Shares (the "Ownership Limit"). However, the Articles of Incorporation provide
that this Ownership Limit may be modified, either entirely or with respect to
one or more Persons, by a vote of a majority of the Directors, if such
modification does not jeopardize the Company's status as a REIT. As a condition
of such modification, the Board of Directors may require opinions of counsel
satisfactory to it and/or an undertaking from the applicant with respect to
preserving the status of the Company as a REIT.
It is the responsibility of each Person (as defined in the Articles of
Incorporation) owning (or deemed to own) more than 5% of the outstanding shares
of Common Stock or any series of outstanding Preferred Stock to give the Company
written notice of such ownership. In addition, to the extent deemed necessary by
the Directors, the Company can demand that each stockholder disclose to the
Company in writing all information regarding the Beneficial and Constructive
Ownership (as such terms are defined in the Articles of Incorporation) of the
Common Stock and Preferred Stock.
If the ownership, transfer or acquisition of shares of Common or
Preferred Stock, or change in capital structure of the Company or other event or
transaction would result in (i) any Person owning (applying certain attribution
rules) Common Stock or Preferred Stock in excess of the Ownership Limit, (ii)
fewer than 100 Persons owning the Common Stock and Preferred Stock, (iii) the
Company being "closely held" within the meaning of section 856(h) of the Code,
or (iv) the Company failing any of the gross income requirements of section
856(c) of the Code or otherwise failing to qualify as a REIT, then the
ownership, transfer, or acquisition, or change in capital structure or other
event or transaction that would have such effect will be void as to the
purported transferee or owner, and the purported transferee or owner will not
have or acquire any rights to the Common Stock and/or Preferred Stock, as the
case may be, to the extent required to avoid such a result. Common Stock or
Preferred Stock owned, transferred or proposed to be transferred in excess of
the Ownership Limit or which would otherwise jeopardize the Company's status as
a REIT will automatically be converted to Excess Shares. A holder of Excess
Shares is not entitled to Distributions, voting rights, and other benefits with
respect to such shares except for the right to payment of the purchase price for
the shares (or in the case of a devise or gift or similar event which results in
the issuance of Excess Shares, the fair market value at the time of such devise
or gift or event) and the right to certain distributions upon liquidation. Any
Distribution paid to a proposed transferee or holder of Excess Shares shall be
repaid to the Company upon demand. Excess Shares shall be subject to repurchase
by the Company at its election. The purchase price of any Excess Shares shall be
equal to the lesser of (a) the price paid in such purported transaction (or in
the case of a devise or gift or similar event resulting in the issuance of
Excess Shares, the fair market value at the time of such devise or gift or
event) or (b) the fair market value of such Shares on the date on which the
Company or its designee determines to exercise its repurchase right. If the
foregoing transfer restrictions are determined to be void or invalid by virtue
of any legal decision, statute, rule or regulation, then the purported
transferee of any Excess Shares may be deemed, at the option of the Company, to
have acted as an agent on behalf of the Company in acquiring such Excess Shares
and to hold such Excess Shares on behalf of the Company.
For purposes of the Articles of Incorporation, the term "Person" shall
mean an individual, corporation, partnership, estate, trust (including a trust
qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside to be used exclusively for the purposes described in
Section 642(c) of the Code, association, private foundation within the meaning
of Section 509(a) of the Code, joint stock company or other entity, or a group
as that term is used for purposes of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended; but does not include (i) CNL Hospitality Advisors,
Inc., during the period ending on December 31, 1997, or (ii) an underwriter
which participated in a public offering of Shares for a period of sixty (60)
days following the purchase by such underwriter of Shares therein, provided that
the foregoing exclusions shall apply only if the ownership of such Shares by CNL
Hospitality Advisors, Inc. or an underwriter would not cause the Company to fail
to qualify as a REIT by reason of being "closely held" within the meaning of
Section 856(a) of the code or otherwise cause the Company to fail to qualify as
a REIT.
RESPONSIBILITY OF DIRECTORS
Directors serve in a fiduciary capacity and shall have a fiduciary duty
to the stockholders of the Company, which duty shall include a duty to supervise
the relationship of the Company with the Advisor. See "Management -- Fiduciary
Responsibilities of the Board of Directors."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to Maryland corporate law and the Company's Articles of
Incorporation, the Company is required to indemnify and hold harmless a present
or former Director, officer, Advisor, or Affiliate and may indemnify and hold
harmless a present or former employee or agent of the Company (the "Indemnitee")
against any or all losses or liabilities reasonably incurred by the Indemnitee
in connection with or by reason of any act or omission performed or omitted to
be performed on behalf of the Company while a Director, officer, Advisor,
Affiliate, employee, or agent and in such capacity, provided, that the
Indemnitee has determined, in good faith, that the act or omission which caused
the loss or liability was in the best interests of the Company. The Company will
not indemnify or hold harmless the Indemnitee if: (i) the loss or liability was
the result of negligence or misconduct, or if the Indemnitee is an Independent
Director, the loss or liability was the result of gross negligence or willful
misconduct; (ii) the act or omission was material to the loss or liability and
was committed in bad faith or was the result of active or deliberate dishonesty;
(iii) the Indemnitee actually received an improper personal benefit in money,
property, or services; (iv) in the case of any criminal proceeding, the
Indemnitee had reasonable cause to believe that the act or omission was
unlawful; or (v) in a proceeding by or in the right of the Company, the
Indemnitee shall have been adjudged to be liable to the Company. In addition,
the Company will not provide indemnification for any loss or liability arising
from an alleged violation of federal or state securities laws unless one or more
of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular Indemnitee; (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular Indemnitee; or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular Indemnitee and finds that
indemnification of the settlement and the related costs should be made, and the
court considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published position
of any state securities regulatory authority in which securities of the Company
were offered or sold as to indemnification for violations of securities laws.
Pursuant to its Articles of Incorporation, the Company is required to pay or
reimburse reasonable expenses incurred by a present or former Director, officer,
Advisor or Affiliate and may pay or reimburse reasonable expenses incurred by
any other Indemnitee in advance of final disposition of a proceeding if the
following are satisfied: (i) the Indemnitee was made a party to the proceeding
by reasons of his or her service as a Director, officer, Advisor, Affiliate,
employee or agent of the Company; (ii) the Indemnitee provides the Company with
written affirmation of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification by the Company as authorized
by the Articles of Incorporation; (iii) the Indemnitee provides the Company with
a written agreement to repay the amount paid or reimbursed by the Company,
together with the applicable legal rate of interest thereon, if it is ultimately
determined that the Indemnitee did not comply with the requisite standard of
conduct; and (iv) the legal proceeding was initiated by a third party who is not
a stockholder or, if by a stockholder of the Company acting in his or her
capacity as such, a court of competent jurisdiction approves such advancement.
The Company's Articles of Incorporation further provide that any
indemnification, payment, or reimbursement of the expenses permitted by the
Articles of Incorporation will be furnished in accordance with the procedures in
Section 2-418 of the Maryland General Corporation Law.
Any indemnification may be paid only out of Net Assets of the Company,
and no portion may be recoverable from the stockholders.
There are certain defenses under Maryland law available to the
Directors, officers and the Advisor in the event of a stockholder action against
them. One such defense is the "business judgment rule." A Director, officer or
the Advisor can argue that he or she performed the action giving rise to the
stockholder's action in good faith and in a manner he or she reasonably believed
to be in the best interests of the Company, and with such care as an ordinarily
prudent person in a like position would have used under similar circumstances.
The Directors, officers and the Advisor are also entitled to rely on
information, opinions, reports or records prepared by experts (including
accountants, consultants, counsel, etc.) who were selected with reasonable care.
However, the Directors, officers and the Advisor may not invoke the business
judgment rule to further limit the rights of the stockholders to access records
as provided in the Articles of Incorporation.
The Company has entered into indemnification agreements with each of
the Company's officers and Directors. The indemnification agreements require,
among other things, that the Company indemnify its officers and Directors to the
fullest extent permitted by law, and advance to the officers and Directors all
related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. In accordance with this agreement, the Company
must indemnify and advance all expenses reasonably incurred by officers and
Directors seeking to enforce their rights under the indemnification agreements.
The Company also must cover officers and Directors under the Company's
directors' and officers' liability insurance. Although these indemnification
agreements offer substantially the same scope of coverage afforded by the
indemnification provisions in the Articles of Incorporation and the Bylaws, it
provides greater assurance to Directors and officers that indemnification will
be available because these contracts cannot be modified unilaterally by the
Board of Directors or by the stockholders.
REMOVAL OF DIRECTORS
Under the Articles of Incorporation, a Director may resign or be
removed with or without cause by the affirmative vote of a majority of the
capital stock of the Company outstanding and entitled to vote.
INSPECTION OF BOOKS AND RECORDS
The Advisor will keep or cause to be kept, on behalf of the Company,
full and true books of account on an accrual basis of accounting, in accordance
with generally accepted accounting principles. All of such books of account,
together with all other records of the Company, including a copy of the Articles
of Incorporation and any amendments thereto, will at all times be maintained at
the principal office of the Company, and will be open to inspection,
examination, and, for a reasonable charge, duplication upon reasonable notice
and during normal business hours by a stockholder or his agent. Stockholders
will also have access to the books of account and records of CNL Hospitality
Partners, LP to the same extent that they have access to the books of account
and records of the Company.
As a part of its books and records, the Company will maintain at its
principal office an alphabetical list of names of stockholders, along with their
addresses and telephone numbers and the number of Shares held by each
stockholder. Such list shall be updated at least quarterly and shall be
available for inspection at the Company's home office by a stockholder or his or
her designated agent upon such stockholder's request. Such list also shall be
mailed to any stockholder requesting the list within 10 days of a request. The
copy of the stockholder list shall be printed in alphabetical order, on white
paper, and in readily readable type size that is not smaller than 10-point type.
The Company may impose a reasonable charge for expenses incurred in reproducing
such list. The list may not be sold or used for commercial purposes.
If the Advisor or Directors neglect or refuse to exhibit, produce or
mail a copy of the stockholder list as requested, the Advisor and the Directors
shall be liable to any stockholder requesting the list for the costs, including
attorneys' fees, incurred by that stockholder for compelling the production of
the stockholder list. It shall be a defense that the actual purpose and reason
for the requests for inspection or for a copy of the stockholder list is to
secure such list of stockholders or other information for the purpose of selling
such list or copies thereof, or of using the same for a commercial purpose other
than in the interest of the applicant as a stockholder relative to the affairs
of the Company. The Company may require the stockholder requesting the
stockholder list to represent that the list is not requested for a commercial
purpose unrelated to the stockholder's interest in the Company. The remedies
provided by the Articles of Incorporation to stockholders requesting copies of
the stockholder list are in addition to, and do not in any way limit, other
remedies available to stockholders under federal law, or the law of any state.
RESTRICTIONS ON "ROLL-UP" TRANSACTIONS
In connection with a proposed Roll-Up Transaction, which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity that would be created or would survive after the
successful completion of the Roll-Up Transaction, an appraisal of all Properties
shall be obtained from an Independent Expert. In order to qualify as an
Independent Expert for this purpose(s), the person or entity shall have no
material current or prior business or personal relationship with the Advisor or
Directors and shall be engaged to a substantial extent in the business of
rendering opinions regarding the value of assets of the type held by the
Company. The Properties shall be appraised on a consistent basis, and the
appraisal shall be based on the evaluation of all relevant information and shall
indicate the value of the Properties as of a date immediately prior to the
announcement of the proposed Roll-Up Transaction. The appraisal shall assume an
orderly liquidation of Properties over a 12-month period. The terms of the
engagement of such Independent Expert shall clearly state that the engagement is
for the benefit of the Company and the stockholders. A summary of the
independent appraisal, indicating all material assumptions underlying the
appraisal, shall be included in a report to stockholders in connection with a
proposed Roll-Up Transaction. In connection with a proposed Roll-Up Transaction
which has not been approved by at least two-thirds of the stockholders, the
person sponsoring the Roll-Up Transaction shall offer to stockholders who vote
against the proposal the choice of:
(i) accepting the securities of the Roll-Up Entity offered in the
proposed Roll-Up Transaction; or
(ii) one of the following:
(A) remaining stockholders of the Company and preserving their
interests therein on the same terms and conditions as existed
previously; or
(B) receiving cash in an amount equal to the stockholder's pro
rata share of the appraised value of the net assets of the Company.
The Company is prohibited from participating in any proposed Roll-Up
Transaction:
(i) which would result in the stockholders having democracy rights in
the Roll-Up Entity that are less than those provided in the Company's Articles
of Incorporation, Sections 8.1, 8.2, 8.4, 8.5, 8.6 and 9.1 and described
elsewhere in this Prospectus, including rights with respect to the election and
removal of Directors, annual reports, annual and special meetings, amendment of
the Articles of Incorporation, and dissolution of the Company. See "Description
of Capital Stock" and "Stockholder Meetings," above;
(ii) which includes provisions that would operate as a material
impediment to, or frustration of, the accumulation of shares by any purchaser of
the securities of the Roll-Up Entity (except to the minimum extent necessary to
preserve the tax status of the Roll-Up Entity), or which would limit the ability
of an investor to exercise the voting rights of its securities of the Roll-Up
Entity on the basis of the number of shares held by that investor;
(iii) in which investor's rights to access of records of the Roll-Up
Entity will be less than those provided in Sections 8.4 and 8.5 of the Company's
Articles of Incorporation and described in "Inspection of Books and Records,"
above; or
(iv) in which any of the costs of the Roll-Up Transaction would be
borne by the Company if the Roll-Up Transaction is not approved by the
stockholders.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
consequences of the ownership of Shares of the Company, prepared by Shaw Pittman
, as Counsel. This discussion is based upon the laws, regulations, and reported
judicial and administrative rulings and decisions in effect as of the date of
this Prospectus, all of which are subject to change, retroactively or
prospectively, and to possibly differing interpretations. This discussion does
not purport to deal with the federal income or other tax consequences applicable
to all investors in light of their particular investment or other circumstances,
or to all categories of investors, some of whom may be subject to special rules
(including, for example, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States). No ruling on the federal, state
or local tax considerations relevant to the operation of the Company, or to the
purchase, ownership or disposition of the Shares, has been requested from the
Internal Revenue Service (the "IRS" or the "Service") or other tax authority.
Counsel has rendered certain opinions discussed herein and believes that if the
Service were to challenge the conclusions of Counsel, such conclusions should
prevail in court. However, opinions of counsel are not binding on the Service or
on the courts, and no assurance can be given that the conclusions reached by
Counsel would be sustained in court. Prospective investors should consult their
own tax advisors in determining the federal, state, local, foreign and other tax
consequences to them of the purchase, ownership and disposition of the Shares of
the Company, the tax treatment of a REIT and the effect of potential changes in
applicable tax laws.
TAXATION OF THE COMPANY
General. The Company has elected to be taxed as a REIT for federal
income tax purposes, as defined in Sections 856 through 860 of the Code,
commencing with its taxable year ending December 31, 1997. The Company believes
that it is organized and will operate in such a manner as to qualify as a REIT,
and the Company intends to continue to operate in such a manner, but no
assurance can be given that it will operate in a manner so as to qualify or
remain qualified as a REIT. The provisions of the Code pertaining to REITs are
highly technical and complex. Accordingly, this summary is qualified in its
entirety by the applicable Code sections, rules and regulations issued
thereunder, and administrative and judicial interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its net income that is currently
distributed to holders of Shares. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from an investment in a corporation. However, the Company will be
subject to federal income tax in the following circumstances. First, the Company
will be taxed at regular corporate rates on any undistributed real estate
investment trust taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
alternative minimum tax on its items of tax preference. Third, if the Company
has net income from foreclosure property, it will be subject to tax on such
income at the highest corporate rate. Foreclosure property generally means real
property (and any personal property incident to such real property) which is
acquired as a result of a default either on a lease of such property or on
indebtedness which such property secured and with respect to which an
appropriate election is made. Fourth, if the Company has net income derived from
prohibited transactions, such income will be subject to a 100% tax. A prohibited
transaction generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of business. Fifth, if the Company should fail to satisfy the
75% gross income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% test. Sixth, if, during each calendar year, the Company fails to distribute
at least the sum of (i) 85% of its real estate investment trust ordinary income
for such year; (ii) 95% of its real estate investment trust capital gain net
income for such year; and (iii) any undistributed taxable income from prior
periods, the Company will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
Company acquires any asset from a C corporation (i.e. a corporation generally
subject to full corporate level tax) in a transaction in which the basis of the
asset in the Company's hands is determined by reference to the basis of the
asset (or any other property) in the hands of the C corporation, and the Company
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by the Company, then, to
the extent of such property's "built-in gain" (the excess of the fair market
value of such property at the time of acquisition by the Company over the
adjusted basis in such property at such time), such gain will be subject to tax
at the highest regular corporate rate applicable (as provided in regulations
promulgated by the United States Department of Treasury under the Code
("Treasury Regulations") that have not yet been promulgated). (The results
described above with respect to the recognition of "built-in gain" assume that
the Company will make an election pursuant to IRS Notice 88-19.)
If the Company fails to qualify as a REIT for any taxable year and
certain relief provisions do not apply, the Company will be subject to federal
income tax (including alternative minimum tax) as an ordinary corporation on its
taxable income at regular corporate rates without any deduction or adjustment
for distributions to holders of Shares. To the extent that the Company would, as
a consequence, be subject to tax liability for any such taxable year, the amount
of cash available for satisfaction of its liabilities and for distribution to
holders of Shares would be reduced. Distributions made to holders of Shares
generally would be taxable as ordinary income to the extent of current and
accumulated earnings and profits and, subject to certain limitations, would be
eligible for the corporate dividends received deduction, but there can be no
assurance that any such Distributions would be made. The Company would not be
eligible to elect REIT status for the four taxable years after the taxable year
during which it failed to qualify as a REIT, unless its failure to qualify was
due to reasonable cause and not willful neglect and certain other requirements
were satisfied.
Opinion of Counsel. Based upon representations made by officers of the
Company with respect to relevant factual matters, upon the existing Code
provisions, rules and regulations promulgated thereunder (including proposed
regulations) and reported administrative and judicial interpretations thereof,
upon Counsel's independent review of such documents as Counsel deemed relevant
in the circumstances and upon the assumption that the Company will operate in
the manner described in this Prospectus, Counsel has advised the Company that,
in its opinion, the Company qualified as a REIT under the Code for the taxable
year ending through December 31, 1998, the Company is organized in conformity
with the requirements for qualification as a REIT, and the Company's proposed
method of operation will enable it to continue to meet the requirements for
qualification as a REIT. It must be emphasized, however, that the Company's
ability to qualify and remain qualified as a REIT is dependent upon actual
operating results and future actions by and events involving the Company and
others, and no assurance can be given that the actual results of the Company's
operations and future actions and events will enable the Company to satisfy in
any given year the requirements for qualification and taxation as a REIT.
Requirements for Qualification as a REIT. As discussed more fully
below, the Code defines a REIT as a corporation, trust or association (i) which
is managed by one or more trustees or directors; (ii) the beneficial ownership
of which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) which, but for Sections 856 through 860 of the Code,
would be taxable as a domestic corporation; (iv) which is neither a financial
institution nor an insurance company; (v) the beneficial ownership of which is
held (without reference to any rules of attribution) by 100 or more persons;
(vi) which is not closely held as defined in section 856(h) of the Code; and
(vii) which meets certain other tests regarding the nature of its assets and
income and the amount of its distributions.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
asset tests described below. Thus, the Company's proportionate share of the
assets, liabilities and items of income of any Joint Venture, as described in
"Business -- Joint Venture Arrangements," will be treated as assets, liabilities
and items of income of the Company for purposes of applying the asset and gross
income tests described herein.
Ownership Tests. The ownership requirements for qualification as a REIT
are that (i) during the last half of each taxable year not more than 50% in
value of the REIT's outstanding shares may be owned, directly or indirectly
(applying certain attribution rules), by five or fewer individuals (or certain
entities as defined in the Code) and (ii) there must be at least 100
stockholders (without reference to any attribution rules) on at least 335 days
of such 12-month taxable year (or a proportionate number of days of a short
taxable year). These two requirements do not apply to the first taxable year for
which an election is made to be treated as a REIT. In order to meet these
requirements for subsequent taxable years, or to otherwise obtain, maintain, or
reestablish REIT status, the Articles of Incorporation generally prohibit any
person or entity from actually, constructively or beneficially acquiring or
owning (applying certain attribution rules) more than 9.8% of the outstanding
Common Stock or 9.8% of any series of outstanding Preferred Stock. Among other
provisions, the Articles of Incorporation empower the Board of Directors to
redeem, at its option, a sufficient number of Shares to bring the ownership of
Shares of the Company in conformity with these requirements or to assure
continued conformity with such requirements.
Under the Articles of Incorporation, each holder of Shares is required,
upon demand, to disclose to the Board of Directors in writing such information
with respect to actual, constructive or beneficial ownership of Shares of the
Company as the Board of Directors deems necessary to comply with provisions of
the Code applicable to the Company or the provisions of the Articles of
Incorporation, or the requirements of any other appropriate taxing authority.
Certain Treasury regulations govern the method by which the Company is required
to demonstrate compliance with these stock ownership requirements and the
failure to satisfy such regulations could cause the Company to fail to qualify
as a REIT. The Company has represented that it expects to meet these stock
ownership requirements for each taxable year and it will be able to demonstrate
its compliance with these requirements.
Asset Tests. At the end of each quarter of a REIT's taxable year, at
least 75% of the value of its total assets must consist of "real estate assets,"
cash and cash items (including receivables) and certain government securities.
The balance of a REIT's assets generally may be invested without restriction,
except that holdings of securities not within the 75% class of assets generally
must not, with respect to any issuer, exceed 5% of the value of the REIT's
assets or 10% of the issuer's outstanding voting securities. The term "real
estate assets" includes real property, interests in real property, leaseholds of
land or improvements thereon, and mortgages on the foregoing and any property
attributable to the temporary investment of new capital (but only if such
property is stock or a debt instrument and only for the one-year period
beginning on the date the REIT receives such capital). When a mortgage is
secured by both real property and other property, it is considered to constitute
a mortgage on real property to the extent of the fair market value of the real
property when the REIT is committed to make the loan (or, in the case of a
construction loan, the reasonably estimated cost of construction). Initially,
the bulk of the Company's assets will be real property. However, the Company
will also hold the Secured Equipment Leases. Counsel is of the opinion, based on
certain assumptions, that the Secured Equipment Leases will be treated as loans
secured by personal property for federal income tax purposes. See "Federal
Income Tax Considerations -- Characterization of Secured Equipment Leases."
Therefore, the Secured Equipment Leases will not qualify as "real estate
assets." However, the Company has represented that at the end of each quarter
the value of the Secured Equipment Leases, together with any personal property
owned by the Company, will in the aggregate represent less than 25% of the
Company's total assets and that the value of the Secured Equipment Leases
entered into with any particular tenant will represent less than 5% of the
Company's total assets. No independent appraisals will be acquired to support
this representation, and Counsel, in rendering its opinion as to the
qualification of the Company as a REIT, is relying on the conclusions of the
Company and its senior management as to the relative values of its assets. There
can be no assurance, however, that the IRS may not contend that either (i) the
value of the Secured Equipment Leases entered into with any particular tenant
represents more than 5% of the Company's total assets, or (ii) the value of the
Secured Equipment Leases, together with any personal property owned by the
Company, exceeds 25% of the Company's total assets.
As indicated in "Business -- Joint Venture Arrangements," the Company
may participate in Joint Ventures. If a Joint Venture were classified for
federal income tax purposes as an association taxable as a corporation rather
than as a partnership, the Company's ownership of a 10% or greater interest in
the Joint Venture would cause the Company to fail to meet the requirement that
it not own 10% or more of an issuer's voting securities. However, Counsel is of
the opinion, based on certain assumptions, that any Joint Ventures will
constitute partnerships for federal income tax purposes. See "Federal Income Tax
Considerations -- Investment in Joint Ventures."
Income Tests. A REIT also must meet two separate tests with respect to
its sources of gross income for each taxable year.
(a) The 75 Percent and 95 Percent Tests. In general, at least 75% of a
REIT's gross income for each taxable year must be from "rents from real
property," interest on obligations secured by mortgages on real property, gains
from the sale or other disposition of real property and certain other sources,
including "qualified temporary investment income." For these purposes,
"qualified temporary investment income" means any income (i) attributable to a
stock or debt instrument purchased with the proceeds received by the REIT in
exchange for stock (or certificates of beneficial interest) in such REIT (other
than amounts received pursuant to a distribution reinvestment plan) or in a
public offering of debt obligations with a maturity of at least five years and
(ii) received or accrued during the one-year period beginning on the date the
REIT receives such capital. In addition, a REIT must derive at least 95% of its
gross income for each taxable year from any combination of the items of income
which qualify under the 75% test, from dividends and interest, and from gains
from the sale, exchange or other disposition of certain stock and securities.
Initially, the bulk of the Company's income will be derived from rents
with respect to the Properties. Rents from Properties received by the Company
qualify as "rents from real property" in satisfying these two tests only if
several conditions are met. First, the rent must not be based in whole or in
part, directly or indirectly, on the income or profits of any person. However,
an amount received or accrued generally will not be excluded from the term
"rents from real property" solely by reason of being based on a fixed percentage
or percentages of receipts or sales. Second, the Code provides that rents
received from a tenant will not qualify as "rents from real property" if the
REIT, or a direct or indirect owner of 10% or more of the REIT owns, directly or
constructively, 10% or more of such tenant (a "Related Party Tenant"). Third, if
rent attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, for rents to qualify as "rents from real
property," a REIT generally must not operate or manage the property or furnish
or render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no revenue, except that a REIT
may directly perform services which are "usually or customarily rendered" in
connection with the rental of space for occupancy, other than services which are
considered to be rendered to the occupant of the property. However, a REIT is
currently permitted to earn up to one percent of its gross income from tenants,
determined on a property-by-property basis, by furnishing services that are
noncustomary or provided directly to the tenants, without causing the rental
income to fail to qualify as rents from real property.
The Company has represented with respect to its leasing of the
Properties that it will not (i) charge rent for any Property that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a percentage or percentages of receipts or sales, as described
above); (ii) charge rent that will be attributable to personal property in an
amount greater than 15% of the total rent received under the applicable lease;
(iii) directly perform services considered to be rendered to the occupant of a
Property or which are not usually or customarily furnished or rendered in
connection with the rental of real property; or (iv) enter into any lease with a
Related Party Tenant. Specifically, the Company expects that virtually all of
its income will be derived from leases of the type described in "Business --
Description of Property Leases," and it does not expect such leases to generate
income that would not qualify as rents from real property for purposes of the
75% and 95% income tests.
In addition, the Company will be paid interest on the Mortgage Loans.
All interest income qualifies under the 95% gross income test. If a Mortgage
Loan is secured by both real property and other property, all the interest on it
will nevertheless qualify under the 75% gross income test if the amount of the
loan did not exceed the fair market value of the real property at the time of
the loan commitment. The Company has represented that this will always be the
case. Therefore, in the opinion of Counsel, income generated through the
Company's investments in Mortgage Loans will be treated as qualifying income
under the 75% gross income test.
The Company will also receive payments under the terms of the Secured
Equipment Leases. Although the Secured Equipment Leases will be structured as
leases or loans, Counsel is of the opinion that, subject to certain assumptions,
they will be treated as loans secured by personal property for federal income
tax purposes. See "Federal Income Tax Considerations -- Characterization of
Secured Equipment Leases." If the Secured Equipment Leases are treated as loans
secured by personal property for federal income tax purposes, then the portion
of the payments under the terms of the Secured Equipment Leases that represent
interest, rather than a return of capital for federal income tax purposes, will
not satisfy the 75% gross income test (although it will satisfy the 95% gross
income test). The Company believes, however, that the aggregate amount of such
non-qualifying income will not cause the Company to exceed the limits on
non-qualifying income under the 75% gross income test.
<PAGE>
If, contrary to the opinion of Counsel, the Secured Equipment Leases
are treated as true leases, rather than as loans secured by personal property
for federal income tax purposes, the payments under the terms of the Secured
Equipment Leases would be treated as rents from personal property. Rents from
personal property will satisfy either the 75% or 95% gross income tests if they
are received in connection with a lease of real property and the rent
attributable to the personal property does not exceed 15% of the total rent
received from the tenant in connection with the lease. However, if rents
attributable to personal property exceed 15% of the total rent received from a
particular tenant, then the portion of the total rent attributable to personal
property will not satisfy either the 75% or 95% gross income tests.
If, notwithstanding the above, the Company fails to satisfy one or both
of the 75% or 95% tests for any taxable year, it may still qualify as a REIT if
(i) such failure is due to reasonable cause and not willful neglect, (ii) it
reports the nature and amount of each item of its income on a schedule attached
to its tax return for such year, and (iii) the reporting of any incorrect
information is not due to fraud with intent to evade tax. However, even if these
three requirements are met and the Company is not disqualified as a REIT, a
penalty tax would be imposed by reference to the amount by which the Company
failed the 75% or 95% test (whichever amount is greater).
(b) The Impact of Default Under the Secured Equipment Leases. In
applying the gross income tests to the Company, it is necessary to consider the
impact that a default under one or more of the Secured Equipment Leases would
have on the Company's ability to satisfy such tests. A default under one or more
of the Secured Equipment Leases would result in the Company directly holding the
Equipment securing such leases for federal income tax purposes. In the event of
a default, the Company may choose either to lease or sell such Equipment.
However, any income resulting from a rental or sale of Equipment not
incidental to the rental or sale of real property would not qualify under the
75% and 95% gross income tests. In addition, in certain circumstances, income
derived from a sale or other disposition of Equipment could be considered "net
income from prohibited transactions," subject to a 100% tax. The Company does
not, however, anticipate that its income from the rental or sale of Equipment
would be material in any taxable year.
Distribution Requirements. A REIT must distribute to its stockholders
for each taxable year ordinary income dividends in an amount equal to at least
(a) 95% of the sum of (i) its "real estate investment trust taxable income"
(before deduction of dividends paid and excluding any net capital gains) and
(ii) the excess of net income from foreclosure property over the tax on such
income, minus (b) certain excess non-cash income. Real estate investment trust
taxable income generally is the taxable income of a REIT computed as if it were
an ordinary corporation, with certain adjustments. Distributions must be made in
the taxable year to which they relate or, if declared before the timely filing
of the REIT's tax return for such year and paid not later than the first regular
dividend payment after such declaration, in the following taxable year.
The Company has represented that it intends to make Distributions to
stockholders that will be sufficient to meet the 95% distribution requirement.
Under some circumstances, however, it is possible that the Company may not have
sufficient funds from its operations to make cash Distributions to satisfy the
95% distribution requirement. For example, in the event of the default or
financial failure of one or more tenants or lessees, the Company might be
required to continue to accrue rent for some period of time under federal income
tax principles even though the Company would not currently be receiving the
corresponding amounts of cash. Similarly, under federal income tax principles,
the Company might not be entitled to deduct certain expenses at the time those
expenses are incurred. In either case, the Company's cash available for making
Distributions might not be sufficient to satisfy the 95% distribution
requirement. If the cash available to the Company is insufficient, the Company
might raise cash in order to make the Distributions by borrowing funds, issuing
new securities or selling assets. If the Company ultimately were unable to
satisfy the 95% distribution requirement, it would fail to qualify as a REIT
and, as a result, would be subject to federal income tax as an ordinary
corporation without any deduction or adjustment for dividends paid to holders of
the Shares. If the Company fails to satisfy the 95% distribution requirement, as
a result of an adjustment to its tax returns by the Service, under certain
circumstances, it may be able to rectify its failure by paying a "deficiency
dividend" (plus a penalty and interest) within 90 days after such adjustment.
This deficiency dividend will be included in the Company's deductions for
Distributions paid for the taxable year affected by such adjustment. However,
the deduction for a deficiency dividend will be denied, if any part of the
adjustment resulting in the deficiency is attributable to fraud with intent to
evade tax or to willful failure to timely file an income tax return.
TAXATION OF STOCKHOLDERS
Taxable Domestic Stockholders. For any taxable year in which the
Company qualifies as a REIT for federal income tax purposes, Distributions made
by the Company to its stockholders that are United States persons (generally,
any person other than a nonresident alien individual, a foreign trust or estate
or a foreign partnership or corporation) generally will be taxed as ordinary
income. Amounts received by such United States persons that are properly
designated as capital gain dividends by the Company generally will be taxed as
long-term capital gain, without regard to the period for which such person has
held its Shares, to the extent that they do not exceed the Company's actual net
capital gain for the taxable year. Corporate stockholders may be required to
treat up to 20% of certain capital gains dividends as ordinary income. Such
ordinary income and capital gain are not eligible for the dividends received
deduction allowed to corporations. In addition, the Company may elect to retain
and pay income tax on its long-term capital gains. If the Company so elects,
each stockholder will take into income the stockholder's share of the retained
capital gain as long-term capital gain and will receive a credit or refund for
that stockholder's share of the tax paid by the Company. The stockholder will
increase the basis of such stockholder's share by an amount equal to the excess
of the retained capital gain included in the stockholder's income over the tax
deemed paid by such stockholder. Distributions to such United States persons in
excess of the Company's current or accumulated earnings and profits will be
considered first a tax-free return of capital for federal income tax purposes,
reducing the tax basis of each stockholder's Shares, and then, to the extent the
Distribution exceeds each stockholder's basis, a gain realized from the sale of
Shares. The Company will notify each stockholder as to the portions of each
Distribution which, in its judgment, constitute ordinary income, capital gain or
return of capital for federal income tax purposes. Any Distribution that is (i)
declared by the Company in October, November or December of any calendar year
and payable to stockholders of record on a specified date in such months and
(ii) actually paid by the Company in January of the following year, shall be
deemed to have been received by each stockholder on December 31 of such calendar
year and, as a result, will be includable in gross income of the stockholder for
the taxable year which includes such December 31. Stockholders who elect to
participate in the Reinvestment Plan will be treated as if they received a cash
Distribution from the Company and then applied such Distribution to purchase
Shares in the Reinvestment Plan. Stockholders may not deduct on their income tax
returns any net operating or net capital losses of the Company.
Upon the sale or other disposition of the Company's Shares, a
stockholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the sale or other disposition and the
adjusted basis of the Shares involved in the transaction. Such gain or loss will
be long-term capital gain or loss if, at the time of sale or other disposition,
the Shares involved have been held for more than one year. In addition, if a
stockholder receives a capital gain dividend with respect to Shares which he has
held for six months or less at the time of sale or other disposition, any loss
recognized by the stockholder will be treated as long-term capital loss to the
extent of the amount of the capital gain dividend that was treated as long-term
capital gain.
Generally, the redemption of Shares by the Company will result in
recognition of ordinary income by the stockholder unless the stockholder
completely terminates or substantially reduces his or her interest in the
Company. A redemption of Shares for cash will be treated as a distribution that
is taxable as a dividend to the extent of the Company's current or accumulated
earnings and profits at the time of the redemption under Section 302 of the Code
unless the redemption (a) results in a "complete termination" of the
stockholder's interest in the Company under Section 302(b)(3) of the Code, (b)
is "substantially disproportionate" with respect to the stockholder under
Section 302(b)(2) of the Code, or (c) is "not essentially equivalent to a
dividend" with respect to the stockholder under Section 302(b)(1) of the Code.
Under Code Section 302(b)(2) a redemption is considered "substantially
disproportionate" if the percentage of the voting stock of the corporation owned
by a stockholder immediately after the redemption is less than eighty percent of
the percentage of the voting stock of the corporation owned by such stockholder
immediately before the redemption. In determining whether the redemption is not
treated as a dividend, Shares considered to be owned by a stockholder by reason
of certain constructive ownership rules set forth in Section 318 of the Code, as
well as Shares actually owned, must generally be taken into account. A
distribution to a stockholder will be "not essentially equivalent to a dividend"
if its results in a "meaningful reduction" in the stockholder's interest in the
Company. The Service has published a ruling indicating that a redemption which
results
<PAGE>
in a reduction in the proportionate interest in a corporation (taking into
account the Section 318 constructive ownership rules) of a stockholder whose
relative stock interest is minimal (an interest of less than 1% should satisfy
this requirement) and who exercises no control over the corporation's affairs
should be treated as being "not essentially equivalent to a dividend."
If the redemption is not treated as a dividend, the redemption of the
Shares for cash will result in taxable gain or loss equal to the difference
between the amount of cash received and the stockholder's tax basis in the
Shares redeemed. Such gain or loss would be capital gain or loss if the Shares
were held as a capital asset and would be long-term capital gain or loss if the
holding period for the Shares exceeds one year.
The Company will report to its U.S. stockholders and the Service the
amount of dividends paid or treated as paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A stockholder that does not
provide the Company with a correct taxpayer identification number may also be
subject to penalties imposed by the Service. Any amount paid to the Service as
backup withholding will be creditable against the stockholder's income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain dividends to any stockholders who fail to certify their non-foreign
status to the Company. See "Foreign Stockholders" below.
The state and local income tax treatment of the Company and its
stockholders may not conform to the federal income tax treatment described
above. As a result, stockholders should consult their own tax advisors for an
explanation of how other state and local tax laws would affect their investment
in Shares.
Tax-Exempt Stockholders. Dividends paid by the Company to a stockholder
that is a tax-exempt entity generally will not constitute "unrelated business
taxable income" ("UBTI") as defined in Section 512(a) of the Code, provided that
the tax-exempt entity has not financed the acquisition of its Shares with
"acquisition indebtedness" within the meaning of Section 514(c) of the Code and
the Shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity.
Notwithstanding the foregoing, qualified trusts that hold more than 10%
(by value) of the shares of certain REITs may be required to treat a certain
percentage of such REIT's distributions as UBTI. This requirement will apply
only if (i) treating qualified trusts holding REIT shares as individuals would
result in a determination that the REIT is "closely held" within the meaning of
Section 856(h)(1) of the Code and (ii) the REIT is "predominantly held" by
qualified trusts. A REIT is predominantly held if either (i) a single qualified
trust holds more than 25% by value of the REIT interests, or (ii) one or more
qualified trusts, each owning more than 10% by value of the REIT interests, hold
in the aggregate more than 50% of the REIT interests. The percentage of any REIT
dividend treated as UBTI is equal to the ratio of (a) the UBTI earned by the
REIT (treating the REIT as if it were a qualified trust and therefore subject to
tax on UBTI) to (b) the total gross income (less certain associated expenses) of
the REIT. A de minimis exception applies where the ratio set forth in the
preceding sentence is less than 5% for any year. For these purposes, a qualified
trust is any trust described in Section 401(a) of the Code and exempt from tax
under Section 501(a) of the Code. The restrictions on ownership of Shares in the
Articles of Incorporation will prevent application of the provisions treating a
portion of REIT distributions as UBTI to tax-exempt entities purchasing Shares
in the Company, absent a waiver of the restrictions by the Board of Directors.
See "Summary of the Articles of Incorporation and Bylaws -- Restriction of
Ownership."
Assuming that there is no waiver of the restrictions on ownership of
Shares in the Articles of Incorporation and that a tax-exempt stockholder does
not finance the acquisition of its Shares with "acquisition indebtedness" within
the meaning of Section 514(c) of the Code or otherwise use its Shares in an
unrelated trade or business, in the opinion of Counsel the distributions of the
Company with respect to such tax-exempt stockholder will not constitute UBTI.
The tax discussion of distributions by qualified retirement plans,
IRAs, Keogh plans and other tax-exempt entities is beyond the scope of this
discussion, and such entities should consult their own tax advisors regarding
such questions.
Foreign Stockholders. The rules governing United States federal income
taxation of nonresident alien individuals, foreign corporations, foreign
participants and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex, and no attempt will be made herein to provide more
than a summary of such rules. The following discussion assumes that the income
from investment in the Shares will not be effectively connected with the
Non-U.S. Stockholders' conduct of a United States trade or business. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local laws with regard to an investment in
Shares, including any reporting requirements. Non-U.S. Stockholders will be
admitted as stockholders with the approval of the Advisor.
Distributions that are not attributable to gain from sales or exchanges
by the Company of United States real property interests and not designated by
the Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current and accumulated earnings
and profits of the Company. Such dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend, unless an
applicable tax treaty reduces or eliminates that tax. A number of U.S. tax
treaties that reduce the rate of withholding tax on corporate dividends do not
reduce, or reduce to a lesser extent, the rate of withholding applied to
distributions from a REIT. The Company expects to withhold U.S. income tax at
the rate of 30% on the gross amount of any such distributions paid to a Non-U.S.
Stockholder unless (i) a lower treaty rate applies (and, with regard to payments
on or after January 1, 1999, the Non-U.S. Stockholder files IRS Form W-8 with
the Company and, if the Shares are not traded on an established securities
market, acquires a taxpayer identification number from the IRS), or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 (or, with respect to payments on or
after January 1, 1999, files IRS Form W-8 with the Company) with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of the Company's current and accumulated earnings and profits will not be
taxable to a stockholder to the extent that such distributions paid do not
exceed the adjusted basis of the stockholder's Shares, but rather will reduce
the adjusted basis of such Shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Stockholders' Shares, such distributions will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on any
gain from the sale or disposition of the Shares, as described below. If it
cannot be determined at the time a distribution is paid whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions will be subject to withholding at the rate of 30%. However, a
Non-U.S. Stockholder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of the
Company's current and accumulated earnings and profits. Beginning with payments
made on or after January 1, 1999, the Company will be permitted, but not
required, to make reasonable estimates of the extent to which distributions
exceed current or accumulated earnings and profits. Such distributions will
generally be subject to a 10% withholding tax, which may be refunded to the
extent they exceed the stockholder's actual U.S. tax liability, provided the
required information is furnished to the IRS.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of United
States real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales
of United States real property interests are taxed to a Non-U.S. Stockholder as
if such gain were effectively connected with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. Stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate stockholder not entitled to treaty exemption or
rate reduction. The Company is required by applicable Treasury Regulations to
withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend. This amount is creditable against the Non-U.S.
Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. It is currently anticipated that the Company
will be a "domestically controlled REIT," and in such case the sale of Shares
would not be subject to taxation under FIRPTA. However, gain not subject to
FIRPTA nonetheless will be taxable to a Non-U.S. Stockholder if (i) investment
in the Shares is treated as "effectively connected" with the Non-U.S.
Stockholders' U.S. trade or business, or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain other conditions are met.
Effectively connected gain realized by a foreign corporate shareholder may be
subject to an additional 30% branch profits tax, subject to possible exemption
or rate reduction under an applicable tax treaty. If the gain on the sale of
Shares were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as U.S. Stockholders with respect to such
gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals), and the purchaser of
the Shares would be required to withhold and remit to the Service 10% of the
purchase price.
STATE AND LOCAL TAXES
The Company and its shareholders may be subject to state and local
taxes in various states and localities in which it or they transact business,
own property, or reside. The tax treatment of the Company and the stockholders
in such jurisdictions may differ from the federal income tax treatment described
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws upon an investment in
the Common Stock of the Company.
CHARACTERIZATION OF PROPERTY LEASES
The Company will purchase both new and existing Properties and lease
them to franchisees or corporate franchisors pursuant to leases of the type
described in "Business -- Description of Property Leases." The ability of the
Company to claim certain tax benefits associated with ownership of the
Properties, such as depreciation, depends on a determination that the lease
transactions engaged in by the Company are true leases, under which the Company
is the owner of the leased Property for federal income tax purposes, rather than
a conditional sale of the Property or a financing transaction. A determination
by the Service that the Company is not the owner of the Properties for federal
income tax purposes may have adverse consequences to the Company, such as the
denying of the Company's depreciation deductions. Moreover, a denial of the
Company's depreciation deductions could result in a determination that the
Company's Distributions to stockholders were insufficient to satisfy the 95%
distribution requirement for qualification as a REIT. However, as discussed
above, if the Company has sufficient cash, it may be able to remedy any past
failure to satisfy the distribution requirements by paying a "deficiency
dividend" (plus a penalty and interest). See "Taxation of the Company --
Distribution Requirements," above. Furthermore, in the event that the Company
was determined not to be the owner of a particular Property, in the opinion of
Counsel the income that the Company would receive pursuant to the
recharacterized lease would constitute interest qualifying under the 95% and 75%
gross income tests by reason of being interest on an obligation secured by a
mortgage on an interest in real property, because the legal ownership structure
of such Property will have the effect of making the building serve as collateral
for the debt obligation.
The characterization of transactions as leases, conditional sales, or
financings has been addressed in numerous cases. The courts have not identified
any one factor as being determinative of whether the landlord or the tenant of
property is to be treated as the owner. Judicial decisions and pronouncements of
the Service with respect to the characterization of transactions as either
leases, conditional sales, or financing transactions have made it clear that the
characterization of leases for tax purposes is a question which must be decided
on the basis of a weighing of many factors, and courts have reached different
conclusions even where characteristics of two lease transactions were
substantially similar.
While certain characteristics of the leases anticipated to be entered
into by the Company suggest the Company might not be the owner of the
Properties, such as the fact that such leases are "triple-net" leases, a
substantial number of other characteristics indicate the bona fide nature of
such leases and that the Company will be the owner of the Properties. For
example, under the types of leases described in "Business -- Description of
Property Leases," the Company will bear the risk of substantial loss in the
value of the Properties, since the Company will acquire its interests in the
Properties with an equity investment, rather than with nonrecourse indebtedness.
Further, the Company, rather than the tenant, will benefit from any appreciation
in the Properties, since the Company will have the right at any time to sell or
transfer its Properties, subject to the tenant's right to purchase the property
at a price not less than the Property's fair market value (determined by
appraisal or otherwise).
Other factors that are consistent with the ownership of the Properties
by the Company are (i) the tenants are liable for repairs and to return the
Properties in reasonably good condition; (ii) insurance proceeds generally are
to be used to restore the Properties and, to the extent not so used, belong to
the Company; (iii) the tenants agree to subordinate their interests in the
Properties to the lien of any first mortgage upon delivery of a nondisturbance
agreement and agree to attorn to the purchaser upon any foreclosure sale; and
(iv) based on the Company's representation that the Properties can reasonably be
expected to have at the end of their lease terms (generally a maximum of 30 to
40 years) a fair market value of at least 20% of the Company's cost and a
remaining useful life of at least 20% of their useful lives at the beginning of
the leases, the Company has not relinquished the Properties to the tenants for
their entire useful lives, but has retained a significant residual interest in
them. Moreover, the Company will not be primarily dependent upon tax benefits in
order to realize a reasonable return on its investments.
Concerning the Properties for which the Company owns the buildings and
the underlying land, on the basis of the foregoing, assuming (i) the Company
leases the Properties on substantially the same terms and conditions described
in "Business -- Description of Property Leases," and (ii) as is represented by
the Company, the residual value of the Properties remaining after the end of
their lease terms (including all renewal periods) may reasonably be expected to
be at least 20% of the Company's cost of such Properties, and the remaining
useful lives of the Properties after the end of their lease terms (including all
renewal periods) may reasonably be expected to be at least 20% of the
Properties' useful lives at the beginning of their lease terms, it is the
opinion of Counsel that the Company will be treated as the owner of the
Properties for federal income tax purposes and will be entitled to claim
depreciation and other tax benefits associated with such ownership. In the case
of Properties for which the Company does not own the underlying land, Counsel
cannot opine that such transactions will be characterized as leases.
CHARACTERIZATION OF SECURED EQUIPMENT LEASES
The Company will purchase Equipment and lease it to franchisees or
corporate franchisors pursuant to leases of the type described in "Business --
General." The ability of the Company to qualify as a REIT depends on a
determination that the Secured Equipment Leases are financing arrangements,
under which the lessees acquire ownership of the Equipment for federal income
tax purposes. If the Secured Equipment Leases are instead treated as true
leases, the Company may be unable to satisfy the income tests for REIT
qualification. See "Federal Income Tax Considerations -- Taxation of the Company
- -- Income Tests."
While certain characteristics of the Secured Equipment Leases to be
entered into by the Company suggest that the Company retains ownership of the
Equipment, such as the fact that certain of the Secured Equipment Leases are
structured as leases, with the Company retaining title to the Equipment, a
substantial number of other characteristics indicate that the Secured Equipment
Leases are financing arrangements and that the lessees are the owners of the
Equipment for federal income tax purposes. For example, under the types of
Secured Equipment Leases described in "Business -- General," the lease term will
equal or exceed the useful life of the Equipment, and the lessee will have the
option to purchase the Equipment at the end of the lease term for a nominal sum.
Moreover, under the terms of the Secured Equipment Leases, the Company and the
lessees will each agree to treat the Secured Equipment Leases as loans secured
by personal property, rather than leases, for tax purposes.
On the basis of the foregoing, assuming (i) the Secured Equipment
Leases are made on substantially the same terms and conditions described in
"Business -- General," and (ii) as represented by the Company, each of the
Secured Equipment Leases will have a term that equals or exceeds the useful life
of the Equipment subject to the lease, it is the opinion of Counsel that the
Company will not be treated as the owner of the Equipment that is subject to the
Secured Equipment Leases for federal income tax purposes and that the Company
will be able to treat the Secured Equipment Leases as loans secured by personal
property. Counsel's opinion that the Company will be organized in conformity
with the requirements for qualification as a REIT is based, in part, on the
assumption that each of the Secured Equipment Leases will conform to the
conditions outlined in clauses (i) and (ii) of the preceding sentence.
<PAGE>
INVESTMENT IN JOINT VENTURES
As indicated in "Business -- Joint Venture Arrangements," the Company
may participate in Joint Ventures which own and lease Properties. Assuming that
the Joint Ventures have the characteristics described in "Business -- Joint
Venture Arrangements," and are operated in the same manner that the Company
operates with respect to Properties that it owns directly, it is the opinion of
Counsel that (i) the Joint Ventures will be treated as partnerships, as defined
in Sections 7701(a)(2) and 761(a) of the Code, and not as associations taxable
as corporations, and that the Company will be subject to tax as a partner
pursuant to Sections 701-761 of the Code; and (ii) all material allocations to
the Company of income, gain, loss and deduction as provided in the Joint Venture
agreements and as discussed in the Prospectus will be respected under Section
704(b) of the Code. The Company has represented that it will not become a
participant in any Joint Venture unless the Company has first obtained advice of
Counsel that the Joint Venture will constitute a partnership for federal income
tax purposes and that the allocations to the Company contained in the Joint
Venture agreement will be respected.
If, contrary to the opinion of Counsel, a Joint Venture were to be
treated as an association taxable as a corporation, the Company would be treated
as a stockholder for tax purposes and would not be treated as owning a pro rata
share of the Joint Venture's assets. In addition, the items of income and
deduction of the Joint Venture would not pass through to the Company. Instead,
the Joint Venture would be required to pay income tax at regular corporate tax
rates on its net income, and distributions to partners would constitute
dividends that would not be deductible in computing the Joint Venture's taxable
income. Moreover, a determination that a Joint Venture is taxable as a
corporation could cause the Company to fail to satisfy the asset tests for
qualification as a REIT. See "Taxation of the Company -- Asset Tests" and
"Taxation of the Company -- Income Tests," above.
REPORTS TO STOCKHOLDERS
The Company will furnish each stockholder with its audited annual
report within 120 days following the close of each fiscal year. These annual
reports will contain the following: (i) financial statements, including a
balance sheet, statement of operations, statement of stockholders' equity, and
statement of cash flows, prepared in accordance with generally accepted
accounting principles which are audited and reported on by independent certified
public accountants; (ii) the ratio of the costs of raising capital during the
period to the capital raised; (iii) the aggregate amount of advisory fees and
the aggregate amount of other fees paid to the Advisor and any Affiliate of the
Advisor by the Company and including fees or charges paid to the Advisor and any
Affiliate of the Advisor by third parties doing business with the Company; (iv)
the Operating Expenses of the Company, stated as a percentage of the Average
Invested Assets (the average of the aggregate book value of the assets of the
Company, for a specified period, invested, directly or indirectly, in equity
interests in and loans secured by real estate, before reserves for depreciation
or bad debts or other similar non-cash reserves, computed by taking the average
of such values at the end of each month during such period) and as a percentage
of its Net Income; (v) a report from the Independent Directors that the policies
being followed by the Company are in the best interest of its stockholders and
the basis for such determination; (vi) separately stated, full disclosure of all
material terms, factors and circumstances surrounding any and all transactions
involving the Company, Directors, Advisor and any Affiliate thereof occurring in
the year for which the annual report is made, and the Independent Directors
shall be specifically charged with a duty to examine and comment in the report
on the fairness of such transactions; and (vii) Distributions to the
stockholders for the period, identifying the source of such Distributions and if
such information is not available at the time of the distribution, a written
explanation of the relevant circumstances will accompany the Distributions (with
the statement as to the source of Distributions to be sent to stockholders not
later than 60 days after the end of the fiscal year in which the distribution
was made).
Within 75 days following the close of each Company fiscal year, each
stockholder that is a Qualified Plan will be furnished with an annual statement
of Share valuation to enable it to file annual reports required by ERISA as they
relate to its investment in the Company. For any period during which the Company
is making a public offering of Shares, the statement will report an estimated
value of each Share at the public offering price per Share, which during the
term of this offering is $10.00 per Share. If no public offering is ongoing, and
until Listing, the statement will report an estimated value of each Share based
on (i) appraisal updates performed by the Company based on a review of the
existing appraisal and lease of each Property, focusing on a re-examination of
the capitalization rate applied to the rental stream to be derived from that
Property; and (ii) a review of the outstanding Mortgage Loans and Secured
Equipment Leases focusing on a determination of present value by a
re-examination of the capitalization rate applied to the stream of payments due
under the terms of each Mortgage Loan and Secured Equipment Leases. The Company
may elect to deliver such reports to all stockholders. Stockholders will not be
forwarded copies of appraisals or updates. In providing such reports to
stockholders, neither the Company nor its Affiliates thereby make any warranty,
guarantee, or representation that (i) the stockholders or the Company, upon
liquidation, will actually realize the estimated value per Share, or (ii) the
stockholders will realize the estimated net asset value if they attempt to sell
their Shares.
If the Company is required by the Securities Exchange Act of 1934, as
amended, to file quarterly reports with the Securities and Exchange Commission
on Form 10-Q, stockholders will be furnished with a summary of the information
contained in each such report within 60 days after the end of each fiscal
quarter. Such summary information generally will include a balance sheet, a
quarterly statement of income, and a statement of cash flows, and any other
pertinent information regarding the Company and its activities during the
quarter. Stockholders also may receive a copy of any Form 10-Q upon request to
the Company. If the Company is not subject to this filing requirement,
stockholders will be furnished with a semi-annual report within 60 days after
each six-month period containing information similar to that contained in the
quarterly report but applicable to such six-month period.
Stockholders and their duly authorized representatives are entitled to
inspect and copy, at their expense, the books and records of the Company at all
times during regular business hours, upon reasonable prior notice to the
Company, at the location where such reports are kept by the Company.
Stockholders, upon request and at their expense, may obtain full information
regarding the financial condition of the Company, a copy of the Company's
federal, state, and local income tax returns for each fiscal year of the
Company, and, subject to certain confidentiality requirements, a list containing
the name, address, and Shares held by each stockholder.
The fiscal year of the Company will be the calendar year.
The Company's federal tax return (and any applicable state income tax
returns) will be prepared by the accountants regularly retained by the Company.
Appropriate tax information will be submitted to the stockholders within 30 days
following the end of each fiscal year of the Company. A specific reconciliation
between GAAP and income tax information will not be provided to the
stockholders; however, such reconciling information will be available in the
office of the Company for inspection and review by any interested stockholder.
THE OFFERING
GENERAL
A maximum of 27,500,000 Shares ($275,000,000) are being offered at a
purchase price of $10.00 per share. Included in the 27,500,000 Shares offered,
the Company has registered 2,500,000 Shares ($25,000,000) available only to
stockholders purchasing Shares in this offering who receive a copy of this
Prospectus or to stockholders who purchased Shares in the Initial Offering and
who received a copy of the related prospectus and who elect to participate in
the Reinvestment Plan. Any participation in such plan by a person who becomes a
stockholder otherwise than by participating in this offering will require
solicitation under a separate prospectus. See "Summary of Reinvestment Plan."
The Board of Directors may determine to engage in future offerings of Common
Stock of up to the number of unissued authorized shares of Common Stock
available following termination of this offering.
A minimum investment of 250 Shares ($2,500) is required, except for
Nebraska, New York, and North Carolina investors who must make a minimum
investment of 500 Shares ($5,000). IRAs, Keogh plans, and pension plans must
make a minimum investment of at least 100 Shares ($1,000), except for Iowa
tax-exempt investors who must make a minimum investment of 250 Shares ($2,500).
For Minnesota investors only, IRAs and qualified plans must make a minimum
investment of 200 Shares ($2,000). Any investor who makes the required minimum
<PAGE>
investment may purchase additional Shares in increments of one Share. Maine
investors, however, may not purchase additional Shares in amounts less than the
applicable minimum investment except at the time of the initial subscription or
with respect to Shares purchased pursuant to the Reinvestment Plan. See "The
Offering -- General," "The Offering -- Subscription Procedures," and "Summary of
Reinvestment Plan."
PLAN OF DISTRIBUTION
The Shares are being offered to the public on a "best efforts" basis
(which means that no one is guaranteeing that any minimum amount will be sold)
through the Soliciting Dealers, who will be members of the National Association
of Securities Dealers, Inc. (the "NASD") or other persons or entities exempt
from broker-dealer registration, and the Managing Dealer. The Soliciting Dealers
will use their best efforts during the offering period to find eligible persons
who desire to subscribe for the purchase of Shares from the Company. Both James
M. Seneff, Jr. and Robert A. Bourne are Affiliates and licensed principals of
the Managing Dealer, and the Advisor is an Affiliate of the Managing Dealer.
Prior to a subscriber's admission to the Company as a stockholder,
funds paid by such subscriber will be deposited in an interest-bearing escrow
account with SouthTrust Asset Management Company of Florida, N.A. The Company,
within 30 days after the date a subscriber is admitted to the Company, will pay
to such subscriber the interest (generally calculated on a daily basis) actually
earned on the funds of those subscribers whose funds have been held in escrow by
such bank for at least 20 days. Stockholders otherwise are not entitled to
interest earned on Company funds or to receive interest on their Invested
Capital. See "Escrow Arrangements" below.
Subject to the provisions for reduced Selling Commissions described
below, the Company will pay the Managing Dealer an aggregate of 7.5% of the
Gross Proceeds as Selling Commissions. The Managing Dealer, in its sole
discretion, may reallow fees of up to 7% to the Soliciting Dealers with respect
to Shares sold by them. In addition, the Company will pay the Managing Dealer,
as an expense allowance, a marketing support and due diligence expense
reimbursement fee equal to 0.5% of Gross Proceeds. All or any portion of this
fee may be reallowed to any Soliciting Dealer with the prior written approval
from, and in the sole discretion of, the Managing Dealer, based on such factors
as the number of Shares sold by such Soliciting Dealer, the assistance, if any,
of such Soliciting Dealer in marketing this offering, and bona fide due
diligence expenses incurred. The Company also will issue to the Managing Dealer,
a Soliciting Dealer Warrant to purchase one share of Common Stock for every 25
Shares sold, to be exercised, if at all, during the Exercise Period, at a price
of $12.00 per share. The Managing Dealer may, in its sole discretion, reallow
all or any part of such Soliciting Dealer Warrant to certain Soliciting Dealers,
unless prohibited by federal or state securities laws. Soliciting Dealer
Warrants will not be exercisable until one year from date of issuance.
Soliciting Dealer Warrants are not transferable or assignable except by the
Managing Dealer, the Soliciting Dealers, their successors in interest, or
individuals who are officers or partners of such a person. See "Summary of the
Articles of Incorporation and Bylaws -- Description of Capital Stock --
Soliciting Dealer Warrants." In connection with the Initial Offering, the
Company will pay a soliciting dealer servicing fee of 0.2% of Invested Capital
(calculated, for purposes of this provision, using only Shares sold pursuant to
the Initial Offering) commencing December 31, 2000 and each December 31
thereafter, to the Managing Dealer, which, in its sole discretion may reallow
all or a portion of such fee to the Soliciting Dealers who sold Shares pursuant
to the Initial Offering and whose clients who purchased Shares in the Initial
Offering hold Shares on such date. The soliciting dealer servicing fee will
terminate as of the beginning of any year in which the Company is liquidated or
in which Listing occurs, provided, however, that any previously accrued but
unpaid portion of the soliciting dealer servicing fee may be paid in such year
or any subsequent year. The soliciting dealer servicing fee will not be assessed
with regard to Shares sold in this offering. Stockholders who elect to
participate in the Reinvestment Plan will be charged Selling Commissions and the
marketing support and due diligence fee on Shares purchased for their accounts
on the same basis as investors who purchase Shares in this offering. See
"Summary of Reinvestment Plan."
A registered principal or representative of the Managing Dealer or a
Soliciting Dealer, employees, officers, and Directors of the Company, or
employees, officers and directors of the Advisor, any of their Affiliates and
any Plan established exclusively for the benefit of such persons or entities may
purchase Shares net of 7% commissions, at a per Share purchase price of $9.30.
Clients of an investment adviser registered under the Investment Advisers Act of
1940, as amended, who have been advised by such adviser on an ongoing basis
regarding investments other than in the Company, and who are not being charged
by such adviser or its Affiliates, through the payment of commissions or
otherwise, for the advice rendered by such adviser in connection with the
purchase of the Shares, may purchase the Shares net of 7% commissions. In
addition, Soliciting Dealers that have a contractual arrangement with their
clients for the payment of fees which is consistent with accepting Selling
Commissions, in their sole discretion, may elect not to accept any Selling
Commissions offered by the Company for Shares that they sell. In that event,
such Shares shall be sold to the investor net of all Selling Commissions, at a
per Share purchase price of $9.30. In connection with the purchases of certain
minimum numbers of Shares, the amount of Selling Commissions otherwise payable
to the Managing Dealer or a Soliciting Dealer shall be reduced in accordance
with the following schedule:
<TABLE>
<CAPTION>
<S> <C>
Purchase Price for Reallowed Commissions on Sales per
Incremental Share in Share on Total Sale for Increment Share
Dollar Amount Volume Discount in Volume Discount Range
of Shares Purchased Range Per Share
------------------------------ ----------------------- -----------------------------------------
Percent Dollar Amount
------------------------------ ----------------------- --------------
-----------------
$ 10 -- $250,000 $10.00 7.0% $0.70
250,010 -- 500,000 9.85 5.5% 0.55
500,010 -- 750,000 9.70 4.0% 0.40
750,010 -- 1,000,000 9.60 3.0% 0.30
1,000,010 -- 5,000,000 9.50 2.0% 0.20
</TABLE>
Selling Commissions for purchases of $5,000,010 or more will, in the
sole discretion of the Managing Dealer, be reduced to $0.15 per Share or less
but in no event will the proceeds to the Company be less than $9.25 per Share.
For example, if an investor purchases 100,000 Shares, the investor
could pay as little as $978,750 rather than $1,000,000 for the Shares, in which
event the Selling Commissions on the sale of such Shares would be $53,750 ($0.54
per Share). The net proceeds to the Company will not be affected by such
discounts.
Subscriptions may be combined for the purpose of determining the volume
discounts in the case of subscriptions made by any "purchaser," provided all
such Shares are purchased through the same Soliciting Dealer or through the
Managing Dealer. The volume discount will be prorated among the separate
subscribers considered to be a single "purchaser." Shares purchased pursuant to
the Reinvestment Plan on behalf of a Participant in the Reinvestment Plan will
not be combined with other subscriptions for Shares by the investor in
determining the volume discount to which such investor may be entitled. See
"Summary of Reinvestment Plan." Further subscriptions for Shares will not be
combined for purposes of the volume discount in the case of subscriptions by any
"purchaser" who subscribes for additional Shares subsequent to the purchaser's
initial purchase of Shares.
Any request to combine more than one subscription must be made in
writing in a form satisfactory to the Company and must set forth the basis for
such request. Any such request will be subject to verification by the Managing
Dealer that all of such subscriptions were made by a single "purchaser." If a
"purchaser" does not reduce the per Share purchase price, the excess purchase
price over the discounted purchase price will be returned to the actual separate
subscribers for Shares.
For purposes of such volume discounts, "purchaser" includes (i) an
individual, his or her spouse, and their children under the age of 21, who
purchase the Shares for his or her or their own accounts, and all pension or
trust funds established by each such individual; (ii) a corporation,
partnership, association, joint-stock company, trust fund, or any organized
group of persons, whether incorporated or not (provided that the entities
described in this clause (ii) must have been in existence for at least six
months before purchasing the Shares and must have formed such group for a
purpose other than to purchase the Shares at a discount); (iii) an employee's
trust, pension, profit-sharing, or other employee benefit plan qualified under
Section 401 of the Code; and (iv) all pension, trust, or other funds maintained
by a given bank. In addition, the Company, in its sole discretion, may aggregate
and combine separate subscriptions for Shares received during the offering
period from (i) the Managing Dealer or the same Soliciting Dealer, (ii)
investors whose accounts are managed by a single investment adviser registered
under the Investment Advisers Act of 1940, (iii) investors over whose accounts a
designated bank, insurance company, trust company, or other entity exercises
discretionary investment responsibility, or (iv) a single corporation,
partnership,
<PAGE>
trust association, or other organized group of persons, whether incorporated or
not, and whether such subscriptions are by or for the benefit of such
corporation, partnership, trust association, or group. Except as provided in
this paragraph, subscriptions will not be cumulated, combined, or aggregated.
Any reduction in commissions will reduce the effective purchase price
per Share to the investor involved but will not alter the net proceeds payable
to the Company as a result of such sale. All investors will be deemed to have
contributed the same amount per Share to the Company whether or not the investor
receives a discount. Accordingly, for purposes of Distributions, investors who
pay reduced commissions will receive higher returns on their investments in the
Company as compared to investors who do not pay reduced commissions.
In connection with the sale of Shares, certain registered principals or
representatives of the Managing Dealer may perform wholesaling functions for
which they will receive compensation payable by the Managing Dealer in an
aggregate amount not in excess of one percent of Gross Proceeds. The first 0.5%
of Gross Proceeds of any such fee will be paid from the 7.5% of Gross Proceeds
payable to the Managing Dealer as Selling Commissions. In addition, the Advisor
and its Affiliates, including the Managing Dealer and its registered principals
or representatives, may incur due diligence fees and other expenses, including
expenses related to sales seminars and wholesaling activities, a portion of
which may be paid by the Company.
In addition, stockholders may agree with their participating Soliciting
Dealer and the Managing Dealer to have Selling Commissions relating to their
Shares paid over a seven-year period pursuant to a deferred commission
arrangement (the "Deferred Commission Option"). Stockholders electing the
Deferred Commission Option will be required to pay a total of $9.40 per Share
purchased upon subscription, rather than $10.00 per Share, with respect to which
$0.15 per Share will be payable as Selling Commissions due upon subscription,
$0.10 of which may be reallowed to the Soliciting Dealer by the Managing Dealer.
For each of the six years following such subscription on a date to be determined
by the Managing Dealer, $0.10 per Share will be paid by the Company as deferred
Selling Commissions with respect to Shares sold pursuant to the Deferred
Commission Option, which amounts will be deducted from and paid out of
distributions otherwise payable to such stockholders holding such Shares and may
be reallowed to the Soliciting Dealer by the Managing Dealer. The net proceeds
to the Company will not be affected by the election of the Deferred Commission
Option. Under this arrangement, a stockholder electing the Deferred Commission
Option will pay a 1% Selling Commission per year thereafter for the next six
years which will be deducted from and paid by the Company out of distributions
otherwise payable to such stockholder. At such time, if any, as Listing occurs,
the Company shall have the right to require the acceleration of all outstanding
payment obligations under the Deferred Commission Option. All such Selling
Commissions will be paid to the Managing Dealer, whereby a total of up to 7% of
such Selling Commissions may be reallowed to the Soliciting Dealer.
The Company or its Affiliates also may provide incentive items for
registered representatives of the Managing Dealer and the Soliciting Dealers,
which in no event shall exceed an aggregate of $100 per annum per participating
salesperson. In the event other incentives are provided to registered
representatives of the Managing Dealer or the Soliciting Dealers, they will be
paid only in cash, and such payments will be made only to the Managing Dealer or
the Soliciting Dealers rather than to their registered representatives. Any such
sales incentive program must first have been submitted for review by the NASD,
and must comply with Rule 2710(c)(6)(B)(xii). Costs incurred in connection with
such sales incentive programs, if any, will be considered underwriting
compensation. See "Estimated Use of Proceeds."
The Company will also reimburse the Managing Dealer and the Soliciting
Dealers for bona fide due diligence expenses and certain expenses as incurred in
connection with the offering.
The total amount of underwriting compensation, including commissions
and reimbursement of expenses, paid in connection with the offering will not
exceed 10.5% of Gross Proceeds.
The Managing Dealer and the Soliciting Dealers severally will indemnify
the Company and its officers and Directors, the Advisor and its officers and
directors and their Affiliates, against certain liabilities, including
liabilities under the Securities Act of 1933.
<PAGE>
SUBSCRIPTION PROCEDURES
Procedures Applicable to All Subscriptions. In order to purchase
Shares, the subscriber must complete and execute the Subscription Agreement. Any
subscription for Shares must be accompanied by cash or check payable to
"SouthTrust Asset Management Company of Florida, N.A., Escrow Agent" or to the
Company, in the amount of $10.00 per Share. See "Escrow Arrangements" below.
Certain Soliciting Dealers who have "net capital," as defined in the applicable
federal securities regulations, of $250,000 or more may instruct their customers
to make their checks for Shares for which they have subscribed payable directly
to the Soliciting Dealer. In such case, the Soliciting Dealer will issue a check
made payable to the order of the Escrow Agent for the aggregate amount of the
subscription proceeds.
Each subscription will be accepted or rejected by the Company within 30
days after its receipt, and no sale of Shares shall be completed until at least
five business days after the date on which the subscriber receives a copy of
this Prospectus. If a subscription is rejected, the funds will be returned to
the subscriber within ten business days after the date of such rejection,
without interest and without deduction. A form of the Subscription Agreement is
set forth as Appendix D to this Prospectus. The subscription price of each Share
is payable in full upon execution of the Subscription Agreement. A subscriber
whose subscription is accepted shall be sent a confirmation of his or her
purchase.
The Advisor and each Soliciting Dealer who sells Shares on behalf of
the Company have the responsibility to make every reasonable effort to determine
that the purchase of Shares is appropriate for an investor and that the
requisite suitability standards are met. See "Suitability Standards and How to
Subscribe -- Suitability Standards." In making this determination, the
Soliciting Dealers will rely on relevant information provided by the investor,
including information as to the investor's age, investment objectives,
investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. Each investor should be aware
that determining suitability is the responsibility of the Soliciting Dealer.
The Advisor and each Soliciting Dealer shall maintain records of the
information used to determine that an investment in the Shares is suitable and
appropriate for an investor. The Advisor and each Soliciting Dealer shall
maintain these records for at least six years.
Subscribers will be admitted as stockholders not later than the last
day of the calendar month following acceptance of their subscriptions.
Procedures Applicable to Non-Telephonic Orders. Each Soliciting Dealer
receiving a subscriber's check made payable solely to the bank escrow agent
(where, pursuant to such Soliciting Dealer's internal supervisory procedures,
internal supervisory review must be conducted at the same location at which
subscription documents and checks are received from subscribers), will deliver
such checks to the Managing Dealer no later than the close of business of the
first business day after receipt of the subscription documents by the Soliciting
Dealer except that, in any case in which the Soliciting Dealer maintains a
branch office, and, pursuant to a Soliciting Dealer's internal supervisory
procedures, final internal supervisory review is conducted at a different
location, the branch office shall transmit the subscription documents and check
to the Soliciting Dealer conducting such internal supervisory review by the
close of business on the first business day following their receipt by the
branch office and the Soliciting Dealer shall review the subscription documents
and subscriber's check to ensure their proper execution and form and, if they
are acceptable, transmit the check to the Managing Dealer by the close of
business on the first business day after the check is received by the Soliciting
Dealer. The Managing Dealer will transmit the check to the Escrow Agent by no
later than the close of business on the first business day after the check is
received from the Soliciting Dealer.
Procedures Applicable to Telephonic Orders. Certain Soliciting Dealers
may permit investors to subscribe for Shares by telephonic order to the
Soliciting Dealer. There are no additional fees associated with telephonic
orders. Subscribers who wish to subscribe for Shares by telephonic order to the
Soliciting Dealer may complete the telephonic order either by delivering a check
in the amount necessary to purchase the Shares to be covered by the subscription
agreement to the Soliciting Dealer or by authorizing the Soliciting Dealer to
pay the purchase price for the Shares to be covered by the subscription
agreement from funds available in an account maintained by the
<PAGE>
Soliciting Dealer on behalf of the subscriber. A subscriber must specifically
authorize the registered representative and branch manager to execute the
subscription agreement on behalf of the subscriber and must already have made or
have agreed to make payment for the Shares covered by the subscription
agreement.
To the extent that customers of any Soliciting Dealer wish to subscribe
and pay for Shares with funds held by or to be deposited with those firms, then
such firms shall, subject to Rule 15c2-4 promulgated under the Securities
Exchange Act of 1934, either (i) upon receipt of an executed subscription
agreement or direction to execute a subscription agreement on behalf of a
customer, to forward the offering price for the Shares covered by the
subscription agreement on or before the close of business of the first business
day following receipt or execution of a subscription agreement by such firms to
the Managing Dealer (except that, in any case in which the Soliciting Dealer
maintains a branch office, and, pursuant to a Soliciting Dealer's internal
supervisory procedures, final internal supervisory review is conducted at a
different location, the branch office shall transmit the subscription documents
and subscriber's check to the Soliciting Dealer conducting such internal
supervisory review by the close of business on the first business day following
their receipt by the branch office and the Soliciting Dealer shall review the
subscription documents and subscriber's check to ensure their proper execution
and form and, if they are acceptable, transmit the check to the Managing Dealer
by the close of business on the first business day after the check is received
by the Soliciting Dealer); or (ii) to solicit indications of interest in which
event (a) such Soliciting Dealers must subsequently contact the customer
indicating interest to confirm the interest and give instructions to execute and
return a subscription agreement or to receive authorization to execute the
subscription agreement on the customer's behalf, (b) such Soliciting Dealers
must mail acknowledgments of receipt of orders to each customer confirming
interest on the business day following such confirmation, (c) such Soliciting
Dealers must debit accounts of such customers on the fifth business day (the
"debit date") following receipt of the confirmation referred to in (a), and (d)
such Soliciting Dealers must forward funds to the Managing Dealer in accordance
with the procedures and on the schedule set forth in clause (i) of this
sentence. If the procedure in (ii) is adopted, subscribers' funds are not
required to be in their accounts until the debit date. The Managing Dealer will
transmit the check to the Escrow Agent by no later than the close of business on
the first business day after the check is received from the Soliciting Dealer.
Investors, however, who are residents of Florida, Iowa, Maine,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico,
North Carolina, Ohio, Oregon, South Dakota, Tennessee or Washington must
complete and sign the Subscription Agreement in order to subscribe for Shares
and, therefore, may not subscribe for Shares by telephone. Representatives of
Soliciting Dealers who accept telephonic orders will execute the Subscription
Agreement on behalf of investors who place such orders. All investors who
telephonically subscribe for Shares will receive, with confirmation of their
subscription, a second copy of the Prospectus.
Residents of California, Oklahoma, and Texas who telephonically
subscribe for Shares will have the right to rescind such subscriptions within
ten days from receipt of the confirmation. Such investors who do not rescind
their subscriptions within such ten-day period shall be deemed to have assented
to all of the terms and conditions of the Subscription Agreement.
Additional Subscription Procedures. Investors who have questions or who
wish to place orders for Shares by telephone or to participate in the
Reinvestment Plan should contact their Soliciting Dealer. Certain Soliciting
Dealers do not permit telephonic subscriptions or participation in the
Reinvestment Plan. See "Summary of Reinvestment Plan." The form of Subscription
Agreement for certain Soliciting Dealers who do not permit telephonic
subscriptions or participation in the Reinvestment Plan differs slightly from
the form attached hereto as Appendix D, primarily in that it will eliminate one
or both of these options.
ESCROW ARRANGEMENTS
The Escrow Agreement between the Company and the Bank provides that
escrowed funds will be invested by the Bank in an interest-bearing account with
the power of investment in short-term, highly liquid securities issued or
guaranteed by the U.S. Government, other investments permitted under Rule 15c2-4
of the Securities Exchange Act of 1934, as amended, or, in other short-term,
highly liquid investments with appropriate safety of principal. Such
subscription funds will be released periodically (at least once per month) upon
admission of stockholders to the Company.
The interest, if any, earned on subscription proceeds will be payable
only to those subscribers whose funds have been held in escrow by the Bank for
at least 20 days. Stockholders will not otherwise be entitled to interest earned
on Company funds or to receive interest on their Invested Capital.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to prospective investors. This discussion does not purport to deal with
all aspects of ERISA or the Code that may be relevant to particular investors in
light of their particular circumstances.
A prospective investor that is an employee benefit plan subject to
ERISA, a tax-qualified retirement Plan, an IRA, or a governmental, church, or
other Plan that is exempt from ERISA is advised to consult its own legal advisor
regarding the specific considerations arising under applicable provisions of
ERISA, the Code, and state law with respect to the purchase, ownership, or sale
of the Shares by such Plan or IRA.
Fiduciary Duties and Prohibited Transactions. A fiduciary of a pension,
profit-sharing, retirement or other employee benefit plan subject to ERISA (an
"ERISA Plan") should consider the fiduciary standards under ERISA in the context
of the ERISA Plan's particular circumstances before authorizing an investment of
any portion of the ERISA Plan's assets in the Common Stock. Accordingly, such
fiduciary should consider (i) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of ERISA; (ii) whether the
investment is in accordance with the documents and instruments governing the
ERISA Plan as required by Section 404(a)(1)(D) of ERISA; (iii) whether the
investment is prudent under Section 404(a)(1)(B) of ERISA; and (iv) whether the
investment is solely in the interests of the ERISA Plan participants and
beneficiaries and for the exclusive purpose of providing benefits to the ERISA
Plan participants and beneficiaries and defraying reasonable administrative
expenses of the ERISA Plan as required by Section 404(a)(1)(A) of ERISA.
In addition to the imposition of fiduciary standards, ERISA and Section
4975 of the Code prohibit a wide range of transactions between an ERISA Plan, an
IRA, or certain other plans (collectively, a "Plan") and persons who have
certain specified relationships to the Plan ("parties in interest" within the
meaning of ERISA and "disqualified persons" within the meaning of the Code).
Thus, a Plan fiduciary or person making an investment decision for a Plan also
should consider whether the acquisition or the continued holding of the Shares
might constitute or give rise to a direct or indirect prohibited transaction.
Plan Assets. The prohibited transaction rules of ERISA and the Code
apply to transactions with a Plan and also to transactions with the "plan
assets" of the Plan. The "plan assets" of a Plan include the Plan's interest in
an entity in which the Plan invests and, in certain circumstances, the assets of
the entity in which the Plan holds such interest. The term "plan assets" is not
specifically defined in ERISA or the Code, nor, as of the date hereof, has it
been interpreted definitively by the courts in litigation. On November 13, 1986,
the United States Department of Labor, the governmental agency primarily
responsible for administering ERISA, adopted a final regulation (the "DOL
Regulation") setting out the standards it will apply in determining whether an
equity investment in an entity will cause the assets of such entity to
constitute "plan assets." The DOL Regulation applies for purposes of both ERISA
and Section 4975 of the Code.
Under the DOL Regulation, if a Plan acquires an equity interest in an
entity, which equity interest is not a "publicly-offered security," the Plan's
assets generally would include both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The DOL Regulation defines a publicly-offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the offering occurred). The Shares
are being sold in an offering registered under the Securities Act of 1933, as
amended, and will be registered within the relevant time period under Section
12(b) of the Exchange Act.
The DOL Regulation provides that a security is "widely held" only if it
is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. However, a class of securities
will not fail to be "widely held" solely because the number of independent
investors falls below 100 subsequent to the initial public offering as a result
of events beyond the issuer's control. The Company expects the Shares to be
"widely held" upon completion of the offering.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The DOL Regulation further provides that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with this offering, certain restrictions ordinarily will
not affect, alone or in combination, the finding that such securities are freely
transferable. The Company believes that the restrictions imposed under the
Articles of Incorporation on the transfer of the Common Stock are limited to
restrictions on transfer generally permitted under the DOL Regulation and are
not likely to result in the failure of the Common Stock to be "freely
transferable." See "Summary of the Articles of Incorporation and Bylaws --
Restriction of Ownership." The DOL Regulation only establishes a presumption in
favor of a finding of free transferability and, therefore, no assurance can be
given that the Department of Labor and the U.S. Treasury Department would not
reach a contrary conclusion with respect to the Common Stock.
Assuming that the Shares will be "widely held" and "freely
transferable," the Company believes that the Shares will be publicly-offered
securities for purposes of the DOL Regulation and that the assets of the Company
will not be deemed to be "plan assets" of any Plan that invests in the Shares.
DETERMINATION OF OFFERING PRICE
The offering price per Share was determined by the Company based upon
the estimated costs of investing in the Properties and the Mortgage Loans, the
fees to be paid to the Advisor and its Affiliates, as well as fees to third
parties, and the expenses of this offering.
SUPPLEMENTAL SALES MATERIAL
Shares are being offered only through this Prospectus. In addition to
this Prospectus, the Company may use certain sales materials in connection with
this offering, although only when accompanied or preceded by the delivery of
this Prospectus. No sales material may be used unless it has first been approved
in writing by the Company. As of the date of this Prospectus, it is anticipated
that the following sales material will be authorized for use by the Company in
connection with this offering: (i) a brochure entitled CNL Hospitality
Properties, Inc., (ii) a fact sheet describing the general features of the
Company, (iii) a cover letter transmitting the Prospectus, (iv) a summary
description of the offering, (v) a slide presentation, (vi) broker updates,
(vii) an audio cassette presentation, (viii) a video presentation, (ix) an
electronic media presentation, (x) a cd-rom presentation, (xi) a script for
telephonic marketing, (xii) seminar advertisements and invitations, and (xiii)
certain third-party articles. All such materials will be used only by registered
broker-dealers which are members of the NASD. The Company also may respond to
specific questions from Soliciting Dealers and prospective investors. Additional
materials relating to the offering may be made available to Soliciting Dealers
for their internal use.
LEGAL OPINIONS
The legality of the Shares being offered hereby has been passed upon
for the Company by Shaw Pittman . Statements made under "Risk Factors -- Tax
Risks" and "Federal Income Tax Considerations" have been reviewed by Shaw
Pittman , who have given their opinion that such statements as to matters of law
are correct in all material respects. Shaw Pittman serves as securities and tax
counsel to the Company and to the Advisor and certain of their Affiliates.
Certain members of the firm have invested in prior programs sponsored by the
Affiliates of the Company in aggregate amounts which do not exceed one percent
of the amounts sold by any such program, and members of the firm also may invest
in the Company.
EXPERTS
The audited balance sheets of the Company as of December 31, 1998 and
1997, and the related statements of earnings, stockholders' equity and cash
flows for the years ended December 31, 1998 and 1997, and for the period June
12, 1996 (date of inception) through December 31, 1996, included in this
Prospectus, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement has been filed with the Securities and
Exchange Commission with respect to the securities offered hereby. This
Prospectus does not contain all information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained in this Prospectus as to the
contents of any document are necessarily summaries of such documents, and in
each instance reference is made to the copy of such documents filed with the
Commission, each such statement being qualified in all respects by such
reference. For further information regarding the Company and the Shares,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed or incorporated as a part thereof which may be obtained from the
principal office of the Commission in Washington, D.C., upon payment of the fee
prescribed by the Commission, or examined at the principal office of the
Commission without charge. The Commission maintains a Web site located at
http://www.sec.gov. that contains information regarding registrants that file
electronically with the Commission.
DEFINITIONS
"Acquisition Expenses" means any and all expenses incurred by the
Company, the Advisor, or any Affiliate of either in connection with the
selection or acquisition of any Property or the making of any Mortgage Loan,
whether or not acquired, including, without limitation, legal fees and expenses,
travel and communication expenses, costs of appraisals, nonrefundable option
payments on property not acquired, accounting fees and expenses, and title
insurance.
"Acquisition Fees" means any and all fees and commissions, exclusive of
Acquisition Expenses, paid by any person or entity to any other person or entity
(including any fees or commissions paid by or to any Affiliate of the Company or
the Advisor) in connection with making or investing in Mortgage Loans or the
purchase, development or construction of a Property, including, without
limitation, real estate commissions, acquisition fees, finder's fees, selection
fees, development fees, construction fees, nonrecurring management fees,
consulting fees, loan fees, points, the Secured Equipment Lease Servicing Fee,
or any other fees or commissions of a similar nature. Excluded shall be
development fees and construction fees paid to any person or entity not
affiliated with the Advisor in connection with the actual development and
construction of any Property.
"Advisor" means CNL Hospitality Advisors, Inc. (formerly CNL Real
Estate Advisors, Inc.), a Florida corporation, any successor advisor to the
Company, or any person or entity to which CNL Hospitality Advisors, Inc. or any
successor advisors subcontracts substantially all of its functions.
"Advisory Agreement" means the Advisory Agreement between the Company
and the Advisor, pursuant to which the Advisor will act as the advisor to the
Company and provide specified services to the Company.
"Affiliate" means (i) any person or entity directly or indirectly
through one or more intermediaries controlling, controlled by, or under common
control with another person or entity; (ii) any person or entity directly or
indirectly owning, controlling, or holding with power to vote ten percent (10%)
or more of the outstanding voting securities of another person or entity; (iii)
any officer, director, partner, or trustee of such person or entity; (iv) any
person ten percent (10%) or more of whose outstanding voting securities are
directly or indirectly owned, controlled or held, with power to vote, by such
other person; and (v) if such other person or entity is an officer, director,
partner, or trustee of a person or entity, the person or entity for which such
person or entity acts in any such capacity.
"Articles of Incorporation" means the Articles of Incorporation, as the
same may be amended from time to time, of the Company.
"Asset Management Fee" means the fee payable to the Advisor for
day-to-day professional management services in connection with the Company and
its investments in Properties and Mortgage Loans pursuant to the Advisory
Agreement.
"Assets" means Properties, Mortgage Loans and Secured Equipment Leases,
collectively.
"Average Invested Assets" means, for a specified period, the average of
the aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
such period.
"Bank" means SouthTrust Asset Management Company of Florida, N.A.,
escrow agent for the offering.
"Board of Directors" means the Directors of the Company.
"Bylaws" means the bylaws of the Company.
"CNL" means CNL Group, Inc., the parent company of the Advisor and the
Managing Dealer.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the common stock, par value $0.01 per share, of
the Company.
"Competitive Real Estate Commission" means a real estate or brokerage
commission for the purchase or sale of property which is reasonable, customary,
and competitive in light of the size, type, and location of the property. The
total of all real estate commissions paid by the Company to all persons and
entities (including the subordinated real estate disposition fee payable to the
Advisor) in connection with any Sale of one or more of the Company's Properties
shall not exceed the lesser of (i) a Competitive Real Estate Commission or (ii)
six percent of the gross sales price of the Property or Properties.
"Counsel" means tax counsel to the Company.
"Deferred Commission Option" means an agreement between a stockholder,
the participating Soliciting Dealer and the Managing Dealer to have Selling
Commissions paid over a seven year period as described in "The Offering -- Plan
of Distribution."
"Director" means a member of the Board of Directors of the Company.
"Distributions" means any distributions of money or other property by
the Company to owners of Shares, including distributions that may constitute a
return of capital for federal income tax purposes.
"Equipment" means the furniture, fixtures and equipment used at Hotel
Chains.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, retirement, or other
employee benefit plan subject to ERISA.
"Excess Shares" means the excess shares exchanged for shares of Common
Stock or Preferred Stock, as the case may be, transferred or proposed to be
transferred in excess of the Ownership Limit or which would otherwise jeopardize
the Company's status as a REIT under the Code.
"Front-End Fees" means fees and expenses paid by any person or entity
to any person or entity for any services rendered in connection with the
organization of the Company and investing in Properties and Mortgage Loans,
including Selling Commissions, marketing support and due diligence expense
reimbursement fees, Offering Expenses, Acquisition Expenses and Acquisition Fees
paid out of Gross Proceeds, and any other similar fees, however designated.
During the term of the Company, Front-End Fees shall not exceed 20% of Gross
Proceeds.
"Gross Proceeds" means the aggregate purchase price of all Shares sold
for the account of the Company through the offering, without deduction for
Selling Commissions, volume discounts, the marketing support and due diligence
expense reimbursement fee or Offering Expenses. For the purpose of computing
Gross Proceeds, the purchase price of any Share for which reduced Selling
Commissions are paid to the Managing Dealer or a Soliciting Dealer (where net
proceeds to the Company are not reduced) shall be deemed to be the full offering
price, currently $10.00.
"Hotel Chains" means the national and regional hotel chains, primarily
limited service, extended stay and full service hotel chains, to be selected by
the Advisor, and who themselves or their franchisees will either (i) lease
Properties purchased by the Company, (ii) become borrowers under Mortgage Loans,
or (iii) become lessees or borrowers under Secured Equipment Leases.
"Independent Director" means a Director who is not and within the last
two years has not been directly or indirectly associated with the Advisor by
virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii)
employment by the Advisor or its Affiliates, (iii) service as an officer or
director of the Advisor or its Affiliates, (iv) the performance of services,
other than as a Director, for the Company, (v) service as a director or trustee
of more than three real estate investment trusts advised by the Advisor, or (vi)
maintenance of a material business or professional relationship with the Advisor
or any of its Affiliates. An indirect relationship shall include circumstances
in which a Director's spouse, parents, children, siblings, mothers- or
fathers-in-law or sons- or daughters-in-law, or brothers- or sisters-in-law is
or has been associated with the Advisor, any of its affiliates, or the Company.
A business or professional relationship is considered material if the gross
revenue derived by the Director from the Advisor and Affiliates exceeds 5% of
either the Director's annual gross revenue during either of the last two years
or the Director's net worth on a fair market value basis.
"Independent Expert" means a person or entity with no material current
or prior business or personal relationship with the Advisor or the Directors and
who is engaged to a substantial extent in the business of rendering opinions
regarding the value of assets of the type held by the Company.
"Initial Offering" means the initial offering of the Company which
commenced on July 9, 1997 and is expected to terminate in June 1999, at which
time this offering will commence.
"Invested Capital" means the amount calculated by multiplying the total
number of shares of Common Stock purchased by stockholders by the issue price,
reduced by the portion of any Distribution that is attributable to Net Sales
Proceeds and by any amounts paid by the Company to repurchase Shares pursuant to
the plan for redemption of Shares.
"IRA" means an Individual Retirement Account.
"IRS" means the Internal Revenue Service.
"Joint Ventures" means the joint venture or general partnership
arrangements in which the Company is a co-venturer or general partner which are
established to acquire Properties.
"Leverage" means the aggregate amount of indebtedness of the Company
for money borrowed (including purchase money mortgage loans) outstanding at any
time, both secured and unsecured.
"Line of Credit" means one or more lines of credit in an aggregate
amount up to $100,000,000, the proceeds of which will be used to acquire
Properties and make Mortgage Loans and Secured Equipment Leases and to pay the
Secured Equipment Lease Servicing Fee. The Line of Credit may be in addition to
any Permanent Financing.
"Listing" means the listing of the Shares of the Company on a national
securities exchange or over-the-counter market.
"Managing Dealer" means CNL Securities Corp., an Affiliate of the
Advisor, or such other person or entity selected by the Board of Directors to
act as the managing dealer for the offering. CNL Securities Corp.
is a member of the National Association of Securities Dealers, Inc.
"Mortgage Loans" means, in connection with mortgage financing provided
by the Company, notes or other evidences of indebtedness or obligations which
are secured or collateralized by real estate owned by the borrower.
"Net Assets" means the total assets of the Company (other than
intangibles) at cost before deducting depreciation or other non-cash reserves
less total liabilities, calculated quarterly by the Company, on a basis
consistently applied.
"Net Income" means for any period, the total revenues applicable to
such period, less the total expenses applicable to such period excluding
additions to reserves for depreciation, bad debts, or other similar non-cash
reserves; provided, however, Net Income for purposes of calculating total
allowable Operating Expenses (as defined herein) shall exclude the gain from the
sale of the Company's Assets.
"Net Offering Proceeds" means Gross Proceeds less (i) Selling
Commissions, (ii) Offering Expenses, and (iii) the marketing support and due
diligence expense reimbursement fee.
"Net Sales Proceeds" means, in the case of a transaction described in
clause (i)(A) of the definition of Sale, the proceeds of any such transaction
less the amount of all real estate commissions and closing costs paid by the
Company. In the case of a transaction described in clause (i)(B) of such
definition, Net Sales Proceeds means the proceeds of any such transaction less
the amount of any legal and other selling expenses incurred in connection with
such transaction. In the case of a transaction described in clause (i)(C) of
such definition, Net Sales Proceeds means the proceeds of any such transaction
actually distributed to the Company from the Joint Venture. In the case of a
transaction or series of transactions described in clause (i)(D) of the
definition of Sale, Net Sales Proceeds means the proceeds of any such
transaction less the amount of all commissions and closing costs paid by the
Company. In the case of a transaction described in clause (ii) of the definition
of Sale, Net Sales Proceeds means the proceeds of such transaction or series of
transactions less all amounts generated thereby and reinvested in one or more
Properties within 180 days thereafter and less the amount of any real estate
commissions, closing costs, and legal and other selling expenses incurred by or
allocated to the Company in connection with such transaction or series of
transactions. Net Sales Proceeds shall also include, in the case of any lease of
a Property consisting of a building only, any Mortgage Loan or any Secured
Equipment Lease, any amounts from tenants, borrowers or lessees that the Company
determines, in its discretion, to be economically equivalent to proceeds of a
Sale. Net Sales Proceeds shall not include, as determined by the Company in its
sole discretion, any amounts reinvested in one or more Properties, Mortgage
Loans or Secured Equipment Leases, to repay outstanding indebtedness, or to
establish reserves.
"Offering Expenses" means any and all costs and expenses, other than
Selling Commissions, the Soliciting Dealer Warrants, and the 0.5% marketing
support and due diligence expense reimbursement fee, incurred by the Company,
the Advisor or any Affiliate of either in connection with the qualification and
registration of the Company and the marketing and distribution of Shares,
including, without limitation, the following: legal, accounting, and escrow
fees; printing, amending, supplementing, mailing, and distributing costs;
filing, registration, and qualification fees and taxes; telegraph and telephone
costs; and all advertising and marketing expenses, including the costs related
to investor and broker-dealer sales meetings. The Offering Expenses paid by the
Company in connection with the offering, together with the 7.5% Selling
Commissions, the Soliciting Dealer Warrants, and the 0.5% marketing support and
due diligence expense reimbursement fee, incurred by the Company will not exceed
13% of the proceeds raised in connection with this offering.
"Operating Expenses" includes all costs and expenses incurred by the
Company, as determined under generally accepted accounting principles, which in
any way are related to the operation of the Company or to Company business,
including (a) advisory fees, (b) any soliciting dealer servicing fees, (c) the
Asset Management Fee, (d) the Performance Fee, and (e) the Subordinated
Incentive Fee, but excluding (i) the expenses of raising capital such as
Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing,
registration, and other fees, printing and other such expenses, and tax incurred
in connection with the issuance, distribution, transfer, registration, and
Listing of the Shares, (ii) interest payments, (iii) taxes, (iv) non-cash
expenditures such as depreciation, amortization, and bad debt reserves, (v) the
Advisor's subordinated 10% share of Net Sales Proceeds, and (vi) Acquisition
Fees and Acquisition Expenses, real estate commissions on the sale of property
and other expenses connected with the acquisition and ownership of real estate
interests, mortgage loans, or other property (such as the costs of foreclosure,
insurance premiums, legal services, maintenance, repair, and improvement of
property).
"Ownership Limit" means, with respect to shares of Common Stock and
Preferred Stock, the percent limitation placed on the ownership of Common Stock
and Preferred Stock by any one Person (as defined in the Articles of
Incorporation). As of the initial date of this Prospectus, the Ownership Limit
is 9.8% of the outstanding Common Stock and 9.8% of the outstanding Preferred
Stock.
"Participants" means those stockholders who elect to participate in the
Reinvestment Plan.
"Performance Fee" means the fee payable to the Advisor under certain
circumstances if certain performance standards have been met and the
Subordinated Incentive Fee has not been paid.
"Permanent Financing" means financing (i) to acquire Assets, (ii) to
pay the Secured Equipment Lease Servicing Fee, (iii) to pay a fee of 4.5% of any
Permanent Financing, excluding amounts to fund Secured Equipment Leases, as
Acquisition Fees, and, (iv) refinance outstanding amounts on the Line of Credit.
Permanent Financing may be in addition to any borrowing under the Line of
Credit.
"Plan" means ERISA Plans, IRAs, Keogh plans, stock bonus plans, and
certain other plans.
"Preferred Stock" means any class or series of preferred stock of the
Company that may be issued in accordance with the terms of the Articles of
Incorporation and applicable law.
"Properties" means (i) the real properties, including the buildings
located thereon and including Equipment; (ii) the real properties only; or (iii)
the buildings only, including Equipment, either directly or through joint
venture arrangements or other partnerships.
"Prospectus" means the final prospectus included in the Company's
Registration Statement filed with the Securities and Exchange Commission,
pursuant to which the Company will offer Shares to the public, as the same may
be amended or supplemented from time to time after the effective date of such
Registration Statement.
"Qualified Plans" means qualified pension, profit-sharing, and stock
bonus plans, including Keogh plans and IRAs.
"Real Estate Asset Value" means the amount actually paid or allocated
to the purchase, development, construction or improvement of a Property,
exclusive of Acquisition Fees and Acquisition Expenses.
"Reinvestment Agent" or "Agent" means the independent agent, which
currently is MMS Securities, Inc., for Participants in the Reinvestment Plan.
"Reinvestment Plan" means the Reinvestment Plan, in the form attached
hereto as Appendix A.
"Reinvestment Proceeds" means net proceeds available from the sale of
Shares under the Reinvestment Plan to redeem Shares or, under certain
circumstances, to invest in additional Properties or Mortgage Loans.
"REIT" means real estate investment trust, as defined pursuant to
Sections 856 through 860 of the Code.
"Related Party Tenant" means a related party tenant, as defined
pursuant to Section 856(d)(2)(B) of the Code.
"Roll-Up Entity" means a partnership, real estate investment trust,
corporation, trust, or similar entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
"Roll-Up Transaction" means a transaction involving the acquisition,
merger, conversion, or consolidation, directly or indirectly, of the Company and
the issuance of securities of a Roll-Up Entity. Such term does not include: (i)
a transaction involving securities of the Company that have been listed on a
national securities exchange or the National Association of Securities Dealers
Automated Quotation National Market System for at least 12 months; or (ii) a
transaction involving the conversion to corporate, trust, or association form of
only the Company if, as a consequence of the transaction, there will be no
significant adverse change in stockholder voting rights, the term of existence
of the Company, compensation to the Advisor, or the investment objectives of the
Company.
"Sale" (i) means any transaction or series of transactions whereby: (A)
the Company sells, grants, transfers, conveys, or relinquishes its ownership of
any Property or portion thereof, including the lease of any Property consisting
of the building only, and including any event with respect to any Property which
gives rise to a significant amount of insurance proceeds or condemnation awards;
(B) the Company sells, grants, transfers, conveys, or relinquishes its ownership
of all or substantially all of the interest of the Company in any Joint Venture
in which it is a co-venturer or partner; (C) any Joint Venture in which the
Company as a co-venturer or partner sells, grants, transfers, conveys, or
relinquishes its ownership of any Property or portion thereof, including any
event with respect to any Property which gives rise to insurance claims or
condemnation awards; or (D) the Company sells, grants, conveys or relinquishes
its interest in any Mortgage Loan or Secured Equipment Lease or portion thereof,
including any event with respect to any Mortgage Loan or Secured Equipment Lease
which gives rise to a significant amount of insurance proceeds or similar
awards; but (ii) shall not include any transaction or series of transactions
specified in clause (i)(A), (i)(B) or (i)(C) above in which the proceeds of such
transaction or series of transactions are reinvested in one or more Properties
within 180 days thereafter.
"Secured Equipment Leases" means the Equipment financing made available
by the Company to operators of Hotel Chains pursuant to which the Company will
finance, through loans or direct financing leases, the Equipment.
"Secured Equipment Lease Servicing Fee" means the fee payable to the
Advisor by the Company out of the proceeds of the Line of Credit or Permanent
Financing for negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program equal to 2% of the purchase price of the Equipment
subject to each Secured Equipment Lease and paid upon entering into such lease
or loan.
"Selling Commissions" means any and all commissions payable to
underwriters, managing dealers, or other broker-dealers in connection with the
sale of Shares as described in the Prospectus, including, without limitation,
commissions payable to CNL Securities Corp.
"Shares" means the shares of Common Stock of the Company, including the
up to 27,500,000 shares to be sold in this offering.
"Soliciting Dealers" means those broker-dealers that are members of the
National Association of Securities Dealers, Inc., or that are exempt from
broker-dealer registration, and that, in either case, enter into participating
broker or other agreements with the Managing Dealer to sell Shares.
"Soliciting Dealer Warrants" means warrants to purchase one share of
Common Stock of the Company for every 25 Shares sold through the offering, which
are issuable to the Managing Dealer (all or a portion of which may be reallowed
to Soliciting Dealers, with prior written approval from, and in the sole
discretion of, the Managing Dealer) and are to be exercised during the Exercise
Period, at a price of $12.00 per share.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Company or any person who will control,
manage or participate in the management of the Company, and any Affiliate of
such Person. Not included is any Person whose only relationship with the Company
is that of an independent property manager of Company assets, and whose only
compensation is as such. Sponsor does not include independent third parties such
as attorneys, accountants, and underwriters whose only compensation is for
professional services. A Person may also be deemed a Sponsor of the Company by:
a. taking the initiative, directly or indirectly, in founding or
organizing the business or enterprise of the Company, either
alone or in conjunction with one or more other Persons;
b. receiving a material participation in the Company in connection
with the founding or organizing of the business of the Company,
in consideration of services or property, or both services and
property;
c. having a substantial number of relationships and contacts with
the Company;
d. possessing significant rights to control Company Properties;
e. receiving fees for providing services to the Company which are
paid on a basis that is not customary in the industry; or
f. providing goods or services to the Company on a basis which was
not negotiated at arm's-length with the Company.
"Stockholders' 8% Return," as of each date, shall mean an aggregate
amount equal to an 8% cumulative, noncompounded, annual return on Invested
Capital.
"Subscription Agreement" means the Subscription Agreement in the form
attached hereto as Appendix D.
"Subordinated Incentive Fee" means the fee payable to the Advisor under
certain circumstances if the Shares are listed on a national securities exchange
or over-the-counter market.
"Termination Date" means the date of termination of the Advisory
Agreement.
"Total Proceeds" means Gross Proceeds, loan proceeds from Permanent
Financing and amounts outstanding on the Line of Credit, if any, at the time of
Listing, but excluding loan proceeds used to finance Secured Equipment Leases.
"Triple-Net Lease" generally means a Property lease pursuant to which
the tenant is responsible for property costs associated with ongoing operations,
including repairs, maintenance, property taxes, utilities and insurance.
"Unimproved Real Property" means Property in which the Company has an
equity interest that is not acquired for the purpose of producing rental or
other operating income, that has no development or construction in process and
for which no development or construction is planned, in good faith, to commence
within one year.
<PAGE>
APPENDIX A
FORM OF
REINVESTMENT PLAN
<PAGE>
FORM OF
REINVESTMENT PLAN
CNL HOSPITALITY PROPERTIES, INC., a Maryland corporation (the
"Company"), pursuant to its Articles of Incorporation, adopted a Reinvestment
Plan (the "Reinvestment Plan") on the terms and conditions set forth below.
1. Reinvestment of Distributions. MMS Securities, Inc., the agent (the
"Reinvestment Agent") for participants (the "Participants") in the Reinvestment
Plan, will receive all cash distributions made by the Company with respect to
shares of common stock of the Company (the "Shares") owned by each Participant
(collectively, the "Distributions"). The Reinvestment Agent will apply such
Distributions as follows:
(a) At any period during which the Company is making a public
offering of Shares, the Reinvestment Agent will invest Distributions in
Shares acquired from the managing dealer or participating brokers for
the offering at the public offering price per Share, 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.
<PAGE>
APPENDIX B
FINANCIAL INFORMATION
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
<TABLE>
<CAPTION>
Page
<S> <C>
Pro Forma Consolidated Financial Information (unaudited):
Pro Forma Consolidated Balance Sheet as of March 31, 1999 B-2
Pro Forma Consolidated Statement of Earnings for the quarter ended March 31, 1999 B-3
Pro Forma Consolidated Statement of Earnings for the year ended December 31, 1998 B-4
Notes to Pro Forma Consolidated Financial Statements for the year ended December
31, 1998 B-5
Updated Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 B-8
Condensed Consolidated Statements of Earnings for the quarters ended March 31, 1999
and 1998 B-9
Condensed Consolidated Statements of Stockholders' Equity for the quarter ended March
31, 1999 and the year ended December 31, 1998 B-10
Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 1999
and 1998 B-11
Notes to Condensed Consolidated Financial Statements for the quarters ended March 31,
1999 and 1998 B-13
Audited Financial Statements:
Report of Independent Accountants B-21
Consolidated Balance Sheets as of December 31, 1998 and 1997 B-22
Consolidated Statements of Earnings for the years ended December 31, 1998 and 1997,
and the period June 12, 1996 (Date of inception) through December 31, 1996 B-23
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998
and 1997, and the period June 12, 1996 (Date of inception) through December 31, 1996 B-24
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997,
and the period June 12, 1996 (Date of inception) through December 31, 1996 B-25
Notes to Consolidated Financial Statements for the years ended December 31,
1998 and 1997, and the period June 12, 1996 (Date of inception) through
December 31, 1996 B-27
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1998 B-35
Notes to Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1998 B-37
</TABLE>
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Balance Sheet of CNL
Hospitality Properties, Inc. and subsidiaries (the "Company") gives effect to
(i) the receipt of $90,749,397 in gross offering proceeds from the sale of
9,074,940 shares of common stock pursuant to a registration statement on Form
S-11 under the Securities Act of 1933, as amended, effective July 9, 1997, for
the period from inception through March 31, 1999 and the receipt of $3,684,745
from borrowings on a convertible loan, and the application of such funds to
purchase two properties, to invest in an unconsolidated subsidiary which owns
four properties, and to pay offering expenses, acquisition fees and
miscellaneous acquisition expenses, (ii) the receipt of $27,230,246 in gross
offering proceeds from the sale of 2,723,025 additional shares for the period
April 1, 1999 through May 13, 1999, (iii) the application of such funds to pay
offering expenses, acquisition fees and miscellaneous acquisition expenses, and
(iv) the conversion of the $3,684,745 loan from related party to 387,868 shares
of common stock, all as reflected in the pro forma adjustments described in the
related notes. The Unaudited Pro Forma Consolidated Balance Sheet as of March
31, 1999, includes the transactions described in (i) above, from its historical
balance sheet, adjusted to give effect to the transactions in (ii) and (iii)
above as if they had occurred on March 31, 1999.
The Unaudited Pro Forma Consolidated Statements of Earnings for the
quarter ended March 31, 1999 and the year ended December 31, 1998, includes the
historical operating results of the properties described in (i) above from the
date of their acquisitions plus operating results from (A) the later of (1) the
date the property became operational or (2) January 1, 1998, to (B) the earlier
of (1) the date the property was acquired by the Company or its unconsolidated
subsidiary or (2) to the end of the pro forma period presented.
This pro forma consolidated financial information is presented for
informational purposes only and does not purport to be indicative of the
Company's financial results or condition if the various events and transactions
reflected therein had occurred on the dates, or been in effect during the
periods, indicated. This pro forma financial information should not be viewed as
predictive of the Company's financial results or conditions in the future.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
Pro Forma
ASSETS Historical Adjustments Pro Forma
------------- -------------- --------------
<S> <C>
Land, buildings and equipment on operating leases,
less accumulated depreciation of $615,000 $28,137,549 $ -- $ 28,137,549
Investment in unconsolidated subsidiary 25,841,816 -- 25,841,816
Cash and cash equivalents 22,840,847 23,997,342 (a) 46,838,189
Restricted cash 139,089 -- 139,089
Certificates of deposit 5,747,142 (730,567 ) (a) 5,016,575
Receivables 32,211 (4,383 ) (a) 27,828
Prepaid expenses 16,946 -- 16,946
Dividends receivable 245,063 -- 245,063
Accrued rental income 60,065 -- 60,065
Loan costs, less accumulated amortization of $50,800 27,482 -- 27,482
Other assets 1,618,073 1,364,024 (a) 2,982,097
------------- --------------
==============
$84,706,283 $24,626,416 $109,332,699
============== ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Convertible loan from related party $3,684,745 $ (3,684,745 ) (a) $ --
Accounts payable and accrued expenses 63,254 -- 63,254
Due to related parties 423,292 (411,447 ) (a) 11,845
Security deposits 1,417,500 -- 1,417,500
Interest payable 29,478 (29,478 ) (a) --
Other payables 4,901 -- 4,901
-------------- ------------- --------------
-------------- ------------- --------------
Total liabilities 5,623,170 (4,125,670 ) 1,497,500
-------------- ------------- --------------
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 9,094,940 shares; issued and
outstanding, as adjusted, 12,186,439 shares 90,949 30,915 (a) 121,864
Capital in excess of par value 79,776,666 28,721,171 (a) 108,497,837
Accumulated distributions in excess of net earnings (784,502 ) -- (784,502 )
-------------- ------------- --------------
Total stockholders' equity 79,083,113 28,752,086 107,835,199
------------- --------------
==============
$84,706,283 $24,626,416 $109,332,699
============== ============= ==============
</TABLE>
See accompanying notes to unaudited pro forma
consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
------------ -------------- --------------
<S> <C>
Revenues:
Rental income from operating
leases $ 737,618 $ -- $ 737,618
FF&E Reserve income 61,027 -- 61,027
Interest and other income 292,864 (206,487 ) (3) 86,377
Dividend income 241,843 362,765 (4) 604,608
------------- ---------------- ----------------
1,333,352 156,278 1,489,630
------------- ---------------- ----------------
Expenses:
Interest and loan cost
amortization 200,573 (122,360 ) (5) 78,213
General operating and
administrative 188,056 -- 188,056
Professional services 21,206 -- 21,206
Asset management fees to related
party 49,565 8,896 (7) 58,461
State taxes 5,375 -- 5,375
Depreciation and amortization 253,758 -- 253,758
------------- ----------------
------------- ---------------- ----------------
718,533 (113,464 ) 605,069
------------- ---------------- ----------------
Earnings Before Equity in Loss of
Unconsolidated Subsidiary 614,819 269,742 884,561
------------- ---------------- ----------------
Equity in Loss of Unconsolidated
Subsidiary (184,539 ) (123,927 ) (9) (308,466 )
------------- ---------------- ----------------
Net Earnings
$ 430,280 $ 145,815 $ 576,095
============= ================ ================
Earnings Per Share of Common
Stock:
Basic $ 0.07 $ 0.09
=============
================
Diluted $ 0.06 $ 0.09
============= ================
Weighted Average Number of Shares
Outstanding:
Basic 6,419,548 6,535,566
============= ================
Diluted 8,244,160 6,535,566
============= ================
</TABLE>
See accompanying notes to unaudited pro forma
consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
------------ -------------- --------------
<S> <C>
Revenues:
Rental income from
operating leases $1,218,500 $1,706,732 (1) $2,925,232
FF&E Reserve income 98,099 140,000 (2) 238,099
Interest income 638,862 (609,975 )(3) 28,887
Dividend income -- 423,938 (4) 423,938
-------------
---------------- ----------------
1,955,461 1,660,695 3,616,156
------------- ---------------- ----------------
Expenses:
Interest expense and loan cost
amortization 350,322 448,718 (5) 799,040
General operating and
administrative 167,951 92,733 (6) 260,684
Asset management fees to
related party 68,114 106,571 (7) 174,685
Professional services 21,581 -- 21,581
Depreciation and amortization 388,554 538,125 (8) 926,679
------------- ---------------- ----------------
996,522 1,186,147 2,182,669
------------- ---------------- ----------------
Earnings Before Equity in Loss
of Unconsolidated Subsidiary 958,939 474,548 1,433,487
Equity in Loss of Unconsolidated
Subsidiary -- (56,464 )(9) (56,464 )
------------- ---------------- ----------------
Net Earnings $ 958,939 $ 418,084 $1,377,023
============= ================ ================
Earnings Per Share of Common
Stock (Basic and Diluted) (10) $ 0.40 $ 0.51
============= ================
Weighted Average Number of
Shares of Common Stock
Outstanding (10) 2,402,344 2,697,355
============= ================
</TABLE>
See accompanying notes to unaudited pro forma
consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Balance Sheet:
(a) Represents gross proceeds of $27,230,246 from the sale of 2,723,025
shares during the period April 1, 1999 through May 13, 1999, the
conversion of the $3,684,745 loan from related party to 387,868 shares
of common stock, and the reimbursement for certificates of deposit and
closing costs totalling $734,950 paid on behalf of CHI in connection
with its permanent financing, used (i) to pay $29,478 in interest to
related party in connection with convertible loan, (ii) to pay
acquisition fees and costs of $1,431,213 ($67,189 of which was accrued
as due to related parties at March 31, 1999), and to pay selling
commissions and offering expenses of $2,507,163 which have been netted
against stockholders' equity (a total of $344,258 of which was accrued
as of March 31, 1999), leaving $23,997,342 for future investment.
Unaudited Pro Forma Consolidated Statements of Earnings:
(1) Represents adjustment to rental income from operating leases for the
properties acquired by the Company as of May 13, 1999, (the "Pro Forma
Properties"), for the period commencing (A) the later of (i) the date
the Pro Forma Property became operational by the previous owner or (ii)
January 1, 1998, to (B) the earlier of (i) the date the Pro Forma
Property was acquired by the Company or (ii) 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 Statements 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 January 1, 1998
Residence Inn Gwinnett Place
in Duluth, GA July 31, 1998 January 1, 1998
</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 1998 that the Company held the properties, no pro
forma adjustment was made for percentage rental income for the year
ended December 31, 1998 and the quarter ended March 31, 1999.
(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 (A) the later of (i) the dates the Pro
Forma Properties and the unconsolidated subsidiary's properties became
operational by the previous owners or (ii) January 1, 1998, through (B)
the earlier of (i) the actual date the Pro Forma Properties and the
unconsolidated subsidiary's properties were acquired or (ii) the end of
the pro forma period presented, as described in Note (1) above and Note
(4) below. The estimated pro forma adjustment is based upon the fact
that interest income from interest bearing accounts was earned at a
rate of approximately four percent per annum by the Company during the
year ended December 31, 1998 and the quarter ended March 31, 1999.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE QUARTER ENDED MARCH 31, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
(4) Represents adjustment to dividend income earned on the Company's
$24,778,630 investment in the 9.76% Class B cumulative preferred stock
of the unconsolidated subsidiary, for the period commencing (A) the
later of (i) the date the properties owned by the unconsolidated
subsidiary became operational by the previous owner or (ii) January 1,
1998, to (B) the earlier of (i) the date the properties owned by the
unconsolidated subsidiary were acquired or (ii) the end of the pro
forma period presented. The cash from the Company's investment, along
with loan proceeds and funds from an institutional investor were used
to purchase four hotel properties which were operational prior to the
Company's investment in the unconsolidated subsidiary. The following
presents the actual date the unconsolidated subsidiary properties were
acquired or placed in service by the unconsolidated subsidiary as
compared to the date the unconsolidated subsidiary's properties were
treated as becoming operational as a rental property for purposes of
the Pro Forma Consolidated Statements of Earnings:
<TABLE>
<CAPTION>
Date Unconsolidated
Date Placed Subsidiary
in Service Properties Became
By the Operational as
Unconsolidated Subsidiary Rental Property
<S> <C>
Residence Inn Las Vegas, NV February 25, 1999 October 1, 1998
Residence Inn Plano, TX February 25, 1999 October 12, 1998
Marriott Suites Dallas, TX February 25, 1999 November 11, 1998
Courtyard Plano, TX February 25, 1999 December 23, 1998
</TABLE>
(5) Represents adjustment to interest expense incurred at a rate ranging
from 8.05% to 8.8% per annum in connection with the assumed borrowings
from the line of credit of $8,600,000 on January 1, 1998 for the period
January 1, 1998 through July 31, 1998. It was assumed that the
$8,600,000 was paid off on December 31, 1998 with proceeds from the
convertible loan and offering proceeds. Also represents amortization of
the loan origination fee of $43,000 (.5% on the $8,600,000 from
borrowings on the line of credit) and $19,149 of other miscellaneous
closing costs, amortized under the straight-line method over a period
of five years.
(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 greater of two
percent of average invested assets or 25 percent of net income (the
"Expense Cap"). During the year ended December 31, 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
earnings for the year ended December 31, 1998, the Company's operating
expenses no longer exceeded the Expense Cap. Therefore, this
reimbursement was reversed for pro forma purposes.
(7) Represents increase in asset management fees relating to the Pro Forma
Properties and the investment in unconsolidated subsidiary for the
period commencing (A) the later of (i) the date the Pro Forma
Properties and the unconsolidated subsidiary properties became
operational by the previous owners or (ii) January 1, 1998, through (B)
the earlier of (i) the date the Pro Forma Properties and the
unconsolidated subsidiaries properties were acquired or (ii) the end of
the pro forma period presented, as described in Notes (1) and (4)
above. Asset management fees are equal to 0.60% per year of the
Company's Real Estate Asset Value, including the investment in the
unconsolidated subsidiary, as defined in the Company's prospectus.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE QUARTER ENDED MARCH 31, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
(8) Represents incremental increase in 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.
(9) Represents adjustment to equity in loss of unconsolidated subsidiary
for the period commencing (A) the date the unconsolidated subsidiary's
properties became operational by the previous owner, through (B) the
earlier of (i) the date the properties were acquired by the
unconsolidated subsidiary or (ii) the end of the pro forma period
presented, as described in Note (4) above. The following represents the
Company's share of net earnings or loss after deduction of preferred
stock dividends declared for the pro forma period ending:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
<S> <C>
Unconsolidated Subsidiary
Earnings Before Preferred Dividend $ 752,368 $ 616,738
8% Class A Cumulative Preferred Stock
(institutional investor) (442,261) (639,654)
9.76% Class B Cumulative Preferred Stock
(the Company) (423,938) (604,608)
8% Class C Cumulative Preferred Stock
(other investors) ( 1,402) (2,000)
------------- ------------
Net Loss of Unconsolidated Subsidiary
After Preferred Dividends $(115,233) $(629,524)
========== =========
The Company's 49% Interest in the Loss of
the Unconsolidated Subsidiary $ (56,464) $(308,466)
========== =========
</TABLE>
(10) Historical earnings per share were calculated based upon the weighted
average number of shares of common stock outstanding during the quarter
ended March 31, 1999 and the year ended December 31, 1998.
As a result of the two Pro Forma Properties being treated in the Pro
Forma Consolidated Statement of Earnings as operational since January
1, 1998, the Company assumed approximately 2,206,573 shares of common
stock were sold, and the net offering proceeds were available for
purchase of these properties. Due to the fact that approximately
1,929,115, of these shares of common stock were actually sold
subsequently, during the period January 1, 1998 through May 21, 1998,
the weighted average number of shares outstanding for the pro forma
period was adjusted.
In addition, as a result of the investment in the unconsolidated
subsidiary being treated in the Pro Forma Consolidated Statements of
Earnings as invested pro rata beginning on October 1, 1998 (the date
the first property became operational), the Company assumed additional
shares of common stock were sold and net offering proceeds were
available for investment during the period October 1, 1998 through
December 31, 1998 and the period January 1, 1999 through January 26,
1999. Due to the fact that approximately 857,020 of these shares of
common stock were actually sold during the quarter ended March 31,
1999, the weighted average number of shares outstanding for the pro
forma period was adjusted. Pro forma earnings per share were calculated
based upon the weighted average number of shares of common stock
outstanding, as adjusted, during the quarter ended March 31, 1999 and
the year ended December 31, 1998.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- ------------
<S> <C>
ASSETS
Land, buildings and equipment on operating leases,
less accumulated depreciation of $615,000 and
$384,166, respectively $28,137,549 $28,368,383
Investment in unconsolidated subsidiary 25,841,816 --
Cash and cash equivalents 22,840,847 13,228,923
Restricted cash 139,089 82,407
Certificates of deposit 5,747,142 5,016,575
Receivables 32,211 28,257
Dividends receivable 245,063 --
Prepaid expenses 16,946 9,391
Organization costs, less accumulated amortization of
$19,752 and $5,221, respectively -- 19,752
Loan costs, less accumulated amortization of $50,800
and $12,980, respectively 27,482 78,282
Accrued rental income 60,065 44,160
Other assets 1,618,073 1,980,560
-------------- -------------
$84,706,283 $48,856,690
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Convertible loan from related party $3,684,745 $ --
Line of credit -- 9,600,000
Accounts payable and accrued expenses 63,254 333,726
Due to related parties 423,292 318,937
Security deposits 1,417,500 1,417,500
Interest payable 29,478 66,547
Other payables 4,901 3,489
-------------- -------------
-------------- -------------
Total liabilities 5,623,170 11,740,199
-------------- -------------
Commitments and Contingencies (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 9,094,940 and
4,321,908 shares, respectively 90,949 43,219
Capital in excess of par value 79,776,666 37,289,402
Accumulated distributions in excess of net (784,502 ) (216,130 )
earnings
-------------- -------------
Total stockholders' equity 79,083,113 37,116,491
-------------- -------------
$84,706,283 $48,856,690
============== =============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998
--------------- -------------
<S> <C>
Revenues:
Rental income from operating leases $ 737,618 $ --
FF&E Reserve income 61,027 --
Interest and other income 292,864 139,153
Dividend income 241,843 --
---------------- --------------
1,333,352 139,153
---------------- --------------
Expenses:
Interest and loan cost amortization 200,573 --
General operating and administrative 188,056 85,393
Professional services 21,206 5,452
Asset management fees to related party 49,565 --
State taxes 5,375 --
Depreciation and amortization 253,758 1,000
---------------- --------------
718,533 91,845
---------------- --------------
Earnings Before Equity in Loss of Unconsolidated
Subsidiary 614,819 47,308
---------------- --------------
Equity in Loss of Unconsolidated Subsidiary (184,539 ) --
---------------- --------------
Net Earnings $ 430,280 $ 47,308
================ ==============
Earnings Per Share of Common Stock:
Basic $ 0.07 $ 0.03
================ ==============
Diluted $ 0.06 $ 0.03
================ ==============
Weighted Average Number of Shares Outstanding:
Basic 6,419,548 1,474,288
================ ==============
Diluted 8,244,160 1,474,288
================ ==============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY Quarter Ended March 31, 1999 and Year Ended
December 31, 1998
<TABLE>
<CAPTION>
Accumulated
distributions
Common stock Capital in in excess
--------------------------
Number Par excess of of net
of Shares value par value earnings Total
------------- ----------- -------------- --------------- --------------
<S> <C>
Balance at 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 3,169,368 31,694 31,661,984 -- 31,693,678
Stock issuance costs -- -- (3,601,898 ) -- (3,601,898 )
Net earnings -- -- -- 958,939 958,939
Distributions declared and paid
($0.46 per share) -- -- -- (1,168,145 ) (1,168,145 )
------------ ---------- -------------- -------------- ---------------
Balance at December 31, 1998 4,321,908 43,219 37,289,402 (216,130 ) 37,116,491
Subscriptions received for
common stock through
public offering and
distribution reinvestment
plan 4,773,032 47,730 47,682,588 -- 47,730,318
Stock issuance costs -- -- (5,195,324 ) -- (5,195,324 )
Net earnings -- -- -- 430,280 430,280
Distributions declared and paid
($0.17 per share) -- -- -- (998,652 ) (998,652 )
------------ ---------- -------------- -------------- ---------------
Balance at March 31, 1999 9,094,940 $90,949 $79,776,666 $ (784,502 ) $79,083,113
============ ========== ============== ============== ===============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998
--------------- ---------------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating
Activities $ 663,437 $ 67,118
--------------- ---------------
Cash Flows from Investing Activities:
Investment in unconsolidated subsidiary (23,983,718 ) --
Investment in certificates of deposit (730,567 ) (1,500,000 )
Increase in restricted cash (56,682 ) --
Increase in other assets (1,690,852 ) (313,391 )
--------------- ---------------
Net cash used in investing
activities (26,461,819 ) (1,813,391 )
--------------- ---------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and
stock issuance costs paid by
related parties on behalf of the
Company (888,032 ) (90,634 )
Proceeds from convertible loan 3,684,745 --
Payment on line of credit (9,600,000 ) --
Subscriptions received from
stockholders 47,730,318 7,263,367
Distributions to stockholders (998,652 ) (101,356 )
Payment of stock issuance costs (4,508,044 ) (749,008 )
Other (10,029 ) --
--------------- ---------------
--------------- ---------------
Net cash provided by
financing activities 35,410,306 6,322,369
--------------- ---------------
Net Increase in Cash and Cash Equivalents 9,611,924 4,576,096
Cash and Cash Equivalents at Beginning
of Quarter 13,228,923 8,869,838
--------------- ---------------
Cash and Cash Equivalents at End of
Quarter $ 22,840,847 $ 13,445,934
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998
--------------- ----------------
<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 $ 351,291 $ 6,685
Stock issuance costs 587,948 107,367
--------------- -----------------
$ 939,239 $ 114,052
=============== =================
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
1. Organization and Nature of Business:
CNL Hospitality Properties, 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"). 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. The Company may also
provide mortgage financing (the "Mortgage Loans"). The Company also may
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 periods presented. Operating results for
the quarter ended March 31, 1999, may not be indicative of the results
that may be expected for the year ending December 31, 1999. Amounts as
of December 31, 1998, 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, 1998.
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 accounts for its 49% interest in the
common stock of CNL Hotel Investors, Inc., using the equity method and
accounts for its preferred stock investment in CNL Hotel Investors,
Inc., using the cost method.
In accordance with Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," basic earnings per share are calculated based
upon net income (income available to common stockholders) divided by
the weighted average number of common shares outstanding during the
reporting period and diluted earnings per share are calculated based
upon adjusted net income divided by the weighted average number of
common shares outstanding plus dilutive potential common shares (see
Note 12).
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
2. Basis of Presentation - Continued:
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 became effective for the Company as of
January 1, 1999. The adoption of this SOP did not have a material
effect on the Company.
3. Public Offerings:
The Company has a currently effective registration statement on Form
S-11 with the Securities and Exchange Commission for the sale of
16,500,000 shares of common stock (the "Initial Offering"). Of the
16,500,000 shares of common stock, the Company has registered 1,500,000
shares ($15,000,000) which are available only to stockholders who elect
to participate in the Company's reinvestment plan. The Company has
adopted a reinvestment plan pursuant to which stockholders may elect to
have the full amount of their cash distributions from the Company
reinvested in additional shares of common stock of the Company. As of
March 31, 1999, the Company had received subscription proceeds of
$90,749,397 (9,074,940 shares), including $72,754 (7,275 shares)
through the reinvestment plan.
On November 23, 1998, the Company filed a registration statement on
Form S-11 with the Securities and Exchange Commission in connection
with the proposed sale by the Company of up to 27,500,000 additional
shares of common stock ($275,000,000) (the "Second Offering") in an
offering expected to commence immediately following the completion of
the Company's Initial Offering. Of the 27,500,000 shares of common
stock to be offered, 2,500,000 will be available only to stockholders
purchasing shares through the reinvestment plan. The price per share
and the other terms of the Second Offering, including the percentage of
gross proceeds payable (i) to the managing dealer for selling
commissions and expenses in connection with the offering and (ii) the
advisor for acquisition fees and acquisition expenses, will be
substantially the same as those for the Company's Initial Offering. The
Company expects to use net proceeds from the Second Offering to
purchase additional Properties and, to a lesser extent, make Mortgage
Loans.
4. Investment in Unconsolidated Subsidiary:
In February 1999, the Company executed a series of agreements with Five
Arrows Realty Securities II L.L.C. ("Five Arrows") pursuant to which
the Company and Five Arrows formed a jointly-owned real estate
investment trust, CNL Hotel Investors, Inc. ("Hotel Investors"), for
the purpose of acquiring up to eight hotel Properties from various
sellers affiliated with Western International (the "Hotels"). The eight
Hotels are either newly constructed or in various stages of completion.
Upon completion, four of the eight Hotels will operate as Courtyard(R)
by Marriott(R) hotels, three will operate as Residence Inn(R) by
Marriott(R) hotels, and one will operate as a Marriott Suites(R).
The Company's advisor, CNL Hospitality Advisors, Inc. (the "Advisor"),
is also the advisor to Hotel Investors pursuant to a separate advisory
agreement. However, in no event has or will the Company pay the Advisor
fees, including the Company's pro rata portion of Hotel Investors'
advisory fees, in excess of amounts payable under its advisory
agreement. The Advisor entered into separate purchase agreements for
each of the eight Hotels, which agreements include customary closing
conditions, including inspection of and due diligence on the completed
Properties. The aggregate purchase price of all eight Hotels, once
acquired, will be approximately $184 million, excluding closing costs.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
4. Investment in Unconsolidated Subsidiary - Continued:
In order to fund these purchases, Five Arrows committed to make an
investment of up to $50.9 million in Hotel Investors. The Company
committed to make an investment of up to $40 million in Hotel
Investors, which investment has been and will be made through the
Company's wholly owned subsidiary, CNL Hospitality Partners, LP. Hotel
Investors expects to fund the remaining amount of approximately $96.6
million (including closing costs) with permanent financing from
Jefferson-Pilot Life Insurance Company consisting of eight separate
loans, collateralized by Hotel Investors' interests in the Properties
(the "Hotel Investors Loan"). On February 25, 1999, Hotel Investors
purchased four of the eight Hotels for an aggregate purchase price of
approximately $90,448,000 (the "Initial Hotels") and paid $10,000,000
as a deposit on the four remaining Hotels. The Initial Hotels are the
Courtyard by Marriott located in Plano, Texas, the Marriott Suites
located in Dallas, Texas, the Residence Inn by Marriott located in Las
Vegas, Nevada and the Residence Inn by Marriott located in Plano,
Texas. As a result of these purchases and the deposit, Five Arrows has
funded $31,536,824 of its $50,890,000 commitment to Hotel Investors and
purchased 31,537 shares of Hotel Investors' 8% Class A cumulative,
preferred stock ("Class A Preferred Stock"). The Company has funded
$24,778,933 of its $40 million commitment to Hotel Investors and
purchased 24,779 shares of Hotel Investors' 9.76% Class B cumulative,
preferred stock ("Class B Preferred Stock"). Hotel Investors obtained
advances of $47,863,052 relating to the Hotel Investors Loan in order
to facilitate the acquisition of the Initial Hotels. In connection with
the Hotel Investors Loan, the Company was required by Jefferson Pilot
Life Insurance Company to obtain a letter of credit on behalf of Hotel
Investors. The letter of credit was collateralized by four certificates
of deposit totalling $730,567. Each certificate of deposit will be
allocated to the purchase of the remaining four Hotels. In connection
with the letter of credit, the Company also incurred on behalf of Hotel
Investors $4,383 in closing costs. Hotel Investors has and intends to
use future funds from Five Arrows, the Company and the Hotel Investors
Loan proportionately to fund each Property acquisition.
In return for their respective funding commitments, Five Arrows
received a 51% common stock interest and CNL Hospitality Partners, LP
received a 49% common stock interest in Hotel Investors. As funds are
continually advanced to Hotel Investors, Five Arrows will receive up to
50,886 shares of Class A Preferred Stock and CNL Hospitality Partners,
LP will receive up to 39,982 shares of Class B Preferred Stock. The
Class A Preferred Stock is exchangeable upon demand into common stock
of the Company, as determined pursuant to a formula.
Five Arrows also committed to invest up to $15 million in the Company
through the purchase of common stock pursuant to the Company's current
public offering, the proceeds of which has been and will be used by the
Company to fund approximately 38% of its funding commitment to Hotel
Investors. Five Arrows has purchased and will purchase the Company's
stock as Properties are acquired by Hotel Investors, as described
above. Five Arrows has invested $9,297,056 of its $15 million
commitment to the Company. Due to the current stock ownership
limitations specified in the Company's Articles of Incorporation,
$5,612,311 has been invested in the Company's common stock through the
purchase of 590,770 shares and $3,684,745 was advanced to the Company
as a convertible loan, which bears interest at a rate of eight percent
per annum. In addition to the above investments, Five Arrows purchased
a 10% interest in the Advisor.
Cash flow from operations of Hotel Investors will be distributed first
to Five Arrows with respect to dividends payable on the Class A
Preferred Stock. Such dividends are calculated based on Five Arrows'
"special investment amount", or $1,294.78 per share, which represents
the sum of its investment in Hotel Investors and its $15,000,000
investment in the Company on a per share basis, adjusted for any
dividends received from the Company. Then, cash flow from operations
will be distributed to the Company with
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
4. Investment in Unconsolidated Subsidiary - Continued:
respect to its Class B Preferred Stock. Next, cash flow will be
distributed to 100 CNL associates who each own one share of Class C
preferred stock in Hotel Investors, to provide a quarterly, cumulative,
compounded 8% return. All remaining cash flow from operations will be
distributed pro rata with respect to the interest in the common shares.
In connection with Five Arrows' commitment to invest $15 million in the
Company, the Advisor and certain Affiliates have agreed to waive
certain fees otherwise payable to them by the Company.
The following presents condensed financial information for Hotel
Investors at March 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Land, buildings and equipment on operating
leases, less accumulated depreciation $90,690,822
Cash 3,083,215
Loan costs, less accumulated amortization 637,443
Accrued rental income 20,764
Other assets 10,005,843
Liabilities 49,353,513
Redeemable preferred stock - Class A 31,536,509
Stockholders' equity 23,548,065
Revenues 918,359
Net income 128,783
</TABLE>
The Company recorded $241,843 in dividend income and an equity in loss
of $184,539 resulting in a net income of $57,304 attributable to this
investment for the quarter ended March 31, 1999.
5. Convertible Loan:
As described above in Note 4, $3,684,745 was advanced to the Company by
Five Arrows as a convertible loan, which bears interest at a rate of
eight percent per annum payable at time of conversion. As of March 31,
1999, the Company had incurred $29,478 in interest related to the
convertible loan.
6. Other Assets:
Other assets as of March 31, 1999 and December 31, 1998 were $1,618,073
and $1,980,560, respectively, which consisted of acquisition fees and
miscellaneous acquisition expenses that will be allocated to future
Properties.
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
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.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
7. Stock Issuance Costs:
During the quarter ended March 31, 1999 and the year ended December 31,
1998, the Company incurred $5,195,324 and $3,606,871, respectively, in
organizational and offering costs, including $3,345,810 and $2,535,494,
respectively, in commissions and marketing support and due diligence
expense reimbursement fees (see Note 9). Of these amounts $5,195,324
and $3,601,898, respectively, have been treated as stock issuance costs
and for the year ended December 31, 1998, $4,973 had 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 quarters ended March 31, 1999 and 1998, approximately 41 and
100 percent, respectively, of the distributions paid to stockholders
were considered ordinary income and for the quarter ended March 31,
1999, approximately 59 percent was considered a return of capital to
stockholders for federal income tax purposes. No amounts distributed to
the stockholders for the quarters ended March 31, 1999 and 1998 are
required to be or have been treated by the Company as a return of
capital for purposes of calculating the stockholders' 8% return on
their invested capital. The characterization for tax purposes of
distributions declared for the quarter ended March 31, 1999 may not be
indicative of the results that may be expected for the year ending
December 31, 1999.
9. Related Party Transactions:
During the quarters ended March 31, 1999 and 1998, the Company incurred
$3,136,697 and $530,509, respectively, in selling commissions due to
CNL Securities Corp. for services in connection with the offering of
shares. A substantial portion of these amounts ($2,927,797 and
$495,216, respectively) were or will be paid by CNL Securities Corp. as
commissions to other brokers.
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 quarters ended March
31, 1999 and 1998, the Company incurred $209,113 and $35,367,
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 quarters ended March 31, 1999 and 1998, the Company incurred
$2,106,510 and $318,305, respectively, of such fees. Such fees are
included in land, buildings and equipment on operating leases, the
investment in private real estate investment trust and other assets at
March 31, 1999.
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 quarter ended March 31, 1999, the
Company incurred $49,565 of such fees.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
9. Related Party Transactions - Continued:
The Advisor and its affiliates provide various administrative services
to the Company, including services related to accounting; financial,
tax and regulatory compliance reporting; stockholder distributions and
reporting; due diligence and marketing; and investor relations
(including administrative services in connection with the offering of
shares), on a day-to-day basis. The expenses incurred for these
services were classified as follows for the quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C>
Stock issuance costs $883,881 $ 89,000
Land, buildings and equipment
on operating leases and
other assets 3,806 --
General operating and
administrative expenses 85,731 40,650
============== =============
$973,418 $129,650
============== =============
</TABLE>
The amounts due to related parties consisted of the following at:
<TABLE>
<CAPTION>
March 31 December 31,
1999 1998
--------------- --------------
<S> <C>
Due to CNL Securities Corp.:
Commissions $110,574 $ 66,063
Marketing support and due
diligence expense
reimbursement fee 7,372 4,404
--------------- --------------
$117,946 $ 70,467
--------------- --------------
Due to CNL Hospitality
Advisor:
Expenditures incurred on behalf
of the Company and
accounting and administrative
services 239,001 110,496
Acquisition fees 66,345 137,974
--------------- --------------
305,346 248,470
--------------- --------------
$423,292 $318,937
=============== ==============
</TABLE>
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
10. Concentration of Credit Risk:
One lessee, STC Leasing Associates, LLC, which operates each of two
properties owned as Residence Inn by Marriott, contributed more than
ten percent of the Company's total rental income (including the
Company's share of total rental income from Hotel Investors) for the
quarter ended March 31, 1999. In addition, all of the Company's rental
income (including the Company's share of rental income from Hotel
Investors) was earned from properties operating as Marriott(R) Brand
chains. 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 this Hotel Chain or lessee 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 during 1999 and subsequent years.
11. Commitments and Contingencies:
As of March 31, 1999, the Company has entered into agreements to
acquire, directly or indirectly, seven hotel Properties. In connection
with three of these agreements, the Company was required by the seller
to obtain a letter of credit. The letter of credit was collateralized
by a $5,000,000 certificate of deposit. In connection with the letter
of credit, the Company incurred $22,500 in closing costs. In connection
with the four remaining agreements, Hotel Investors was required by the
seller to pay a deposit of $10,000,000 which is being held in escrow by
the title company. Of this amount, Five Arrows contributed $5,600,000
and the Company contributed $4,400,000.
Pursuant to the purchase agreement in connection with the acquisition
of the two Properties directly owned by the Company, the Company may be
required to make an additional payment of up to $1 million, contingent
upon these Properties achieving certain gross earnings before interest,
taxes, depreciation and amortization, as compared to the original
purchase price pursuant to a formula during a 36 month period ending
July 31, 2001. Rental income will be adjusted upward in accordance with
the lease agreements for any such amount paid.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
12. Earnings Per Share:
The following represents the calculation of earnings per share and the
weighted average number of shares of dilutive potential common stock
for the quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
---------------- -----------------
<S> <C>
Basic Earnings Per Share:
Net earnings $ 430,280 $ 47,308
================ =================
Weighted average number of
shares outstanding 6,419,548 1,474,288
================ =================
Basic earnings per share $ 0.067 $ 0.032
================ =================
Diluted Earnings Per Share:
Net earnings $ 430,280 $ 47,308
Additional income attributable
to investment in
unconsolidated subsidiary
assuming all Class A Preferred
Shares were converted 71,479 --
---------------- -----------------
Adjusted net earnings
assuming dilution $ 501,759 $ 47,308
================ =================
Weighted average number of
shares outstanding 6,419,548 1,474,288
Assumed conversion of Class
A Preferred Stock 1,824,612 --
---------------- -----------------
Adjusted weighted average
number of shares outstanding 8,244,160 1,474,288
================ =================
Diluted earnings per share $ 0.061 $ 0.032
================ =================
</TABLE>
For the quarter ended March 31, 1999, the conversion of the convertible
loan to shares of common stock were not included in computing diluted
earnings per share because their effects were antidilutive.
13. Subsequent Events:
During the period April 1, 1999 through May 7, 1999, the Company
received subscription proceeds for an additional 2,706,012 shares
($27,060,121) of common stock.
On April, 1, 1999 and May 1, 1999, the Company declared distributions
totalling $554,793 and $688,077, respectively, or $0.0604 per share of
common stock, payable in June 1999, to stockholders of record on April
1, 1999 and May 1, 1999, respectively.
Due to the additional subscription proceeds received as noted above,
the convertible loan in the amount of $3,684,745 advanced by Five
Arrows was converted to 387,868 shares of the Company's common stock on
April 30, 1999.
<PAGE>
Report of Independent Accountants
To the Board of Directors
CNL Hospitality Properties, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings and of stockholders' equity and of cash
flows present fairly in all material respects, the financial position of CNL
Hospitality Properties, Inc. (a Maryland corporation) and its subsidiaries at
December 31, 1998 and 1997 and the results of their operations and their cash
flows for each of the two years ended December 31, 1998 and 1997 and the period
June 12, 1996 (date of inception) through December 31, 1996, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinions expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Orlando, Florida
January 19, 1999
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C>
December 31,
1998 1997
------------ ------------
ASSETS
Land, building and equipment on operating leases,
less accumulated depreciation $28,368,383 $ --
Cash and cash equivalents 13,228,923 8,869,838
Restricted cash 82,407 --
Certificate of deposit 5,016,575 --
Receivables 28,257 --
Due from related party -- 7,500
Prepaid expenses 9,391 11,179
Organization costs, less accumulated amortization of
$5,221 and $833, respectively 19,752 19,167
Loan costs, less accumulated amortization of $12,980 78,282 --
Accrued rental income 44,160 --
Other assets 1,980,560 535,792
------------- -------------
$48,856,690 $9,443,476
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $9,600,000 $ --
Accounts payable and accrued expenses 333,726 16,305
Due to related parties 318,937 193,254
Security deposits 1,417,500 --
Rents paid in advance 3,489 --
Interest payable 66,547 --
------------- -------------
Total liabilities 11,740,199 209,559
------------- -------------
Commitments (Note 10)
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
4,321,908 and 1,152,540 shares, respectively 43,219 11,525
Capital in excess of par value 37,289,402 9,229,316
Accumulated distributions in excess of net earnings (216,130 ) (6,924 )
------------- -------------
Total stockholders' equity 37,116,491 9,233,917
------------- -------------
$48,856,690 $ 9,443,476
============= =============
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONSOLIDATED STATEMENTS OF EARNINGS
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1998 1997 1996
------------ ------------- ------------
Revenues:
Rental income from
operating leases $1,218,500 $ -- $ --
FF&E Reserve income 98,099 -- --
Interest and other income 638,862 46,071 --
------------ ------------ ------------
1,955,461 46,071 --
------------ ------------ ------------
Expenses:
Interest and loan cost
amortization 350,322 -- --
General operating and
administrative 167,951 22,386 --
Professional services 21,581 -- --
Asset management fees to
related party 68,114 -- --
Depreciation and amortization 388,554 833 --
------------ ------------ ------------
996,522 23,219 --
------------ ------------ ------------
Net Earnings $ 958,939 $ 22,852 $ --
============ ============ ============
Earnings Per Share of Common
Stock (Basic and Diluted) $ 0.40 $ 0.03 $ --
============ ============ ============
Weighted Average Number of
Shares of Common Stock
Outstanding 2,402,344 686,063 --
============ ============ ============
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
Accumulated
Common stock distributions
------------------------ Capital in in excess
Number Par excess of of net
of Shares value par value earnings Total
----------- --------- ------------- -------------- -------------
Balance at June 12, 1996 -- $ -- $ -- $ -- $ --
Sale of common stock to
related party 20,000 200 199,800 -- 200,000
----------- --------- ------------- ------------- ------------
Balance at December 31, 1996 20,000 200 199,800 -- 200,000
Subscriptions received for common
stock through public offering
and distribution reinvestment
plan 1,132,540 11,325 11,314,077 -- 11,325,402
Stock issuance costs -- -- (2,284,561 ) -- (2,284,561 )
Net earnings -- -- -- 22,852 22,852
Distributions declared and paid
($.05 per share) -- -- -- (29,776 ) (29,776 )
----------- --------- ------------- ------------- ------------
Balance at
December 31, 1997 1,152,540 11,525 9,229,316 (6,924 ) 9,233,917
Subscriptions received for common
stock through public offering
and distribution reinvestment
plan 3,169,368 31,694 31,661,984 -- 31,693,678
Stock issuance costs -- -- (3,601,898 ) -- (3,601,898 )
Net earnings -- -- -- 958,939 958,939
Distributions declared and paid
($.46 per share) -- -- -- (1,168,145 ) (1,168,145 )
----------- --------- ------------- ------------- ------------
Balance at
December 31, 1998 4,321,908 $43,219 $37,289,402 $ (216,130 ) $37,116,491
=========== ========= ============= ============= ============
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1998 1997 1996
----------- ------------- -------------
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants $2,665,171 $ -- $ --
Interest received 622,237 46,071 --
Cash paid for expenses (239,648 ) (23,602 ) --
Cash paid for interest (270,795 ) -- --
------------ ------------ -----------
Net cash provided by operating
activities 2,776,965 22,469 --
------------ ------------ -----------
Cash Flows from Investing Activities:
Additions to land, buildings and equipment
on (28,216,757 ) -- --
operating leases
Investment in certificate of deposit (5,000,000 ) -- --
Increase in restricted cash (82,407 ) -- --
Increase in other assets (1,211,818 ) (463,470 ) --
------------ ------------ -----------
Net cash used in investing
activities (34,510,982 ) (463,470 ) --
------------ ------------ -----------
Cash Flows from Financing Activities:
Reimbursement of acquisition, organization,
deferred offering and stock issuance
costs paid by related parties on behalf of
the Company (862,068 ) (1,003,031 ) (197,916 )
Sale of common stock to related party -- -- 200,000
Proceeds from borrowing on line of credit 9,600,000 -- --
Payment of loan costs (91,262 ) -- --
Subscriptions received from stockholders 31,693,678 11,325,402 --
Distributions to stockholders (1,168,145 ) (29,776 ) --
Payment of stock issuance costs (3,086,630 ) (986,338 ) --
Other 7,529 2,498 --
------------ ------------ -----------
Net cash provided by financing
activities 36,093,102 9,308,755 2,084
------------ ------------ -----------
Net Increase in Cash and Cash Equivalents 4,359,085 8,867,754 2,084
Cash and Cash Equivalents at Beginning
of Period 8,869,838 2,084 --
------------ ------------ -----------
Cash and Cash Equivalents at End of
Period $13,228,923 $8,869,838 $ 2,084
============ ============ ===========
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
STATEMENTS OF CASH FLOWS - CONTINUED
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1998 1997 1996
------------- ----------- -----------
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
Net earnings $ 958,939 $ 22,852 $ --
------------ ----------- -----------
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 384,166 -- --
Amortization 17,368 833 --
Increase in receivables (44,832 ) -- --
Decrease (increase) in prepaid
expenses 1,788 (11,179 ) --
Increase in accrued rental income (44,160 ) -- --
Increase in accounts payable
and other accrued expenses 71,869 6,141 --
Increase in due to related
parties, excluding reimbursement
of acquisition,organization,
deferred offering and stock
issuance costs paid on behalf
of the Company 10,838 3,822 --
Increase in security deposits 1,417,500 -- --
Increase in rents paid in advance 3,489 -- --
------------ ----------- -----------
Total adjustments 1,818,026 (383 ) --
------------ ----------- -----------
Net Cash Provided by Operating Activities $2,776,965 $ 22,469 $ --
============ =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain
acquisition, organization,deferred
offering and stock issuance costs
on behalf of the Company as
follows:
Acquisition costs $ 392,863 $ 26,149 $ --
Organization costs 4,973 -- 20,000
Deferred offering costs -- -- 535,812
Stock issuance costs 454,277 638,274 --
============ =========== ===========
$ 852,113 $ 664,423 $ 555,812
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies:
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., each of which were 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"). 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. 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.
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.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of 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.
Real Estate and Lease Accounting - The Company records the acquisition
of land, buildings and equipment at cost, including acquisition and
closing costs. Land, buildings and equipment are leased to unrelated
third parties on a triple-net basis, whereby the tenant is generally
responsible for all operating expenses relating to the Property,
including property taxes, insurance, maintenance and repairs.
The Property leases are accounted for using the operating method. Under
the operating method, land, building and equipment leases are recorded
at cost, revenue is recognized as rentals are earned and depreciation
is charged to operations as incurred. Buildings and equipment are
depreciated on the straight-line method over their estimated useful
lives of 40 and seven years, respectively. When scheduled rentals vary
during the lease term, income is recognized on a straight-line basis so
as to produce a constant periodic rent over the lease term commencing
on the date the Property is placed in service. Accrued rental income
represents the aggregate amount of income recognized on a straight-line
basis in excess of scheduled rental payments to date.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies - Continued:
When the Properties or equipment are sold, the related cost and
accumulated depreciation, plus any accrued rental income, will be
removed from the accounts and any gain or loss from sale will be
reflected in income. Management reviews its Properties for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through operations.
Management determines whether an impairment in value has occurred by
comparing the estimated future undiscounted cash flows, including the
residual value of the Property, with the carrying cost of the
individual Property. If an impairment is indicated, the assets are
adjusted to their fair value.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds. Cash equivalents
are stated at cost plus accrued interest, which approximates market
value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Company has not experienced any losses in such
accounts. The Company limits investment of temporary cash investments
to financial institutions with high credit standing; therefore,
management believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Organization Costs - Organization costs are amortized over five years
using the straight-line method.
Loan Costs - Loan costs incurred in connection with the Company's
$9,600,000 line of credit and a $5,000,000 letter of credit have been
capitalized and are being amortized over the term of the loan and
letter of credit commitment, respectively, using the straight-line
method which approximates the effective interest method.
Income Taxes - The Company has made an election to be taxed as a real
estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, and related regulations. The
Company generally will not be subject to federal corporate income taxes
on amounts distributed to stockholders, providing it distributes at
least 95 percent of its REIT taxable income and meets certain other
requirements for qualifying as a REIT. Accordingly, no provision for
federal income taxes has been made in the accompanying consolidated
financial statements. Notwithstanding the Company's qualification for
taxation as a REIT, the Company is subject to certain state taxes on
its income and property.
Earnings Per Share - Basic earnings per share are calculated based upon
net earnings (income available to common stockholders) divided by the
weighted average number of shares of common stock outstanding during
the reporting period. The Company does not have any dilutive potential
common shares.
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform with the 1998
presentation. These reclassifications had no effect on stockholders'
equity or net earnings.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies - Continued:
Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
New Accounting Standards - 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.
2. Public Offerings:
The Company has a currently effective registration statement on Form
S-11 with the Securities and Exchange Commission for the sale of
16,500,000 shares of common stock (the "Offering"). Of the 16,500,000
shares of common stock, the Company has registered 1,500,000 shares
($15,000,000) which are available only to stockholders who elect to
participate in the Company's reinvestment plan. The Company has adopted
a reinvestment plan pursuant to which stockholders may elect to have
the full amount of their cash distributions from the Company reinvested
in additional shares of common stock of the Company. As of December 31,
1998, the Company had received subscription proceeds of $43,019,080
(4,301,908 shares), including $37,299 (3,730 shares) through the
reinvestment plan.
On November 23, 1998, the Company filed a registration statement on
Form S-11 with the Securities and Exchange Commission in connection
with the proposed sale by the Company of up to 27,500,000 additional
shares of common stock ($275,000,000) (the "Secondary Offering") in an
offering expected to commence immediately following the completion of
the Company's current Offering. Of the 27,500,000 shares of common
stock to be offered, 2,500,000 will be available only to stockholders
purchasing shares through the reinvestment plan. The price per share
and the other terms of the Secondary Offering, including the percentage
of gross proceeds payable (i) to the managing dealer for selling
commissions and expenses in connection with the offering and (ii) the
advisor for acquisition fees and acquisition expenses, will be
substantially the same as those for the Company's current Offering. The
Company expects to use net proceeds from the Secondary Offering to
purchase additional Properties and, to a lesser extent, make Mortgage
Loans.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
3. Land, Buildings and Equipment on Operating Leases:
The Company leases its land, buildings and equipment to a hotel
operator. 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 tenant to renew each of the leases for three
successive five-year periods subject to the same terms and conditions
of the initial leases. The leases also require the establishment of
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
have been earned, granted and assigned to the Company as additional
rent. For the year ended December 31, 1998, revenues from the FF&E
Reserve totalled $98,099, of which $15,692 is included in receivables
and $82,407 is restricted cash.
Land, buildings and equipment on operating leases consisted of the
following at:
December 31, December 31,
1998 1997
------------- -------------
Land $2,926,976 $ --
Buildings 23,476,442 --
Equipment 2,349,131 --
-------------- -------------
28,752,549 --
Less accumulated depreciation (384,166 ) --
============== =============
$28,368,383 $ --
============== =============
The leases provide an increase in the minimum annual rent at a
predetermined interval during the terms of the leases. Such amount is
recognized on a straight-line basis over the terms of the leases
commencing on the date the Property is placed in service. For the year
ended December 31, 1998, the Company recognized $44,160 of such rental
income.
The following is a schedule of future minimum lease payments to be
received on the noncancellable operating leases at December 31, 1998:
1999 $2,889,162
2000 2,928,895
2001 2,928,895
2002 2,928,895
2003 2,928,895
Thereafter 40,028,238
===============
$54,632,980
===============
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
3. Land, Buildings and Equipment on Operating Leases - Continued:
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.
4. Other Assets:
Other assets as of December 31, 1998 and 1997 were $1,980,560 and
$535,792, respectively, which consisted of acquisition fees and
miscellaneous acquisition expenses that will be allocated to future
Properties.
5. Line of Credit:
On July 31, 1998, the Company entered into an initial revolving line of
credit and security agreement with a bank to be used by the Company to
acquire hotel Properties. The line of credit provides that the Company
may receive advances of up to $30,000,000 until July 30, 2003, with an
annual review to be performed by the bank to indicate that there has
been no substantial deterioration, in the bank's reasonable discretion,
of the credit quality. Interest expense on each advance shall be
payable monthly, with all unpaid interest and principal due no later
than five years from the date of the advance. Advances under the line
of credit will bear interest at either (i) a rate per annum equal to
318 basis points above the London Interbank Offered Rate (LIBOR) or
(ii) a rate per annum equal to 30
basis points above the bank's base rate, whichever the Company selects
at the time advances are made. In addition, a fee of .5% per advance
will be due and payable to the bank on funds as advanced. Each advance
made under the line of credit will be collateralized 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 31, 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 and the commitment to acquire
three additional Properties (see Note 10). The interest rate of the
line of credit at December 31, 1998 was 8.05% (bank's base rate plus 30
basis points).
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
6. Stock Issuance Costs:
The Company has incurred certain expenses of its Offering, 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 years ended December 31, 1998 and 1997, the Company incurred
$3,606,871 and $2,304,561, respectively, in organizational and offering
costs, including $2,535,494 and $906,032, respectively, in commissions
and marketing support and due diligence expense reimbursement fees (see
Note 8). Of these amounts $3,601,898 and $2,284,561, respectively, have
been treated as stock issuance costs and $4,973 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.
7. Distributions:
For the years ended December 31, 1998 and 1997, approximately 76
percent and 100 percent, respectively, of the distributions paid to
stockholders were considered ordinary income, and for the year ended
December 31, 1998, approximately 24 percent was considered a return of
capital to stockholders for federal income tax purposes. No amounts
distributed to the stockholders for the years ended December 31, 1998
and 1997 are required to be or have been treated by the Company as a
return of capital for purposes of calculating the stockholders' return
on their invested capital.
8. Related Party Transactions:
Certain affiliates of the Company received fees and compensation in
connection with the Offering, and the acquisition, management and sale
of the assets of the Company.
On June 12, 1996 (date of inception), CNL Fund Advisors, Inc.
contributed $200,000 in cash to the Company and became its sole
stockholder. In February 1997, the Advisor purchased the Company's
outstanding common stock from CNL Fund Advisors, Inc. and became the
sole stockholder of the Company.
During the years ended December 31, 1998 and 1997, the Company incurred
$2,377,026 and $849,405, respectively, in selling commissions due to
CNL Securities Corp. for services in connection with the Offering. A
substantial portion of these amounts ($2,200,516 and $792,832,
respectively) were or will be paid by CNL Securities Corp. as
commissions to other broker-dealers.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
8. Related Party Transactions - Continued:
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 years ended December
31, 1998 and 1997, the Company incurred $158,468 and $56,627,
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.
CNL Securities Corp. will also receive, in connection with the
Offering, a soliciting dealer servicing fee payable annually by the
Company beginning on December 31 of the year following the year in
which the Offering is completed in the amount of 0.20% of the invested
capital of the stockholders that invest in the Company through this
Offering. CNL Securities Corp. in turn may reallow all or a portion of
such fee to soliciting dealers whose clients held shares on such date.
As of December 31, 1998, no such fees had been incurred.
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 Mortgage Loans equal to 4.5% of the
gross proceeds of the Offering, 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 years ended December 31,
1998 and 1997, the Company incurred $1,426,216 and $509,643,
respectively, of such fees. Such fees are included in land, buildings
and equipment on operating leases and other assets.
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 year ended December 31, 1998, the
Company incurred $68,114 of such fees. No such fees were incurred by
the Company for 1997.
The Company incurs operating expenses which, in general, are those
expenses relating to administration of the Company on an ongoing basis.
Pursuant to the advisory agreement described above, 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 greater of two percent of average
invested assets or 25 percent of net income (the "Expense Cap"). During
the year ended December 31, 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.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
8. Related Party Transactions - Continued:
The Advisor and its affiliates provide various administrative services
to the Company, including services related to accounting; financial,
tax and regulatory compliance reporting; stockholder distributions and
reporting; due diligence and marketing; and investor relations
(including administrative services in connection with the Offering), on
a day-to-day basis. The expenses incurred for these services were
classified as follows:
<TABLE>
<CAPTION>
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1998 1997 1996
--------------- ------------- --------------
<S> <C>
Deferred offering costs $ -- $ -- $28,665
Stock issuance costs 494,729 185,335 --
Land, buildings and equipment
on operating leases and
other assets 9,084 -- --
General operating and
administrative expenses 140,376 6,889 --
============= ============ ============
$644,189 $192,224 $28,665
============= ============ ============
The amounts due to related parties consisted of the following at
December 31:
1998 1997
------------ ------------
Due to CNL Securities Corp.:
Commissions $66,063 $100,709
Marketing support and due diligence
expense reimbursement fee 4,404 7,268
------------ ------------
70,467 107,977
------------ ------------
Due to the Advisor:
Expenditures incurred on behalf
of the Company and for
accounting, administrative and
acquisition services 110,496 39,105
Acquisition fees 137,974 46,172
------------ ------------
248,470 85,277
============ ============
$318,937 $193,254
============ ============
</TABLE>
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
9. Concentration of Credit Risk:
All of the Company's rental income for the year ended December 31,
1998 was earned from one lessee, STC Leasing Associates, LLC, which
operates each of the two Properties as a 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 this Hotel Chain or lessee 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 subsequent years.
10. Commitments:
In July 1998, the Company entered into agreements to acquire three
additional hotel Properties for an anticipated aggregate purchase price
of approximately $100 million. In connection with these agreements, the
Company was required by the seller to obtain a letter of credit. The
letter of credit is collateralized by a $5,000,000 certificate of
deposit.
11. Subsequent Events:
During the period January 1, 1999 through January 19, 1999, the Company
received subscription proceeds for an additional 561,565 shares
($5,615,647) of common stock.
On January 1, 1999, the Company declared distributions totalling
$251,967 or $0.0583 per share of common stock, payable in March 1999,
to stockholders of record on January 1, 1999.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
--------------------------------- -------------------
Encum- Improve- Carrying
brances Land Buildings Equipment ments Costs
------- ---- --------- --------- ----- --------
Properties the Company
has Invested in Under
Operating Leases:
Residence Inns by Marriott(R):
Atlanta, Georgia (b) $1,907,479 $13,459,040 $1,234,689 $ - $ -
Duluth, Georgia (c) 1,019,497 10,017,402 1,114,442 - -
---------- ----------- ---------- ------- -------
$ 2,926,976 $23,476,442 $2,349,131 $ - $ -
=========== =========== ========== ======== =======
<PAGE>
Life
on Which
Depreciation
in Latest
Gross Amount at Which Carried Date Income
at Close of Period (d) Accumulated of Con- Date Statement is
Land Buildings Equipment Total Depreciation struction Acquired Computed
---- --------- --------- ----- ------------ --------- -------- -------------
$1,907,479 $13,459,040 $1,234,689 $16,601,208 $213,483 1997 07/98 (e)
1,019,497 10,017,402 1,114,442 12,151,341 170,683 1997 07/98 (e)
- ---------- ----------- ---------- ----------- --------
$2,926,976 $23,476,442 $2,349,131 $28,752,549 $384,166
========== =========== ========== =========== ========
</TABLE>
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(a) Transactions in real estate and accumulated depreciation during 1998
and 1997 are summarized as follows:
Accumulated
Cost (d) Depreciation
---------- ------------
Properties the Company
has Invested in Under
Operating Leases:
Balance, December 31, 1997 $ - $ -
Acquisitions 28,752,549 384,166
----------- --------
Balance, December 31, 1998 $28,752,549 $384,166
=========== ========
(b) In connection with the purchase of this Property, the Company has
obtained a loan in the amount of $6,000,000 collateralized by the
assignment of the rents and leases related to the Property.
(c) In connection with the purchase of this Property, the Company has
obtained a loan in the amount of $3,600,000 collateralized by the
assignment of the rents and leases related to the Property.
(d) As of December 31, 1998, the aggregate cost of the Properties owned by
the Company and its subsidiaries for federal income tax purposes is
$28,752,549. All of the leases are treated as operating leases for
federal income tax purposes.
(e) Depreciation expense is computed for buildings and equipment based upon
estimated lives of 40 and seven years, respectively.
(f) During the years ended December 31, 1998 and 1997, the Company incurred
acquisition fees totalling $1,426,216 and $509,643, respectively, paid
to the Advisor. Acquisition fees are included in land and buildings on
operating leases and other assets at December 31, 1998 and 1997.
INDEX TO OTHER FINANCIAL STATEMENTS
The following financial information is provided in connection with the Company's
acquisition of the Buckhead (Lenox Park) and the Gwinnett Place Properties. Due
to the fact that the tenant of the Company is a newly formed entity, the
information presented represents the historical financial performance of the
hotel businesses. The Buckhead (Lenox Park) Property and the Gwinnett Place
Property became operational on August 7, 1997 and July 29, 1997, respectively.
This information was obtained from the seller of the Properties. The Company has
acquired the hotel Properties and does not own any interest in the hotel
businesses. For information on the Properties and the long-term, triple-net
leases in which the Company has entered, see "Business -- Property
Acquisitions."
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
Updated Financial Statements (unaudited):
Balance Sheet as of June 30, 1998 B-27
Statement of Loss for the six months ended June 30, 1998 B-28
Audited Financial Statements:
Report of Independent Public Accountants B-29
Balance Sheet as of December 31, 1997 B-30
Statement of Loss for the year ended December 31, 1997 B-31
Statement of Member's Equity for the year ended December
31, 1997 B-32
Statement of Cash Flows for the year ended December 31,
1997 B-33
Notes to Financial Statement for the year ended December
31, 1997 B-34
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
Updated Financial Statements (unaudited):
Balance Sheet as of June 30, 1998 B-39
Statement of Loss for the six months ended June 30, 1998 B-40
Audited Financial Statements:
Report of Independent Public Accountants B-41
Balance Sheet as of December 31, 1997 B-42
Statement of Loss for the year ended December 31, 1997 B-43
Statement of Member's Deficit for the year ended December
31, 1997 B-44
Statement of Cash Flows for the year ended December 31,
1997 B-45
Notes to Financial Statement for the year ended December 31,
1997 B-46
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' EQUITY
------ -------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $ 1,229,955 Accounts payable $ 711,974
Accounts receivable, net 173,287 Accrued liabilities 427,306
-----------
Prepaid expenses 18,080
------------ Total current liabilities 1,139,280
Total current assets 1,421,322
------------
PROPERTY, at cost: FIRST MORTGAGE LOAN 10,634,958
Land 1,505,591
Buildings 8,842,642
Furniture, fixtures, and equipment 1,470,899 MEZZANINE LOAN 1,601,152
------------ -----------
11,819,132 Total liabilities 13,375,390
Less accumulated depreciation (467,063)
------------
Net property 11,352,069
------------
LOAN COSTS, net of accumulated MEMBERS' EQUITY 62,078
amortization of $109,395 377,910 -----------
------------
ORGANIZATION COSTS, net of Total liabilities and members'
accumulated amortization of equity $13,437,468
$38,269 43,272 ===========
------------
FRANCHISE COSTS, net of
accumulated amortization of
$2,750 57,250
------------
DEVELOPMENT IN PROGRESS 185,645
------------
Total assets $ 13,437,468
============
</TABLE>
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
REVENUES:
Rooms $ 2,007,424
Telephone 79,188
Other 50,203
-------------
Total revenues 2,136,815
-------------
EXPENSES:
Rooms 453,769
Telephone 18,730
Other operating departments 9,368
Administrative and general 158,036
Credit card commissions 44,111
Franchise fees 80,337
Advertising, marketing, and promotion 141,041
Repairs and maintenance 66,750
Utilities 52,275
Property insurance and taxes 117,165
Management fees 64,098
Other 5,134
Interest 604,186
Depreciation and amortization 337,891
-------------
Total expenses 2,152,891
-------------
NET LOSS $ (16,076)
=============
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Buckhead Residence Associates, L.L.C.:
We have audited the accompanying balance sheet of BUCKHEAD RESIDENCE ASSOCIATES,
L.L.C. as of December 31, 1997 and the related statement of loss, members'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Buckhead Residence Associates,
L.L.C. as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
February 27, 1998
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' EQUITY
------ -------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and short-term investments, including Accounts payable $ 285,134
restricted cash of $18,387 $ 225,703 Accrued liabilities 140,911
Accounts receivable, net of allowance for doubtful Current portion of mortgage loan 38,522
accounts of $1,973 114,685 -----------
Prepaid expenses 12,398 Total current liabilities 464,567
------------
Total current assets 352,786
------------
PROPERTY, at cost: DEFERRED DEVELOPMENT FEE 619,000
Land 1,505,591
Buildings 8,969,838
Furniture, fixtures, and equipment 1,470,899 FIRST MORTGAGE LOAN, less current portion 9,949,319
------------ (Note 2)
11,946,328
Less accumulated depreciation (211,216)
Net property 11,735,112 MEZZANINE LOAN (Note 2) 1,533,202
------------ -----------
LOAN COSTS, net of accumulated amortization of $49,725 437,580 Total liabilities 12,566,088
------------
ORGANIZATION COSTS, net of accumulated amortization of
$17,395 64,146 COMMITMENTS AND CONTINGENCIES (Note 2)
------------
FRANCHISE COSTS, net of accumulated amortization of
$1,250 58,750 MEMBERS' EQUITY 82,286
------------ -----------
Total assets $ 12,648,374 Total liabilities and members'
============ equity $12,648,374
===========
</TABLE>
The accompanying notes are an integral part of
this balance sheet.
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1997
REVENUES:
Rooms $ 862,815
Telephone 40,832
Other 15,684
----------
Total revenues 919,331
----------
EXPENSES:
Rooms 280,204
Telephone 8,603
Other operating departments 2,725
Administrative and general 103,471
Credit card commissions 19,124
Franchise fees 34,513
Advertising, marketing, and promotion 88,954
Repairs and maintenance 46,188
Utilities 37,097
Property insurance and taxes 18,758
Management fees 27,580
Other 34,541
Interest 447,026
Depreciation and amortization 279,586
----------
Total expenses 1,428,370
----------
NET LOSS $ (509,039)
==========
The accompanying notes are an integral part of this statement.
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
Stormont
Trice
Development RI HWE
Corporation Partners IV Total
----------- -------- --- -----
BALANCE, December 31, 1996 $ 193,800 $ 193,800 $ 203,725 $ 591,325
Net loss (193,800) (193,800) (121,439) (509,039)
---------- ---------- --------- ---------
BALANCE, December 31, 1997 $ 0 $ 0 $ 82,286 $ 82,286
========== ========== ========= =========
The accompanying notes are an integral part of this statement.
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (509,039)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 279,586
Changes in assets and liabilities:
Accounts receivable, net (114,685)
Prepaid expenses (12,398)
Accounts payable 285,134
Accrued liabilities 130,196
-----------
Total adjustments 567,833
-----------
Net cash provided by operating activities 58,794
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,627,218)
Organization costs (7,361)
-----------
Net cash used in investing activities (8,634,579)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal received from loans payable 8,715,244
Loan costs (7,362)
-----------
Net cash provided by financing activities 8,707,882
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 132,097
-----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 93,606
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 225,703
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the year $ 0
===========
The accompanying notes are an integral part of this statement.
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Buckhead Residence Associates, L.L.C. (the "Company") is a Georgia limited
liability company that was organized for the purpose of constructing,
operating, and owning the Residence Inn Lenox Park (the "Hotel") in
Atlanta, Georgia. The Hotel is comprised of 150 suites and became
operational on August 7, 1997.
The members of the Company (the"Members"), their ownership percentages, and
their initial capital contributions are as follows:
Initial
Ownership Capital
Percentage Contribution
---------- ------------
Members:
Stormont Trice Development
Corporation ("STDC" or the
"Manager ") 40.74% $212,000
RI Partners ( "RI ") 40.74 212,000
HWE IV 18.52 212,000
The operating agreement provides for allocation of profits, losses, and
cash distributions, as follows:
Profits
o To the Members in proportion to their respective ownership
percentage interests, as defined in the agreement
Losses
o First, to the Members in proportion to their respective ownership
percentage interests until any Member's capital account is reduced
to zero
o Second, to the Member, if any, to the extent of its remaining
positive capital account balance (as adjusted to reflect any prior
allocation of loss)
<PAGE>
o Third, to the partners in proportion to their respective ownership
percentage interests
Notwithstanding the above loss allocations, to the extent losses
allocated to a Member would cause a Member to have an adjusted capital
account deficit, such losses shall not be allocated to such Member but
instead shall be allocated to other Members in proportion to, and to
the extent that, the amounts in which losses may be allocated to the
other Members without causing the other Members to have an adjusted
capital account deficit and then to the Members in proportion to their
respective contribution percentage interests.
Cash Distributions
o First, to the repayment or prepayment of such debts or
liabilities, other than any debts of the Company to any of the
Members, as the Manager shall determine to be in the best interest
of the Company
o Second, to the establishment of such reserves as the Manager deems
appropriate
o Third, to the repayment or prepayment of any back-up loans, as
defined in the agreement
o Fourth, to the repayment or prepayment of any Member loans
o Fifth, to the Members in equal shares until such time as $63,600
has been distributed to the Members
o Sixth, in equal amounts to the Manager and RI until such time as
$50,871 has been distributed to the Members
o Seventh, the balance available to the Members in proportion to
their respective ownership percentage interests
Allocation of profits, losses, and cash distributions from the sale or
refinancing of the property are allocated in a different manner and will be
affected by the terms of notes payable agreements discussed in Note 2.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash on hand,
deposits in banks, and short-term investments with original maturities of
90 days or less to be cash and cash equivalents.
The first mortgage, mezzanine loan, and management agreements require the
Hotel to establish a furniture, fixtures, and equipment reserve, as
follows: 0% in year one, 2% in year two, 3% in year three, 4% in year four,
and 5% in year five of gross revenues, as defined in the loan agreement. As
of December 31, 1997, $18,387 of cash and cash equivalents was designated
as the furniture, fixtures, and equipment reserve.
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Franchise and Organization Expenses
A franchise application fee has been capitalized and is being amortized
over the 20-year life of the franchise agreement. Organization costs have
been capitalized and are being amortized over 5 years.
Property
Property is recorded at cost, including capitalized interest, and is
depreciated using the straight-line method over the estimated useful lives
of the assets, which are 30 years for buildings and 3 to 7 years for
furniture, fixtures, and equipment. Expenditures for replacements and
betterments are capitalized, while expenditures for maintenance and repairs
are expensed as incurred.
Income Taxes
No provisions for income taxes have been made in the accounts of the
Company, since the Members report their respective shares of taxable income
and loss in their individual tax returns.
2. NOTES PAYABLE
First Mortgage Loan
On August 29, 1996, the Company entered into a loan agreement with Ocwen
Federal Bank FSB ("Ocwen"), formerly Berkeley Federal Bank & Trust FSB, for
a total available amount of $11,262,500 to fund costs of developing and
operating the Hotel. The note bears 10.25% interest until its maturity date
of August 31, 2001. The loan is collateralized by the Company's interest in
the Hotel. Interest accrues monthly and is added to the outstanding balance
until the budgeted interest reserve is depleted or September 1, 1998,
whichever is earlier. Beginning October 1, 1998, interest and principal are
due monthly, with all remaining repaid principal and interest being due on
August 31, 2001. The principal outstanding at December 31, 1997 is
repayable as follows:
1998 $ 38,522
1999 164,304
2000 181,960
2001 9,603,055
-----------
$ 9,987,841
===========
<PAGE>
In addition, Ocwen receives noncumulative participating interest based on a
percentage of the Company's excess cash flow, as defined in the loan
agreement. These percentages are as follows: 22.5% in year one, 25% in
years two and three, and 30% in years four and five. No amounts were
payable in 1997.
In the event the Company sells the Hotel or refinances the loan, an amount
shall be due to Ocwen as follows: in year one, the greater of $525,000 or
22.5% of the greater of the net proceeds or net economic value, as defined
in the loan; in years two or three, the greater of $525,000 or 25% of the
greater of the net proceeds or net economic value; in year four, the
greater of $800,000 or 30% of the greater of the net proceeds or net
economic value; in year five, the greater of $1,300,000 or 30% of the
greater of the net proceeds or net economic value.
Mezzanine Loan
On August 29, 1996, the Company entered into a loan agreement with Heller
Financial, Inc. ("Heller") for a total available amount of $1,621,800. At
December 31, 1997, $1,533,202 is outstanding, including $181,702 of accrued
interest. The note bears an interest rate of 10% and is interest only until
its maturity date of August 31, 2001. Interest is due monthly, commencing
when the accrued interest exceeds $270,300 or 20% of the outstanding
principal amount of the loan or when distributable cash flow, as defined,
is available. In addition, Heller receives quarterly, as additional
consideration, the excess of the percentage of the Company's excess cash
flow, as defined in the loan agreement, over the amount of interest accrued
during the previous quarter. These percentages are as follows: 42.625% in
year one, 41.25% in years two and three, and 38.5% in years four and five
(effectively, this equals 55% of the cash flow after paying Ocwen's
participating interest).
Through August 31, 2006, upon the occurrence of any participation event, as
defined in the loan agreement, Heller will receive an amount calculated as
follows: in year one, the greater of $800,000 or 55% of the net adjusted
proceeds, as defined in the loan agreement, less $250,000 and the Company's
equity (the "Participation Amount"); in year two, the greater of $1,100,000
or 55% of the Participation Amount; in year three, the greater of
$1,200,000 or 55% of the Participation Amount; in year four, the greater of
$1,400,000 or 55% of the Participation Amount; in year five and thereafter,
the greater of $1,500,000 or 55% of the Participation Amount. In no event
may Heller's participation exceed 49.9% of the total profit of the
participation event.
3. FRANCHISE AND MANAGEMENT AGREEMENTS
The Hotel is operated under a franchise agreement with Marriott
International, Inc. ("Marriott"). The term of the agreement is 20 years
unless otherwise extended or terminated. The Company paid Marriott an
application fee of $60,000. This has been capitalized as franchise costs in
the accompanying balance sheet. Amortization began when the Hotel became
operational, and the cost is being amortized over the life of the franchise
agreement. The agreement provides for the Hotel to reimburse Marriott for
certain common expenses, including, but not limited to, the use of
Marriott's national reservation system. The Hotel also pays Marriott
certain fees, as follows:
<PAGE>
o Royalty Fee. Percent of the gross sales, as defined in the
agreement. Royalty fees for the year ended December 31, 1997 were
$34,513.
o Marketing Fund Fee. Percent of gross sales. Marketing fund fees
for the year ended December 31, 1997 were $21,571 and are included
in advertising, marketing, and promotion expenses in the
accompanying statement of loss.
The Hotel is operated under a management agreement with Stormont Trice
Management Corporation ("STMC"), an affiliate of STDC. The term of the
management agreement is ten years. Under the terms of the agreement, the
Company pays STMC 3% of gross revenues, as defined in the agreement. At
December 31, 1997, $6,907 in management fees were payable to STMC.
Management fee expense for 1997 was $27,580.
4. RELATED-PARTY TRANSACTIONS
In addition to the management agreement (Note 3), Stormont Trice
Corporation, an affiliate of STDC, provides workers' compensation, group
insurance, and certain employee benefits to all of the Stormont Trice
Corporation group of hotels, and a pro rata portion of the total insurance
and certain employee benefits expense is allocated to each hotel. The
amount allocated to the Company for the year ended December 31, 1997 was
$11,493.
Stormont Trice Corporation also provides property, umbrella, and casualty
insurance to all of the Stormont Trice Corporation group of hotels, and a
pro rata portion of the total insurance expense is allocated to each hotel.
The amount allocated to the Company for the year ended December 31, 1997
was $15,925.
STDC provided development management services to the Company in
construction of the Hotel. The costs for these services in 1997 were
$619,000 and are included in buildings in the accompanying balance sheet.
Amounts due to STDC for these services are $619,000 at December 31, 1997.
In accordance with the terms of the agreement, the fee will not be payable
until the Company repays all of the Ocwen loan obligation and a portion of
the Heller loan obligation, as defined.
STDC also provided the director of design and development for the Hotel.
The cost for these services in 1997 was $34,082 and is included in
buildings in the accompanying balance sheet. Amounts due to STDC for these
services were approximately $14,000 at December 31, 1997 and are included
in accounts payable in the accompanying balance sheet.
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' DEFICIT
------ --------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $ 768,261 Accounts payable $ 459,653
Accounts receivable, net 106,194 Accrued liabilities 292,461
-----------
Prepaid expenses 18,985
----------- Total current liabilities 752,114
Total current assets 893,440
-----------
PROPERTY, at cost: FIRST MORTGAGE LOAN 7,691,138
Land 800,000
Buildings 6,509,423
Furniture, fixtures, and equipment 1,311,137 MEZZANINE LOAN 1,204,270
----------- -----------
8,620,560 Total liabilities 9,647,522
Less accumulated depreciation (369,063)
-----------
Net property 8,251,497
-----------
LOAN COSTS, net of accumulated MEMBERS' DEFICIT (75,739)
amortization of $86,686 299,461 -----------
-----------
ORGANIZATION COSTS, net of Total liabilities and members'
accumulated amortization of deficit $ 9,571,783
$39,585 44,664 ===========
-----------
FRANCHISE COSTS, net of
accumulated amortization of
$2,420 50,380
-----------
DEVELOPMENT IN PROGRESS 32,341
-----------
Total assets $ 9,571,783
===========
</TABLE>
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
REVENUES:
Rooms $ 1,454,846
Telephone 66,129
Other 44,609
------------
Total revenues 1,565,584
------------
EXPENSES:
Rooms 290,519
Telephone 10,900
Other operating departments 14,259
Administrative and general 134,926
Credit card commissions 33,083
Franchise fees 58,194
Advertising, marketing, and promotion 120,237
Repairs and maintenance 64,418
Utilities 62,361
Property insurance and taxes 66,783
Management fees 62,623
Other 4,010
Interest 439,034
Depreciation and amortization 272,287
------------
Total expenses 1,633,634
------------
NET LOSS $ (68,050)
============
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Gwinnett Residence Associates, L.L.C.:
We have audited the accompanying balance sheet of GWINNETT RESIDENCE ASSOCIATES,
L.L.C. as of December 31, 1997 and the related statement of loss, members'
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gwinnett Residence Associates,
L.L.C. as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
February 27, 1998
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' DEFICIT
------ --------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and short-term investments, including Accounts payable $ 311,598
restricted cash of $15,483 $ 212,745 Accrued liabilities 105,740
Accounts receivable, net of allowance for Current portion of mortgage loan 27,736
doubtful accounts of $744 51,372 ----------
Prepaid expenses 24,414 Total current liabilities 445,074
------------
Total current assets 288,531
------------
PROPERTY, at cost: DEFERRED DEVELOPMENT FEE 451,000
Land 800,000
Buildings 6,509,423
Furniture, fixtures, and equipment 1,311,137 FIRST MORTGAGE LOAN, less current portion 7,163,684
------------ (Note 2)
8,620,560
Less accumulated depreciation (166,971)
------------
Net property 8,453,589 MEZZANINE LOAN (Note 2) 1,153,163
------------- ----------
LOAN COSTS, net of accumulated amortization Total liabilities 9,212,921
of $39,403 346,744
------------
ORGANIZATION COSTS, net of accumulated
amortization of $17,993 66,256 COMMITMENTS AND CONTINGENCIES (Note 2)
------------
FRANCHISE COSTS, net of accumulated amortization of
$1,100 51,700 MEMBERS' DEFICIT (6,101)
------------ ----------
Total assets $ 9,206,820 Total liabilities and members' deficit $9,206,820
============ ==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1997
REVENUES:
Rooms $ 691,864
Telephone 32,821
Other 19,473
----------
Total revenues 744,158
----------
EXPENSES:
Rooms 226,612
Telephone 4,079
Other operating departments 3,257
Administrative and general 100,206
Credit card commissions 15,073
Franchise fees 27,675
Advertising, marketing, and promotion 62,531
Repairs and maintenance 46,072
Utilities 46,892
Property insurance and taxes 17,298
Management fees 29,759
Other 9,030
Interest 328,707
Depreciation and amortization 225,467
---------
Total expenses 1,142,658
---------
NET LOSS $(398,500)
=========
The accompanying notes are an integral part of this statement.
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF MEMBERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
Stormont
Trice
Development RI HWE
Corporation Partners IV Total
----------- -------- --- -----
BALANCE, December 31, 1996 $ 128,197 $ 128,197 $ 136,005 $ 392,399
Net loss (130,703) (130,703) (137,094) (398,500)
--------- --------- --------- ---------
BALANCE, December 31, 1997 $ (2,506) $ (2,506) $ (1,089) $ (6,101)
========= ========= ========= =========
The accompanying notes are an integral part of this statement.
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (398,500)
-----------
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 225,467
Changes in assets and liabilities:
Accounts receivable, net (51,372)
Prepaid expenses (24,414)
Accounts payable 311,598
Accrued liabilities 97,282
-----------
Total adjustments 558,561
-----------
Net cash provided by operating activities 160,061
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,086,029)
Start-up costs (7,129)
-----------
Net cash used in investing activities (6,093,158)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal received from loans payable 6,142,121
Loan costs (7,129)
-----------
Net cash provided by financing activities 6,134,992
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 201,895
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,850
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 212,745
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the year $ 0
===========
The accompanying notes are an integral part of this statement.
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Gwinnett Residence Associates, L.L.C. (the "Company") is a Georgia limited
liability company that was organized for the purpose of constructing,
operating, and owning the Gwinnett Residence Inn (the "Hotel") in Atlanta,
Georgia. The Hotel is comprised of 132 suites and became operational on
July 29, 1997.
The members of the Company (the"Members"), their ownership percentages, and
their initial capital contributions are as follows:
Initial
Ownership Capital
Percentage Contribution
---------- ------------
Members:
Stormont Trice Development
Corporation ("STDC" or the
"Manager ") 41.08% $142,000
RI Partners ( "RI ") 41.08 142,000
HWE IV 17.84 142,000
The operating agreement provides for allocation of profits, losses, and
cash distributions, as follows:
Profits
o To the Members in proportion to their respective ownership
percentage interests, as defined in the agreement
Losses
o First, to the Members in proportion to their respective ownership
percentage interests until any Member's capital account is reduced
to zero
o Second, to the Member, if any, to the extent of its remaining
positive capital account balance (as adjusted to reflect any prior
allocation of loss)
<PAGE>
o Third, to the partners in proportion to their respective ownership
percentage interests
Notwithstanding the above loss allocations, to the extent losses
allocated to a Member would cause a Member to have an adjusted capital
account deficit, such losses shall not be allocated to such Member but
instead shall be allocated to other Members in proportion to, and to
the extent that, the amounts in which losses may be allocated to the
other Members without causing the other Members to have an adjusted
capital account deficit and then to the Members in proportion to their
respective ownership percentage interests.
Cash Distributions
o First, to the repayment or prepayment of such debts or
liabilities, other than any debts of the Company to any of the
Members, as the Manager shall determine to be in the best interest
of the Company
o Second, to the establishment of such reserves as the Manager deems
appropriate
o Third, to the repayment or prepayment of any back-up loans, as
defined in the agreement
o Fourth, to the repayment or prepayment of any Member loans
o Fifth, to the Members in equal shares until such time as $42,600
has been distributed to the Members
o Sixth, in equal amounts to the Manager and RI until such time as
$36,996 has been distributed to the Members
o Seventh, the balance available to the Members in proportion to
their respective ownership percentage interests
Allocation of profits, losses, and cash distributions from the sale or
refinancing of the property are allocated in a different manner and will be
affected by the terms of notes payable agreements discussed in Note 2.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash on hand,
deposits in banks, and short-term investments with original maturities of
90 days or less to be cash and cash equivalents.
The first mortgage, mezzanine loan, and management agreements require the
Hotel to establish a furniture, fixtures, and equipment reserve, as
follows: 0% in year one, 2% in year two, 3% in year three, 4% in year four,
and 5% in year five of gross revenues, as defined in the loan agreement. As
of December 31, 1997, $15,483 of cash and cash equivalents was designated
as the furniture, fixtures, and equipment reserve.
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Franchise and Organization Expenses
A franchise application fee has been capitalized and is being amortized
over the 20-year life of the franchise agreement. Organization costs have
been capitalized and are being amortized over 5 years.
Property
Property is recorded at cost, including capitalized interest, and is
depreciated using the straight-line method over the estimated useful lives
of the assets, which are 30 years for buildings and 3 to 7 years for
furniture, fixtures, and equipment. Expenditures for replacements and
betterments are capitalized, while expenditures for maintenance and repairs
are expensed as incurred.
Income Taxes
No provisions for income taxes have been made in the accounts of the
Company since the Members report their respective shares of taxable income
and loss in their individual tax returns.
2. NOTES PAYABLE
First Mortgage Loan
On August 29, 1996, the Company entered into a loan agreement with Ocwen
Federal Bank FSB ("Ocwen"), formerly Berkeley Federal Bank & Trust FSB, for
a total available amount of $8,174,500 to fund costs of developing and
operating the Hotel. The note bears 10.25% interest until its maturity date
of August 31, 2001. The loan is collateralized by the Company's interest in
the Hotel. Interest accrues monthly and is added to the outstanding balance
until the budgeted interest reserve is depleted or September 1, 1998,
whichever is earlier. Beginning October 1, 1998, interest and principal are
due monthly, with all remaining repaid principal and interest being due on
August 31, 2001. The principal outstanding at December 31, 1997 is
repayable as follows:
1998 $ 27,736
1999 118,301
2000 131,014
2001 6,914,369
----------
$7,191,420
==========
<PAGE>
In addition, Ocwen receives noncumulative participating interest based on a
percentage of the Company's excess cash flow, as defined in the loan
agreement. These percentages are as follows: 22.5% in year one, 25% in
years two and three, and 30% in years four and five. No amounts were
payable in 1997.
In the event the Company sells the Hotel or refinances the loan, an amount
shall be due to Ocwen as follows: in year one, the greater of $400,000 or
22.5% of the greater of the net proceeds or net economic value, as defined
in the loan; in years two or three, the greater of $400,000 or 25% of the
greater of the net proceeds or net economic value; in year four, the
greater of $700,000 or 30% of the greater of the net proceeds or net
economic value; in year five, the greater of $1,000,000 or 30% of the
greater of the net proceeds or net economic value.
Mezzanine Loan
On August 29, 1996, the Company entered into a loan agreement with Heller
Financial, Inc. ("Heller") for a total available amount of $1,219,800. At
December 31, 1997, $1,153,163 is outstanding, including $136,663 of accrued
interest. The note bears an interest rate of 10% and is interest only until
its maturity date of August 31, 2001. Interest is due monthly, commencing
when the accrued interest exceeds $203,300 or 20% of the outstanding
principal amount of the loan or when distributable cash flow, as defined,
is available. In addition, Heller receives quarterly, as additional
consideration, the excess of the percentage of the Company's excess cash
flow, as defined in the loan agreement, over the amount of interest accrued
during the previous quarter. These percentages are as follows: 44.175% in
year one, 42.75% in years two and three, and 39.9% in years four and five
(effectively, this equals 57% of the cash flow after paying Ocwen's
participating interest).
Through August 31, 2006, upon the occurrence of any participation event, as
defined in the loan agreement, Heller will receive an amount calculated as
follows: in year one, the greater of $700,000 or 57% of the net adjusted
proceeds, as defined in the loan agreement, less $451,000 and the Company's
equity (the "Participation Amount"); in year two, the greater of $1,000,000
or 57% of the Participation Amount; in year three, the greater of
$1,100,000 or 57% of the Participation Amount; in year four, the greater of
$1,200,000 or 57% of the Participation Amount; in year five and thereafter,
the greater of $1,300,000 or 57% of the Participation Amount. In no event
may Heller's participation exceed 49.9% of the total profit of the
participation event.
3. FRANCHISE AND MANAGEMENT AGREEMENTS
The Hotel is operated under a franchise agreement with Marriott
International, Inc. ("Marriott"). The term of the agreement is 20 years
unless otherwise extended or terminated. The Company paid Marriott an
application fee of $52,800. This has been capitalized as franchise costs in
the accompanying balance sheet. Amortization began when the Hotel became
operational, and the cost is being amortized over the life of the franchise
agreement. The agreement provides for the Hotel to reimburse Marriott for
certain common expenses, including, but not limited to, the use of
Marriott's national reservation system. The Hotel also pays Marriott
certain fees, as follows:
<PAGE>
o Royalty Fee. Percent of the gross sales, as defined in the
agreement. Royalty fees for the year ended December 31, 1997 were
$27,675.
o Marketing Fund Fee. Percent of gross sales. Marketing fund fees
for the year ended December 31, 1997 were $17,296 and are included
in advertising, marketing, and promotion expenses in the
accompanying statement of loss.
The Hotel is operated under a management agreement with Stormont Trice
Management Corporation ("STMC"), an affiliate of STDC. The term of the
management agreement is ten years. Under the terms of the agreement, the
Company pays STMC 4% of gross revenues, as defined in the agreement. At
December 31, 1997, $6,622 in management fees were payable to STMC.
Management fee expense for 1997 was $29,759.
4. RELATED-PARTY TRANSACTIONS
Julian LeCraw & Co, Inc. ("LeCraw"), which is related to one of the Members
through common ownership, provided general contracting services to the
Company in construction of the Hotel. The costs for these services in 1997
were approximately $3,682,183 and are included in buildings in the
accompanying balance sheet. Amounts due to LeCraw for these services are
approximately $20,000 at December 31, 1997 and are included in accounts
payable in the accompanying balance sheet.
In addition to the management agreement (Note 3), Stormont Trice
Corporation, an affiliate of STDC, provides workers' compensation, group
insurance, and certain employee benefits to all of the Stormont Trice
Corporation group of hotels, and a pro rata portion of the total insurance
and certain employee benefits expense is allocated to each hotel. The
amount allocated to the Company for the year ended December 31, 1997 was
$9,388.
Stormont Trice Corporation also provides property, umbrella, and casualty
insurance to all of the Stormont Trice Corporation group of hotels, and a
pro rata portion of the total insurance expense is allocated to each hotel.
The amount allocated to the Company for the year ended December 31, 1997
was $14,379.
STDC provided development management services to the Company in
construction of the Hotel. The costs for these services in 1997 were
$451,000 and are included in buildings in the accompanying balance sheet.
Amounts due to STDC for these services are approximately $451,000 at
December 31, 1997. In accordance with the terms of the agreement, the fee
will not be payable until the Company repays all of the Ocwen loan
obligation and a portion of the Heller loan obligation, as defined.
STDC also provided the director of design and development for the Hotel.
The cost for these services in 1997 was $40,982 and is included in
buildings in the accompanying balance sheet. Amounts due to STDC for these
services were $20,900 at December 31, 1997 and are included in accounts
payable in the accompanying balance sheet.
<PAGE>
<PAGE>
APPENDIX C
PRIOR PERFORMANCE TABLES
<PAGE>
APPENDIX C
PRIOR PERFORMANCE TABLES
The information in this Exhibit C contains certain relevant summary
information concerning certain prior public programs sponsored by two of the
Company's principals (who also serve as the Chairman of the Board and President
of the Company) and their Affiliates (the "Prior Public Programs") which were
formed to invest in restaurant properties leased on a triple-net basis to
operators of national and regional fast-food and family-style restaurant chains,
or in the case of CNL Health Care Properties, Inc., to invest in health care
properties. No Prior Public Programs sponsored by the Company's Affiliates have
invested in hotel properties leased on a triple-net basis to operators of
national and regional limited-service, extended-stay and full-service hotel
chains.
A more detailed description of the acquisitions by the Prior Public
Programs is set forth in Part II of the registration statement filed with the
Securities and Exchange Commission for this Offering and is available from the
Company upon request, without charge. In addition, upon request to the Company,
the Company will provide, without charge, a copy of the most recent Annual
Report on Form 10-K filed with the Securities and Exchange Commission for CNL
Income Fund, Ltd., CNL Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL
Income Fund IV, Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL
Income Fund VII, Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL
Income Fund X, Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL
Income Fund XIII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL
Income Fund XVI, Ltd., CNL Income Fund XVII, Ltd., CNL Income Fund XVIII, Ltd.,
CNL American Properties Fund, Inc., and CNL Health Care Properties, Inc. as well
as a copy, for a reasonable fee, of the exhibits filed with such reports.
The investment objectives of the Prior Public Programs generally
include preservation and protection of capital, the potential for increased
income and protection against inflation, and potential for capital appreciation,
all through investment in properties. In addition, the investment objectives of
the Prior Public Programs included making partially tax-sheltered distributions.
STOCKHOLDERS SHOULD NOT CONSTRUE INCLUSION OF THE FOLLOWING TABLES AS
IMPLYING THAT THE COMPANY WILL HAVE RESULTS COMPARABLE TO THOSE REFLECTED IN
SUCH TABLES. DISTRIBUTABLE CASH FLOW, FEDERAL INCOME TAX DEDUCTIONS, OR OTHER
FACTORS COULD BE SUBSTANTIALLY DIFFERENT. STOCKHOLDERS SHOULD NOTE THAT, BY
ACQUIRING SHARES IN THE COMPANY, THEY WILL NOT BE ACQUIRING ANY INTEREST IN ANY
PRIOR PUBLIC PROGRAMS.
Description of Tables
The following Tables are included herein:
Table I - Experience in Raising and Investing Funds
Table II - Compensation to Sponsor
Table III - Operating Results of Prior Programs
Table V - Sales or Disposal of Properties
Unless otherwise indicated in the Tables, all information contained in
the Tables is as of December 31, 1998. The following is a brief description of
the Tables:
C-1
<PAGE>
Table I - Experience in Raising and Investing Funds
Table I presents information on a percentage basis showing the
experience of two of the principals of the Company and their Affiliates in
raising and investing funds for the Prior Public Programs, the offerings of
which became fully subscribed between January 1994 and December 1998.
The Table sets forth information on the offering expenses incurred and
amounts available for investment expressed as a percentage of total dollars
raised. The Table also shows the percentage of property acquisition cost
leveraged, the date the offering commenced, and the time required to raise funds
for investment.
Table II - Compensation to Sponsor
Table II provides information, on a total dollar basis, regarding
amounts and types of compensation paid to the two of the Company's principals
and their Affiliates which sponsored the Prior Public Programs.
The Table indicates the total offering proceeds and the portion of such
offering proceeds paid or to be paid to two of the principals of the Company and
their Affiliates in connection with the Prior Public Programs, the offerings of
which became fully subscribed between January 1994 and December 1998. The Table
also shows the amounts paid to two of the principals of the Company and their
Affiliates from cash generated from operations and from cash generated from
sales or refinancing by each of the Prior Public Programs on a cumulative basis
commencing with inception and ending December 31, 1998.
Table III - Operating Results of Prior Programs
Table III presents a summary of operating results for the period from
inception through December 31, 1998, of the Prior Public Programs, the offerings
of which became fully subscribed between January 1994 and December 1998.
The Table includes a summary of income or loss of the Prior Public
Programs, which are presented on the basis of generally accepted accounting
principles ("GAAP"). The Table also shows cash generated from operations, which
represents the cash generated from operations of the properties of the Prior
Public Programs, as distinguished from cash generated from other sources
(special items). The section of the Table entitled "Special Items" provides
information relating to cash generated from or used by items which are not
directly related to the operations of the properties of the Prior Public
Programs, but rather are related to items of an investing or financing nature.
These items include proceeds from capital contributions of investors and
disbursements made from these sources of funds, such as syndication (or stock
issuance) and organizational costs, acquisition of the properties and other
costs which are related more to the organization of the entity and the
acquisition of properties than to the actual operations of the entities.
The Table also presents information pertaining to investment income,
returns of capital on a GAAP basis, cash distributions from operations, sales
and refinancing proceeds expressed in total dollar amounts as well as
distributions and tax results on a per $1,000 investment basis.
Table IV - Results of Completed Programs
Table IV is omitted from this Exhibit C because none of the Prior
Public Programs have completed operations (meaning they no longer hold
properties).
Table V - Sales or Disposal of Properties
Table V provides information regarding the sale or disposal of
properties owned by the Prior Public Programs between January 1994 and December
1998.
The Table includes the selling price of the property, the cost of the
property, the date acquired and the date of sale.
C-2
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL American
Fund XIV, Fund XV, Fund XVI, Properties Fund,
Ltd. Ltd. Ltd. Inc.
----------- ----------- ----------- -----------------
(Note 1)
<S> <C> <C> <C> <C>
Dollar amount offered $45,000,000 $40,000,000 $45,000,000 $745,000,000
=========== =========== =========== ============
Dollar amount raised 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- ------------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5) (8.5) (7.5)
Organizational expenses (3.0) (3.0) (3.0) (2.2)
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated
entities) (0.5) (0.5) (0.5) (0.5)
----------- ----------- ----------- -----------
(12.0) (12.0) (12.0) (10.2)
----------- ----------- ----------- -----------
Reserve for operations -- -- -- --
----------- ----------- ----------- -----------
Percent available for
investment 88.0% 88.0% 88.0% 89.8%
=========== =========== =========== ===========
Acquisition costs:
Cash down payment 82.5% 82.5% 82.5% 85.3%
Acquisition fees paid
to affiliates 5.5 5.5 5.5 4.5
Loan costs -- -- -- --
----------- ----------- ----------- -----------
Total acquisition costs 88.0% 88.0% 88.0% 89.8%
=========== =========== =========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- -- --
Date offering began 8/27/93 2/23/94 9/02/94 4/19/95, 2/06/97
and 3/02/98
Length of offering (in
months) 6 6 9 22, 13 and 9,
respectively
Months to invest 90% of
amount available for
investment measured
from date of offering 11 10 11 23, 16 and 11,
respectively
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Health Care
Fund XVII, Fund XVIII, Properties,
Ltd. Ltd. Inc.
----------- ----------- ----------------
<S> <C> <C>
(Note 2)
Dollar amount offered $30,000,000 $35,000,000
Dollar amount raised 100.0% 100.0%
----------- -----------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5)
Organizational expenses (3.0) (3.0)
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated
entities) (0.5) (0.5)
----------- -----------
(12.0) (12.0)
----------- -----------
Reserve for operations -- --
----------- -----------
Percent available for
investment 88.0% 88.0%
=========== ===========
Acquisition costs:
Cash down payment 83.5% 83.5%
Acquisition fees paid
to affiliates 4.5 4.5
Loan costs -- --
----------- -----------
Total acquisition costs 88.0% 88.0%
=========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- --
Date offering began 9/02/95 9/20/96
Length of offering (in
months) 12 17
Months to invest 90% of
amount available for
investment measured
from date of offering 15 17
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the
Securities Act of 1933, as amended, effective March 29, 1995, CNL
American Properties Fund, Inc. ("APF") registered for sale $165,000,000
of shares of common stock (the "Initial Offering"), including
$15,000,000 available only to stockholders participating in the
company's reinvestment plan. The Initial Offering of APF commenced
April 19, 1995, and upon completion of the Initial Offering on February
6, 1997, had received subscription proceeds of $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) issued pursuant to the
reinvestment plan. Pursuant to a Registration Statement on Form S-11
under the Securities Act of 1933, as amended, effective January 31,
1997, APF registered for sale $275,000,000 of shares of common stock
(the "1997 Offering"), including $25,000,000 available only to
stockholders participating in the company's reinvestment plan. The 1997
Offering of APF commenced following the completion of the Initial
Offering on February 6, 1997, and upon completion of the 1997 Offering
on March 2, 1998, had received subscription proceeds of $251,872,648
(25,187,265 shares), including $1,872,648 (187,265 shares) issued
pursuant to the reinvestment plan. Pursuant to a Registration Statement
on Form S-11 under the Securities Act of 1933, as amended, effective
May 12, 1998, APF registered for sale $345,000,000 of shares of common
stock (the "1998 Offering". The 1998 Offering of APF commenced
following the completion of the 1997 Offering on March 2, 1998. As of
December 31, 1998, APF had received subscriptions totalling
approximately $345,000,000 from the 1998 Offering, including $3,107,848
issued pursuant to the company's reinvestment plan. The 1998 Offering
became fully subscribed in December 1998 and proceeds from the last
subscriptions were received in January 1999.
Note 2: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective September 18, 1998, CNL Health Care
Properties, Inc. registered for sale $155,000,000 of shares of common
stock, including $5,000,000 available only to stockholders
participating in the company's reinvestment plan. The offering of
shares of CNL Health Care Properties, Inc. commenced September 18,
1998.
C-4
<PAGE>
TABLE II
COMPENSATION TO SPONSOR
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL American
Fund XIV, Fund XV, Fund XVI, Properties Fund,
Ltd. Ltd. Ltd. Inc.
----------- ----------- ----------- -------------------
(Note 1)
<S> <C> <C> <C> <C>
Date offering commenced 8/27/93 2/23/94 9/02/94 4/19/95, 2/06/97
and 3/02/98
Dollar amount raised $45,000,000 $40,000,000 $45,000,000 $747,253,675
=========== =========== =========== ============
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts 3,825,000 3,400,000 3,825,000 56,044,026
Real estate commissions - - - -
Acquisition fees 2,475,000 2,200,000 2,475,000 33,595,134
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 225,000 200,000 225,000 3,736,268
----------- ----------- ----------- ------------
Total amount paid to sponsor 6,525,000 5,800,000 6,525,000 93,375,428
=========== =========== =========== ============
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1998 3,662,593 3,343,292 3,765,104 42,216,874
1997 3,734,726 3,419,967 3,909,781 18,514,122
1996 3,841,163 3,557,073 3,911,609 6,096,045
1995 3,823,939 3,361,477 2,619,840 594,425
1994 2,897,432 1,154,454 212,171 -
1993 329,957 - - -
Amount paid to sponsor from
operations (administrative,
accounting and management
fees):
1998 148,049 126,564 141,410 3,100,599
1997 128,536 113,372 129,357 1,437,908
1996 134,867 122,391 157,883 613,505
1995 114,095 122,107 138,445 95,966
1994 84,801 37,620 7,023 -
1993 8,220 - - -
Dollar amount of property
sales and refinancing
before deducting payments
to sponsor:
Cash (Note 3) 5,168,000 3,312,297 1,385,384 9,046,652
Notes - - - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - - - -
Incentive fees - - - -
Other (Note 2) - - - -
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Health Care
Fund XVII, Fund XVIII, Properties,
Ltd. Ltd. Inc.
----------- ----------- ----------------
<S> <C> <C> <C>
(Note 4)
Date offering commenced 9/02/95 9/20/96
Dollar amount raised $30,000,000 $35,000,000
=========== ===========
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts 2,550,000 2,975,000
Real estate commissions - -
Acquisition fees 1,350,000 1,575,000
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 150,000 175,000
----------- -----------
Total amount paid to sponsor 4,050,000 4,725,000
=========== ===========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1998 2,638,733 2,964,628
1997 2,611,191 1,459,963
1996 1,340,159 30,126
1995 11,671 -
1994 - -
1993 - -
Amount paid to sponsor from
operations (administrative,
accounting and management
fees):
1998 117,814 132,890
1997 116,077 98,207
1996 107,211 2,980
1995 2,659 -
1994 - -
1993 - -
Dollar amount of property
sales and refinancing
before deducting payments
to sponsor:
Cash (Note 3) - -
Notes - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - -
Incentive fees - -
Other (Note 2) - -
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective March 29, 1995, CNL American
Properties Fund, Inc. ("APF") registered for sale $165,000,000 of
shares of common stock (the "Initial Offering"), including $15,000,000
available only to stockholders participating in the company's
reinvestment plan. The Initial Offering of APF commenced April 19,
1995, and upon completion of the Initial Offering on February 6, 1997,
had received subscription proceeds of $150,591,765 (15,059,177 shares),
including $591,765 (59,177 shares) issued pursuant to the reinvestment
plan. Pursuant to a Registration Statement on Form S-11 under the
Securities Act of 1933, as amended, effective January 31, 1997, APF
registered for sale $275,000,000 of shares of common stock (the "1997
Offering"), including $25,000,000 available only to stockholders
participating in the company's reinvestment plan. The 1997 Offering of
APF commenced following the completion of the Initial Offering on
February 6, 1997, and upon completion of the 1997 Offering on March 2,
1998, had received subscription proceeds of $251,872,648 (25,187,265
shares), including $1,872,648 (187,265 shares) issued pursuant to the
reinvestment plan. Pursuant to a Registration Statement on Form S-11
under the Securities Act of 1933, as amended, effective May 12, 1998,
APF registered for sale $345,000,000 of shares of common stock (the
"1998 Offering"). The 1998 Offering of APF commenced following the
completion of the 1997 Offering on March 2, 1998. As of December 31,
1998, APF had received subscriptions totalling approximately
$345,000,000 from the 1998 Offering, including $3,107,848 issued
pursuant to the company's reinvestment plan. The 1998 Offering became
fully subscribed in December 1998 and proceeds from the last
subscriptions were received in January 1999. The amounts shown
represent the combined results of the Initial Offering, the 1997
Offering and the 1998 Offering as of December 31, 1998, including
shares issued pursuant to the company's reinvestment plans.
Note 2: For negotiating secured equipment leases and supervising the secured
equipment lease program, APF is entitled to receive a one-time secured
equipment lease servicing fee of two percent of the purchase price of
the equipment that is the subject of a secured equipment lease. During
the years ended December 31, 1998, 1997 and 1996, APF incurred $54,998,
$87,665 and $70,070, respectively, in secured equipment lease servicing
fees.
Note 3: Excludes properties sold and substituted with replacement properties,
as permitted under the terms of the lease agreements.
Note 4: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective September 18, 1998, CNL Health Care
Properties, Inc. registered for sale $155,000,000 of shares of common
stock, including $5,000,000 available only to stockholders
participating in the company's reinvestment plan. The offering of
shares of CNL Health Care Properties, Inc. commenced September 18,
1998. As of December 31, 1998, CNL Health Care Properties, Inc. had
received subscription proceeds of $25,500 (2,550 shares) from the
offering. Until subscription proceeds totalling $2,500,000 are
received, the proceeds will be held in escrow.
C-6
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIV, LTD.
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenue $ 0 $ 256,234 $ 3,135,716 $ 4,017,266
Equity in earnings of joint ventures 0 1,305 35,480 338,717
Profit (Loss) from sale of properties
(Notes 4, 6, 7, 8 and 9) 0 0 0 (66,518)
Provision for loss on building (Note 10) 0 0 0 0
Interest income 0 27,874 200,499 50,724
Less: Operating expenses 0 (14,049) (181,980) (248,840)
Interest expense 0 0 0 0
Depreciation and amortization 0 (28,918) (257,640) (340,112)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 242,446 2,932,075 3,751,237
============ ============ ============ ============
Taxable income
- from operations 0 278,845 2,482,240 3,162,165
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 321,737 2,812,631 3,709,844
Cash generated from sales (Notes 4, 6,
7, 8 and 9) 0 0 0 696,012
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 321,737 2,812,631 4,405,856
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (9,050) (2,229,952) (3,543,751)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 312,687 582,679 862,105
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 28,785,100 16,214,900 0
General partners' capital
contributions 1,000 0 0 0
Syndication costs 0 (2,771,892) (1,618,477) 0
Acquisition of land and buildings 0 (13,758,004) (11,859,237) (964,073)
Investment in direct financing leases 0 (4,187,268) (5,561,748) (75,352)
Investment in joint ventures 0 (315,209) (1,561,988) (1,087,218)
Return of capital from joint venture 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIV, Ltd. by related parties 0 (706,215) (376,738) (577)
Increase in other assets 0 (444,267) 0 0
Increase (decrease) in restricted cash 0 0 0 0
Other 0 0 0 5,530
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 6,914,932 (4,180,609) (1,259,585)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 16 56 70
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4, 6, 7,
8 and 9) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Gross revenue $ 3,999,813 $ 3,918,582 $ 3,440,910
Equity in earnings of joint ventures 459,137 309,879 317,654
Profit (Loss) from sale of properties
(Notes 4, 6, 7, 8 and 9) 0 0 112,206
Provision for loss on building (Note 10) 0 0 (37,155)
Interest income 44,089 40,232 73,246
Less: Operating expenses (246,621) (262,592) (326,960)
Interest expense 0 0 0
Depreciation and amortization (340,089) (340,161) (380,814)
------------ ------------ ------------
Net income - GAAP basis 3,916,329 3,665,940 3,199,087
============ ============ ============
Taxable income
- from operations 3,236,329 3,048,675 3,230,884
============ ============ ============
- from gain (loss) on sale 0 47,256 53,034
============ ============ ============
Cash generated from operations
(Notes 2 and 3) 3,706,296 3,606,190 3,514,544
Cash generated from sales (Notes 4, 6,
7, 8 and 9) 0 318,592 1,648,110
Cash generated from refinancing 0 0 0
------------ ------------ ------------
Cash generated from operations, sales
and refinancing 3,706,296 3,924,782 5,162,654
Less: Cash distributions to investors
(Note 5)
- from operating cash flow (3,706,296) (3,606,190) (3,514,544)
- from sale of properties 0 0 0
- from cash flow from prior period (6,226) (106,330) (197,976)
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions (6,226) 212,262 1,450,134
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 0 0
General partners' capital
contributions 0 0 0
Syndication costs 0 0 0
Acquisition of land and buildings 0 0 (605,712)
Investment in direct financing leases 0 0 (931,237)
Investment in joint ventures (7,500) (121,855) (568,498)
Return of capital from joint venture 0 51,950 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIV, Ltd. by related parties 0 0 0
Increase in other assets 0 0 0
Increase (decrease) in restricted cash 0 (318,592) 318,592
Other 0 0 0
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items (13,726) (176,235) (336,721)
============ ============ =============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 71 67 71
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) (Notes 4, 6, 7,
8 and 9) 0 1 1
============ ============ ============
</TABLE>
C-8
<PAGE>
TABLE III - CNL INCOME FUND XIV, LTD. (continued)
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 51 79
- from capital gain 0 0 0 0
- from return of capital 0 0 0 0
- from investment income from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 0 1 51 79
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from operations 0 1 51 79
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 5) 0 1 51 79
============ ============ ============ ============
Total cash distributions as a percentage of
original $1,000 investment (Note 11) 0.00% 4.50% 6.50% 8.06%
Total cumulative cash distributions
per $1,000 investment from inception 0 1 52 131
Amount (in percentage terms) remaining invested
in program properties at the end of each year
(period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition cost of
all properties in program) (Notes 4, 6, 7, 8
and 9) N/A 100% 100% 100%
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income
- from capital gain 83 81 68
- from return of capital 0 0 2
- from investment income from prior 0 0 0
period
0 2 12
Total distributions on GAAP basis (Note 5) ------------ ------------ ------------
83 83 82
============ ============ ============
Source (on cash basis)
- from sales
- from operations 0 0 4
- from cash flow from prior period 83 81 78
0 2 0
Total distributions on cash basis (Note 5) ------------ ------------ ------------
83 83 82
Total cash distributions as a percentage of ============ ============ ============
original $1,000 investment (Note 11)
Total cumulative cash distributions 8.25% 8.25% 8.25%
per $1,000 investment from inception
214 297 379
Amount (in percentage terms) remaining invested
in program properties at the end of each year
(period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition cost of
all properties in program) (Notes 4, 6, 7, 8
and 9) 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund XIV, Ltd. ("CNL XIV") and CNL
Income Fund XIII, Ltd. each registered for sale $40,000,000 units of
limited partnership interests ("Units"). The offering of Units of CNL
Income Fund XIII, Ltd. commenced March 17, 1993. Pursuant to the
registration statement, CNL XIV could not commence until the offering
of Units of CNL Income Fund XIII, Ltd. was terminated. CNL Income Fund
XIII, Ltd. terminated its offering of Units on August 26, 1993, at
which time the maximum offering proceeds of $40,000,000 had been
received. Upon the termination of the offering of Units of CNL Income
Fund XIII, Ltd., CNL XIV commenced its offering of Units. Activities
through September 13, 1993, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint ventures, less cash paid for expenses,
plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund XIV, Ltd.
Note 4: During 1995, the partnership sold two of its properties to a tenant for
its original purchase price, excluding acquisition fees and
miscellaneous acquisition expenses. The net sales proceeds were used to
acquire two additional properties. As a result of these transactions,
the partnership recognized a loss for financial reporting purposes of
$66,518 primarily due to acquisition fees and miscellaneous acquisition
expenses the partnership had allocated to the property and due to the
accrued rental income relating to future scheduled rent increases that
the partnership had recorded and reversed at the time of sale. In
addition, during 1996, Wood-Ridge Real Estate Joint Venture, in which
the partnership owns a 50% interest, sold its two properties to the
tenant and recognized a gain of approximately $261,100 for financial
reporting purposes. As a result, the partnership's pro rata share of
such gain of approximately $130,550 is included in equity in earnings
of unconsolidated joint ventures for 1996.
Note 5: As a result of the partnership's change in investor services agents in
1993, distributions are now declared at the end of each quarter and
paid in the following quarter. Since this table generally presents
distributions on a cash basis (rather than amounts declared),
distributions on a cash basis for 1993 only reflect payments for three
quarters. Distributions declared for the quarters ended December 31,
1993, 1994, 1995, 1996 and 1997, are reflected in the 1994, 1995, 1996,
1997 and 1998 columns, respectively, for distributions on a cash basis
due to the payment of such distributions in January 1994, 1995, 1996,
1997 and 1998, respectively. As a result of 1994, 1995, 1996, 1997 and
1998 distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and 1998
are not included in the 1994, 1995, 1996, 1997 and 1998 totals,
respectively.
Note 6: In January 1998, the partnership sold its property in Madison, Alabama,
to a third party for $740,000 and received net sales proceeds of
$696,486. Due to the fact that during 1997 the partnership wrote off
$13,314 in accrued rental income (non-cash accounting adjustments
relating to the straight-lining of future scheduled rent increases over
the lease term in accordance with generally accepted accounting
principles), no gain or loss was incurred for financial reporting
purposes in January 1998 relating to this sale. In April 1998, the
partnership reinvested a portion of the net sales proceeds from the
sale of the property in Madison, Alabama in Melbourne Joint Venture,
with an affiliate of the partnership which has the same general
partners. The partnership intends to use the remaining proceeds to
invest in an additional property or for other partnership purposes.
Note 7: In January 1998, the partnership sold one of its properties in
Richmond, Virginia for $512,462 and received net sales proceeds of
$512,246, resulting in a gain of $70,798 for financial reporting
purposes. The partnership reinvested the net sales proceeds in a
property in Fayetteville, North Carolina.
Note 8: In April 1998, the partnership reached an agreement to accept
$360,000 for the property in Riviera Beach, Florida, which was taken
through a right of way taking in December 1997. The partnership had
received preliminary sales proceeds of $318,592 as of December 31,
1997. Upon agreement and receipt of the final sales price of $360,000,
the partnership recognized a gain of $41,408 for financial reporting
purposes. The partnership reinvested the net sales proceeds in a
property in Fayetteville, North Carolina.
Note 9: In July 1998, the Partnership sold one of its properties in Richmond,
Virginia for $415,000 and received net sales proceeds of $397,970. Due
to the fact that during 1998 the partnership wrote off $12,060 in
accrued rental income (non-cash accounting adjustments relating to the
straight-lining of future scheduled rent increases over the lease term
in accordance with generally accepted accounting principles), no gain
or loss was incurred for financial reporting purposes in July 1998
relating to this sale. In October 1998, the partnership reinvested the
net sales proceeds from the sale of the property in Richmond, Virginia
in a property in Fayetteville, North Carolina.
Note 10: At December 31, 1998, the Partnership recorded a provision for loss
on building in the amount of $37,155 for financial reporting purposes
relating to a Long John Silver's Property whose lease was rejected by
the tenant. The tenant of this Property filed for bankruptcy and ceased
payment of rents under the terms of its lease agreement. The allowance
represents the difference between the carrying value of the Property at
December 31, 1998 and the estimated net realizable value for the
Property.
C-10
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XV, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenue $ 0 $ 1,143,586 $ 3,546,320 $ 3,632,699
Equity in earnings of joint ventures 0 8,372 280,606 392,862
Profit (Loss) from sale of properties
(Note 4) 0 0 (71,023) 0
Provision for loss on land and buildings
(Note 7) 0 0 0 0
Interest income 0 167,734 88,059 43,049
Less: Operating expenses 0 (62,926) (228,319) (235,319)
Interest expense 0 0 0 0
Depreciation and amortization 0 (70,848) (243,175) (248,232)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 1,185,918 3,372,468 3,585,059
============ ============ ============ ============
Taxable income
- from operations 0 1,026,715 2,861,912 2,954,318
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,116,834 3,239,370 3,434,682
Cash generated from sales (Note 4) 0 0 811,706 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,116,834 4,051,076 3,434,682
Less: Cash distributions to investors
(Notes 5, 6 and 9)
- from operating cash flow 0 (635,944) (2,650,003) (3,200,000)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 480,890 1,401,073 234,682
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 40,000,000 0 0
General partners' capital contri-
butions 1,000 0 0 0
Syndication costs 0 (3,892,003) 0 0
Acquisition of land and buildings 0 (22,152,379) (1,625,601) 0
Investment in direct financing
leases 0 (6,792,806) (2,412,973) 0
Investment in joint ventures 0 (1,564,762) (720,552) (129,939)
Return of capital from joint venture 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XV, Ltd. by related parties 0 (1,098,197) (23,507) 0
Increase in other assets 0 (187,757) 0 0
Other (38) (6,118) 25,150 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 962 4,786,868 (3,356,410) 104,743
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 71 73
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Note 4) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-11
<PAGE>
1997 1998
------------ ------------
Gross revenue $ 3,622,123 $ 3,179,911
Equity in earnings of joint ventures 239,249 236,553
Profit (Loss) from sale of properties
(Note 4) 0 0
Provision for loss on land and buildings
(Note 7) 0 (280,907)
Interest income 46,642 54,576
Less: Operating expenses (224,761) (265,748)
Interest expense 0 0
Depreciation and amortization (248,348) (281,888)
------------ ------------
Net income - GAAP basis 3,434,905 2,642,497
============ ============
Taxable income
- from operations 2,856,893 2,847,638
============ ============
- from gain on sale 47,256 0
============ ============
Cash generated from operations
(Notes 2 and 3) 3,306,595 3,216,728
Cash generated from sales (Note 4) 0 0
Cash generated from refinancing 0 0
Cash generated from operations, sales
and refinancing 3,306,595 3,216,728
Less: Cash distributions to investors
(Notes 5, 6 and 9)
- from operating cash flow (3,280,000) (3,216,728)
- from sale of properties 0 0
- from cash flow from prior period 0 (183,272)
Cash generated (deficiency) after cash
distributions 26,595 (183,272)
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 0
General partners' capital contri-
butions 0 0
Syndication costs 0 0
Acquisition of land and buildings 0 0
Investment in direct financing
leases 0 0
Investment in joint ventures 0 (216,992)
Return of capital from joint venture 51,950 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XV, Ltd. by related parties 0 0
Increase in other assets 0 0
Other 0 0
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 78,545 (400,264)
============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 71 70
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) (Note 4) 1 0
============ ============
C-12
<PAGE>
TABLE III - CNL INCOME FUND XV, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 21 66 80
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 0 21 66 80
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 21 66 80
- from investment income from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 5) 0 21 66 80
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 6,
8 and 9).0.00% 5.00% 7.25% 8.20%
Total cumulative cash distributions per
$1,000 investment from inception 0 21 87 167
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 4) N/A 100% 100% 100%
</TABLE>
Note 1: The registration statement relating to this offering of Units of CNL
Income Fund XV, Ltd. became effective February 23, 1994. Activities
through March 23, 1994, were devoted to organization of the partnership
and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint venture, less cash paid for expenses,
plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund XV, Ltd.
Note 4: During 1995, the partnership sold three of its properties to a tenant
for its original purchase price, excluding acquisition fees and
miscellaneous acquisition expenses. The majority of the net sales
proceeds were used to acquire additional properties. As a result of
these transactions, the partnership recognized a loss for financial
reporting purposes of $71,023 primarily due to acquisition fees and
miscellaneous acquisition expenses the partnership had allocated to the
three properties and due to the accrued rental income relating to
future scheduled rent increases that the partnership had recorded and
reversed at the time of sale. In addition, during 1996, Wood-Ridge Real
Estate Joint Venture, in which the partnership owns a 50% interest,
sold its two properties to the tenant and recognized a gain of
approximately $261,100 for financial reporting purposes. As a result,
the partnership's pro rata share of such gain of approximately $130,550
is included in equity in earnings of unconsolidated joint ventures for
1996.
Note 5: Distributions declared for the quarters ended December 31, 1994,
1995, 1996 and 1997 are reflected in the 1995, 1996, 1997 and 1998
columns, respectively, due to the payment of such distributions in
January 1995, 1996, 1997 and 1998, respectively. As a result of
distributions being presented on a cash basis, distributions declared
and unpaid as of December 31, 1994, 1995, 1996, 1997 and 1998 are not
included in the 1994, 1995, 1996, 1997 and 1998 totals, respectively.
Note 6: On December 31, 1996, CNL Income Fund XV, Ltd. declared a special
distribution of cumulative excess operating reserves equal to .20% of
the total invested capital. Accordingly, the total yield for 1996 was
8.20%
Note 7. During the year ended December 31, 1998, the Partnership established
an allowance for loss on land and buildings of $280,907 for financial
reporting purposes relating to two of the four Long John Silver's
properties whose leases were rejected by the tenant. The tenant of
these properties filed for bankruptcy and ceased payment of rents under
the terms of the lease agreements. The loss represents the difference
between the carrying value of the Properties at December 31, 1998 and
the current estimated net realizable value for these Properties.
Note 8: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 5 above)
Note 9: Cash distributions for 1998 include an additional amount equal to
0.50% of invested capital which was earned in 1997 or prior years, but
declared payable in the first quarter of 1998.
C-13
<PAGE>
1997 1998
------------ ------------
Cash distributions to investors
Source (on GAAP basis)
- from investment income 82 65
- from capital gain 0 0
- from investment income from prior
period 0 20
------------ ------------
Total distributions on GAAP basis (Note 5) 82 85
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 82 80
- from investment income from prior period 0 5
------------ ------------
Total distributions on cash basis (Note 5) 82 85
============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 6,
8 and 9).0.00% 8.00% 8.50%
Total cumulative cash distributions per
$1,000 investment from inception 249 334
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 4) 100% 100%
C-14
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVI, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenue $ 0 $ 186,257 $ 2,702,504 $ 4,343,390
Equity in earnings from joint venture 0 0 0 19,668
Profit from sale of properties (Notes 4
and 5) 0 0 0 124,305
Provision for loss on building (Note 8) 0 0 0 0
Interest income 0 21,478 321,137 75,160
Less: Operating expenses 0 (10,700) (274,595) (261,878)
Interest expense 0 0 0 0
Depreciation and amortization 0 (9,458) (318,205) (552,447)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 187,577 2,430,841 3,748,198
============ ============ ============ ============
Taxable income
- from operations 0 189,864 2,139,382 3,239,830
============ ============ ============ ============
- from gain on sale (Notes 4 and 5) 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 205,148 2,481,395 3,753,726
Cash generated from sales (Notes 4 and 5) 0 0 0 775,000
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 205,148 2,481,395 4,528,726
Less: Cash distributions to investors
(Note 6)
- from operating cash flow 0 (2,845) (1,798,921) (3,431,251)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 202,303 682,474 1,097,475
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 20,174,172 24,825,828 0
General partners' capital contri-
butions 1,000 0 0 0
Syndication costs 0 (1,929,465) (2,452,743) 0
Acquisition of land and buildings 0 (13,170,132) (16,012,458) (2,355,627)
Investment in direct financing
leases 0 (975,853) (5,595,236) (405,937)
Investment in joint ventures 0 0 0 (775,000)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVI, Ltd. by related parties 0 (854,154) (405,569) (2,494)
Increase in other assets 0 (443,625) (58,720) 0
Increase (decrease) in restricted cash 0 0 0 0
Reimbursement from developer of
construction costs 0 0 0 0
Other (36) (20,714) 20,714 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 964 2,982,532 1,004,290 (2,441,583)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 17 53 71
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4 and 5) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-15
<PAGE>
1997 1998
------------ ------------
Gross revenue $ 4,308,853 $ 3,901,555
Equity in earnings from joint venture 73,507 132,002
Profit from sale of properties (Notes 4
and 5) 41,148 0
Provision for loss on building (Note 8) 0 (266,257)
Interest income 73,634 60,199
Less: Operating expenses (272,932) (295,141)
Interest expense 0 0
Depreciation and amortization (563,883) (555,360)
------------ ------------
Net income - GAAP basis 3,660,327 2,976,998
============ ============
Taxable income
- from operations 3,178,911 3,153,618
============ ============
- from gain on sale (Notes 4 and 5) 64,912 0
============ ============
Cash generated from operations
(Notes 2 and 3) 3,780,424 3,623,694
Cash generated from sales (Notes 4 and 5) 610,384 0
Cash generated from refinancing 0 0
------------ ------------
Cash generated from operations, sales
and refinancing 4,390,808 3,623,694
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,600,000) (3,623,694)
- from sale of properties 0 (66,306)
------------ ------------
Cash generated (deficiency) after cash
distributions 790,808 (66,306)
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 0
General partners' capital contri-
butions 0 0
Syndication costs 0 0
Acquisition of land and buildings (23,501) (3,545)
Investment in direct financing
leases (29,257) (28,403)
Investment in joint ventures 0 (744,058)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVI, Ltd. by related parties 0 0
Increase in other assets 0 0
Increase (decrease) in restricted cash (610,384) 610,384
Reimbursement from developer of
construction costs 0 161,648
Other 0 0
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 127,666 (70,280)
============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 70 69
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) (Notes 4 and 5) 1 0
============ ============
C-16
<PAGE>
TABLE III - CNL INCOME FUND XVI, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 45 76
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 6) 0 1 45 76
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 1 45 76
- from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 6) 0 1 45 76
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 7
and 9) 0.00% 4.50% 6.00% 7.88%
Total cumulative cash distributions per
$1,000 investment from inception 0 1 46 122
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Notes 4 and 5) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund XVI, Ltd. ("CNL XVI") and CNL
Income Fund XV, Ltd. each registered for sale $40,000,000 units of
limited partnership interests ("Units"). The offering of Units of CNL
Income Fund XV, Ltd. commenced February 23, 1994. Pursuant to the
registration statement, CNL XVI could not commence until the offering
of Units of CNL Income Fund XV, Ltd. was terminated. CNL Income Fund
XV, Ltd. terminated its offering of Units on September 1, 1994, at
which time the maximum offering proceeds of $40,000,000 had been
received. Upon the termination of the offering of Units of CNL Income
Fund XV, Ltd., CNL XVI commenced its offering of Units. Activities
through September 22, 1994, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund XVI, Ltd.
Note 4: In April 1996, CNL Income Fund XVI, Ltd. sold one of its properties
and received net sales proceeds of $775,000, resulting in a gain of
$124,305 for financial reporting purposes. In October 1996, the
partnership reinvested the net sales proceeds in an additional property
as tenants-in-common with an affiliate of the general partners.
Note 5: In March 1997, CNL Income Fund XVI, Ltd. sold one of its properties
and received net sales proceeds of $610,384, resulting in a gain of
$41,148 for financial reporting purposes. In January 1998, the
partnership reinvested the net sales proceeds in an additional property
as tenants-in-common with affiliates of the general partners.
Note 6: Distributions declared for the quarters ended December 31, 1994,
1995, 1996 and 1997 are reflected in the 1995, 1996, 1997 and 1998
columns, respectively, due to the payment of such distributions in
January 1995, 1996, 1997 and 1998, respectively. As a result of
distributions being presented on a cash basis, distributions declared
and unpaid as of December 31, 1994, 1995, 1996, 1997 and 1998 are not
included in the 1994, 1995, 1996, 1997 and 1998 totals, respectively.
Note 7: Cash distributions for 1998 include an additional amount equal to
0.20% of invested capital which was earned in 1997 but declared payable
in the first quarter of 1998.
Note 8: During the year ended December 31, 1998, the Partnership recorded a
provision for loss on building of $266,257 for financial reporting
purposes relating to a Long John Silver's property in Celina, Ohio. The
tenant of this property filed for bankruptcy and ceased payment of
rents under the terms of its lease agreement. The allowance represents
the difference between the Property's carrying value at December 31,
1998 and the estimated net realizable value for this Property.
Note 9: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 6 above)
C-17
<PAGE>
1997 1998
------------ ------------
Cash distributions to investors
Source (on GAAP basis) 80 65
- from investment income 0 0
- from capital gain
- from investment income from
prior period 0 17
------------ ------------
Total distributions on GAAP basis (Note 6) 80 82
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 80 81
- from prior period 0 1
----------- ------------
Total distributions on cash basis (Note 6) 80 82
============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 7
and 9) 8.00% 8.20%
Total cumulative cash distributions per
$1,000 investment from inception 202 284
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Notes 4 and 5) 100% 100%
C-18
<PAGE>
TABLE III Operating Results
of Prior Programs CNL AMERICAN
PROPERTIES FUND, INC.
<TABLE>
<CAPTION>
1994 1997
(Note 1) 1995 1996 (Note 2)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenue $ 0 $ 539,776 $ 4,363,456 $ 15,516,102
Equity in earnings of joint venture 0 0 0 0
Provision for loss on land and buildings
(Note 12) 0 0 0 0
Interest income 0 119,355 1,843,228 3,941,831
Less: Operating expenses 0 (186,145) (908,924) (2,066,962)
Interest expense 0 0 0 0
Depreciation and amortization 0 (104,131) (521,871) (1,795,062)
Minority interest in income of
consolidated joint venture 0 (76) (29,927) (31,453)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 368,779 4,745,962 15,564,456
============ ============ ============ ============
Taxable income
- from operations (Note 8) 0 379,935 4,894,262 15,727,311
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 (41,115)
============ ============ ============ ============
Cash generated from operations
(Notes 4 and 5) 0 498,459 5,482,540 17,076,214
Cash generated from sales (Note 7) 0 0 0 6,289,236
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 498,459 5,482,540 23,365,450
Less: Cash distributions to investors
(Note 9)
- from operating cash flow 0 (498,459) (5,439,404) (16,854,297)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
- from return of capital (Note 10) 0 (136,827) 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 (136,827) 43,136 6,511,153
Special items (not including sales of
real estate and refinancing):
Subscriptions received from
stockholders 0 38,454,158 100,792,991 222,482,560
Sale of common stock to CNL Fund
Advisors, Inc. 200,000 0 0 0
Retirement of shares of common stock
(Note 13) 0 0 0 0
Contributions from minority interest 0 200,000 97,419 0
Distributions to holder of minority
interest 0 0 (39,121) (34,020)
Stock issuance costs (19) (3,680,704) (8,486,188) (19,542,862)
Acquisition of land and buildings 0 (18,835,969) (36,104,148) (143,542,667)
Investment in direct financing
leases 0 (1,364,960) (13,372,621) (39,155,974)
Proceeds from sale of equipment direct
financing leases 0 0 0 962,274
Investment in joint venture 0 0 0 0
Purchase of other investments 0 0 0 0
Investment in mortgage notes
receivable 0 0 (13,547,264) (4,401,982)
Collections on mortgage notes
receivable 0 0 133,850 250,732
Investment in equipment notes receivable 0 0 0 (12,521,401)
Collections on equipment notes receivable 0 0 0 0
Investment in certificate of deposit 0 0 0 (2,000,000)
Proceeds of borrowing on line of
credit 0 0 3,666,896 19,721,804
Payment on line of credit 0 0 (145,080) (20,784,577)
Reimbursement of organization,
acquisition, and deferred offering
and stock issuance costs paid on
behalf of CNL American Properties
Fund, Inc. by related parties (199,036) (2,500,056) (939,798) (2,857,352)
Increase in intangibles and other assets 0 (628,142) (1,103,896) 0
Other 0 0 (54,533) 49,001
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 945 11,507,500 30,941,643 5,136,689
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED (Note 6)
Federal income tax results:
Ordinary income (loss) (Note 11)
- from operations (Note 8) 0 20 61 67
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-19
<PAGE>
1998
(Note 3)
--------------
Gross revenue $ 33,202,491
Equity in earnings of joint venture 16,018
Provision for loss on land and buildings
(Note 12) (611,534)
Interest income 8,984,546
Less: Operating expenses (5,354,859)
Interest expense 0
Depreciation and amortization (4,054,098)
Minority interest in income of
consolidated joint venture (30,156)
--------------
Net income - GAAP basis 32,152,408
==============
Taxable income
- from operations (Note 8) 33,553,390
==============
- from gain (loss) on sale (149,948)
==============
Cash generated from operations
(Notes 4 and 5) 39,116,275
Cash generated from sales (Note 7) 2,385,941
Cash generated from refinancing 0
-------------
Cash generated from operations, sales
and refinancing 41,502,216
Less: Cash distributions to investors
(Note 9)
- from operating cash flow (39,116,275)
- from sale of properties 0
- from cash flow from prior period (265,053)
- from return of capital (Note 10) (67,821)
------------
Cash generated (deficiency) after cash
distributions 2,053,067
Special items (not including sales of
real estate and refinancing):
Subscriptions received from
stockholders 385,523,966
Sale of common stock to CNL Fund
Advisors, Inc. 0
Retirement of shares of common stock
(Note 13) (639,528)
Contributions from minority interest 0
Distributions to holder of minority
interest (34,073)
Stock issuance costs (34,579,650)
Acquisition of land and buildings (200,101,667)
Investment in direct financing
leases (47,115,435)
Proceeds from sale of equipment direct
financing leases 0
Investment in joint venture (974,696)
Purchase of other investments (16,083,055)
Investment in mortgage notes
receivable (2,886,648)
Collections on mortgage notes
receivable 291,990
Investment in equipment notes receivable (7,837,750)
Collections on equipment notes receivable 1,263,633
Investment in certificate of deposit 0
Proceeds of borrowing on line of
credit 7,692,040
Payment on line of credit (8,039)
Reimbursement of organization,
acquisition, and deferred offering
and stock issuance costs paid on
behalf of CNL American Properties
Fund, Inc. by related parties (4,574,925)
Increase in intangibles and other assets (6,281,069)
Other (95,101)
--------------
Cash generated (deficiency) after cash
distributions and special items 75,613,060
==============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED (Note 6)
Federal income tax results:
Ordinary income (loss) (Note 11)
- from operations (Note 8) 63
==============
- from recapture 0
==============
Capital gain (loss) 0
==============
C-20
<PAGE>
TABLE III - CNL AMERICAN PROPERTIES FUND, INC. (continued)
<TABLE>
<CAPTION>
1994 1997
(Note 1) 1995 1996 (Note 2)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 19 59 66
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
- from return of capital (Note 10) 0 14 8 6
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 11) 0 33 67 72
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 26 67 72
- from cash flow from prior period 0 0 0 0
- from return of capital (Note 10) 0 7 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 11) 0 33 67 72
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 6 and 9) 0.00% 5.34% 7.06% 7.45%
Total cumulative cash distributions per
$1,000 investment from inception 0 33 100 172
Amount (in percentage terms) remaining invested in
program properties at the end of each year
(period) presented (original total acquisition
cost of properties retained, divided by original
total acquisition cost of all properties in
program) (Note 7) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective March 29, 1995, CNL American
Properties Fund, Inc. ("APF") registered for sale $165,000,000 of
shares of common stock (the "Initial Offering"), including $15,000,000
available only to stockholders participating in the company's
reinvestment plan. The Initial Offering of APF commenced April 19,
1995, and upon completion of the Initial Offering on February 6, 1997,
had received subscription proceeds of $150,591,765 (15,059,177 shares),
including $591,765 (59,177 shares) issued pursuant to the reinvestment
plan. Pursuant to a Registration Statement on Form S-11 under the
Securities Act of 1933, as amended, effective January 31, 1997, APF
registered for sale $275,000,000 of shares of common stock (the "1997
Offering"), including $25,000,000 available only to stockholders
participating in the company's reinvestment plan. The 1997 Offering of
APF commenced following the completion of the Initial Offering on
February 6, 1997, and upon completion of the 1997 Offering on March 2,
1998, had received subscription proceeds of $251,872,648 (25,187,265
shares), including $1,872,648 (187,265 shares) issued pursuant to the
reinvestment plan. Pursuant to a Registration Statement on Form S-11
under the Securities Act of 1933, as amended, effective May 12, 1998,
APF registered for sale $345,000,000 of shares of common stock (the
"1998 Offering"). The 1998 Offering of APF commenced following the
completion of the 1997 Offering on March 2, 1998. As of December 31,
1998, APF had received subscriptions totalling approximately
$345,000,000 from the 1998 Offering, including $3,107,848 issued
pursuant to the company's reinvestment plan. The 1998 Offering became
fully subscribed in December 1998 and proceeds from the last
subscriptions were received in January 1999. Activities through June 1,
1995, were devoted to organization of APF and operations had not begun.
Note 2: The amounts shown represent the combined results of the Initial
Offering and the 1997 Offering.
Note 3: The amounts shown represent the combined results of the Initial
Offering, 1997 Offering and 1998 Offering.
Note 4: Cash generated from operations includes cash received from tenants,
less cash paid for expenses, plus interest received.
Note 5: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of APF.
Note 6: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared for
the period.
Note 7: In May 1997 and July 1997, APF sold four properties and one property,
respectively, to a tenant for $5,254,083 and $1,035,153, respectively,
which was equal to the carrying value of the properties at the time of
sale. In May and July 1998, APF sold two and one properties,
respectively, to third parties for $1,605,154 and $1,152,262,
respectively, (and received net sales proceeds of approximately
$1,233,700 and $629,435, respectively, after deduction of construction
costs incurred but not paid by APF as of the date of the sale) which
approximated the carrying value of the properties at the time of sale.
As a result, no gain or loss was recognized for financial reporting
purposes. The company reinvested the proceeds from the sale of
properties in additional properties.
Note 8: Taxable income presented is before the dividends paid deduction.
Note 9: For the years ended December 31, 1998, 1997, 1996 and 1995, 84.87%,
93.33%, 90.25% and 59.82%, respectively, of the distributions received
by stockholders were considered to be ordinary income and 15.13%,
6.67%, 9.75% and 40.18%, respectively, were considered a return of
capital for federal income tax purposes. No amounts distributed to
stockholders for the years ended December 31, 1998, 1997, 1996 and 1995
are required to be or have been treated by the company as a return of
capital for purposes of calculating the stockholders' return on their
invested capital.
C-21
<PAGE>
1998
(Note 3)
--------------
Cash distributions to investors
Source (on GAAP basis)
- from investment income 60
- from capital gain 0
- from investment income from
prior period 0
- from return of capital (Note 10) 14
--------------
Total distributions on GAAP basis (Note 11) 74
==============
Source (on cash basis)
- from sales 0
- from refinancing 0
- from operations 73
- from cash flow from prior period 1
- from return of capital (Note 10) 0
--------------
Total distributions on cash basis (Note 11) 74
==============
Total cash distributions as a percentage
of original $1,000 investment (Note 6 and 9) 7.62%
Total cumulative cash distributions per
$1,000 investment from inception 246
Amount (in percentage terms) remaining invested in
program properties at the end of each year
(period) presented (original total acquisition
cost of properties retained, divided by original
total acquisition cost of all properties in
program) (Note 7) 100%
Note 10: Cash distributions presented above as a return of capital on a GAAP
basis represent the amount of cash distributions in excess of
accumulated net income on a GAAP basis. Accumulated net income
includes deductions for depreciation and amortization expense and
income from certain non-cash items. This amount is not required to
be presented as a return of capital except for purposes of this
table, and APF has not treated this amount as a return of capital
for any other purpose.
Note 11: Tax and distribution data and total distributions on GAAP basis
were computed based on the weighted average shares outstanding
during each period presented.
Note 12: During the year ended December 31, 1998, APF recorded provisions
for losses on land and buildings in the amount of $611,534 for
financial reporting purposes relating to two Shoney's properties
and two Boston Market Properties. The tenants of these properties
experienced financial difficulties and ceased payment of rents
under the terms of their lease agreements. The allowances represent
the difference between the carrying value of the Properties at
December 31, 1998 and the estimated net realizable value for these
Properties.
Note 13: In October 1998, the Board of Directors of APF elected to implement
APF's redemption plan. Under the redemption plan, APF elected to
redeem shares, subject to certain conditions and limitations.
During the year ended December 31, 1998, 69,514 shares were
redeemed at $9.20 per share ($639,528) and retired from shares
outstanding of common stock.
C-22
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVII, LTD.
<TABLE>
<CAPTION>
1995
(Note 1) 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenue $ 0 $ 1,195,263 $ 2,643,871 $ 2,816,845
Equity in earnings of unconsolidated
joint ventures 0 4,834 100,918 140,595
Interest income 12,153 244,406 69,779 51,240
Less: Operating expenses (3,493) (169,536) (181,865) (182,681)
Interest expense 0 0 0 0
Depreciation and amortization (309) (179,208) (387,292) (369,209)
Minority interest in income of
consolidated joint venture 0 (41,854) (62,632)
------------ ------------ ------------ ------------
Net income - GAAP basis 8,351 1,095,759 2,203,557 2,394,158
============ ============ ============ ============
Taxable income
- from operations 12,153 1,114,964 2,058,601 2,114,039
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 9,012 1,232,948 2,495,114 2,520,919
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 9,012 1,232,948 2,495,114 2,520,919
Less: Cash distributions to investors
(Note 4)
- from operating cash flow (1,199) (703,681) (2,177,584) (2,400,000)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 7,813 529,267 317,530 120,919
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 5,696,921 24,303,079 0 0
General partners' capital contri-
butions 1,000 0 0 0
Contributions from minority interest 0 140,676 278,170 0
Distribution to holder of minority
interest 0 0 (41,507) (49,023)
Syndication costs (604,348) (2,407,317) 0 0
Acquisition of land and buildings (332,928) (19,735,346) (1,740,491) 0
Investment in direct financing
leases 0 (1,784,925) (1,130,497) 0
Investment in joint ventures 0 (201,501) (1,135,681) (124,452)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVII, Ltd. by related parties (347,907) (326,483) (25,444) 0
Increase in other assets (221,282) 0 0 0
Reimbursement from developer of
construction costs 0 0 0 306,100
Other (410) 410 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 4,198,859 517,860 (3,477,920) 253,544
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 36 37 69 70
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-23
<PAGE>
TABLE III - CNL INCOME FUND XVII, LTD. (continued)
<TABLE>
<CAPTION>
1995
(Note 1) 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 4 23 73 79
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 1
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 4) 0 23 73 80
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 4 23 73 80
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 4) 4 23 73 80
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 5) 5.00% 5.50% 7.625% 8.00%
Total cumulative cash distributions per
$1,000 investment from inception 4 27 100 180
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 6) N/A 98% 100% 98%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, effective August 11, 1995, CNL Income Fund
XVII, Ltd. ("CNL XVII") and CNL Income Fund XVIII, Ltd. each registered
for sale $30,000,000 units of limited partnership interests ("Units").
The offering of Units of CNL Income Fund XVII, Ltd. commenced September
2, 1995. Pursuant to the registration statement, CNL XVIII could not
commence until the offering of Units of CNL Income Fund XVII, Ltd. was
terminated. CNL Income Fund XVII, Ltd. terminated its offering of Units
on September 19, 1996, at which time subscriptions for the maximum
offering proceeds of $30,000,000 had been received. Upon the
termination of the offering of Units of CNL Income Fund XVII, Ltd., CNL
XVIII commenced its offering of Units. Activities through November 3,
1995, were devoted to organization of the partnership and operations
had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint ventures, less cash paid for expenses,
plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL XVII.
Note 4: Distributions declared for the quarters ended December 31, 1995,
1996 and 1997 are reflected in the 1996, 1997 and 1998 columns,
respectively, due to the payment of such distributions in January 1996,
1997 and 1998, respectively. As a result of distributions being
presented on a cash basis, distributions declared and unpaid as of
December 31, 1996, 1997 and 1998 are not included in the 1996, 1997 and
1998 totals, respectively.
Note 5: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 4 above)
Note 6: During 1998, CNL Income Fund XVII, Ltd. received approximately $306,100
in reimbursements from the developer upon final reconciliation of total
construction costs relating to the properties in Aiken, South Carolina
and Weatherford, Texas, in accordance with the related development
agreements. The partnership intends to reinvest the funds in additional
properties.
C-24
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVIII, LTD.
<TABLE>
<CAPTION>
1995
(Note 1) 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenue $ 0 $ 1,373 $ 1,291,416 $ 2,956,349
Equity in earnings of joint venture 0 0 0 0
Provision for loss on land (Note 5) 0 0 0 (197,466)
Interest income 0 30,241 161,826 141,408
Less: Operating expenses 0 (3,992) (156,403) (223,496)
Interest expense 0 0 0 0
Depreciation and amortization 0 (712) (142,079) (374,473)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 26,910 1,154,760 2,302,322
============ ============ ============ ============
Taxable income
- from operations 0 30,223 1,318,750 2,324,746
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 27,146 1,361,756 2,831,738
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 27,146 1,361,756 2,831,738
Less: Cash distributions to investors
(Note 4)
- from operating cash flow 0 (2,138) (855,957) (2,468,400)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 25,008 505,799 363,338
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 8,498,815 25,723,944 854,241
General partners' capital contri-
butions 1,000 0 0 0
Contributions from minority interest 0 0 0 0
Syndication costs 0 (845,657) (2,450,214) (161,142)
Acquisition of land and buildings 0 (1,533,446) (18,581,999) (3,134,046)
Investment in direct financing leases 0 0 (5,962,087) (12,945)
Investment in joint venture 0 0 0 (166,025)
Increase in restricted cash 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVIII, Ltd. by related parties 0 (497,420) (396,548) (37,135)
Increase in other assets 0 (276,848) 0 0
Other (20) (107) (66,893) (10,000)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 980 5,370,345 (1,227,998) (2,303,714)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 6 57 66
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-25
<PAGE>
TABLE III - CNL INCOME FUND XVIII, LTD. (continued)
<TABLE>
<CAPTION>
1995
(Note 1) 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 0 38 65
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 6
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 4) 0 0 38 71
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 0 38 71
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 4) 0 0 38 71
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment from
inception 0.00% 5.00% 5.75% 7.63%
Total cumulative cash distributions per
$1,000 investment (Note 6) 0 0 38 109
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 83% 95% 96%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, effective August 11, 1995, CNL
Income Fund XVIII, Ltd ("CNL XVIII") and CNL Income Fund XVII, Ltd.
each registered for sale $30,000,000 units of limited partnership
interest ("Units"). The offering of Units of CNL Income Fund XVII, Ltd.
commenced September 2, 1995. Pursuant to the registration statement,
CNL XVIII could not commence until the offering of Units of CNL Income
Fund XVII, Ltd. was terminated. CNL Income Fund XVII, Ltd. terminated
its offering of Units on September 19, 1996, at which time the maximum
offering proceeds of $30,000,000 had been received. Upon the
termination of the offering of Units of CNL Income Fund XVII, Ltd., CNL
XVIII commenced its offering of Units. Activities through October 11,
1996, were devoted to organization of the partnership and operations
had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL XVIII.
Note 4: Distributions declared for the quarters ended December 1996 and 1997
are reflected in the 1997 and 1998 columns, respectively, due to the
payment of such distributions in January 1997 and 1998, respectively.
As a result of distributions being presented on a cash basis,
distributions declared and unpaid as of December 31, 1997 and 1998 are
not included in the 1997 and 1998 totals, respectively.
Note 5: During the year ended December 31, 1998, the partnership established
an allowance for loss on land of $197,466 for financial reporting
purposes relating to the property in Minnetonka, Minnesota. The tenant
of this Boston Market property declared bankruptcy and rejected the
lease relating to this property. The loss represents the difference
between the Property's carrying value at December 31, 1998 and the
current estimate of net realizable value.
Note 6: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 4 above)
Note 7: Certain data for columns representing less than 12 months have been
annualized.
C-26
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA (14) 02/05/87 06/12/92 $1,169,021 0 0 0 $1,169,021
Wendy's -
Fairfield, CA (14) 07/01/87 10/03/94 1,018,490 0 0 0 1,018,490
Wendy's -
Casa Grande, AZ 12/10/86 08/19/97 795,700 0 0 0 795,700
Wendy's -
North Miami, FL (9) 02/18/86 08/21/97 473,713 0 0 0 473,713
Popeye's -
Kissimmee, FL (14) 12/31/86 04/30/98 661,300 0 0 0 661,300
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 05/29/87 07/21/93 746,800 0 0 0 746,800
Pizza Hut -
Graham, TX 08/24/87 07/28/94 261,628 0 0 0 261,628
Golden Corral -
Medina, OH (11) 11/18/87 11/30/94 825,000 0 0 0 825,000
Denny's -
Show Low, AZ (8) 05/22/87 01/31/97 620,800 0 0 0 620,800
KFC -
Eagan, MN 06/01/87 06/02/97 623,882 0 42,000 0 665,882
KFC -
Jacksonville, FL 09/01/87 09/09/97 639,363 0 0 0 639,363
Wendy's -
Farmington Hills, MI (12) 05/18/87 10/09/97 833,031 0 0 0 833,031
Wendy's -
Farmington Hills, MI (13) 05/18/87 10/09/97 1,085,259 0 0 0 1,085,259
Denny's -
Plant City, FL 11/23/87 10/24/97 910,061 0 0 0 910,061
Pizza Hut -
Mathis, TX 12/17/87 12/04/97 297,938 0 0 0 297,938
KFC -
Avon Park, FL 09/02/87 12/10/97 501,975 0 0 0 501,975
CNL Income Fund III, Ltd.:
Wendy's -
Chicago, IL (14) 06/02/88 01/10/97 496,418 0 0 0 496,418
Perkins -
Bradenton, FL 06/30/88 03/14/97 1,310,001 0 0 0 1,310,001
Pizza Hut -
Kissimmee, FL 02/23/88 04/08/97 673,159 0 0 0 673,159
</TABLE>
<TABLE>
<CAPTION>
=========================================================================================
Cost of Properties
Including Closing and
Soft Costs
--------------------------------------- Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==========================================================================================
<S> <C> <C> <C> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA (14) 0 $955,000 $955,000 $214,021
Wendy's -
Fairfield, CA (14) 0 861,500 861,500 156,990
Wendy's -
Casa Grande, AZ 0 667,255 667,255 128,445
Wendy's -
North Miami, FL (9) 0 385,000 385,000 88,713
Popeye's -
Kissimmee, FL (14) 0 475,360 475,360 185,940
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 0 642,800 642,800 104,000
Pizza Hut -
Graham, TX 0 205,500 205,500 56,128
Golden Corral -
Medina, OH (11) 0 743,000 743,000 82,000
Denny's -
Show Low, AZ (8) 0 484,185 484,185 136,615
KFC -
Eagan, MN 0 601,100 601,100 64,782
KFC -
Jacksonville, FL 0 405,000 405,000 234,363
Wendy's -
Farmington Hills, MI (12) 0 679,000 679,000 154,031
Wendy's -
Farmington Hills, MI (13) 0 887,000 887,000 198,259
Denny's -
Plant City, FL 0 820,717 820,717 89,344
Pizza Hut -
Mathis, TX 0 202,100 202,100 95,838
KFC -
Avon Park, FL 0 345,000 345,000 156,975
CNL Income Fund III, Ltd.:
Wendy's -
Chicago, IL (14) 0 591,362 591,362 (94,944)
Perkins -
Bradenton, FL 0 1,080,500 1,080,500 229,501
Pizza Hut -
Kissimmee, FL 0 474,755 474,755 198,404
</TABLE>
C-27
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Burger King -
Roswell, GA 06/08/88 06/20/97 257,981 0 685,000 0 942,981
Wendy's -
Mason City, IA 02/29/88 10/24/97 217,040 0 0 0 217,040
Taco Bell -
Fernandina Beach, FL (14) 04/09/88 01/15/98 721,655 0 0 0 721,655
Denny's -
Daytona Beach, FL (14) 07/12/88 01/23/98 1,008,976 0 0 0 1,008,976
Wendy's -
Punta Gorda, FL 02/03/88 02/20/98 665,973 0 0 0 665,973
Po Folks -
Hagerstown, MD 06/21/88 06/10/98 788,884 0 0 0 788,884
Denny's -
Hazard, KY 02/01/88 12/23/98 432,625 0 0 0 432,625
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 03/22/89 04/27/94 712,000 0 0 0 712,000
Burger King -
Hastings, MI 08/12/88 12/15/95 518,650 0 0 0 518,650
Wendy's -
Tampa, FL 12/30/88 09/20/96 1,049,550 0 0 0 1,049,550
Checkers -
Douglasville, GA 12/08/94 11/07/97 380,695 0 0 0 380,695
Taco Bell -
Fort Myers, FL (14) 12/22/88 03/02/98 794,690 0 0 0 794,690
Denny's -
Union Township, OH (14) 11/01/88 03/31/98 674,135 0 0 0 674,135
Perkins -
Leesburg, FL 01/11/89 07/09/98 529,288 0 0 0 529,288
Taco Bell -
Naples, FL 12/22/88 09/03/98 533,127 0 0 0 533,127
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 02/28/90 08/25/95 0 0 1,040,000 0 1,040,000
Ponderosa -
St. Cloud, FL (6) (14) 06/01/89 10/24/96 73,713 0 1,057,299 0 1,131,012
Franklin National Bank -
Franklin, TN 06/26/89 01/07/97 960,741 0 0 0 960,741
Shoney's -
Smyrna, TN 03/22/89 05/13/97 636,788 0 0 0 636,788
KFC -
Salem, NH 05/31/89 09/22/97 1,272,137 0 0 0 1,272,137
</TABLE>
<TABLE>
<CAPTION>
=========================================================================================
Cost of Properties
Including Closing and
Soft Costs
--------------------------------------- Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==========================================================================================
<S> <C> <C> <C> <C>
Burger King -
Roswell, GA 0 775,226 775,226 167,755
Wendy's -
Mason City, IA 0 190,252 190,252 26,788
Taco Bell -
Fernandina Beach, FL (14) 0 559,570 559,570 162,085
Denny's -
Daytona Beach, FL (14) 0 918,777 918,777 90,799
Wendy's -
Punta Gorda, FL 0 684,342 684,342 (18,369)
Po Folks -
Hagerstown, MD 0 1,188,315 1,188,315 (399,431)
Denny's -
Hazard, KY 0 647,622 647,622 (214,997)
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 0 616,501 616,501 95,499
Burger King -
Hastings, MI 0 419,936 419,936 98,714
Wendy's -
Tampa, FL 0 828,350 828,350 221,200
Checkers -
Douglasville, GA 0 363,768 363,768 16,927
Taco Bell -
Fort Myers, FL (14) 0 597,998 597,998 196,692
Denny's -
Union Township, OH (14) 0 872,850 872,850 (198,715)
Perkins -
Leesburg, FL 0 737,260 737,260 (207,972)
Taco Bell -
Naples, FL 0 410,546 410,546 122,581
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 0 986,418 986,418 53,582
Ponderosa -
St. Cloud, FL (6) (14) 0 996,769 996,769 134,243
Franklin National Bank -
Franklin, TN 0 1,138,164 1,138,164 (177,423)
Shoney's -
Smyrna, TN 0 554,200 554,200 82,588
KFC -
Salem, NH 0 1,079,310 1,079,310 192,827
</TABLE>
C-28
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Perkins -
Port St. Lucie, FL 11/14/89 09/23/97 1,216,750 0 0 0 1,216,750
Hardee's -
Richmond, VA 02/17/89 11/07/97 397,785 0 0 0 397,785
Wendy's -
Tampa, FL 02/16/89 12/29/97 805,175 0 0 0 805,175
Denny's -
Port Orange, FL (14) 07/10/89 01/23/98 1,283,096 0 0 0 1,283,096
Shoney's -
Tyler, TX 03/20/89 02/17/98 844,229 0 0 0 894,229
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 11/02/89 05/24/94 791,211 0 0 0 791,211
Hardee's -
Heber Springs, AR 02/13/90 05/24/94 638,270 0 0 0 638,270
Hardee's -
Little Canada, MN 11/28/89 06/29/95 899,503 0 0 0 899,503
Jack in the Box -
Dallas, TX 06/28/94 12/09/96 982,980 0 0 0 982,980
Denny's -
Show Low, AZ (8) 05/22/87 01/31/97 349,200 0 0 0 349,200
KFC -
Whitehall Township, MI 02/26/90 07/09/97 629,888 0 0 0 629,888
Perkins -
Naples, FL 12/26/89 07/09/97 1,487,725 0 0 0 1,487,725
Burger King -
Plattsmouth, NE 01/19/90 07/18/97 699,400 0 0 0 699,400
Shoney's -
Venice, FL 08/03/89 09/17/97 1,206,696 0 0 0 1,206,696
Jack in the Box -
Yuma, AZ (10) 07/14/94 10/31/97 510,653 0 0 0 510,653
Denny's -
Deland, FL 03/22/90 01/23/98 1,236,971 0 0 0 1,236,971
Wendy's -
Liverpool, NY 12/08/89 02/09/98 145,221 0 0 0 145,221
Perkin's -
Melbourne, FL 02/03/90 02/12/98 552,910 0 0 0 552,910
Hardee's
Bellevue, NE 05/03/90 06/05/98 900,000 0 0 0 900,000
</TABLE>
<TABLE>
<CAPTION>
=========================================================================================
Cost of Properties
Including Closing and
Soft Costs
--------------------------------------- Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==========================================================================================
<S> <C> <C> <C> <C>
Perkins -
Port St. Lucie, FL 0 1,203,207 1,203,207 13,543
Hardee's -
Richmond, VA 0 695,464 695,464 (297,679)
Wendy's -
Tampa, FL 0 657,800 657,800 147,375
Denny's -
Port Orange, FL (14) 0 1,021,000 1,021,000 262,096
Shoney's -
Tyler, TX 0 770,300 770,300 73,929
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 0 605,500 605,500 185,711
Hardee's -
Heber Springs, AR 0 532,893 532,893 105,377
Hardee's -
Little Canada, MN 0 821,692 821,692 77,811
Jack in the Box -
Dallas, TX 0 964,437 964,437 18,543
Denny's -
Show Low, AZ (8) 0 272,354 272,354 76,846
KFC -
Whitehall Township, MI 0 725,604 725,604 (95,716)
Perkins -
Naples, FL 0 1,083,869 1,083,869 403,856
Burger King -
Plattsmouth, NE 0 561,000 561,000 138,400
Shoney's -
Venice, FL 0 1,032,435 1,032,435 174,261
Jack in the Box -
Yuma, AZ (10) 0 448,082 448,082 62,571
Denny's -
Deland, FL 0 1,000,000 1,000,000 236,971
Wendy's -
Liverpool, NY 0 341,440 341,440 (196,219)
Perkin's -
Melbourne, FL 0 692,850 692,850 (139,940)
Hardee's
Bellevue, NE 0 899,512 899,512 488
</TABLE>
C-29
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 06/14/90 05/19/92 700,000 0 0 0 700,000
Hardee's -
St. Paul, MN 08/09/90 05/24/94 869,036 0 0 0 869,036
Perkins -
Florence, SC (3) 08/28/90 08/25/95 0 0 1,160,000 0 1,160,000
Church's Fried Chicken -
Jacksonville, FL (4) (14) 04/30/90 12/01/95 0 0 240,000 0 240,000
Shoney's -
Colorado Springs, CO 07/03/90 07/24/96 1,044,909 0 0 0 1,044,909
Hardee's -
Hartland, MI 07/10/90 10/23/96 617,035 0 0 0 617,035
Hardee's -
Columbus, IN 09/04/90 05/30/97 223,590 0 0 0 223,590
KFC -
Dunnellon, FL 08/02/90 10/07/97 757,800 0 0 0 757,800
Jack in the Box -
Yuma, AZ (10) 07/14/94 10/31/97 471,372 0 0 0 471,372
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 03/16/91 07/31/95 1,184,865 0 0 0 1,184,865
Church's Fried Chicken -
Jacksonville, FL (4) (14) 09/28/90 12/01/95 0 0 240,000 0 240,000
Church's Fried Chicken -
Jacksonville, FL (5) (14) 09/28/90 12/01/95 0 0 220,000 0 220,000
Ponderosa -
Orlando, FL (6) (14) 12/17/90 10/24/96 0 0 1,353,775 0 1,353,775
CNL Income Fund IX, Ltd.:
Burger King -
Woodmere, OH (15) 05/31/91 12/12/96 918,445 0 0 0 918,445
Burger King -
Alpharetta, GA 09/20/91 06/30/97 1,053,571 0 0 0 1,053,571
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 03/04/92 08/11/95 1,050,186 0 0 0 1,050,186
Jack in the Box -
Freemont, CA 03/26/92 09/23/97 1,366,550 0 0 0 1,366,550
</TABLE>
<TABLE>
<CAPTION>
=========================================================================================
Cost of Properties
Including Closing and
Soft Costs
--------------------------------------- Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==========================================================================================
<S> <C> <C> <C> <C>
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 0 560,202 560,202 139,798
Hardee's -
St. Paul, MN 0 742,333 742,333 126,703
Perkins -
Florence, SC (3) 0 1,084,905 1,084,905 75,095
Church's Fried Chicken -
Jacksonville, FL (4) (14) 0 233,728 233,728 6,272
Shoney's -
Colorado Springs, CO 0 893,739 893,739 151,170
Hardee's -
Hartland, MI 0 841,642 841,642 (224,607)
Hardee's -
Columbus, IN 0 219,676 219,676 3,914
KFC -
Dunnellon, FL 0 546,333 546,333 211,467
Jack in the Box -
Yuma, AZ (10) 0 413,614 413,614 57,758
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 0 949,199 949,199 235,666
Church's Fried Chicken -
Jacksonville, FL (4) (14) 0 238,153 238,153 1,847
Church's Fried Chicken -
Jacksonville, FL (5) (14) 0 215,845 215,845 4,155
Ponderosa -
Orlando, FL (6) (14) 0 1,179,210 1,179,210 174,565
CNL Income Fund IX, Ltd.:
Burger King -
Woodmere, OH (15) 0 918,445 918,445 0
Burger King -
Alpharetta, GA 0 713,866 713,866 339,705
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 0 987,679 987,679 62,507
Jack in the Box -
Freemont, CA 0 1,102,766 1,102,766 263,784
</TABLE>
C-30
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
===============================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Jack in the Box -
Sacramento, CA 12/19/91 01/20/98 1,234,175 0 0 0 1,234,175
Pizza Hut -
Billings, MT 04/16/92 10/07/98 359,990 0 0 0 359,990
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 09/29/92 11/07/96 1,044,750 0 0 0 1,044,750
Burger King -
Columbus, OH (19) 06/29/92 09/30/98 795,264 0 0 0 795,264
Burger King -
Nashua, NH 06/29/92 10/07/98 1,630,296 0 0 0 1,630,296
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 12/28/92 04/10/96 1,640,000 0 0 0 1,640,000
Long John Silver's -
Monroe, NC 06/30/93 12/31/98 483,550 0 0 0 483,550
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 03/31/94 04/24/95 286,411 0 0 0 286,411
Checkers -
Richmond, VA 03/31/94 11/21/96 550,000 0 0 0 550,000
Denny's -
Orlando, FL 09/01/93 10/24/97 932,849 0 0 0 932,849
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 03/31/94 03/01/95 339,031 0 0 0 339,031
Checkers -
Dallas, TX 03/31/94 03/01/95 356,981 0 0 0 356,981
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0 1,753,533
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0 747,058
Hardee's -
Madison, AL 12/14/93 01/08/98 700,950 0 0 0 700,950
Checkers -
Richmond, VA (#548) 03/31/94 01/29/98 512,462 0 0 0 512,462
Checkers -
Riviera Beach, FL 03/31/94 04/14/98 360,000 0 0 0 360,000
Checkers -
Richmond, VA (#486) 03/31/94 07/27/98 397,985 0 0 0 397,985
</TABLE>
<TABLE>
<CAPTION>
==========================================================================================
Cost of Properties
Including Closing and
Soft Costs
--------------------------------------- Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
===========================================================================================
<S> <C> <C> <C> <C>
Jack in the Box -
Sacramento, CA 0 969,423 969,423 264,752
Pizza Hut -
Billings, MT 0 302,000 302,000 57,990
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 0 818,850 818,850 225,900
Burger King -
Columbus, OH (19) 0 795,264 795,264 0
Burger King -
Nashua, NH 0 1,217,015 1,217,015 413,281
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 0 1,636,643 1,636,643 3,357
Long John Silver's -
Monroe, NC 0 239,788 239,788 243,762
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 0 286,411 286,411 0
Checkers -
Richmond, VA 0 413,288 413,288 136,712
Denny's -
Orlando, FL 0 934,120 934,120 (1,271)
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 0 339,031 339,031 0
Checkers -
Dallas, TX 0 356,981 356,981 0
TGI Friday's -
Woodridge, NJ (7) 0 1,510,245 1,510,245 243,288
Wendy's -
Woodridge, NJ (7) 0 672,746 672,746 74,312
Hardee's -
Madison, AL 0 658,977 658,977 41,973
Checkers -
Richmond, VA (#548) 0 382,435 382,435 130,027
Checkers -
Riviera Beach, FL 0 276,409 276,409 83,591
Checkers -
Richmond, VA (#486) 0 352,034 352,034 45,951
</TABLE>
C-31
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
===============================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 05/27/94 03/01/95 263,221 0 0 0 263,221
Checkers -
Leavenworth, KS 06/22/94 03/01/95 259,600 0 0 0 259,600
Checkers -
Knoxville, TN 07/08/94 03/01/95 288,885 0 0 0 288,885
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0 1,753,533
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0 747,058
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 06/24/95 04/24/96 775,000 0 0 0 775,000
Checker's -
Oviedo, FL 11/14/94 02/28/97 610,384 0 0 0 610,384
Boston Market -
Madison, TN (16) 05/05/95 05/08/98 774,851 0 0 0 774,851
Boston Market -
Chattanooga, TN (17) 05/05/95 06/16/98 713,386 0 0 0 713,386
CNL Income Fund XVII, Ltd.:
Boston Market -
Troy, OH (18) 07/24/96 06/16/98 857,487 0 0 0 857,487
CNL American Properties Fund, Inc.:
TGI Friday's -
Orange, CT 10/30/95 05/08/97 1,312,799 0 0 0 1,312,799
TGI Friday's -
Hazlet, NJ 07/15/96 05/08/97 1,324,109 0 0 0 1,324,109
TGI Friday's -
Marlboro, NJ 08/01/96 05/08/97 1,372,075 0 0 0 1,372,075
TGI Friday's -
Hamden, CT 08/26/96 05/08/97 1,245,100 0 0 0 1,245,100
Boston Market -
Southlake, TX 07/02/97 07/21/97 1,035,153 0 0 0 1,035,135
Boston Market -
Franklin, TN (20) 08/18/95 04/14/98 950,361 0 0 0 950,361
Boston Market -
Grand Island, NE (21) 09/19/95 04/14/98 837,656 0 0 0 837,656
Burger King -
Indian Head Park, IL 04/03/96 05/05/98 674,320 0 0 0 674,320
</TABLE>
<TABLE>
<CAPTION>
=========================================================================================
Cost of Properties
Including Closing and
Soft Costs
--------------------------------------- Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==========================================================================================
<S> <C> <C> <C> <C>
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 0 263,221 263,221 0
Checkers -
Leavenworth, KS 0 259,600 259,600 0
Checkers -
Knoxville, TN 0 288,885 288,885 0
TGI Friday's -
Woodridge, NJ (7) 0 1,510,245 1,510,245 243,288
Wendy's -
Woodridge, NJ (7) 0 672,746 672,746 74,312
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 0 613,838 613,838 161,162
Checker's -
Oviedo, FL 0 506,311 506,311 104,073
Boston Market -
Madison, TN (16) 0 774,851 774,851 0
Boston Market -
Chattanooga, TN (17) 0 713,386 713,386 0
CNL Income Fund XVII, Ltd.:
Boston Market -
Troy, OH (18) 0 857,487 857,487 0
CNL American Properties Fund, Inc
TGI Friday's -
Orange, CT 0 1,310,980 1,310,980 1,819
TGI Friday's -
Hazlet, NJ 0 1,294,237 1,294,237 29,872
TGI Friday's -
Marlboro, NJ 0 1,324,288 1,324,288 47,787
TGI Friday's -
Hamden, CT 0 1,203,136 1,203,136 41,964
Boston Market -
Southlake, TX 0 1,035,135 1,035,135 0
Boston Market -
Franklin, TN (20) 0 950,361 950,361 0
Boston Market -
Grand Island, NE (21) 0 837,656 837,656 0
Burger King -
Indian Head Park, IL 0 670,867 670,867 3,453
</TABLE>
C-32
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
===============================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Boston Market -
Dubuque, IA (22) 10/04/95 05/08/98 969,159 0 0 0 969,159
Boston Market -
Merced, CA (23) 10/06/96 05/08/98 930,834 0 0 0 930,834
Boston Market -
Arvada, CO (24) 07/21/97 07/28/98 1,152,262 0 0 0 1,152,262
</TABLE>
<TABLE>
<CAPTION>
=========================================================================================
Cost of Properties
Including Closing and
Soft Costs
--------------------------------------- Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==========================================================================================
<S> <C> <C> <C> <C>
Boston Market -
Dubuque, IA (22) 0 969,159 969,159 0
Boston Market -
Merced, CA (23) 0 930,834 930,834 0
Boston Market -
Arvada, CO (24) 0 1,152,262 1,152,262 0
</TABLE>
(1) Amounts shown do not include pro rata share of original offering costs or
acquisition fees.
(2) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,006,004 in July 2000.
(3) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,106,657 in July 2000.
(4) Amounts shown are face value and do not represent discounted current value.
Each mortgage note bears interest at a rate of 10.00% per annum and
provides for a balloon payment of $218,252 in December 2005.
(5) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.00% per annum and provides
for a balloon payment of $200,324 in December 2005.
(6) Amounts shown are face value and do not represent discounted current value.
Each mortgage note bears interest at a rate of 10.75% per annum and
provides for 12 monthly payments of interest only and thereafter, 168 equal
monthly payments of principal and interest.
(7) CNL Income Fund XIV, Ltd. and CNL Income Fund XV, Ltd. each owned a 50
percent interest in Wood-Ridge Real Estate Joint Venture, which owned two
properties. The amounts presented for CNL Income Fund XIV, Ltd. and CNL
Income Fund XV, Ltd. represent each partnership's 50 percent interest in
the properties owned by Wood-Ridge Real Estate Joint Venture.
(8) CNL Income Fund II, Ltd. owns a 64 percent interest and CNL Income Fund VI,
Ltd. owns a 36 percent interest in this joint venture. The amounts
presented for CNL Income Fund II, Ltd. and CNL Income Fund VI, Ltd.
represent each partnership's percent interest in the property owned by Show
Low Joint Venture.
(9) CNL Income Fund, Ltd. owns a 50 percent interest in this joint venture. The
amounts presented represent the partnerships percent interest in the
property owned by Seventh Avenue Joint Venture. A third party owns the
remaining 50 percent interest in this joint venture.
(10) CNL Income Fund VI, Ltd. and CNL Income Fund VII, Ltd. own a 52 percent and
48 percent interest, respectively, in the property in Yuma, Arizona. The
amounts presented for CNL Income Fund VI, Ltd. and CNL Income Fund VII,
Ltd. represent each partnership's respective interest in the property.
(11) Cash received net of closing costs includes $198,000 received as a lease
termination fee.
(12) Cash received net of closing costs includes $93,885 received as a lease
termination fee.
(13) Cash received net of closing costs includes $120,115 received as a lease
termination fee.
(14) Closing costs deducted from net sales proceeds do not include deferred,
subordinated real estate disposition fees payable to CNL Fund Advisors or
its affiliates.
(15) The Burger King property in Woodmere, Ohio was exchanged on December 12,
1996 for a Burger King property in Carrboro, NC at the option of the tenant
as permitted under the terms of the lease agreement. Due to the exchange,
the Burger King property in Carrboro, NC is being leased under the same
lease as the Burger King property in Woodmere, OH.
(16) The Boston Market property in Madison, TN was exchanged on May 8, 1998 for
a Boston Market property in Lawrence, KS at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Lawrence, KS is being leased under the same lease
as the Boston Market property in Madison, TN.
(17) The Boston Market property in Chattanooga, TN was exchanged on June 16,
1998 for a Boston Market property in Indianapolis, IN at the option of the
tenant as permitted under the terms of the lease agreement. Due to the
exchange, the Boston Market property in Indianapolis, IN is being leased
under the same lease as the Boston Market property in Chattanooga, TN.
(18) The Boston Market property in Troy, OH was exchanged on June 16, 1998 for a
Boston Market property in Inglewood, CA at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Inglewood, CA is being leased under the same
lease as the Boston Market property in Troy, OH.
(19) The Burger King property in Columbus, OH was exchanged on September 30,
1998 for a Burger King property in Danbury, CT at the option of the tenant
as permitted under the terms of the lease agreement. Due to the exchange,
the Burger King property in Danbury, CT is being leased under the same
lease as the Burger King property in Columbus, OH.
C-33
<PAGE>
(20) The Boston Market property in Franklin, TN was exchanged on April 14, 1998
for a Boston Market property in Glendale, AZ at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Glendale, AZ is being leased under the same lease
as the Boston Market property in Franklin, TN.
(21) The Boston Market property in Grand Island, NE was exchanged on April 14,
1998 for a Boston Market property in Warwick, RI at the option of the
tenant as permitted under the terms of the lease agreement. Due to the
exchange, the Boston Market property in Warwick, RI is being leased under
the same lease as the Boston Market property in Grand Island, NE.
(22) The Boston Market property in Dubuque, IA was exchanged on May 8, 1998 for
a Boston Market property in Columbus, OH at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Columbus, OH is being leased under the same lease
as the Boston Market property in Dubuque, IA.
(23) Cash received net of closing costs includes $362,949 in construction costs
incurred but not paid by CNL American Properties Fund, Inc. as of the
closing date, which were deducted from the actual net sales proceeds
received by CNL American Properties Fund, Inc.
(24) Cash received net of closing costs includes $522,827 in construction costs
incurred but not paid by CNL American Properties Fund, Inc. as of the
closing date, which were deducted from the actual net sales proceeds
received by CNL American Properties Fund, Inc.
C-34
<PAGE>
APPENDIX D
SUBSCRIPTION AGREEMENT
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
- --------------------------------------------------------------------------------
Up to 27,500,000 Shares -- $10.00 per Share
Minimum Purchase -- 250 Shares ($2,500)
100 Shares ($1,000) for IRAs, Keogh, and Qualified Plans
Minimum purchase is higher in Nebraska, New York and North Carolina
================================================================================
PLEASE READ CAREFULLY this Subscription Agreement and the Notices (on the back
of the Agreement) before completing this document. TO SUBSCRIBE FOR SHARES,
complete and sign, where appropriate, and deliver the Subscription Agreement,
along with your check, to your Registered Representative. YOUR CHECK SHOULD BE
MADE PAYABLE TO:
SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.
ALL ITEMS ON THE SUBSCRIPTION AGREEMENT MUST BE COMPLETED IN ORDER FOR YOUR
SUBSCRIPTION TO BE PROCESSED.
================================================================================
Overnight Packages: Regular Mail Packages:
Attn: Investor Services Attn: Investor Services
400 E. South Street Post Office Box 1033
Orlando, Florida 32801 Orlando, Florida 32802-1033
For Telephone Inquiries:
CNL SECURITIES CORP.
(407) 650-1000 OR (800) 522-3863
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
- --------------------------------------------------------------------------------
1. --------------- INVESTMENT --------------------------------------------------
This subscription is in the amount of $___________ for the purchase of
___________ Shares ($10.00 per Share). The minimum initial subscription is 250
Shares ($2,500); 100 Shares ($1,000) for IRA, Keogh and qualified plan accounts
(except in states with higher minimum purchase requirements).
|_| ADDITIONAL PURCHASE |_| REINVESTMENT PLAN - Investor elects to participate
in Plan (See prospectus for details.)
2. --------------- SUBSCRIBER INFORMATION --------------------------------------
Name (1st)_______________________ |_| M |_| F Date of Birth (MM/DD/YY)__________
Name (2nd)_______________________ |_| M |_| F Date of Birth (MM/DD/YY)__________
Address_________________________________________________________________________
City___________________________________ State___________ Zip Code_______________
Custodian Account No._____________________ Daytime Phone # ( )_______________
|_| U.S. Citizen |_| Resident Alien |_| Foreign Resident Country___________
|_| Check if Subscriber is a U.S. citizen residing outside the U.S.
Income Tax Filing State_________________________________________________________
ALL SUBSCRIBERS: State of Residence of Subscriber/Plan Beneficiary
(required)_____________________________________________________
Taxpayer Identification Number: For most individual taxpayers, it is their
Social Security number. Note: If the purchase is in more than one name, the
number should be that of the first person listed. For IRAs, Keoghs and qualified
plans, enter both the Social Security number and the custodian taxpayer
identification number.
Taxpayer ID#_____ - ______ - ______ Social Security #______ -_______ - _______
3. --------------- INVESTOR MAILING ADDRESS ------------------------------------
For the Subscriber of an IRA, Keogh, or qualified plan to receive informational
mailings, please complete if different from address in Section 2.
Name____________________________________________________________________________
Address_________________________________________________________________________
City____________________________ State_____________ Zip Code__________________
Daytime Phone #____________________________________
4. ---------------- DIRECT DEPOSIT ADDRESS -------------------------------------
Investors requesting direct deposit of distribution checks to another financial
institution or mutual fund, please complete below. In no event will the Company
or Affiliates be responsible for any adverse consequences of direct deposit.
Company_________________________________________________________________________
Address_________________________________________________________________________
City_________________________________ State_______________ Zip Code___________
Account No._________________________________ Phone #___________________________
5. --------------- FORM OF OWNERSHIP -------------------------------------------
(Select only one)
|_|INDIVIDUAL-one signature required (1)
|_|HUSBAND AND WIFE, AS COMMUNITY PROPERTY- two signatures required (15)
|_|TENANTS IN COMMON-two signatures required (9)
|_|TENANTS BY THE ENTIRETY-two signatures required (31)
|_|S-CORPORATION (22)
|_|C-CORPORATION (5)
|_|IRA-custodian signature required (23)
|_|ROTH IRA-custodian signature required (36)
|_|SEP-custodian signature required (38)
|_|TAXABLE TRUST (7)
|_|TAX-EXEMPT TRUST (20)
|_|JOINT TENANTS WITH RIGHT OF SURVIVORSHIP-all parties must sign (8)
|_|A MARRIED PERSON/SEPARATE PROPERTY-one signature required (34)
|_|KEOGH (H.R.10)-trustee signature required (24)
|_|CUSTODIAN-custodian signature required (33)
|_|PARTNERSHIP (3)
|_|NON-PROFIT ORGANIZATION (12)
|_|PENSION PLAN-trustee signature(s) required (19)
|_|PROFIT SHARING PLAN-trustee signature(s) required (27)
|_|CUSTODIAN UGMA-STATE of _________ -custodian signature required (16)
|_|CUSTODIAN UTMA-STATE of _________ -custodian signature required (42)
|_|ESTATE-Personal Representative signature required (13)
|_|REVOCABLE GRANTOR TRUST-grantor signature required (25)
|_|IRREVOCABLE TRUST-trustee signature required (21)
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
6. -------------- SUBSCRIBER SIGNATURES ----------------------------------------
If the Subscriber is executing the Subscriber Signature Page, the Subscriber
understands that, BY EXECUTING THIS AGREEMENT A SUBSCRIBER DOES NOT WAIVE ANY
RIGHTS HE MAY HAVE UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE
ACT OF 1934 OR UNDER ANY STATE SECURITIES LAW:
X
----------------------------------------------- -------------------
Signature of 1st Subscriber Date
X
---------------------------------------------- -------------------
Signature of 2nd Subscriber Date
7. -------------- BROKER/DEALER INFORMATION ------------------------------------
Broker/Dealer NASD Firm Name____________________________________________________
Registered Representative_______________________________________________________
Branch Mail Address_____________________________________________________________
City_________________________________ State _____________ Zip Code_____________
|_| Please check if new address
Phone #______________________ Fax #______________________ |_| Sold CNL before
Shipping Address________________________________________________________________
City___________________________ State____________________ Zip Code______________
|_| Telephonic Subscriptions (check here): If the Registered Representative
and Branch Manager are executing the signature page on behalf of the
Subscriber, both must sign below. Registered Representatives and Branch
Managers may not sign on behalf of residents of Florida, Iowa, Maine,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New
Mexico, North Carolina, Ohio, Oregon, South Dakota, Tennessee, or
Washington. [NOTE: Not to be executed until Subscriber(s) has (have)
acknowledged receipt of final prospectus.] Telephonic subscriptions may
not be completed for IRA accounts.
|_| Deferred Commission Option (check here): The Deferred Commission Option
means an agreement between a stockholder, the participating
Broker/Dealer and the Managing Dealer to have Selling Commissions paid
over a seven year period as described in "The Offering -- Plan of
Distribution." This option will only be available with prior
authorization by the Broker/Dealer.
|_| Registered Investment Advisor (RIA) (check here): This investment is
made through the RIA in its capacity as a RIA and not in its capacity as
a Registered Representative, if applicable. If an owner or principal or
any member of the RIA firm is a NASD licensed Registered Representative
affiliated with a Broker/Dealer, the transaction should be conducted
through that Broker/Dealer, not through the RIA.
PLEASE READ CAREFULLY THE REVERSE SIDE OF THIS SIGNATURE PAGE AND SUBSCRIPTION
AGREEMENT BEFORE COMPLETING
X
----------------------------- ------------------ --------------------------
Principal, Branch Manager or Date Print or Type Name of
Other Authorized Signature Person Signing
X
----------------------------- ------------------ --------------------------
Registered Representative/ Date Print or Type Name of
Investment Advisor Signature Person Signing
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Make check payable to : SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.,
ESCROW AGENT
Please remit check and For overnight delivery, please send to:
subscription document to: For Office Use Only
CNL SECURITIES CORP. CNL SECURITIES CORP. Sub.#______________
Attn: Investor Services Attn: Investor Services Admit Date_________
Post Office Box 1033 400 E. South Street
Orlando, FL 32802-1033 Orlando, FL 32801 Amount_____________
(800) 522-3863 (407) 650- 1000
(800) 522-3863 Region_____________
RSVP#______________
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
NOTICE TO ALL INVESTORS:
(a) The purchase of Shares by an IRA, Keogh, or other tax-qualified plan does
not, by itself, create the plan.
(b) The Company, in its sole and absolute discretion, may accept or reject the
Subscriber's subscription which if rejected will be promptly returned to the
Subscriber, without interest. Non-U.S. stockholders (as defined in the
Prospectus) will be admitted as stockholders with the approval of the Advisor.
(c) THE SALE OF SHARES SUBSCRIBED FOR HEREUNDER MAY NOT BE COMPLETED UNTIL AT
LEAST FIVE BUSINESS DAYS AFTER THE DATE THE SUBSCRIBER RECEIVES A FINAL
PROSPECTUS. EXCEPT AS PROVIDED IN THIS NOTICE, THE NOTICE BELOW, AND IN THE
PROSPECTUS, THE SUBSCRIBER WILL NOT BE ENTITLED TO REVOKE OR WITHDRAW HIS
SUBSCRIPTION.
The subscribed is asked to refer to the prospectus concerning the Deferred
Commission Option outlined in "The Offering - Plan of Distribution." This
option will only be available with prior authorization by the Broker/Dealer.
NOTICE TO CALIFORNIA RESIDENTS: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER
OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION
THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS
OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
California investors who do not execute the Subscription Agreement will receive
a confirmation of investment accompanied by a second copy of the final
Prospectus, and will have the opportunity to rescind the investment within ten
(10) days from the date of confirmation.
NOTICE TO NORTH CAROLINA RESIDENTS: By signing this Subscription Agreement,
North Carolina investors acknowledge receipt of the Prospectus and represent
that they meet the suitability standards for North Carolina investors listed in
the Prospectus.
NOTICE TO OHIO RESIDENTS: Shares purchased pursuant to the Company's
Reinvestment Plan are subject to commissions. (See Prospectus for details.)
BROKER/DEALER AND FINANCIAL ADVISOR:
By signing this subscription agreement, the signers certify that they recognize
and have complied with their obligations under the NASD's Conduct Rules, and
hereby further certify as follows: (i) a copy of the Prospectus, including the
Subscription Agreement attached thereto as Appendix D, as amended and/or
supplemented to date, has been delivered to the Subscriber; (ii) they have
discussed such investor's prospective purchase of Shares with such investor and
have advised such investor of all pertinent facts with regard to the liquidity,
valuation, and marketability of the Shares; and (iii) they have reasonable
grounds to believe that the purchase of Shares is a suitable investment for such
investor, that such investor meets the suitability standards applicable to such
investor set forth in the Prospectus and related supplements, if any, that such
investor is legally capable of purchasing such Shares and will not be in
violation of any laws for having engaged in such purchase, and that such
investor is in a financial position to enable such investor to realize the
benefits of such an investment and to suffer any loss that may occur with
respect thereto and will maintain documentation on which the determination was
based for a period of not less than six years; (iv) under penalties of perjury,
(a) the information provided in this Subscription Agreement to the best of our
knowledge and belief is true, correct, and complete, including, but not limited
to, the number shown above as the Subscriber's taxpayer identification number;
(b) to the best of our knowledge and belief, the Subscriber is not subject to
backup withholding either because the Subscriber has not been notified that the
Subscriber is subject to backup withholding as result of failure to report all
interest or dividends or the Internal Revenue Service has notified the
subscriber that the Subscriber is no longer subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code of 1986, as amended; and (c)
to the best of our knowledge and belief, the Subscriber is not a nonresident
alien, foreign corporation, foreign trust, or foreign estate for U.S. tax
purposes, and we hereby agree to notify the Company if it comes to the attention
of either of us that the Subscriber becomes such a person within sixty (60) days
of any event giving rise to the Subscriber becoming such a person.
<PAGE>
APPENDIX E
STATEMENT OF ESTIMATED
TAXABLE OPERATING RESULTS
BEFORE DIVIDENDS PAID DEDUCTION
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
STATEMENT OF ESTIMATED TAXABLE OPERATING RESULTS
BEFORE DIVIDENDS PAID DEDUCTION
PROPERTIES ACQUIRED FROM INCEPTION
THROUGH MAY 13, 1999
For the Year Ended December 31, 1998 (Unaudited)
The following schedule presents unaudited estimated taxable operating
results before dividends paid deduction of each Property acquired directly by
the Company from inception through May 13, 1999. The statement presents
unaudited estimated taxable operating results for each Property that was
operational as if the Property had been acquired and operational on January 1,
1998 through December 31, 1998. The schedule should be read in light of the
accompanying footnotes.
These estimates do not purport to present actual or expected operations
of the Company for any period in the future. These estimates were prepared on
the basis described in the accompanying notes which should be read in
conjunction herewith.
<TABLE>
<CAPTION>
Residence Inn by Marriott Residence Inn by Marriott
Buckhead (Lenox Park) (6) Gwinnett Place (6) Total
------------------------- ------------------------- -----------
<S> <C>
Estimated Taxable Operating
Results Before Dividends
Paid Deduction:
Rental Income (1) $1,651,798 $1,208,983 $2,860,781
Asset Management Fees (2) (94,388) (69,085) (163,473)
Interest Expense (3) (440,000) (316,800) (756,800)
General and Administrative
Expenses (4) (132,144) (96,719) (228,863)
---------- ---------- ----------
Estimated Cash Available from
Operations 985,266 726,379 1,711,645
Depreciation Expense (5) (738,159) (612,656) (1,350,815)
---------- ---------- ----------
Estimated Taxable Operating
Results Before Dividends
Paid Deduction $ 247,107 $ 113,723 $ 360,830
========== ========== ==========
</TABLE>
E-1
<PAGE>
- ------------------------
FOOTNOTES:
(1) Rental income does not include percentage rents which will become due
if specified levels of gross receipts are achieved.
(2) The Properties will be managed pursuant to an advisory agreement
between the Company and CNL Hospitality Advisors, Inc. (the "Advisor"),
pursuant to which the Advisor will receive monthly asset management
fees in an amount equal to one-twelfth of .60% of the Company's Real
Estate Asset Value as of the end of the preceding month as defined in
such agreement. See "Management Compensation."
(3) Estimated at 8.8% per annum based on the bank's base rate as of July
31, 1998, plus 30 basis points assuming $15 million was borrowed on the
Company's line of credit to acquire the Buckhead (Lenox Park) Property
and $3.6 million for the Gwinnett Place Property. The Company repaid,
in February 1999, amounts it had borrowed to acquire these Properties.
(4) Estimated at 8% of gross rental income, based on the previous
experience of an Affiliate of the Advisor with another public REIT.
Amount does not include soliciting dealer servicing fee due to the fact
that such fee will not be incurred until December 31 of the year
following the year in which the offering terminates.
(5) The estimated federal tax basis of the depreciable portion of each
Property and the number of years the assets have been depreciated on
the straight-line method is as follows:
Furniture and
Buildings Fixtures
(39 years) (5-15 years)
---------- ------------
Buckhead (Lenox Park) Property $13,459,000 $1,235,000
Gwinnett Place Property 10,017,000 1,114,000
(6) The lessee of the Buckhead (Lenox Park) and the Gwinnett Place
Properties is the same unaffiliated lessee.
E-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
<TABLE>
<CAPTION>
Amount
<S> <C>
SEC registration fee....................................................... $ 79,786
NASD filing fee............................................................ 29,200
Accounting fees and expenses............................................... 150,000*
Escrow Agent's Fees........................................................ 8,500*
Sales and advertising expenses............................................. 5,000,000*
Legal fees and expenses.................................................... 400,000*
Blue Sky fees and expenses................................................. 500,000*
Printing expenses.......................................................... 350,000*
Miscellaneous.............................................................. 982,514*
------------
Total............................................................. $7,500,000
==========
- ---------------------
* Estimated through completion of the offering, assuming sale of 25,000,000 Shares.
</TABLE>
Item 32. Sales to Special Parties.
The registrant was capitalized through the purchase by the
Advisor of 20,000 Shares for aggregate consideration of $200,000.
Item 33. Recent Sales of Unregistered Securities.
See response to Item 32. The offer and sale of the shares is
claimed to be exempt from the registration provisions of the Securities Act of
1933, as amended, by virtue of Section 4(2) thereunder.
Item 34. Indemnification of Directors and Officers.
Pursuant to Maryland corporate law and the Company's Articles
of Incorporation, the Company is required to indemnify and hold harmless a
present or former Director, officer, Advisor, or Affiliate and may indemnify and
hold harmless a present or former employee or agent of the Company (the
"Indemnitee") against any or all losses or liabilities reasonably incurred by
the Indemnitee in connection with or by reason of any act or omission performed
or omitted to be performed on behalf of the Company while a Director, officer,
Advisor, Affiliate, employee, or agent and in such capacity, provided, that the
Indemnitee has determined, in good faith, that the act or omission which caused
the loss or liability was in the best interests of the Company. The Company will
not indemnify or hold harmless the Indemnitee if: (i) the loss or liability was
the result of negligence or misconduct, or if the Indemnitee is an Independent
Director, the loss or liability was the result of gross negligence or willful
misconduct, (ii) the act or omission was material to the loss or liability and
was committed in bad faith or was the result of active or deliberate dishonesty,
(iii) the Indemnitee actually received an improper personal benefit in money,
property, or services, (iv) in the case of any criminal proceeding, the
Indemnitee had reasonable cause to believe that the act or omission was
unlawful, or (v) in a proceeding by or in the right of the Company, the
Indemnitee shall have been adjudged to be liable to the Company. In addition,
the Company will not provide indemnification for any loss or liability arising
from an alleged violation of federal or state securities laws unless one or more
of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular Indemnitee; (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular Indemnitee; or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular Indemnitee and finds that
indemnification of the settlement and the related costs should be made, and the
court considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published position
of any state securities regulatory authority in which securities of the Company
were offered or sold as to indemnification for violations of securities laws.
Pursuant to its Articles of Incorporation, the Company is required to pay or
reimburse reasonable expenses incurred by a present or former Director, officer,
Advisor or Affiliate and may pay or reimburse reasonable expenses incurred by
any other Indemnitee in advance of final disposition of a proceeding if the
following are satisfied: (i) the Indemnitee was made a party to the proceeding
by reasons of his or her service as a Director, officer, Advisor, Affiliate,
employee or agent of the Company, (ii) the Indemnitee provides the Company with
written affirmation of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification by the Company as authorized
by the Articles of Incorporation, (iii) the Indemnitee provides the Company with
a written agreement to repay the amount paid or reimbursed by the Company,
together with the applicable legal rate of interest thereon, if it is ultimately
determined that the Indemnitee did not comply with the requisite standard of
conduct, and (iv) the legal proceeding was initiated by a third party who is not
a stockholder or, if by a stockholder of the Company acting in his or her
capacity as such, a court of competent jurisdiction approves such advancement.
The Company's Articles of Incorporation further provide that any
indemnification, payment, or reimbursement of the expenses permitted by the
Articles of Incorporation will be furnished in accordance with the procedures in
Section 2-418 of the Maryland General Corporation Law.
Any indemnification may be paid only out of Net Assets of the
Company, and no portion may be recoverable from the stockholders.
The Company has entered into indemnification agreements with
each of the Company's officers and Directors. The indemnification agreements
require, among other things, that the Company indemnify its officers and
Directors to the fullest extent permitted by law, and advance to the officers
and Directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. In accordance
with this agreement, the Company must indemnify and advance all expenses
incurred by officers and Directors seeking to enforce their rights under the
indemnification agreements. The Company must also cover officers and Directors
under the Company's directors' and officers' liability insurance.
Item 35. Treatment of Proceeds from Securities Being Registered.
Not applicable.
Item 36. Financial Statements and Exhibits.
(a) Financial Statements:
The following financial statements are included in the Prospectus.
(1) Pro Forma Consolidated Balance Sheet as of March 31, 1999
(2) Pro Forma Consolidated Statement of Earnings for the
quarter ended March 31, 1999
(3) Pro Forma Consolidated Statement of Earnings for the year
ended December 31, 1998
(4) Notes to Pro Forma Consolidated Financial Statements for
the quarter ended March 31, 1999 and the year ended
December 31, 1998
(5) Balance Sheets as of March 31, 1999 and December 31, 1998
(6) Statements of Earnings for the quarters ended March 31,
1999 and 1998
(7) Statements of Stockholders' Equity for the quarter ended
March 31, 1999 and the year ended December 31, 1998
(8) Statements of Cash Flows for the quarters ended March 31,
1999 and 1998
(9) Notes to Financial Statements for the quarters ended March
31, 1999 and 1998
(10) Report of Independent Accountants for CNL Hospitality
Properties, Inc.
(11) Balance Sheets at December 31, 1998 and 1997
(12) Statements of Earnings for the years ended December 31,
1998 and 1997 and the period June 12, 1996 (date of
inception) through December 31, 1996
(13) Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997 and the period June 12, 1996
(date of inception) through December 31, 1996
(14) Statements of Cash Flows for the years ended December 31,
1998 and 1997 and the period June 12, 1996 (date of
inception) through December 31, 1996
(15) Notes to Financial Statements for the years ended December
31, 1998 and 1997 and the period June 12, 1996 (date of
inception) through December 31, 1996
(16) Schedule III - Real Estate and Accumulated Depreciation as
of December 31, 1998.
(17) Notes to Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 1998.
Other Financial Statements:
The following other financial statements are included in the
Prospectus.
Buckhead Residence Associates, L.L.C.
(18) Balance Sheet as of June 30, 1998
(19) Statement of Loss for the six months ended June 30, 1998
(20) Report of Independent Public Accountants
(21) Balance Sheet as of December 31, 1997
(22) Statement of Loss for the year ended December 31, 1997
(23) Statement of Members' Equity for the year ended December
31, 1997
(24) Statement of Cash Flows for the year ended December 31,
1997
(25) Notes to Financial Statements for the year ended December
31, 1997
Gwinnett Residence Associates, L.L.C.
(26) Balance Sheet as of June 30, 1998
(27) Statement of Loss for the six months ended June 30, 1998
(28) Report of Independent Public Accountants
(29) Balance Sheet as of December 31, 1997
(30) Statement of Loss for the year ended December 31, 1997
(31) Statement of Members' Deficit for the year ended December
31, 1997
(32) Statement of Cash Flows for the year ended December 31,
1997
(33) Notes to Financial Statements for the year ended December
31, 1997
All other Schedules have been omitted as the required information is
inapplicable or is presented in the financial statements or related notes.
(b) Exhibits:
*1.1 Form of Managing Dealer Agreement
*1.2 Form of Participating Broker Agreement
*1.3 Form of Warrant Purchase Agreement
*3.1 CNL American Realty Fund, Inc. Articles of Incorporation
(Previously filed as Exhibit 3.1 to the Registrant's
Registration Statement on Form S-11 (Registration No.
333-9943) (the "1996 Form S-11") and incorporated herein
by reference.)
*3.2 CNL American Realty Fund, Inc. Amended and Restated
Articles of Incorporation (Previously filed as Exhibit 3.2
to the 1996 Form S-11 and incorporated herein by
reference.)
*3.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as
Exhibit 3.3 to the 1996 Form S-11 and incorporated herein
by reference.)
*3.4 Articles of Amendment to the Amended and Restated Articles
of Incorporation of CNL American Realty Fund, Inc. dated
June 3, 1998. (To change the name of the Company from CNL
American Realty Fund, Inc. to CNL Hospitality Properties,
Inc.) (Previously filed as Exhibit 3.4 to the 1996 Form
S-11 and incorporated herein by reference.)
3.5 Articles of Amendment to the Amended and Restated Articles
of Incorporation of CNL Hospitality Properties, Inc. dated
May 26, 1999. (Filed herewith.)
*4.1 CNL American Realty Fund, Inc. Articles of Incorporation
(Previously filed as Exhibit 3.1 and incorporated herein
by reference.)
*4.2 CNL American Realty Fund, Inc. Amended and Restated
Articles of Incorporation (Previously filed as Exhibit 3.2
and incorporated herein by reference.)
*4.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as
Exhibit 3.3 and incorporated herein by reference.)
*4.4 Form of Reinvestment Plan (Included in the Prospectus as
Appendix A and incorporated herein by reference.)
- --------------------
* Previously filed
<PAGE>
*4.5 Articles of Amendment to the Amended and Restated Articles
of Incorporation of CNL American Realty Fund, Inc. dated
June 3, 1998. (Previously filed as Exhibit 3.4 to the 1996
Form S-11 and incorporated herein by reference.)
4.6 Articles of Amendment to the Amended and Restated Articles
of Incorporation of CNL Hospitality Properties, Inc. dated
May 26, 1999. (Filed herewith.)
5 Opinion of Shaw Pittman as to the legality of the
securities being registered by CNL Hospitality Properties,
Inc. (Filed herewith.)
8 Opinion of Shaw Pittman regarding certain material tax
issues relating to CNL Hospitality Properties, Inc. (Filed
herewith.)
*10.1 Form of Escrow Agreement between CNL Hospitality
Properties, Inc. and SouthTrust Asset Management Company
of Florida, N.A.
*10.2 Form of Advisory Agreement (Previously filed as Exhibit
10.2 to the 1996 Form S-11 and incorporated herein by
reference.)
*10.3 Form of Joint Venture Agreement
*10.4 Form of Indemnification and Put Agreement (Previously
filed as Exhibit 10.4 to the 1996 Form S-11 and
incorporated herein by reference.)
*10.5 Form of Unconditional Guaranty of Payment and Performance
(Previously filed as Exhibit 10.5 to the 1996 Form S-11
and incorporated herein by reference.)
*10.6 Form of Purchase Agreement (Previously filed as Exhibit
10.6 to the 1996 Form S-11 and incorporated herein by
reference.)
*10.7 Form of Lease Agreement including Rent Addendum,
Construction Addendum and Memorandum of Lease (Previously
filed as Exhibit 10.7 to the 1996 Form S-11 and
incorporated herein by reference.)
*10.8 Form of Reinvestment Plan (Included in the Prospectus as
Appendix A and incorporated herein by reference.)
*10.9 Form of Indemnification Agreement dated as of July 9,
1997, between CNL American Realty Fund, Inc. and each of
James M. Seneff, Jr., Robert A. Bourne, G. Richard
Hostetter, J. Joseph Kruse, Richard C. Huseman, Charles A.
Muller, Jeanne A. Wall and Lynn E. Rose, dated as of
October 31, 1998, between CNL Hospitality Properties, Inc.
and C. Brian Strickland dated as of January 7, 1999,
between CNL Hospitality Properties, Inc. and John A.
Griswold, dated as of February 10, 1999, between CNL
Hospitality Properties, Inc. and each of Charles E. Adams
and Craig M. McAllaster and dated as of February 24, 1999,
between CNL Hospitality Properties, Inc. and each of
Matthew W. Kaplan and Lawrence A. Dustin. (Previously
filed as Exhibit 10.9 to the 1996 Form S-11 and
incorporated herein by reference.)
*10.10 Agreement of Limited Partnership of CNL Hospitality
Partners, LP (Previously filed as Exhibit 10.10 to the
1996 Form S-11 and incorporated herein by reference.)
- --------------------
* Previously filed
<PAGE>
*10.11 Hotel Purchase and Sale Contract between CNL Real Estate
Advisors, Inc. and Gwinnett Residence Associates, LLC,
relating to the Residence Inn - Gwinnett Place (Previously
filed as Exhibit 10.11 to the 1996 Form S-11 and
incorporated herein by reference.)
*10.12 Assignment and Assumption Agreement between CNL Real
Estate Advisors, Inc. and CNL Hospitality Partners, LP,
relating to the Residence Inn - Gwinnett Place (Previously
filed as Exhibit 10.12 to the 1996 Form S-11 and
incorporated herein by reference.)
*10.13 Hotel Purchase and Sale Contract between CNL Real Estate
Advisors, Inc. and Buckhead Residence Associates, LLC,
relating to the Residence Inn - Buckhead (Lenox Park)
(Previously filed as Exhibit 10.13 to the 1996 Form S-11
and incorporated herein by reference.)
*10.14 Assignment and Assumption Agreement between CNL Real
Estate Advisors, Inc. and CNL Hospitality Partners, LP,
relating to the Residence Inn - Buckhead (Lenox Park)
(Previously filed as Exhibit 10.14 to the 1996 Form S-11
and incorporated herein by reference.)
*10.15 Lease Agreement between CNL Hospitality Partners, LP and
STC Leasing Associates, LLC, dated August 1, 1998,
relating to the Residence Inn - Gwinnett Place (Previously
filed as Exhibit 10.15 to the 1996 Form S-11 and
incorporated herein by reference.)
*10.16 Lease Agreement between CNL Hospitality Partners, LP and
STC Leasing Associates, LLC, dated August 1, 1998,
relating to the Residence Inn - Buckhead (Lenox Park)
(Previously filed as Exhibit 10.16 to the 1996 Form S-11
and incorporated herein by reference.)
*10.17 Master Revolving Line of Credit Loan Agreement with CNL
Hospitality Properties, Inc. and Colonial Bank, dated July
31, 1998 (Previously filed as Exhibit 10.17 to the 1996
Form S-11 and incorporated herein by reference.)
*10.18 Master Loan Agreement by and between CNL Hotel Investors,
Inc. and Jefferson-Pilot Life Insurance Company, dated
February 24, 1999 (Previously filed as Exhibit 10.18 to
the 1996 Form S-11 and incorporated herein by reference.)
*10.19 Securities Purchase Agreement between CNL Hospitality
Properties, Inc. and Five Arrows Realty Securities II
L.L.C., dated February 24, 1999 (Previously filed as
Exhibit 10.19 to the 1996 Form S-11 and incorporated
herein by reference.)
*10.20 Subscription and Stockholders' Agreement among CNL Hotel
Investors, Inc., Five Arrows Realty Securities II L.L.C.,
CNL Hospitality Partners, LP and CNL Hospitality
Properties, Inc., dated February 24, 1999 (Previously
filed as Exhibit 10.20 to the 1996 Form S-11 and
incorporated herein by reference.)
*10.21 Registration Rights Agreement by and between CNL
Hospitality Properties, Inc. and Five Arrows Realty
Securities II L.L.C., dated February 24, 1999 (Previously
filed as Exhibit 10.21 to the 1996 Form S-11 and
incorporated herein by reference.)
23.1 Consent of PricewaterhouseCoopers LLP, Certified Public
Accountants, dated May 21, 1999 (Filed herewith.)
23.2 Consent of Shaw Pittman (Contained in its opinion filed
herewith as Exhibit 5 and incorporated herein by
reference.)
- --------------------
* Previously filed
<PAGE>
23.3 Consent of Arthur Andersen LLP, Certified Public
Accountants, dated May 21, 1999 (Filed herewith.)
-------------------
* Previously filed
Item 37. Undertakings.
The registrant undertakes (a) to file any prospectus required
by Section 10(a)(3) as post-effective amendments to this registration statement,
(b) during any period in which offers or sales are being made, to file a
post-effective amendment to this registration statement (i) to reflect in the
prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement, and (ii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement, (c) that, for the purpose of
determining any liability under the Securities Act of 1933, as amended, each
such post-effective amendment may be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof, (d)
that all post-effective amendments will comply with the applicable forms, rules
and regulations of the Commission in effect at the time such post-effective
amendments are filed, and (e) to remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
The registrant undertakes to send to each stockholder, at
least on an annual basis, a detailed statement of any transactions with the
Advisor or its Affiliates, and of fees, commissions, compensation, and other
benefits paid or accrued to the Advisor or its Affiliates, for the fiscal year
completed, showing the amount paid or accrued to each recipient and the services
performed.
The registrant undertakes to provide to the stockholders the
financial statements required by Form 10-K for the first full fiscal year of
operations.
The registrant undertakes to file a sticker supplement
pursuant to Rule 424(b)(3) under the Act during the distribution period
describing each property not identified in the Prospectus at such time as there
arises a reasonable probability that such property will be acquired and to
consolidate all such stickers into a post-effective amendment filed at least
once every three months, with the information contained in such amendment
provided simultaneously to the existing stockholders. Each sticker supplement
will disclose all compensation and fees received by the Advisor and its
Affiliates in connection with any such acquisition. The post-effective amendment
will include audited financial statements meeting the requirements of Rule 3-14
of Registration S-X only for properties acquired during the distribution period.
The registrant also undertakes to file, after the end of the
distribution period, a current report on Form 8-K containing the financial
statements and any additional information required by Rule 3-14 of Regulation
S-X, to reflect each commitment (i.e., the signing of a binding purchase
agreement) made after the end of the distribution period involving the use of
10% or more (on a cumulative basis) of the net proceeds of the offering and to
provide the information contained in such report to the stockholders at least
once each quarter after the distribution period of the offering has ended.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any such action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that (a) for
purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective, and (b) for the purpose of
determining any liability under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
<PAGE>
TABLE VI
ACQUISITION OF PROPERTIES BY PROGRAMS
Table VI presents information concerning the acquisition of real
properties by the public real estate limited partnerships and the unlisted
public REIT sponsored by Affiliates of the Company through December 31, 1998.
The information includes the gross leasable space or number of units and total
square feet of units, dates of purchase, locations, cash down payment and
contract purchase price plus acquisition fee. This information is intended to
assist the prospective investor in evaluating the terms involved in acquisitions
by such prior programs.
<PAGE>
TABLE VI
ACQUISITION OF PROPERTIES BY PROGRAMS
Table VI presents information concerning the acquisition of real
properties by the public real estate limited partnerships and the unlisted
public REITs sponsored by Affiliates of the Company through December 31, 1998.
The information includes the gross leasable space or number of units and total
square feet of units, dates of purchase, locations, cash down payment and
contract purchase price plus acquisition fee. This information is intended to
assist the prospective investor in evaluating the terms involved in acquisitions
by such prior programs.
<PAGE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund, Fund II, Fund III, Fund IV,
Ltd. Ltd. Ltd. Ltd.
---- ---- ---- ----
(Note 2) (Note 3) (Note 4) (Note 5)
<S> <C>
AL,AZ,CO,FL, AZ,CA,CO,FL, AL,DC,FL,GA,
GA,IL,IN,KS, GA,IA,IL,IN, IL,IN,KS,MA,
AL,AZ,CA,FL, LA,MI,MN,MO, KS,KY,MD,MI, MD,MI,MS,NC,
GA,LA,MD,OK, NC,NM,OH,TN, MN,MO,NC,NE, OH,PA,TN,TX,
Locations PA,TX,VA,WA TX,WA,WY OK,TX VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 22 units 49 units 37 units 46 units
total square feet
of units 80,314 s/f 185,717 s/f 158,819 s/f 163,754 s/f
Dates of purchase 6/17/86 - 2/11/87- 10/04/87- 6/24/88-
12/31/97 1/13/98 5/1/98 9/15/98
Cash down payment (Note 1) $13,435,137 $26,654,961 $22,413,070 $28,110,326
Contract purchase price
plus acquisition fee $13,361,435 $26,501,721 $22,296,185 $28,006,046
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 73,702 153,240 116,885 104,280
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $13,435,137 $26,654,961 $22,413,070 $28,110,326
=========== =========== =========== ===========
</TABLE>
Note 1: This amount was derived from capital contributions or proceeds from
partners or stockholders, respectively, and net sales proceeds
reinvested in other properties. With respect to CNL Hospitality
Properties, Inc., $8,600,000 of this amount was advanced under the line
of credit to facilitate the acquisition of these properties. These
advances were subsequently repaid with net offering proceeds.
Note 2: The partnership owns a 50% interest in three separate joint ventures
which each own a restaurant property. In addition, the partnership owns
a 12.17% interest in one restaurant property held as tenants-in-common
with affiliates.
Note 3: The partnership owns a 49%, 50% and 64% interest in three separate
joint ventures. Each joint venture owns one restaurant property. In
addition, the partnership owns a 33.87%, a 57.77%, a 47%, a 37.01%, a
39.42% and a 13.38% interest in six restaurant properties held
separately as tenants-in-common with affiliates.
Note 4: The partnership owns a 73.4%, 69.07% and 46.89% interest in three
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 32.77%, a 9.84% and a
25.84% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 5: The partnership owns a 51%, 26.6%, 57%, 96.1%, 68.87% and 35.71%
interest in six separate joint ventures. Each joint venture owns one
restaurant property. In addition, the partnership owns a 53.68%
interest in one restaurant property held as tenants-in-common with
affiliates.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund V, Fund VI, Fund VII, Fund VIII,
Ltd. Ltd. Ltd. Ltd.
---- ---- ---- ----
(Note 6) (Note 7) (Note 8) (Note 9)
<S> <C>
AR,AZ,FL,GA,
IL,IN,KS,MA,
AZ,FL,GA,IL, MI,MN,NC,NE, AZ,CO,FL,GA,
IN,MI,NH,NY, NM,NY,OH,OK, IN,LA,MI,MN, AZ,FL,IN,LA,
OH,SC,TN,TX, PA,TN,TX,VA, NC,OH,SC,TN, MI,MN,NC,NY,
Locations UT,WA WA,WY TX,UT,WA OH,TN,TX,VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 35 units 56 units 49 units 42 units
total square feet
of units 143,344 s/f 226,561 s/f 184,412 s/f 179,885 s/f
Dates of purchase 2/06/89- 7/13/89- 3/30/90- 9/13/90-
5/1/98 9/15/98 12/31/97 5/31/96
Cash down payment (Note 1) $26,329,791 $40,842,686 $30,416,598 $31,985,071
Contract purchase price
plus acquisition fee $25,946,991 $40,313,586 $29,745,103 $31,450,507
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 382,800 529,100 671,495 534,564
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $26,329,791 $40,842,686 $30,416,598 $31,985,071
=========== =========== =========== ===========
</TABLE>
Note 6: The partnership owns a 43%, 49%, 66.5% and 53.11% interest in four
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 42.23% and a 27.78%
interest in two restaurant properties held separately as
tenants-in-common with affiliates.
Note 7: The partnership owns a 3.9%, 14.5%, 36%, 66.14%, 50% and 64.29%
interest in six separate joint ventures. Each joint venture owns one
restaurant property. In addition, the partnership owns a 51.67%, a
17.93%, a 23.04%, a 34.74%, a 46.2% and a 85.07% interest in six
restaurant properties held separately as tenants-in-common with
affiliates.
Note 8: The partnership owns a 51%, 83.3%, 4.79%, 18%, and 79% interest in
five separate joint ventures. Four of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties. In addition, the partnership owns a 48.33%, a 53% and a
35.64% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 9: The partnership owns a 85.5%, 87.68%, 36.8% and a 12% interest in
four separate joint ventures. Three of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund IX, Fund X, Fund XI, Fund XII,
Ltd. Ltd. Ltd. Ltd.
---- ---- ---- ----
(Note 10) (Note 11) (Note 12) (Note 13)
<S> <C>
AL,AZ,CA,CO,
AL,CO,FL,GA, AL,CA,CO,FL, CT,FL,KS,LA,
IL,IN,LA,MI, ID,IL,LA,MI, MA,MI,MS,NC, AL,AZ,CA,FL,
MN,MS,NC,NH, MO,MT,NC,NH, NH,NM,OH,OK, GA,LA,MO,MS,
NY,OH,SC,TN, NM,NY,OH,PA, PA,SC,TX,VA, NC,NM,OH,SC,
Locations TX SC,TN,TX WA TN,TX,WA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 43 units 52 units 41 units 50 units
total square feet
of units 185,636 s/f 216,856 s/f 178,602 s/f 209,365 s/f
Dates of purchase 5/31/91- 10/01/91- 5/18/92- 11/20/92-
7/16/97 11/06/98 9/30/98 8/12/98
Cash down payment (Note 1) $32,812,908 $38,464,854 $36,964,521 $41,083,539
Contract purchase price
plus acquisition fee $32,068,289 $37,756,191 $36,363,563 $40,583,135
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 744,619 708,663 600,958 500,404
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $32,812,908 $38,464,854 $36,964,521 $41,083,539
=========== =========== =========== ===========
</TABLE>
Note 10: The partnership owns a 50%, 45.2% and 27.3% interest in three
separate joint ventures. One of the joint ventures owns one
restaurant property and the other two joint ventures own six
restaurant properties each. In addition, the partnership owns a
67.23% interest in one restaurant property held as
tenants-in-common with an affiliate.
Note 11: The partnership owns a 50%, 88.3%, 40.95% and 10.5% interest
in four separate joint ventures. Three of the joint ventures own
one restaurant property each and the other joint venture owns six
restaurant properties. In addition, the partnership owns a 13.37%
and a 6.69% interest in two restaurant properties held separately
as tenants-in-common with affiliates.
Note 12: The partnership owns a 62.2%, 77.33%, 85% and 76.6% interest
in four separate joint ventures. Each joint venture owns one
restaurant property. In addition, the partnership owns a 72.5%
interest in one restaurant property held as tenants-in-common with
an affiliate.
Note 13: The partnership owns a 31.13%, 59.05%, 18.61%, 88% and 27.72%
interest in five separate joint ventures. Each joint venture owns
one restaurant property.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
---- ---- ---- ----
(Note 14) (Note 15) (Note 16) (Note 17)
<S> <C>
AL,AR,AZ,CA, AL,AZ,CO,FL, AL,CA,FL,GA, AZ,CA,CO,DC,
CO,FL,GA,IN, GA,KS,LA,MN, KS,KY,MN,MO, FL,GA,ID,IN,
KS,LA,MD,NC, MO,MS,NC,NJ, MS,NC,NJ,NM, KS,MN,MO,NC,
OH,PA,SC,TN, NV,OH,SC,TN, OH,OK,PA,SC, NM,NV,OH,TN,
Locations TX,VA TX,VA TN,TX,VA TX,UT,WI
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 50 units 65 units 55 units 48 units
total square feet
of units 167,286 s/f 196,556 s/f 172,379 s/f 182,610 s/f
Dates of purchase 5/18/93- 9/27/93- 4/28/94- 10/21/94-
12/31/97 10/02/98 6/16/98 8/12/98
Cash down payment (Note 1) $36,388,084 $44,285,554 $38,446,910 $42,677,881
Contract purchase price
plus acquisition fee $36,019,958 $43,856,055 $38,054,069 $42,288,418
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 368,126 429,499 392,841 389,463
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $36,388,084 $44,285,554 $38,446,910 $42,677,881
=========== =========== =========== ===========
</TABLE>
Note 14: The partnership owns a 50% and a 28% interest in two separate
joint ventures. Each joint venture owns one restaurant property.
In addition, the Partnership owns a 66.13%, a 63.03% and a 47.83%
interest in three restaurant properties held separately as
tenants- in-common with affiliates.
Note 15: The partnership owns a 50% interest in three separate joint
ventures and a 72% and a 39.94% interest in two additional joint
ventures. Three of the joint ventures each own one restaurant
property and the other joint venture owns six restaurant
properties.
Note 16: The partnership owns a 50% interest in a joint venture which
owns six restaurant properties. In addition, the partnership owns
a 15.02% and a 14.93% interest in two restaurant properties held
as tenants-in-common with affiliates.
Note 17: The partnership owns a 32.35% interest in a joint venture which
owns one restaurant. In addition, the partnership owns a 80.27%
and a 40.42% interest in two restaurant properties held as
tenants-in-common with affiliates.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL American CNL Income CNL Income CNL Hospitality
Properties Fund, Fund XVII, Fund XVIII, Properties,
Inc. Ltd. Ltd. Inc.
---- ---- ---- ----
(Note 18) (Note 19) (Note 20) (Note 21)
<S> <C>
AL,AZ,CA,CO,
CT,DE,FL,GA,
IA,ID,IL,IN,
KS,KY,MD,MI,
MN,MO,MS,NC,
NE,NJ,NM,NV,
NY,OH,OK,OR, AZ,CA,FL,GA,
PA,RI,SC,TN, CA,FL,GA,IL, IL,KY,MD,MN,
TX,UT,VA,WA, IN,MI,NC,NV, NC,NV,NY,OH,
Locations WI,WV OH,SC,TN,TX TN,TX GA
Type of property Restaurants Restaurants Restaurants Hotels
Gross leasable space
(sq. ft.) or number
of units and 420 units 29 units 24 units 2 units
total square feet
of units 2,019,216 s/f 119,664 s/f 125,855 s/f 199,290 s/f
Dates of purchase 6/30/95 - 12/20/95 - 12/27/96 - 7/31/98 -
12/31/98 6/16/98 12/31/98 12/31/98
Cash down payment (Note 1) $495,814,420 $25,525,954 $29,982,604 $28,752,549
Contract purchase price
plus acquisition fee $494,372,780 $25,490,918 $29,871,990 $28,705,900
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 1,441,640 35,036 110,614 46,649
------------ ----------- ----------- -----------
Total acquisition cost
(Note 1) $495,814,420 $25,525,954 $29,982,604 $28,752,549
============ =========== =========== ===========
</TABLE>
Note 18: CNL American Properties Fund, Inc. owns an 85.47% and a 55.38%
interest in two separate joint ventures. Each joint venture owns
one restaurant property. In addition, in May 1998, CNL American
Properties Fund, Inc. formed an operating partnership, CNL APF
Partners, LP, to acquire and hold all properties subsequent to the
formation of CNL APF Partners, LP. CNL American Properties Fund,
Inc. has a 100% ownership interest in the general and limited
partners (which are wholly owned subsidiaries) of CNL APF
Partners, LP.
Note 19: The partnership owns an 80%, a 21% and a 60.06% interest in three
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 19.73%, 27.5% and
36.97% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 20: The partnership owns a 39.93% interest in a joint venture which
owns one restaurant.
Note 21: In June 1998, CNL Hospitality Properties, Inc. formed an operating
partnership, CNL Hospitality Partners, LP, to acquire and hold
all properties subsequent to the formation of CNL Hospitality
Partners,LP. CNL Hospitality Properties, Inc. has a 100% ownership
interest in the general and limited partners (which are wholly
owned subsidiaries) of CNL Hospitality Partners, LP.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Orlando, State of
Florida, on May 26, 1999.
CNL HOSPITALITY PROPERTIES, INC.
(Registrant)
By: /s/ James M. Seneff, Jr.
--------------------------------
James M. Seneff, Jr.
Chairman of the Board and Chief
Executive Officer
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned hereby
constitutes and appoints Robert A. Bourne and James M. Seneff, Jr. and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, with full power to act alone, to sign any and all
documents (including both pre- and post-effective amendments in connection with
the registration statement), and to file the same, with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ James M. Seneff, Jr. Chairman of the Board and May 26, 1999
----------------------------------------
JAMES M. SENEFF, JR. Chief Executive Officer
(Principal Executive Officer)
/s/ Robert A. Bourne Director and President May 26, 1999
----------------------------------------
ROBERT A. BOURNE (Principal Financial Officer)
/s/ Mathew W. Kaplan Director May 26, 1999
----------------------------------------
MATHEW W. KAPLAN
/s/ Charles E. Adams Independent Director May 26, 1999
----------------------------------------
CHARLES E. ADAMS
/s/ Lawrence A. Dustin Independent Director May 26, 1999
----------------------------------------
LAWRENCE A. DUSTIN
/s/ John A. Griswold Independent Director May 26, 1999
----------------------------------------
JOHN A. GRISWOLD
/s/ Craig M. McAllaster Independent Director May 26, 1999
----------------------------------------
CRAIG M. MCALLASTER
</TABLE>
ii
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Page
<S> <C>
*1.1 Form of Managing Dealer Agreement
*1.2 Form of Participating Broker Agreement
*1.3 Form of Warrant Purchase Agreement
*3.1 CNL American Realty Fund, Inc. Articles of Incorporation
(Previously filed as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-9943) (the "1996 Form
S-11") and incorporated herein by reference.)
*3.2 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Previously filed as Exhibit 3.2 to the 1996 Form
S-11 and incorporated herein by reference.)
*3.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as Exhibit
3.3 to the 1996 Form S-11 and incorporated herein by reference.)
*3.4 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL American Realty Fund, Inc. dated June 3,
1998. (To change the name of the Company from CNL American Realty
Fund, Inc. to CNL Hospitality Properties, Inc.) (Previously filed
as Exhibit 3.4 to the 1996 Form S-11 and incorporated herein by
reference.)
3.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated May 26,
1999. (Filed herewith.)
*4.1 CNL American Realty Fund, Inc. Articles of Incorporation
(Previously filed as Exhibit 3.1 and incorporated herein by
reference.)
*4.2 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Previously filed as Exhibit 3.2 and incorporated
herein by reference.)
*4.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as Exhibit
3.3 and incorporated herein by reference.)
*4.4 Form of Reinvestment Plan (Included in the Prospectus as Appendix
A and incorporated herein by reference.)
*4.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL American Realty Fund, Inc. dated June 3,
1998. (Previously filed as Exhibit 3.4 to the 1996 Form S-11 and
incorporated herein by reference.)
4.6 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated May 26,
1999. (Filed herewith.)
5 Opinion of Shaw Pittman as to the legality of the securities being
registered by CNL Hospitality Properties, Inc. (Filed herewith.)
8 Opinion of Shaw Pittman regarding certain material tax issues
relating to CNL Hospitality Properties, Inc. (Filed herewith.)
</TABLE>
- --------------------
* Previously filed
<PAGE>
*10.1 Form of Escrow Agreement between CNL Hospitality Properties, Inc.
and SouthTrust Asset Management Company of Florida, N.A.
*10.2 Form of Advisory Agreement (Previously filed as Exhibit 10.2 to
the 1996 Form S-11 and incorporated herein by reference.)
*10.3 Form of Joint Venture Agreement
*10.4 Form of Indemnification and Put Agreement (Previously filed as
Exhibit 10.4 to the 1996 Form S-11 and incorporated herein by
reference.)
*10.5 Form of Unconditional Guaranty of Payment and Performance
(Previously filed as Exhibit 10.5 to the 1996 Form S-11 and
incorporated herein by reference.)
*10.6 Form of Purchase Agreement (Previously filed as Exhibit 10.6 to
the 1996 Form S-11 and incorporated herein by reference.)
*10.7 Form of Lease Agreement including Rent Addendum, Construction
Addendum and Memorandum of Lease (Previously filed as Exhibit 10.7
to the 1996 Form S-11 and incorporated herein by reference.)
*10.8 Form of Reinvestment Plan (Included in the Prospectus as Appendix
A and incorporated herein by reference.)
*10.9 Form of Indemnification Agreement dated as of July 9, 1997,
between CNL American Realty Fund, Inc. and each of James M.
Seneff, Jr., Robert A. Bourne, G. Richard Hostetter, J. Joseph
Kruse, Richard C. Huseman, Charles A. Muller, Jeanne A. Wall and
Lynn E. Rose, dated as of October 31, 1998, between CNL
Hospitality Properties, Inc. and C. Brian Strickland dated as of
January 7, 1999, between CNL Hospitality Properties, Inc. and John
A. Griswold, dated as of February 10, 1999, between CNL
Hospitality Properties, Inc. and each of Charles E. Adams and
Craig M. McAllaster and dated as of February 24, 1999, between CNL
Hospitality Properties, Inc. and each of Matthew W. Kaplan and
Lawrence A. Dustin. (Previously filed as Exhibit 10.9 to the 1996
Form S-11 and incorporated herein by reference.)
*10.10 Agreement of Limited Partnership of CNL Hospitality Partners, LP
(Previously filed as Exhibit 10.10 to the 1996 Form S-11 and
incorporated herein by reference.)
*10.11 Hotel Purchase and Sale Contract between CNL Real Estate Advisors,
Inc. and Gwinnett Residence Associates, LLC, relating to the
Residence Inn - Gwinnett Place (Previously filed as Exhibit 10.11
to the 1996 Form S-11 and incorporated herein by reference.)
*10.12 Assignment and Assumption Agreement between CNL Real Estate
Advisors, Inc. and CNL Hospitality Partners, LP, relating to the
Residence Inn - Gwinnett Place (Previously filed as Exhibit 10.12
to the 1996 Form S-11 and incorporated herein by reference.)
*10.13 Hotel Purchase and Sale Contract between CNL Real Estate Advisors,
Inc. and Buckhead Residence Associates, LLC, relating to the
Residence Inn - Buckhead (Lenox Park) (Previously filed as Exhibit
10.13 to the 1996 Form S-11 and incorporated herein by reference.)
*10.14 Assignment and Assumption Agreement between CNL Real Estate
Advisors, Inc. and CNL Hospitality Partners, LP, relating to the
Residence Inn - Buckhead (Lenox Park) (Previously filed as Exhibit
10.14 to the 1996 Form S-11 and incorporated herein by reference.)
- --------------------
* Previously filed
<PAGE>
*10.15 Lease Agreement between CNL Hospitality Partners, LP and STC
Leasing Associates, LLC, dated August 1, 1998, relating to the
Residence Inn - Gwinnett Place (Previously filed as Exhibit 10.15
to the 1996 Form S-11 and incorporated herein by reference.)
*10.16 Lease Agreement between CNL Hospitality Partners, LP and STC
Leasing Associates, LLC, dated August 1, 1998, relating to the
Residence Inn - Buckhead (Lenox Park) (Previously filed as Exhibit
10.16 to the 1996 Form S-11 and incorporated herein by reference.)
*10.17 Master Revolving Line of Credit Loan Agreement with CNL
Hospitality Properties, Inc. and Colonial Bank, dated July 31,
1998 (Previously filed as Exhibit 10.17 to the 1996 Form S-11 and
incorporated herein by reference.)
*10.18 Master Loan Agreement by and between CNL Hotel Investors, Inc. and
Jefferson-Pilot Life Insurance Company, dated February 24, 1999
(Previously filed as Exhibit 10.18 to the 1996 Form S-11 and
incorporated herein by reference.)
*10.19 Securities Purchase Agreement between CNL Hospitality Properties,
Inc. and Five Arrows Realty Securities II L.L.C., dated February
24, 1999 (Previously filed as Exhibit 10.19 to the 1996 Form S-11
and incorporated herein by reference.)
*10.20 Subscription and Stockholders' Agreement among CNL Hotel
Investors, Inc., Five Arrows Realty Securities II L.L.C., CNL
Hospitality Partners, LP and CNL Hospitality Properties, Inc.,
dated February 24, 1999 (Previously filed as Exhibit 10.20 to the
1996 Form S-11 and incorporated herein by reference.)
*10.21 Registration Rights Agreement by and between CNL Hospitality
Properties, Inc. and Five Arrows Realty Securities II L.L.C.,
dated February 24, 1999 (Previously filed as Exhibit 10.21 to the
1996 Form S-11 and incorporated herein by reference.)
23.1 Consent of PricewaterhouseCoopers LLP, Certified Public
Accountants, dated May 21, 1999 (Filed herewith.)
23.2 Consent of Shaw Pittman (Contained in its opinion filed herewith
as Exhibit 5 and incorporated herein by reference.)
23.3 Consent of Arthur Andersen LLP, Certified Public Accountants,
dated May 21, 1999 (Filed herewith.)
-------------------
* Previously filed
EXHIBIT 3.5
Articles of Amendment to the Amended and Restated
Articles of Incorporation
of CNL Hospitality Properties, Inc.
<PAGE>
ARTICLES OF AMENDMENT
TO
THE AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
CNL HOSPITALITY PROPERTIES, INC.
CNL Hospitality Properties, Inc., a Maryland corporation having its
principal office in Maryland in Baltimore City, Maryland (hereinafter called the
"corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The Amended and Restated Articles of Incorporation (the
"Articles of Incorporation") are hereby amended by striking out ARTICLE VII,
SECTION 7.6(ix) and inserting in lieu thereof the following:
Exception. The Board of Directors, upon receipt of a ruling from the
Internal Revenue Service, an opinion of counsel or other evidence
satisfactory to the Board of Directors, in its sole discretion, in each case
to the effect that the restrictions contained in subparagraphs (c), (d) and
(e) of Section 7.6(ii) will not be violated, may waive or change, in whole
or in part, the application of the Common or Preferred Share Ownership Limit
with respect to any Person. In connection with any such waiver or change,
the Board of Directors may require such representations and undertakings
from such Person or affiliates and may impose such other conditions as the
Board deems necessary, advisable or prudent, in its sole discretion, to
determine the effect, if any, of the proposed transaction or ownership of
Equity Shares on the Company's status as a REIT.
SECOND: The amendment of the Articles of Incorporation of the
corporation as hereinabove set forth has been duly advised by the board of
directors and approved by the stockholders of the corporation.
IN WITNESS WHEREOF: CNL Hospitality Properties, Inc. has caused these
presents to be signed in its name and on its behalf by its President and
attested by its Secretary on May 21, 1999.
THE UNDERSIGNED, President of CNL Hospitality Properties, Inc., who
executed on behalf of said corporation the foregoing Articles of Amendment, of
which this certificate is made a part, hereby acknowledges, in the name of and
on behalf of said corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the approval thereof are true in all material respects, under the
penalties of perjury.
CNL HOSPITALITY PROPERTIES, INC.
/s/ Robert A. Bourne
-----------------------------
Robert A. Bourne, President
ATTEST:
/s/ Lynn E. Rose
- --------------------------
Lynn E. Rose, Secretary
EXHIBIT 5
Opinion of Shaw Pittman as to the legality
of the securities being registered by CNL Hospitality Properties, Inc.
<PAGE>
SHAW PITTMAN
A Partnership including Professional Corporations
2300 N Street, N.W.
Washington, DC 20037
202.633.8000
Facsimile: 202.663.8007
May 26, 1999
CNL Hospitality Properties, Inc.
400 East South Street
Orlando, FL 32801
Gentlemen:
We have acted as counsel for CNL Hospitality Properties, Inc., a
Maryland corporation (the "Company"), in connection with the registration and
proposed sale of (i) up to 27,500,000 shares of common stock of the Company, par
value $.01 per share, and having a per share purchase price of $10.00 (the
"Shares"), (ii) warrants (the "Warrants") to purchase up to 1,000,000 shares of
common stock of the Company, par value $.01 per share and (iii) up to 1,000,000
shares of common stock of the Company, par value $.01 per share (the "Warrant
Shares"), issuable upon the exercise of the Warrants and the payment of the
purchase price of $12.00 per share, in accordance with the Warrant Purchase
Agreement (the "Warrant Purchase Agreement") filed as Exhibit 1.3 to the
Registration Statement on Form S-11 (File No. 333-67787) which was filed by the
Company under the Securities Act of 1933 (the "Registration Statement").
Based upon an examination and review of, and in reliance upon, such
documents and opinions as we have deemed necessary, relevant or appropriate, we
are of the opinion that (i) upon issuance and delivery as provided in the
Registration Statement (and, with respect to the Warrant Shares, the Warrant
Purchase Agreement), the Shares and the Warrant Shares will be validly issued,
fully paid and nonassessable and (ii) upon issuance and delivery as provided in
the Registration Statement, the Warrants will be validly issued.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Opinions" in the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ SHAW PITTMAN
----------------------------------------
SHAW PITTMAN
EXHIBIT 8
Opinion of Shaw Pittman regarding certain
material tax issues relating to CNL Hospitality Properties, Inc.
<PAGE>
SHAW PITTMAN
A Partnership including Professional Corporations
2300 N Street, N.W.
Washington, DC 20037
202.663.8000
Facsimile: 202.663.8007
May 26, 1999
CNL Hospitality Properties, Inc.
400 East South Street
Orlando, FL 32801
Gentlemen:
You have requested certain opinions regarding the application of U.S.
federal income tax laws to CNL Hospitality Properties, Inc. (the "Company") in
connection with the registration statement on Form S-11, No. 333-67787,
originally filed with the Securities and Exchange Commission on November 23,
1998, and the amendments thereto (the "Registration Statement"). All capitalized
terms used but not otherwise defined herein shall have the respective meanings
given them in the prospectus included in the amendment to the Registration
Statement filed on or about May 26, 1999.
In rendering the following opinions, we have examined such statutes,
regulations, records, certificates and other documents as we have considered
necessary or appropriate as a basis for such opinions, including the following:
(1) the Registration Statement (including all Exhibits thereto and all
amendments made thereto through the date hereof), (2) the Articles of
Incorporation of the Company, together with all amendments, (3) certain written
representations of the Company contained in a letter to us dated on or about the
date hereof, (4) copies of all leases entered into by the Company as of the date
hereof and (5) such other documents or information as we have deemed necessary
to render the opinions set forth in this letter. In our review, we have assumed,
with your consent, that the documents listed above that we reviewed in proposed
form will be executed in substantially the same form, all of the representations
and statements set forth in such documents are true and correct, and all of the
obligations imposed by any such documents on the parties thereto, including
<PAGE>
CNL Hospitality Properties, Inc.
May 26, 1999
Page 2
obligations imposed under the Articles of Incorporation of the Company, have
been or will be performed or satisfied in accordance with their terms. We also
have assumed the genuineness of all signatures, the proper execution of all
documents, the authenticity of all documents submitted to us as originals, the
conformity to originals of documents submitted to us as copies, and the
authenticity of the originals from which any copies were made.
Unless facts material to the opinions expressed herein are specifically
stated to have been independently established or verified by us, we have relied
as to such facts solely upon the representations made by the Company. To the
extent that the representations of the Company are with respect to matters set
forth in the Code or Treasury Regulations, we have reviewed with the individuals
making such representations the relevant provisions of the Code, the applicable
Treasury Regulations and published administrative interpretations thereof.
Based upon, and subject to, the foregoing, we are of the opinion as
follows:
1. The Company qualified as a REIT under the Code for the taxable
years ending December 31, 1997 and December 31, 1998, the Company
is organized in conformity with the requirements for qualification
as a REIT, and the Company's proposed method of operation will
enable it to meet the requirements for qualification as a REIT
under the Code.
2. The discussion of matters of law under the heading "FEDERAL INCOME
TAX CONSIDERATIONS" in the Registration Statement is accurate in
all material respects, and such discussion fairly summarizes the
federal income tax considerations that are likely to be material
to a holder of Shares of the Company.
3. Assuming that there is no waiver of the restrictions on ownership
of Shares in the Articles of Incorporation of the Company and that
a tax-exempt stockholder does not finance the acquisition of its
Shares with "acquisition indebtedness" within the meaning of
Section 524(c) of the Code or otherwise use its Shares in an
unrelated trade or business, the distributions of the Company with
respect to such tax-exempt shareholder will not constitute
unrelated business taxable income as defined in Section 512(a) of
the Code.
4. Assuming (i) the Company leases the Properties on substantially
the same terms and conditions described in the "Business --
Description of Property Leases" section of the Registration
Statement, and (ii) the residual value of the Properties for which
the Company owns the underlying land remaining after the end of
their lease terms (including all renewal periods) may reasonably
be expected to be at least 20% of the Company's cost of such
properties, and the remaining useful lives of the Properties for
which the Company owns the underlying land at the end
<PAGE>
CNL Hospitality Properties, Inc.
May 26, 1999
Page 3
of their lease terms (including all renewal periods) may
reasonably be expected to be at least 20% of such properties'
useful lives at the beginning of their lease terms, the Company
will be treated as the owner of the Properties for which the
Company owns the underlying land for federal income tax purposes
and will be entitled to claim depreciation and other tax benefits
associated with such ownership.
5. Assuming (i) the Mortgage Loans are made on the terms and
conditions described in the "Business -- Mortgage Loans" section
of the Registration Statement, and (ii) the amount of each loan
does not exceed the fair market value of the real property subject
to the mortgage at the time of the loan commitment, the income
generated through the Company's investments in Mortgage Loans will
be treated as qualifying income under the 75 percent gross income
test.
6. Assuming (i) the Secured Equipment Leases are made on
substantially the same terms and conditions described in the
"Business -- General" section of the Registration Statement, and
(ii) each of the Secured Equipment Leases will have a term that
equals or exceeds the useful life of the Equipment subject to the
lease, the Company will not be treated as the owner of the
Equipment that is subject to the Secured Equipment Leases and the
Company will be able to treat the Secured Equipment Leases as
loans secured by personal property for federal income tax
purposes.
7. Assuming that each Joint Venture has the characteristics described
in the "Business-- Joint Venture Arrangements" section of the
Registration Statement, and is operated in the same manner as the
Company operates with respect to Properties that it owns directly,
(i) the Joint Ventures will be treated as partnerships, as defined
in Sections 7701(a)(2) and 761(a) of the Code and not as
associations taxable as corporations, and the Company will be
subject to tax as a partner pursuant to Sections 701 through 761
of the Code and (ii) all material allocations to the Company of
income, gain, loss and deduction as provided in the Joint Venture
Agreements and as discussed in the Registration Statement will be
respected under Section 704(b) of the Code.
For a discussion relating the law to the facts and legal analysis
underlying the opinions set forth in this letter, we incorporate by reference
the discussion of federal income tax issues, which we assisted in preparing, in
the sections of the Registration Statement under the heading "FEDERAL INCOME TAX
CONSIDERATIONS."
<PAGE>
CNL Hospitality Properties, Inc.
May 26, 1999
Page 4
The opinions set forth in this letter are based on existing law as
contained in the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations promulgated thereunder (including any Temporary and
Proposed Regulations), and interpretations of the foregoing by the Internal
Revenue Service ("IRS") and by the courts in effect (or, in case of certain
Proposed Regulations, proposed) as of the date hereof, all of which are subject
to change, both retroactively or prospectively, and to possibly different
interpretations. Moreover, the Company's ability to achieve and maintain
qualification as a REIT depends upon its ability to achieve and maintain certain
diversity of stock ownership requirements and, through actual annual operating
results, certain requirements under the Code regarding its income, assets and
distribution levels. No assurance can be given that the actual ownership of the
Company's stock and its actual operating results and distributions for any
taxable year will satisfy the tests necessary to achieve and maintain its status
as a REIT. We assume no obligation to update the opinions set forth in this
letter. We believe that the conclusions expressed herein, if challenged by the
IRS, would be sustained in court. Because our positions are not binding upon the
IRS or the courts, however, there can be no assurance that contrary positions
may not be successfully asserted by the IRS.
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply the undersigned has offered its
opinion on any other matter.
We hereby consent to the use and filing of this opinion as an exhibit
to the Registration Statement and to all references to us in the Registration
Statement.
Very truly yours,
SHAW PITTMAN
By: /s/ Charles B. Temkin, P.C.
---------------------------------
Charles B. Temkin, P.C.
EXHIBIT 23.1
Consent of PricewaterhouseCoopers LLP,
Certified Public Accountants,
dated May 21, 1999
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 of our
report dated January 19, 1999 on our audit of the financial statements of CNL
Hospitality Properties, Inc. We also consent to the reference to our Firm under
the caption "Experts".
/s/ PricewaterhouseCoopers LLP
- -------------------------------------
PricewaterhouseCoopers LLP
Orlando, Florida
May 21, 1999
EXHIBIT 23.3
Consent of Arthur Andersen LLP,
Certified Public Accountants,
dated May 21, 1999
<PAGE>
CONSENT OF THE INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 27, 1998 with respect to the financial statements of Buckhead
Residence Associates, L.L.C. and our report dated February 27, 1998 with respect
to the financial statements of Gwinnett Residence Associates, L.L.C. included in
or made part of this Registration Statement on Form S-11.
/s/ Arthur Andersen LLP
- -----------------------------
Arthur Andersen LLP
Atlanta, Georgia
May 21, 1999
