UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-24097
CNL HOSPITALITY PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 59-3396369
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 650-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of shares of common stock (the
"Shares") on Form S-11 under the Securities Act of 1933, as amended. Since no
established market for such Shares exists, there is no market value for such
Shares. Each Share was originally sold at $10 per Share.
The number of shares of common stock outstanding as of February 16,
1999, was 6,169,868.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant incorporates by reference portions of the CNL Hospitality
Properties, Inc. Definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders (Items 10, 11, 12 and 13 of Part III) to be filed no later than
April 30, 1999.
<PAGE>
PART I
Item 1. Business
CNL Hospitality Properties, Inc., formerly known as CNL American Realty
Fund, Inc., was organized pursuant to the laws of the state of 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 (the "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. Properties acquired are generally expected to
be held by the Partnership and, as a result, owned by CNL Hospitality
Properties, Inc. through the Partnership. The terms "Company" or "Registrant"
include CNL Hospitality Properties, Inc. and its subsidiaries, CNL Hospitality
GP Corp., CNL Hospitality LP Corp. and CNL Hospitality Partners, LP. The Company
operates for federal income tax purposes as a real estate investment trust (a
"REIT").
Beginning in July 1997, the Company offered for sale up to $165,000,000
of shares of common stock (the "Shares") (16,500,000 Shares at $10 per Share)
(the "Offering") pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended. As of December 31, 1998, the Company had
received subscription proceeds of $43,019,080 (4,301,908 Shares) from the
Offering, including $37,299 (3,730 Shares) through the distribution reinvestment
plan provided under the Company's registration statement. The Company
anticipates significant additional sales of Shares prior to the completion of
the Offering. In accordance with the Company's prospectus, the Company has
elected to extend the Offering until a date no later than July 9, 1999.
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
($275,000,000) (the "Secondary Offering") which is 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) to CNL
Hospitality Advisors, Inc. (formerly CNL Real Estate Advisors, Inc.) (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, provide mortgage financing (the "Mortgage Loans"). The
Company believes that the net proceeds received from the Secondary Offering and
any additional offerings will enable the Company to continue to grow and take
advantage of acquisition opportunities until such time, if any, that the Company
lists on a national exchange, although there is no assurance that listing
("Listing") will occur. In addition, if Listing does not occur by December 31,
2007, the Company will commence the orderly sale of its assets and the
distribution of the proceeds. Listing does not assure liquidity.
The Company was formed primarily to acquire properties (the
"Properties") located across the United States to be leased on a long-term
(generally, 10 to 20 years, plus renewal options for up to an additional 20
years), "triple-net" basis, which means that the tenant generally will be
responsible for repairs, maintenance, property taxes, utilities and insurance.
The Properties will be leased to operators of selected national and regional
limited service, extended stay and full service hotel chains (the "Hotel
Chains") and operators of 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 structures the leases of its Properties to provide
for payment of base rent with (i) automatic increases in base rent and/or (ii)
percentage rent based on a percentage of gross sales above a specified level.
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 furniture, fixture and equipment financing ("Secured Equipment Leases") to
operators of Hotel Chains and Restaurant Chains. Secured Equipment Leases will
be funded from the proceeds of financing that have been 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.
As of December 31, 1998, net proceeds to the Company from the Offering
and capital contributions from the Advisor after deduction of selling
commissions, marketing support and due diligence expense reimbursement fees and
organizational and offering expenses totalled approximately $37,313,000. In
addition, the Company received three advances under the line of credit (the
"Line of Credit") totalling $9,600,000. As of December 31, 1998, the Company had
used net proceeds from the Offering and borrowings to invest approximately
$27,246,000 in two hotel Properties, to pay $5,000,000 as a deposit on three
additional Properties and to pay approximately $3,487,000 in acquisition fees
and expenses. The Company will use the remaining net proceeds to invest in
additional Properties and, to a lesser extent, Mortgage Loans. The number of
Properties to be acquired and Mortgage Loans to be entered into will depend upon
the amount of net proceeds available to the Company. The Company presently is
negotiating to acquire additional Properties, but as of January 19, 1999, had
not acquired any such Properties.
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 automatic increases in base rent and/or receipt of percentage rent, and
obtaining fixed income through the receipt of payments from 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 within five to ten years after commencement of the
Offering, either in whole or in part, through (a) Listing or (b) the
commencement of orderly sales of the Company's assets and distribution of the
proceeds thereof (outside the ordinary course of business and consistent with
its objectives of qualifying as a REIT). There can be no assurance that these
investment objectives will be met.
For the first five to ten years after the commencement of the 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 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. 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 Line of Credit. At or prior to the end of such
ten-year period, the Company intends to provide stockholders of the Company with
liquidity of their investment, either in whole or in part, through Listing of
the Shares of the Company (although liquidity cannot be assured thereby) or by
commencing orderly sales of the Company's assets. If Listing occurs, the Company
intends to reinvest in additional Properties, Mortgage Loans and Secured
Equipment Leases any net sales proceeds not required to be distributed to
stockholders in order to preserve the Company's status as a REIT. The Company's
Articles of Incorporation provide, however, that if Listing does not occur
within ten years after the commencement of the 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. 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 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.
Leases
The leases the Company has entered into to date, and the leases the
Company expects to enter into in the future are long-term, generally 10 to 20
years, triple-net leases. The following is a summarized description of the
general structure of the Company's leases.
The leases of the two Properties owned by the Company as of December
31, 1998, provide for initial terms of 19 years and expire in 2017. The leases
are on a triple-net basis, with the tenants generally required to pay 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 leases of the Properties
provide for minimum base annual rental payments (payable in monthly
installments) ranging from approximately $1,209,000 to $1,651,800. In addition,
the leases provide for percentage rent based on a percentage of gross sales
above a specified amount to be paid by the tenant. The leases also provide for
the annual base rent required under the terms of the lease to increase in the
second lease year (August 1999). The leases of the Properties also provide for
the tenant to fund, in addition to its lease payment, a capital expenditures
reserve fund up to a pre-determined amount. Money in that fund may be used by
the tenant, with the approval of the Company, to pay for capital expenditures.
The Company may be responsible for capital expenditures in excess of the amounts
in the reserve fund, and the tenant generally would be responsible for
replenishing the reserve fund and to pay a specified return on the amount of
capital expenditures paid for by the Company in excess of amounts in the reserve
fund.
The leases provide for up to four, five-year renewal options. During
the initial term of each lease, the tenant will pay the Company, as lessor,
minimum annual rent equal to a specified percentage of the Company's cost of
purchasing the Property payable in monthly installments. If the Company is
acquiring a Property that is to be constructed or renovated pursuant to the
development agreement, the cost 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. The
minimum rental payment under the renewal option generally will be greater than
that due for the final lease year of the initial term of the lease. In addition
to the minimum annual rent, the lease will generally provide for percentage rent
based on a percentage of the gross sales above a specified amount to be paid by
the tenant.
Certain lessees may have the right to purchase the Property seven to
twenty years after commencement of the lease at a purchase price equal to the
greater of (i) the appraised value of the Property, or (ii) a specified amount,
generally equal to the Company's purchase price of the Property, plus a
pre-determined percentage of the Company's purchase price. The leases also
generally provide that, in the event the Company wishes to sell a Property
subject to that lease to a third party, it must offer the lessee first refusal
to purchase the Property on the same terms and conditions, and for the same
price, as any offer which the Company has received for the sale of the Property.
During the period January 1, 1999 through January 19, 1999, the Company
had not acquired additional Properties or invested in any Mortgage Loans.
Major Tenants
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 owned by the Company as Residence Inn(R) by Marriott(R). It
is anticipated that Marriott(R) Brand Chains will continue to contribute more
than ten percent of the Company's total rental income in 1999 and subsequent
years. 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.
Certain Management Services
Pursuant to an advisory agreement (the "Advisory Agreement") with the
Company, the Advisor provides management services relating to the Company, the
Properties, the Mortgage Loans and the Secured Equipment Lease program. Under
this agreement, the Advisor is responsible for assisting the Company in
negotiating leases, Mortgage Loans, the Line of Credit 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
tenants inquiries and notices. The Advisor also provides information to the
Company about the status of the leases, the Properties, the Mortgage Loans, the
Line of Credit and the Secured Equipment Leases. In exchange for these services,
the Advisor is entitled to receive certain fees from the Company. For
supervision of the Properties and the Mortgage Loans, the Advisor receives the
asset management fee, which is payable monthly in an amount equal to one-twelfth
of .60% of the total amount invested in the Properties, exclusive of acquisition
fees and acquisition expenses (the "Real Estate Asset Value") plus one-twelfth
of .60% of the outstanding principal amount of any 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 Line of Credit, equal to 2% of the purchase price of the
equipment subject to each Secured Equipment Lease (the "Secured Equipment Lease
Servicing Fee"). For identifying the Properties, structuring the terms of the
acquisition and leases of the Properties and structuring the terms of the
Mortgage Loans, the Advisor will receive a fee 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.
The Advisory Agreement continues until July 9, 1999, and thereafter may
be extended annually upon mutual consent of the Advisor and the Board of
Directors of the Company unless terminated at an earlier date upon 60 days prior
written notice by each party.
Borrowing
On July 31, 1998, the Company entered into a revolving Line of Credit
and security agreement with a bank to be used by the Company to acquire hotel
Properties. The 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 .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 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. 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.
The Company expects to use net proceeds it receives from the current
Offering, plus any net proceeds from the sale of Shares in the Secondary
Offering, to purchase additional Properties and, to a lesser extent, to invest
in Mortgage Loans. In addition, the Company intends to borrow money to acquire
additional Properties, to invest in Mortgage Loans and Secured Equipment Leases,
and to pay certain related fees. The Company intends to encumber assets in
connection with such borrowing. The Company currently plans to obtain one or
more revolving Lines of Credit in an aggregate amount initially of up to
$45,000,000 and may, in addition, also obtain permanent financing. The Line of
Credit may be repaid with offering proceeds, working capital or permanent
financing. Although the Board of Directors anticipates that the Line of Credit
will initially be in an amount up to $45,000,000 and that the aggregate amount
of any permanent financing will not exceed 30% of the Company's total assets,
the maximum amount the Company may borrow, absent a satisfactory showing that a
higher level of borrowing is appropriate as approved by a majority of the
independent directors, is 300% of the Company's net assets.
Competition
The hotel and restaurant businesses are characterized by intense
competition. The operators of the hotels and restaurants located on the
Properties do, and are expected to in the future, compete with independently
owned hotels and restaurants, hotels and restaurants which are part of local or
regional chains, and hotels and restaurants in other well-known national chains,
including those offering different types of food and accommodations.
Many successful fast-food, family-style and casual dining restaurants
are located in "eating islands," which are areas to which people tend to return
frequently and within which they can diversify their eating habits, because in
many cases local competition may enhance the restaurant's success instead of
detracting from it. Fast-food, family-style and casual dining restaurants
frequently experience better operating results when there are other restaurants
in the same area. Similarly, 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.
Employees
Reference is made to Item 10. Directors and Executive Officers of the
Registrant for a listing of the Company's Executive Officers. The Company has no
other employees.
Item 2. Properties
As of December 31, 1998, the Company owned two hotel Properties in the
Atlanta, Georgia area. Reference is made to the Schedule of Real Estate and
Accumulated Depreciation filed with this report for a listing of the Properties
and their respective costs, including acquisition fees and certain acquisition
expenses. The Company is presently negotiating to acquire additional Properties,
but as of January 19, 1999, had not acquired any such Properties.
While the Company may currently invest in both hotel and restaurant
Properties, management believes that over time the Company will focus its
Property investments exclusively on hotel Properties. 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 the land underlying the building with
the building owned by the tenant or a third party, and also may acquire the
building only with the land owned by a third party. The two Properties owned by
the Company as of December 31, 1998 conform, and the Advisor expects that any
Properties purchased by the Company will conform, generally to the following
specifications of size, cost, and type of land and buildings.
Hotel Properties. The lot sizes will generally range 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 expected
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.
Restaurant Properties. Lot sizes will generally range between 25,000 to
60,000 square feet depending upon building size and local demographic factors.
Restaurants located on land within shopping centers will be freestanding and may
be located on smaller parcels if insufficient common parking is available. Sites
purchased by the Company will be in locations zoned for commercial use which
have been reviewed for traffic patterns and volume. The restaurant buildings
generally will be rectangular and constructed from various combinations of
stucco, steel, wood, brick and tile. Building sizes generally will range from
2,500 to 6,000 square feet, with the larger restaurants having greater seating
and equipment areas.
Before or after construction or renovation, both hotel and restaurant
Properties to be acquired will be one of a Hotel Chain's or Restaurant Chain's
approved designs. In general, the Properties will be freestanding and surrounded
by paved parking areas. Buildings will be suitable for a variety of uses, and in
the case of hotel Properties, the Properties may include equipment.
Generally, a lessee is required, under the terms of its 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
lessee's obligations under the franchise agreement to reflect the current
commercial image of its Hotel Chain or Restaurant Chain. These capital
expenditures generally will be paid by the lessee during the term of the lease.
Some hotel Property leases may, however, obligate the lessee to fund, in
addition to its lease payment, a capital expenditures reserve up to a
pre-determined amount. Money in that reserve may be used by the lessee, with the
approval of the Company, to pay for capital expenditures. The Company may be
responsible for capital expenditures in excess of the amounts in the reserve
fund, and the lessee would be generally responsible for replenishing the reserve
fund and to pay additional rent equal to a specified return on the amount of
capital expenditures paid for by the Company in excess of amounts in the reserve
fund.
Leases with Major Tenants. The terms of the leases with the Company's
major tenants as of December 31, 1998 (see Item 1. Business - Major Tenants),
are substantially the same as those described in Item 1. Business - Leases.
STC Leasing Associates, LLC leases two Residence Inn(R) by Marriott(R)
hotel Properties. The initial term of each lease is 19 years (expiring in 2017)
and the aggregate minimum base annual rent is approximately $2,861,000.
Management considers the Properties to be well-maintained and
sufficient for the Company's operations.
Item 3. Legal Proceedings
Neither the Company, nor its Advisor or any affiliates of the Advisor,
nor any of their respective Properties, is a party to, or subject to, any
material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of February 16, 1999, there were 2,703 stockholders of record of common
stock. There is no public trading market for the Shares, and even though the
Company intends to list the Shares on a national securities exchange or
over-the-counter market within ten years of commencement of the offering of
Shares, there is no assurance that one will develop and it is not known at this
time if a public market for the Shares will develop. Prior to such time, if any,
as Listing occurs, any stockholder (other than the Advisor) may present all or
any portion equal to at least 25% of such stockholder's Shares to the Company
for redemption at any time, in accordance with the procedures outlined in the
Company's prospectus. 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. 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. Stockholders who wish to have their distributions
used to acquire additional Shares (to the extent Shares are available for
purchase), may do so pursuant to the Company's reinvestment plan (the
"Reinvestment Plan"). There is no assurance that there will be sufficient funds
available for redemption and, accordingly, a stockholder's Shares may not be
redeemed. Any Shares acquired pursuant to a redemption will be retired and no
longer available for issuance by the Company. The Board of Directors of the
Company, in their 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 price to be paid for any Share transferred other than pursuant
to the redemption plan is subject to negotiation by the purchaser and the
selling stockholder. For the year ended December 31, 1998, no Shares were
transferred, or retired pursuant to the redemption plan.
As of December 31, 1998, the offering price per Share was $10.
The Company expects to distribute at least 95% of its real estate
investment trust taxable income to the stockholders pursuant to the provisions
of the Articles of Incorporation. For the years ended December 31, 1998 and
1997, the Company declared cash distributions of $1,168,145 and $29,776,
respectively, to the stockholders. No amounts distributed to stockholders for
the year 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. The following table presents
total distributions and distributions per Share:
<TABLE>
<CAPTION>
1998 Quarter First Second Third Fourth Year
- ------------ --------- ---------- --------- ---------- -----------
<S> <C>
Total distributions declared $101,356 $155,730 $362,045 $549,014 $1,168,145
Distributions per Share 0.075 0.075 0.142 0.175 0.467
1997 Quarter First Second Third Fourth Year
- ------------ --------- ---------- --------- ---------- -----------
Total distributions declared (1) (1) (1) $29,776 $29,776
Distributions per Share (1) (1) (1) 0.050 0.050
</TABLE>
(1) For the period June 12, 1996 (date of inception) through October 15,
1997, the Company did not make any cash distributions because
operations had not commenced.
On January 1, 1999 and February 1, 1999, the Company declared
distributions totalling $251,967 and $314,928, respectively, or $0.0583 per
Share of common stock, payable in March 1999, to stockholders of record on
January 1, 1999 and February 1, 1999, respectively.
The Company intends to continue to declare distributions of cash to
stockholders on a monthly basis during the offering period, and quarterly
thereafter.
(b) The information required by this item is set forth in Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations and is
hereby incorporated by reference.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1998 1997 (1) 1996 (2)
---------------- ------------ ------------
<S> <C>
Year Ended December 31:
Revenues $1,955,461 $ 46,071 $ -
Net earnings 958,939 22,852 -
Cash distributions declared 1,168,145 29,776 -
Funds from operations (3) 1,343,105 22,852 -
Earnings per share 0.40 0.03 -
Cash distributions declared per Share 0.46 0.05 -
Weighted average number of Shares
outstanding (4) 2,402,344 686,063 -
At December 31:
Total assets $48,856,690 $9,443,476 $598,190
Total stockholders' equity (5) 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) 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 generally accepted accounting principles
("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. (Net earnings determined in accordance with GAAP include the
noncash effect of straight-lining rent increases throughout the lease
term. This straight-lining is a GAAP convention requiring real estate
companies to report rental revenue based on the average rent per year
over the life of the lease. During the year ended December 31, 1998,
net earnings included $44,160 of these amounts.) 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
consolidated 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.
(4) The weighted average number of Shares outstanding is based upon the
period the Company was operational.
(5) Includes subscriptions of $31,693,678 and $11,325,402 received, net of
stock issuance costs of $3,601,898 and $2,284,561, for the years ended
December 31, 1998 and 1997, respectively. Stock issuance costs consist
of selling commissions, marketing support and due diligence expense
reimbursement fees and organizational and offering expenses. The ratio
of stock issuance costs to subscriptions received was 1:9 and 1:5
during 1998 and 1997, respectively. The Advisor has agreed to pay all
organizational and offering expenses which exceed 3% of the gross
offering proceeds received from the sale of Shares of the Company.
(6) During 1998 and for the period October 15, 1997 (the date operations
commenced) through December 31, 1997, operating expenses incurred by
the Company as a percent of net income, each term as defined in the
Company's Prospectus, was 18.90% and 94.52%, respectively. In addition,
during 1998, operating expenses incurred by the Company represented
approximately 1.6% of average invested assets, as defined in the
Company's Prospectus. In accordance with the Advisory Agreement, to the
extent that operating expenses payable or reimbursable by the Company,
in any four consecutive fiscal quarters exceed the greater of 2% of
average invested assets or 25% of net income (the "Expense Cap"), the
Advisor is required to reimburse the Company the amount by which the
total operating expenses paid or incurred by the Company exceed 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. As of December 31, 1998, net offering proceeds had
been invested in short term, highly liquid investments pending
investment in Properties and Mortgage Loans. Therefore, operating
expenses as a percentage of average invested assets for the period
October 15 (the date operations commenced) through December 31, 1997,
was not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Act of 1934. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: changes in general economic conditions, changes in local
and national real estate conditions, continued availability of proceeds from the
Company's Offering, the ability of the Company to obtain permanent financing on
satisfactory terms, the ability of the Company to identify suitable investments,
the ability of the Company to locate suitable tenants for its Properties and
borrowers for its Mortgage Loans and Secured Equipment Leases, and the ability
of such tenants and borrowers to make payments under their respective leases,
Mortgage Loans or Secured Equipment Leases.
Introduction
CNL Hospitality Properties, Inc., formerly known as CNL American Realty
Fund, Inc., is a Maryland corporation that was organized on June 12, 1996. On
June 15, 1998, CNL Hospitality Properties, Inc. formed CNL Hospitality Partners,
LP, a wholly owned Delaware limited partnership. Properties acquired are
expected to be held by the Partnership and, as a result, owned by CNL
Hospitality Properties, Inc. through the Partnership.
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 and operators of national and regional fast-food, family-style and casual
dining 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 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 and Restaurant
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 the Offering to the public of up
to 16,500,000 Shares of common stock pursuant to a registration statement on
Form S-11 under the Securities Act of 1933, as amended. As of December 31, 1998,
the Company had received aggregate subscription proceeds of $43,019,080
(4,301,908 Shares), from the Offering, including $37,299 (3,730 Shares) through
the Company's Reinvestment Plan. The Company anticipates significant additional
sales of Shares prior to the completion of the Offering. In accordance with the
Company's prospectus, the Company has elected to extend the Offering until a
date no later than July 9, 1999.
The managing dealer of the offering of Shares is CNL Securities Corp.,
an affiliate of the Company.
<PAGE>
As of December 31, 1998, net proceeds to the Company from its Offering
and capital contributions from the Advisor, after deduction of selling
commissions, marketing support and due diligence expense reimbursement fees and
organizational and offering expenses, totalled approximately $37,313,000. In
addition, the Company had received three advances under the Line of Credit
totalling $9,600,000. As of December 31, 1998, the Company had used net proceeds
from the Offering and borrowings to invest approximately $27,246,000 in two
hotel Properties, to pay $5,000,000 as a deposit on three additional Properties
and to pay approximately $3,487,000 in acquisition fees and expenses, leaving
approximately $11,180,000 of net offering proceeds available for investment in
Properties and Mortgage Loans.
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 an additional 27,500,000 Shares of common
stock ($275,000,000) in the Secondary 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 to the managing dealer for selling commissions and
expenses in connection with the offering, payable to the Advisor for acquisition
fees and acquisition expenses and reimbursable to the Advisor for offering
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.
As of January 19, 1999, the Company had received subscription proceeds
of $48,634,727 (4,863,472 Shares) from its Offering. As of January 19, 1998, net
proceeds to the Company from its Offering and capital contributions from the
Advisor, after deduction of selling commissions, marketing support and due
diligence expense reimbursement fees and organizational and offering expenses
totalled approximately $42,479,000. In addition, the Company received three
advances under the Line of Credit totalling $9,600,000. The Company has used net
proceeds from the current Offering and borrowings to invest approximately
$27,246,000 in two hotel Properties, to pay $5,000,000 as a deposit on three
additional hotel Properties and to pay approximately $3,740,000 in acquisition
fees and expenses, leaving approximately $16,093,000 available for investment in
Properties and Mortgage Loans.
The Company expects to use net proceeds it receives from the current
Offering, plus any net proceeds from the sale of Shares in the Secondary
Offering, to purchase additional Properties and, to a lesser extent, make
Mortgage Loans. In addition, the Company intends to borrow money to acquire
additional Properties, to invest in Mortgage Loans and Secured Equipment Leases,
and to pay certain related fees. The Company intends to encumber assets in
connection with such borrowing. The Company currently plans to obtain one or
more revolving Lines of Credit in an aggregate amount up to $45,000,000 and may,
in addition, also obtain permanent financing. The Line of Credit may be repaid
with offering proceeds, working capital or permanent financing. Although the
Board of Directors anticipates that the Line of Credit will initially be in an
amount initially of up to $45,000,000 and that the aggregate amount of any
permanent financing will not exceed 30% of the Company's total assets, the
maximum amount the Company may borrow, absent a satisfactory showing that a
higher level of borrowing is appropriate as approved by a majority of the
independent directors, is 300% of the Company's net assets.
On July 31, 1998, the Company entered into an initial 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 .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 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
<PAGE>
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.
As of January 19, 1999, the Company had initial commitments to acquire
three hotel Properties. The acquisition of each of these Properties is subject
to the fulfillment of certain conditions, including, but not limited to, a
satisfactory environmental survey and property appraisal. In order to acquire
these Properties, the Company must obtain additional funds through the receipt
of additional offering proceeds and/or debt financing. In connection with 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. There can be no assurance that any or all of the conditions described
above will be satisfied or, if satisfied, that one or more of these Properties
will be acquired by the Company.
As of January 19, 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 January 19, 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. The remaining funds will be used primarily to
purchase additional Properties, to make Mortgage Loans, to pay offering and
acquisition expenses, to pay distributions to stockholders, to meet other
Company expenses and, in management's discretion, to create cash reserves.
During 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 $459,250, $638,274 and $555,812,
respectively, for certain organizational and offering expenses. In addition,
during the years ended December 31, 1998 and 1997, affiliates of the Company
incurred on behalf of the Company $392,863 and $26,149, respectively, for
certain acquisition expenses and $98,212 and $11,003, respectively, for certain
operating expenses. As of December 31, 1998, the Company owed the Advisor
$318,937 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 (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 $2,776,965 and $22,469, respectively. Based on cash from
operations, the Company declared distributions to its stockholders of $1,168,145
and $29,776 during the year ended December 31, 1998 and the period October 15,
1997 (the date operations commenced) through December 31, 1997, respectively. In
addition, on January 1, 1999, the Company declared distributions to stockholders
of record on January 1, 1999, totalling $251,967 ($0.0583 per Share), payable in
March 1999.
For the years ended December 31, 1998 and 1997, approximately 76
percent and 100 percent, respectively, of the distributions received by
stockholders were considered to be ordinary income and for the year ended
December 31, 1998, approximately 24 percent was considered a return of capital
for federal income tax purposes. No amounts distributed or to be distributed to
the stockholders as of January 19, 1999, were 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.
Management believes that the Properties are adequately covered by
insurance. In addition, the Advisor has obtained contingent liability coverage
for the Company. This insurance policy is intended to reduce the Company's
exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to a Property.
The tenant of the two Properties owned by the Company as of January 19,
1999 has established capital expenditure reserve funds which will be used for
the replacement and renewal of furniture, fixtures and equipment relating to the
hotel Properties (the "FF&E Reserve"). Funds in the FF&E Reserve have been paid,
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. Due to the
fact that the Properties are leased on a long term, triple-net basis, management
does not believe that 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 expects that the cash to be generated from operations will
be adequate to pay operating expenses and to make distributions to stockholders.
Results of Operations
No operations commenced until the Company received the minimum offering
proceeds of $2,500,000 on October 15, 1997. As of December 31, 1998, the Company
had acquired two Properties, each consisting of land, building and equipment,
and had entered into a long-term, triple-net lease agreement relating to each of
the Properties.
The Property leases provide for minimum base annual rental payments
ranging from approximately $1,209,000 to $1,651,800, which are payable in
monthly installments. The leases also provide that, commencing in the second
lease year, the annual base rent required under the terms of the leases will
increase. In addition to annual base rent, the tenant pays a percentage rent
computed as a percentage of the gross sales of the Property. No such rent was
owed during 1998. The Company's leases also require the establishment of the
FF&E Reserves. The FF&E Reserves established for the Properties at December 31,
1998 are owned by the Company and are thus reported as additional rent. In
connection therewith, the Company earned $1,316,599 (including $98,099 in FF&E
Reserve income) from the two Properties during the year ended December 31, 1998.
Because the Company has not yet acquired all of its Properties and the
Properties owned as of December 31, 1998 were owned for only a portion of the
year, revenues for the year ended December 31, 1998, represent only a portion of
revenues which the Company is expected to earn in future periods.
During the years ended December 31, 1998 and 1997, the Company earned
$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 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 $996,522 and $23,219 for the years ended December 31,
1998 and 1997, respectively. Operating expenses increased during 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 acquired Properties and received
advances under the Line of Credit during 1998. Operating expenses, including
asset management fees, interest expense 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
<PAGE>
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. 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.
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
The Year 2000 problem is the result of information technology systems
and embedded systems (products which are made with microprocessor (computer)
chips such as HVAC systems, physical security systems and elevators) using a
two-digit format, as opposed to four digits, to indicate the year. Such
information technology and embedded systems may be unable to properly recognize
and process date-sensitive information beginning January 1, 2000.
The Company does not have any information technology systems.
Affiliates of the Advisor provide all services requiring the use of information
technology systems pursuant to a management agreement with the Company. The
maintenance of embedded systems, if any, at the Company's Properties is the
responsibility of the tenants of the Properties in accordance with the terms of
the Company's leases. The Advisor and its affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Company, and the information technology and embedded systems
and the Year 2000 compliance plans of the Company's tenants, significant
suppliers, financial institutions and transfer agent.
The information technology infrastructure of the affiliates of the
Advisor consists of a network of personal computers and servers that were
obtained from major suppliers. The affiliates utilize various administrative and
financial software applications on that infrastructure to perform the business
functions of the Company. The inability of the Advisor and its affiliates to
identify and timely correct material Year 2000 deficiencies in the software
and/or infrastructure could result in an interruption in, or failure of, certain
of the Company's business activities or operations. Accordingly, the Advisor and
its affiliates have requested and are evaluating documentation from the
suppliers of the software and infrastructure of the affiliates regarding the
Year 2000 compliance of their products that are used in the business activities
or operations of the Company. The Advisor has not yet received sufficient
certifications to be assured that the suppliers have fully considered and
mitigated any potential material impact of the Year 2000 deficiencies. The costs
expected to be incurred by the Advisor and its affiliates to become Year 2000
compliant will be incurred by the Advisor and its affiliates; therefore, these
costs will have no impact on the Company's financial position or results of
operations.
The Company has material third party relationships with its tenants,
financial institutions and transfer agent. The Company depends on its tenants
for rents and cash flows, its financial institutions for availability of cash
and its transfer agent to maintain and track investor information. If any of
these third parties are unable to meet their obligations to the Company because
of the Year 2000 deficiencies, such a failure may have a material impact on the
Company. Accordingly, the Advisor has requested and is evaluating documentation
from the Company's tenants, financial institutions, and transfer agent relating
to their Year 2000 compliance plans. The Advisor has not yet received sufficient
certifications to be assured that the tenants, financial institutions, and
transfer agent have fully considered and mitigated any potential material impact
of the Year 2000 deficiencies. Therefore, the Advisor does not, at this time,
know of the potential costs to the Company of any adverse impact or effect of
any Year 2000 deficiencies by these third parties.
The Advisor currently expects that all year 2000 compliance testing and
any necessary remedial measures on the information technology systems used in
the business activities and operations of the Company will be completed prior to
June 30, 1999. Based on the progress the Advisor and its affiliates have made in
identifying and addressing the Company's Year 2000 issues and the plan and
timeline to complete the compliance program, the Advisor does not foresee
significant risks associated with the Company's Year 2000 compliance at this
time. Because the Advisor and its affiliates are still evaluating the status of
the systems used in business activities and operations of the Company and the
systems of the third parties with which the Company conducts its business, the
Advisor has not yet developed a comprehensive contingency plan and is unable to
identify "the most reasonably likely worst case scenario" at this time. As the
Advisor identifies significant risks related to the Company's Year 2000
compliance or if the Company's Year 2000 compliance program's progress deviates
substantially from the anticipated timeline, the Advisor will develop
appropriate contingency plans.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk for information related to quantitative
and qualitative disclosure about market risk.
Item 8. Financial Statements and Supplementary Data
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONTENTS
Page
----
Report of Independent Accountants 16
Financial Statements:
Consolidated Balance Sheets 17
Consolidated Statements of Earnings 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 22
<PAGE>
Report of Independent Accountants
To the Board of Directors
CNL Hospitality Properties, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) 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. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits 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 opinion 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>
December 31,
1998 1997
------------ ------------
ASSETS
<S> <C>
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
============= =============
</TABLE>
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
<TABLE>
<CAPTION>
June 12, 1996
(Date of
Inception)
through
December 31,
Year Ended
December 31,
1998 1997 1996
------------ ------------- ------------
<S> <C>
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 --
============ ============ ============
</TABLE>
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
<TABLE>
<CAPTION>
Accumulated
Common stock distributions
------------------------ Capital in in excess
Number Par excess of of net
of Shares value par value earnings Total
----------- --------- ------------- -------------- -------------
<S> <C>
Balance at 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
=========== ========= ============= ============= ============
</TABLE>
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
<TABLE>
<CAPTION>
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1998 1997 1996
----------- ------------- -------------
<S> <C>
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
operating leases (28,216,757 ) -- --
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
============ ============ ===========
</TABLE>
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
<TABLE>
<CAPTION>
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1998 1997 1996
------------- ----------- -----------
<S> <C>
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 to (i) 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)
through
December 31,
Year Ended
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>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference to
the Company's Definitive Proxy Statement to be filed with the Commission no
later than April 30, 1999.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to
the Company's Definitive Proxy Statement to be filed with the Commission no
later than April 30, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to
the Company's Definitive Proxy Statement to be filed with the Commission no
later than April 30, 1999.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to
the Company's Definitive Proxy Statement to be filed with the Commission no
later than April 30, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1998 and 1997
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
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
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
Notes to Consolidated Financial Statements
2.
<PAGE>
Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 1998
Notes to Schedule III - Real Estate and Accumulated
Depreciation at December 31, 1998
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or
notes thereto.
3. Exhibits
3.1 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Included as Exhibit 3.4 to the 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. Bylaws (Included as Exhibit 3.3 to the
1996 Form S-11 and incorporated herein by reference.)
4.1 Reinvestment Plan (Included as Exhibit 4.4 to the 1996 Form S-11 and
incorporated herein by reference.)
10.1 Advisory Agreement, dated as of July 10, 1998, between CNL Hospitality
Properties, Inc. and CNL Hospitality Advisors, Inc. (formerly CNL Real
Estate Advisors, Inc.) (Filed herewith.)
10.2 Indemnification Agreement between CNL Hospitality Properties, Inc. and
C. Brian Strickland dated October 31, 1998. Each of the following
director and/or officer has signed a substantially similar agreement as
follows: James M. Seneff, Jr., Robert A. Bourne, G. Richard Hostetter,
J. Joseph Kruse, Richard C. Huseman, Charles A. Muller, John T. Walker,
Jeanne A. Wall and Lynn E. Rose dated July 9, 1997, John A. Griswold
dated January 7, 1999 and Charles E. Adams and Craig M. McAllaster
dated February 10, 1999 (Filed herewith.)
10.3 Agreement of Limited Partnership of CNL Hospitality Partners, LP
(Included as Exhibit 10.10 to the 1996 Form S-11 and incorporated
herein by reference.)
10.4 Hotel Purchase and Sale Contract between CNL Real Estate Advisors, Inc.
and Gwinnett Residence Associates, LLC, relating to the Residence Inn -
Gwinnett Place (Included as Exhibit 10.11 to the 1996 Form S-11 and
incorporated herein by reference.)
10.5 Assignment and Assumption Agreement between CNL Real Estate Advisors,
Inc. and CNL Hospitality Partners, LP, relating to the Residence Inn -
Gwinnett Place (Included as Exhibit 10.12 to the 1996 Form S-11 and
incorporated herein by reference.)
10.6 Hotel Purchase and Sale Contract between CNL Real Estate Advisors, Inc.
and Buckhead Residence Associates, LLC, relating to the Residence Inn -
Buckhead (Lenox Park) (Included as Exhibit 10.13 to the 1996 Form S-11
and incorporated herein by reference.)
10.7 Assignment and Assumption Agreement between CNL Real Estate Advisors,
Inc. and CNL Hospitality Partners, LP, relating to the Residence Inn -
Buckhead (Lenox Park) (Included as Exhibit 10.14 to the 1996 Form S-11
and incorporated herein by reference.)
10.8 Lease Agreement between CNL Hospitality Partners, LP and STC Leasing
Associates, LLP, dated August 1, 1998, relating to the Residence Inn -
Gwinnett Place (Included as Exhibit 10.15 to the 1996 Form S-11 and
incorporated herein by reference.)
10.9 Lease Agreement between CNL Hospitality Partners, LP and STC Leasing
Associates, LLC, dated August 1, 1998, relating to the Residence Inn -
Buckhead (Lenox Park) (Included as Exhibit 10.16 to the 1996 Form S-11
and incorporated herein by reference.)
10.10 Master Revolving Line of Credit Loan Agreement with CNL Hospitality
Properties, Inc., CNL Hospitality Partners, LP and Colonial Bank, dated
July 31, 1998 (Included as Exhibit 10.17 to the 1996 Form S-11 and
incorporated herein by reference.)
27 Financial Data Schedule (Filed herewith.)
(b) No reports on Form 8-K were filed during the period October 1, 1998
through December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 19th day of
February, 1999.
CNL HOSPITALITY PROPERTIES, INC.
By: ROBERT A. BOURNE
President
/s/ Robert A. Bourne
--------------------
ROBERT A. BOURNE
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and 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 Chief February 19, 1999
- ---------------------------- Executive Officer (Principal
James M. Seneff, Jr. Executive Officer)
/s/ Robert A. Bourne Director and President February 19, 1999
- ---------------------------
Robert A. Bourne
/s/ C. Brian Strickland Vice President, Finance & February 19, 1999
- --------------------------- Administration (Principal Financial
C. Brian Strickland and Accounting Officer)
/s/ Charles E. Adams Independent Director February 19, 1999
- ---------------------------
Charles E. Adams
/s/ John A. Griswold Independent Director February 19, 1999
- ----------------------------
John A. Griswold
/s/ Craig M. McAllaster Independent Director February 19, 1999
- ----------------------------
Craig M. McAllaster
</TABLE>
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent
To Acquisition
Initial Cost ------------------
Encum- --------------------------------- Improve- Carrying
brances Land Buildings Equipment ments Costs
------- ---- --------- --------- ----- -----
<S> <C>
Properties the Company
has Invested in Under
Operating Leases:
Residence Inns by Marriott:
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
Gross Amount at Which Carried in Latest
at Close of Period (d) Date Income
------------------------------------ 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>
F-1
<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.
F-2
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT INDEX
Exhibit Number
- --------------
3.1 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Included as Exhibit 3.4 to the 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. Bylaws (Included as Exhibit 3.3 to the
1996 Form S-11 and incorporated herein by reference.)
4.1 Reinvestment Plan (Included as Exhibit 4.4 to the 1996 Form S-11 and
incorporated herein by reference.)
10.1 Advisory Agreement, dated as of July 10, 1998, between CNL Hospitality
Properties, Inc. and CNL Hospitality Advisors, Inc. (formerly CNL Real
Estate Advisors, Inc.) (Filed herewith.)
10.2 Indemnification Agreement between CNL Hospitality Properties, Inc. and
C. Brian Strickland dated October 31, 1998. Each of the following
director and/or officer has signed a substantially similar agreement as
follows: James M. Seneff, Jr., Robert A. Bourne, G. Richard Hostetter,
J. Joseph Kruse, Richard C. Huseman, Charles A. Muller, John T. Walker,
Jeanne A. Wall and Lynn E. Rose dated July 9, 1997, John A. Griswold
dated January 7, 1999 and Charles E. Adams and Craig M. McAllaster
dated February 10, 1999 (Filed herewith.)
10.3 Agreement of Limited Partnership of CNL Hospitality Partners, LP
(Included as Exhibit 10.10 to the 1996 Form S-11 and incorporated
herein by reference.)
10.4 Hotel Purchase and Sale Contract between CNL Real Estate Advisors, Inc.
and Gwinnett Residence Associates, LLC, relating to the Residence Inn -
Gwinnett Place (Included as Exhibit 10.11 to the 1996 Form S-11 and
incorporated herein by reference.)
10.5 Assignment and Assumption Agreement between CNL Real Estate Advisors,
Inc. and CNL Hospitality Partners, LP, relating to the Residence Inn -
Gwinnett Place (Included as Exhibit 10.12 to the 1996 Form S-11 and
incorporated herein by reference.)
10.6 Hotel Purchase and Sale Contract between CNL Real Estate Advisors, Inc.
and Buckhead Residence Associates, LLC, relating to the Residence Inn -
Buckhead (Lenox Park) (Included as Exhibit 10.13 to the 1996 Form S-11
and incorporated herein by reference.)
10.7 Assignment and Assumption Agreement between CNL Real Estate Advisors,
Inc. and CNL Hospitality Partners, LP, relating to the Residence Inn -
Buckhead (Lenox Park) (Included as Exhibit 10.14 to the 1996 Form S-11
and incorporated herein by reference.)
10.8 Lease Agreement between CNL Hospitality Partners, LP and STC Leasing
Associates, LLP, dated August 1, 1998, relating to the Residence Inn -
Gwinnett Place (Included as Exhibit 10.15 to the 1996 Form S-11 and
incorporated herein by reference.)
10.9 Lease Agreement between CNL Hospitality Partners, LP and STC Leasing
Associates, LLC, dated August 1, 1998, relating to the Residence Inn -
Buckhead (Lenox Park) (Included as Exhibit 10.16 to the 1996 Form S-11
and incorporated herein by reference.)
10.10 Master Revolving Line of Credit Loan Agreement with CNL Hospitality
Properties, Inc., CNL Hospitality Partners, LP and Colonial Bank, dated
July 31, 1998 (Included as Exhibit 10.17 to the 1996 Form S-11 and
incorporated herein by reference.)
27 Financial Data Schedule (Filed herewith.)
<PAGE>
EXHIBIT 10.1
Advisory Agreement
<PAGE>
ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT, dated as of July 10, 1998, is between CNL
HOSPITALITY PROPERTIES, INC., a corporation organized under the laws of the
State of Maryland (the "Company") and CNL REAL ESTATE ADVISORS, INC., a
corporation organized under the laws of the State of Florida (the "Advisor").
W I T N E S S E T H
WHEREAS, the Company has filed with the Securities and Exchange
Commission a Registration Statement (No. 333-9943) on Form S-11 covering
16,500,000 of its common shares ("Shares"), par value $.01, to be offered to the
public, and the Company may subsequently issue securities other than such Shares
("Securities") or otherwise raise additional capital;
WHEREAS, the Company intends to qualify as a REIT (as defined below),
and to invest its funds in investments permitted by the terms of the
Registration Statement and Sections 856 through 860 of the Code (as defined
below);
WHEREAS, the Company desires to avail itself of the experience, sources
of information, advice, assistance and certain facilities available to the
Advisor and to have the Advisor undertake the duties and responsibilities
hereinafter set forth, on behalf of, and subject to the supervision, of the
Board of Directors of the Company all as provided herein; and
WHEREAS, the Advisor is willing to undertake to render such services,
subject to the supervision of the Board of Directors, on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, the parties hereto agree as follows:
(1) Definitions. As used in this Advisory Agreement (the "Agreement"),
the following terms have the definitions hereinafter indicated:
Acquisition Expenses. 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
communications expenses, costs of appraisals, nonrefundable option payments on
property not acquired, accounting fees and expenses, and title insurance.
Acquisition Fees. 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
<PAGE>
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. CNL Real Estate Advisors, Inc., a Florida corporation, any
successor advisor to the Company, or any person or entity to which CNL Real
Estate Advisors, Inc. or any successor advisor subcontracts substantially all of
its functions.
Affiliate or Affiliated. As to any individual, corporation,
partnership, trust or other association (other than the Excess Shares Trust),
(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 or
controlling 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.
Appraised Value. Value according to an appraisal made by an Independent
Appraiser.
Articles of Incorporation. The Articles of Incorporation of the Company
under Title 2 of the Corporations and Associations Article of the Annotated Code
of Maryland, as amended from time to time.
Asset Management Fee. 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 this Agreement.
Assets. Properties, Mortgage Loans and Secured Equipment Leases,
collectively.
Average Invested Assets. 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.
Board of Directors or Board. The persons holding such office, as of any
particular time, under the Articles of Incorporation of the Company, whether
they be the Directors named therein or additional or successor Directors.
Bylaws. The bylaws of the Company, as the same are in effect from time
to time.
Cause. With respect to the termination of this Agreement, fraud,
criminal conduct, willful misconduct or willful or negligent breach of fiduciary
duty by the Advisor, breach of this Agreement, a default by the Sponsor under
the guarantee by the Sponsor to the Company or the bankruptcy of the Sponsor.
Change of Control. A change of control of the Company of such a nature
that would be required to be reported in response to the disclosure requirements
of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act
of 1934, as amended, as enacted and in force on the date hereof (the "Exchange
Act"), whether or not the Company is then subject to such reporting
requirements; provided, however, that, without limitation, a change of control
shall be deemed to have occurred if: (i) any "person" (within the meaning of
Section 13(d) of the Exchange Act) is or becomes the "beneficial owner" (as that
term is defined in Rule 13d-3, as enacted and in force on the date hereof, under
the Exchange Act) of securities of the Company representing 8.5% or more of the
combined voting power of the Company's securities then outstanding; (ii) there
occurs a merger, consolidation or other reorganization of the Company which is
not approved by the Board of Directors of the Company; (iii) there occurs a
sale, exchange, transfer or other disposition of substantially all of the assets
of the Company to another entity, which disposition is not approved by the Board
of Directors of the Company; or (iv) there occurs a contested proxy solicitation
of the Stockholders of the Company that results in the contesting party electing
candidates to a majority of the Board of Directors' positions next up for
election.
Code. Internal Revenue Code of 1986, as amended from time to time, or
any successor statute thereto. Reference to any provision of the Code shall mean
such provision as in effect from time to time, as the same may be amended, and
any successor provision thereto, as interpreted by any applicable regulations as
in effect from time to time.
Company. CNL Hospitality Properties, Inc., a corporation organized
under the laws of the State of Maryland.
Company Property. Any and all property, real, personal or otherwise,
tangible or intangible, including Mortgage Loans and Secured Equipment Leases,
which is transferred or conveyed to the Company (including all rents, income,
profits and gains therefrom), and which is owned or held by, or for the account
of, the Company.
Competitive Real Estate Commission. 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
(including the Subordinated 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.
Contract Purchase Price. The amount actually paid or allocated (as of
the date of purchase) to the purchase, development, construction or improvement
of property, exclusive of Acquisition Fees and Acquisition Expenses.
Contract Sales Price. The total consideration received by the Company
for the sale of Company Property.
Director. A member of the Board of Directors of the Company.
Distributions. Any distributions of money or other property by the
Company to owners of Equity Shares, including distributions that may constitute
a return of capital for federal income tax purposes.
Equipment. The furniture, fixtures and equipment used at Restaurant
Chains and Hotel Chains.
Equity Interest. The stock of or other interests in, or warrants or
other rights to purchase the stock of or other interests in, any entity that has
borrowed money from the Company or that is a tenant of the Company or that is a
parent or controlling Person of any such borrower or tenant.
Equity Shares. Transferable shares of beneficial interest of the
Company of any class or series,
including common shares or preferred shares.
Good Reason. With respect to the termination of this Agreement, (i) any
failure to obtain a satisfactory agreement from any successor to the Company to
assume and agree to perform the Company's obligations under this Agreement; or
(ii) any material breach of this Agreement of any nature whatsoever by the
Company.
Gross Proceeds. 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 Organizational and 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
$10.00.
Hotel Chains. The national and regional hotel chains, primarily limited
service, extended stay and full service 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 Appraiser. A qualified appraiser of real estate as
determined by the Board. Membership in a nationally recognized appraisal society
such as the American Institute of Real Estate Appraisers ("M.A.I.") or the
Society of Real Estate Appraisers ("S.R.E.A.") shall be conclusive evidence of
such qualification.
Independent Director. 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) 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. 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 Company's annual gross revenue during either
of the last two years or the Director's net worth on a fair market value basis.
An indirect relationship shall include circumstances in which a Director's
spouse, parents, children, siblings, mothers- or fathers-in-law, 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.
Independent Expert. 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.
Invested Capital. The amount calculated by multiplying the total number
of Shares 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 Company's plan
for redemption of Shares.
Joint Ventures. The joint venture or general partnership arrangements
in which the Company is a co-venturer or general partner which are established
to acquire Properties.
Line of Credit. A line of credit in an amount up to $45,000,000, the
proceeds of which will be used to acquire Properties and make Mortgage Loans and
Secured Equipment Leases.
Listing. The listing of the Shares of the Company on a national
securities exchange or over-the-counter market.
Managing Dealer. CNL Securities Corp., an Affiliate of the Advisor, or
such 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. In connection with mortgage financing provided by the
Company, the notes or other evidence of indebtedness or obligations which are
secured or collateralized by real estate owned by the borrower.
Net Income. 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 Sales Proceeds. 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. The initial public offering of Shares.
Operating Expenses. 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) the Soliciting Dealer Servicing Fee, (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 Organizational and
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 loan 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).
Organizational and Offering Expenses. Any and all costs and expenses,
other than Selling Commissions, the 0.5% marketing support and due diligence
expense reimbursement fee, and the Soliciting Dealer Servicing Fee incurred by
the Company, the Advisor or any Affiliate of either in connection with the
formation, 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.
Performance Fee. The fee payable to the Advisor upon termination of
this Agreement under certain circumstances if certain performance standards have
been met and the Subordinated Incentive Fee has not been paid.
Permanent Financing. The financing to acquire Assets, to pay the
Secured Equipment Lease Servicing Fee to pay a fee of 4.5% of any Permanent
Financing, excluding amounts to fund Secured Equipment Leases, as Acquisition
Fees, and to refinance outstanding amounts on the Line of Credit.
<PAGE>
Person. 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 for or 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 any government or any agency or political subdivision
thereof, and also includes 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) an underwriter that participates in a public offering of Equity
Shares for a period of sixty (60) days following the initial purchase by such
underwriter of such Equity Shares in such public offering, or (ii) CNL Real
Estate Advisors, Inc., during the period ending December 31, 1997, provided that
the foregoing exclusions shall apply only if the ownership of such Equity Shares
by an underwriter or CNL Real Estate Advisors, Inc. 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.
Property or Properties. (i) The real properties, including the
buildings located thereon, or (ii) the real properties only, or (iii) the
buildings only, which are acquired by the Company, either directly or through
joint venture arrangements or other partnerships.
Prospectus. "Prospectus" means the same as that term as defined in
Section 2(10) of the Securities Act of 1993, including a preliminary Prospectus,
an offering circular as described in Rule 256 of the General Rules and
Regulations under the Securities Act of 1933 or, in the case of an intrastate
offering, any document by whatever name known, utilized for the purpose of
offering and selling securities to the public.
Real Estate Asset Value. The amount actually paid or allocated to the
purchase, development, construction or improvement of a Property, exclusive of
Acquisition Fees and Acquisition Expenses.
Registration Statement. The Registration Statement (No. 333-9943) on
Form S-11 registering the Shares to be sold in the Offering.
REIT. A "real estate investment trust" under Sections 856 through 860
of the Code.
Restaurant Chains. The national and regional restaurant chains,
primarily fast-food family-style, and casual-dining 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 of Secured Equipment Leases.
Sale or Sales. (i) 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) not including 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. The Equipment financing made available by the
Company to operators of Restaurant Chains and Hotel Chains pursuant to which the
Company will finance, through loans or direct financing leases, the Equipment.
Secured Equipment Lease Servicing Fee. 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.
Securities. Any Equity Shares, Excess Shares, as such term is defined
in the Company's Articles of Incorporation, any other stock, shares or other
evidences of equity or beneficial or other interests, voting trust certificates,
bonds, debentures, notes or other evidences of indebtedness, secured or
unsecured, convertible, subordinated or otherwise, or in general any instruments
commonly known as "securities" or any certificates of interest, shares or
participations in, temporary or interim certificates for, receipts for,
guarantees of, or warrants, options or rights to subscribe to, purchase or
acquire, any of the foregoing.
Shares. The up to 16,500,000 shares of the common stock of the Company
to be sold in the Offering.
Soliciting Dealers. Broker-dealers who are members of the National
Association of Securities Dealers, Inc., or that are exempt from broker-dealer
registration, and who, in either case, have executed participating broker or
other agreements with the Managing Dealer to sell Shares.
Soliciting Dealer Servicing Fee. An annual fee of .20% of Invested
Capital on December 31 of each year, commencing in the year following the year
in which the Offering terminates, payable to the Managing Dealer, which in turn
may reallow all or a portion of such fee to the Soliciting Dealers whose clients
hold Shares on such date.
Sponsor. 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 arms length with the Company.
Stockholders. The registered holders of the Company's Equity Shares.
Stockholders' 8% Return. As of each date, an aggregate amount equal to
an 8% cumulative, noncompounded, annual return on Invested Capital.
Subordinated Disposition Fee. The Subordinated Disposition Fee as
defined in Paragraph 9(c).
Subordinated Incentive Fee. 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. The date of termination of the Agreement.
Total Proceeds. The Gross Proceeds plus loan proceeds from Permanent
Financing, excluding loan proceeds used to finance Secured Equipment Leases.
Total Property Cost. With regard to any Company Property, an amount
equal to the sum of the Real Estate Asset Value of such Property plus the
Acquisition Fees paid in connection with such Property.
2%/25% Guidelines. The requirement pursuant to the guidelines of the
North American Securities Administrators Association, Inc. that, in any 12 month
period, total Operating Expenses not exceed the greater of 2% of the Company's
Average Invested Assets during such 12 month period or 25% of the Company's Net
Income over the same 12 month period.
Valuation. An estimate of value of the assets of the Company as
determined by an Independent Expert.
(2) Appointment. The Company hereby appoints the Advisor to serve as
its advisor on the terms and conditions set forth in this Agreement, and the
Advisor hereby accepts such appointment.
(3) Duties of the Advisor. The Advisor undertakes to use its best
efforts to present to the Company potential investment opportunities and to
provide a continuing and suitable investment program consistent with the
investment objectives and policies of the Company as determined and adopted from
time to time by the Directors. In performance of this undertaking, subject to
the supervision of the Directors and consistent with the provisions of the
Registration Statement, Articles of Incorporation and Bylaws of the Company, the
Advisor shall, either directly or by engaging an Affiliate:
(a) serve as the Company's investment and financial advisor
and provide research and economic and statistical data in
connection with the Company's assets and investment
policies;
(b) provide the daily management of the Company and perform
and supervise the various administrative functions
reasonably necessary for the management of the Company;
(c) investigate, select, and, on behalf of the Company,
engage and conduct business with such Persons as the
Advisor deems necessary to the proper performance of its
obligations hereunder, including but not limited to
consultants, accountants, correspondents, lenders,
technical advisors, attorneys, brokers, underwriters,
corporate fiduciaries, escrow agents, depositaries,
custodians, agents for collection, insurers, insurance
agents, banks, builders, developers, property owners,
mortgagors, and any and all agents for any of the
foregoing, including Affiliates of the Advisor, and
Persons acting in any other capacity deemed by the
Advisor necessary or desirable for the performance of any
of the foregoing services, including but not limited to
entering into contracts in the name of the Company with
any of the foregoing;
(d) consult with the officers and Directors of the Company
and assist the Directors in the formulation and
implementation of the Company's financial policies, and,
as necessary, furnish the Directors with advice and
recommendations with respect to the making of investments
consistent with the investment objectives and policies of
the Company and in connection with any borrowings
proposed to be undertaken by the Company;
(e) subject to the provisions of Paragraphs 3(g) and 4
hereof, (i) locate, analyze and select potential
investments in Properties, Mortgage Loans and potential
lessees of Secured Equipment Leases, (ii) structure and
negotiate the terms and conditions of transactions
pursuant to which investment in Properties, Mortgage
Loans will be made and Secured Equipment Leases will be
offered by the Company; (iii) make investments in
Properties, Mortgage Loans and enter into Secured
Equipment Leases on behalf of the Company in compliance
with the investment objectives and policies of the
Company; (iv) arrange for financing and refinancing and
make other changes in the asset or capital structure of,
and dispose of, reinvest the proceeds from the sale of,
or otherwise deal with the investments in, Property,
Mortgage Loans and Secured Equipment Leases; and (v)
enter into leases and service contracts for Company
Property and, to the extent necessary, perform all other
operational functions for the maintenance and
administration of such Company Property;
(f) provide the Directors with periodic reports regarding
prospective investments in Properties, Mortgage Loans and
prospective lessees or borrowers of Secured Equipment
Leases;
(g) obtain the prior approval of the Directors (including a
majority of all Independent Directors) for any and all
investments in Properties, Mortgage Loans, and in
connection with the offering of Secured Equipment Leases;
(h) negotiate on behalf of the Company with banks or lenders
for loans to be made to the Company and negotiate on
behalf of the Company with investment banking firms and
broker-dealers or negotiate private sales of Shares and
Securities or obtain loans for the Company, but in no
event in such a way so that the Advisor shall be acting
as broker-dealer or underwriter; and provided, further,
that any fees and costs payable to third parties incurred
by the Advisor in connection with the foregoing shall be
the responsibility of the Company;
(i) obtain reports (which may be prepared by the Advisor or
its Affiliates), where appropriate, concerning the value
of investments or contemplated investments of the Company
in Properties, Mortgage Loans, and/or Secured Equipment
Leases;
(j) from time to time, or at any time reasonably requested by
the Directors, make reports to the Directors of its
performance of services to the Company under this
Agreement;
(k) provide the Company with all necessary cash management
services;
(l) do all things necessary to assure its ability to render
the services described in this Agreement;
(m) deliver to or maintain on behalf of the Company copies of
all appraisals obtained in connection with the
investments in Properties, Mortgage Loans;
(n) notify the Board of all proposed material transactions
before they are completed; and (o) administer the Secured
Equipment Lease program on behalf of the Company.
(4) Authority of Advisor.
(a) Pursuant to the terms of this Agreement (including the
restrictions included in this Paragraph 4 and in Paragraph 7), and subject to
the continuing and exclusive authority of the Directors over the management of
the Company, the Directors hereby delegate to the Advisor the authority to (1)
locate, analyze and select investment opportunities, (2) structure the terms and
conditions of transactions pursuant to which investments will be made or
acquired for the Company, (3) acquire Properties, make Mortgage Loans and offer
Secured Equipment Leases in compliance with the investment objectives and
policies of the Company, (4) arrange for financing or refinancing Property,
Mortgage Loans and Secured Equipment Leases, (5) enter into leases and service
contracts for the Company's Property, and perform other property management
services, (6) oversee non-affiliated property managers and other non-affiliated
Persons who perform services for the Company; and (7) undertake accounting and
other record-keeping functions at the Property level.
(b) Notwithstanding the foregoing, any investment in
Properties, Mortgage Loans; or extension of a Secured Equipment Lease, including
any acquisition of Property by the Company (as well as any financing acquired by
the Company in connection with such acquisition) will require the prior approval
of the Directors (including a majority of the Independent Directors).
(c) If a transaction requires approval by the Independent
Directors, the Advisor will deliver to the Independent Directors all documents
required by them to properly evaluate the proposed investment in the Property,
Mortgage Loan or Secured Equipment Lease. The prior approval of a majority of
the Independent Directors and a majority of the Directors not otherwise
interested in the transaction will be required for each transaction with the
Advisor or its Affiliates.
The Directors may, at any time upon the giving of notice to the
Advisor, modify or revoke the authority set forth in this Paragraph 4. If and to
the extent the Directors so modify or revoke the authority contained herein, the
Advisor shall henceforth submit to the Directors for prior approval such
proposed transactions involving investments in Property as thereafter require
prior approval, provided, however, that such modification or revocation shall be
effective upon receipt by the Advisor and shall not be applicable to investment
transactions to which the Advisor has committed the Company prior to the date of
receipt by the Advisor of such notification.
(5) Bank Accounts. The Advisor may establish and maintain one or more
bank accounts in its own name for the account of the Company or in the name of
the Company and may collect and deposit into any such account or accounts, and
disburse from any such account or accounts, any money on behalf of the Company,
under such terms and conditions as the Directors may approve, provided that no
funds shall be commingled with the funds of the Advisor; and the Advisor shall
from time to time render appropriate accountings of such collections and
payments to the Directors and to the auditors of the Company.
(6) Records; Access. The Advisor shall maintain appropriate records of
all its activities hereunder and make such records available for inspection by
the Directors and by counsel, auditors and authorized agents of the Company, at
any time or from time to time during normal business hours. The Advisor shall at
all reasonable times have access to the books and records of the Company.
(7) Limitations on Activities. Anything else in this Agreement to the
contrary notwithstanding, the Advisor shall refrain from taking any action
which, in its sole judgment made in good faith, would (a) adversely affect the
status of the Company as a REIT, (b) subject the Company to regulation under the
Investment Company Act of 1940, or (c) violate any law, rule, regulation or
statement of policy of any governmental body or agency having jurisdiction over
the Company, its Equity Shares or its Securities, or otherwise not be permitted
by the Articles of Incorporation or Bylaws of the Company, except if such action
shall be ordered by the Directors, in which case the Advisor shall notify
promptly the Directors of the Advisor's judgment of the potential impact of such
action and shall refrain from taking such action until it receives further
clarification or instructions from the Directors. In such event the Advisor
shall have no liability for acting in accordance with the specific instructions
of the Directors so given. Notwithstanding the foregoing, the Advisor, its
directors, officers, employees and stockholders, and stockholders, directors and
officers of the Advisor's Affiliates shall not be liable to the Company or to
the Directors or Stockholders for any act or omission by the Advisor, its
directors, officers or employees, or Stockholders, directors or officers of the
Advisor's Affiliates except as provided in Paragraphs 20 and 21 of this
Agreement.
(8) Relationship with Directors. Directors, officers and employees of
the Advisor or an Affiliate of the Advisor or any corporate parents of an
Affiliate, or directors, officers or stockholders of any director, officer or
corporate parent of an Affiliate may serve as a Director and as officers of the
Company, except that no director, officer or employee of the Advisor or its
Affiliates who also is a Director or officer of the Company shall receive any
compensation from the Company for serving as a Director or officer other than
reasonable reimbursement for travel and related expenses incurred in attending
meetings of the Directors.
(9) Fees.
(a) Asset Management Fee. The Company shall pay to the Advisor
as compensation for the advisory services rendered to the Company under
Paragraph 3 above a monthly fee in an amount equal to one-twelfth of .60% of the
Company's Real Estate Asset Value and the outstanding principal amount of the
Mortgage Loans (the "Asset Management Fee"), as of the end of the preceding
month. Specifically, Real Estate Asset Value equals the amount invested in the
Properties wholly owned by the Company, determined on the basis of cost, plus,
in the case of Properties owned by any Joint Venture or partnership in which the
Company is a co-venturer or partner, the portion of the cost of such Properties
paid by the Company, exclusive of Acquisition Fees and Expenses. The Asset
Management Fee shall be payable monthly on the last day of such month, or the
first business day following the last day of such month. The Asset Management
Fee, which will not exceed fees which are competitive for similar services in
the same geographic area,
<PAGE>
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.
(b) Acquisition Fees. The Company shall pay the Advisor a fee
in the amount of 4.5% of Total Proceeds as Acquisition Fees. 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. The total of all Acquisition Fees and any Acquisition Expenses
shall be limited in accordance with the Articles of Incorporation.
(c) Subordinated Disposition Fee. If the Advisor or an
Affiliate provides a substantial amount of the services (as determined by a
majority of the Independent Directors) in connection with the Sale of one or
more Properties, the Advisor or an Affiliate shall receive a Subordinated
Disposition Fee equal to the lesser of (i) one-half of a Competitive Real Estate
Commission or (ii) 3% of the sales price of such Property or Properties. The
Subordinated Disposition Fee will be paid only if Stockholders have received
total Distributions in an amount equal to the sum of their aggregate Invested
Capital and their aggregate Stockholders' 8% Return. To the extent that
Subordinated Disposition Fees are not paid by the Company on a current basis due
to the foregoing limitation, the unpaid fees will be accrued and paid at such
time as the subordination conditions have been satisfied. The Subordinated
Disposition Fee may be paid in addition to real estate commissions paid to
non-Affiliates, provided that the total real estate commissions paid to all
Persons by the Company shall not exceed an amount equal to the lesser of (i) 6%
of the Contract Sales Price of a Property or (ii) the Competitive Real Estate
Commission. In the event this Agreement is terminated prior to such time as the
Stockholders have received total Distributions in an amount equal to 100% of
Invested Capital plus an amount sufficient to pay the Stockholders' 8% Return
through the Termination Date, an appraisal of the Properties then owned by the
Company shall be made and the Subordinated Disposition Fee on Properties
previously sold will be deemed earned if the Appraised Value of the Properties
then owned by the Company plus total Distributions received prior to the
Termination Date equals 100% of Invested Capital plus an amount sufficient to
pay the Stockholders' 8% Return through the Termination Date. Upon Listing, if
the Advisor has accrued but not been paid such Subordinated 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 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.
(d) Subordinated Share of Net Sales Proceeds. The Subordinated Share of
Net Sales Proceeds shall be payable to the Advisor in an amount equal to 10% of
Net Sales Proceeds from Sales of assets of the Company after the Stockholders
have received Distributions equal to the sum of the Stockholders' 8% Return and
100% of Invested Capital. Following Listing, no Subordinated Share of Net Sales
Proceeds will be paid to the Advisor.
(e) Subordinated Incentive Fee. Upon Listing, the Advisor shall be paid
the Subordinated Incentive Fee in an amount equal to 10% of the amount by which
(i) the market value of the Company, measured by taking 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 "Market Value"), plus the total Distributions paid 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 paid to the Stockholders in order to pay the Stockholders' 8%
Return from inception through the date the Market Value is determined. The
Company shall have the option to pay such fee in the form of cash, Securities, a
promissory note or any combination of the foregoing. 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.
(f) Secured Equipment Lease Servicing Fee. The Company shall pay to the
Advisor out of the Proceeds of the Line of Credit or Permanent Financing as
compensation for negotiating its respective Secured Equipment Leases and
supervising the Secured Equipment Lease program a fee equal to 2% of the
purchase price of the Equipment subject to each Secured Equipment Lease upon
entering into such lease or loan.
(g) Loans from Affiliates. If any loans are made to the Company by an
Affiliate of the Advisor, the maximum amount of interest that may be charged by
such Affiliate shall be the lesser of (i) 1% above the prime rate of interest
charged from time to time by The Bank of New York and (ii) the rate that would
be charged to the Company by unrelated lending institutions on comparable loans
for the same purpose. The terms of any such loans shall be no less favorable
than the terms available between non-Affiliated Persons for similar commercial
loans.
(h) Changes to Fee Structure. In the event of Listing, the Company and
the Advisor shall negotiate in good faith to establish a fee structure
appropriate for a perpetual-life entity. A majority of the Independent Directors
must approve the new fee structure negotiated with the Advisor. In negotiating a
new fee structure, the Independent Directors shall consider all of the factors
they deem relevant, including, but not 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
performing 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 REIT or by others
with whom the REIT does business; (v) the quality and extent of service and
advice furnished by the Advisor; (vi) the performance of the investment
portfolio of the REIT, including income, conversion 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 new fee structure can be no more favorable to the Advisor than the current
fee structure.
<PAGE>
(10) Expenses.
(a) In addition to the compensation paid to the Advisor
pursuant to Paragraph 9 hereof, the Company shall pay directly or reimburse the
Advisor for all of the expenses paid or incurred by the Advisor in connection
with the services it provides to the Company pursuant to this Agreement,
including, but not limited to:
(i) the Company's Organizational and Offering Expenses;
(ii) Acquisition Expenses incurred in connection with
the selection and acquisition of Properties for goods and services provided by
the Advisor at the lesser of the actual cost or 90% of the competitive rate
charged by unaffiliated persons providing similar goods and services in the same
geographic location;
(iii) the actual cost of goods and services used by the
Company and obtained from entities not affiliated with the Advisor, other than
Acquisition Expenses, including brokerage fees paid in connection with the
purchase and sale of securities;
(iv) interest and other costs for borrowed money,
including discounts, points and other similar fees;
(v) taxes and assessments on income or Property and
taxes as an expense of doing business;
(vi) costs associated with insurance required in
connection with the business of the
Company or by the Directors;
(vii) expenses of managing and operating Properties
owned by the Company, whether payable to an Affiliate of the Company or a
non-affiliated Person;
(viii) all expenses in connection with payments to the
Directors and meetings of the Directors and Stockholders;
(ix) expenses associated with Listing or with the
issuance and distribution of Shares and Securities, such as selling commissions
and fees, advertising expenses, taxes, legal and accounting fees, Listing and
registration fees, and other Organization and Offering Expenses;
(x) expenses connected with payments of Distributions in
cash or otherwise made or caused to be made by the Directors to the
Stockholders;
(xi) expenses of organizing, revising, amending,
converting, modifying, or terminating the Company or the Articles of
Incorporation;
(xii) expenses of maintaining communications with
Stockholders, including the cost of preparation, printing, and mailing annual
reports and other Stockholder reports, proxy statements and other reports
required by governmental entities;
(xiii) expenses related to negotiating and servicing
Mortgage Loans Secured Equipment Leases;
(xiv) expenses related to negotiating and servicing
Secured Equipment Leases and administering the Secured Equipment Lease program;
(xv) administrative service expenses (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); and
(xvi) audit, accounting and legal fees.
(b) Expenses incurred by the Advisor on behalf of the Company
and payable pursuant to this Paragraph 10 shall be reimbursed no less than
monthly to the Advisor. The Advisor shall prepare a statement documenting the
expenses of the Company during each quarter, and shall deliver such statement to
the Company within 45 days after the end of each quarter.
(11) Other Services. Should the Directors request that the Advisor or
any director, officer or employee thereof render services for the Company other
than set forth in Paragraph 3, such services shall be separately compensated at
such rates and in such amounts as are agreed by the Advisor and the Independent
Directors of the Company, subject to the limitations contained in the Articles
of Incorporation, and shall not be deemed to be services pursuant to the terms
of this Agreement.
(12) Fidelity Bond. The Advisor shall maintain a fidelity bond for the
benefit of the Company which bond shall insure the Company from losses of up to
$10 million per occurrence and shall be of the type customarily purchased by
entities performing services similar to those provided to the Company by the
Advisor.
(13) Reimbursement to the Advisor. 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. All figures used in the foregoing
computation shall be determined in accordance with generally accepted accounting
principles applied on a consistent basis.
<PAGE>
(14) Other Activities of the Advisor. Nothing herein contained shall
prevent the Advisor from engaging in other activities, including, without
limitation, the rendering of advice to other Persons (including other REITs) and
the management of other programs advised, sponsored or organized by the Advisor
or its Affiliates; nor shall this Agreement limit or restrict the right of any
director, officer, employee, or stockholder of the Advisor or its Affiliates to
engage in any other business or to render services of any kind to any other
partnership, corporation, firm, individual, trust or association. The Advisor
may, with respect to any investment in which the Company is a participant, also
render advice and service to each and every other participant therein. The
Advisor shall report to the Directors the existence of any condition or
circumstance, existing or anticipated, of which it has knowledge, which creates
or could create a conflict of interest between the Advisor's obligations to the
Company and its obligations to or its interest in any other partnership,
corporation, firm, individual, trust or association. The Advisor or its
Affiliates shall promptly disclose to the Directors knowledge of such condition
or circumstance. If the Sponsor, Advisor, Director or Affiliates thereof have
sponsored other investment programs with similar investment objectives which
have investment funds available at the same time as the Company, it shall be the
duty of the Directors (including the Independent Directors) to adopt the method
set forth in the Registration Statement or another reasonable method by which
properties are to be allocated to the competing investment entities and to use
their best efforts to apply such method fairly to the Company.
The Advisor shall be required to use its best efforts to present a continuing
and suitable investment program to the Company which is consistent with the
investment policies and objectives of the Company, but neither the Advisor nor
any Affiliate of the Advisor shall be obligated generally to present any
particular investment opportunity to the Company even if the opportunity is of
character which, if presented to the Company, could be taken by the Company. The
Advisor or its Affiliates may make such an investment in a property only after
(i) such investment has been offered to the Company and all public partnerships
and other investment entities affiliated with the Company with funds available
for such investment and (ii) such investment is found to be unsuitable for
investment by the Company, such partnerships and investment entities.
In the event that the Advisor or its Affiliates is presented with a potential
investment which might be made by the Company and by another investment entity
which the Advisor or its Affiliates advises or manages, the Advisor and its
Affiliates shall consider the investment portfolio of each entity, cash flow of
each entity, the effect of the acquisition on the diversification of each
entity's portfolio, rental payments during any renewal period, the estimated
income tax effects of the purchase on each entity, the policies of each entity
relating to leverage, the funds of each entity available for investment and the
length of time such funds have been available for investment. In the event that
an investment opportunity becomes available which is suitable for both the
Company and a public or private entity which the Advisor or its Affiliates are
Affiliated, 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.
(15) Relationship of Advisor and Company. The Company and the Advisor
are not partners or joint venturers with each other, and nothing in this
Agreement shall be construed to make them such partners or joint venturers or
impose any liability as such on either of them.
(16) Term; Termination of Agreement. This Agreement shall continue in
force until July 11, 1999, subject to an unlimited number of successive one-year
renewals upon mutual consent of the parties. It is the duty of the Directors to
evaluate the performance of the Advisor or annually before renewing the
Agreement, and each such agreement shall have a term of no more than one year.
(17) Termination by Either Party. This Agreement may be terminated upon
60 days written notice without Cause or penalty, by either party (by a majority
of the Independent Directors of the Company or a majority of the Board of
Directors of the Advisor, as the case may be).
(18) Assignment to an Affiliate. This Agreement may be assigned by the
Advisor to an Affiliate with the approval of a majority of the Directors
(including a majority of the Independent Directors). The Advisor may assign any
rights to receive fees or other payments under this Agreement without obtaining
the approval of the Directors. This Agreement shall not be assigned by the
Company without the consent of the Advisor, except in the case of an assignment
by the Company to a corporation or other organization which is a successor to
all of the assets, rights and obligations of the Company, in which case such
successor organization shall be bound hereunder and by the terms of said
assignment in the same manner as the Company is bound by this Agreement.
(19) Payments to and Duties of Advisor Upon Termination. Payments to
the Advisor pursuant to this Section (19) shall be subject to the 2%/25%
Guidelines to the extent applicable.
(a) After the Termination Date, the Advisor shall not be
entitled to compensation for further services hereunder except it shall be
entitled to receive from the Company within 30 days after the effective date of
such termination all unpaid reimbursements of expenses and all earned but unpaid
fees payable to the Advisor prior to termination of this Agreement.
(b) Upon termination, the Advisor shall be entitled to payment
of 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 such assets, plus the total Distributions paid 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.
(c) 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 Advisor only for that portion of the holding period
for the respective assets during which the Advisor provided services to the
Company.
(d) 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
this Agreement is terminated because of failure of the Company and the Advisor
to establish, pursuant to Paragraph 9(h) hereof, a fee structure appropriate for
a perpetual-life entity at such time, if any, as Listing occurs.
(e) The Advisor shall promptly upon termination:
(i) pay over to the Company all money collected and held
for the account of the Company pursuant to this Agreement, after deducting any
accrued compensation and reimbursement for its expenses to which it is then
entitled;
(ii) deliver to the Directors a full accounting,
including a statement showing all payments collected by it and a statement of
all money held by it, covering the period following the date of the last
accounting furnished to the Directors;
(iii) deliver to the Directors all assets, including
Properties, Mortgage Loans, and Secured Equipment Leases, and documents of the
Company then in the custody of the Advisor; and
(iv) cooperate with the Company to provide an orderly
management transition.
(20) Indemnification by the Company. The Company shall indemnify and
hold harmless the Advisor and its Affiliates, including their respective
officers, directors, partners and employees, from all liability, claims, damages
or losses arising in the performance of their duties hereunder, and related
expenses, including reasonable attorneys' fees, to the extent such liability,
claims, damages or losses and related expenses are not fully reimbursed by
insurance, subject to any limitations imposed by the laws of the State of
Maryland or the Articles of Incorporation of the Company. Notwithstanding the
foregoing, the Advisor shall not be entitled to indemnification or be held
harmless pursuant to this paragraph 20 for any activity for which the Advisor
shall be required to indemnify or hold harmless the Company pursuant to
paragraph 21. Any indemnification of the Advisor may be made only out of the net
assets of the Company and not from Stockholders.
(21) Indemnification by Advisor. The Advisor shall indemnify and hold
harmless the Company from contract or other liability, claims, damages, taxes or
losses and related expenses including attorneys' fees, to the extent that such
liability, claims, damages, taxes or losses and related expenses are not fully
reimbursed by insurance and are incurred by reason of the Advisor's
<PAGE>
bad faith, fraud, willful misfeasance, misconduct, negligence or reckless
disregard of its duties, but the Advisor shall not be held responsible for any
action of the Board of Directors in following or declining to follow any advice
or recommendation given by the Advisor.
(22) Notices. Any notice, report or other communication required or
permitted to be given hereunder shall be in writing unless some other method of
giving such notice, report or other communication is required by the Articles of
Incorporation, the Bylaws, or accepted by the party to whom it is given, and
shall be given by being delivered by hand or by overnight mail or other
overnight delivery service to the addresses set forth herein:
To the Directors and to the Company: CNL Hospitality Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
To the Advisor: CNL Real Estate Advisors, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Either party may at any time give notice in writing to the other party of a
change in its address for the purposes of this Paragraph 22.
(23) Modification. This Agreement shall not be changed, modified,
terminated, or discharged, in whole or in part, except by an instrument in
writing signed by both parties hereto, or their respective successors or
assignees.
(24) Severability. The provisions of this Agreement are independent of
and severable from each other, and no provision shall be affected or rendered
invalid or unenforceable by virtue of the fact that for any reason any other or
others of them may be invalid or unenforceable in whole or in part.
(25) Construction. The provisions of this Agreement shall be construed
and interpreted in accordance with the laws of the State of Florida.
(26) Entire Agreement. This Agreement contains the entire agreement and
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements, understandings,
inducements and conditions, express or implied, oral or written, of any nature
whatsoever with respect to the subject matter hereof. The express terms hereof
control and supersede any course of performance and/or usage of the trade
inconsistent with any of the terms hereof. This Agreement may not be modified or
amended other than by an agreement in writing.
<PAGE>
(27) Indulgences, Not Waivers. Neither the failure nor any delay on the
part of a party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
(28) Gender. Words used herein regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
(29) Titles Not to Affect Interpretation. The titles of paragraphs and
subparagraphs contained in this Agreement are for convenience only, and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
(30) Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
(31) Name. CNL Real Estate Advisors, Inc. has a proprietary interest in
the name "CNL." Accordingly, and in recognition of this right, if at any time
the Company ceases to retain CNL Real Estate Advisors, Inc. or an Affiliate
thereof to perform the services of Advisor, the Directors of the Company will,
promptly after receipt of written request from CNL Real Estate Advisors, Inc.,
cease to conduct business under or use the name "CNL" or any diminutive thereof
and the Company shall use its best efforts to change the name of the Company to
a name that does not contain the name "CNL" or any other word or words that
might, in the sole discretion of the Advisor, be susceptible of indication of
some form of relationship between the Company and the Advisor or any Affiliate
thereof. Consistent with the foregoing, it is specifically recognized that the
Advisor or one or more of its Affiliates has in the past and may in the future
organize, sponsor or otherwise permit to exist other investment vehicles
(including vehicles for investment in real estate) and financial and service
organizations having "CNL" as a part of their name, all without the need for any
consent (and without the right to object thereto) by the Company or its
Directors.
(32) Initial Investment. The Advisor has contributed to the Company
$200,000 in exchange for 20,000 Equity Shares (the "Initial Investment"). The
Advisor or its Affiliates may not sell any of the Equity Shares purchased with
the Initial Investment for a period of one year following completion of the
Offering and may only sell Equity Shares representing the Initial Investment
through the market on which the Equity Shares are normally traded. The
restrictions included above shall not apply to any Equity Shares, other than the
Equity Shares acquired through the Initial Investment, acquired by the Advisor
or its Affiliates. The Advisor shall not vote any Equity Shares it now owns, or
hereafter acquires, in any vote for the removal of Directors or any vote
regarding the approval or termination of any contract with the Advisor or any of
its Affiliates.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
CNL HOSPITALITY PROPERTIES, INC.
By: /s/James M. Seneff, Jr
Name: James M. Seneff, Jr.
Its: Chairman of the Board and
Chief Executive Officer
CNL REAL ESTATE ADVISORS, INC.
By: /s/Robert A. Bourne
Name: Robert A. Bourne
Its: President
EXHIBIT 10.2
Form of Indemnification Agreement
<PAGE>
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made and entered into
as of the 31st day of October, 1998 by and among CNL Hospitality Properties,
Inc., a Maryland corporation (the "Company") and C. Brian Strickland, a director
and/or officer of the Company (the "Indemnitee").
W I T N E S S E T H:
WHEREAS, the interpretation of ambiguous statutes, regulations,
articles of incorporation and bylaws regarding indemnification of directors and
officers may be too uncertain to provide such directors and officers with
adequate notice of the legal, financial and other risks to which they may be
exposed by virtue of their service as such; and
WHEREAS, damages sought against directors and officers in shareholder
or similar litigation by class action plaintiffs may be substantial, and the
costs of defending such actions and of judgments in favor of plaintiffs or of
settlement therewith may be prohibitive for individual directors and officers,
without regard to the merits of a particular action and without regard to the
culpability of, or the receipt of improper personal benefit by, any named
director or officer to the detriment of the corporation; and
WHEREAS, the issues in controversy in such litigation usually relate to
the knowledge, motives and intent of the director or officer, who may be the
only person with firsthand knowledge of essential facts or exculpating
circumstances who is qualified to testify in his defense regarding matters of
such a subjective nature, and the long period of time which may elapse before
final disposition of such litigation may impose undue hardship and burden on a
director or officer or his estate in launching and maintaining a proper and
adequate defense of himself or his estate against claims for damages; and
WHEREAS, the Company is organized under the Maryland General
Corporation Law (the "MGCL") and Section 2-418 of the MGCL empowers corporations
to indemnify and advance expenses of litigation to a person serving as a
director, officer, employee or agent of a corporation and to persons serving at
the request of the corporation, while a director of a corporation, as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan, and further provides that the indemnification and
advancement of expenses set forth in said section, subject to certain
limitations are not "exclusive of any other rights, by indemnification or
otherwise, to which a director may be entitled under the charter, the bylaws, a
resolution of stockholders or directors, an agreement or otherwise, both as to
action in an official capacity and as to action in another capacity while
holding such office"; and
WHEREAS, the Articles of Incorporation of the Company, as they may be
amended or amended and restated from time to time (the "Articles of
Incorporation"), provide that the Company shall indemnify and hold harmless
directors, advisors, or affiliates, as such terms are defined in the Articles of
Incorporation; and
WHEREAS, the Board of Directors of the Company (the "Board") has
concluded that it is reasonable and prudent for the Company contractually to
obligate itself to indemnify in a reasonable and adequate manner the Indemnitee
and to assume for itself maximum liability for expenses and damages in
connection with claims lodged against him for his decisions and actions as a
director and/or officer of the Company; and
NOW, THEREFORE, in consideration of the foregoing, and of other good
and valuable consideration, the receipt and sufficiency of which is acknowledged
by each of the parties hereto, the parties agree as follows:
I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
A. "Board" shall mean the Board of Directors of the Company.
B. "Change in Control" shall mean a change in the ownership or power to
direct the Voting Securities of the Company or the acquisition by a person not
affiliated with the Company of the ability to direct the management of the
Company.
C. "Corporate Status" shall mean the status of a person who is or was a
director or officer of the Company, or a member of any committee of the Board,
and the status of a person who, while a director or officer of the Company, is
or was serving at the request of the Company as a director, officer, partner
(including service as a general partner of any limited partnership), trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, other incorporated or unincorporated entity or enterprise
or employee benefit plan.
D. "Disinterested Director" shall mean a director of the Company who
neither is nor was a party to the Proceeding in respect of which indemnification
is being sought by the Indemnitee.
E. "Expenses" shall mean without limitation expenses of Proceedings
including all attorneys' fees, retainers, court costs, transcript costs, fees of
experts, investigation fees and expenses, accounting and witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating or being or preparing to be a witness in a
Proceeding.
F. "Good Faith Act or Omission" shall mean an act or omission of the
Indemnitee reasonably believed by the Indemnitee to be in or not opposed to the
best interests of the Company and other than (i)one involving negligence or
misconduct, or, if the Indemnitee is an independent director, one involving
gross negligence or willful misconduct; (ii) one that was material to the loss
or liability and that was committed in bad faith or that was the result of
active or deliberate
<PAGE>
dishonesty; (iii) one from which the Indemnitee actually received an improper
personal benefit in money, property or services; or (iv) in the case of a
criminal Proceeding, one as to which the Indemnitee had cause to believe his
conduct was unlawful.
G. "Liabilities" shall mean liabilities of any type whatsoever,
including, without limitation, any judgments, fines, excise taxes and penalties
under the Employee Retirement Income Security Act of 1974, as amended, penalties
and amounts paid in settlement (including all interest, assessments and other
charges paid or payable in connection with or in respect of such judgments,
fines, penalties or amounts paid in settlement) in connection with the
investigation, defense, settlement or appeal of any Proceeding or any claim,
issue or matter therein.
H. "Proceeding" shall mean any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, investigation,
administrative hearing or any other actual, threatened or completed proceeding
whether civil, criminal, administrative or investigative, or any appeal
therefrom.
I. "Voting Securities" shall mean any securities of the Company that
are entitled to vote generally in the election of directors.
II
TERMINATION OF AGREEMENT
This Agreement shall continue until, and terminate upon the late to
occur of (i) the death of the Indemnitee; or (ii) the final termination of all
Proceedings (including possible Proceedings) in respect of which the Indemnitee
is granted rights of indemnification or advancement of Expenses hereunder and of
any proceeding commenced by the Indemnitee regarding the interpretation or
enforcement of this Agreement.
III
SERVICE BY INDEMNITEE, NOTICE OF
PROCEEDINGS, DEFENSE OF CLAIMS
A. Notice of Proceedings. The Indemnitee agrees to notify the Company
promptly in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification or advancement of Expenses
covered hereunder, but the Indemnitee's omission to so notify the Company shall
not relieve the Company from any liability which it may have to the Indemnitee
under this Agreement.
B. Defense of Claims. The Company will be entitled to participate, at
its own expense, in any Proceeding of which it has notice. The Company jointly
with any other indemnifying party similarly notified of any Proceeding will be
entitled to assume the defense of the Indemnitee therein, with counsel
reasonably satisfactory to the Indemnitee; provided, however, that the Company
shall not be entitled to assume the defense of the Indemnitee in any Proceeding
if there has been a Change in Control or if the Indemnitee has reasonably
concluded that there may be a conflict of interest between the Company and the
Indemnitee with respect to such Proceeding. The Company will not be liable to
the Indemnitee under this Agreement for any Expenses incurred by the Indemnitee
in connection with the defense of any Proceeding, other than reasonable costs of
investigation or as otherwise provided below, after notice from the Company to
the Indemnitee of its election to assume the defense of the Indemnitee therein.
The Indemnitee shall have the right to employ his own counsel in any such
Proceeding, but the fees and expenses of such counsel incurred after notice from
the Company of its assumption of the defense thereof shall be at the expense of
the Indemnitee unless (i) the employment of counsel by the Indemnitee has been
authorized by the Company; (ii) the Indemnitee shall have reasonably concluded
that counsel employed by the Company may not adequately represent the Indemnitee
and shall have so informed the Company; or (iii) the Company shall not in fact
have employed counsel to assume the defense of the Indemnitee in such Proceeding
or such counsel shall not, in fact, have assumed such defense or such counsel
shall not be acting, in connection therewith, with reasonable diligence; and in
each such case the fees and expenses of the Indemnitee's counsel shall be
advanced by the Company in accordance with this Agreement.
C. Settlement of Claims. The Company shall not settle any Proceeding in
any manner which would impose any liability, penalty or limitation on the
Indemnitee without the written consent of the Indemnitee; provided, however,
that the Indemnitee will not unreasonably withhold or delay consent to any
proposed settlement. The Company shall not be liable to indemnify the Indemnitee
under this Agreement or otherwise for any amounts paid in settlement of any
Proceeding effected by the Indemnitee without the Company's written consent,
which consent shall not be unreasonably withheld or delayed.
IV
INDEMNIFICATION
A. In General. Upon the terms and subject to the conditions set forth
in this Agreement, the Company shall hold harmless and indemnify the Indemnitee
against any and all Liabilities actually incurred by or for him in connection
with any Proceeding (whether the Indemnitee is or becomes a party, a witness or
otherwise is a participant in any role) to the fullest extent required or
permitted by the Articles of Incorporation and by applicable law in effect on
the date hereof and to such greater extent as applicable law may hereafter from
time to time permit. For all matters for which the Indemnitee is entitled to
indemnification under this Article IV, the Indemnitee shall be entitled to
advancement of Expenses in accordance with Article V hereof.
B. Proceeding Other Than a Proceeding by or in the Right of the
Company. If the Indemnitee was or is a party or is threatened to be made a party
to any Proceeding (whether the Indemnitee is or becomes a party, a witness or
otherwise is a participant in any role) (other than a Proceeding by or in the
right of the Company) by reason of his Corporate Status, or by reason of alleged
action or inaction by him in any such capacity, the Company shall, subject to
the limitations set forth in Section IV.F. below, hold harmless and indemnify
him against any and all Expenses and Liabilities actually and reasonably
incurred by or for the Indemnitee in connection with the Proceeding if the
act(s) or comission(s) of the Indemnitee giving rise thereto were Good Faith
Act(s) or Omission(s).
C. Proceedings by or in the Right of the Company. If the Indemnitee was
or is a party or is threatened to be made a party to any Proceeding (whether the
Indemnitee is or becomes a party, a witness or otherwise is a participant in any
role) by or in the right of the Company to procure a judgment in its favor by
reason of his Corporate Status, or by reason of any action or inaction by him in
any such capacity, the Company shall, subject to the limitations set forth in
Section IV.F. below, hold harmless and indemnify him against any and all
Expenses actually incurred by or for him in connection with the investigation,
defense, settlement or appeal of such Proceeding if the act(s) or omission(s) of
the Indemnitee giving rise to the Proceeding were Good Faith Act(s) or
Omission(s); except that no indemnification under this Section IV.C. shall be
made in respect of any claim, issue or matter as to which the Indemnitee shall
have been finally adjudged to be liable to the Company, unless a court of
appropriate jurisdiction (including, but not limited to, the court in which such
Proceeding was brought) shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
regardless of whether the Indemnitee's act(s) or omission(s) were found to be a
Good Faith Act(s) or Omission(s), the Indemnitee is fairly and reasonably
entitled to indemnification for such Expenses which such court shall deem
proper.
D. Indemnification of a Party Who is Wholly or Partly Successful.
Notwithstanding any other provision of this Agreement, to the extent that the
Indemnitee is, by reason of the Indemnitee's Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, the Indemnitee shall
be indemnified by the Company to the maximum extent consistent with applicable
law, against all Expenses and Liabilities actually incurred by or for him in
connection therewith. If the Indemnitee is not wholly successful in such
Proceeding but is successful, on the merits or otherwise, as to one or more but
less than all claims, issues or matters in such Proceeding, the Company shall
hold harmless and indemnify the Indemnitee to the maximum extent consistent with
applicable law, against all Expenses and Liabilities actually and reasonably
incurred by or for him in connection with each successfully resolved claim,
issue or matter in such Proceeding. Resolution of a claim, issue or matter by
dismissal, with or without prejudice, except as provided in subsection F hereof,
shall be deemed a successful result as to such claim, issue or matter, so long
as there has been no finding (either adjudicated or pursuant to Article VI
hereof) that the act(s) or omission(s) of the Indemnitee giving rise thereto
were not a Good Faith Act(s) or Omission(s).
E. Indemnification for Expenses of Witness. Notwithstanding any other
provision of this Agreement, to the extent that the Indemnitee, by reason of the
Indemnitee's Corporate Status, has prepared to serve or has served as a witness
in any Proceeding, or has participated in discovery proceedings or other trial
preparation, the Indemnitee shall be held harmless and indemnified against all
Expenses actually and reasonably incurred by or for him in connection therewith.
F. Specific Limitations on Indemnification. In addition to the other
limitations set forth in this Article IV, and notwithstanding anything in this
Agreement to the contrary, the Company shall not be obligated under this
Agreement to make any payment to the Indemnitee for indemnification with respect
to any Proceeding:
1. To the extent that payment is actually made to the
Indemnitee under any insurance policy or is made on behalf of the Indemnitee by
or on behalf of the Company otherwise than pursuant to this Agreement.
2. If a court in such Proceeding has entered a judgment or
other adjudication which is final and has become nonappealable and establishes
that a claim of the Indemnitee for such indemnification arose from: (i) a breach
by the Indemnitee of the Indemnitee's duty of loyalty to the Company or its
shareholders; (ii) acts or omissions of the Indemnitee that are not Good Faith
Acts or Omissions or which are the result of active and deliberate dishonesty;
(iii) acts or omissions of the Indemnitee which the Indemnitee had reasonable
cause to believe were unlawful; or (iv) a transaction in which the Indemnitee
actually received an improper personal benefit in money, property or service.
3. If there has been no Change in Control, for Liabilities in
connection with Proceedings settled without the consent of the Company which
consent, however, shall not be unreasonably withheld
4. 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 Indemnitee,
(ii) such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the Indemnitee; or (iii) a court of competent
jurisdiction approves a settlement of the claims against the 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.
V
ADVANCEMENT OF EXPENSES
Notwithstanding any provision to the contrary in Article VI hereof, the
Company shall advance to the Indemnitee all Expenses which, by reason of the
Indemnitee's Corporate Status, were incurred by or for him in connection with
any Proceeding for which the Indemnitee is entitled to indemnification pursuant
to Article IV hereof, in advance of the final disposition of such Proceeding,
provided that all of the following are satisfied: (i) the Indemnitee was made a
party to the proceeding by reason of his service as a director or officer of the
Company, (ii) the Indemnitee provides the Company with written affirmation of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the Company pursuant to Article IV hereof, (iii) the
Indemnitee provides the Company with a written agreement (the "Undertaking") 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 of the
Company 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
Indemnitee shall be required to execute and submit the Undertaking to repay
Expenses advanced in the form of Exhibit A attached hereto or in such form as
may be required under applicable law as in effect at the time of execution
thereof. The Undertaking shall reasonably evidence the Expenses incurred by or
for the Indemnitee and shall contain the written affirmation by the Indemnitee,
described above, of his good faith belief that the standard of conduct necessary
for indemnification has been met. The Company shall advance such expenses within
five (5) business days after the receipt by the Company of the Undertaking. The
Indemnitee hereby agrees to repay any Expenses advanced hereunder if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
against such Expenses. Any advances and the undertaking to repay pursuant to
this Article V shall be unsecured.
VI
PROCEDURE FOR PAYMENT OF LIABILITIES;
DETERMINATION OF RIGHT TO INDEMNIFICATION
A. Procedure for Payment. To obtain indemnification for Liabilities
under this Agreement, the Indemnitee shall submit to the Company a written
request for payment, including with such request such documentation as is
reasonably available to the Indemnitee and reasonably necessary to determine
whether, and to what extent, the Indemnitee is entitled to indemnification and
payment hereunder. The Secretary of the Company, or such other person as shall
be designated by the Board of Directors, promptly upon receipt of a request for
indemnification shall advise the Board of Directors, in writing, of such
request. Any indemnification payment due hereunder shall be paid by the Company
no later than five (5) business days following the determination, pursuant to
this Article VI, that such indemnification payment is proper hereunder.
B. No Determination Necessary when the Indemnitee was Successful. To
the extent the Indemnitee has been successful, on the merits or otherwise, in
defense of any Proceeding referred to in Sections IV.B. or IV.C. above or in the
defense of any claim, issue or matter described therein, the Company shall
indemnify the Indemnitee against Expenses actually and reasonably incurred by or
for him in connection with the investigation, defense or appeal of such
Proceeding.
C. Determination of Good Faith Act or Omission. In the event that
Section VI.B. is inapplicable, the Company also shall hold harmless and
indemnify the Indemnitee unless the Company shall prove by clear and convincing
evidence to a forum listed in Section VI.D. below that the act(s) or omission(s)
of the Indemnitee giving rise to the Proceeding were not Good Faith Act(s) or
Omission(s).
D. Forum for Determination. The Indemnitee shall be entitled to select
from among the following the forums, in which the validity of the Company's
claim under Section VI.C., above, that the Indemnitee is not entitled to
indemnification will be heard:
1. A quorum of the Board consisting of Disinterested Directors;
2. The shareholders of the Company;
3. Legal counsel selected by the Indemnitee, subject to the
approval of the Board, which approval shall not be unreasonably delayed or
denied, which counsel shall make such determination in a written opinion; or
<PAGE>
4. A panel of three arbitrators, one of whom is selected by
the Company, another of whom is selected by the Indemnitee and the last of whom
is selected jointly by the first two arbitrators so selected. As soon as
practicable, and in no event later than thirty (30) days after written notice of
the Indemnitee's choice of forum pursuant to this Section VI.D., the Company
shall, at its own expense, submit to the selected forum in such manner as the
Indemnitee or the Indemnitee's counsel may reasonably request, its claim that
the Indemnitee is not entitled to indemnification, and the Company shall act in
the utmost good faith to assure the Indemnitee a complete opportunity to defend
against such claim. The fees and expenses of the selected forum in connection
with making the determination contemplated hereunder shall be paid by the
Company. If the Company shall fail to submit the matter to the selected forum
within thirty (30) days after the Indemnitee's written notice or if the forum so
empowered to make the determination shall have failed to make the requested
determination within thirty (30) days after the matter has been submitted to it
by the Company, the requisite determination that the Indemnitee has the right to
indemnification shall be deemed to have been made.
E. Right to Appeal. Notwithstanding a determination by any forum listed
in Section VI.D. above that the Indemnitee is not entitled to indemnification
with respect to a specific Proceeding, the Indemnitee shall have the right to
apply to the court in which that Proceeding is or was pending, or to any other
court of competent jurisdiction, for the purpose of enforcing the Indemnitee's
right to indemnification pursuant to this Agreement. Such enforcement action
shall consider the Indemnitee's entitlement to indemnification de novo, and the
Indemnitee shall not be prejudiced by reason of a prior determination that the
Indemnitee is not entitled to indemnification. The Company shall be precluded
from asserting that the procedures and presumptions of this Agreement are not
valid, binding and enforceable. The Company further agrees to stipulate in any
such judicial proceeding that the Company is bound by all the provisions of this
Agreement and is precluded from making any assertion to the contrary.
F. Right to Seek Judicial Determination. Notwithstanding any other
provision of this Agreement to the contrary, at any time after sixty (60) days
after a request for indemnification has been made to the Company (or upon
earlier receipt of written notice that a request for indemnification has been
rejected) and before the third (3rd) anniversary of the making of such
indemnification request, the Indemnitee may petition a court of competent
jurisdiction, whether or not the court has jurisdiction over, or is the forum in
which is pending, the Proceeding, to determine whether the Indemnitee is
entitled to indemnification hereunder, and such court thereupon shall have the
exclusive authority to make such determination, unless and until such court
dismisses or otherwise terminates the Indemnitee's action without having made
such determination. The court, as petitioned, shall make an independent
determination of whether the Indemnitee is entitled to indemnification
hereunder, without regard to any prior determination in any other forum as
provided hereby.
G. Expenses under this Agreement. Notwithstanding any other provision
in this Agreement to the contrary, the Company shall indemnify the Indemnitee
against all Expenses incurred by the Indemnitee in connection with any hearing
or proceeding under this Section VI involving the Indemnitee and against all
Expenses incurred by the Indemnitee in connection with any other action between
the Company and the Indemnitee involving the interpretation or enforcement of
the rights of the Indemnitee under this Agreement, even if it is finally
determined that the Indemnitee is not entitled to indemnification in whole or in
part hereunder.
VII
PRESUMPTIONS AND EFFECT
OF CERTAIN PROCEEDINGS
A. Burden of Proof. In making a determination with respect to
entitlement to indemnification hereunder, the person, persons, entity or
entities making such determination shall presume that the Indemnitee is entitled
to indemnification under this Agreement and the Company shall have the burden of
proof to overcome that presumption.
B. Effect of Other Proceedings. The termination of any Proceeding or of
any claim, issue or matter therein, by judgment, order or settlement shall not
create a presumption that the act(s) or omission(s) giving rise to the
Proceeding were not Good Faith Act(s) or Omission(s). The termination of any
Proceeding by conviction, or upon a plea of nolo contendere, or its equivalent,
or an entry of an order of probation prior to judgment, shall create a
rebuttable presumption that the act(s) or omission(s) of the Indemnitee giving
rise to the Proceeding were not Good Faith Act(s) or Omission(s).
C. Reliance as Safe Harbor. For purposes of any determination of
whether any act or omission of the Indemnitee was a Good Faith Act or Omission,
each act of the Indemnitee shall be deemed to be a Good Faith Act or Omission if
the Indemnitee's action is based on the records or books of accounts of the
Company, including financial statements, or on information supplied to the
Indemnitee by the officers of the Company in the course of their duties, or on
the advice of legal counsel for the Company or on information or records given
or reports made to the Company by an independent certified public accountant or
by an appraiser or other expert selected with reasonable care by the Company.
The provisions of this Section VII.C. shall not be deemed to be exclusive or to
limit in any way the other circumstances in which the Indemnitee may be deemed
to have met the applicable standard of conduct set forth in this Agreement or
under applicable law.
D. Actions of Others. The knowledge and/or actions, or failure to act,
of any director, officer, agent or employee of the Company shall not be imputed
to the Indemnitee for purposes of determining the right to indemnification under
this Agreement.
VIII
INSURANCE
In the event that the Company maintains officers' and directors' or
similar liability insurance to protect itself and any director or officer of the
Company against any expense, liability or loss, such insurance shall cover the
Indemnitee to at least the same degree as each other director and/or officer of
the Company.
<PAGE>
IX
OBLIGATIONS OF THE COMPANY
UPON A CHANGE IN CONTROL
In the event of a Change in Control, upon written request of the
Indemnitee the Company shall establish a trust for the benefit of the Indemnitee
hereunder (a "Trust") and from time to time, upon written request from the
Indemnitee, shall fund the Trust in an amount sufficient to satisfy all amounts
actually paid hereunder as indemnification for Liabilities or Expenses
(including those paid in advance) or which the Indemnitee reasonably determines
and demonstrates, from time to time, may be payable by the Company hereunder.
The amount or amounts to be deposited in the Trust shall be determined by legal
counsel selected by the Indemnitee and approved by the Company, which approval
shall not be unreasonably withheld. The terms of the Trust shall provide that
(i) the Trust shall not be dissolved or the principal thereof invaded without
the written consent of the Indemnitee; (ii) the trustee of the Trust (the
"Trustee") shall be selected by the Indemnitee; (iii) the Trustee shall make
advances to the Indemnitee for Expenses within ten (10) business days following
receipt of a written request therefor (and the Indemnitee hereby agrees to
reimburse the Trust under the circumstances under which the Indemnitee would be
required to reimburse the Company under Article V hereof; (iv) the Company shall
continue to fund the Trust from time to time in accordance with its funding
obligations hereunder; (v) the Trustee promptly shall pay to the Indemnitee all
amounts as to which indemnification is due under this Agreement; (vi) unless the
Indemnitee agrees otherwise in writing, the Trust for the Indemnitee shall be
kept separate from any other trust established for any other person to whom
indemnification might be due by the Company; and (vii) all unexpended funds in
the Trust shall revert to the Company upon final, nonappealable determination by
a court of competent jurisdiction that the Indemnitee has been indemnified to
the full extent required under this Agreement.
X
NON-EXCLUSIVITY,
SUBROGATION AND MISCELLANEOUS
A. Non-Exclusivity. The rights of the Indemnitee hereunder shall not be
deemed exclusive of any other rights to which the Indemnitee may at any time be
entitled under any provision of law, the Articles of Incorporation, the Bylaws
of the Company, as the same may be in effect from time to time, any agreement, a
vote of shareholders of the Company or a resolution of directors of the Company
or otherwise, and to the extent that during the term of this Agreement the
rights of the then-existing directors and officers of the Company are more
favorable to such directors or officers than the rights currently provided to
the Indemnitee under this Agreement, the Indemnitee shall be entitled to the
full benefits of such more favorable rights. No amendment, alteration,
rescission or replacement of this Agreement or any provision hereof which would
in any way limit the benefits and protections afforded to an Indemnitee hereby
shall be effective as to such Indemnitee with respect to any action or inaction
by such Indemnitee in the Indemnitee's Corporate Status prior to such amendment,
alteration, rescission or replacement.
<PAGE>
B. Subrogation. In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all documents required and take
all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Company to bring suit to enforce such
rights.
C. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given (i) if
delivered by hand, by courier or by telegram and receipted for by the party to
whom said notice or other communication shall have been directed at the time
indicated on such receipt; (ii) if by facsimile at the time shown on the
confirmation of such facsimile transmission; or (iii) if by U.S. certified or
registered mail, with postage prepaid, on the third business day after the date
on which it is so mailed:
If to the Indemnitee, as shown with the Indemnitee's signature below.
If to the Company to:
CNL Hospitality Properties, Inc.
400 East South Street
Orlando, FL 32801
Attention: President
Facsimile No. (407) 423-2894
or to such other address as may have been furnished to the Indemnitee by the
Company or to the Company by the Indemnitee, as the case may be.
D. Governing Law. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the substantive laws
of the State of Maryland, without application of the conflict of laws principles
thereof.
E. Binding Effect. Except as otherwise provided in this Agreement, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their heirs, executors, administrators, successors, legal representatives
and permitted assigns. The Company shall require any successor or assignee
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of its respective assets or business, by written
agreement in form and substance reasonably satisfactory to the Indemnitee,
expressly to assume and agree to be bound by and to perform this Agreement in
the same manner and to the same extent as the Company would be required to
perform absent such succession or assignment.
F. Waiver. No termination, cancellation, modification, amendment,
deletion, addition or other change in this Agreement, or any provision hereof,
or waiver of any right or remedy herein, shall be effective for any purpose
unless specifically set forth in a writing signed by the party or parties to be
bound thereby. The waiver of any right or remedy with respect to any occurrence
on one occasion shall not be deemed a waiver of such right or remedy with
respect to such occurrence on any other occasion.
<PAGE>
G. Entire Agreement. This Agreement, constitutes the entire agreement
and understanding among the parties hereto in reference to the subject matter
hereof; provided, however, that the parties acknowledge and agree that the
Amended and Restated Articles of Incorporation of the Company contain provisions
on the subject matter hereof and that this Agreement is not intended to, and
does not, limit the rights or obligations of the parties hereto pursuant to such
instruments.
H. Titles. The titles to the articles and sections of this Agreement
are inserted for convenience of reference only and should not be deemed a part
hereof or affect the construction or interpretation of any provisions hereof.
I. Invalidity of Provisions. Every provision of this Agreement is
severable, and the invalidity or unenforceability of any term or provision shall
not effect the validity or enforceability of the remainder of this Agreement.
J. Pronouns and Plurals. Whenever the context may require, any pronoun
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
K. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together constitute one agreement binding on all the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CNL HOSPITALITY PROPERTIES, INC.
By: /s/ Robert A. Bourne
Name: Robert A. Bourne
Title: President
/s/ Brian Strickland, as INDEMNITEE
Name: C. Brian Strickland
Title: Vice President -
Finance and Administration
Address: 400 East South Street
Facsimile No.: (407) 428-9370
<PAGE>
EXHIBIT A
FORM OF UNDERTAKING TO REPAY EXPENSES ADVANCED
The Board of Directors of CNL Hospitality Properties, Inc.
Re: Undertaking to Repay Expenses Advanced
Ladies and Gentlemen:
This undertaking is being provided pursuant to that certain
Indemnification Agreement dated the ____ day of ______________, by and among CNL
Hospitality Properties, Inc. and the undersigned Indemnitee (the
"Indemnification Agreement"), pursuant to which I am entitled to advancement of
expenses in connection with [Description of Proceeding] (the "Proceeding").
Terms used herein and not otherwise defined shall have the meanings specified in
the Indemnification Agreement.
I am subject to the Proceeding by reason of my Corporate Status or by
reason of alleged actions or omissions by me in such capacity. During the period
of time to which the Proceeding relates I was _____________________ [name of
office(s) held] of CNL Hospitality Properties, Inc. Pursuant to Section IV of
the Indemnification Agreement, the Company is obligated to reimburse me for
Expenses that are actually and reasonably incurred by or for me in connection
with the Proceeding, provided that I execute and submit to the Company an
Undertaking in which I (i) undertake to repay any Expenses paid by the Company
on my behalf, together with the applicable legal rate of interest thereon, if it
shall be ultimately determined that I am not entitled to be indemnified thereby
against such Expenses; (ii) affirm my good faith belief that I have met the
standard of conduct necessary for indemnification; and (iii) reasonably evidence
the Expenses incurred by or for me.
[Description of expenses incurred by or for Indemnitee]
This letter shall constitute my undertaking to repay to the Company any
Expenses paid by it on my behalf, together with the applicable legal rate of
interest thereon, in connection with the Proceeding if it is ultimately
determined that I am not entitled to be indemnified with respect to such
Expenses as set forth above. I hereby affirm my good faith belief that I have
met the standard of conduct necessary for indemnification and that I am entitled
to such indemnification.
--------------------------
Signature
--------------------------
Print Name
--------------------------
Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet of CNL Hospitality Properties, Inc. at December 31, 1998, and its
statement of earnings for the year then ended and is qualified in its entirety
by reference to the Form 10-K of CNL Hospitality Properties, Inc. for the year
ended December 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 18,327,905<F1>
<SECURITIES> 0
<RECEIVABLES> 28,257
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 28,752,549
<DEPRECIATION> 384,166
<TOTAL-ASSETS> 48,856,690
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 0
0
0
<COMMON> 43,219
<OTHER-SE> 37,073,272
<TOTAL-LIABILITY-AND-EQUITY> 48,856,690
<SALES> 0
<TOTAL-REVENUES> 1,955,461
<CGS> 0
<TOTAL-COSTS> 996,522
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 350,322
<INCOME-PRETAX> 958,939
<INCOME-TAX> 0
<INCOME-CONTINUING> 958,939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 958,939
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
<FN>
<F1>Cash includes certificate of deposit and restricted cash totalling
$5,016,575 and $82,407, respectively.
<F2>Due to the nature of its industry, CNL Hospitality Properties, Inc. has an
unclassified balance sheet; therefore no values are listed above for current
assets and current liabilities.
</FN>
</TABLE>
