As filed with the Securities and Exchange Commission on March 16, 1999
Registration No. 333-9943
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. SEVEN
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
CNL HOSPITALITY PROPERTIES, INC.
(Exact Name of Registrant as Specified in Charter)
400 East South Street
Orlando, Florida 32801
Telephone: (407) 650-1000
(Address of principal executive offices)
JAMES M. SENEFF, JR.
Chief Executive Officer
400 East South Street
Orlando, Florida 32801
Telephone: (407) 650-1000
(Name and Address of Agent for Service)
COPIES TO:
THOMAS H. McCORMICK, ESQUIRE
PATRICK CONNORS, ESQUIRE
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Prospectus
CNL HOSPITALITY PROPERTIES, INC.
16,500,000 Shares of Common Stock
Minimum Purchase -- 250 Shares ($2,500)
100 Shares ($1,000) for IRAs and Keogh and Pension Plans
Minimum Purchase is higher in Nebraska, New York and North Carolina
Of the 16,500,000 shares of common stock that we have registered, we
are offering 15,000,000 shares to investors who meet our suitability standards
and 1,500,000 shares only to participants in our reinvestment plan.
An investment in our shares involves significant risks. See "Risk
Factors" beginning on page 11 for a discussion of material risks that you should
consider before you invest in the common stock being sold with this Prospectus.
Per Share Total
Public Offering Price........................... $ 10.00 $165,000,000
Selling Commissions $ 0.75 $ 12,375,000
Proceeds to the Company......................... $ 9.25 $152,625,000
o The managing dealer, CNL Securities Corp., is our affiliate. The managing
dealer is not required to sell any specific number or dollar amount of
shares but will use its best efforts to sell the shares.
o This offering will end no later than July 9, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. In addition, the Attorney General of
the State of New York has not passed on or endorsed the merits of this offering.
Any representation to the contrary is a criminal offense.
No one is authorized to make any statements about the offering
different from those that appear in this Prospectus. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted. We will only
accept subscriptions from people who meet the suitability standards described in
this Prospectus. You should also be aware that the description of the Company
contained in this Prospectus was accurate on February 26, 1999 but may no longer
be accurate. We will amend or supplement this Prospectus if there is a material
change in the affairs of the Company.
It is prohibited for anyone to make forecasts or predictions in
connection with this offering concerning the future performance of an investment
in the common stock.
CNL SECURITIES CORP.
________________, 1999
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
TABLE OF CONTENTS.......................................................................... ii
QUESTIONS AND ANSWERS ABOUT CNL HOSPITALITY
PROPERTIES, INC.'S PUBLIC OFFERING........................................................1
PROSPECTUS SUMMARY...........................................................................5
CNL Hospitality Properties, Inc..............................................................5
Our Business..........................................................................5
Our REIT Status.......................................................................5
Our Management and Conflicts of Interest..............................................6
Our Affiliates........................................................................6
Our Investment Objectives.............................................................7
Risk Factors..........................................................................7
Management Compensation...............................................................8
The Offering.........................................................................10
RISK FACTORS................................................................................11
Offering-Related Risks...............................................................11
An Unspecified Property Offering..............................................11
Potential Investors Cannot Evaluate Properties Not Yet
Acquired or Identified for Acquisition................................11
No Assurance of Obtaining Suitable Investments..........................11
No Independent Review of the Company or the
Prospectus by Managing Dealer.........................................11
Possible Delays in Investment.................................................11
No Current Public Market for Shares Which Could Make Sale of
Shares Difficult............................................................12
Company-Related Risks................................................................12
Limited Operating History.....................................................12
Limited Experience of Management..............................................12
Company is Dependent on Advisor..............................................12
Conflicts of Interest.........................................................12
Selection of Properties Acquired........................................12
Competing Demands on Officers and Directors............................12
Timing of Sales and Acquisitions May Favor the Advisor.................12
Property Development by Affiliates.....................................13
We May Invest With Affiliates of the Advisor..........................13
No Separate Counsel for the Company, Affiliates and Investors..........13
Company May Not Have Sufficient Working Capital...............................13
Real Estate Investment Risks.......................................................13
Possible Lack of Diversification Increases Risk of Investment.................13
Lack of Control Over Market and Business Conditions...........................13
Impact of Adverse Trends in the Hotel and Restaurant Industries...............14
Company Will Not Control Property Management..................................14
Company May Not Control Joint Ventures........................................14
Difficulty in Exiting a Joint Venture After an Impasse........................14
Lack of Control Over Properties Under Construction............................14
Ground Lease Property Risks...................................................15
We Do Not Control Third Party Franchise Agreements............................15
Multiple Property Leases or Mortgage Loans with Individual Tenants or
Borrowers Increase Risks....................................................15
Re-leasing of Properties May Be Difficult.....................................15
Inability to Control the Sale of Certain Properties...........................15
Limitations on the Ability of the Company to Liquidate........................15
Seasonality of Hotel Industry.................................................16
Risks of Mortgage Lending.....................................................16
Real Estate Market Conditions...........................................16
Investment Subject to Interest Rate Fluctuations........................16
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Delays in Liquidating Defaulted Mortgage Loans Could Reduce Our
Investment Returns....................................................16
Returns May Be Limited By Regulations...................................16
Risks of Secured Equipment Leasing............................................16
Collateral May Be Inadequate to Secure Leases...........................16
Returns May be Limited By Regulations...................................16
Possible Environmental Liabilities............................................16
Financing Risks......................................................................17
Uncertainty of Long-Term Financing............................................17
Anticipated Borrowing has Risks...............................................17
We Can Borrow Money to Make Distributions.....................................17
Miscellaneous Risks.................................................................17
Competition..................................................................17
Inflation Could Adversely Affect Investment Returns..........................18
Lack of Adequate Insurance....................................................18
Possible Effect of ERISA......................................................18
Effects of Governing Documents and Maryland Law on
Potential Takeovers.........................................................18
Ownership Limitations Relating to REIT Status.................................18
Majority Stockholder Vote May Discourage Changes of Control...................18
Potential for Dilution........................................................18
Board of Directors Can Take Many Actions Without Stockholder
Approval....................................................................19
Reliance on Advisor and Board of Directors; No Management
Rights for Stockholders.....................................................19
Limited Liability of Officers and Directors...................................19
Tax Risks............................................................................19
Failure to Qualify as a REIT for Tax Purposes.................................19
Risks Relating to Leases of Properties........................................20
Risks Associated with Loans Secured by Personal Property......................20
Risks Associated with Distribution Requirements...............................20
Limitations on Share Ownership..............................................20
Other Tax Liabilities.........................................................20
Changes in Tax Laws...........................................................20
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE..................................................21
Suitability Standards................................................................21
How to Subscribe.....................................................................22
ESTIMATED USE OF PROCEEDS...................................................................23
MANAGEMENT COMPENSATION....................................................................24
CONFLICTS OF INTEREST.......................................................................30
Prior and Future Programs............................................................31
Acquisition of Properties............................................................31
Sales of Properties..................................................................32
Joint Investment With An Affiliated Program..........................................32
Competition for Management Time......................................................32
Compensation of the Advisor..........................................................32
Relationship with Managing Dealer....................................................33
Legal Representation ................................................................33
Certain Conflict Resolution Procedures...............................................33
SUMMARY OF REINVESTMENT PLAN................................................................35
General..............................................................................35
Investment of Distributions..........................................................36
Participant Accounts, Fees, and Allocation of Shares.................................36
Reports to Participants..............................................................37
Election to Participate or Terminate Participation...................................37
Federal Income Tax Considerations....................................................37
Amendments and Termination...........................................................38
REDEMPTION OF SHARES........................................................................38
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BUSINESS.....................................................................................39
General...............................................................................39
Investment of Offering Proceeds.......................................................44
Property Acquisitions.................................................................44
Pending Investments...................................................................50
Site Selection and Acquisition of Properties..........................................55
Standards for Investment in Properties................................................58
Description of Properties.............................................................59
Description of Property Leases........................................................60
Joint Venture Arrangements............................................................63
Mortgage Loans........................................................................64
Management Services...................................................................65
Borrowing.............................................................................65
Sale of Properties, Mortgage Loans and Secured
Equipment Leases....................................................................67
Franchise Regulation..................................................................67
Competition...........................................................................67
Regulation of Mortgage Loans and Secured Equipment
Leases..............................................................................68
SELECTED FINANCIAL DATA......................................................................68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY........................................................69
Liquidity and Capital Resources.......................................................69
Results of Operations.................................................................72
MANAGEMENT...................................................................................74
General...............................................................................74
Fiduciary Responsibility of the Board of Directors....................................74
Directors and Executive Officers......................................................75
Independent Directors.................................................................79
Committees of the Board of Directors..................................................79
Compensation of Directors and Executive Officers......................................79
Management Compensation ..........................................................79
THE ADVISOR AND THE ADVISORY AGREEMENT.......................................................79
The Advisor...........................................................................79
The Advisory Agreement..............................................................80
CERTAIN TRANSACTIONS........................................................................82
PRIOR PERFORMANCE INFORMATION................................................................83
INVESTMENT OBJECTIVES AND POLICIES...........................................................88
General...............................................................................88
Certain Investment Limitations........................................................89
DISTRIBUTION POLICY..........................................................................91
General...............................................................................91
Distributions.........................................................................91
SUMMARY OF THE ARTICLES OF INCORPORATION
AND BYLAWS................................................................................92
General...............................................................................92
Description of Capital Stock..........................................................93
Board of Directors....................................................................94
Stockholder Meetings..................................................................94
Advance Notice for Stockholder Nominations for
Directors and Proposals of New Business.............................................94
Amendments to the Articles of Incorporation...........................................95
Mergers, Combinations, and Sale of Assets.............................................95
Termination of the Company and REIT Status............................................95
Restriction of Ownership..............................................................95
Responsibility of Directors...........................................................96
Limitation of Liability and Indemnification...........................................96
Removal of Directors..................................................................97
Inspection of Books and Records.......................................................97
Restrictions on "Roll-Up" Transactions...............................................98
FEDERAL INCOME TAX CONSIDERATIONS............................................................99
Introduction..........................................................................99
Taxation of the Company...............................................................99
Taxation of Stockholders.............................................................104
State and Local Taxes................................................................107
Characterization of Property Leases..................................................107
Characterization of Secured Equipment Leases.........................................108
Investment in Joint Ventures.........................................................108
REPORTS TO STOCKHOLDERS.....................................................................109
THE OFFERING................................................................................110
General..............................................................................110
Plan of Distribution.................................................................110
Subscription Procedures..............................................................112
Escrow Arrangements..................................................................114
ERISA Considerations.................................................................115
Determination of Offering Price......................................................116
SUPPLEMENTAL SALES MATERIAL.................................................................116
LEGAL OPINIONS..............................................................................116
EXPERTS.....................................................................................116
ADDITIONAL INFORMATION......................................................................117
DEFINITIONS.................................................................................117
Form of Reinvestment Plan............................................................ Exhibit A
Financial Information................................................................ Exhibit B
Prior Performance Tables............................................................. Exhibit C
Subscription Agreement............................................................... Exhibit D
Statement of Estimated Taxable Operating Results
Before Dividends Paid Deduction................................................... Exhibit E
</TABLE>
<PAGE>
Questions and Answers About
CNL Hospitality Properties, Inc.'s Public Offering
<PAGE>
Q: What is CNL Hospitality Properties, Inc.?
A: The Company is a real estate investment trust, or a REIT, that was formed
in 1996 to acquire hotel and restaurant properties and lease them on a
long-term, triple-net basis. In addition, the Company may provide mortgage
financing loans and secured equipment leases.
As of December 31, 1998, the Company had total assets of $48,856,690.
Q: What is a REIT?
A: In general, a REIT is a company that:
o combines the capital of many investors to acquire or provide financing
for real estate,
o offers benefits of a diversified portfolio under professional management,
o typically is not subject to federal corporate income taxes on its net
income, provided certain income tax requirements are satisfied. This
treatment substantially eliminates the "double taxation" (at both the
corporate and stockholder levels) that generally results from investments
in a corporation, and
o must pay distributions to investors of at least 95% of its taxable
income.
Q: What kind of offering is this?
A: We are offering up to 15,000,000 shares of common stock on a "best efforts"
basis. In addition, we are offering up to 1,500,000 shares of stock to
investors who want to participate in our reinvestment plan.
Q: How does a "best efforts" offering work?
A: When shares are offered to the public on a "best efforts" basis, we are not
guaranteeing that any minimum number of shares will be sold. If you choose
to purchase stock in this offering, you will fill out a Subscription
Agreement, like the one attached to this Prospectus as Exhibit D, for a
certain number of shares and pay for the shares at the time you subscribe.
The purchase price will be placed into escrow with SouthTrust Asset
Management Company of Florida, N.A. SouthTrust will hold your funds, along
with those of other subscribers, in an interest-bearing account until such
time as you are admitted by the Company as a stockholder. Generally, we
admit stockholders no later than the last day of the calendar month
following acceptance of your subscription.
Q: How long will the offering last?
A: The offering will not last beyond July 9, 1999.
Q: Who can buy shares?
A: Anyone who receives this Prospectus can buy shares provided that they have
a net worth (not including home, furnishings and personal automobiles) of
at least $45,000 and an annual gross income of at least $45,000; or, a net
worth (not including home, furnishings and personal automobiles) of at
least $150,000. However, these minimum levels may vary from state to state,
so you should carefully read the more detailed description in the
"Suitability Standards" section of this Prospectus.
Q: Is there any minimum required investment?
A: Yes. Generally, individuals must invest at least $2,500 and IRA, Keogh or
other qualified plans must invest at least $1,000. However, these minimum
investment levels may vary from state to state, so you should carefully
read the more detailed description of the minimum investment requirements
appearing later in the "Suitability Standards" section of this Prospectus.
Q: After I subscribe for shares, can I change my mind and withdraw my money?
A: Once you have subscribed for shares and you have deposited the subscription
price with SouthTrust, your subscription is irrevocable, unless the Company
elects to permit you to revoke your subscription.
Q: If I buy shares in the offering, how can I sell them?
A: At the time you purchase them, the shares will not be listed for trading on
any national securities exchange or over-the-counter market. In fact, we
expect that there will not be any public market for the shares when you
purchase them, and we cannot be sure if one will ever develop. As a result,
you may find that it is difficult to sell your shares and realize a return
on your investment.
We plan to list the shares on a national securities exchange or
over-the-counter market within five to ten years after commencement of this
offering, if market conditions are favorable. If we have not listed the
shares on a national securities exchange or over-the-counter market by
December 31, 2007, we plan to sell the properties and other assets and
return the proceeds from the liquidation to our stockholders through
distributions.
Beginning one year after you receive your shares, provided we have
sufficient funds available, you may request the Company to redeem at least
25% of the shares you own. The redemption procedures are described in the
"Redemption of Shares" section of this Prospectus.
As a result, if a public market for the shares never develops, you should
be able to obtain a return of your investment through the redemption plan
beginning one year from the date on which you received your stock or
through the liquidation process.
Q: What will you do with the proceeds from this offering?
A: We plan to use approximately 84% of the proceeds to purchase properties and
to make mortgage loans, approximately 9% to pay fees and expenses to
affiliates for their services and as reimbursement of offering and
acquisition-related expenses, and the remaining proceeds to pay other
expenses of this offering. The payment of these fees will not reduce your
Invested Capital. Your initial Invested Capital amount will be $10 per
share.
Until we invest the proceeds in real estate assets, we will invest them in
short-term, highly liquid investments. These short-term investments will
not earn as high a return as we expect to earn on our real estate
investments, and we cannot know how long it will be before we will be able
to fully invest the proceeds in real estate.
We commenced our public offering of common stock on July 9, 1997. Assuming
15,000,000 shares are sold in this offering, approximately $126,000,000 is
expected to be invested in hotel properties, restaurant properties and
mortgage loans. Our public offering will end no later than July 9, 1999.
Q: What types of hotels and restaurants will you invest in?
A: We intend to purchase primarily limited service, extended stay and/or full
service hotel properties. We also may purchase fast-food, family-style and
casual-dining restaurant properties; although, we are not obligated to
invest in both hotel properties and restaurant properties. 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.
Q: What are the terms of your leases?
A: The leases we have entered into to date, and the leases we expect to enter
into in the future, are long-term (meaning generally 10 to 20 years, plus
renewal options for an additional 10 to 20 years), "triple-net" leases.
"Triple-net" means that the tenant, not the Company, is generally
responsible for repairs, maintenance, property taxes, utilities, and
insurance. Under our leases, the tenant must pay us minimum, base rent on a
<PAGE>
monthly basis. In addition, our leases generally require the tenant to pay
us percentage rent or provide for increases in the base rent at specified
times during the term of the lease.
Q: How well have your investments done so far?
A: As of February 26, 1999, we have purchased, directly or indirectly, six
newly constructed hotel properties. Two of these purchases were made in
July 1998 and four were made in February 1999, so we have only limited
information regarding their performance.
Q: What is the experience of the Company's officers and directors?
A: Our management team has extensive previous experience investing in real
estate on a triple-net basis. Our Chief Executive Officer and President
have over 25 and 20 years , respectively, of experience with other CNL
affiliates. In addition, our Chief Operating Officer and our Vice President
of Finance and Administration have extensive previous experience investing
in hotel properties. The majority of our Directors have extensive
experience investing in hotels and/or other types of real estate.
However, our affiliates have limited experience investing in hotel
properties. Our officers, Directors and affiliates have operated several
other REITs and partnerships in the past. The investment results from those
funds are included in this Prospectus under the heading "Prior Performance
Information." However, because those funds had different goals and the
managers had different amounts of experience investing in the types of
assets purchased by those funds, you cannot assume that the Company's
investment returns will be similar to those described in the "Prior
Performance Information" section.
Q: How will you choose which investments to make?
A: We have hired an Advisor. The Advisor has the authority, subject to the
approval of our Directors, to make all of the Company's investment
decisions.
Q: Is the Advisor independent of the Company?
A: No. Some of our officers and Directors are officers and directors of the
Advisor. The conflicts of interest the Company and Advisor face are
discussed under the heading "Conflicts of Interest" later in this
Prospectus.
Q: If I buy shares, will I receive distributions and how often?
A: Historically, we have paid cash distributions every quarter since our
operations commenced.
We intend to continue to make quarterly cash distributions to our
stockholders. The amount of distributions is determined by the Board of
Directors and typically depends on the amount of distributable funds,
current and projected cash requirements, tax considerations and other
factors. However, in order to remain qualified as a REIT, we must make
distributions equal to at least 95% of our REIT taxable income each year.
Q: Are distributions I receive taxable?
A: Yes. Generally, distributions that you receive will be considered ordinary
income to the extent they are from current and accumulated earnings and
profits. In addition, because depreciation expense reduces taxable income
but does not reduce cash available for distribution, we expect a portion of
your distributions will be considered return of capital for tax purposes.
These amounts will not be subject to tax immediately but will instead
reduce the tax basis of your investment. This in effect defers a portion of
your tax until your investment is sold or the Company is liquidated.
However, because each investor's tax implications are different, we suggest
you consult with your tax advisor.
<PAGE>
Q: Do you have a Reinvestment Plan where I reinvest my distributions in
additional shares?
A: Yes. We have adopted a Reinvestment Plan in which an investor can reinvest
their distributions in additional shares. For information on how to
participate in our Reinvestment Plan, see the section of the Prospectus
entitled "Summary of Reinvestment Plan."
Who Can Help Answer Your Questions?
If you have more questions about the offering, you should contact
your registered representative or:
CNL Marketing Services Department
400 East South Street
Orlando, Florida 32801
(800) 522-3863
(407) 650-1000
www.cnlgroup.com
If you would like additional copies of this Prospectus, you should
contact your registered representative or:
CNL Marketing Services Department
400 East South Street
Orlando, Florida 32801
(800) 522-3863
(407) 650-1000
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this Prospectus. It
is not complete and may not contain all of the information that you should
consider before investing in the common stock. To understand the offering fully,
you should read this entire Prospectus carefully, including the documents
attached as appendices.
CNL HOSPITALITY PROPERTIES, INC.
CNL Hospitality Properties, Inc. is a Maryland corporation which is
qualified and operated for federal income tax purposes as a REIT. Our address is
400 East South Street, Orlando, Florida 32801, and our telephone number is (407)
650-1000 or toll free (800) 522-3863.
OUR BUSINESS
Our Company acquires hotel properties and restaurant properties to be
leased on a long-term "triple-net" basis, which means that the tenant generally
will be responsible for repairs, maintenance, property taxes, utilities and
insurance. We intend to invest the proceeds of this offering in hotel
properties, which may include furniture, fixtures and equipment, to be leased to
operators of national and regional limited service, extended stay and full
service hotel chains and in restaurant properties to be leased to operators of
selected national and regional fast-food, family-style and casual-dining
restaurant chains. Both the hotel properties and the restaurant properties will
be located across the United States. We are not obligated, however, to invest in
both types of 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. We may also
offer mortgage financing, and, to a lesser extent, furniture, fixtures and
equipment financing to operators of hotel chains and restaurant chains through
secured equipment leases as loans or direct financing leases. See the "Business"
section for a description of the hotel properties we currently own, our pending
investments, the types of properties that may be selected by CNL Hospitality
Advisors, Inc, the property selection and acquisition processes and the nature
of the mortgage loans and secured equipment leases.
As described in "The Offering" section, the Board of Directors may
determine to engage in future offerings of common stock. In connection
therewith, the Board of Directors has approved a second offering by the Company
of 25,000,000 shares, with an additional 2,500,000 shares being reserved for the
reinvestment plan in connection with the second offering. The second offering is
currently anticipated to be at the same price and on substantially the same
terms as this offering. The Company will not commence the second offering until
after the completion of this offering.
The Company currently anticipates that any net offering proceeds
received from the second offering will be invested in hotel properties or, to a
lesser extent, to make mortgage loans to hotel operators. The Company believes
that the net proceeds received from the second offering and any additional
offerings will enable the Company to continue to grow and take advantage of
acquisition opportunities until such time, if any, that the Company lists on a
national exchange. Under the Company's Articles of Incorporation, if the Company
does not list by December 31, 2007, it will commence an orderly liquidation of
its assets, and the distribution of the proceeds therefrom to its stockholders.
Under our Articles of Incorporation, the Company will automatically
terminate and dissolve on December 31, 2007, unless the shares of common stock
of the Company, including the shares offered by this Prospectus, are listed on a
national securities exchange or over-the-counter market before that date. If the
shares are listed, the Company automatically will become a perpetual life
entity. If we are not listed by December 31, 2007, we will sell our assets,
distribute the net sales proceeds to stockholders and limit our activities to
those related to the Company's orderly liquidation, unless the stockholders
owning a majority of the shares elect to amend the Articles of Incorporation to
extend the duration of the Company.
OUR REIT STATUS
As a REIT, we generally are not subject to federal income tax on income
that we distribute to our stockholders. Under the Internal Revenue Code of 1986,
as amended, REITs are subject to numerous organizational and operational
requirements, including a requirement that they distribute at least 95% of their
taxable income, as figured on an annual basis. If we fail to qualify for
taxation as a REIT in any year, our income will be taxed at
<PAGE>
regular corporate rates, and we may not be able to qualify for treatment as a
REIT for that year and the next four years. Even if we qualify as a REIT for
federal income tax purposes, we may be subject to federal, state and local taxes
on our income and property and to federal income and excise taxes on our
undistributed income.
OUR MANAGEMENT AND CONFLICTS OF INTEREST
We have retained the Advisor to provide us with management,
acquisition, advisory and administrative services. The members of our Board of
Directors oversee the management of the Company. The majority of the Directors
are independent of the Advisor and have responsibility for reviewing its
performance. The Directors are elected annually to the Board of Directors by the
stockholders.
All of the officers and directors of the Advisor also are officers or
Directors of the Company. The Advisor has responsibility for (i) selecting the
properties that we will acquire, formulating and evaluating the terms of each
proposed acquisition, and arranging for the acquisition of the property by the
Company; (ii) identifying potential tenants for the properties and potential
borrowers for the mortgage loans, and formulating, evaluating and negotiating
the terms of each lease of a property and each mortgage loan; (iii) locating and
identifying potential lessees and formulating, evaluating and negotiating the
terms of each secured equipment lease; and (iv) negotiating the terms of any
borrowing by the Company, including lines of credit and any long-term, permanent
financing. All of the Advisor's actions are subject to approval by the Board of
Directors. The Advisor also has the authority, subject to approval by a majority
of the Board of Directors, including a majority of the independent Directors, to
select assets for sale by the Company in keeping with the Company's investment
objectives and based on an analysis of economic conditions both nationally and
in the vicinity of the assets being considered for sale.
See the "Management" and "The Advisor and The Advisory Agreement"
sections for a description of the business background of the individuals
responsible for the management of the Company and the Advisor, as well as for a
description of the services the Advisor will provide.
Certain of our officers and Directors, who are also officers or
directors of the Advisor, may experience conflicts of interest in their
management of the Company. These arise principally from their involvement in
other activities that may conflict with our business and interests, including
matters related to (i) allocation of new investments and management time and
services between us and various other entities, (ii) the timing and terms of the
investment in or sale of an asset, (iii) development of our properties by
affiliates, (iv) investments with affiliates of the Advisor, (v) compensation to
the Advisor, (vi) our relationship with the managing dealer, CNL Securities
Corp., which is an affiliate of the Company and the Advisor, and (vii) the fact
that our securities and tax counsel also serves as securities and tax counsel
for some of our affiliates, which means neither the Company nor the stockholders
will have separate counsel. The "Conflicts of Interest" section discusses in
more detail the more significant of these potential conflicts of interest, as
well as the procedures that have been established to resolve a number of these
potential conflicts.
OUR AFFILIATES
The "Prior Performance Information" section of this Prospectus contains
a narrative discussion of the public and private real estate programs sponsored
by our affiliates and affiliates of the Advisor in the past, including 18 public
limited partnerships and one unlisted public REIT. As of December 31, 1998,
these entities, which invest in restaurant properties that are leased on a
"triple-net" basis to operators of restaurant chains, but do not invest in hotel
properties, had purchased 1,139 fast-food, family-style, and casual-dining
restaurants. In addition, an affiliate sponsors an unlisted, public REIT that
invests in health care and seniors' housing properties that are leased on a
long-term, triple-net basis to operators of health care facilities. Based on an
analysis of the operating results of the 89 real estate limited partnerships and
two unlisted public REITs in which our principals have served, individually or
with others, as general partners or officers and directors, we believe that each
of these companies has met, or is in the process of meeting, its principal
investment objectives. Statistical data relating to the public limited
partnerships and the unlisted REITs are contained in Exhibit C -- Prior
Performance Tables.
<PAGE>
OUR INVESTMENT OBJECTIVES
Our Company's primary investment objectives are:
o to preserve, protect, and enhance our assets.
o to make distributions.
o to obtain fixed income through the receipt of base rent, and to
increase our income (and distributions) and provide protection
against inflation through receipt of percentage rent and/or
automatic increases in base rent, and to obtain fixed income
through the receipt of payments on mortgage loans and secured
equipment leases.
o to qualify and remain qualified as a REIT for federal income tax
purposes.
o to provide you with liquidity for your investment within five to
ten years after commencement of this offering, either through (i)
listing our shares on a national securities exchange or
over-the-counter market or (ii) if listing does not occur within
ten years after commencement of the offering, selling our assets
and distributing the proceeds.
See the "Business -- General," "Business -- Site Selection and
Acquisition of Properties," "Business -- Description of Property Leases" and
"Investment Objectives and Policies" sections of this Prospectus for a more
complete description of the manner in which the structure of our business
facilitates our ability to meet our investment objectives.
RISK FACTORS
An investment in our Company is subject to significant risks. We
summarize some of the more important risks below. A more detailed list of the
risk factors is found in the "Risk Factors" section, which begins on page 11.
You should read and understand all of the risk factors before making your
decision to invest.
o As of February 26, 1999, we currently own, directly or indirectly, six
hotels and have commitments to acquire, directly or indirectly, seven
additional hotel properties. The acquisition of the seven properties is
subject to the fulfillment of certain conditions and there can be no
assurance that any or all of the conditions will be satisfied or, if
satisfied, that one or more of these properties will be acquired by the
Company. In addition, the Board of Directors may approve future
offerings, the proceeds of which may be invested in additional
properties; therefore, you will not have the opportunity to evaluate
all the properties that will be in our portfolio.
o There is currently no public trading market for the shares, and there
is no assurance that one will develop.
o We rely on the Advisor, subject to approval by the Board of Directors,
with respect to all investment decisions. Not all of the officers and
Directors of the Advisor have extensive experience, and our affiliates
have limited experience, with acquiring and leasing hotels, which could
adversely affect the Company's business.
o The Advisor and its affiliates are or will be engaged in other
activities that will result in potential conflicts of interest with the
services that the Advisor and affiliates will provide to the Company.
o Market and economic conditions that we cannot control will affect the
value of our investments.
o We may make investments that will not appreciate in value over time,
such as mortgage loans and building-only properties, with the land
owned by a third-party.
o We cannot predict the amount of revenues we will receive from tenants
and borrowers.
o If our tenants or borrowers default, we will have less income with
which to make distributions.
o If the shares are not listed on a national securities exchange or
over-the-counter market by December 31, 2007, we will sell our assets
and distribute the proceeds.
o We do not yet have a commitment for long-term financing for the
Company. If we do not obtain long-term financing, we will not be able
to acquire as many properties or make as many loans and leases as we
anticipated, which could limit the diversification of our investments
and our ability to achieve our investment objectives.
o The secured equipment lease program is dependent upon obtaining
financing, which has not yet been secured.
o In connection with any borrowing, we may mortgage or pledge our assets,
which would put us at risk of losing the assets if we are unable to pay
our debts.
o We may incur debt, including debt to make distributions to
stockholders, in order to maintain our status as a REIT.
o The vote of stockholders owning at least a majority but less than all
of the shares of common stock will bind all of the stockholders as to
matters such as the election of Directors and amendment of the
Company's governing documents.
o Restrictions on ownership of more than 9.8% of the shares of common
stock by any single stockholder or certain related stockholders may
have the effect of inhibiting a change in control of the Company, even
if such a change is in the interest of a majority of the stockholders.
o We may not remain qualified as a REIT for federal income tax purposes,
which would subject us to federal income tax on our taxable income at
regular corporate rates, thereby reducing the amount of funds available
for paying distributions to you as a stockholder.
MANAGEMENT COMPENSATION
Out of the proceeds of this offering, the Company will pay the Advisor,
CNL Securities Corp., which is the managing dealer for this offering, and other
affiliates of the Advisor compensation for services they will perform . The
Company will also reimburse them for expenses they paid on behalf of the
Company. The following paragraphs summarize the more significant items of
compensation and reimbursement. See "Management Compensation" for a complete
description.
Offering Stage.
Selling Commissions and Marketing Support and Due Diligence Expense
Reimbursement Fee. The Company will pay the managing dealer selling commissions
of 7.5% (a maximum of $11,250,000 if 15,000,000 shares are sold), and a
marketing support and due diligence expense reimbursement fee of 0.5% (a maximum
of $750,000 if 15,000,000 shares are sold). The managing dealer in turn may pass
along selling commissions of up to 7% on shares sold, and all or a portion of
the 0.5% marketing support and due diligence expense reimbursement fee, to
soliciting dealers who are not affiliates of the Company.
Acquisition Stage.
Acquisition Fees. The Company will pay the Advisor a fee equal to 4.5%
of the proceeds of this offering and loan proceeds from permanent financing and
amounts outstanding on the line of credit, if any, at the time of listing, but
excluding amounts used to finance secured equipment leases ($6,750,000 if
15,000,000 shares are sold and up to an additional $2,025,000 if permanent
financing equals $45,000,000) for identifying the properties, structuring the
terms of the acquisition and leases of the properties and structuring the terms
of the mortgage loans.
<PAGE>
Operational Stage.
Asset Management Fee. The Company will pay the Advisor a monthly asset
management fee of one-twelfth of 0.60% of an amount equal to the total amount
invested in the properties (exclusive of acquisition fees and acquisition
expenses) plus the total outstanding principal amount of the mortgage loans, as
of the end of the preceding month, for managing the properties and mortgage
loans.
Soliciting Dealer Servicing Fee . Beginning on December 31 of the year
following the year in which this offering terminates, and every December 31
thereafter, the Company will pay to the managing dealer .20% of the product of
the number of shares held by stockholders on that date and $10.00, reduced by
distributions received by stockholders from the sale of assets of the Company
and amounts paid by the Company to repurchase shares under its redemption plan.
The managing dealer may pass along all or a portion of this amount to soliciting
dealers whose clients own shares on that date.
Secured Equipment Lease Servicing Fee. The Company will pay the Advisor
a one-time secured equipment lease servicing fee of 2% of the purchase price of
the equipment that is the subject of a secured equipment lease, for negotiating
secured equipment leases and supervising the secured equipment lease program.
Operational or Liquidation Stage.
The Company will not pay the following fees until it has paid
distributions to stockholders equal to the sum of an aggregate, annual,
cumulative, noncompounded 8% return on their invested capital plus 100% of the
stockholders' aggregate invested capital, which is what we mean when we call a
fee "subordinated." In general, the Company calculates the stockholders'
invested capital by multiplying the number of shares owned by stockholders by
the offering price per share and reducing the product by the portion of all
prior distributions received by stockholders from the sale of assets of the
Company and by any amounts paid by the Company to repurchase shares pursuant to
the redemption plan.
Deferred,Subordinated Real Estate Disposition Fee. The Company may pay
the Advisor a real estate disposition fee equal to the lesser of one-half of a
competitive real estate commission or 3% of the gross sales price of the
property for providing substantial services in connection with the sale of any
of its properties. See "The Advisor and the Advisory Agreement -- The Advisory
Agreement."
Deferred, Subordinated Share of Net Sales Proceeds from the Sale of
Assets. The Company will pay to the Advisor a deferred, subordinated share of
net sales proceeds from the sale of assets of the Company in an amount equal to
10% of net sales proceeds.
The Company's obligation to pay certain fees may be subject to
conditions and restrictions or to change . The Company may reimburse the Advisor
and its affiliates for out-of-pocket expenses that they incur on behalf of the
Company, subject to certain expense limitations, and pay a subordinated
incentive fee if listing of the Company's common stock on a national securities
exchange or over-the-counter market occurs.
<PAGE>
THE OFFERING
Offering Size.................... o Maximum -- $165,000,000
o $150,000,000 worth of common stock
to be offered to investors meeting
certain suitability standards and
$15,000,000 worth of common stock
available only to investors who
purchased their shares in this offering
and who choose to participate in our
reinvestment plan.
Minimum Investments............. o Individuals--$2,500-- Additional shares
may be purchased in ten dollar
increments.
o IRA, Keogh and other Qualified Plans
--$1,000 -- Additional shares may be
purchased in ten dollar increments.
(Note: The amounts apply to most
potential investors, but minimum
investments may vary from state to
state. Please see "The Offering"
section, which begins on page 110).
<PAGE>
Suitability Standards........... o Net worth (not including home,
furnishings and personal automobiles)
of at least $45,000 and annual gross
income of at least $45,000; OR
o Net worth (not including home,
furnishings and personal automobiles)
of at least$150,000.
(Note: Suitability standards may vary
from state to state. Please see the
"Suitability Standards and How to
Subscribe" section, which begins on
page 21).
Holding Period.................. Anticipated to be five to ten years from the
commencement of this offering. If the shares
are listed on a national securities exchange
or over-the-counter market, our Company will
become a perpetual life entity, and we will
then reinvest proceeds from the sale of
assets.
Distribution Policy............. Consistent with our objective of qualifying
as a REIT, we expect to continue to pay
quarterly distributions and distribute at
least 95% of our REIT taxable income.
Our Advisor..................... CNL Hospitality Advisors, Inc. will
administer the day-to-day operation of our
Company and select our Company's real estate
investments, mortgage loans and secured
equipment leases.
Estimated Use of Proceeds........ o 84%-- To acquire hotel properties and
restaurant properties and make
mortgage loans.
o 9% -- To pay fees and expenses to
affiliates for their services and as
reimbursement of offering and
acquisition-related expenses.
o Remainder -- To pay for other
expenses of the offering.
Our Reinvestment Plan............ We have adopted a reinvestment plan which
will allow our stockholders to have the full
amount of their distributions reinvested in
additional shares that may be available. We
have registered 1,500,000 shares of our
common stock for this purpose. See the
"Summary of Reinvestment Plan" and the
"Federal Income Tax Considerations--Taxation
of Stockholders" sections and the Form of
Reinvestment Plan accompanying this
Prospectus as Exhibit A for more specific
information about the Reinvestment Plan.
<PAGE>
RISK FACTORS
An investment in our shares involves significant risks and therefore is
suitable only for persons who understand those risks and their consequences and
who are able to lose their investment. You should consider the following risks
in addition to other information set forth elsewhere in this Prospectus before
making your investment decision.
We also caution you that this Prospectus contains forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. Although we believe that our expectations
reflected in the forward-looking statements are based on reasonable assumptions,
these expectations may not prove to be correct. Important factors that could
cause our actual results to differ materially from the expectations reflected in
these forward-looking statements include those set forth below, as well as
general economic, business and market conditions, changes in federal and local
laws and regulations and increased competitive pressures.
OFFERING-RELATED RISKS
An Unspecified Property Offering.
Potential Investors Cannot Evaluate Properties Not Yet
Acquired or Identified for Acquisition. We have established certain criteria for
evaluating hotel chains, restaurant chains, particular properties and the
operators of the properties in which we may invest. See the "Business --
Standards for Investment in Properties" and "Business -- General" sections for a
description of these criteria and the types of properties in which we intend to
invest. We have not set fixed minimum standards relating to creditworthiness of
tenants and therefore the Board of Directors has flexibility in assessing
potential tenants. In addition, as of the date of this Prospectus, we have
purchased, directly or indirectly, six hotels and we have entered into
commitments for the direct or indirect acquisition of seven additional hotel
properties. The acquisition of the seven properties is subject to the
fulfillment of certain conditions and there can be no assurance that any or all
of the conditions will be satisfied or, if satisfied, that one or more of these
properties will be acquired by the Company. In addition, the Board of Directors
may approve future offerings, the proceeds of which may be invested in
additional properties; therefore, you will not have the opportunity to evaluate
all the properties that will be in our portfolio.
No Assurance of Obtaining Suitable Investments. We cannot be
sure that we will be successful in obtaining suitable investments on financially
attractive terms or that, if we make investments, our objectives will be
achieved. If we are unable to find suitable investments, our financial condition
and ability to pay distributions could be adversely affected.
No Independent Review of the Company or the Prospectus by
Managing Dealer. The managing dealer, CNL Securities Corp., is an affiliate of
the Company and will not make an independent review of the Company or the
offering. Accordingly, you do not have the benefit of an independent review of
the terms of this offering.
Possible Delays in Investment. The offering proceeds may remain
uninvested for up to the later of two years from the initial date of this
Prospectus or one year after termination of the offering; although, we expect to
invest substantially all net offering proceeds by the end of that period. The
"Prior Performance Information" section provides a summary description of the
investment experience of affiliates of the Advisor in prior CNL programs, but
you should be aware that previous experience is not necessarily indicative of
the rate at which the proceeds of this offering will be invested.
We may delay investing the proceeds from this offering, and therefore
delay the receipt of any returns from investments, due to the inability of the
Advisor to find suitable properties or mortgage loans for investment, and the
inability of a prior program formed by affiliates of the Advisor that currently
is in the process of acquiring fast-food, family-style and casual-dining
restaurants and offering mortgage loans to substantially complete its
acquisition program prior to the time that we have funds available to invest.
Until we invest in properties or make mortgage loans, our investment returns
will be limited to the rates of return available on short-term, highly liquid
investments that provide appropriate safety of principal. We expect these rates
of return, which affect the amount of cash available to make distributions to
stockholders, to be lower than we would receive for property investments or
mortgage loans. Further, if we are required to invest any funds in properties
and mortgage loans and we have not done so or reserved those funds for Company
purposes within the later of two years from the initial date of this Prospectus,
or one year after the termination of this offering, we will distribute the
remaining funds pro rata to the persons who are stockholders of the Company at
that time.
No Current Public Market for Shares Which Could Make Sale of Shares
Difficult. Currently there is no public market for the shares, so stockholders
may not be able to sell their shares promptly at a desired price. Therefore, you
should consider purchasing the shares as a long-term investment only. We do not
know if we will ever apply to list the Company's shares on a national securities
exchange or over-the-counter market, or, if we do apply for listing, if a public
trading market will develop. In any event, the Articles of Incorporation provide
that the Company will not apply for listing before the completion or termination
of this offering. There can be no assurance that the price you would receive in
a sale on a national securities exchange or over-the-counter market would be
representative of the value of the assets owned by the Company or that it would
equal or exceed the amount you paid for the shares.
COMPANY-RELATED RISKS
Limited Operating History. As of the date of this Prospectus, the
Company has purchased, directly or indirectly, six properties, and prior to
October 15, 1997, the date our operations commenced, had no previous performance
history. As a result, you cannot be sure how the Company will be operated,
whether it will pursue the objectives described in this Prospectus or how it
will perform financially.
Limited Experience of Management. None of the prior public programs
organized by our affiliates has invested in hotels. The limited experience of
certain of our management in investing in hotel properties may adversely affect
the Company's results of operations and therefore its ability to pay
distributions.
Company is Dependent on Advisor. The Advisor, with approval from the
Board of Directors, will be responsible for the daily management of the Company,
including all acquisitions, dispositions and financings. The Board of Directors
may fire the Advisor, with or without cause, but only subject to payment and
release of the Advisor from all guarantees and other obligations incurred as
Advisor, which are referenced in the "Management Compensation" section of this
Prospectus. We cannot be sure that the Advisor will achieve the Company's
objectives or that the Board of Directors will be able to act quickly to remove
the Advisor if it deems removal necessary. As a result, it is possible that the
Company would be managed for some period by a company that was not acting in our
best interests or not capable of helping us achieve our objectives.
Conflicts of Interest.
We will be subject to conflicts of interest arising out of our
relationships with the Advisor and its affiliates, including the material
conflicts discussed below. The "Conflicts of Interest" section provides a
further discussion of the conflicts of interest between the Company and the
Advisor and its affiliates and our policies to reduce or eliminate certain
potential conflicts.
Selection of Properties Acquired. The Advisor or its
affiliates from time to time may acquire properties on a temporary basis with
the intention of subsequently transferring the properties to the Company. The
selection of properties to be transferred by the Advisor to the Company may be
subject to conflicts of interest. We cannot be sure that the Advisor will act in
the Company's best interests when deciding whether to allocate any particular
property to the Company. You will not have the opportunity to evaluate the
manner in which these conflicts of interest are resolved before making your
investment.
Competing Demands on Officers and Directors. The Directors and
certain of the officers of the Company and the directors and certain of the
officers of the Advisor have management responsibilities for other companies,
including companies that may in the future invest in some of the same types of
assets in which we may invest. For this reason, these officers and Directors
will share their management time and services among those companies and the
Company, will not devote all of their attention to the Company and could take
actions that are more favorable to the other companies than to the Company.
Timing of Sales and Acquisitions May Favor the Advisor. The
Advisor may immediately realize substantial commissions, fees and other
compensation as a result of any investment in or sale of an asset by the
Company. Our Board of Directors must approve any investments and sales, but the
Advisor's recommendation to the Board may be influenced by the impact of the
transaction on the Advisor's compensation. The agreements between the Company
and the Advisor were not the result of arm's-length negotiations. As a result,
the Advisor may not always act in the Company's best interests, which could
adversely affect our results of operations.
Property Development by Affiliates. Properties acquired by the
Company may require development prior to use by a tenant. Our affiliates may
serve as developer and if so, the affiliates would receive the development fee
that would otherwise be paid to an unaffiliated developer. The Board of
Directors, including the independent Directors, must approve employing an
affiliate of the Company to serve as a developer. There is a risk, however, that
the Company would acquire properties that require development so that an
affiliate would receive the development fee.
We May Invest With Affiliates of the Advisor. We may invest in
joint ventures with another program sponsored by the Advisor or its affiliates.
The Board of Directors, including the independent Directors, must approve the
transaction, but the Advisor's recommendation may be affected by its
relationship with one or more of the co-venturers.
No Separate Counsel for the Company, Affiliates and Investors.
The Company, its affiliates and investors may have interests which conflict with
one another, but none of them currently has the benefit of separate counsel.
Company May Not Have Sufficient Working Capital. There can be no
assurance that the Company will have sufficient working capital. As of December
31, 1998, the Company had stockholders' equity of $37,116,491. If we do not have
sufficient capital, we may not be able to meet our business objectives, which
could decrease the return on your investment.
REAL ESTATE INVESTMENT RISKS
Possible Lack of Diversification Increases Risk of Investment. There is
no limit on the number of properties of a particular hotel chain or restaurant
chain which we may acquire, and we are not obligated to invest in both types of
properties. The Company could invest entirely in hotel properties. Because of
the higher average purchase price of a hotel property compared to a restaurant
property, investment in hotel properties will reduce the number of properties in
which the Company could otherwise invest. While we may invest in both hotel and
restaurant properties, management believes that over time the Company may focus
its property investments exclusively on hotel properties . The Board of
Directors, however, including a majority of the independent Directors, will
review the Company's properties and potential investments in terms of geographic
diversification. At this time, all of the Company's properties are
Marriott-branded hotels. If we continue to concentrate our acquisitions with
Marriott chains or in the future concentrate our acquisitions on another chain,
it will increase the risk that our financial condition will be adversely
affected by a downturn in a particular market sub-segment or by the poor
judgment of a particular management group.
Our profitability and our ability to diversify our investments, both
geographically and by type of properties purchased, will be limited by the
amount of funds at our disposal. If our assets become geographically
concentrated, an economic downturn in one or more of the markets in which we
have invested could have an adverse effect on our financial condition and our
ability to make distributions. We do not know whether we will sell all of the
shares being offered by this Prospectus. If we do not, it is possible that we
will not have the money necessary to diversify our investments or achieve the
highest possible return on our investments.
Lack of Control Over Market and Business Conditions. Changes in general
or local economic or market conditions, increased costs of energy, increased
costs of food or other products, increased costs and shortages of labor,
competitive factors, fuel shortages, quality of management, the ability of a
hotel or restaurant chain to fulfill any obligations to operators of its hotel
or restaurant business, limited alternative uses for the building, changing
consumer habits, condemnation or uninsured losses, changing demographics,
changing traffic patterns, inability to remodel outmoded buildings as required
by the franchise or lease agreement, voluntary termination by a tenant of its
obligations under a lease, bankruptcy of a tenant or borrower, and other factors
beyond the control of the Company and the Board of Directors may reduce the
value of properties to be acquired by the Company, the ability of tenants to pay
rent on a timely basis, the amount of the rent and the ability of borrowers to
make mortgage loan payments on time. If tenants are unable to make lease
payments or borrowers are unable to make mortgage loan payments as a result of
any of these factors, we might not have cash available to make distributions to
our stockholders.
<PAGE>
Impact of Adverse Trends in the Hotel and Restaurant Industries. The
success of our properties will depend largely on the property operators' ability
to adapt to dominant trends in the hotel and restaurant industries, including
greater competitive pressures, increased consolidation, industry overbuilding,
dependence on consumer spending patterns and changing demographics, the
introduction of new concepts and products, availability of labor, price levels
and general economic conditions. The "Business -- General" section includes a
description of the size and nature of the hotel and restaurant industries and
current trends in these industries. The success of a particular hotel or
restaurant chain, the ability of a hotel or restaurant chain to fulfill any
obligations to operators of its businesses, and trends in these industries may
affect the income of the Company and the funds we have available to distribute
to stockholders.
Company Will Not Control Property Management. Our tenants will be
responsible for maintenance and other day-to-day management of the properties.
Because our revenues will largely be derived from rents, our financial condition
will be dependent on the ability of third-party tenants that we do not control
to operate the properties successfully. We intend to enter into leasing
agreements only with tenants having substantial prior hotel or restaurant
experience. Although we believe the tenants of the six properties directly or
indirectly owned, and the seven properties identified as probable acquisitions,
as of February 26, 1999, have significant prior hotel experience, there is no
assurance we will be able to make such arrangements in the future. If our
tenants are unable to operate the properties successfully, they may not be able
to pay their rent and they may not generate significant percentage rent, which
could adversely affect our financial condition.
Company May Not Control Joint Ventures. Our independent Directors must
approve all joint venture or general partnership arrangements to which the
Company is a party. Subject to such approval, we may enter into a joint venture
with an unaffiliated party to purchase a property, and the joint venture or
general partnership agreement relating to that joint venture or partnership may
provide that we will share management control of the joint venture with the
unaffiliated party. In the event the joint venture or general partnership
agreement provides that we will have sole management control of the joint
venture, the agreement may be ineffective as to a third party who has no notice
of the agreement, and we therefore may be unable to control fully the activities
of the joint venture. If we enter into a joint venture with another program
sponsored by an affiliate, we do not anticipate that we will have sole
management control of the joint venture.
Investments in joint ventures involve the risk that the Company's
co-venturer may have economic or business interests or goals which, at a
particular time, are inconsistent with our interests or goals, that such
co-venturer may be in a position to take action contrary to our instructions,
requests, policies or objectives, or that such co-venturer may experience
financial difficulties. Among other things, actions by a co-venturer might
subject property owned by the joint venture to liabilities in excess of those
contemplated by the terms of the joint venture agreement or to other adverse
consequences. If we do not have full control over a joint venture, the value of
our investment will be affected to some extent by a third party that may have
different goals and capabilities than the Company. As a result, joint ownership
of investments may adversely affect our returns on the investments and,
therefore, our ability to pay distributions to our stockholders.
Difficulty in Exiting a Joint Venture After an Impasse. If we enter
into a joint venture, there will be a potential risk of impasse in certain joint
venture decisions since our approval and the approval of each co-venturer will
be required for certain decisions. In any joint venture with an affiliated
program, however, we will have the right to buy the other co-venturer's interest
or to sell our own interest on specified terms and conditions in the event of an
impasse regarding a sale. In the event of an impasse, it is possible that
neither party will have the funds necessary to consummate the buy-out. See
"Business -- Joint Venture Arrangements." In addition, we may experience
difficulty in locating a third-party purchaser for our joint venture interest
and in obtaining a favorable sale price for the interest. As a result, it is
possible that we may not be able to exit the relationship if an impasse
develops.
Lack of Control Over Properties Under Construction. We intend to
acquire sites on which a property to be owned by the Company will be built, as
well as sites which have existing properties (including properties which require
renovation). If we acquire a property for development or renovation, we may be
subject to certain risks in connection with a developer's ability to control
construction costs and the timing of completion of construction or a developer's
ability to build in conformity with plans, specifications and timetables. Our
agreements with a developer will provide certain safeguards designed to minimize
these risks. In the event of a default by a developer, we generally will have
the right to require the tenant to repurchase the property that is under
development at a pre-
<PAGE>
established price designed to reimburse us for all acquisition and development
costs. We cannot be sure, however, that the tenants will be willing or able to
fulfill their obligations under these agreements. See "Business -- Site
Selection and Acquisition of Properties."
Ground Lease Property Risks. If we invest in ground lease properties,
we will not own, or have a leasehold interest in, the underlying land, unless we
enter into an assignment or other agreement. Thus, with respect to ground lease
properties, the Company will have no economic interest in the land or building
at the expiration of the lease on the underlying land; although, we generally
will retain partial ownership of, and will have the right to remove any
equipment that we may own in the building. As a result, though we will share in
appreciation of the income stream derived from the lease, we will not share in
any appreciation of the land associated with any ground lease property.
We Do Not Control Third Party Franchise Agreements. We will not be a
party to any franchise agreement between a hotel chain or restaurant chain and a
tenant; so, those agreements could be modified or canceled without notice to us,
or our prior consent. In that event, we could require the tenant to cease its
operations at the property, although the tenant's obligation to pay rent to the
Company would continue. However, if we removed a tenant due to the cancellation
of the tenant's franchise agreement, we would be required to locate a new tenant
acceptable to the hotel chain or restaurant chain. As a result, if a tenant's
franchise agreement is canceled or amended, we may have difficulty removing the
tenant and difficulty realizing our expected return on the property.
Multiple Property Leases or Mortgage Loans with Individual Tenants or
Borrowers Increase Risks. The value of the Company's properties will depend
principally upon the value of the leases of the properties. Minor defaults by a
tenant or borrower may continue for some time before the Advisor or Board of
Directors determines that it is in the interest of the Company to evict the
tenant or foreclose on the property of the borrower. Tenants may lease more than
one property, and borrowers may enter into more than one mortgage loan. As a
result, a default by or the financial failure of a tenant or borrower could
cause more than one property to become vacant or more than one loan to become
non-performing under certain circumstances. Vacancies would reduce our cash
receipts and could decrease the properties' resale value until we are able to
re-lease the affected properties.
Re-leasing of Properties May Be Difficult. If a tenant vacates a
property, we may be unable either to re-lease the property for the rent due
under the prior lease or to re-lease the property without incurring additional
expenditures relating to the property. In addition, we could experience delays
in enforcing our rights against, and collecting rents (and, under certain
circumstances, real estate taxes and insurance costs) due from, a defaulting
tenant. Any delay we experience in re-leasing a property or difficulty in
re-leasing at acceptable rates could affect our ability to pay distributions.
Inability to Control the Sale of Certain Properties. We expect to give
certain tenants the right, but not the obligation, to purchase their property
from the Company commencing a specified number of years after the date of the
lease. The leases also generally provide the tenant with a right of first
refusal on any proposed sale provisions. These policies may lessen the ability
of the Advisor and the Board of Directors to freely control the sale of the
property. See "Business -- Description of Property Leases -- Right of Tenant to
Purchase."
Limitations on the Ability of the Company to Liquidate. For the first
five to ten years after commencement of this offering, we intend to use any
proceeds from the sale of properties or mortgage loans that are not required to
be distributed to stockholders in order to preserve the Company's status as a
REIT to acquire additional properties, make additional mortgage loans and repay
outstanding indebtedness. The proceeds from the sale of secured equipment leases
will be used to fund additional secured equipment leases, or to reduce our
outstanding indebtedness. If the shares are listed on a national securities
exchange or over-the-counter market, we may reinvest the proceeds from sales in
other properties, mortgage loans or secured equipment leases for an indefinite
period of time. If the shares are not listed by December 31, 2007, we will
undertake to sell our assets and distribute the net sales proceeds to
stockholders, and we will engage only in activities related to the orderly
liquidation of the Company, unless the stockholders elect otherwise.
Neither the Advisor nor the Board of Directors may be able to control
the timing of sales due to market conditions, and there can be no assurance that
we will be able to sell our assets so as to return our stockholders' aggregate
invested capital, to generate a profit for the stockholders or to fully satisfy
our debt obligations. We will only return all of our stockholders' invested
capital if we sell the properties for more than their original purchase price,
although return of capital, for federal income tax purposes, is not necessarily
limited to stockholder distributions following sales of properties. If we take a
purchase money obligation in partial payment of the sales price of a property,
we will realize the proceeds of the sale over a period of years. Further, any
intended liquidation of the Company may be delayed beyond the time of the sale
of all of the properties until all mortgage loans and secured equipment leases
expire or are sold, because we plan to enter into mortgage loans with terms of
10 to 20 years and secured equipment leases with terms of seven years, and those
obligations may not expire before all of the properties are sold.
Seasonality of Hotel Industry. The hotel industry is seasonal. As a
result, there may be quarterly fluctuations in the amount of percentage rent, if
any, we will receive from our hotel properties. Any reduction in percentage rent
would reduce the amount of cash we could distribute to our stockholders.
Risks of Mortgage Lending.
Real Estate Market Conditions. If we make mortgage loans, we
will be at risk of defaults on those loans caused by many conditions beyond our
control, including local and other economic conditions affecting real estate
values and interest rate levels. We do not know whether the values of the
properties securing the mortgage loans will remain at the levels existing on the
dates of origination of the mortgage loans. If the values of the underlying
properties drop, the risk of the loans to the Company will increase and the
values of our interests may decrease.
Investment Subject to Interest Rate Fluctuations. If we invest
in fixed-rate, long-term mortgage loans and interest rates rise, the mortgage
loans will yield a return lower than then-current market rates. If interest
rates decrease, we will be adversely affected to the extent that mortgage loans
are prepaid, because we will not be able to make new loans at the previously
higher interest rate.
Delays in Liquidating Defaulted Mortgage Loans Could Reduce
Our Investment Returns. If there are defaults under our mortgage loans, we may
not be able to repossess and sell the underlying properties quickly. The
resulting time delay could reduce the value of our investment in the defaulted
loans. An action to foreclose on a mortgaged property securing a loan is
regulated by state statutes and rules and is subject to many of the delays and
expenses of other lawsuits if the defendant raises defenses or counterclaims .
In the event of default by a mortgagor, these restrictions, among other things,
may impede our ability to foreclose on or sell the mortgaged property or to
obtain proceeds sufficient to repay all amounts due to us on the loan.
Returns May Be Limited By Regulations. The mortgage loans may
also be subject to regulation by federal, state and local authorities and
subject to various laws and judicial and administrative decisions. These laws
may directly or indirectly limit the amount of return we can receive on our
mortgage loans, and, therefore, may limit the return on our investment.
Risks of Secured Equipment Leasing.
Collateral May Be Inadequate to Secure Leases. In the event
that a lessee defaults on a secured equipment lease, we may not be able to sell
the subject equipment at a price that would enable us to recover our costs
associated with the equipment. If we cannot recover our costs, it could affect
our results of operations.
Returns May Be Limited By Regulations. The secured equipment
lease program may also be subject to regulation by federal, state and local
authorities and subject to various laws and judicial and administrative
decisions. These laws and regulations may limit the amount of return on our
investment in certain markets and may prevent us from lending in other markets.
"Tax Risks" discusses certain federal income tax risks
associated with the secured equipment lease program.
Possible Environmental Liabilities. Under various federal and state
environmental laws and regulations, as an owner or operator of real estate, we
may be required to investigate and clean up certain hazardous or toxic
substances, asbestos-containing materials, or petroleum product releases at our
properties. We may also be held liable to a governmental entity or to third
parties for property damage and for investigation and cleanup costs incurred by
those parties in connection with the contamination. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
The presence of contamination or the failure to remediate contaminations at any
of our properties may adversely affect our ability to sell or lease the
properties or to borrow using the properties as collateral. We could also be
liable under common law to third parties for damages and injuries resulting from
environmental contamination emanating from our properties.
All of our properties will be acquired subject to satisfactory Phase I
environmental assessments, which generally involve the inspection of site
conditions without invasive testing such as sampling or analysis of soil,
groundwater or other media or conditions; or satisfactory Phase II environmental
assessments, which generally involve the testing of soil, groundwater or other
media and conditions. The Board of Directors or the Advisor may determine that a
Phase I or Phase II environmental assessment is satisfactory if a problem exists
and has not been resolved at the time the property is acquired, provided that
the seller has (i) agreed in writing to indemnify the Company and/or (ii)
established in escrow cash funds equal to a predetermined amount greater than
the estimated costs to remediate the problem. We cannot be sure, however, that
any seller will be able to pay under an indemnity we obtain or that the amount
in escrow will be sufficient to pay all remediation costs. Further, we cannot be
sure that all environmental liabilities have been identified or that no prior
owner, operator or current occupant has created an environmental condition not
known to us. Moreover, we cannot be sure (i) future laws, ordinances or
regulations will not impose any material environmental liability or (ii) the
current environmental condition of our properties will not be affected by
tenants and occupants of the properties, by the condition of land or operations
in the vicinity of the properties (such as the presence of underground storage
tanks), or by third parties unrelated to the Company. The imposition on the
Company of environmental liabilities could have an adverse effect on our
financial condition or results of operation.
FINANCING RISKS
Uncertainty of Long-Term Financing. The Company intends to obtain
long-term financing; however, we have not yet obtained a commitment for any
long-term financing, and we cannot be sure that we will be able to obtain any
long-term financing on satisfactory terms. If we do not obtain long-term
financing, we may not be able to acquire as many properties or make as many
loans and leases as we anticipated, which could limit the diversification of our
investments and our ability to achieve our investment objectives.
Anticipated Borrowing has Risks. The Company may borrow money to
acquire assets, to preserve its status as a REIT or for other corporate
purposes. We may mortgage or put a lien on one or more of our assets in
connection with any borrowing. The Board of Directors anticipates that we will
obtain one or more revolving lines of credit in an aggregate amount of up to
$45,000,000 to provide financing for the acquisition of assets. On July 31,
1998, we entered into an initial $30,000,000 line of credit to be used to
acquire hotel properties. We may also obtain long-term, permanent financing. We
do not think that our permanent financing will exceed 30% of the Company's total
assets. The Company may repay the lines of credit with proceeds from this
offering, working capital or permanent financing. We may not borrow more than
300% of the Company's net assets, without showing our independent Directors that
a higher level of borrowing is appropriate. The use of borrowing may be risky if
the cash flow from the Company's real estate and other investments is
insufficient to meet its debt obligations. In addition, lenders to the Company
may seek to impose restrictions on future borrowings, distributions and Company
operating policies. If we mortgage or pledge assets as collateral and we cannot
meet our debt obligations, the lender could take the collateral, and we would
lose both the asset and the income we were deriving from it.
We Can Borrow Money to Make Distributions. We may borrow money as
necessary or advisable to assure that we maintain our qualification as a REIT
for federal income tax purposes. In such an event, it is possible that we could
make distributions in excess of our earnings and profits and, accordingly, that
the distributions could constitute a return of capital for federal income tax
purposes, although such distributions would not reduce stockholders' aggregate
invested capital.
MISCELLANEOUS RISKS
Competition. We compete with other companies for the acquisition of
properties. In addition, the hotel and restaurant industries in which we invest
are highly competitive, and we anticipate that any property we acquire will
compete with other businesses in the vicinity. Our ability to receive rent, in
the form of percentage rent in excess of the base rent (including automatic
increases in the base rent), for our properties will depend in part on the
<PAGE>
ability of the tenants to compete successfully with other businesses in the
vicinity. In addition, we will compete with other financing sources for suitable
tenants and properties. If we and our tenants are unable to compete
successfully, our results of operations will be adversely affected.
Inflation Could Adversely Affect Investment Returns. Inflation may
decrease the value of some of our investments. For example, a substantial rise
in inflation over the term of an investment in mortgage loans and secured
equipment leases may reduce the value of those investments, if they do not
otherwise provide for adjustments based upon inflation. Inflation could also
reduce the value of our investments in properties if the inflation rate is high
enough that percentage rent and automatic increases in base rent do not keep up
with inflation.
Lack of Adequate Insurance. If we, as landlord, incur any liability
which is not fully covered by insurance, we would be liable for the uninsured
amounts, and returns to the stockholders could be reduced. "Business --
Description of Property Leases -- Insurance, Taxes Maintenance and Repairs"
describes the types of insurance that the leases of the properties will require
the tenant to obtain.
Possible Effect of ERISA. We believe that our assets will not be
deemed, under the Employee Retirement Income Security Act of 1974, as amended,
to be "plan assets" of any plan that invests in the shares, although we have not
requested an opinion of counsel to that effect. If our assets were deemed to be
"plan assets" under ERISA (i) it is not clear that the exemptions from the
"prohibited transaction" rules under ERISA would be available for our
transactions and (ii) the prudence standards of ERISA would apply to our
investments (and might not be met). ERISA makes plan fiduciaries personally
responsible for any losses resulting to the plan from any breach of fiduciary
duty and the Internal Revenue Code imposes nondeductible excise taxes on
prohibited transactions. If such excise taxes were imposed on the Company, the
amount of funds available for us to make distributions to stockholders would be
reduced.
Effects of Governing Documents and Maryland Law on Potential Takeovers.
Certain provisions of the Company's Articles of Incorporation, including the
ownership limitations, transfer restrictions and ability to issue preferential
preferred stock, may have the effect of preventing, delaying or discouraging
takeovers of the Company by third parties. Certain other provisions of the
Articles of Incorporation which exempt the Company from the application of
Maryland's Business Combinations Statute and Control Share Acquisition Statute,
may have the effect of facilitating (i) business combinations between the
Company and beneficial owners of 10% or more of the voting power of the
outstanding voting stock of the Company and (ii) the acquisition by any person
of shares entitled to exercise or direct the exercise of 20% or more of the
total voting power of the Company. Because we will not be subject to the
provisions of the Business Combinations Statute and the Control Share
Acquisition Statute, it may be more difficult for our stockholders to prevent or
delay business combinations with large stockholders or acquisitions of
substantial blocks of voting power by such stockholders or other persons, should
the ownership restrictions be waived, modified or completely removed. Such
business combinations or acquisitions of voting power could cause the Company to
fail to qualify as a REIT. See "-- Tax Risks -- Failure to Qualify as a REIT for
Tax Purposes," "-- Tax Risks -- Limitations on Share Ownership," "Summary of the
Articles of Incorporation and Bylaws -- General," "Summary of the Articles of
Incorporation and Bylaws -- Mergers, Combinations, and Sale of Assets," "Summary
of the Articles of Incorporation and Bylaws -- Control Share Acquisitions" and
"Summary of the Articles of Incorporation and Bylaws -- Restriction of
Ownership" sections of this Prospectus.
Ownership Limitations Relating to REIT Status. The Articles of
Incorporation generally restrict direct or indirect ownership (applying certain
attribution rules) of the outstanding common stock to no more than 9.8% of the
outstanding common stock or 9.8% of any series of outstanding preferred stock by
one person (as defined in the Articles of Incorporation).
Majority Stockholder Vote May Discourage Changes of Control.
Stockholders may take certain actions, including approving amendments to the
Articles of Incorporation and Bylaws, by a vote of a majority of the shares
outstanding and entitled to vote. All actions taken, if approved by the holders
of the requisite number of shares, would be binding on all stockholders. Certain
of these provisions may discourage or make it more difficult for another party
to acquire control of the Company or to effect a change in the operation of the
Company.
Potential for Dilution. Stockholders have no preemptive rights. If we
(i) commence a subsequent public offering of shares or securities convertible
into shares or (ii) otherwise issue additional shares, investors purchasing
shares in this offering who do not participate in future stock issuances will
experience dilution in the percentage of their equity investment in the Company.
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) relating to
a second offering which is expected to commence immediately following the
completion of this offering. The Board of Directors has not yet determined
whether it will engage in additional future offerings or other issuances of
shares, although it may do so if it is determined to be in the best interests of
the Company. See "Summary of Articles of Incorporation and Bylaws -- Description
of Capital Stock" and "The Offering -- Plan of Distribution."
Board of Directors Can Take Many Actions Without Stockholder Approval.
The Board of Directors has overall authority to conduct the Company's
operations. This authority includes significant flexibility. For example, the
Board of Directors can (i) prevent the ownership, transfer and/or accumulation
of shares in order to protect our status as a REIT or for any other reason
deemed to be in the best interests of the stockholders (see "Summary of the
Articles of Incorporation and Bylaws -- Restriction of Ownership"); (ii) issue
additional shares without obtaining stockholder approval, which could dilute
your ownership; (iii) change the compensation of the Advisor, and employ and
compensate affiliates; (iv) direct our investments toward investments that will
not appreciate over time, such as building only properties, with the land owned
by a third party, and mortgage loans; and (v) change minimum creditworthiness
standards with respect to tenants. Any of these actions could reduce the value
of our assets without giving you, as a stockholder, the right to vote.
Reliance on Advisor and Board of Directors; No Management Rights for
Stockholders. If you invest in the Company, you will be relying entirely on the
management ability of the Advisor and on the oversight of our Board of
Directors. You will have no right or power to take part in the management of the
Company, except through the exercise of your voting rights. Thus, you should not
purchase any of the shares offered by this Prospectus unless you are willing to
entrust all aspects of the management of the Company to the Advisor and the
Board of Directors.
Limited Liability of Officers and Directors. The Articles of
Incorporation and Bylaws provide that an officer or Director's liability for
monetary damages to the Company, its stockholders or third parties may be
limited. Generally, we are obligated under the Articles of Incorporation and the
Bylaws to indemnify our officers and Directors against certain liabilities
incurred in connection with their services . We have executed indemnification
agreements with each officer and Director and agreed to indemnify the officer or
Director for any such liabilities that he or she incurs. These indemnification
agreements could limit the ability of the Company and the stockholders to
effectively take action against the Directors and officers of the Company
arising from their service to the Company. See "Summary of the Articles of
Incorporation and Bylaws -- Limitation of Liability and Indemnification."
TAX RISKS
Failure to Qualify as a REIT for Tax Purposes. Our management believes
that we operate in a manner that enables us to meet the requirements for
qualification and to remain qualified as a REIT for federal income tax purposes.
A REIT generally is not taxed at the federal corporate level on income it
distributes to its stockholders, as long as it distributes annually at least 95%
of its income to its stockholders. We have not requested, and do not plan to
request a ruling from the Internal Revenue Service that we qualify as a REIT. We
have, however, received an opinion from our tax counsel, Shaw Pittman Potts &
Trowbridge, that we meet the requirements for qualification as a REIT for the
taxable year ended December 31, 1997 and that we are in a position to continue
such qualification.
You should be aware that opinions of counsel are not binding on the
Internal Revenue Service or on any court. Furthermore, the conclusions stated in
the opinion are conditioned on, and our continued qualification as a REIT will
depend on, our management meeting various requirements, which are discussed in
more detail under the heading "Federal Income Tax Considerations -- Taxation of
the Company -- Requirements for Qualification as a REIT."
If we fail to qualify as a REIT, we would be subject to federal income
tax at regular corporate rates. In addition to these taxes, we may be subject to
the federal alternative minimum tax. Unless we are entitled to relief under
specific statutory provisions, we could not elect to be taxed as a REIT for four
taxable years following the year during which we were disqualified. Therefore,
if we lose our REIT status, the funds available for distribution to you, as a
stockholder, would be reduced substantially for each of the years involved.
Risks Relating to Leases of Properties. Our tax counsel, Shaw Pittman
Potts & Trowbridge, is of the opinion, based upon certain assumptions, that the
leases of hotels and restaurants where we own the underlying land constitute
leases for federal income tax purposes. However, with respect to the hotels and
restaurants where we do not own the underlying land, Shaw Pittman is unable to
render this opinion. If the lease of a hotel or restaurant does not constitute a
lease for federal income tax purposes, it will be treated as a financing
arrangement. In the opinion of Shaw Pittman, the income derived from such a
financing arrangement would satisfy the 75% and the 95% gross income tests for
REIT qualification because it would be considered to be interest on a loan
secured by real property. Nevertheless, the recharacterization of a lease in
this fashion may have adverse tax consequences for us, in particular that we
would not be entitled to claim depreciation deductions with respect to the hotel
or restaurant (although we would be entitled to treat part of the payments we
would receive under the arrangement as the repayment of principal). In such
event, in certain taxable years our taxable income, and the corresponding
obligation to distribute 95% of such income, would be increased. Any increase in
our distribution requirements may limit our ability to invest in additional
hotels and restaurants and to make additional mortgage loans.
Risks Associated with Loans Secured by Personal Property. In order to
qualify as a REIT, at least 75% of the value of our assets must consist of
investments in real estate, investments in other REITs, cash and cash
equivalents, and government securities. Our secured equipment leases would not
be considered real estate assets for federal income tax purposes. Therefore, the
value of the secured equipment leases, together with any other property that is
not considered a real estate asset for federal income tax purposes, must
represent in the aggregate less than 25% of our total assets.
In addition, we may not own securities in, or make loans to, any one
company (other than a REIT) which have, in the aggregate, a value in excess of
5% of our total assets. For federal income tax purposes, the secured equipment
leases would be considered loans. The value of the secured equipment leases
entered into with any particular tenant under a lease or entered into with any
particular borrower under a mortgage loan must not represent in excess of 5% of
our total assets.
The 25% and 5% tests are determined at the end of each calendar
quarter. If we fail to meet either test at the end of any calendar quarter, we
will cease to qualify as a REIT.
Risks Associated with Distribution Requirements. Subject to certain
adjustments that are unique to REITs, a REIT generally must distribute 95% of
its taxable income. For the purpose of determining taxable income, we may be
required to accrue interest, rent and other items treated as earned for tax
purposes but that we have not yet received. In addition, we may be required not
to accrue as expenses for tax purposes certain items which actually have been
paid or certain of the Company's deductions might be disallowed by the Internal
Revenue Service. As a result, we could have taxable income in excess of cash
available for distribution. If this occurs, we may have to borrow funds or
liquidate some of our assets in order to meet the distribution requirement
applicable to a REIT.
Limitations on Share Ownership. For the purpose of protecting our REIT
status, our Articles of Incorporation limit the ownership by any single
stockholder of any class of our capital stock, including common stock, to 9.8%
of the outstanding shares of such class. The Articles also prohibit anyone from
buying shares if the purchase would result in our losing our REIT status. For
example, we would lose our REIT status if we had fewer than 100 different
stockholders or if five or fewer stockholders, applying certain broad
attribution rules of the Internal Revenue Code, owned 50% or more of the common
stock. These restrictions may discourage a change in control, deter any
attractive tender offers for our common stock or limit the opportunity for you
or other stockholders to receive a premium for your common stock in the event a
stockholder is making purchases of shares of common stock in order to acquire a
block of shares.
Other Tax Liabilities. Even if we qualify as a REIT, we may be subject
to certain federal, state and local taxes on our income and property that could
reduce operating cash flow.
Changes in Tax Laws. As we have previously described, we are treated as
a REIT for federal income tax purposes . However, this treatment is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect our status as a REIT. If
there is a change in the tax laws that prevents us from qualifying as a REIT or
that requires REITs generally to pay corporate level income taxes, we may not be
able to make the same level of distributions to our stockholders.
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE
SUITABILITY STANDARDS
The shares of common stock offered hereby (the "Shares") are suitable
only as a long-term investment for persons of adequate financial means who have
no need for liquidity in this investment. Initially, there is not expected to be
any public market for the Shares, which means that it may be difficult to sell
Shares. See the "Summary of the Articles of Incorporation and Bylaws --
Restrictions on Ownership" for a description of the transfer requirements. As a
result, the Company has established suitability standards which require
investors to have either (i) a net worth (not including home, furnishings, and
personal automobiles) of at least $45,000 and an annual gross income of at least
$45,000, or (ii) a net worth (not including home, furnishings, and personal
automobiles) of at least $150,000. The Company's suitability standards also
require that a potential investor (i) can reasonably benefit from an investment
in the Company based on such investor's overall investment objectives and
portfolio structuring; (ii) is able to bear the economic risk of the investment
based on the prospective stockholder's overall financial situation; and (iii)
has apparent understanding of (a) the fundamental risks of the investment, (b)
the risk that such investor may lose the entire investment, (c) the lack of
liquidity of the Company's Shares, (d) the background and qualifications of the
Advisor, and (e) the tax consequences of the investment.
Iowa, Maine, Massachusetts, Missouri, New Hampshire, North Carolina,
Ohio, Pennsylvania and Tennessee have established suitability standards
different from those established by the Company, and Shares will be sold only to
investors in those states who meet the special suitability standards set forth
below.
IOWA, MASSACHUSETTS, MISSOURI, NORTH CAROLINA AND TENNESSEE -- The
investor has either (i) a net worth (not including home, furnishings, and
personal automobiles) of at least $60,000 and an annual gross income of at least
$60,000, or (ii) a net worth (not including home, furnishings, and personal
automobiles) of at least $225,000.
MAINE -- The investor has either (i) a net worth (not including home,
furnishings, and personal automobiles) of at least $50,000 and an annual gross
income of at least $50,000, or (ii) a net worth (not including home,
furnishings, and personal automobiles) of at least $200,000.
NEW HAMPSHIRE -- The investor has either (i) a net worth (not including
home, furnishings, and personal automobiles) of at least $125,000 and an annual
gross income of at least $50,000, or (ii) a net worth (not including home,
furnishings, and personal automobiles) of at least $250,000.
OHIO -- The investor's investment in the Shares shall not exceed 10% of
the investor's net worth (not including home, furnishings, and personal
automobiles).
PENNSYLVANIA -- The investor has (i) a net worth (not including home,
furnishings, and personal automobiles) of at least ten times the investor's
investment in the Company; and (ii) either (a) a net worth (not including home,
furnishings, and personal automobiles) of at least $45,000 and an annual gross
income of at least $45,000, or (b) a net worth (not including home, furnishings,
and personal automobiles) of at least $150,000. Because the minimum offering of
Shares of the Company is less than $16,500,000, Pennsylvania investors are
cautioned to evaluate carefully the Company's ability to fully accomplish its
stated objectives and to inquire as to the current dollar volume of the
Company's subscription proceeds.
The foregoing suitability standards must be met by the investor who
purchases the Shares. If the investment is being made for a fiduciary account
(such as an IRA, Keogh Plan, or corporate pension or profit-sharing plan), the
beneficiary, the fiduciary account, or any donor or grantor that is the
fiduciary of the account who directly or indirectly supplies the investment
funds must meet such suitability standards.
In addition, under the laws of certain states, investors may transfer
their Shares only to persons who meet similar standards, and the Company may
require certain assurances that such standards are met. Investors should read
carefully the requirements in connection with resales of Shares as set forth in
the Articles of Incorporation and as summarized under "Summary of the Articles
of Incorporation and Bylaws -- Restrictions of Ownership."
In purchasing Shares, custodians or trustees of employee pension
benefit plans or IRAs may be subject to the fiduciary duties imposed by the
Employee Retirement Income Security Act of 1974 ("ERISA") or other applicable
laws and to the prohibited transaction rules prescribed by ERISA and related
provisions of the Internal Revenue Code (the "Code"). See "Federal Income Tax
Considerations -- Taxation of Stockholders." In addition, prior to purchasing
Shares, the trustee or custodian of an employee pension benefit plan or an IRA
should determine that such an investment would be permissible under the
governing instruments of such plan or account and applicable law. For
information regarding "unrelated business taxable income," see "Federal Income
Tax Considerations -- Taxation of Stockholders -- Tax -- Exempt Stockholders."
In order to ensure adherence to the suitability standards described
above, requisite suitability standards must be met, as set forth in the
Subscription Agreement in one of the forms attached hereto as Exhibit D. In
addition, soliciting dealers, broker-dealers that are members of the National
Association of Securities Dealers, Inc. or other entities exempt from
broker-dealer registration (collectively, the "Soliciting Dealers"), who are
engaged by CNL Securities Corp. (the "Managing Dealer") to sell Shares, have the
responsibility to make every reasonable effort to determine that the purchase of
Shares is a suitable and appropriate investment for an investor. In making this
determination, the Soliciting Dealers will rely on relevant information provided
by the investor, including information as to the investor's age, investment
objectives, investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. See "The Offering --
Subscription Procedures." Executed Subscription Agreements will be maintained in
the Company's records for six years.
HOW TO SUBSCRIBE
An investor who meets the suitability standards described above may
subscribe for Shares by completing and executing the Subscription Agreement and
delivering it to a Soliciting Dealer, together with a check for the full
purchase price of the Shares subscribed for, payable to "SouthTrust Asset
Management Company of Florida, N.A., Escrow Agent." See "The Offering --
Subscription Procedures." Certain Soliciting Dealers who have "net capital," as
defined in the applicable federal securities regulations, of $250,000 or more
may instruct their customers to make their checks for Shares subscribed for
payable directly to the Soliciting Dealer. Care should be taken to ensure that
the Subscription Agreement is filled out correctly and completely. Partnerships,
individual fiduciaries signing on behalf of trusts, estates, and in other
capacities, and persons signing on behalf of corporations and corporate trustees
may be required to obtain additional documents from Soliciting Dealers. Any
subscription may be rejected by the Company in whole or in part, regardless of
whether the subscriber meets the minimum suitability standards.
Certain Soliciting Dealers may permit investors who meet the
suitability standards described above to subscribe for Shares by telephonic
order to the Soliciting Dealer. This procedure may not be available in certain
states. See "The Offering -- Subscription Procedures" and "The Offering -- Plan
of Distribution."
A minimum investment of 250 Shares ($2,500) is required, except for
Nebraska, New York, and North Carolina investors who must make a minimum
investment of 500 Shares ($5,000). IRAs, Keogh plans, and pension plans must
make a minimum investment of at least 100 Shares ($1,000), except for Iowa
tax-exempt investors who must make a minimum investment of 250 Shares ($2,500).
For Minnesota investors only, IRAs and qualified plans must make a minimum
investment of 200 Shares ($2,000). Following an initial subscription for at
least the required minimum investment, any investor may make additional
purchases in increments of one Share. Maine investors, however, may not make
additional purchases in amounts less than the applicable minimum investment
except with respect to Shares purchased pursuant to the Company's reinvestment
plan (the "Reinvestment Plan"). See "The Offering -- General," "The Offering --
Subscription Procedures," and "Summary of Reinvestment Plan."
<PAGE>
ESTIMATED USE OF PROCEEDS
The table set forth below summarizes certain information relating to
the anticipated use of offering proceeds by the Company, assuming that
15,000,000 Shares are sold (7,356,821 Shares had been sold as of February 26,
1999, excluding 3,730 Shares issued pursuant to the Reinvestment Plan). The
Company estimates that 84% of gross offering proceeds computed at $10 per share
sold ("Gross Proceeds") will be available for the purchase of properties (the
"Properties") and the making of mortgage loans (the "Mortgage Loans"), and
approximately 9% of Gross Proceeds will be paid in fees and expenses to
affiliates of the Company (the "Affiliates") for their services and as
reimbursement for organizational and offering expenses ("Organizational and
Offering Expenses") incurred on behalf of the Company. While the estimated use
of proceeds set forth in the table below is believed to be reasonable, this
table should be viewed only as an estimate of the use of proceeds that may be
achieved.
<TABLE>
<CAPTION>
Maximum Offering(1)(2)
----------------------
Amount Percent
------ -------
<S> <C>
GROSS PROCEEDS TO THE COMPANY (3)......................................... $150,000,000 100.0%
Less:
Selling Commissions to CNL
Securities Corp. (3)................................................. 11,250,000 7.5%
Marketing Support and Due Diligence
Expense Reimbursement Fee to
CNL Securities Corp. (3)............................................. 750,000 0.5%
Organizational and Offering Expenses (4)................................ 4,500,000 3.0%
------------ ------
NET PROCEEDS TO THE COMPANY................................................ 133,500,000 89.0%
Less:
Acquisition Fees to the Advisor (5) .................................... 6,750,000 4.5%
Acquisition Expenses (6)................................................ 750,000 0.5%
Initial Working Capital Reserve ........................................ (7)
------------ ------
CASH PAYMENT FOR PURCHASE OF PROPERTIES
AND THE MAKING OF MORTGAGE LOANS
BY THE COMPANY (8)...................................................... $126,000,000 84.0%
============ ======
</TABLE>
FOOTNOTES:
(1) Excludes the purchase of 20,000 shares of Common Stock by the Advisor in
exchange for its $200,000 investment in the Company. The Advisor may, but
is not required to, purchase additional Shares of the Company.
(2) Excludes 1,500,000 Shares that may be sold pursuant to the Reinvestment
Plan.
(3) Gross Proceeds of the offering are calculated as if all Shares are sold at
$10.00 per Share and do not take into account any reduction in selling
commissions ("Selling Commissions"). See "The Offering -- Plan of
Distribution" for a description of the circumstances under which Selling
Commissions may be reduced, including commission discounts available for
purchases by registered representatives or principals of the Managing
Dealer or Soliciting Dealers, certain Directors and officers and certain
investment advisers. Selling Commissions are calculated assuming that
reduced commissions are not paid in connection with the purchase of any
Shares. The Shares are being offered to the public through CNL Securities
Corp., which will receive Selling Commissions of 7.5% on all sales of
Shares and will act as Managing Dealer. The Managing Dealer is an Affiliate
of the Advisor. Other broker-dealers may be engaged as Soliciting Dealers
to sell Shares and reallowed Selling Commissions of up to 7% with respect
to Shares which they sell. In addition, all or a portion of the marketing
support and due diligence expense reimbursement fee may be reallowed to
certain Soliciting Dealers for expenses incurred by them in selling the
Shares, including reimbursement for bona fide expenses incurred in
connection with due diligence activities, with prior written approval from,
and in the sole discretion of, the Managing Dealer. See "The Offering --
Plan of Distribution" for a more complete description of this fee.
(4) Organizational and Offering Expenses include legal, accounting, printing,
escrow, filing, registration, qualification, and other expenses of the
organization of the Company and the offering of the Shares, but exclude
Selling Commissions and the marketing support and due diligence expense
reimbursement fee. The Advisor will pay all Organizational and Offering
Expenses which exceed 3% of Gross Proceeds. The Organizational and Offering
Expenses paid by the Company in connection with the formation of the
Company, together with the 7.5% Selling Commissions, the 0.5% marketing
support and due diligence reimbursement fee, and the Soliciting Dealer
Servicing Fee incurred by the Company will not exceed thirteen percent
(13%) of the proceeds raised in connection with this offering.
(5) Acquisition fees ("Acquisition Fees") include all fees and commissions paid
by the Company to any person or entity in connection with the selection or
acquisition of any Property or the making of any Mortgage Loan, including
to Affiliates or nonaffiliates. Acquisition Fees do not include acquisition
expenses ("Acquisition Expenses").
(6) Represents Acquisition Expenses that are neither reimbursed to the Company
nor included in the purchase price of the Properties, and on which rent is
not received, but does not include certain expenses associated with
Property acquisitions that are part of the purchase price of the
Properties, that are included in the basis of the Properties, and on which
rent is received. Acquisition Expenses include any and all expenses
incurred by the Company, the Advisor, or any Affiliate of the Advisor in
connection with the selection or acquisition of any Property or the making
of any Mortgage Loan, whether or not acquired or made, including, without
limitation, legal fees and expenses, travel and communication expenses,
costs of appraisals, nonrefundable option payments on property not
acquired, accounting fees and expenses, taxes, and title insurance, but
exclude Acquisition Fees. The expenses that are attributable to the seller
of the Properties and part of the purchase price of the Properties is
anticipated to range between 1% and 2% of Gross Proceeds.
(7) Because leases generally will be on a "triple-net basis", it is not
anticipated that a permanent reserve for maintenance and repairs will be
established. However, to the extent that the Company has insufficient funds
for such purposes, the Advisor may, but is not required to, contribute to
the Company an aggregate amount of up to 1% of the net offering proceeds
available to the Company for maintenance and repairs. The Advisor also may,
but is not required to, establish reserves from offering proceeds,
operating funds, and the available proceeds of any sales of Company assets
("Sale").
(8) Offering proceeds designated for investment in Properties or the making of
Mortgage Loans temporarily may be invested in short-term, highly liquid
investments with appropriate safety of principal. The Company may, at its
discretion, use up to $100,000 per calendar quarter of offering proceeds
for redemption of Shares. See "Redemption of Shares."
<PAGE>
MANAGEMENT COMPENSATION
The table below summarizes the types, recipients, methods of
computation, and estimated amounts of all compensation, fees, reimbursements and
distributions to be paid directly or indirectly by the Company to the Advisor
and its Affiliates, exclusive of any distributions to which the Advisor or its
Affiliates may be entitled by reason of their purchase and ownership of Shares.
See "The Advisor and the Advisory Agreement." For information concerning
compensation and fees paid to the Advisor and its Affiliates since the date of
inception of the Company, see "Certain Transactions." For information concerning
compensation to the Directors, see "Management."
A maximum of 16,500,000 Shares ($165,000,000) may be sold. This amount
includes 1,500,000 Shares that may be sold to stockholders who receive a copy of
this Prospectus and who purchase Shares through the Reinvestment Plan.
The following arrangements for compensation and fees to the Advisor and
its Affiliates were not determined by arm's-length negotiations. See "Conflicts
of Interest." There is no item of compensation and no fee that can be paid to
the Advisor or its Affiliates under more than one category.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Type of Method of Computation Estimated
Compensation Maximum Amount
and Recipient
- --------------------------------------------------------------------------------------------------------------------------------
Organizational Stage
- --------------------------------------------------------------------------------------------------------------------------------
Selling Commissions to Selling Commissions of 7.5% per Share on all Shares sold, $12,375,000 if 16,500,000
Managing Dealer and subject to reduction under certain circumstances as described Shares are sold.
Soliciting Dealers in "The Offering - Plan of Distribution." Soliciting Dealers
may be reallowed Selling Commissions of up to 7% with respect
to Shares they sell.
- --------------------------------------------------------------------------------------------------------------------------------
Marketing support and Expense allowance of 0.5% of Gross Proceeds to the Managing Dealer, $825,000 if 16,500,000
due diligence expense all or a portion of which may be reallowed to Soliciting Dealers Shares are sold.
reimbursement fee to with prior written approval from, and in the sole discretion of,
Managing Dealer and the Managing Dealer. The Managing Dealer will pay all sums
Soliciting Dealers attributable to bona fide due diligence expenses from this fee, in
the Managing Dealer's sole discretion.
- --------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Actual expenses incurred, except that the Advisor will pay all such Amount is not determinable at
Advisor and its Affiliates expenses in excess of 3% of Gross Proceeds. The Organizational and this time, but will not exceed
for Organizational and Offering Expenses paid by the Company in connection with the 3% of Gross Proceeds, $4,950,000
Offering Expenses formation of the Company, together with the 7.5% Selling Commissions, if 16,500,000 Shares are sold.
the 0.5% marketing support and due diligence reimbursement fee, and
the Soliciting Dealer Servicing Fee incurred by the Company will not
exceed thirteen percent (13%) of the proceeds raised in connection
with this offering.
- --------------------------------------------------------------------------------------------------------------------------------
Acquisition Stage
- --------------------------------------------------------------------------------------------------------------------------------
Acquisition Fee to the 4.5% of Gross Proceeds, loan proceeds from permanent financing and $7,425,000 if 16,500,000 Shares
Advisor amounts outstanding on the line of credit, if any, at the time of are sold plus $2,227,500 if
listing the Company's common stock on a national securities exchange Permanent Financing equals
or over-the-counter market, but excluding loan proceeds used to $49,500,000.
finance secured equipment leases (collectively, "Total Proceeds")
payable to the Advisor as Acquisition Fees.
- --------------------------------------------------------------------------------------------------------------------------------
Other Acquisition Fees Any fees paid to Affiliates of the Advisor in connection with the Amount is not determinable at
to Affiliates of the financing, development, construction or renovation of a Property. this time.
Advisor Such fees are in addition to 4.5% of Total Proceeds payable to the
Advisor as Acquisition Fees, and payment of such fees will be
subject to approval by the Board of Directors, including a majority
of the Independent Directors, not otherwise interested in the
transaction.
<PAGE>
- --------------------------------------------------------------------------------------------------------------------------------
Type of Method of Computation Estimated
Compensation Maximum Amount
and Recipient
- --------------------------------------------------------------------------------------------------------------------------------
Reimbursement of Reimbursement to the Advisor and its Affiliates for expenses Acquisition Expenses, which are
Acquisition Expenses actually incurred. based on a number of factors,
to the Advisor and its including the purchase price of
Affiliates The total of all Acquisition Fees and any Acquisition Expenses the Properties, are not determinable
payable to the Advisor and its Affiliates shall be reasonable and at this time.
shall not exceed an amount equal to 6% of the Real
Estate Asset Value of a Property, or in the case of a
Mortgage Loan, 6% of the funds advanced, unless a
majority of the Board of Directors, including a
majority of the Independent Directors not otherwise
interested in the transaction, approves fees in excess
of this limit subject to a determination that the
transaction is commercially competitive, fair and
reasonable to the Company. Acquisition Fees shall be
reduced to the extent that, and if necessary to limit,
the total compensation paid to all persons involved in
the acquisition of any Property to the amount
customarily charged in arms-length transactions by
other persons or entities rendering similar services
as an ongoing public activity in the same geographical
location and for comparable types of Properties, and
to the extent that other acquisition fees, finder's
fees, real estate commissions, or other similar fees
or commissions are paid by any person in connection
with the transaction. "Real Estate Asset Value" means
the amount actually paid or allocated to the purchase,
development, construction or improvement of a
Property, exclusive of Acquisition Fees and
Acquisition Expenses.
- --------------------------------------------------------------------------------------------------------------------------------
Operational Stage
- --------------------------------------------------------------------------------------------------------------------------------
Asset Management Fee to A monthly Asset Management Fee in an amount equal to one-twelfth Amount is not determinable at
the Advisor of 0.60% of the Company's Real Estate Asset Value and the this time. The amount of the
outstanding principal amount of any Mortgage Loans, as Asset Management Fee will depend
of the end of the preceding month. Specifically, Real upon, among other things, the
Real Estate Asset Value equals the amount invested in the cost of the Properties and the
Properties wholly owned by the Company, determined on the amount invested in Mortgage Loans.
basis of cost, plus, in the case of Properties owned by
any joint venture or partnership in which the Company is a
co-venturer or partner ("Joint Venture"), the portion
of the cost of such Properties paid by the Company,
exclusive of Acquisition Fees and Expenses. The Asset
Management Fee, which will not exceed fees which are
competitive for similar services in the same
geographic area, may or may not be taken, in whole or
in part as to any year, in the sole discretion of the
Advisor. All or any portion of the Asset Management
Fee not taken as to any fiscal year shall be deferred
without interest and may be taken in such other fiscal
year as the Advisor shall determine.
<PAGE>
- --------------------------------------------------------------------------------------------------------------------------------
Type of Method of Computation Estimated
Compensation Maximum Amount
and Recipient
- --------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Operating Expenses (which, in general, are those expenses Amount is not determinable
Advisor and Affiliates relating to administration of the Company on an ongoing at this time.
for operating expenses basis) will be reimbursed by the Company. To the extent
that Operating Expenses payable or reimbursable by the
Company, in any four consecutive fiscal quarters (the
"Expense Year"), exceed the greater of 2% of Average
Invested Assets or 25% of Net Income (the "2%/25%
Guidelines"), the Advisor shall reimburse the Company
within 60 days after the end of the Expense Year the
amount by which the total Operating Expenses paid or
incurred by the Company exceed the 2%/25% Guidelines.
"Average Invested Assets" means, for a specified
period, the average of the aggregate book value of the
Properties, Mortgage Loans, and Secured Equipment
Leases (collectively, the "Assets") of the Company
invested, directly or indirectly, in equity interests
in and loans secured by real estate before reserves
for depreciation or bad debts or other similar
non-cash reserves, computed by taking the average of
such values at the end of each month during such
period. "Net Income" means for any period, the total
revenues applicable to such period, less the total
expenses applicable to such period excluding additions
to reserves for depreciation, bad debts, or other
similar non-cash reserves; provided, however, Net
Income for purposes of calculating total allowable
Operating Expenses shall exclude the gain from the
sale of the Company's Assets.
- --------------------------------------------------------------------------------------------------------------------------------
Soliciting Dealer An annual fee of .20% of Invested Capital on December 31 of Amount is not determinable at
Servicing Fee to each year, commencing on December 31 of the year following this time. Until such time as
Managing Dealer the year in which the offering terminates, generally assets are sold, the estimated
payable to the Managing Dealer, which, in its sole discretion, amounts payable to the Managing
in turn may reallow all or a portion of such fee to Dealer for each of the years
Soliciting Dealers whose clients hold Shares on such date. following the year of termination
In general, Invested Capital is the amount of cash paid of the offering are expected to be
by the stockholders to the Company for their Shares, $330,000 if 16,500,000 Shares are
reduced by certain prior Distributions to the stockholders sold. The maximum total amount
from the Sale of Assets. The Soliciting Dealer Servicing payable to the Managing Dealer
Fee will terminate as of the beginning of any year in through December 31, 2005 is
which the Company is liquidated or in which Listing occurs, $1,980,000 if 16,500,000 Shares are
provided, however, that any previously accrued but unpaid sold.
portion of the Soliciting Dealer Servicing Fee may be paid in
such year or any subsequent year.
<PAGE>
- --------------------------------------------------------------------------------------------------------------------------------
Type of Method of Computation Estimated
Compensation Maximum Amount
and Recipient
- --------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated real estate disposition fee, payable upon Amount is not determinable at
real estate disposition Sale of one or more Properties, in an amount equal to the lesser this time. The amount of this
fee payable to the of (i) one-half of a Competitive Real Estate Commission, or (ii) fee, if it becomes payable, will
Advisor from a Sale or 3% of the sales price of such Property or Properties. Payment of depend upon the price at which
Sales of a Property not such fee shall be made only if the Advisor provides a substantial Properties are sold.
in liquidation of the amount of services in connection with the Sale of a Property or
Company Properties and shall be subordinated to receipt by the
stockholders of Distributions equal to the sum of (i)
their aggregate Stockholders' 8% Return and (ii) their
aggregate Invested Capital. If, at the time of a Sale,
payment of the disposition fee is deferred because the
subordination conditions have not been satisfied, then
the disposition fee shall be paid at such later time
as the subordination conditions are satisfied. Upon
Listing, if the Advisor has accrued but not been paid
such real estate disposition fee, then for purposes of
determining whether the subordination conditions have
been satisfied, stockholders will be deemed to have
received a Distribution in the amount equal to the
product of the total number of Shares outstanding and
the average closing price of the Shares over a period,
beginning 180 days after Listing, of 30 days during
which the Shares are traded. "Stockholders' 8%
Return," as of each date, means an aggregate amount
equal to an 8% cumulative, noncompounded, annual
return on Invested Capital.
- --------------------------------------------------------------------------------------------------------------------------------
Subordinted Incentive At such time, if any, as Listing occurs, the Advisor shall be Amount is not determinable at
Fee payable to the paid the Subordinated Incentive Fee in an amount equal to 10% this time.
Advisor at such time, of the amount by which (i) the market value of the Company
if any, as Listing (as defined below) plus the total Distributions made to
occurs stockholders from the Company's inception until the date of
Listing exceeds (ii) the sum of (A) 100% of Invested Capital
and (B) the total Distributions required to be made to the
stockholders in order to pay the Stockholders' 8%
Return from inception through the date the market
value is determined. For purposes of calculating the
Subordinated Incentive Fee, the market value of the
Company shall be the average closing price or average
of bid and asked price, as the case may be, over a
period of 30 days during which the Shares are traded
with such period beginning 180 days after Listing. The
Subordinated Incentive Fee will be reduced by the
amount of any prior payment to the Advisor of a
deferred, subordinated share of Net Sales Proceeds
from Sales of assets of the Company.
- --------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated share equal to 10% of Net Sales Proceeds Amount is not determinable at
share of Net Sales from Sales of assets of the Company payable after receipt by the this time.
Proceeds from Sales of stockholders of Distributions equal to the sum of (i) the
Assets of the Company Stockholders' 8% Return and (ii) 100% of Invested Capital.
not in liquidation of Following Listing, no share of Net Sales Proceeds will be paid to
the Company payable to the Advisor.
the Advisor
<PAGE>
- --------------------------------------------------------------------------------------------------------------------------------
Type of Method of Computation Estimated
Compensation Maximum Amount
and Recipient
- --------------------------------------------------------------------------------------------------------------------------------
Secured Equipment A fee paid to the Advisor out of the proceeds of one or more Amount is not determinable at
Lease Servicing Fee revolving lines of credit (collectively, the "Line of Credit") this time.
to the Advisor or Permanent Financing for negotiating furniture, fixture and
equipment ("Equipment") loans or direct financing
leases (the "Secured Equipment Leases") and
supervising the Secured Equipment Lease program equal
to 2% of the purchase price of the Equipment subject
to each Secured Equipment Lease and paid upon entering
into such lease.
- --------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Repayment by the Company of actual expenses incurred. Amount not determinable at this
Advisor and Affiliates time.
for Secured Equipment
Lease servicing expenses
- --------------------------------------------------------------------------------------------------------------------------------
Liquidation Stage
- --------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated real estate disposition fee, payable Amount is not determinable at this
real estate disposition upon Sale of one or more Properties, in an amount equal to time. The amount of this fee,
fee payable to the the lesser of (i) one-half of a Competitive Real Estate if it becomes payable, will depend
Advisor from a Sale or Commission, or (ii) 3% of the sales price of such Property upon the price at which Properties
Sales in liquidation of or Properties. Payment of such fee shall be made only if are sold.
the Company the Advisor provides a substantial amount of services in
connection with the Sale of a Property or Properties
and shall be subordinated to receipt by the stockholders
of Distributions equal to the sum of (i) their aggregate
Stockholders' 8% Return and (ii) their aggregate Invested
Capital. If, at the time of a Sale, payment of the
disposition fee is deferred because the subordination
conditions have not been satisfied, then the disposition
fee shall be paid at such later time as the subordination
conditions are satisfied.
- --------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated A deferred, subordinated share equal to 10% of Net Sales Amount is not determinable at
share of Net Sales Proceeds from Sales of Assets of the Company payable after this time.
Proceeds from Sales of receipt by the stockholders of Distributions equal to the sum
Assets of the Company of (i) the Stockholders' 8% Return and (ii) 100% of Invested
in liquidation of the Capital. Following Listing, no share of Net Sales Proceeds will
Company payable to the be paid to the Advisor.
Advisor
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONFLICTS OF INTEREST
The Company will be subject to various conflicts of interest arising
out of its relationship to the Advisor and its Affiliates, as described below.
The following chart indicates the relationship between the Advisor and
those Affiliates that will provide services to the Company.
CNL Group, Inc. (1)
Subsidiaries, Affiliates and Strategic Business Units
Capital Markets: Retail:
CNL Securities Corp. (2) Commercial Net Lease Realty, Inc.
CNL Investment Company (4)
Restaurant:
CNL Fund Advisors, Inc.
CNL Restaurant Services, Inc.
Corporate Services:
CNL Corporate Services, Inc. (3)
Hospitality:
CNL Hospitality Advisors, Inc.
(formerly CNL Real Estate Advisors,
Inc.) (5)
CNL Hotel Development Company
Health Care:
CNL Health Care Advisors, Inc.
CNL Health Care Development, Inc.
Financial Services:
CNL Financial Services, Inc.
CNL Advisory Services, Inc.
Corporate Properties:
CNL Corporate Properties, Inc.
- --------------------------
(1) James M. Seneff, Jr., Chairman of the Board and Chief Executive Office
r of the Company, shares ownership and voting cont rol of CNL Group,
Inc. with Dayle L. Seneff, his wife.
(2) CNL Securities Corp. (a subsidiary of CNL Group, Inc.) has served as
managing dealer in the offerings for various CNL public and private
real estate programs, including the Company.
(3) CNL Corporate Services, Inc. (a wholly owned subsidiary of CNL Group,
Inc.) and other Affiliates provide administrative and accounting
services for various CNL entities, including the Company.
(4) Commercial Net Lease Realty, Inc. is a REIT listed on the New York
Stock Exchange. Effective January 1, 1998, CNL Realty Advisors, Inc.
and Commercial Net Lease Realty, Inc. merged, at which time Commercial
Net Lease Realty, Inc. became self advised. James M. Seneff, Jr.
continues to hold the positions of Chief Executive Officer and Chairman
of the Board, and Robert A. Bourne continues to hold the position of
Vice Chairman of the Board of Commercial Net Lease Realty, Inc.
(5) CNL Hospitality Advisors, Inc. (a subsidiary of CNL Group, Inc.)
provides management and advisory services to the Company pursuant to
the Advisory Agreement.
The Advisor and certain other Affiliates of the Company are affiliated
with CNL American Properties Fund, Inc., a public program which invests in
restaurant properties. As of February 26, 1999, CNL American Properties Fund,
Inc. had approximately $56,800,000 available for investment.
<PAGE>
PRIOR AND FUTURE PROGRAMS
Affiliates of the Advisor have organized over 100 other real estate
investments, currently have other real estate holdings, and in the future expect
to form, offer interests in, and manage other real estate programs in addition
to the Company, and make additional real estate investments. Some of these
(including 18 prior public partnerships, one prior unlisted public REIT and one
prior listed public REIT) involve and will involve Affiliates of the Advisor in
the ownership, operation, leasing, and management of properties that may be
suitable for the Company.
Certain of these affiliated public or private real estate programs
invest in restaurant properties, may invest in restaurant and hotel properties,
may purchase properties concurrently with the Company and may lease properties
to operators who also lease or operate certain of the Company's Properties.
These properties, if located in the vicinity of, or adjacent to, Properties
acquired by the Company may affect the Properties' gross revenues. Additionally,
such other programs may offer mortgage or equipment financing to the same or
similar entities as those targeted by the Company, thereby affecting the
Company's Mortgage Loan activities or Secured Equipment Lease program. Such
conflicts between the Company and affiliated programs may affect the value of
the Company's investments as well as its Net Income. The Company believes that
the Advisor has established guidelines to minimize such conflicts. See "Certain
Conflict Resolution Procedures" below.
ACQUISITION OF PROPERTIES
Affiliates of the Advisor regularly have opportunities to acquire
restaurant properties of a type suitable for acquisition by the Company as a
result of their existing relationships and past experience with various
restaurant chains (the "Restaurant Chains") and their franchisees. Affiliates of
the Advisor are expected to develop similar relationships with various hotel
chains (the "Hotel Chains") and their franchisees. See "Business -- General." A
purchaser who wishes to acquire one or more of these properties or invest in one
or more mortgage loans may have to do so within a relatively short period of
time, occasionally at a time when the Company (due to insufficient funds, for
example) may be unable to make the acquisition or investment.
In an effort to address these situations and preserve the acquisition
opportunities for the Company (and other entities with which the Advisor or its
Affiliates are affiliated), Affiliates of the Advisor may maintain lines of
credit which enable them to acquire properties or make mortgage loans on an
interim basis. In the event Affiliates acquire such properties, these properties
and or mortgage loans generally will be purchased from Affiliates of the
Advisor, at their cost, by one or more existing or future public or private
programs formed by Affiliates of the Advisor.
The Advisor could experience potential conflicts of interest in
connection with the negotiation of the purchase price and other terms of the
acquisition of a Property, as well as the terms of the lease of a Property, due
to its relationship with its Affiliates and the ongoing business relationship of
its Affiliates with operators of Restaurant Chains and Hotel Chains.
The Advisor or its Affiliates also may be subject to potential
conflicts of interest at such time as the Company wishes to acquire a property
that also would be suitable for acquisition by an Affiliate of CNL. Affiliates
of the Advisor serve as Directors of the Company and, in this capacity, have a
fiduciary obligation to act in the best interest of the stockholders of the
Company and, as general partners or directors of CNL Affiliates, to act in the
best interests of the investors in other programs with investments that may be
similar to those of the Company and will use their best efforts to assure that
the Company will be treated as favorably as any such other program. See
"Management -- Fiduciary Responsibility of the Board of Directors." The Company
has also developed procedures to resolve potential conflicts of interest in the
allocation of properties between the Company and certain of its Affiliates. See
"Certain Conflict Resolution Procedures" below.
The Company will supplement this Prospectus during the offering period
to disclose the acquisition of a Property at such time as the Advisor believes
that a reasonable probability exists that the Company will acquire the Property,
including an acquisition from the Advisor or its Affiliates. Based upon the
experience of management of the Company and the Advisor and the proposed
acquisition methods, a reasonable probability that the Company will acquire a
Property normally will occur as of the date on which (i) a commitment letter is
executed by a proposed lessee, (ii) a satisfactory credit underwriting for the
proposed lessee has been completed and (iii) a satisfactory site inspection has
been completed.
<PAGE>
SALES OF PROPERTIES
A conflict also could arise in connection with the Advisor's
determination as to whether or not to sell a Property, since the interests of
the Advisor and the stockholders may differ as a result of their distinct
financial and tax positions and the compensation to which the Advisor or its
Affiliates may be entitled upon the Sale of a Property. See "Compensation of the
Advisor," below for a description of these compensation arrangements. In order
to resolve this potential conflict, the Board of Directors will be required to
approve each Sale of a Property. In the unlikely event that the Company and
another CNL program attempted to sell similar properties at the same time, a
conflict could arise since the two programs potentially could compete with each
other for a suitable purchaser. In order to resolve this potential conflict, the
Advisor has agreed not to approve the sale of any of the Company's Properties
contemporaneously with the sale of a property owned by another CNL program if
the two properties are part of the same Restaurant Chain or Hotel Chain and are
within a three mile radius of each other, unless the Advisor and the principals
of the other CNL program are able to locate a suitable purchaser for each
property.
JOINT INVESTMENT WITH AN AFFILIATED PROGRAM
The Company may invest in Joint Ventures with another program sponsored
by the Advisor or its Affiliates if a majority of the Directors, including a
majority of the Independent Directors, not otherwise interested in the
transaction, determine that the investment in the Joint Venture is fair and
reasonable to the Company and on substantially the same terms and conditions as
those to be received by the co-venturer or co-venturers. Potential situations
may arise in which the interests of the co-venturer or co-venturers may conflict
with those of the Company. In addition, the Company and the co-venturer or
co-venturers may reach an impasse with regard to business decisions, such as the
purchase or sale of Property, in which the approval of the Company and each
co-venturer is required. In this event, none of the parties may have the funds
necessary to purchase the interests of the other co-venturers. The Company may
experience difficulty in locating a third party purchaser for its Joint Venture
interest and in obtaining a favorable sales price for such Joint Venture
interest. See "Risk Factors -- Company May Not Control Joint Ventures."
COMPETITION FOR MANAGEMENT TIME
The officers and directors of the Advisor and the officers and
Directors of the Company currently are engaged, and in the future will engage,
in the management of other business entities and properties and in other
business activities. They will devote only as much of their time to the business
of the Company as they, in their judgment, determine is reasonably required,
which will be substantially less than their full time. These officers and
directors of the Advisor and officers and Directors of the Company may
experience conflicts of interest in allocating management time, services, and
functions among the Company and the various entities, investor programs (public
or private), and any other business ventures in which any of them are or may
become involved.
COMPENSATION OF THE ADVISOR
The Advisor has been engaged to perform various services for the
Company and will receive fees and compensation for such services. None of the
agreements for such services were the result of arm's-length negotiations. All
such agreements, including the Advisory Agreement, require approval by a
majority of the Board of Directors, including a majority of the Independent
Directors, not otherwise interested in such transactions, as being fair and
reasonable to the Company and on terms and conditions no less favorable than
those which could be obtained from unaffiliated entities. The timing and nature
of fees and compensation to the Advisor could create a conflict between the
interests of the Advisor and those of the stockholders. A transaction involving
the purchase, lease, or Sale of any Property, or the entering into or Sale of a
Mortgage Loan or a Secured Equipment Lease by the Company may result in the
immediate realization by the Advisor and its Affiliates of substantial
commissions, fees, compensation, and other income. Although the Advisory
Agreement authorizes the Advisor to take primary responsibility for all
decisions relating to any such transaction, the Board of Directors must approve
all of the Company's acquisitions and Sales of Properties and the entering into
and Sales of Mortgage Loans or Secured Equipment Leases. Potential conflicts may
arise in connection with the determination by the Advisor on behalf of the
Company of whether to hold or sell a Property, Mortgage Loan, or Secured
Equipment Leases as such determination could impact the timing and amount of
fees payable to the Advisor. See "The Advisor and the Advisory Agreement."
<PAGE>
RELATIONSHIP WITH MANAGING DEALER
The Managing Dealer is CNL Securities Corp., an Affiliate of the
Company. Certain of the officers and Directors of the Company are also officers,
directors, and registered principals of the Managing Dealer. This relationship
may create conflicts in connection with the fulfillment by the Managing Dealer
of its due diligence obligations under the federal securities laws. Although the
Managing Dealer will examine the information in the Prospectus for accuracy and
completeness, the Managing Dealer is an Affiliate of the Company and will not
make an independent review of the Company and the offering. Accordingly, the
investors do not have the benefit of such independent review. Certain of the
Soliciting Dealers have made, or are expected to make, their own independent due
diligence investigations. The Managing Dealer is not prohibited from acting in
any capacity in connection with the offer and sale of securities offered by
entities that may have some or all investment objectives similar to those of the
Company and is expected to participate in other offerings sponsored by one or
more of the officers or Directors of the Company.
LEGAL REPRESENTATION
Shaw Pittman Potts & Trowbridge, which serves as securities and tax
counsel to the Company in this offering, also serves as securities and tax
counsel for certain of its Affiliates, including other real estate programs, in
connection with other matters. In addition, certain members of the firm of Shaw
Pittman Potts & Trowbridge have invested as limited partners in prior programs
sponsored by Affiliates of the Advisor in aggregate amounts which do not exceed
one percent of the amounts sold by any of these programs, and members of the
firm also may invest in the Company. Neither the Company nor the stockholders
will have separate counsel. In the event any controversy arises following the
termination of this offering in which the interests of the Company appear to be
in conflict with those of the Advisor or its Affiliates, other counsel may be
retained for one or both parties.
CERTAIN CONFLICT RESOLUTION PROCEDURES
In order to reduce or eliminate certain potential conflicts of
interest, the Articles of Incorporation contain a number of restrictions
relating to (i) transactions between the Company and the Advisor or its
Affiliates, (ii) certain future offerings, and (iii) allocation of properties,
mortgage loans and secured equipment leases among certain affiliated entities.
These restrictions include the following:
1. No goods or services will be provided by the Advisor or its
Affiliates to the Company except for transactions in which the Advisor or its
Affiliates provide goods or services to the Company in accordance with the
Articles of Incorporation which provides that a majority of the Directors
(including a majority of the Independent Directors) not otherwise interested in
such transactions must approve such transactions as fair and reasonable to the
Company and on terms and conditions not less favorable to the Company than those
available from unaffiliated third parties and not less favorable than those
available from the Advisor or its Affiliates in transactions with unaffiliated
third parties.
2. The Company will not purchase or lease Properties in which the
Advisor or its Affiliates has an interest without the determination, by a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction, that such transaction is
competitive and commercially reasonable to the Company and at a price to the
Company no greater than the cost of the asset to the Advisor or its Affiliate
unless there is substantial justification for any amount that exceeds such cost
and such excess amount is determined to be reasonable. In no event shall the
Company acquire any such asset at an amount in excess of its appraised value.
The Company will not sell or lease Properties to the Advisor or its Affiliates
unless a majority of the Directors (including a majority of the Independent
Directors) not interested in the transaction determine the transaction is fair
and reasonable to the Company.
3. The Company will not make any loans to Affiliates. Any loans to the
Company by the Advisor or its Affiliates must be approved by a majority of the
Directors (including a majority of the Independent Directors) not otherwise
interested in such transaction as fair, competitive, and commercially
reasonable, and no less favorable to the Company than comparable loans between
unaffiliated parties. It is anticipated that the Advisor or its Affiliates shall
be entitled to reimbursement, at cost, for actual expenses incurred by the
Advisor or its Affiliates on behalf of the
<PAGE>
Company or Joint Ventures in which the Company is a co-venturer, subject to the
2%/25% Guidelines (2% of Average Invested Assets or 25% of Net Income) described
under "The Advisor and the Advisory Agreement -- The Advisory Agreement."
4. Until completion of this offering, the Advisor and its Affiliates
will not offer or sell interests in any subsequently formed public program that
has investment objectives and structure similar to those of the Company and that
intends to (i) invest, on a cash and/or leveraged basis, in a diversified
portfolio of restaurant and hotel properties to be leased on a "triple-net"
basis to operators of Restaurant Chains and Hotel Chains, (ii) offer mortgage
loans and (iii) offer secured equipment leases. The Advisor and its Affiliates
also will not purchase a property or offer or invest in a mortgage loan or
secured equipment lease for any such subsequently formed public program that has
investment objectives and structure similar to the Company and that intends to
invest on a cash and/or leveraged basis primarily in a diversified portfolio of
restaurant and hotel properties to be leased on a "triple-net" basis to
operators of Restaurant Chains and Hotel Chains until substantially all
(generally, 80%) of the funds available for investment (Net Offering Proceeds)
by the Company have been invested or committed to investment. (For purposes of
the preceding sentence only, funds are deemed to have been committed to
investment to the extent written agreements in principle or letters of
understanding are executed and in effect at any time, whether or not any such
investment is consummated, and also to the extent any funds have been reserved
to make contingent payments in connection with any Property, whether or not any
such payments are made.) Affiliates of the Advisor are currently purchasing
restaurant and other types of properties, including furniture, fixtures and
equipment, and incurring related costs for public and private programs, which
have investment objectives that are not identical, and/or a structure not
similar to, those of the Company, but which make investments that include
"triple-net" leases of fast-food, family-style and casual-dining restaurant
properties and other types of properties, Mortgage Loans and/or in Secured
Equipment Leases. The Advisor or its Affiliates currently are and in the future
may offer interests in one or more public or private programs organized to
purchase properties of the type to be acquired by the Company, to offer Mortgage
Loans and/or to offer Secured Equipment Leases.
5. The Board of Directors and the Advisor have agreed that, in the
event that an investment opportunity becomes available which is suitable for
both the Company and a public or private entity with which the Advisor or its
Affiliates are affiliated, for which both entities have sufficient uninvested
funds, then the entity which has had the longest period of time elapse since it
was offered an investment opportunity will first be offered the investment
opportunity. An investment opportunity will not be considered suitable for a
program if the requirements of Item 4 above could not be satisfied if the
program were to make the investment. In determining whether or not an investment
opportunity is suitable for more than one program, the Advisor and its
Affiliates will examine such factors, among others, as the cash requirements of
each program, the effect of the acquisition both on diversification of each
program's investments by types of restaurants and other businesses and
geographic area, and on diversification of the tenants of its properties (which
also may affect the need for one of the programs to prepare or produce audited
financial statements for a property or a tenant), the anticipated cash flow of
each program, the size of the investment, the amount of funds available to each
program, and the length of time such funds have been available for investment.
If a subsequent development, such as a delay in the closing of a property or a
delay in the construction of a property, causes any such investment, in the
opinion of the Advisor and its Affiliates, to be more appropriate for an entity
other than the entity which committed to make the investment, however, the
Advisor has the right to agree that the other entity affiliated with the Advisor
or its Affiliates may make the investment. The Advisor and certain other
Affiliates of the Company are affiliated with CNL American Properties Fund,
Inc., a public program whose offering of securities became fully subscribed in
December 1998. As of February 26, 1999, CNL American Properties Fund, Inc. had
approximately $56,800,000 available for investment.
6. With respect to Shares owned by the Advisor, the Directors, or any
Affiliate, neither the Advisor, nor the Directors may vote or consent on matters
submitted to the stockholders regarding the removal of the Advisor, Directors,
or any Affiliate or any transaction between the Company and any of them. In
determining the requisite percentage in interest of Shares necessary to approve
a matter on which the Advisor, Directors, and any Affiliate may not vote or
consent, any Shares owned by any of them shall not be included.
Additional conflict resolution procedures are identified under "-Sales
of Properties," " -- Joint Investment With An Affiliated Program," and " --
Legal Representation."
<PAGE>
SUMMARY OF REINVESTMENT PLAN
The Company has adopted the Reinvestment Plan pursuant to which
stockholders may elect to have the full amount of their cash Distributions from
the Company reinvested in additional Shares of the Company. Each prospective
investor who wishes to participate in the Reinvestment Plan should consult with
such investor's Soliciting Dealer as to the Soliciting Dealer's position
regarding participation in the Reinvestment Plan. The following discussion
summarizes the principal terms of the Reinvestment Plan. The Reinvestment Plan
is attached hereto as Exhibit A.
GENERAL
An independent agent (the "Reinvestment Agent"), which currently is MMS
Securities, Inc., will act on behalf of the participants in the Reinvestment
Plan (the "Participants"). The Reinvestment Agent at all times will be
registered as a broker-dealer with the Securities and Exchange Commission (the
"Commission") and each state securities commission. At any time that the Company
is engaged in an offering, including the offering described herein, the
Reinvestment Agent will invest all Distributions attributable to Shares owned by
Participants in Shares of the Company at the public offering price per Share,
which is currently $10.00 per Share. At any time that the Company is not engaged
in an offering and until Listing, the price per Share will be determined by (i)
quarterly appraisal updates performed by the Company based on a review of the
existing appraisal and lease of each Property, focusing on a re-examination of
the capitalization rate applied to the rental stream to be derived from that
Property; and (ii) a review of the outstanding Mortgage Loans and Secured
Equipment Leases focusing on a determination of present value by a
re-examination of the capitalization rate applied to the stream of payments due
under the terms of each Mortgage Loan and Secured Equipment Lease. The
capitalization rate used by the Company and, as a result, the price per Share
paid by the Participants in the Reinvestment Plan prior to Listing will be
determined by the Advisor in its sole discretion. The factors that the Advisor
will use to determine the capitalization rate include (i) its experience in
selecting, acquiring and managing properties similar to the Properties; (ii) an
examination of the conditions in the market; and (iii) capitalization rates in
use by private appraisers, to the extent that the Advisor deems such factors
appropriate, as well as any other factors that the Advisor deems relevant or
appropriate in making its determination. The Company's internal accountants will
then convert the most recent quarterly balance sheet of the Company from a
"GAAP" balance sheet to a "fair market value" balance sheet. Based on the "fair
market value" balance sheet, the internal accountants will then assume a Sale of
the Company's Assets and the liquidation of the Company in accordance with its
constitutive documents and applicable law and compute the appropriate method of
distributing the cash available after payment of reasonable liquidation
expenses, including closing costs typically associated with the sale of assets
and shared by the buyer and seller, and the creation of reasonable reserves to
provide for the payment of any contingent liabilities. All Shares available for
purchase under the Reinvestment Plan either are registered pursuant to this
Prospectus or will be registered under the Securities Act of 1933 through a
separate prospectus relating solely to the Reinvestment Plan. Until this
offering has terminated, Shares will be available for purchase out of the
additional 1,500,000 Shares registered with the Commission in connection with
this offering. See "The Offering -- Plan of Distribution." After the offering
has terminated, Shares will be available from any additional Shares (not
expected to exceed 1,500,000 Shares at any one time) which the Company elects to
register with the Commission for the Reinvestment Plan. The Reinvestment Plan
may be amended or supplemented by an agreement between the Reinvestment Agent
and the Company at any time, including but not limited to an amendment to the
Reinvestment Plan to add a voluntary cash contribution feature or to substitute
a new Reinvestment Agent to act as agent for the Participants or to increase the
administrative charge payable to the Reinvestment Agent, by mailing an
appropriate notice at least 30 days prior to the effective date thereof to each
Participant at his or her last address of record; provided, that any such
amendment must be approved by a majority of the Independent Directors of the
Company. Such amendment or supplement shall be deemed conclusively accepted by
each Participant except those Participants from whom the Company receives
written notice of termination prior to the effective date thereof.
Stockholders who have received a copy of this Prospectus and
participate in this offering can elect to participate in and purchase Shares
through the Reinvestment Plan at any time and would not need to receive a
separate prospectus relating solely to the Reinvestment Plan. A person who
becomes a stockholder otherwise than by participating in this offering, may
purchase Shares through the Reinvestment Plan only after receipt of a separate
prospectus relating solely to the Reinvestment Plan.
<PAGE>
At any time that the Company is not engaged in an offering, the price
per Share purchased pursuant to the Reinvestment Plan shall be the fair market
value of the Shares based on quarterly appraisal updates of the Company's assets
until such time, if any, as Listing occurs. Upon Listing, the Shares to be
acquired for the Reinvestment Plan may be acquired either through such market or
directly from the Company pursuant to a registration statement relating to the
Reinvestment Plan, in either case at a per-Share price equal to the
then-prevailing market price on the national securities exchange or
over-the-counter market on which the Shares are listed at the date of purchase.
In the event that, after Listing occurs, the Reinvestment Agent purchases Shares
on a national securities exchange or over-the-counter market through a
registered broker-dealer, the amount to be reinvested shall be reduced by any
brokerage commissions charged by such registered broker-dealer. In the event
that such registered broker-dealer charges reduced brokerage commissions,
additional funds in the amount of any such reduction shall be left available for
the purchase of Shares. The Company is unable to predict the effect which such a
proposed Listing would have on the price of the Shares acquired through the
Reinvestment Plan.
INVESTMENT OF DISTRIBUTIONS
Distributions will be used by the Reinvestment Agent, promptly
following the payment date with respect to such Distributions, to purchase
Shares on behalf of the Participants from the Company. All such Distributions
shall be invested in Shares within 30 days after such payment date. Any
Distributions not so invested will be returned to Participants.
At this time, Participants will not have the option to make voluntary
contributions to the Reinvestment Plan to purchase Shares in excess of the
amount of Shares that can be purchased with their Distributions. The Board of
Directors reserves the right, however, to amend the Reinvestment Plan in the
future to permit voluntary contributions to the Reinvestment Plan by
Participants, to the extent consistent with the Company's objective of
qualifying as a REIT.
PARTICIPANT ACCOUNTS, FEES, AND ALLOCATION OF SHARES
For each Participant, the Reinvestment Agent will maintain a record
which shall reflect for each fiscal quarter the Distributions received by the
Reinvestment Agent on behalf of such Participant. The Company shall be
responsible for all administrative charges and expenses charged by the
Reinvestment Agent. Any interest earned on such Distributions will be paid to
the Company to defray certain costs relating to the Reinvestment Plan. The
administrative charge for each fiscal quarter will be the lesser of 5% of the
amount reinvested for the Participant or $2.50, with a minimum charge of $0.50.
The maximum annual charge is $10.00.
The Reinvestment Agent will use the aggregate amount of Distributions
to all Participants for each fiscal quarter to purchase Shares for the
Participants. If the aggregate amount of Distributions to Participants exceeds
the amount required to purchase all Shares then available for purchase, the
Reinvestment Agent will purchase all available Shares and will return all
remaining Distributions to the Participants within 30 days after the date such
Distributions are made. The purchased Shares will be allocated among the
Participants based on the portion of the aggregate Distributions received by the
Reinvestment Agent on behalf of each Participant, as reflected in the records
maintained by the Reinvestment Agent. The ownership of the Shares purchased
pursuant to the Reinvestment Plan shall be reflected on the books of the
Company.
Subject to the provisions of the Articles of Incorporation relating to
certain restrictions on and the effective dates of transfer, Shares acquired
pursuant to the Reinvestment Plan will entitle the Participant to the same
rights and to be treated in the same manner as those purchased by the
Participants in the offering. Accordingly, the Company will pay the Managing
Dealer Selling Commissions of 7.5% (subject to reduction under the circumstances
provided under "The Offering -- Plan of Distribution") and a marketing support
and due diligence fee of 0.5%. The Company will also pay the Advisor Acquisition
Fees of 4.5% of the purchase price of the Shares sold pursuant to the
Reinvestment Plan until the termination of the offering. Thereafter, Acquisition
Fees will be paid by the Company only in the event that proceeds of the sale of
Shares are used to acquire Properties or to invest in Mortgage Loans. As a
result, aggregate fees payable to Affiliates of the Company will total between
8.0% and 12.5% of the proceeds of reinvested Distributions, up to 7.5% of which
may be reallowed to Soliciting Dealers.
The allocation of Shares among Participants may result in the ownership
of fractional Shares, computed to four decimal places.
REPORTS TO PARTICIPANTS
Within 60 days after the end of each fiscal quarter, the Reinvestment
Agent will mail to each Participant a statement of account describing, as to
such Participant, the Distributions reinvested during the quarter, the number of
Shares purchased during the quarter, the per Share purchase price for such
Shares, the total administrative charge paid by the Company on behalf of each
Participant (see "Participant Accounts, Fees, and Allocation of Shares" above),
and the total number of Shares purchased on behalf of the Participant pursuant
to the Reinvestment Plan. Until such time, if any, as Listing occurs, the
statement of account also will report the most recent fair market value of the
Shares, determined as described above. See "General" above.
Tax information for income earned on Shares under the Reinvestment Plan
will be sent to each participant by the Company or the Reinvestment Agent at
least annually.
ELECTION TO PARTICIPATE OR TERMINATE PARTICIPATION
Stockholders of the Company who purchase Shares in this offering may
become Participants in the Reinvestment Plan by making a written election to
participate on their Subscription Agreements at the time they subscribe for
Shares. Any other stockholder who receives a copy of this Prospectus or a
separate prospectus relating solely to the Reinvestment Plan and who has not
previously elected to participate in the Reinvestment Plan may so elect at any
time by written notice to the Board of Directors of such stockholder's desire to
participate in the Reinvestment Plan. Participation in the Reinvestment Plan
will commence with the next Distribution made after receipt of the Participant's
notice, provided it is received at least ten days prior to the record date for
such Distribution. Subject to the preceding sentence, the election to
participate in the Reinvestment Plan will apply to all Distributions
attributable to the fiscal quarter in which the stockholder made such written
election to participate in the Reinvestment Plan and to all fiscal quarters
thereafter, whether made (i) upon subscription or subsequently for stockholders
who participate in this offering, or (ii) upon receipt of a separate prospectus
relating solely to the Reinvestment Plan for stockholders who do not participate
in this offering. Participants will be able to terminate their participation in
the Reinvestment Plan at any time without penalty by delivering written notice
to the Board of Directors ten business days before the end of a fiscal quarter.
A Participant who chooses to terminate participation in the
Reinvestment Plan must terminate his or her entire participation in the
Reinvestment Plan and will not be allowed to terminate in part. If a Participant
terminates his or her Participation, the Reinvestment Agent will send him or her
a check in payment for any fractional Shares in his or her account based on the
then market price of the Shares, and the Company record books will be revised to
reflect the ownership records of his or her whole Shares. There are no fees
associated with a Participant's terminating his or her interest in the
Reinvestment Plan. A Participant in the Reinvestment Plan who terminates his or
her interest in the Reinvestment Plan will be allowed to participate in the
Reinvestment Plan again upon receipt of the then current version of this
Prospectus or a separate current prospectus relating solely to the Reinvestment
Plan, by notifying the Reinvestment Agent and completing any required forms.
The Board of Directors reserves the right to prohibit Qualified Plans
from participating in the Reinvestment Plan if such participation would cause
the underlying assets of the Company to constitute "plan assets" of Qualified
Plans. See "The Offering -- ERISA Considerations."
FEDERAL INCOME TAX CONSIDERATIONS
Stockholders subject to federal taxation who elect to participate in
the Reinvestment Plan will incur a tax liability for Distributions allocated to
them even though they have elected not to receive their Distributions in cash
but rather to have their Distributions held pursuant to the Reinvestment Plan.
Specifically, stockholders will be treated as if they have received the
Distribution from the Company and then applied such Distribution to purchase
Shares in the Reinvestment Plan. A stockholder designating a Distribution for
reinvestment will be taxed on the amount of such Distribution as ordinary income
to the extent such Distribution is from current or accumulated earnings and
profits, unless the Company has designated all or a portion of the Distribution
as a capital gain dividend. In such case, such designated portion of the
Distribution will be taxed as long-term capital gain.
<PAGE>
AMENDMENTS AND TERMINATION
The Company reserves the right to renew, extend, or amend any aspect of
the Reinvestment Plan without the consent of stockholders, provided that notice
of the amendment is sent to Participants at least 30 days prior to the effective
date thereof. The Company also reserves the right to terminate the Reinvestment
Plan for any reason, at any time, by ten days prior written notice of
termination to all Participants.
REDEMPTION OF SHARES
Prior to such time, if any, as Listing occurs, any stockholder who has
held Shares for not less than one year (other than the Advisor) may present all
or any portion equal to at least 25% of such Shares to the Company for
redemption at any time, in accordance with the procedures outlined herein. At
such time, the Company may, at its sole option, redeem such Shares presented for
redemption for cash to the extent it has sufficient funds available. There is no
assurance that there will be sufficient funds available for redemption and,
accordingly, a stockholder's Shares may not be redeemed. If the Company elects
to redeem Shares, the following conditions and limitations would apply. The full
amount of proceeds from the sale of Shares under the Reinvestment Plan (the
"Reinvestment Proceeds") attributable to any calendar quarter will be used to
redeem Shares presented for redemption during such quarter. In addition, the
Company may, at its discretion, use up to $100,000 per calendar quarter of the
proceeds of any public offering of its common stock for redemptions. Any amount
of offering proceeds which is available for redemptions, but which is unused,
may be carried over to the next succeeding calendar quarter for use in addition
to the amount of offering proceeds and Reinvestment Proceeds that would
otherwise be available for redemptions. At no time during a 12-month period,
however, may the number of shares redeemed by the Company exceed 5% of the
number of shares of the Company's outstanding common stock at the beginning of
such 12-month period.
In the event there are insufficient funds to redeem all of the Shares
for which redemption requests have been submitted, the Company plans to redeem
the Shares in the order in which such redemption requests have been received. A
stockholder whose Shares are not redeemed due to insufficient funds can ask that
the request to redeem the Shares be honored at such time, if any, as there are
sufficient funds available for redemption. In such case, the redemption request
will be retained and such Shares will be redeemed before any subsequently
received redemption requests are honored. Alternatively, a stockholder whose
Shares are not redeemed may withdraw his or her redemption request. Stockholders
will not relinquish their Shares until such time as the Company commits to
redeeming such Shares.
If the full amount of funds available for any given quarter exceeds the
amount necessary for such redemptions, the remaining amount shall be held for
subsequent redemptions unless such amount is sufficient to acquire an additional
Property (directly or through a Joint Venture) or to invest in additional
Mortgage Loans, or is used to repay outstanding indebtedness. In that event, the
Company may use all or a portion of such amount to acquire one or more
additional Properties, to invest in one or more additional Mortgage Loans or to
repay such outstanding indebtedness, provided that the Company (or, if
applicable, the Joint Venture) enters into a binding contract to purchase such
Property or Properties or invests in such Mortgage Loan or Mortgage Loans, or
uses such amount to repay outstanding indebtedness, prior to payment of the next
Distribution and the Company's receipt of requests for redemption of Shares.
A stockholder who wishes to have his or her Shares redeemed must mail
or deliver a written request on a form provided by the Company and executed by
the stockholder, its trustee or authorized agent, to the redemption agent (the
"Redemption Agent"), which is currently MMS Securities, Inc. The Redemption
Agent at all times will be registered as a broker-dealer with the Commission and
each state securities commission. Within 30 days following the Redemption
Agent's receipt of the stockholder's request, the Redemption Agent will forward
to such stockholder the documents necessary to effect the redemption, including
any signature guarantee the Company or the Redemption Agent may require. The
Redemption Agent will effect such redemption for the calendar quarter provided
that it receives the properly completed redemption documents relating to the
Shares to be redeemed from the stockholder at least one calendar month prior to
the last day of the current calendar quarter and has sufficient funds available
to redeem such Shares. The effective date of any redemption will be the last
date during a quarter during which the Redemption Agent receives the properly
completed redemption documents. As a result, the Company anticipates that,
assuming sufficient funds for redemption, the effective date of redemptions will
be no later than thirty days after the quarterly determination of the
availability of funds for redemption.
Upon the Redemption Agent's receipt of notice for redemption of Shares,
the redemption price will be on such terms as the Company shall determine. The
redemption price for Shares redeemed during an offering would equal the then
current offering price, which the Company anticipates will continue to be $10.00
per Share, until such time, if any, as Listing occurs, less a discount of 8%,
for a net redemption price of $9.20 per Share. The aforementioned redemption
price approximates the per Share net proceeds received by the Company in the
offering, after deducting Selling Commissions of 7.5% and a 0.5% marketing
support and due diligence fee payable to the Managing Dealer and certain
Soliciting Dealers in such offering.
It is not anticipated that there will be a market for the Shares before
Listing occurs (although liquidity is not assured thereby). Accordingly, during
periods when the Company is not engaged in an offering, it is expected that the
purchase price for Shares purchased from stockholders will be determined by
reference to the following factors, as well as any others deemed relevant or
appropriate by the Company: (i) the price at which Shares have been purchased by
stockholders, either pursuant to the Reinvestment Plan or outside of the
Reinvestment Plan (to the extent the Company has information regarding the
prices paid for Shares purchased outside the Reinvestment Plan), (ii) the annual
statement of Share valuation provided to certain stockholders (see "Reports to
Stockholders"), and (iii) the price at which stockholders are willing to sell
their Shares. Shares purchased during any particular period of time therefore
may be purchased at varying prices. The Board of Directors will announce any
price adjustment and the time period of its effectiveness as part of its regular
communications with stockholders. Any Shares acquired pursuant to a redemption
will be retired and no longer available for issuance by the Company.
A stockholder may present fewer than all of his or her Shares to the
Company for redemption, provided, however, that (i) the minimum number of Shares
which must be presented for redemption shall be at least 25% of his or her
Shares, and (ii) if such stockholder retains any Shares, he or she must retain
at least 250 Shares (100 Shares for an IRA, Keogh Plan or pension plan).
The Directors, in their sole discretion, may amend or suspend the
redemption plan at any time they determine that such amendment or suspension is
in the best interest of the Company. The Directors may suspend the redemption of
Shares if (i) they determine, in their sole discretion, that such redemption
impairs the capital or the operations of the Company; (ii) they determine, in
their sole discretion, that an emergency makes such redemption not reasonably
practical; (iii) any governmental or regulatory agency with jurisdiction over
the Company so demands for the protection of the stockholders; (iv) they
determine, in their sole discretion, that such redemption would be unlawful; (v)
they determine, in their sole discretion, that such redemption, when considered
with all other redemptions, sales, assignments, transfers and exchanges of
Shares in the Company, could cause direct or indirect ownership of Shares of the
Company to become concentrated to an extent which would prevent the Company from
qualifying as a REIT under the Code; or (vi) the Directors, in their sole
discretion, deem such suspension to be in the best interest of the Company. For
a discussion of the tax treatment of such redemptions, see "Federal Income Tax
Considerations -- Taxation of Stockholders." The redemption plan will terminate,
and the Company no longer shall accept Shares for redemption, if and when
Listing occurs. See "Risk Factors -- Investment Risks -- Lack of Liquidity of
Shares."
BUSINESS
GENERAL
The Company is a Maryland corporation that was organized on June 12,
1996. On June 15, 1998, the Company formed CNL Hospitality Partners, LP, a
wholly owned Delaware limited partnership (the "Partnership"). Properties
acquired are expected to be held by the Partnership and, as a result, owned by
the Company through the Partnership. The term "Company" includes CNL Hospitality
Properties, Inc. and its subsidiaries, CNL Hospitality GP Corp., CNL Hospitality
LP Corp. and CNL Hospitality Partners, LP.
The Company has been formed primarily to acquire Properties to be
leased on a long-term (generally, 10 to 20 years, plus renewal options for an
additional 10 to 20 years), "triple-net" basis. With proceeds of this offering,
the Company intends to purchase primarily fast-food, family-style, and
casual-dining restaurant Properties and limited service, extended stay and full
service hotel Properties. "Triple-net" means that the tenant generally will be
responsible for repairs, maintenance, property taxes, utilities, and insurance.
Some hotel Property leases may, however, obligate 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 is 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. Management believes that
the combination of restaurant and hotel Properties will benefit the Company and
its investors by enabling the Company to take advantage of attractive investment
opportunities in the growing restaurant and hotel industries and by providing
the Company with increased diversification of its investments. The Properties
may consist of land and building, the land underlying the building with the
building owned by the tenant or a third party, and the building only with the
land owned by a third party. The Company may provide Mortgage Loans to operators
of Restaurant Chains and Hotel Chains secured by real estate owned by the
operators. To a lesser extent, the Company also intends to offer Secured
Equipment Leases to operators of Restaurant Chains and Hotel Chains pursuant to
which the Company will finance, through loans or direct financing leases, the
Equipment.
The Properties, which typically will be freestanding and will be
located across the United States, will be leased to operators of Restaurant
Chains and Hotel Chains to be selected by the Advisor and approved by the Board
of Directors. Each Property acquisition and Mortgage Loan will be submitted to
the Board of Directors for approval. Properties purchased by the Company are
expected to be leased under arrangements generally requiring base annual rent
equal to a specified percentage of the Company's cost of purchasing a particular
Property, with automatic rent increases and/or percentage rent based on gross
sales above specified levels. See "Description of Leases -- Computation of Lease
Payments," below.
The Company has not specified any percentage of Net Offering Proceeds
to be invested in either restaurant or hotel Properties. To the extent the
Company invests in restaurant Properties, it is expected that those will be
Properties of selected Restaurant Chains that are national and regional
restaurant chains, primarily fast-food, family-style, and casual-dining chains.
Fast-food restaurants feature quality food and quick service, which often
includes drive-through service, and offer a variety of menu items such as
hamburgers, steaks, seafood, chili, pizza, pasta dishes, chicken, hot and cold
sandwiches, and salads. Family-style restaurants feature services that generally
are associated with full-service restaurants, such as full table service and
cooked-to-order food, but at more moderate prices. The casual-dining (or dinner
house) concept features a variety of popular contemporary foods, full table
service, moderate prices, and surroundings that are appealing to families. The
casual-dining segment of the restaurant industry, like the family-style segment,
features services that generally are associated with the full-service restaurant
category. According to forecasts appearing in the January 1, 1997 issue of
Restaurants and Institutions, it is projected that the casual-dining segment of
full-service restaurant sales will experience 3.8% real growth in sales in 1997,
with sales predicted to reach $49 billion. The top 15 casual-dining chains by
sales have a total of 3,583 restaurants throughout the United States.
The restaurant industry is one of the largest industries in the United
States in volume of sales and number of employees (more than 10 million persons)
and includes fast-food outlets, cafeterias, lunchrooms, convenience stores,
family-style restaurants, casual-dining facilities, full-service restaurants,
and contract and industrial feeders. Industry publications project that
restaurant industry sales will increase from $173.7 billion in 1985 to $354
billion in 1999. Restaurant industry sales for 1998 are projected to be $338.4
billion. Nominal growth, which is comprised of real growth and inflationary
growth, is estimated to be 4.6% in 1999. Real growth of the restaurant industry
in 1998 was 2.6%, and industry analysts currently estimate that the restaurant
industry will achieve 1.8% real growth in 1999; however, according to the
National Restaurant Association, fast-food restaurants should also experience a
1.8% real growth increase over 1998. Sales in this segment of the restaurant
industry are projected to be $110.4 billion for 1999.
The Company may invest in the fast-food, family-style, and
casual-dining segments of the restaurant industry, the most rapidly growing
segments in recent years. According to the National Restaurant Association, 51%
of adults eat at a quick-service restaurant and 42% of adults patronize a
moderately-priced family restaurant at least once each week. In addition, the
National Restaurant Association indicates that Americans spend approximately 44
cents of every food dollar on dining away from home. Surveys published in
Restaurant Business indicate that families with children choose quick-service
restaurants four out of every five times they dine out. Further, according to
Nation's Restaurant News, the 100 largest restaurant chains are posting an
average of 8.65% growth in their systemwide sales figures for 1997. Casual-theme
dining concepts are among the chains showing the strongest growth. In 1997, the
sandwich segment experienced sales growth of 4.48% over 1996 figures, and the
casual-dining segment experienced systemwide sales growth in 1997 of 10.63%,
compared to 9.98% in 1995. Management believes that the Company will have the
opportunity to participate in this growth through the ownership of Properties
leased to operators of the Restaurant Chains.
The fast-food, family-style and casual-dining segments of the
restaurant industry have demonstrated their ability to adapt to changes in
consumer preferences, such as health and dietary issues, decreases in the
disposable income of consumers and environmental awareness, through various
innovative techniques, including special value pricing and promotions, increased
advertising, menu changes featuring low-calorie, low-cholesterol menu items, and
new packaging and energy conservation techniques.
The table set forth below provides information with respect to certain
Restaurant Chains in which Affiliates of the Company (consisting of an unlisted
public REIT, 18 public partnerships and 8 private partnerships) had invested as
of December 31, 1998, and a listed public REIT (which was managed by an
Affiliate through December 31, 1997, at which time such Affiliate merged with
the REIT) had invested as of December 31, 1997:
Approximate Aggregate
Dollars Invested Percentage of Number of
Restaurant Chain by Affiliates Dollars Invested Prior Programs
- ---------------- ------------- ---------------- --------------
Golden Corral $145,920,000 13.1% 23
Jack in the Box 108,625,000 9.7% 15
Burger King 97,611,000 8.9% 24
Denny's 61,601,000 5.5% 19
Boston Market 57,501,000 5.2% 11
IHOP 56,719,000 5.1% 10
Hardee's 54,108,000 4.9% 12
Bennigan's 43,143,000 3.9% 5
TGI Friday's 33,734,000 3.0% 7
Shoney's 33,513,000 3.0% 10
Wendy's 33,251,000 3.0% 14
Steak & Ale 30,182,000 2.7% 1
Long John Silver's 29,045,000 2.6% 6
Arby's 25,047,000 2.3% 10
Darryl's 22,296,000 2.0% 4
Checkers 21,125,000 1.9% 8
Chevy's Fresh Mex 20,776,000 1.9% 6
Black-eyed Pea 18,301,000 1.7% 4
Pizza Hut 17,964,000 1.6% 9
Applebee's 17,188,000 1.6% 1
Pollo Tropical 17,086,000 1.5% 1
Ground Round 15,751,000 1.4% 3
Perkins 15,157,000 1.4% 9
KFC 14,463,000 1.3% 12
Taco Bell 10,049,000 0.9% 9
Popeyes 9,906,000 0.9% 9
Tumbleweed Southwest
Mesquite Grill & Bar 9,323,000 0.8% 1
Ruby Tuesday 9,030,000 0.8% 3
Sonny's Real Pit Bar-B-Q 9,000,000 0.8% 1
Roadhouse Grill 8,361,000 0.8% 2
Ponderosa 6,400,000 0.6% 4
Quincy's 5,968,000 0.5% 5
The Company also invests Net Offering Proceeds in Properties of
selected national and regional limited service, extended stay and full service
Hotel Chains. The Company believes that attractive opportunities exist to
acquire limited service, extended stay and full service hotels in urban and
resort locations. According to Smith Travel Research, a leading provider of
lodging industry statistical research, the hotel industry has been steadily
improving its financial performance over the past seven consecutive years. Also
according to Smith Travel Research, in 1997, the industry reached its highest
absolute level of pre-tax profit in its history at approximately $17 billion, an
increase of approximately 36% over 1996.
<PAGE>
Pre-Tax Profits
of Hospitality Industry
(in billions)
Year Profitability
---- -------------
1993 $ 2.4
1994 5.5
1995 8.5
1996 12.5
1997 17.0
Source: Smith Travel Research
As indicated in the table below, the average daily room rate increased
4.4% in 1998, from $75.31 in 1996 to $78.62 in 1998, resulting in 11 consecutive
years of room rate growth.
Hospitality Industry Average
Daily Room Rate By Year
Year Rate
---- ----
1987 $52.58
1988 54.47
1989 56.35
1990 57.96
1991 58.08
1992 58.91
1993 60.53
1994 62.86
1995 65.81
1996 70.81
1997 75.31
1998 78.62
Source: Smith Travel Research
Revenue per available room also increased by 3.6% from $48.57 in 1997
to $50.32 in 1998. In 1998, growth in room supply exceeded growth in room demand
and resulted in a slight dip in occupancy. In 1998, total occupancy fell 0.8%
from 64.5% in 1997 to 64.0%. Growth in room demand exceeded the growth in new
room supply for each year from 1992 through 1996 and industry-wide occupancy
increased from a 20 year low of 61.8% in 1991 to 65% in 1996.
According to American Hotel & Motel Association data, in 1997,
Americans traveling in the United States spent more than $1.38 billion per day,
$57.4 million per hour and $955,800 per minute on travel and tourism. Total
travel expenditures in the United States generated $481.5 billion in sales. In
addition, there were 49,000 hotel properties which included over 3.8 million
hotel rooms recording $85.6 billion in revenue. Hotels are a vital part of
travel and tourism. In the United States, the tourism industry, which globally
is the world's largest industry, is currently ranked third behind auto sales and
retail food sales. In terms of employment, the hotel industry supports over 7
million direct jobs, generating $18.93 billion in wages. Nationally, 13.8% of
total hotel rooms available are located in urban areas, 35.3% in suburban areas,
33.2% in highway locations, 6.4% in airport areas, and the remaining 11.3% in
resort locations.
The Company will 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
<PAGE>
with a kitchen area and living area separate from the bedroom. Extended stay
hotels vary with respect to providing on-site restaurant facilities. Full
service hotels generally have conference or meeting facilities and on-site food
and beverage facilities.
Management intends to structure the Company's investments to allow it
to participate, to the maximum extent possible, in any sales growth in the
restaurant and hotel industries, as reflected in the Properties that it owns.
The Company therefore intends to generally structure its leases with percentage
rent requirements which are based on gross sales over specified levels of the
particular business located on the Property. Gross sales may increase even
absent real growth because increases in the costs typically are passed on to the
consumers through increased prices, and increased prices are reflected in gross
sales. In an effort to provide regular cash flow to the Company, the Company
intends to structure its leases to provide a minimum level of rent which is
payable regardless of the amount of gross sales at a particular Property. The
Company also will endeavor to maximize growth and minimize risks associated with
ownership and leasing of real estate that operates in these industry segments
through careful selection and screening of its tenants (as described in
"Standards for Investment" below) in order to reduce risks of default;
monitoring statistics relating to restaurant and hotel chains and continuing to
develop relationships in the industry in order to reduce certain risks
associated with investment in real estate. See "Standards for Investment" below
for a description of the standards which the Board of Directors will employ in
selecting Restaurant Chains, Hotel Chains and particular Properties for
investment.
Management expects to acquire Properties in part with a view to
diversification among the geographic location of the Properties. There are no
restrictions on the geographic area or areas within the United States in which
Properties acquired by the Company may be located. It is anticipated that the
Properties acquired by the Company will be located in various states and regions
within the United States.
The Company believes that freestanding, "triple-net" leased properties
of the type in which the Company will generally invest are attractive to tenants
because freestanding properties typically offer high visibility to passing
traffic, ease of access from a busy thoroughfare, tenant control over the site
to set hours of operation and maintenance standards and distinctive building
designs conducive to customer name recognition.
The Company may provide Mortgage Loans, generally for the purchase of
buildings by tenants that lease the underlying land from the Company. However,
because it prefers to focus on investing in Properties, which have the potential
to appreciate, the Company currently expects to provide Mortgage Loans in the
aggregate principal amount of approximately 5% to 10% of Gross Proceeds.
Mortgage Loans will be secured by the building and improvements on the land. The
Company expects that the interest rate and terms (generally, 10 to 20 years) of
the Mortgage Loans will be similar to those of its leases.
The Company also intends to offer Secured Equipment Leases to operators
of Restaurant Chains and Hotel Chains. The Secured Equipment Leases will consist
primarily of leases of, and loans for the purchase of, Equipment. As of the date
of this Prospectus, the Company has neither identified any prospective operators
of Restaurant Chains or Hotel Chains that will participate in such financing
arrangements nor negotiated any specific terms of a Secured Equipment Lease. The
Company cannot predict terms and conditions of the Secured Equipment Leases,
although the Company expects that the Secured Equipment Leases will (i) have
terms that equal or exceed the useful life of the subject Equipment (although
such terms will not exceed 7 years), (ii) in the case of the leases, include an
option for the lessee to acquire the subject Equipment at the end of the lease
term for a nominal fee, (iii) include a stated interest rate, and (iv) in the
case of the leases, provide that the Company and the lessees will each treat the
Secured Equipment Leases as loans secured by personal property for federal
income tax purposes. See "Federal Income Tax Considerations -- Characterization
of Secured Equipment Leases." In addition, the Company expects that each of the
Secured Equipment Leases will be secured by the Equipment to which it relates.
Payments received from lessees under Secured Equipment Leases will be treated as
payments of principal and interest. All Secured Equipment Leases will be
negotiated by the Advisor and approved by the Board of Directors including a
majority of the Independent Directors.
The Company will borrow money to acquire Assets and to pay certain
fees. The Company intends to encumber Assets in connection with the borrowing.
The Company plans to obtain one or more revolving Lines of Credit in an
aggregate amount up to $45,000,000, and may, in addition, also obtain Permanent
Financing. On July 31, 1998, the Company entered into an initial $30,000,000
revolving Line of Credit to be used to acquire hotel Properties. See "Business
- -- Borrowings" for a description of the $30,000,000 Line of Credit. The Board of
Directors anticipates that the aggregate amount of any Permanent Financing, if
obtained, will not exceed 30% of the Company's total assets. The Permanent
Financing would be used to acquire Assets and pay a fee of 4.5% of any Permanent
Financing, excluding amounts to fund Secured Equipment Leases, as Acquisition
Fees, to the Advisor. The Line of Credit may be repaid with offering proceeds,
working capital or Permanent Financing. The Line of Credit and Permanent
Financing are the only source of funds for making Secured Equipment Leases and
for paying the Secured Equipment Lease Servicing Fee. 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 February 26, 1999, the Company had acquired , directly or
indirectly, six hotel Properties consisting of land , building and equipment and
had initial commitments to acquire indirectly, seven additional Properties.
However, as of February 26, 1999, the Company had not entered into any
arrangements that create a reasonable probability that the Company will enter
into any Mortgage Loan or Secured Equipment Lease.
INVESTMENT OF OFFERING PROCEEDS
The Company has undertaken to supplement this Prospectus during the
offering period to disclose the acquisition of Properties at such time as the
Company believes that a reasonable probability exists that any such Property
will be acquired by the Company. Based upon the experience and acquisition
methods of the Affiliates of the Company and the Advisor, this normally will
occur, with regard to acquisition of Properties, as of the date on which (i) a
commitment letter is executed by a proposed lessee, (ii) a satisfactory credit
underwriting for the proposed lessee has been completed, and (iii) a
satisfactory site inspection has been completed. The initial disclosure of any
proposed acquisition, however, cannot be relied upon as an assurance that the
Company ultimately will consummate such proposed acquisition or that the
information provided concerning the proposed acquisition will not change between
the date of such supplement and the actual purchase or extension of financing.
The terms of any borrowing by the Company will also be disclosed by supplement
following receipt by the Company of an acceptable commitment letter from a
potential lender.
Based on their past experience in acquiring similar properties and in
light of current market conditions, management of the Company and the Advisor
have estimated an average purchase price of $800,000 to $900,000 per restaurant
Property. Based on the purchase prices of the six Properties acquired directly
or indirectly by the Company as of February 26, 1999, and current market
conditions, the Company and the Advisor have estimated an average purchase price
of $10,000,000 to $35,000,000 per hotel Property. See "Business -- General." If
15,000,000 Shares ($150,000,000) are sold, the Company could (i) invest in only
hotel Properties, in which case it could acquire between 8 to 13 hotel
Properties or (ii) invest in both restaurant and hotel Properties, although in
this instance the number of restaurant Properties and hotel Properties would
vary significantly depending upon the cost of the hotel Properties acquired.
Based on the Properties owned as of February 26, 1999, and assuming that the
remaining uninvested proceeds as of February 26, 1999 and any additional Net
Offering Proceeds are divided evenly between restaurant and hotel Properties, as
to which there is no assurance, the Company could invest in approximately 40 to
50 restaurant Properties and 7 to 10 hotel Properties. In certain cases, the
Company may become a co-venturer in a Joint Venture that will own the Property.
In each such case, the Company's cost to purchase an interest in such Property
will be less than the total purchase price and the Company therefore will be
able to acquire interests in a greater number of Properties. The Company may
also borrow to acquire Assets. See "Business -- Borrowing." Management estimates
that approximately 30% to 50% of the Company's investment in a restaurant
Property generally will be for the cost of land, and 50% to 70% generally will
be for the cost of the building. For a hotel Property, management estimates that
10% to 20% of the Company's investment will be for cost of land and 80% to 90%
for the cost of the building. See "Joint Venture Arrangements" below and "Risk
Factors -- Investment Risks -- Possible Lack of Diversification." Management
cannot estimate the number of Mortgage Loans that may be entered into. The
Company may also borrow money to make Mortgage Loans.
Although management cannot estimate the number of Secured Equipment
Leases that may be entered into, it expects to fund the Secured Equipment Lease
program from the proceeds of the Line of Credit or Permanent Financing in an
amount not to exceed 10% of Gross Proceeds and management has undertaken,
consistent with its objective of qualifying as a REIT for federal income tax
purposes, to ensure that the total value of all Secured Equipment Leases will
not exceed 25% of the Company's total assets, and that Secured Equipment Leases
to a single lessee, in the aggregate, will not exceed 5% of total assets.
PROPERTY ACQUISITIONS
Atlanta Portfolio. On July 31, 1998, the Company acquired two hotel
Properties. The Properties are the Residence Inn(R) by Marriott(R) located in
the Buckhead (Lenox Park) area of Atlanta, Georgia (the"Buckhead (Lenox Park)
Property"), and the Residence Inn by Marriott located at Gwinnett Place in
Duluth, Georgia (the "Gwinnett Place Property").
<PAGE>
The Company acquired the Buckhead (Lenox Park) Property for $15,731,414
from Buckhead Residence Associates, L.L.C. and the Gwinnett Place Property for
$11,514,125 from Gwinnett Residence Associates, L.L.C. In connection with the
purchase of the two Properties, the Company, as lessor, entered into two
separate, long-term lease agreements. The lessee of the Buckhead (Lenox Park)
and the Gwinnett Place Properties is the same unaffiliated lessee. The leases on
both Properties are cross-defaulted. The general terms of the lease agreements
are described in "Business -- Description of Property Leases." The principal
features of the leases are as follows:
0 The initial term of each lease expires in approximately 19 years, on August
31, 2017.
0 At the end of the initial lease term, the tenant will have three
consecutive renewal options of five years.
0 The leases will require minimum rent payments to the Company aggregating
$1,651,798 per year for the Buckhead (Lenox Park) Property and $1,208,983
per year for the Gwinnett Place Property.
0 Minimum rent payments will increase to $1,691,127 per year for the Buckhead
(Lenox Park) Property and $1,237,768 per year for the Gwinnett Place
Property after the first lease year.
0 In addition to minimum rent, for each calendar year, the leases will
require percentage rent equal to 15% of the aggregate amount of all
revenues combined, for the Buckhead (Lenox Park) and the Gwinnett Place
Properties, in excess of $8,080,000.
0 A security deposit equal to $819,000 for the Buckhead (Lenox Park) Property
and $598,500 for the Gwinnett Place Property will be retained by the
Company as security for the tenant's obligations under the leases.
0 Management fees payable to Stormont Trice Management Corporation for
operation of the Buckhead (Lenox Park) and Gwinnett Place Properties are
subordinated to minimum rents due to the Company.
0 The tenant of the Buckhead (Lenox Park) and Gwinnett Place Properties will
establish a capital expenditures reserve fund which will be used for the
replacement and renewal of furniture, fixtures and equipment relating to
the hotel Properties (the "FF&E Reserve"). Deposits to the FF&E Reserve
will be made monthly as follows: 3% of gross receipts for the first lease
year; 4% of gross receipts for the second lease year; and 5% of gross
receipts every lease year thereafter. Funds in the FF&E Reserve and all
property purchased with funds from the FF&E Reserve shall be paid, granted
and assigned to the Company as additional rent.
0 Stormont Trice Corporation, Stormont Trice Development Corporation and
Stormont Trice Management Corporation jointly and severally will guarantee
the obligations of the tenant under the leases for the Buckhead (Lenox
Park) and the Gwinnett Place Properties combined. The guarantee terminates
on the earlier of the end of the third lease year or at such time as the
net operating income from the Buckhead (Lenox Park) and the Gwinnett Place
Properties exceeds minimum rent due under the leases by 25% for any
trailing 12 month period. The guarantee is equal to $2,835,000 for the
first two years, and $1,197,000 for the third year.
The estimated federal income tax basis of the depreciable portion of
the Buckhead (Lenox Park) Property and the Gwinnett Place Property is
$14,700,000 and $11,100,000, respectively.
The Buckhead (Lenox Park) Property and the Gwinnett Place Property are
newly constructed hotels which commenced operations on August 7, 1997 and July
29, 1997, respectively. The Buckhead (Lenox Park) Property is situated in a 22
acre mixed-use development and has 150 guest suites. The Gwinnett Place Property
is located 30 minutes from downtown Atlanta and has 132 guest suites. Other
lodging facilities located in proximity to the Buckhead (Lenox Park) Property
include an Embassy Suites, a Summerfield Suites, a Homewood Suites, an
Amerisuites, a Courtyard(R) by Marriott(R) and another Residence Inn by
Marriott. Other lodging facilities located in
<PAGE>
proximity to the Gwinnett Place Property include a Courtyard by Marriott, an
Amerisuites, a Sumner Suites and a Hampton Inn. The average occupancy rate, the
average daily room rate and the revenue per available room for the periods the
hotels have been operational are as follows:
<TABLE>
<CAPTION>
Buckhead (Lenox Park) Property Gwinnett Place Property
-------------------------------------------------------- -------------------------------------------------
<S> <C>
Average Average Revenue Average Average Revenue
Occupancy Daily Room per Available Occupancy Daily Room per Available
Year Rate Rate Room Rate Rate Room
- ------------ ------------- --------------- ------------------ ------------- -------------- ---------------
*1997 42.93% $91.15 $39.13 39.08% $85.97 $33.60
**1998 75.20% 99.70 75.01 74.10% 87.36 64.73
</TABLE>
* Data for the Buckhead (Lenox Park) Property represents the period
August 7, 1997 through December 31, 1997 and data for the Gwinnett
Place Property represents the period August 1, 1997 through December
31, 1997.
** Data for 1998 represents the period January 1, 1998 through December
31, 1998.
The Company believes that the results achieved by the Properties for
year-end 1997, are not indicative of their long-term operating potential, as
both Properties had been open for less than six months during the reporting
period. On a proforma basis, had the Company owned the Properties as of January
1, 1998, combined net operating income before subordinated management fees would
be 1.23 times base rent on a year-to-date basis.
Western International Portfolio. In February 1999, the Company executed
a series of agreements with Five Arrows Realty Securities II L.L.C. ("Five
Arrows"), pursuant to which the Company and Five Arrows formed a jointly-owned
real estate investment trust, CNL Hotel Investors, Inc. ("Hotel Investors"), for
the purpose of acquiring up to eight hotels from various sellers affiliated with
Western International (the "Hotels"). The eight Hotels are either newly
constructed or in various stages of completion. When fully built, four of eight
Hotels will operate as Courtyard by Marriott hotels, three will operate as
Residence Inn by Marriott hotels, and one will operate as a Marriott Suites(R).
The Company's advisor, CNL Hospitality Advisors, Inc. (the "Advisor"),
will act as the advisor to Hotel Investors pursuant to a separate advisory
agreement. However, in no event will the Company pay the Advisor fees, including
the Company's pro rata portion of Hotel Investors' advisory fees, in excess of
amounts payable under its Advisory Agreement. In that capacity, the Advisor has
entered into separate purchase agreements for each of the eight Hotels, which
agreements include customary closing conditions, including inspection of and due
diligence on the completed properties. The aggregate purchase price of all eight
Hotels, once acquired, will be approximately $184 million, excluding closing
costs.
In order to fund these purchases, Five Arrows has committed to make an
investment of up to $50.9 million in Hotel Investors. The Company has committed
to make an investment of up to $40 million in Hotel Investors, which investment
will be made through the Company's wholly owned subsidiary, CNL Hospitality
Partners, LP ("Hospitality Partners"). Hotel Investors expects to fund the
remaining amount of approximately $96.6 million with permanent financing from
Jefferson-Pilot Life Insurance Company, secured by Hotel Investors' interests in
the properties (the "Hotel Investors Loan"). Hotel Investors intends to use
funds from Five Arrows, the Company, and the Hotel Investors Loan
proportionately to fund each property acquisition.
In return for their respective funding commitments, Five Arrows will
receive a 51% common stock interest and Hospitality Partners will receive a 49%
common stock interest in Hotel Investors. As funds are advanced to Hotel
Investors, Five Arrows will receive up to 50,886 shares of Hotel Investors' 8%
Class A cumulative, preferred stock ("Class A Preferred Stock"), and Hospitality
Partners will receive up to 39,982 shares of Hotel Investors' 9.76% Class B
cumulative, preferred stock ("Class B Preferred Stock"). The Class A Preferred
Stock is exchangeable upon demand into common stock of the Company, as
determined pursuant to a formula that is intended to make the conversion not
dilutive to the Company's common stockholders.
<PAGE>
Five Arrows has also committed to invest up to $15 million in the
Company through the purchase of common stock pursuant to the Company's current
public offering, the proceeds of which will be used by the Company to fund
approximately 38% of its funding commitment to Hotel Investors. Five Arrows will
purchase the Company's stock as properties are acquired by Hotel Investors, as
described above. In addition to the above investments, Five Arrows purchased a
10% interest in the Advisor.
Cash flow from operations of Hotel Investors is expected to be
distributed first to Five Arrows with respect to dividends payable on the Class
A Preferred Stock. Such dividends are calculated based on Five Arrows' "special
investment amount" which, is $1,294.78 per share, which represents the sum of
its investment in Hotel Investors and its $15,000,000 investment in the Company
on a per share basis, adjusted for any dividends received from the Company.
Then, cash flow from operations is expected to be distributed to the Company
with respect to its Class B Preferred Stock. Next, cash flow will be distributed
to 100 CNL associates who each own one share of Class C preferred stock in Hotel
Investors, to provide a quarterly, cumulative, compounded 8% return. All
remaining cash flow from operations will be distributed pro rata with respect to
the interest in the common shares.
On February 25, 1999, Hotel Investors purchased four of the eight
Hotels for an aggregate purchase price of $90,448,000 (the "Initial Hotels") and
paid $10,000,000 as a deposit on the four remaining Hotels. The Initial Hotels
are the Courtyard by Marriott located in Plano, Texas (the "Legacy Park
Property"), the Marriott Suites located in Dallas, Texas (the "Market Center
Property"), the Residence Inn by Marriott located in Las Vegas, Nevada (the
"Hughes Center Property") and the Residence Inn by Marriott located in Plano,
Texas (the "Dallas Plano Property"). As a result of these purchases and the
deposit, Five Arrows has funded $31,536,824 of its $50,890,000 commitment to
Hotel Investors and purchased 31,537 shares of Class A Preferred Stock. In
addition, Five Arrows has invested $9,297,056 of its $15 million commitment to
the Company. Due to the current stock ownership limitations specified in the
Company's Articles of Incorporation, $5,612,311 has been invested in the
Company's common stock through the purchase of 590,770 Shares and $3,684,745 was
advanced to the Company as a convertible loan, which bears interest at a rate of
eight percent per annum. In connection with the acquisitions and the deposit,
the Company has funded $24,778,933 of its $40 million commitment to Hotel
Investors and purchased 24,779 shares of Class B Preferred Stock. Hotel
Investors has obtained an advance of $47,863,052 relating to the Hotel Investors
Loan in order to facilitate the acquisition of the Initial Hotels.
In connection with Five Arrows' commitment to invest $15 million in the
Company, the Advisor and certain Affiliates have agreed to waive certain fees
otherwise payable to them by the Company.
Hotel Investors acquired the Legacy Park Property for $12,694,000 from
PLC Hotel Property, Ltd., the Market Center Property for $32,973,000 from Marcen
Property, Ltd., the Hughes Center Property for $33,097,000 from LVHC Hotel
Property, Ltd. and the Dallas Plano Property for $11,684,000 from PLR1 Hotel
Property, Ltd. In connection with the purchase of the four Properties, Hotel
Investors, as lessor, entered into four separate, long-term lease agreements.
The lessee of the Initial Hotels is the same unaffiliated lessee. The leases on
all four Properties are cross-defaulted. The general terms of the lease
agreements are described in the section of the Prospectus entitled "Business
Description of Property Leases." The principal features of the leases are as
follows:
0 The initial term of each lease expires in approximately 20 years, on
December 28, 2018.
0 At the end of the initial lease term, the tenant will have three
consecutive renewal options of fifteen years.
0 The leases will require minimum rent payments as follows.
<PAGE>
Minimum Annual Rent
---------------------------------------
Year 2 and
Property Year 1 Thereafter
--------------------------- ---------------- ----------------
Legacy Park Property $1,308,673 $1,341,390
Market Center Property 3,399,319 3,484,302
Hughes Center Property 3,412,068 3,497,369
Dallas Plano Property 1,204,485 1,234,597
<PAGE>
0 In addition to minimum rent, for lease years one and two, the leases will
require percentage rent equal to 7.75% of the aggregate amount of all room
revenues combined, for the Initial Hotels, in excess of a combined
threshold of $26,672,000. For lease year three and thereafter, the leases
will require percentage rent equal to 7.75% of the aggregate amount of all
room revenues combined, for the Initial Hotels, in excess of lease year two
actual revenues.
0 The tenant of the Initial Hotels will establish a capital expenditures
reserve fund which will be used for the replacement and renewal of
furniture, fixtures and equipment relating to the hotel Properties (the
"FF&E Reserve"). Deposits to the FF&E Reserve will be made once every four
weeks as follows: (i) for the Legacy Park, Hughes Center and Dallas Plano
Properties, 1% of gross receipts for the first lease year; 3% of gross
receipts for the second lease year; and 5% of gross receipts every lease
year thereafter and (ii) for the Market Center Property, 1% of gross
receipts for the first lease year; 2% of gross receipts for the second
lease year; 3% of gross receipts for the third through fifth lease years;
4% of gross receipts for the sixth through tenth lease years; and 5% of
gross receipts for the eleventh lease year and thereafter. Funds in the
FF&E Reserve and all property purchased with funds from the FF&E Reserve
shall be paid, granted and assigned to the Company.
0 The tenant under each lease is required to maintain, for up to three years
from the commencement of the last lease for the Hotels to be executed (but
in no event earlier than December 31, 2003), a liquid net worth equal to a
minimum amount (the "Net Worth Requirement"), which may be used solely to
make payments under the leases. The Net Worth Requirement may be reduced
after twelve months to the extent by which payment of rent exceeds cash
available for lease payments (gross revenues less property expenses)
derived from the leased Hotels during the one-year period. In addition,
providing that all of the Hotels have been opened for one year, the Net
Worth Requirement will terminate at such time that cash available for lease
payments for all of the leased Hotels equals 125% of total minimum rent due
under the leases; or that the lease is terminated pursuant to its terms
(other than for an event of default).
The estimated federal income tax basis of the depreciable portion of the
Initial Hotels is as follows.
Legacy Park Property $11,224,000
Market Center Property 30,623,000
Hughes Center Property 29,788,000
Dallas Plano Property 10,470,000
Each of the Initial Hotels are newly constructed hotels which recently
commenced operations. The Legacy Park Property is located approximately 25 miles
north of the city of Dallas and has 153 guest rooms and five suites. The Market
Center Property is approximately two miles northwest of the Dallas central
business district and has 266 guest suites. The Hughes Center Property is in a
commercial park located east of the Las Vegas strip and has 256 guest suites.
The Dallas Plano Property is located approximately 25 miles north of the city of
Dallas and has 126 guest suites. Other lodging facilities located in proximity
to the Legacy Park Property include a Hampton Inn, a Fairfield Inn by Marriott,
a LaQuinta Inn & Suites and another Courtyard by Marriott. Other lodging
facilities located in proximity to the Market Center Property include a
Renaissance(R) Hotel, an Embassy Suites, a Sheraton Suites, a Wyndham Garden
Hotel and a Courtyard by Marriott. Other lodging facilities located in proximity
to the Hughes Center Property include an AmeriSuites, a Hawthorn Suites and
another Residence Inn by Marriott. Other lodging facilities located in proximity
to the Dallas Plano Property include a Homewood Suites, a Bradford Suites, a
Mainstay Suites, a La Quinta Inn & Suites, a Courtyard by Marriott and another
Residence Inn by Marriott.
The Initial Hotels are recently constructed properties; therefore,
limited operating history is available. Of the Initial Hotels, the Hughes Center
Property and the Dallas Plano Property were the earliest to open, in October
1998. Based on information provided to the Company by Western International for
the period ended December 31, 1998, these properties generated gross operating
profits of $690,000 and $188,000, respectively, which
<PAGE>
resulted in net operating profits (earnings before interest, taxes and
depreciation) of $394,000 and $55,000 respectively. The average occupancy rate,
the average daily room rate and the revenue per available room for the periods
the hotels have been operational are as follows:
<TABLE>
<CAPTION>
Average Average Revenue
Occupancy Daily Room per
Property Year Rate Rate Available Room
----------------------------- ---------- ------------- --------------- -------------------
<S> <C>
Legacy Park Property *1998 8.20% $45.28 $ 3.70
**1999 42.20% 105.37 44.45
Market Center Property *1998 37.90% $100.95 $ 38.26
**1999 81.50% 138.50 112.91
Hughes Center Property *1998 47.30% $107.86 $ 51.00
**1999 51.60% 100.33 51.79
Dallas Plano Property *1998 46.70% $ 88.79 $ 41.47
**1999 47.10% 94.95 44.68
</TABLE>
* Data for the Legacy Park Property represents the period December 23,
1998 through January 1, 1999, data for the Market Center Property
represents the period November 11, 1998 through January 1, 1999, data
for the Hughes Center Property represents the period October 1, 1998
through January 1, 1999 and data for the Dallas Plano Property
represents the period October 12, 1998 through January 1, 1999.
** Data for 1999 represents the period January 2, 1999 through January 29,
1999.
The Company believes that the results achieved by the Initial Hotels
for year-end 1998, are not indicative of their long-term operating potential, as
they each had been open for three months or less during the reporting period.
The brands, Residence Inn by Marriott, Courtyard by Marriott and
Marriott Hotels, Resorts and Suites(R) are part of Marriott International's
portfolio of brands. According to data obtained in February 1999 from Marriott's
Market Planning & Feasibility department, Marriott International is one of the
world's leading hospitality companies, managing the most hotels worldwide and is
ranked as the sixth largest hotel company overall by brand (based on number of
rooms in 1997). According to Marriott data, as of September 1998, Marriott
International had more than 1,600 units (or properties), for an aggregate of
more than 315,000 rooms worldwide. Although Marriott International has entered
into a management agreement relating to the Initial Hotels, it has not
guaranteed the payments due under the leases.
Each Residence Inn by Marriott hotel typically offers daily
complimentary breakfast and newspaper, an evening hospitality hour, a swimming
pool, heated whirlpool and Sport Court(R). Guest suites provide in-room modem
jacks, separate living and sleeping areas and a fully equipped kitchen with
appliances and cooking utensils. According to Marriott, as of September 1998,
there were over 250 Residence Inn by Marriott hotels in the United States and
four in Canada and Mexico. With a usage rate of more than 83% among extended
stay chains, Residence Inn by Marriott is the top U.S. extended stay lodging
brand, appealing to travelers who need a room for five or more consecutive
nights, according to Marriott Marketing Planning and Feasibility, February 1999.
Each Courtyard by Marriott features a residential atmosphere, a
restaurant, lounge, meeting space, exercise room and swimming pool. According to
data obtained in February 1999 from Marriott's Marketing Planning & Feasibility
department, Courtyard by Marriott is a leading moderate price lodging chain
featuring a residential atmosphere. According to Marriott, as of September 1998,
there were more than 340 Courtyard by Marriott hotels across the United States,
Canada and abroad.
Marriott Hotels, Resorts and Suites is Marriott International's
flagship brand of upscale, full-service hotels and resorts. Each of the Marriott
Hotels, Resorts and Suites features multiple restaurants and lounges, health
club, swimming pool, gift shop, concierge level, business center and meeting
facilities. According to Marriott, as of September 1998, there were over 340
Marriott Hotels, Resorts and Suites worldwide.
<PAGE>
In connection with the acquisition of certain of the Properties, the
Company and Hotel Investors have entered into agreements with Marriott
International or one of its affiliates. Among other things, these agreements
require under certain circumstances that the Company or Hotel Investors obtain
the consent of, or offer the Property to, Marriott International or one of its
affiliates in the event that the Company or Hotel Investors wishes to sell the
Property to a third party. The Company believes that these agreements and the
terms thereof are consistent with standard practices in the hospitality
industry.
PENDING INVESTMENTS
As of February 26, 1999, the Company had initial commitments to acquire
, directly or indirectly, seven hotel properties. Three of the Properties are
located in Little Lake Bryan, a 300-acre community planned by The Little Lake
Bryan Company. Included in the proposed acquisition are a 314-room Courtyard by
Marriott, a 389-room Fairfield Inn(R) by Marriott(R) and a 398-room SpringHill
Suites(R) by Marriott(R) (formerly Fairfield Suites(R) by Marriott(R)). The
hotels will be developed by Marriott International, Inc. with completion
scheduled for the year 2000. The community is less than five miles from the WALT
DISNEY WORLD(R) Resort and less than ten miles from SeaWorld(R) Orlando,
Universal Studios Florida and the Orange County Convention Center.
As shown below, the lodging market in the Lake Buena Vista area
averaged 77% occupancy and an average daily room rate of $121 for year-end 1998.
The Lake Buena Vista lodging market also achieved a 9.6% growth in room demand
on a compounded annual basis over the last ten years. The following table
reflects the hotel occupancy rates and daily room rates for hotels in the
Orlando area:
ORLANDO AREA HOTEL OCCUPANCY RATES
AND AVERAGE DAILY ROOM RATES
ORLANDO LAKE BUENA VISTA*
AVERAGE DAILY AVERAGE DAILY
YEAR OCCUPANCY RATE ROOM RATE OCCUPANCY RATE ROOM RATE
---- -------------- --------- -------------- ---------
1993 72.2% $64.61 74.7% $103.09
1994 71.3% 65.85 76.3% 100.26
1995 74.6% 68.55 80.3% 96.99
1996 80.1% 73.04 82.5% 104.65
1997 78.7% 80.99 80.2% 116.18
1998 74.7% 84.64 76.9% 121.48
* Little Lake Bryan is part of the Lake Buena Vista market area.
Source: Smith Travel Research
Orlando. According to the Orlando/Orange County Convention & Visitors
Bureau 1998 Research report, Central Florida is one of the top five travel
destinations in the United States and leisure travel to Orlando continues to
grow. The number of domestic non-Florida leisure travelers visiting Orlando in
1997 increased 16.1% over 1996. In 1997, Universal Studios Florida drew an
estimated 8.9 million visitors and SeaWorld(R) Orlando had an estimated 4.9
million visitors. Area attractions continue to grow with new developments.
In addition, according to the Orlando/Orange County Convention &
Visitors Bureau 1998 Research report, visitor arrivals at Orlando International
Airport increased from approximately 21,500,000 passengers in 1993, to
27,300,000 passengers in 1997. The number of domestic non-Florida business
travelers during 1997 increased 22.1% over 1996. In addition, more than six
million international visitors arrived in Florida in 1997, for a national market
share of 25.1%. The Orlando area claimed 11.5% of the national market share. On
average, international visitors spent $800 per person/per trip, excluding
airfare, while visiting Orlando in 1997.
<PAGE>
The Orange County Convention Center recently completed a new phase of
development. With 1.1 million square feet of exhibition space, an independent
study ranked the center as number two in the nation for continuous exhibition
space. The following table reflects the number of events which took place at the
Orange County Convention Center between 1994 and 1997 and attendance levels for
those events:
ORANGE COUNTY CONVENTION
CENTER ATTENDANCE
Year # of Events Attendance
---- ----------- ----------
1994 188 705,824
1995 168 700,429
1996 240 1,017,679
1997 260 930,219
Source: Orlando/Orange County CVB
Fairfield Inn by Marriott and SpringHill Suites by Marriott are economy
lodging brands appealing to both business and leisure travelers. According to
Marriott, as of September 1998, there are more than 340 Fairfield Inn by
Marriott hotels and SpringHill Suites by Marriott hotels in 47 states.
The four remaining hotel properties which the Company has initial
commitments to acquire indirectly, are the following. The 176-room Courtyard by
Marriott is located in Addison, Texas, a northern suburb of Dallas, in close
proximity to high-rise office buildings, retail centers and restaurants. The
180-room Courtyard by Marriott is located in Scottsdale, Arizona, in central
Scottsdale, within close proximity to office and retail developments in addition
to galleries and upscale shops. The 250-room Courtyard by Marriott is located in
Seattle, Washington, in the Lake Union district which is considered the northern
boundary of the downtown area. The 200-room Residence Inn by Marriott is located
in Phoenix, Arizona, approximately four miles from Sky Harbor International
Airport.
The acquisition of each of these properties is subject to the
fulfillment of certain conditions. In order to acquire these properties, the
Company must obtain additional funds through the receipt of additional offering
proceeds and/or debt financing. There can be no assurance that any or all of the
conditions will be satisfied or, if satisfied, that one or more of these
properties will be acquired by the Company. If acquired, the leases of these
properties are expected to be entered into on substantially the same terms
described in "Business -- Description of Property Leases."
The following chart provides additional information on systemwide
occupancy levels for Marriott lodging brands:
Total Occupancy Rate for 1997
Marriott Brand as Compared to
U.S. Lodging Industry
Occupancy Rate
--------------
U.S. Lodging Industry 64.5%
Courtyard by Marriott 78.2%
Fairfield Inns by Marriott &
SpringHill Suites by Marriott 73.0%
Marriott Hotels, Resorts and Suites 76.6%
Residence Inn by Marriott 80.6%
Source: Smith Travel Research (U.S. Lodging Industry only) and
Marriott International, Inc. 1997 Annual Report
Leases. Set forth below are summarized terms expected to apply to the
leases for each of the properties. More detailed information relating to a
property and its related lease will be provided at such time, if any, as the
property is acquired.
<PAGE>
<TABLE>
<CAPTION>
Estimated
Purchase Lease Term and Minimum Annual
Property Price Renewal Options Rent Percentage Rent
- -------- --------- --------------- -------------- ---------------
<S><C>
Courtyard by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year after
Orlando, FL (1) renewal options total cost to purchase the second lease year, 7%
(the "Courtyard Little Lake Bryan the property of revenues in excess of
Property") revenues for the second
Hotel to be constructed lease year
Fairfield Inn by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year after
Orlando, FL (1) renewal options total cost to purchase the second lease year, 7%
(the "Fairfield Inn Little Lake the property of revenues in excess of
Bryan Property") revenues for the second
Hotel to be constructed lease year
SpringHill Suites by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year after
Orlando, FL (1) renewal options total cost to purchase the second lease year, 7%
(the "SpringHill Suites Little the property of revenues in excess of
Lake Bryan Property") revenues for the second
Hotel to be constructed lease year
Courtyard by Marriott $17,085,000 approximately 20 years; 10.309% of the total cost for the first and second
Addison, TX (3)(4)(5)(6) three 15-year renewal to purchase the Property; lease years, 7.75% of room
(the "Courtyard Addison options increases to 10.567% revenues in excess of the
Property") after the first lease year second year pro forma
Hotel to be constructed revenues; and for the third
lease year and thereafter,
7.75% of room revenues in
excess of the second year
actual revenues
Courtyard by Marriott $19,614,000 approximately 20 years; 10.309% of the total cost for the first and second
Scottsdale, AZ (3)(4)(5)(6) three 15-year renewal to purchase the Property; lease years, 7.75% of room
(the "Courtyard Scottsdale options increases to 10.567% revenues in excess of the
Property") after the first lease year second year pro forma
Hotel to be constructed revenues; and for the third
lease year and thereafter,
7.75% of room revenues in
excess of the second year
actual revenues
<PAGE>
Estimated
Purchase Lease Term and Minimum Annual
Property Price Renewal Options Rent Percentage Rent
- -------- --------- --------------- -------------- ---------------
Courtyard by Marriott $35,801,000 approximately 20 years; 10.309% of the total cost for the first and second lease
Seattle, WA (3)(4)(5)(6) three 15-year renewal to purchase the Property; years, 7.75% of room revenues in
(the "Courtyard Seattle options increases to 10.567% after excess of the second year pro
Property") the first lease year forma revenues; and for the third
Hotel to be constructed lease year and thereafter, 7.75%
of room revenues in excess of the
second year actual revenues
Residence Inn by Marriott $21,352,000 approximately 20 years; 10.309% of the total cost for the first and second lease
Phoenix, AZ (3)(4)(5)(6) three 15-year renewal to purchase the Property; years, 7.75% of room revenues in
(the "Residence Inn Phoenix options increases to 10.567% after excess of the second year pro
Property") the first lease year forma revenues; and for the third
Hotel to be constructed lease year and thereafter, 7.75%
of room revenues in excess of the
second year actual revenues
</TABLE>
- ------------------------------------
FOOTNOTES:
(1) The leases for the Courtyard Little Lake Bryan, the Fairfield Inn
Little Lake Bryan and the SpringHill Suites Little Lake Bryan
Properties are expected to be with the same unaffiliated lessee.
(2) The anticipated aggregate purchase price for the Courtyard Little Lake
Bryan, Fairfield Inn Little Lake Bryan and SpringHill Suites Little
Lake Bryan Properties is approximately $100 million.
(3) The leases for the Courtyard Addison, the Courtyard Scottsdale, the
Courtyard Seattle, and the Residence Inn Phoenix Properties (in
addition to the Initial Hotels) are expected to be with the same
unaffiliated lessee.
(4) The Company, together with an institutional investor, will indirectly
acquire these four hotel properties (in addition to the Initial Hotels)
through Hotel Investors. (See "Property Acquisitions.")
(5) In connection with the acquisition of the four properties (in addition
to the Initial Hotels), Hotel Investors is expected to obtain
approximately $96,567,500 in long-term, permanent financing to be used
to fund a portion of the purchase prices. Such financing will be
secured by the properties, bear interest at a market rate and be
nonrecourse to Hotel Investors. (See "Property Acquisitions.")
<PAGE>
(6) In connection with the acquisition of the four hotel properties (in
addition to the Initial Hotels), an investment of $15,000,000 in the
Company and the acquisition of a ten percent interest in the Advisor by
the institutional investor, the Advisor and certain of its Affiliates
intend to waive or reduce certain fees otherwise payable by the
Company. In connection with these transactions, Hotel Investors will
pay the advisor of the institutional investor a commitment fee. (See
"Property Acquisitions.")
<PAGE>
SITE SELECTION AND ACQUISITION OF PROPERTIES
General. It is anticipated that the Restaurant Chains and Hotel Chains
selected by the Advisor, and as approved by the Board of Directors, will have
full-time staffs engaged in site selection and evaluation. All new sites must be
approved by the Restaurant Chains or Hotel Chains. The Restaurant Chains and
Hotel Chains generally conduct or require the submission of studies which
typically include such factors as traffic patterns, population trends,
commercial and industrial development, office and institutional development,
residential development, per capita or household median income, per capita or
household median age, and other factors. The Restaurant Chains and Hotel Chains
also will review and approve all proposed tenants and business sites. The
Restaurant Chains and Hotel Chains or the operators are expected to make their
site evaluations and analyses, as well as financial information regarding
proposed tenants, available to the Company.
The Board of Directors, on behalf of the Company, will elect to
purchase and lease Properties based principally on an examination and evaluation
by the Advisor of the potential value of the site, the financial condition and
business history of the proposed tenant, the demographics of the area in which
the property is located or to be located, the proposed purchase price and
proposed lease terms, geographic and market diversification, and potential sales
expected to be generated by the business located on the property. In addition,
the potential tenant must meet at least the minimum standards established by a
Restaurant Chain or Hotel Chain for its operators. The Advisor also will perform
an independent break-even analysis of the potential profitability of a property
using historical data and other data developed by the Company and provided by
the operator.
The Board of Directors will exercise its own judgment as to, and will
be solely responsible for, the ultimate selection of both tenants and
Properties. Therefore, some of the properties approved by a Restaurant Chain or
Hotel Chain may not be purchased by the Company.
In each Property acquisition, it is anticipated that the Advisor will
negotiate the lease agreement with the tenant. In certain instances, the Advisor
may negotiate an assignment of an existing lease, in which case the terms of the
lease may vary substantially from the Company's standard lease terms, if the
Board of Directors, based on the recommendation of the Advisor, determines that
the terms of an acquisition and lease of a Property, taken as a whole, are
favorable to the Company. It is expected that the structure of the long-term
"triple-net" lease agreements, which generally provide for monthly rental
payments with automatic increases in base rent at specified times during the
lease terms and/or a percentage of gross sales over specified levels, will
increase the value of the Properties and provide an inflation hedge. See
"Description of Leases" below for a discussion of the anticipated terms of the
Company's leases. In connection with a Property acquisition, in the event the
tenant does not enter into a Secured Equipment Lease with the Company, the
tenant will provide at its own expense all Equipment necessary to operate the
Company's Property as a restaurant or hotel. Generally, a tenant either pays
cash or obtains a loan from a third party to purchase such items. If the tenant
obtains such a loan, the tenant will own this personal property subject to the
tenant's obligations under its loan. In the experience of the Affiliates of the
Company and the Advisor, there may be rare circumstances in which a tenant
defaults under such a loan, in which event the lender may attempt to remove the
personal property from the building, resulting in the Property becoming
inoperable until new Equipment can be purchased and installed. In order to
prevent repossession of this personal property by the lender, and only on an
interim basis in order to preserve the value of a Property, the Company may
elect (but only to the extent consistent with the Company's objective of
qualifying as a REIT) to use Company reserves to purchase this personal property
from the lender, generally at a discount for the remaining unpaid balance under
the tenant's loan. The Company then would expect, consistent with the Company's
objective of qualifying as a REIT, to resell the personal property to a new
tenant in connection with the transfer of the lease to that tenant.
Some lease agreements will be negotiated to provide the tenant with the
opportunity to purchase the Property under certain conditions, generally either
at a price not less than fair market value (determined by appraisal or
otherwise) or through a right of first refusal to purchase the Property. In
either case, the lease agreements will provide that the tenant may exercise
these rights only to the extent consistent with the Company's objective of
qualifying as a REIT. See "Sale of Properties, Mortgage Loans and Secured
Equipment Leases" below and "Federal Income Tax Considerations --
Characterization of Leases."
The purchase of each Property will be supported by an appraisal of the
real estate prepared by an independent appraiser. The Advisor, however, will
rely on its own independent analysis and not on such appraisals in determining
whether or not to recommend that the Company acquire a particular property. The
purchase price of each such Property, plus any Acquisition Fees paid by the
Company in connection with such purchase, will not exceed the Property's
appraised value. (In connection with the acquisition of a Property which is to
be constructed or renovated, the comparison of the purchase price and the
appraised value of such Property ordinarily will be based on the "when
constructed" price and value of such Property.) It should be noted that
appraisals are estimates of value and should not be relied upon as measures of
true worth or realizable value. Each appraisal will be maintained in the
Company's records for at least five years and will be available for inspection
and duplication by any stockholder.
The titles to Properties purchased by the Company will be insured by
appropriate title insurance policies and/or abstract opinions consistent with
normal practices in the jurisdictions in which the Properties are located.
Construction and Renovation. In some cases, construction or renovation
will be required after the purchase contract has been entered into, but before
the total purchase price has been paid. In connection with the acquisition of
Properties that are to be constructed or renovated and as to which the Company
will own both the land and the building or building only, the Company generally
will advance funds for construction or renovation costs, as they are incurred,
pursuant to a development agreement with the developer. The developer may be the
tenant or an Affiliate of the Company. An Affiliate may serve as a developer and
enter into the development agreement with the Company if the transaction is
approved by a majority of the Directors, including a majority of the Independent
Directors. The Company believes that the ability to have an Affiliate capable of
serving as the developer provides the Company an advantage by enhancing its
relationship with key tenants and by giving it access to tenant opportunities at
an earlier stage of the development cycle. As a result, the Company believes it
has a greater number of opportunities for investment presented to it than it
might otherwise have and it is able to obtain better terms by negotiating the
terms of its investment at an earlier stage in the development cycle when there
are fewer competitive alternatives to the tenant.
The developer will enter into all construction contracts and will
arrange for and coordinate all aspects of the construction or renovation of the
property improvements. The developer will be responsible for the construction or
renovation of the building improvements, although it may employ co-developers or
sub-agents in fulfilling its responsibilities under the development agreement.
All general contractors performing work in connection with such building
improvements must provide a payment and performance bond or other satisfactory
form of guarantee of performance. All construction and renovation will be
performed or supervised by persons or entities acceptable to the Advisor. The
Company will be obligated, as construction or renovation costs are incurred, to
make the remaining payments due as part of the purchase price for the
Properties, provided that the construction or renovation conforms to definitive
plans, specifications, and costs approved by the Advisor and the Board of
Directors and embodied in the construction contract.
Under the terms of the development agreement, the Company generally
will advance its funds on a monthly basis to meet construction draw requests of
the developer. The Company, in general, only will advance its funds to meet the
developer's draw requests upon receipt of an inspection report and a
certification of draw requests from an inspecting architect or engineer suitable
to the Company, and the Company may retain a portion of any advance until
satisfactory completion of the project. The certification generally must be
supported by color photographs showing the construction work completed as of the
date of inspection. The total amount of the funds advanced to the developer
(including the purchase price of the land plus closing costs and certain other
costs) generally will not exceed the maximum amount specified in the development
agreement. Such maximum amount will be based on the Company's estimate of the
costs of such construction or renovation.
In some cases, construction or renovation will be required before the
Company has acquired the Property. In this situation, the Company may have made
a deposit on the Property in cash or by means of a letter of credit. The
renovation or construction may be made by an Affiliate or a third party. The
Company may permit the proposed developer to arrange for a bank or another
lender, including an Affiliate, to provide construction financing to the
developer. In such cases, the lender may seek assurance from the Company that it
has sufficient funds to pay to the developer the full purchase price of the
Property upon completion of the construction or renovation. In the event that
the Company segregates funds as assurance to the lender of its ability to
purchase the Property, the funds will remain the property of the Company, and
the lender will have no rights with respect to such funds upon any default by
the developer under the development agreement or under the loan agreement with
such lender, or if the closing of the purchase of the Property by the Company
does not occur for any reason, unless the transaction is supported by a letter
of credit in favor of the lender.
Under the development agreement, the developer generally will be
obligated to complete the construction or renovation of the building
improvements within a specified period of time from the date of the development
agreement, which generally will be between 4 to 5 months for restaurant
Properties and between 12 to 18 months for hotel Properties. If the construction
or renovation is not completed within that time and the developer fails to
remedy this default within 10 days after notice from the Company, the Company
will have the option to grant the developer additional time to complete the
construction, to take over construction or renovation of the building
improvements, or to terminate the development agreement and require the
developer to purchase the Property at a price equal to the sum of (i) the
Company's purchase price of the land, including all fees, costs, and expenses
paid by the Company in connection with its purchase of the land, (ii) all fees,
costs, and expenses disbursed by the Company pursuant to the development
agreement for construction of the building improvements, and (iii) the Company's
"construction financing costs." The "construction financing costs" of the
Company is an amount equal to a return, at the annual percentage rate used in
calculating the minimum annual rent under the lease, on all Company payments and
disbursements described in clauses (i) and (ii) above.
The Company also generally will enter into an indemnification and put
agreement (the "Indemnity Agreement") with the developer. The Indemnity
Agreement will provide for certain additional rights to the Company unless
certain conditions are met. In general, these conditions are (i) the developer's
acquisition of all permits, approvals, and consents necessary to permit
commencement of construction or renovation of the building improvements within a
specified period of time after the date of the Indemnity Agreement (normally, 60
days), or (ii) the completion of construction or renovation of the building as
evidenced by the issuance of a certificate of occupancy, within a specified
period of time after the date of the Indemnity Agreement. If such conditions are
not met, the Company will have the right to grant the developer additional time
to satisfy the conditions or to require the developer to purchase the Property
from the Company at a purchase price equal to the total amount disbursed by the
Company in connection with the acquisition and construction or renovation of the
Property (including closing costs), plus an amount equal to the return described
in item (iii) of the preceding paragraph. Failure of the developer to purchase
the Property from the Company upon demand by the Company under the circumstances
specified above will entitle the Company to declare the developer in default
under the lease and to declare each guarantor in default under any guarantee of
the developer's obligations to the Company.
In certain situations where construction or renovation is required for
a Property, the Company will pay a negotiated maximum amount upon completion of
construction or renovation rather than providing financing to the developer,
with such amount generally based on the developer's costs and fees related to
such construction or renovation.
Affiliates of the Company also may provide construction financing to
the developer of a Property. In addition, the Company may purchase from an
Affiliate of the Company a Property that has been constructed or renovated by
the Affiliate. Any fees paid to Affiliates of the Company in connection with the
financing, construction or renovation of a Property acquired by the Company will
be considered Acquisition Fees and will be subject to approval by a majority of
the Board of Directors, including a majority of the Independent Directors, not
otherwise interested in the transaction. See "Management Compensation" and
"Conflicts of Interest -- Certain Conflict Resolution Procedures." Any such fees
will be included in the cost of the Property and, therefore, will be included in
the calculation of base rent.
In all situations where construction or renovation of a Property is
required, the Company also will have the right to review the tenant's books,
records, and agreements during and following completion of construction to
verify actual costs.
Interim Acquisitions. The Advisor may regularly have opportunities to
acquire properties that often must be made within a relatively short period of
time, occasionally at a time when the Company may be unable to make the
acquisition. In an effort to address these situations and preserve the
acquisition opportunities of the Company (and other entities with which the
Company is affiliated), the Advisor and its Affiliates maintain lines of credit
which enable them to acquire these properties on an interim basis and
temporarily own them for the purpose of facilitating their acquisition by the
Company (or other entities with which the Company is affiliated). At such time
as a Property acquired on an interim basis is determined to be suitable for
acquisition by the Company, the interim owner of the Property will sell its
interest in the Property to the Company at a price equal to the lesser of its
cost (which includes carrying costs and, in instances in which an Affiliate of
the Company has provided real estate brokerage services in connection with the
initial purchase of the Property, indirectly includes fees paid to an Affiliate
of the Company) to purchase such interest in the Property or the Property's
appraised value, provided that a majority of Directors, including a majority of
the Independent Directors, determine that the acquisition is fair and reasonable
to the Company. See "Conflicts of Interest -- Certain Conflict Resolution
Procedures." Appraisals of Properties acquired from such interim owners will be
obtained in all cases.
Acquisition Services. Acquisition services performed by the Advisor may
include, but are not limited to site selection and/or approval; review and
selection of tenants and negotiation of lease agreements and related documents;
monitoring Property acquisitions; and the processing of all final documents
and/or procedures to complete the acquisition of Properties and the commencement
of tenant occupancy and lease payments.
The Company will pay the Advisor a fee of 4.5% of the Total Proceeds as
Acquisition Fees. See "Management Compensation." The total of all Acquisition
Fees and Acquisition Expenses shall be reasonable and shall not exceed an amount
equal to 6% of the Real Estate Asset Value of a Property, or in the case of a
Mortgage Loan, 6% of the funds advanced, unless a majority of the Board of
Directors, including a majority of the Independent Directors, not otherwise
interested in the transaction approves fees in excess of these limits subject to
a determination that the transaction is commercially competitive, fair and
reasonable to the Company. The total of all Acquisition Fees payable to all
persons or entities will not exceed the compensation customarily charged in
arm's-length transactions by others rendering similar services as an ongoing
activity in the same geographical location and for comparable types of
properties.
The Advisor engages counsel to perform legal services, and such counsel
also may provide legal services to the Company in connection with the
acquisition of Properties. The legal fees payable to such counsel by the Company
will not exceed those generally charged for similar services.
STANDARDS FOR INVESTMENT IN PROPERTIES
Selection of Restaurant Chains and Hotel Chains. The selection of
Restaurant Chains and Hotel Chains by the Advisor, as approved by the Board of
Directors, will be based on an evaluation of the operations of restaurants in
the Restaurant Chains or hotels in the Hotel Chains, the number of restaurants
or hotels operated, the relationship of average gross sales to the average
capital costs of a restaurant or the relationship of average revenue per
available room to the average capital cost per room of a hotel, the relative
competitive position among the same type of restaurants or hotels offering
similar types of products, name recognition, and market penetration. The
Restaurant Chains and Hotel Chains will not be affiliated with the Advisor, the
Company or an Affiliate.
Selection of Properties and Tenants. In making investments in
Properties, the Advisor will consider relevant real property and financial
factors, including the condition, use, and location of the Property,
income-producing capacity, the prospects for long-term appreciation, the
relative success of the Restaurant Chain or Hotel Chain in the geographic area
in which the Property is located, and the management capability and financial
condition of the tenant. The Company will obtain an independent appraisal for
each Property it purchases. In selecting tenants, the Advisor will consider the
prior experience of the tenant, the net worth of the tenant, past operating
results of other restaurants or hotels currently or previously operated by the
tenant, and the tenant's prior experience in managing restaurants or hotels
within a particular Restaurant Chain or Hotel Chain.
In selecting specific Properties within a particular Restaurant Chain
or Hotel Chain and in selecting lessees for the Company's Properties, the
Advisor, as approved by the Board of Directors, will apply the following minimum
standards.
1. Each Property will be in what the Advisor believes is a prime
business location for that type of Property.
2. Base (or minimum) annual rent will provide a specified minimum
return on the Company's cost of purchasing and, if applicable, developing the
Property, and the lease also will generally provide for automatic increases in
base rent at specified times during the lease term and/or payment of percentage
rent based on gross sales over specified levels.
3. The initial lease term typically will be at least 10 to 20 years.
4. The Company will reserve the right to approve or reject any tenant
and site selected by a Restaurant Chain or Hotel Chain.
5. In evaluating prospective tenants, the Company will examine, among
other factors, the tenant's ranking in its market segment, trends in per
property sales, overall changes in consumer preferences, the tenant's ability to
adapt to changes in market and competitive conditions, the tenant's historical
financial performance, and its current financial condition.
6. In general, the Company will not acquire a Property if the Board of
Directors, including a majority of the Independent Directors, determines that
the acquisition would adversely affect the Company in terms of geographic,
property type or chain diversification.
DESCRIPTION OF PROPERTIES
The six hotel Properties directly or indirectly owned by the Company as
of February 26, 1999, conform, and the Advisor expects that any Properties
purchased by the Company will conform, to the following specifications of size,
cost, and type of land and buildings.
Restaurant Properties. Lot sizes generally range from 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 sufficient common parking is available.
Restaurant sites purchased by the Company will be in locations zoned for
commercial use which have been reviewed for traffic patterns and volume of
traffic. There is substantial competition for quality sites; accordingly, land
costs may be high and are generally expected to range from $150,000 to $500,000,
although the cost of the land for particular Properties may be higher or lower
in some cases.
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. Building and site
preparation costs vary depending upon the size of the building and the site and
the area in which the restaurant Property is located. It is estimated that
building and site preparation costs generally will range from $250,000 to
$750,000 for each restaurant Property.
Hotel Properties. Lot sizes generally range in size up to 10 acres
depending on product, market and design considerations, and are available at a
broad range of pricing. It is anticipated that hotel sites purchased by the
Company will generally be in primary or secondary urban, suburban, airport,
highway or resort markets which have been evaluated for past and future
anticipated lodging demand trends. The hotel buildings generally will be low to
mid rise construction. The Company may acquire limited service, extended stay or
full service hotel Properties. Limited service hotels generally minimize
non-guest room space and offer limited food service such as complimentary
continental breakfasts and do not have restaurant or lounge facilities on-site.
Extended stay hotels generally contain guest suites with a kitchen area and
living area separate from the bedroom. Extended stay hotels vary with respect to
providing on-site restaurant facilities. Full service hotels generally have
conference or meeting facilities and on-site food and beverage facilities.
Restaurant and Hotel Properties. Either before or after construction or
renovation, the Properties to be acquired by the Company will be one of a
Restaurant Chain's or Hotel Chain's approved designs. Prior to purchase of all
Properties, other than those purchased prior to completion of construction, the
Company will receive a copy of the certificate of occupancy issued by the local
building inspector or other governmental authority which permits the use of the
Property as a restaurant or hotel, and shall receive a certificate from the
Restaurant Chain or Hotel Chain to the effect that (i) the Property is
operational and (ii) the Property and the tenant are in compliance with all of
the chain's requirements, including, but not limited to, building plans and
specifications approved by the chain. The Company also will receive a
certificate of occupancy for each Property for which construction has not been
completed at the time of purchase, prior to the Company's payment of the final
installment of the purchase price for the Property.
Generally, Properties to be acquired by the Company will consist of
both land and building, although in a number of cases the Company may acquire
only the land underlying the building with the building owned by the tenant or a
third party, and also may acquire the building only with the land owned by a
third party. In general, the Properties will be freestanding and surrounded by
paved parking areas. Buildings are suitable for conversion to various uses,
although modifications will be required prior to use for other operations. In
the case of hotel Properties, the properties may include Equipment.
A tenant generally will be required by the lease agreement to make such
capital expenditures as may be reasonably necessary to refurbish buildings,
premises, signs, and equipment so as to comply with the tenant's obligations
under the franchise agreement to reflect the current commercial image of its
Restaurant Chain or Hotel Chain. These capital expenditures generally will be
paid by the tenant during the term of the lease. Some hotel Property leases may,
however, obligate 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 is
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.
DESCRIPTION OF PROPERTY LEASES
The terms and conditions of any lease entered into by the Company with
regard to a Property may vary from those described below. The Advisor in all
cases will use its best efforts to obtain terms at least as favorable as those
described below. If the Board of Directors determines, based on the
recommendation of the Advisor, that the terms of an acquisition and lease of a
Property, taken as a whole, are favorable to the Company, the Board of Directors
may, in its sole discretion, cause the Company to enter into leases with terms
which are substantially different than the terms described below, but only to
the extent consistent with the Company's objective of qualifying as a REIT. In
making such determination, the Advisor will consider such factors as the type
and location of the Property, the creditworthiness of the tenant, the purchase
price of the Property, the prior performance of the tenant, and the prior
business experience of management of the Company and the Company's Affiliates
with a Restaurant Chain or Hotel Chain, or the operator.
General. In general, the leases are expected to be "triple-net" leases,
which means that the tenants generally will be required to pay for all repairs,
maintenance, property taxes, utilities, and insurance. The tenants also will be
required to pay for special assessments, sales and use taxes, and the cost of
any renovations permitted under the leases. The Company will be the lessor under
each lease except in certain circumstances in which it may be a party to a Joint
Venture which will own the Property. In those cases, the Joint Venture, rather
than the Company, will be the lessor, and all references in this section to the
Company as lessor therefore should be read accordingly. See "Joint Venture
Arrangements" below.
Term of Leases. It is anticipated that Properties will be leased for an
initial term of 10 to 20 years with up to four, five-year renewal options. Upon
termination of the lease, the tenant will surrender possession of the Property
to the Company, together with any improvements made to the Property during the
term of the lease, except that for Properties in which the Company owns only the
building and not the underlying land, the owner of the land may assume ownership
of the building.
Computation of Lease Payments. During the initial term of the lease,
the tenant will pay the Company, as lessor, minimum annual rent equal to a
specified percentage of the Company's cost of purchasing the Property. In the
case of acquisition of Properties that are to be constructed or renovated
pursuant to a development agreement, the Company's costs of purchasing the
Property will include the purchase price of the land, including all fees, costs,
and expenses paid by the Company in connection with its purchase of the land,
and all fees, costs, and expenses disbursed by the Company for construction of
building improvements. See "Site Selection and Acquisition of Properties --
Construction and Renovation" above. In addition to minimum annual rent, the
tenant will generally pay the Company "percentage rent" and/or automatic
increases in the minimum annual rent at predetermined intervals during the term
of the lease. Percentage rent is generally computed as a percentage of the gross
sales above a specified level at a particular Property.
In the case of Properties in which the Company owns only the building,
the Company will structure its leases to have recovered its investment in the
building by the expiration of the lease.
Assignment and Sublease. In general, leases may not be assigned or
subleased without the Company's prior written consent (which may not be
unreasonably withheld) except to a tenant's corporate franchisor, corporate
affiliate or subsidiary, a successor by merger or acquisition, or, in certain
cases, another franchisee, if such assignee or subtenant agrees to operate the
same type of restaurant or hotel on the premises, but only to the extent
consistent with the Company's objective of qualifying as a REIT. The leases set
forth certain factors (such as the financial condition of the proposed tenant or
subtenant) that are deemed to be a reasonable basis for the Company's refusal to
consent to an assignment or sublease. In addition, the Company may refuse to
permit any assignment or sublease that would jeopardize the Company's continued
qualification as a REIT. In certain cases, the original tenant generally will
remain fully liable, however, for the performance of all tenant obligations
under the lease following any such assignment or sublease unless the Company
agrees in writing to release the original tenant from its lease obligations.
Alterations to Premises. A tenant generally will have the right,
without the prior written consent of the Company and at the tenant's own
expense, to make certain improvements, alterations or modifications to the
Property. Under certain leases, the tenant, at its own expense, may make certain
immaterial structural improvements (with a cost of up to $10,000) without the
prior consent of the Company. Certain leases may require the tenant to post a
payment and performance bond for any structural alterations with a cost in
excess of a specified amount.
Right of Tenant to Purchase. In some cases, if the Company wishes at
any time to sell a Property pursuant to a bona fide offer from a third party,
the tenant of that Property will have the right to purchase the Property for the
same price, and on the same terms and conditions, as contained in the offer. In
certain cases, the tenant also may have a right to purchase the Property seven
to 20 years after commencement of the lease at a purchase price equal to the
greater of (i) the Property's appraised value at the time of the tenant's
purchase, or (ii) a specified amount, generally equal to the Company's purchase
price of the Property, plus a predetermined percentage (generally, 15% to 20%)
of such purchase price. See "Federal Income Tax Considerations --
Characterization of Leases."
Substitution of Properties. Under certain leases, the tenant of a
Property, at its own expense and with the Company's prior written consent, may
be entitled to operate another form of approved restaurant or hotel on the
Property as long as such approved restaurant or hotel has an operating history
which reflects an ability to generate gross sales and potential sales growth
equal to or greater than that experienced by the tenant in operating the
original restaurant or hotel.
In addition, certain Property leases will provide the tenant with the
right, to the extent consistent with the Company's objective of qualifying as a
REIT, to offer the substitution of another property selected by the tenant in
the event that (i) the Property that is the subject of the lease is not
producing percentage rent pursuant to the terms of the lease, and (ii) the
tenant determines that the Property has become uneconomic (other than as a
result of an insured casualty loss or condemnation) for the tenant's continued
use and occupancy in its business operation and the tenant's board of directors
has determined to close and discontinue use of the Property. The tenant's
determination that a Property has become uneconomic is to be made in good faith
based on the tenant's reasonable business judgment after comparing the results
of operations of the Property to the results of operations at the majority of
other properties then operated by the tenant. If either of these events occurs,
the tenant will have the right to offer the Company the opportunity to exchange
the Property for another property (the "Substituted Property") with a total cost
for land and improvements thereon (including overhead, construction interest,
and other related charges) equal to or greater than the cost of the Property to
the Company.
Generally, the Company will have 30 days following receipt of the
tenant's offer for exchange of the Property to accept or reject such offer. In
the event that the Company requests an appraisal of the Substituted Property, it
will have at least ten days following receipt of the appraisal to accept or
reject the offer. If the Company accepts such offer, (i) the Substituted
Property will be exchanged for the Property in a transaction designed and
intended to qualify as a "like-kind exchange" within the meaning of section 1031
of the Code with respect to the Company and (ii) the lease of the Property will
be amended to (a) provide for minimum rent in an amount equal to the sum
determined by multiplying the cost of the Substituted Property by the Property
lease rate and (b) provide for the number of five-year lease renewal options
sufficient to permit the tenant, at its option, to continue its occupancy of the
Substituted Property for up to 35 years from the date on which the exchange is
made. The Company will pay the tenant the excess, if any, of the cost of the
Substituted Property over the cost of the Property. If the substitution does not
take place within a specified period of time after the tenant makes the offer to
exchange the Property for the Substituted Property, either party thereafter will
have the right not to proceed with the substitution. If the Company rejects the
Substituted Property offered by the tenant, the tenant is generally required to
offer at least three additional alternative properties for the Company's
acceptance or rejection. If the Company rejects all Substituted Properties
offered to it pursuant to the lease, or otherwise fails or refuses to consummate
a substitution for any reason other than the tenant's failure to fulfill the
conditions precedent to the exchange, then the tenant will be entitled to
terminate the lease on the date scheduled for such exchange by purchasing the
Property from the Company for a price equal to the then-fair market value of the
Property.
Neither the tenant nor any of its subsidiaries, licensees,
concessionaires, or sublicensees or any other affiliate will be permitted to use
the original Property as a restaurant or other business of the same type and
style for at least one year after the closing of the original Property. In
addition, in the event the tenant or any of its affiliates sells the Property
within twelve months after the Company acquires the Substituted Property, the
Company will receive, to the extent consistent with its objective of qualifying
as a REIT, from the proceeds of the sale the amount by which the selling price
exceeds the cost of the Property to the Company.
Special Conditions. Certain leases may provide that the lessee will not
be permitted to own or operate, directly or indirectly, another Property of the
same or similar type as the leased Property that is or will be located within a
specified distance of the leased Property.
Insurance, Taxes, Maintenance, and Repairs. Tenants of restaurant
Properties generally will be required, under the terms of the leases, to
maintain, for the benefit of the Company and the tenant, casualty insurance in
an amount not less than the full replacement value of the building and other
permanent improvements (or a percent of such value in the case of certain
leases, but in no case less than 90%), as well as liability insurance, generally
in an amount not less than $2,000,000 for each location and event. Tenants of
hotel Properties will be required, under the terms of the leases, to maintain,
for the benefit of the Company and the tenant, insurance that is commercially
reasonable given the size, location and nature of the Property. All tenants,
other than those tenants with a substantial net worth, generally also will be
required to obtain "rental value" or "business interruption" insurance to cover
losses due to the occurrence of an insured event for a specified period,
generally six to twelve months. In general, no lease will be entered into
unless, in the opinion of the Advisor, as approved by the Board of Directors,
the insurance required by the lease adequately insures the Property.
All of the restaurant Property leases are expected to require that the
tenant pay all taxes and assessments, maintenance, repair, utility, and
insurance costs applicable to the real estate and permanent improvements.
Tenants will be required to maintain such Properties in good order and repair.
Such tenants generally will be required to maintain the Property and repair any
damage to the Property, except damage occurring during the last 24 to 48 months
of the lease term (as extended), which in the opinion of the tenant renders the
Property unsuitable for occupancy, in which case the tenant will have the right
instead to pay the insurance proceeds to the Company and terminate the lease.
The nature of the obligations of hotel Property tenants for maintenance and
repairs of the Properties will vary depending upon individual lease
negotiations. In some instances, the Company may be obligated to make repairs
and fund capital improvements. In these instances, the lease will adjust the
lease payments so that the economic terms would be the same as if the tenant
were responsible to make repairs and fund capital improvements.
The restaurant Property tenant generally will be required to repair the
Property in the event that less than a material portion of the Property (for
example, more than 20% of the building or more than 40% of the land) is taken
for public or quasi-public use. The Company's leases generally will provide
that, in the event of any condemnation of the restaurant Property that does not
give rise to an option to terminate the lease or in the event of any
condemnation which does give rise to an option to terminate the lease and the
tenant elects not to terminate, the Company will remit to the tenant the award
from such condemnation and the tenant will be required to repair and restore the
Property. To the extent that the award exceeds the estimated costs of restoring
or repairing the Property, the tenant is required to deposit such excess amount
with the Company. Until a specified time (generally, ten days) after the tenant
has restored the premises and all improvements thereon to the same condition as
existed immediately prior to such condemnation insofar as is reasonably
possible, a "just and proportionate" amount of the minimum annual rent will be
abated from the date of such condemnation. In addition, the minimum annual rent
will be reduced in proportion to the reduction in the then rental value of the
premises or the fair market value of the premises after the condemnation in
comparison with the rental value or fair market value prior to such
condemnation.
Events of Default. The leases generally are expected to provide that
the following events, among others, will constitute a default under the lease:
(i) the insolvency or bankruptcy of the tenant, provided that the tenant may
have the right, under certain circumstances, to cure such default, (ii) the
failure of the tenant to make timely payment of rent or other charges due and
payable under the lease, if such failure continues for a specified period of
time (generally, five to 30 days) after notice from the Company of such failure,
(iii) the failure of the tenant to comply with any of its other obligations
under the lease (for example, the discontinuance of operations of the leased
Property) if such failure continues for a specified period of time (generally,
ten to 45 days), (iv) a default under or termination of the franchise agreement
between the tenant and its franchisor, (v) in cases where the Company enters
into a development agreement relating to the construction or renovation of a
building, a default under the development agreement or the Indemnity Agreement
or the failure to establish the minimum annual rent at the end of the
development period, and (vi) in cases where the Company has entered into other
leases with the same tenant, a default under such lease.
Upon default by the tenant, the Company generally will have the right
under the lease and under most state laws to evict the tenant, re-lease the
Property to others, and hold the tenant responsible for any deficiency in the
minimum lease payments. Similarly, if the Company determined not to re-lease the
Property, it could sell the Property. (However, unless required to do so by the
lease or its investment objectives, the Company does not intend to sell any
Property prior to five to ten years after the commencement of the lease on such
Property. See "Right of Tenant to Purchase" above.) In the event that a lease
requires the tenant to make a security deposit, the Company will have the right
under the lease to apply the security deposit, upon default by the tenant,
towards any payments due from the defaulting tenant. In general, the tenant will
remain liable for all amounts due under the lease to the extent not paid from a
security deposit or by a new tenant.
In the event that a tenant defaults under a lease with the Company, the
Company either will attempt to locate a replacement operator acceptable to the
Restaurant Chain or Hotel Chain involved or will discontinue operation of the
restaurant or hotel. In lieu of obtaining a replacement operator, some
Restaurant Chains and Hotel Chains may have the option and may elect to operate
the restaurants or hotels themselves. The Company will have no obligation to
operate the restaurants or hotels, and no Restaurant Chain or Hotel Chain will
be obligated to permit the Company or a replacement operator to operate the
restaurants or hotels.
JOINT VENTURE ARRANGEMENTS
The Company may enter into a Joint Venture to own and operate a
Property with various unaffiliated persons or entities or with another program
formed by the principals of the Company or the Advisor or their Affiliates, if a
majority of the Directors, including a majority of the Independent Directors,
not otherwise interested in the transaction determine that the investment in the
Joint Venture is fair and reasonable to the Company and on substantially the
same terms and conditions as those to be received by the co-venturer or
co-venturers. The Company may take more or less than a 50% interest in any Joint
Venture, subject to obtaining the requisite approval of the Directors. See "Risk
Factors -- Real Estate Investment Risks -- Company May Not Control Joint
Ventures" and "-- Difficulty in Exiting a Joint Venture After an Impasse."
Under the terms of each Joint Venture agreement, the Company and each
joint venture partner will be jointly and severally liable for all debts,
obligations, and other liabilities of the Joint Venture, and the Company and
each joint venture partner will have the power to bind each other with any
actions they take within the scope of the Joint Venture's business. In addition,
it is expected that the Advisor or its Affiliates will be entitled to
reimbursement, at cost, for actual expenses incurred by the Advisor or its
Affiliates on behalf of the Joint Venture. Joint Ventures entered into to
purchase and hold a Property for investment generally will have an initial term
of 10 to 20 years (generally the same term as the initial term of the lease for
the Property in which the Joint Venture invests), and, after the expiration of
the initial term, will continue in existence from year to year unless terminated
at the option of either joint venturer or unless terminated by an event of
dissolution. Events of dissolution will include the bankruptcy, insolvency, or
termination of any co-venturer, sale of the Property owned by the Joint Venture,
mutual agreement of the Company and its joint venture partner to dissolve the
Joint Venture, and the expiration of the term of the Joint Venture. The Joint
Venture agreement typically will restrict each venturer's ability to sell,
transfer, or assign its joint venture interest without first offering it for
sale to its co-venturer. In addition, in any Joint Venture with another program
sponsored by the Advisor or its Affiliates, where such arrangements are entered
into for the purpose of purchasing and holding Properties for investment, in the
event that one party desires to sell the Property and the other party does not
desire to sell, either party will have the right to trigger dissolution of the
Joint Venture by sending a notice to the other party. The notice will establish
the price and terms for the sale or purchase of the other party's interest in
the Joint Venture to the other party. The Joint Venture agreement will grant the
receiving party the right to elect either to purchase the other party's interest
on the terms set forth in the notice or to sell its own interest on such terms.
The following paragraphs describe the allocations and distributions
under the expected terms of the joint venture agreement for any Joint Venture in
which the Company and its co-venturer each have a 50% ownership interest. In any
other case, the allocations and distributions are expected to be similar to
those described below, except that allocations and distributions which are
described below as being made 50% to each co-venturer will instead be made in
proportion to each co-venturer's respective ownership interest.
Under the terms of each joint venture agreement, operating profits and
losses generally will be allocated 50% to each co-venturer. Profits from the
sale or other disposition of Joint Venture property first will be allocated to
any co-venturers with negative capital account balances in proportion to such
balances until such capital accounts equal zero, and thereafter 50% to each
co-venturer. Similarly, losses from the sale or other disposition of Joint
Venture property first will be allocated to joint venture partners with positive
capital account balances in proportion to such balances until such capital
accounts equal zero, and thereafter 50% to each co-venturer. Notwithstanding
<PAGE>
any other provisions in the Joint Venture agreement, income, gain, loss, and
deductions with respect to any contributed property will be shared in a manner
which takes into account the variation between the basis of such property and
its fair market value at the time of contribution in accordance with section
704(c) of the Code.
Net cash flow from operations of the Joint Venture will be distributed
50% to each joint venture partner. Any liquidation proceeds, after paying joint
venture debts and liabilities and funding reserves for contingent liabilities,
will be distributed first to the joint venture partners with positive capital
account balances in proportion to such balances until such balances equal zero,
and thereafter 50% to each joint venture partner.
In order that the allocations of Joint Venture income, gain, loss, and
deduction provided in Joint Venture agreements may be respected for federal
income tax purposes, it is expected that any Joint Venture agreement (i) will
contain a "qualified income offset" provision, (ii) will prohibit allocations of
loss or deductions to the extent such allocation would cause or increase an
"Adjusted Capital Account Deficit," and (iii) will require (a) that capital
accounts be maintained for each joint venture partner in a manner which complies
with Treasury Regulation ss.1.704-1(b)(2)(iv) and (b) that distributions of
proceeds from the liquidation of a partner's interest in the Joint Venture
(whether or not in connection with the liquidation of the Joint Venture) be made
in accordance with the partner's positive capital account balance. See "Federal
Income Tax Considerations - Investment in Joint Ventures."
Prior to entering into any Joint Venture arrangement with any
unaffiliated co-venturer (or the principals of any unaffiliated co-venturer),
the Company will confirm that such person or entity has demonstrated to the
satisfaction of the Company that requisite financial qualifications are met.
The Company may acquire Properties from time to time by issuing limited
partnership units in CNL Hospitality Partners, LP to sellers of such Properties
pursuant to which the seller, as owner, would receive partnership interests
convertible at a later date into Common Stock of the Company. The Company is the
general partner of CNL Hospitality Partners, LP. This structure enables a
property owner to transfer property without incurring immediate tax liability,
and therefore may allow the Company to acquire Properties on more favorable
terms than otherwise.
MORTGAGE LOANS
The Company may provide Mortgage Loans to operators of Restaurant
Chains or Hotel Chains, or their affiliates, to enable them to acquire the
building and improvements on real property. Generally, in these cases, the
Company will acquire the underlying land and will enter into a long-term ground
lease for the Property with the borrower as the tenant. The Mortgage Loan will
be secured by the building and improvements on the land.
Generally, management believes the interest rate and terms of these
transactions are substantially the same as those of the Company's Property
leases. The borrower will be responsible for all of the expenses of owning the
property, as with the "triple-net" leases, including expenses for insurance and
repairs and maintenance. Management expects the Mortgage Loans will be fully
amortizing loans over a period of 10 to 20 years (generally, the same term as
the initial term of the Property leases), with payments of principal and
interest due monthly. In addition, management expects the interest rate charged
under the terms of the Mortgage Loan will be fixed over the term of the loan and
generally will be comparable to, or slightly lower than, lease rates charged to
tenants for the Properties.
The Company may combine leasing and financing in connection with a
Property. For example, it may make a Mortgage Loan with respect to the building
and lease the underlying land to the borrower. Management believes that the
combined leasing and financing structure provides the benefit of allowing the
Company to receive, on a fixed income basis, the return of its initial
investment in each financed building, which is generally a depreciating asset,
plus interest. At the same time, the Company retains ownership of the underlying
land, which may appreciate in value, thus providing an opportunity for a capital
gain on the sale of the land. In such cases, in which the borrower is also the
tenant under a Property lease for the underlying land, if the borrower does not
elect to exercise its purchase option to acquire the Property under the terms of
the lease, the building and improvements on the Property will revert to the
Company at the end of term of the lease, including any renewal periods. If the
borrower does elect to exercise its purchase option as the tenant of the
underlying land, the Company will generally have the option of selling the
Property at the greater of fair market value or cost plus a specified
percentage.
<PAGE>
The Company will not make or invest in Mortgage Loans unless an
appraisal is obtained concerning the property that secures the Mortgage Loan.
Mortgage indebtedness on any property shall not exceed such property's appraised
value. In cases in which the majority of the Independent Directors so determine,
and in all cases in which the Mortgage Loan involves the Advisor, Directors, or
Affiliates, such appraisal must be obtained from an independent expert
concerning the underlying property. Such appraisal shall be maintained in the
Company's records for at least five years, and shall be available for inspection
and duplication by any stockholder. In addition to the appraisal, a mortgagee's
or owner's title insurance policy or commitment as to the priority of the
mortgage or condition of the title must be obtained.
Management believes that the criteria for investing in Mortgage Loans
are substantially the same as those involved in the Company's investments in
Properties; therefore, the Company will use the same underwriting criteria as
described above in "Business -- Standards for Investment in Properties." In
addition, the Company will not make or invest in Mortgage Loans on any one
property if the aggregate amount of all mortgage loans outstanding on the
property, including the loans of the Company, would exceed an amount equal to
85% of the appraised value of the property as determined by appraisal unless
substantial justification exists because of the presence of other underwriting
criteria. For purposes of this limitation, the aggregate amount of all mortgage
loans outstanding on the property, including the loans of the Company, shall
include all interest (excluding contingent participation in income and/or
appreciation in value of the mortgaged property), the current payment of which
may be deferred pursuant to the terms of such loans, to the extent that deferred
interest on each loan exceeds 5% per annum of the principal balance of the loan.
Further, the Company will not make or invest in any Mortgage Loans that
are subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or Affiliates of the Company. The Company currently
expects to provide Mortgage Loans in the aggregate principal amount of
approximately 5% to 10% of Gross Proceeds.
MANAGEMENT SERVICES
The Advisor will provide management services relating to the Company,
the Properties, the Mortgage Loans, and the Secured Equipment Lease program
pursuant to an Advisory Agreement between it and the Company. Under this
agreement, the Advisor will be responsible for assisting the Company in
negotiating leases, Mortgage Loans and Secured Equipment Leases, collecting
rental, Mortgage Loan and Secured Equipment Lease payments, inspecting the
Properties and the tenants' books and records, and responding to tenant
inquiries and notices. The Advisor also will provide information to the Company
about the status of the leases, the Properties, the Mortgage Loans, the Line of
Credit, the Permanent Financing and the Secured Equipment Leases. In exchange
for these services, the Advisor will be entitled to receive certain fees from
the Company. For supervision of the Properties and Mortgage Loans, the Advisor
will receive the Asset Management Fee, which, generally, is payable monthly in
an amount equal to one-twelfth of .60% of Real Estate Asset Value and the
outstanding principal amount of the Mortgage Loans, as of the end of the
preceding month. For negotiating Secured Equipment Leases and supervising the
Secured Equipment Lease program, the Advisor will receive, upon entering into
each lease, a Secured Equipment Lease Servicing Fee, payable out of the proceeds
of the borrowings, equal to 2% of the purchase price of the Equipment subject to
each Secured Equipment Lease. See "Management Compensation."
BORROWING
The Company will borrow money to acquire Assets and to pay certain
related fees. The Company intends to encumber Assets in connection with any
borrowing. The Company plans to obtain one or more revolving Lines of Credit in
an aggregate amount up to $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. The Line of Credit and Permanent
Financing are the only source of funds for making Secured Equipment Leases and
for paying the Secured Equipment Lease Servicing Fee.
On July 31, 1998, the Company entered into a revolving line of credit
and security agreement with a bank to be used by the Company to acquire hotel
Properties. The Line of Credit provides that the Company will be able to receive
advances of up to $30,000,000 until July 30, 2003, with an annual review to be
performed by the bank to indicate that there has been no substantial
deterioration, in the bank's reasonable discretion, of the credit quality.
Interest expense on each advance shall be payable monthly, with all unpaid
interest and principal due no later than five years from the date of the
advance. Advances under the Line of Credit will bear interest at either (i) a
rate per annum equal to 318 basis points above the LIBOR or (ii) a rate per
annum equal to 30 basis points above the bank's base rate, whichever the Company
selects at the time advances are made. In addition a fee of 0.5% per loan will
be due and payable to the bank on funds as advanced. Each loan made under the
Line of Credit will be secured by the assignment of rents and leases. In
addition, the Line of Credit provides that the Company will not be able to
further encumber the applicable hotel Property during the term of the loan
without the bank's consent. The Company will be required, at each closing, to
pay all costs, fees and expenses arising in connection with the Line of Credit.
The Company must also pay the bank's attorneys fees, subject to a maximum cap,
incurred in connection with the Line of Credit and each advance. As of February
26, 1999, the Company had obtained and repaid three advances totalling
$9,600,000 relating to the Line of Credit. In connection with the Line of
Credit, the Company incurred a commitment fee, legal fees and closing costs of
$68,762. The proceeds were used in connection with the purchase of two hotel
Properties described in "Business -- Property Acquisitions" and in connection
with the agreement to acquire three additional hotel Properties described in
"Business -- Pending Investments."
Management believes that any financing obtained during the offering
period will allow the Company to make investments in Assets that the Company
otherwise would be forced to delay until it raised a sufficient amount of
proceeds from the sale of Shares. By eliminating this delay, the Company will
also eliminate the risk that these investments will no longer be available, or
the terms of the investment will be less favorable, when the Company has raised
sufficient offering proceeds. Alternatively, Affiliates of the Advisor could
make such investments, pending receipt by the Company of sufficient offering
proceeds, in order to preserve the investment opportunities for the Company.
However, Assets acquired by the Company in this manner would be subject to
closing costs both on the original purchase by the Affiliate and on the
subsequent purchase by the Company, which would increase the amount of expenses
associated with the acquisition of Assets and reduce the amount of offering
proceeds available for investment in income-producing assets. Management
believes that the use of borrowings will enable the Company to reduce or
eliminate the instances in which the Company will be required to pay duplicate
closing costs, which may be substantial in certain states.
Similarly, management believes that the borrowings will benefit the
Company by allowing it to take advantage of its ability to borrow at favorable
interest rates. Specifically, the Company intends to structure the terms of any
financing so that the lease rates for Properties acquired and the interest rates
for Mortgage Loans and Secured Equipment Leases made with the loan proceeds will
exceed the interest rate payable on the financing. To the extent that the
Company is able to structure the financing on these terms, the Company will
increase its net revenues. In addition, the use of financing will increase the
diversification of the Company's portfolio by allowing it to acquire more Assets
than would be possible using only the Gross Proceeds from the offering.
As a result of existing relationships between Affiliates of the Advisor
and certain financing sources, the Company may have the opportunity to obtain
financing at more favorable interest rates than the Company could otherwise
obtain. In connection with any financing obtained by the Company as a result of
any such relationship, the Company will pay a loan origination fee to the
Affiliate. In addition, certain lenders may require, as a condition of providing
financing to the Company, that the Affiliate with which the lender has an
existing relationship act as a loan servicing agent. In connection with any such
arrangement the Company will pay a loan servicing fee to the Affiliate. Any loan
origination fee or loan servicing fee paid to an Affiliate of the Company is
subject to the approval by a majority of the Board of Directors (including a
majority of the Independent Directors) not otherwise interested in the
transaction as fair and reasonable to the Company and on terms not less
favorable to the Company than those available from unaffiliated third parties
and not less favorable than those available from the Advisor or its Affiliates
in transactions with unaffiliated third parties. See "Conflicts of Interest --
Certain Conflict Resolution Procedures."
The Company may also borrow funds for the purpose of preserving its
status as a REIT. For example, the Company may borrow to the extent necessary to
permit the Company to make Distributions required in order to enable the Company
to qualify as a REIT for federal income tax purposes; however, the Company will
not borrow for the purpose of returning Invested Capital to the stockholders
unless necessary to eliminate corporate-level tax to the Company. The aggregate
borrowing of the Company, secured and unsecured, shall be reasonable in relation
to Net Assets of the Company and shall be reviewed by the Board of Directors at
least quarterly. The Board of Directors anticipates that the aggregate amounts
of any Lines of Credit will be up to $45,000,000 and that the aggregate amount
of the Permanent Financing will not exceed 30% of the Company's total assets.
However, in accordance with the Company's Articles of Incorporation, the maximum
amount of borrowing in relation to Net Assets, in the absence of a satisfactory
showing that a higher level of borrowing is appropriate, shall not exceed 300%
of Net Assets. Any excess in borrowing over such 300% level shall occur only
with approval by a majority of the Independent Directors and will be disclosed
and explained to stockholders in the first quarterly report of the Company
prepared after such approval occurs.
SALE OF PROPERTIES, MORTGAGE LOANS AND SECURED EQUIPMENT LEASES
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 a Mortgage Loan that are not required to
be distributed to stockholders in order to preserve the Company's REIT status
for federal income tax purposes. The Company may also use such proceeds to
reduce its outstanding indebtedness. Similarly, and to the extent consistent
with REIT qualification, the Company plans to use the proceeds of the Sale of a
Secured Equipment Lease to fund additional Secured Equipment Leases, or to
reduce its outstanding indebtedness on the borrowings. At or prior to the end of
such 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
(although liquidity cannot be assured thereby) or by commencing orderly sales of
the Company's assets. If Listing occurs, the Company intends to use any Net
Sales Proceeds not required to be distributed to stockholders in order to
preserve the Company's status as a REIT to reinvest in additional Properties,
Mortgage Loans and Secured Equipment Leases or to repay outstanding
indebtedness. If Listing does not occur within 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. See "Business -- Description
of Leases -- Right of Tenant to Purchase." The Company will have no obligation
to sell all or any portion of a Property at any particular time, except as may
be required under property or joint venture purchase options granted to certain
tenants. In connection with Sales of Properties by the Company, purchase money
obligations may be taken by the Company as part payment of the sales price. The
terms of payment will be affected by custom in the area in which the Property is
located and by prevailing economic conditions. When a purchase money obligation
is accepted in lieu of cash upon the Sale of a Property, the Company will
continue to have a mortgage on the Property and the proceeds of the Sale will be
realized over a period of years rather than at closing of the Sale.
The Company does not anticipate selling the Secured Equipment Leases
prior to expiration of the lease term, except in the event that the Company
undertakes orderly liquidation of its assets. In addition, the Company does not
anticipate selling any Mortgage Loans prior to the expiration of the loan term,
except in the event (i) the Company owns the Property (land only) underlying the
building improvements which secure the Mortgage Loan and the Sale of the
Property occurs, or (ii) the Company undertakes an orderly Sale of its Assets.
FRANCHISE REGULATION
Many states regulate the franchise or license relationship between a
tenant/franchisee and a franchisor. The Company will not be an Affiliate of any
franchisor, and is not currently aware of any states in which the relationship
between the Company as lessor and the tenant will be subjected to those
regulations, but it will comply with such regulations in the future, if so
required. Restaurant Chains and Hotel Chains which franchise their operations
are subject to regulation by the Federal Trade Commission.
COMPETITION
The restaurant and hotel businesses are characterized by intense
competition. The operators of the restaurants and hotels located on the
Properties will compete with independently owned restaurants and hotels,
restaurants and hotels which are part of local or regional chains, and
restaurants and hotels 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.
REGULATION OF MORTGAGE LOANS AND SECURED EQUIPMENT LEASES
The Mortgage Loan and Secured Equipment Lease programs may be subject
to regulation by federal, state and local authorities and subject to various
laws and judicial and administrative decisions imposing various requirements and
restrictions, including among other things, regulating credit granting
activities, establishing maximum interest rates and finance charges, requiring
disclosures to customers, governing secured transactions and setting collection,
repossession, claims handling procedures and other trade practices. In addition,
certain states have enacted legislation requiring the licensing of mortgage
bankers or other lenders and these requirements may affect the Company's ability
to effectuate its Mortgage Loan and Secured Equipment Lease program.
Commencement of operations into these or other jurisdictions may be dependent
upon a finding of financial responsibility, character and fitness of the
Company. The Company may determine not to make Mortgage Loans or enter into
Secured Equipment Leases in any jurisdiction in which it believes the Company
has not complied in all material respects with applicable requirements.
SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the
Company, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition of the Company" and the Financial Statements
included in Exhibit B.
<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 (3) 1,168,145 29,776 -
Funds from operations (4) 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 (5) 2,402,344 686,063 -
At December 31:
Total assets $48,856,690 $9,443,476 $598,190
Total stockholders' equity (6) 37,116,491 9,233,917 200,000
</TABLE>
(1) No operations commenced until the Company received minimum offering
proceeds and funds were released from escrow on October 15, 1997.
(2) Selected financial data for 1996 represents the period June 12, 1996
(date of inception) through December 31, 1996.
(3) Approximately 18% and 23% of cash distributions for the years ended
December 31, 1998 and 1997, respectively, represent a return of capital
in accordance with generally accepted accounting principles ("GAAP").
Cash distributions treated as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
earnings on a GAAP basis. The Company has not treated such amount as a
return of capital for purposes of calculating Invested Capital and the
Stockholders' 8% Return.
<PAGE>
(4) Funds from operations ("FFO"), based on the revised definition adopted
by the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, means net earnings
determined in accordance with GAAP, excluding gains or losses from debt
restructuring and sales of property, plus depreciation and amortization
of real estate assets and after adjustments for unconsolidated
partnerships and joint ventures. FFO was developed by NAREIT as a
relative measure of performance and liquidity of an equity REIT in
order to recognize that income-producing real estate historically has
not depreciated on the basis determined under GAAP. However, FFO (i)
does not represent cash generated from operating activities determined
in accordance with GAAP (which, unlike FFO, generally reflects all cash
effects of transactions and other events that enter into the
determination of net earnings), (ii) is not necessarily indicative of
cash flow available to fund cash needs and (iii) should not be
considered as an alternative to net earnings determined in accordance
with GAAP as an indication of the Company's operating performance, or
to cash flow from operating activities determined in accordance with
GAAP as a measure of either liquidity or the Company's ability to make
distributions. Accordingly, the Company believes that in order to
facilitate a clear understanding of the historical operating results of
the Company, FFO should be considered in conjunction with the Company's
net earnings and cash flows as reported in the accompanying financial
statements and notes thereto. See Exhibit B -- Financial Information.
(5) The weighted average number of Shares outstanding is based upon the
period the Company was operational.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY
This information contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Act of 1934. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: changes in general economic conditions, changes in local
and national real estate conditions, continued availability of proceeds from the
Company's offering, the ability of the Company to obtain permanent financing on
satisfactory terms, the ability of the Company to identify suitable investments,
the ability of the Company to locate suitable tenants for its Properties and
borrowers for its Mortgage Loans and Secured Equipment Leases, and the ability
of such tenants and borrowers to make payments under their respective leases,
Mortgage Loans or Secured Equipment Leases.
The Company is a Maryland corporation that was organized on June 12,
1996. On June 15, 1998, the Company formed CNL Hospitality Partners, LP, a
wholly owned Delaware limited partnership (the "Partnership"). Properties
acquired are expected to be held by the Partnership and, as a result, owned by
the Company through the Partnership. The term "Company" includes CNL Hospitality
Properties, Inc. and its subsidiaries, CNL Hospitality GP Corp., CNL Hospitality
LP Corp. and CNL Hospitality Partners, LP.
LIQUIDITY AND CAPITAL RESOURCES
On July 9, 1997, the Company commenced its offering of Shares of Common
Stock. As of 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 termination of the offering.
The Company has elected to extend the offering of Shares until a date no later
than July 9, 1999.
As of December 31 , 1998, net proceeds to the Company from its offering
of Shares , 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 proceeds had been used 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) (the "Second Offering ") which is expected to commence
immediately following the completion of this Offering. Of the 27,500,000 Shares
of common stock to be offered, 2,500,000 will be available only to stockholders
purchasing Shares through the Reinvestment Plan. The price per Share and the
other terms of the Second Offering, including the percentage of Gross Proceeds
payable 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 this Offering. The Company expects to use
net proceeds from the Second Offering to purchase additional Properties and, to
a lesser extent, make Mortgage Loans.
The Company expects to use net proceeds it receives from this Offering,
plus any net proceeds from the sale of Shares in the Second Offering, to
purchase additional Properties and, to a lesser extent, make Mortgage Loans. See
"Investment Objectives and Policies." In addition, the Company intends to borrow
money to acquire Assets, and to pay certain related fees. The Company intends to
encumber Assets in connection with such borrowing. The Company currently 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.
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
an assignment of rents and leases. In addition, the Line of Credit provides that
the Company will not be able to further encumber the applicable hotel Property
during the term of the advance without the bank's consent. The Company will be
required, at each closing, to pay all costs, fees and expenses arising in
connection with the Line of Credit. The Company must also pay the bank's
attorneys fees, subject to a maximum cap, incurred in connection with the Line
of Credit and each advance. As of 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.
As of February 26, 1999, the Company had received subscription proceeds
of $73,605,508 (7,360,551 Shares) from its offering of Shares. As of February
26, 1999, net proceeds to the Company from its offering of Shares and capital
contributions from the Advisor, after deduction of Selling Commissions,
marketing support and due diligence expense reimbursement fees and
Organizational and Offering Expenses, totalled approximately $66,101,000. The
Company has used net proceeds and borrowing to invest, directly or indirectly,
approximately $51,230,000 in six hotel Properties, to pay $5,000,000 as a
deposit on three additional hotel Properties and to pay approximately $4,836,000
in Acquisition Fees and Acquisition Expenses, leaving approximately $4,835,000
in Net Offering Proceeds available for investment in additional Properties and
Mortgage Loans.
As of February 26, 1999, the Company had initial commitments to acquire
, directly or indirectly, seven hotel Properties. The acquisition of each of
these Properties is subject to the fulfillment of certain conditions . In order
to acquire these Properties, the Company must obtain additional funds through
the receipt of additional offering proceeds and/or advances on the Line of
Credit. In connection with three of these agreements, the Company was required
by the seller to obtain a letter of credit. The letter of credit was
collateralized by a $5,000,000 certificate of deposit. In connection with the
letter of credit, the Company incurred $22,500 in closing costs. In connection
with the four remaining agreements, the Company paid a deposit of $10,000,000.
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 February 26, 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 February 26, 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 decrease 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 Expenses
and Acquisition Expenses, to pay Distributions to stockholders, to pay other
Company expenses and, in management's discretion, to create cash reserves.
During the 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 Proceeds. In addition, the Advisor
is required to reimburse the Company the amount by which total Operating
Expenses paid or incurred by the Company exceed, in any four consecutive fiscal
quarters, the greater of two percent of Average Invested Assets or 25 percent of
net income, as defined in the Advisory Agreement (the "Expense Cap"). During the
year ended December 31, 1998, the Company's Operating Expenses exceeded the
Expense Cap by $92,733; therefore, the Advisor reimbursed the Company such
amount in accordance with the Advisory Agreement.
During the year 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,
in January, February and March 1999, the Company declared Distributions
totalling $251,967, $314,928 and $431,754, respectively ($0.0583 per Share),
payable in March 1999. For the years ended December 31, 1998 and 1997, 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 February 26 1999, were required to be or have been
treated by the Company as a return of capital for purposes of calculating the
Stockholders' 8% Return on Invested Capital.
Management believes that the Properties are adequately covered by
insurance. In addition, the Advisor has obtained contingent liability coverage
for the Company. This insurance policy is intended to reduce the Company's
exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to a Property.
The tenants of the six Properties owned by the Company, either directly
or indirectly, as of February 26, 1999, have 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.
For the year ended December 31, 1998, revenues relating to the FF&E Reserve
totalled $98,099. 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 reserves if, in their discretion, they determine such reserves are
required to meet the Company's working capital needs.
Management is not aware of any material trends, favorable or
unfavorable, in either capital resources or the outlook for long-term cash
generation, nor does management expect any material changes in the availability
and relative cost of such capital resources, other than as referred to in the
Prospectus.
Management expects that the cash to be generated from operations will
be adequate to pay Operating Expenses and to make Distributions to stockholders.
RESULTS OF OPERATIONS
No operations commenced until the Company received the minimum offering
proceeds of $2,500,000 on October 15, 1997. As of December 31, 1998, the Company
had acquired two Properties consisting of land, building and equipment, and had
entered into a long-term, triple-net lease agreements relating to these
Properties.
The Property leases provide for minimum base annual rental payments
ranging from approximately $1,209,000 to $1,651,800, which are payable in
monthly installments. The leases also provide that, commencing in the second
lease year, the annual base rent required under the terms of the leases will
increase. 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 tenant at December 31, 1998
are owned by the Company and have been 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 were only operational for a portion of the period, 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 represent only
a portion of Operating Expenses which the Company is expected to incur during a
full year in which the Company owns Properties. The dollar amount of Operating
Expenses is expected to increase as the Company acquires additional Properties
and invests in Mortgage Loans. However, general and administrative expenses as a
percentage of total revenues is expected to decrease as the Company acquires
additional Properties and invests in Mortgage Loans.
During the year ended December 31, 1998, the Company reduced Operating
Expenses by $92,733 as a result of Operating Expenses reimbursed by the Advisor
due to such expenses exceeding the Expense Cap as defined in the Advisory
Agreement as described above in "Liquidity and Capital Resources."
The Company has made an election under Section 856(c) of the Internal
Revenue Code of 1986, as amended (the "Code"), to be taxed as a REIT under the
Code beginning with its taxable year ended December 31, 1997. As a REIT, for
federal income tax purposes, the Company generally will not be subject to
federal income tax on income that it distributes to its stockholders. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to
federal income tax on its taxable income at regular corporate rates and will not
be permitted to qualify for treatment as a REIT for federal income tax purposes
for four years following the year during which qualification is lost. Such an
event could materially affect the Company's net earnings. However, the Company
believes that it is organized and operates in such a manner as to qualify for
treatment as a REIT for the years ended December 31, 1998 and 1997. In addition,
the Company intends to continue to operate the Company so as to remain qualified
as a REIT for federal income tax purposes.
The Company anticipates that its leases will be triple-net leases and
will contain provisions that management believes will mitigate the effect of
inflation. Such provisions will include clauses requiring the payment of
percentage rent based on certain gross sales above a specified level and/or
automatic increases in base rent at specified times during the term of the
lease. Management expects that increases in gross sales volumes due to inflation
and real sales growth should result in an increase in rental income over time.
Continued inflation also may cause capital appreciation of the Company's
Properties. Inflation and changing prices, however, also may have an adverse
impact on the sales of the Properties and on potential capital appreciation of
the Properties.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for the Company as of January 1, 1999. This SOP
requires start-up and organization costs to be expensed as incurred and also
requires previously deferred start-up costs to be recognized as a cumulative
effect adjustment in the statement of income. 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 ("Year 2000") problem is the result of information
technology systems and embedded systems (products which are made with
microprocessor (computer) chips such as HVAC systems, physical security systems
and elevators) using a two-digit format, as opposed to four digits, to indicate
the year. Such information technology and embedded systems may be unable to
properly recognize and process date-sensitive information beginning January 1,
2000.
The Company does not have any information technology systems.
Affiliates of the Advisor provide all services requiring the use of information
technology systems pursuant to the Advisory Agreement with the Company. The
maintenance of embedded systems, if any, at the Company's Properties is the
responsibility of the tenants of the Properties in accordance with the terms of
the Company's leases. The Advisor and its Affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Company, and the information technology and embedded systems
and the Year 2000 compliance plans of the Company's tenants, significant
suppliers, financial institutions and transfer agent.
The information technology infrastructure of the Affiliates of the
Advisor consists of a network of personal computers and servers that were
obtained from major suppliers. The Affiliates utilize various administrative and
financial software applications on that infrastructure to perform the business
functions of the Company. The inability of the Advisor and its Affiliates to
identify and timely correct material Year 2000 deficiencies in the software
and/or infrastructure could result in an interruption in, or failure of, certain
of the Company's business activities or operations. Accordingly, the Advisor and
its Affiliates have requested and are evaluating documentation from the
suppliers of the 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
<PAGE>
received sufficient certifications to be assured that the tenants, financial
institutions, and transfer agent have fully considered and mitigated any
potential material impact of the Year 2000 deficiencies. Therefore, the Advisor
does not, at this time, know of the potential costs to the Company of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
The Advisor currently expects that all Year 2000 compliance testing and
any necessary remedial measures on the information technology systems used in
the business activities and operations of the Company will be completed prior to
June 30, 1999. Based on the progress the Advisor and its Affiliates have made in
identifying and addressing the Company's Year 2000 issues and the plan and
timeline to complete the compliance program, the Advisor does not foresee
significant risks associated with the Company's Year 2000 compliance at this
time. Because the Advisor and its Affiliates are still evaluating the status of
the systems used in business activities and operations of the Company and the
systems of the third parties with which the Company conducts its business, the
Advisor has not yet developed a comprehensive contingency plan and is unable to
identify "the most reasonably likely worst case scenario" at this time. As the
Advisor identifies significant risks related to the Company's Year 2000
compliance or if the Company's Year 2000 compliance program's progress deviates
substantially from the anticipated timeline, the Advisor will develop
appropriate contingency plans.
MANAGEMENT
GENERAL
The Company will operate under the direction of the Board of Directors,
the members of which are accountable to the Company as fiduciaries. As required
by applicable regulations, a majority of the Independent Directors and a
majority of the Directors have reviewed and ratified the Articles of
Incorporation and have adopted the Bylaws.
The Company currently has seven Directors; it may have no fewer than
three Directors and no more than 15. Directors will be elected annually, and
each Director will hold office until the next annual meeting of stockholders or
until his successor has been duly elected and qualified. There is no limit on
the number of times that a Director may be elected to office. Although the
number of Directors may be increased or decreased as discussed above, a decrease
shall not have the effect of shortening the term of any incumbent Director.
Any Director may resign at any time and may be removed with or without
cause by the stockholders upon the affirmative vote of at least a majority of
all the Shares outstanding and entitled to vote at a meeting called for this
purpose. The notice of such meeting shall indicate that the purpose, or one of
the purposes, of such meeting is to determine if a Director shall be removed.
FIDUCIARY RESPONSIBILITY OF THE BOARD OF DIRECTORS
The Board of Directors will be responsible for the management and
control of the affairs of the Company; however, the Board of Directors will
retain the Advisor to manage the Company's day-to-day affairs and the
acquisition and disposition of investments, subject to the supervision of the
Board of Directors.
The Directors are not required to devote all of their time to the
Company and are only required to devote such of their time to the affairs of the
Company as their duties require. The Board of Directors will meet quarterly in
person or by telephone, or more frequently if necessary. It is not expected that
the Directors will be required to devote a substantial portion of their time to
discharge their duties as directors. Consequently, in the exercise of their
fiduciary responsibilities, the Directors will rely heavily on the Advisor. In
this regard, the Advisor, in addition to the Directors, will have a fiduciary
duty to the Company.
The Directors will establish written policies on investments and
borrowings and will monitor the administrative procedures, investment
operations, and performance of the Company and the Advisor to assure that such
policies are in the best interest of the stockholders and are fulfilled. Until
modified by the Directors, the Company will follow the policies on investments
set forth in this Prospectus. See "Investment Objectives and Policies."
<PAGE>
The Independent Directors are responsible for reviewing the fees and
expenses of the Company at least annually or with sufficient frequency to
determine that the total fees and expenses of the Company are reasonable in
light of the Company's investment performance, Net Assets, Net Income, and the
fees and expenses of other comparable unaffiliated real estate investment
trusts. This determination shall be reflected in the minutes of the meetings of
the Board of Directors. For purposes of this determination, Net Assets are the
Company's total assets (other than intangibles), calculated at cost before
deducting depreciation or other non-cash reserves, less total liabilities, and
computed at least quarterly on a basis consistently applied. Such determination
will be reflected in the minutes of the meetings of the Board of Directors. In
addition, a majority of the Independent Directors and a majority of Directors
not otherwise interested in the transaction must approve each transaction with
the Advisor or its Affiliates. The Board of Directors also will be responsible
for reviewing and evaluating the performance of the Advisor before entering into
or renewing an advisory agreement. The Independent Directors shall determine
from time to time and at least annually that compensation to be paid to the
Advisor is reasonable in relation to the nature and quality of services to be
performed and shall supervise the performance of the Advisor and the
compensation paid to it by the Company to determine that the provisions of the
Advisory Agreement are being carried out. Specifically, the Independent
Directors will consider factors such as the amount of the fee paid to the
Advisor in relation to the size, composition and performance of the Company's
investments, the success of the Advisor in generating appropriate investment
opportunities, rates charged to other comparable REITs and other investors by
advisors performing similar services, additional revenues realized by the
Advisor and its Affiliates through their relationship with the Company, whether
paid by the Company or by others with whom the Company does business, the
quality and extent of service and advice furnished by the Advisor, the
performance of the investment portfolio of the Company and the quality of the
portfolio of the Company relative to the investments generated by the Advisor,
if any, for its own account. Such review and evaluation will be reflected in the
minutes of the meetings of the Board of Directors. The Board of Directors shall
determine that any successor Advisor possesses sufficient qualifications to (i)
perform the advisory function for the Company and (ii) justify the compensation
provided for in its contract with the Company.
The liability of the officers and Directors while serving in such
capacity is limited in accordance with the Articles of Incorporation and
applicable law. See "Summary of the Articles of Incorporation and Bylaws --
Limitation of Director and Officer Liability."
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are listed below:
Name Age Position with the Company
---- --- -------------------------
James M. Seneff, Jr. 52 Director, Chairman of the Board, and Chief
Executive Officer
Robert A. Bourne 51 Director and President
Matthew W. Kaplan 36 Director
Charles E. Adams 36 Independent Director
Lawrence A. Dustin 53 Independent Director
John A. Griswold 50 Independent Director
Craig M. McAllaster 47 Independent Director
Charles A. Muller 40 Chief Operating Officer and Executive Vice
President
C. Brian Strickland 36 Vice President of Finance and Administration
Jeanne A. Wall 40 Executive Vice President
Lynn E. Rose 50 Secretary and Treasurer
James M. Seneff, Jr. Director, Chairman of the Board, and Chief
Executive Officer. Mr. Seneff currently holds the position of Chairman of the
Board, Chief Executive Officer and director of CNL Hospitality Advisors, Inc.,
the Advisor. Mr. Seneff also serves as Chairman of the Board, Chief Executive
Officer and a director of CNL American Properties Fund, Inc. and CNL Health Care
Properties, Inc., public, unlisted real estate investment trusts, and CNL Fund
Advisors, Inc. and CNL Health Care Advisors, Inc., their advisors, respectively.
Mr. Seneff is a principal stockholder of CNL Group, Inc., a diversified real
estate company, and has served as its Chairman of the Board of Directors,
director, and Chief Executive Officer since its formation in 1980. CNL Group,
Inc. is the parent company of CNL Securities Corp., which is acting as the
Managing Dealer in this offering, CNL Investment Company, CNL Fund Advisors,
Inc. and CNL Hospitality Advisors, Inc. Mr. Seneff has been Chairman of the
Board, Chief Executive Officer and a director of CNL Securities Corp. since its
formation in 1979. Mr. Seneff also has held the position of Chairman of the
Board, Chief Executive Officer, President and a director of CNL Management
Company, a registered investment advisor, since its formation in 1976, has
served as Chief Executive Officer, Chairman of the Board and a director of CNL
Investment Company, and Chief Executive Officer and Chairman of the Board of
Commercial Net Lease Realty, Inc. since 1992, served as Chief Executive Officer
and Chairman of the Board of CNL Realty Advisors, Inc. from its inception in
1991 through 1997 at which time such company merged with Commercial Net Lease
Realty, Inc., a public real estate investment trust that is listed on the New
York Stock Exchange, and has held the position of Chief Executive Officer,
Chairman of the Board and a director of CNL Institutional Advisors, Inc., a
registered investment advisor, since its inception in 1990. Mr. Seneff also
serves as a director of First Union National Bank of Florida, N.A. Mr. Seneff
previously served on the Florida State Commission on Ethics and is a former
member and past Chairman of the State of Florida Investment Advisory Council,
which recommends to the Florida Board of Administration investments for various
Florida employee retirement funds. The Florida Board of Administration,
Florida's principal investment advisory and money management agency, oversees
the investment of more than $60 billion of retirement funds. Since 1971, Mr.
Seneff has been active in the acquisition, development, and management of real
estate projects and, directly or through an affiliated entity, has served as a
general partner or joint venturer in over 100 real estate ventures involved in
the financing, acquisition, construction, and rental of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Included in these
real estate ventures are approximately 65 privately offered real estate limited
partnerships with investment objectives similar to one or more of the Company's
investment objectives, in which Mr. Seneff, directly or through an affiliated
entity, serves or has served as a general partner. Mr. Seneff received his
degree in Business Administration from Florida State University in 1968.
Robert A. Bourne. Director and President. Mr. Bourne currently holds
the position of President and director of CNL Hospitality Advisors, Inc., the
Advisor. Mr. Bourne has also served as Vice Chairman and Treasurer of CNL
American Properties Fund, Inc. since February 1999 and as President and a
director of CNL Health Care Properties, Inc., public, unlisted real estate
investment trusts, and Vice Chairman of the Board of Directors, a director and
Treasurer of CNL Fund Advisors, Inc. and President and a director of CNL Health
Care Advisors, Inc., their advisors. Mr. Bourne has served as a director of CNL
American Properties Fund, Inc. since May 1994, and previously served as
President from May 1994 through February 1999. He also served as President of
CNL Fund Advisors, Inc. from the date of its inception in 1994 through October
1997. Mr. Bourne is President and Treasurer of CNL Group, Inc., President,
Treasurer, a director, and a registered principal of CNL Securities Corp. (the
Managing Dealer of this offering), President, Treasurer, a director, and a
registered principal of CNL Investment Company, and Chief Investment Officer, a
director and Treasurer of CNL Institutional Advisors, Inc., a registered
investment advisor. Mr. Bourne served as President of CNL Institutional
Advisors, Inc. from the date of its inception through June 30, 1997. Mr. Bourne
served as President and a director from July 1992 to February 1996, served as
Secretary and Treasurer from February 1996 through December 1997, and has served
as Vice Chairman of the Board of Directors since February 1996, of Commercial
Net Lease Realty, Inc., a public real estate investment trust that is listed on
the New York Stock Exchange. In addition, Mr. Bourne served as President of CNL
Realty Advisors, Inc. from 1991 to February 1996, and served as a director of
CNL Realty Advisors, Inc. from 1991 through December 1997, and as Treasurer and
Vice Chairman from February 1996 through December 1997, at which time such
company merged with Commercial Net Lease Realty, Inc. Upon graduation from
Florida State University in 1970, where he received a B.A. in Accounting, with
honors, Mr. Bourne worked as a certified public accountant and, from September
1971 through December 1978 was employed by Coopers & Lybrand, Certified Public
Accountants, where he held the position of tax manager beginning in 1975. From
January 1979 until June 1982, Mr. Bourne was a partner in the accounting firm of
Cross & Bourne and from July 1982 through January 1987 he was a partner in the
accounting firm of Bourne & Rose, P.A., Certified Public Accountants. Mr.
Bourne, who joined CNL Securities Corp. in 1979, has participated as a general
partner or joint venturer in over 100 real estate ventures involved in the
financing, acquisition, construction, and rental of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Included in these
real estate ventures are approximately 64 privately offered real estate limited
partnerships with investment objectives similar to one or more of the Company's
investment objectives, in which Mr. Bourne, directly or through an affiliated
entity, serves or has served as a general partner.
Matthew W. Kaplan. Director. Mr. Kaplan serves as a director of the
Advisor, Hotel Investors, CNL Financial Services, Inc. and CNL Financial
Corporation. Mr. Kaplan is a managing director of Rothschild Realty Inc. where
he has served since 1992, and where he is responsible for securities investment
activities including acting as portfolio manager of Five Arrows Realty
Securities LLC, a $900 million private investment fund. From 1990 to 1992, Mr.
Kaplan served in the corporate finance department of Rothschild Inc., an
affiliate of Rothschild Realty Inc. Mr. Kaplan served as a director of
Ambassador Apartments Inc. from August 1996 through May 1998 and is a member of
the Urban Land Institute. Mr. Kaplan received a B.A. with honors from Washington
University in 1984 and a M.B.A. from the Wharton School of Finance and Commerce
at the University of Pennsylvania in 1988.
<PAGE>
Charles E. Adams . Independent Director. Mr. Adams is the president and
a founding principal with Celebration Associates, Inc., a real estate advisory
and development firm with offices in Celebration, Florida and Charlotte, North
Carolina. Celebration Associates specializes in large-scale master planned
communities, seniors housing and specialty commercial developments. Mr. Adams
joined The Walt Disney Company in 1990 and from 1996 until May 1997 served as
vice president of community business development for The Celebration Company and
Walt Disney Imagineering. He was responsible for Celebration Education,
Celebration Network, Celebration Health and Celebration Foundation, as well as
New Business Development, Strategic Alliances, Retail Sales and Leasing,
Commercial Sales and Leasing, the development of Little Lake Bryan and
Celebration. Previously, Mr. Adams was responsible for the initial residential,
amenity, sales and marketing, consumer research and master planning efforts for
Celebration. Additionally, Mr. Adams participated in the planning for
residential development at EuroDisney in Paris, France. He was a founding member
of the Celebration School Board of Trustees and served as president and founding
member of the Celebration Foundation Board of Directors. Mr. Adams is a founding
member of the Health Magic Steering Committee and council member on the
Recreation Development Council for the Urban Land Institute. Before joining The
Walt Disney Company in 1990, Mr. Adams worked with Trammell Crow Residential
developing luxury apartment communities in the Orlando and Jacksonville, Florida
areas. Mr. Adams received a B.A. from Northeast Louisiana University in 1984 and
a M.B.A. from Harvard Graduate School of Business in 1989.
Lawrence A. Dustin. Independent Director. Mr. Dustin is a principal of
BBT, an advisory company specializing in hotel operations, marketing and
development. Mr. Dustin has 29 years of experience in the hospitality industry.
From 1994 to September 1998, Mr. Dustin served as senior vice president of
lodging of Universal Studios Recreation Group, where he was responsible for
matters related to hotel development, marketing, operations and management. Mr.
Dustin supervised the overall process of developing the five highly themed
hotels and related recreational amenities within Universal Studios Escape and
provided guidance for hotel projects in Universal City, California, Japan and
Singapore. From 1989 to 1994, Mr. Dustin served as a shareholder, chief
executive officer and director of AspenCrest Hospitality, Inc., a professional
services firm which helped hotel owners enhance both the operating performance
and asset value of their properties. From 1969 to 1989, Mr. Dustin held various
positions in the hotel industry, including 14 years in management with Westin
Hotels & Resorts. Mr. Dustin received a B.A. from Michigan State University in
1968.
John A. Griswold. Independent Director. Mr. Griswold serves as
president of Tishman Hotel Corporation, an operating unit of Tishman Realty &
Construction Co., Inc., founded in 1898. Tishman Hotel Corporation is a hotel
developer, owner and operator, and has provided such services for more than 85
hotels, totalling more than 30,000 rooms. Mr. Griswold joined Tishman Hotel
Corporation 1985. From 1981 to 1985, Mr. Griswold served as general manager of
the Buena Vista Palace Hotel in the Walt Disney World Village. From 1978 to
1981, he served as vice president and general manager of the Homestead Resort, a
luxury condominium resort in Glen Arbor, Michigan. Mr. Griswold served as an
operations manager for the Walt Disney Company from 1971 to 1978. He was
responsible for operational, financial and future planning for multi-unit dining
facilities in Walt Disney World Village and Lake Buena Vista Country Club. He is
a member of the board of directors of the Florida Hotel & Motel Association and
the First Orlando Foundation. Mr. Griswold received a B.S. from the School of
Hotel Administration at Cornell University in Ithaca, New York.
Craig M. McAllaster. Independent Director. Dr. McAllaster has served as
director of the executive MBA program at the Roy E. Crummer Graduate School of
Business at Rollins College since 1994. Besides his duties as director, he is on
the management faculty and serves as executive director of the international
consulting practicum programs at the Crummer School. Prior to Rollins College,
Dr. McAllaster was on the faculty at the School of Industrial and Labor
Relations and the Johnson Graduate School of Management, both at Cornell
University, and the University of Central Florida. Dr. McAllaster spent over ten
years in the consumer services and electronics industry in management,
organizational and executive development positions. He is a consultant to many
domestic and international companies in the areas of strategy and leadership.
Dr. McAllaster received a B.S. from the University of Arizona in 1973, a M.S.
from Alfred University in 1981 and a M.A. and Doctorate from Columbia University
in 1987.
Charles A. Muller. Chief Operating Officer and Executive Vice
President. Mr. Muller joined CNL Hospitality Advisors, Inc. in October 1996 and
is responsible for the planning and implementation of CNL's interest in hotel
industry investments, including acquisitions, development, project analysis and
due diligence. He currently serves as the Chief Operating Officer of CNL
Hospitality Advisors, Inc., the Advisor, and Executive Vice President of CNL
Hotel Development Company. Mr. Muller joined CNL following more than 15 years of
broadbased hotel industry experience with firms such as Tishman Hotel
Corporation, Wyndham Hotels & Resorts, Pannell Kerr Forster, and AIRCOA
Hospitality Services. Mr. Muller's background includes responsibility for market
review and valuation efforts, property acquisitions and development, capital
improvement planning, hotel operations and project management for renovations
and new construction. Mr. Muller served on the former Market, Finance and
Investment Analysis Committee of the American Hotel & Motel Association and is a
founding member of the Lodging Industry Investment Council. He holds a
bachelor's degree in Hotel Administration from Cornell University.
C. Brian Strickland. Vice President of Finance and Administration. Mr.
Strickland currently serves as Vice President of Finance and Administration of
CNL Hospitality Advisors, Inc., the Advisor. Mr. Strickland supervises the
companies' financial reporting, financial control and accounting functions as
well as forecasting, budgeting and cash management activities. He is also
responsible for SEC compliance, equity and debt financing activities and
insurance for the companies. Mr. Strickland joined CNL Hospitality Advisors,
Inc. in April 1998 with an extensive accounting background. Prior to joining
CNL, he served as vice president of taxation with Patriot American Hospitality,
Inc., where he was responsible for implementation of tax planning strategies on
corporate mergers and acquisitions and where he performed or assisted in
strategic processes in the REIT industry. From 1989 to 1997, Mr. Strickland
served as director of tax and asset management for Wyndham Hotels & Resorts
where he was integrally involved in structuring acquisitive transactions,
including the roll-up and initial public offering of Wyndham Hotel Corporation
and its subsequent merger with Patriot American Hospitality, Inc. In his
capacity of director of asset management, he was instrumental in the development
and opening of a hotel and casino in San Juan, Puerto Rico. Prior to 1989, Mr.
Strickland was senior tax accountant for Trammell Crow Company where he provided
tax consulting services to regional development offices. From 1986 to 1988, Mr.
Strickland was tax accountant for Ernst & Whinney where he was a member of the
real estate practice group. Mr. Strickland is a certified public accountant and
holds a bachelor's degree in accounting.
Jeanne A. Wall. Executive Vice President. Ms. Wall serves as Executive
Vice President and director of CNL Hospitality Advisors, Inc., the Advisor. Ms.
Wall is also Executive Vice President of CNL American Properties Fund, Inc. and
CNL Health Care Properties, Inc., public, unlisted real estate investment
trusts, and their advisors, CNL Fund Advisors, Inc. and CNL Health Care
Advisors, Inc., respectively. Ms. Wall currently serves as Executive Vice
President of CNL Group, Inc., a diversified real estate company. Ms. Wall has
served as Chief Operating Officer of CNL Investment Company and of CNL
Securities Corp. since November 1994 and has served as Executive Vice President
of CNL Investment Company since January 1991. In 1984, Ms. Wall joined CNL
Securities Corp. In 1985, Ms. Wall became Vice President of CNL Securities Corp.
In 1987, she became a Senior Vice President and in July 1997, she became
Executive Vice President of CNL Securities Corp. In this capacity, Ms. Wall
serves as national marketing and sales director and oversees the national
marketing plan for the CNL investment programs. In addition, Ms. Wall oversees
product development, partnership administration and investor services for
programs offered through participating brokers . Ms. Wall also has served as
Senior Vice President of CNL Institutional Advisors, Inc., a registered
investment advisor, from 1990 to 1993, as Vice President of CNL Realty Advisors,
Inc. since its inception in 1991 through 1997, and as Vice President of
Commercial Net Lease Realty, Inc., a public real estate investment trust that is
listed on the New York Stock Exchange, since 1992 through 1997. Ms. Wall holds a
B.A. in Business Administration from Linfield College and is a registered
principal of CNL Securities Corp. Ms. Wall currently serves as a trustee on the
Board of the Investment Program Association and is a member of the Corporate
Advisory Council for the International Association for Financial Planning and
previously served on the Direct Participation Program committee for the National
Association of Securities Dealers.
Lynn E. Rose. Secretary and Treasurer. Ms. Rose serves as Secretary,
Treasurer and a director of CNL Hospitality Advisors, Inc., the Advisor. Ms.
Rose is also Secretary of CNL American Properties Fund, Inc. and CNL Health Care
Properties, Inc., public, unlisted real estate investment trusts, and as
Secretary and a director of their advisors, CNL Fund Advisors, Inc. and CNL
Health Care Advisors, Inc., respectively. Ms. Rose, a certified public
accountant, has served as Secretary of CNL Group, Inc. since 1987, as Chief
Financial Officer of CNL Group, Inc., since December 1993, and served as
Controller of CNL Group, Inc. from 1987 until December 1993. In addition, Ms.
Rose has served as Chief Financial Officer and Secretary of CNL Securities Corp.
since July 1994. She has served as Chief Operating Officer, Vice President and
Secretary of CNL Corporate Services, Inc. since November 1994. Ms. Rose also has
served as Chief Financial Officer and Secretary of CNL Institutional Advisors,
Inc. since its inception in 1990 as Secretary and a director of CNL Realty
Advisors, Inc. from its inception in 1991 through 1997, and as Treasurer of CNL
Realty Advisors, Inc. from 1991 to February 1996. In addition, Ms. Rose served
as Secretary and Treasurer of Commercial Net Lease Realty, Inc., a public real
estate investment trust listed on the New York Stock Exchange, from 1992 to
February 1996. Ms. Rose also currently serves as Secretary for approximately 50
additional corporations. Ms. Rose oversees the legal compliance, accounting,
tenant compliance, and reporting for over 250 corporations, partnerships and
joint ventures. Prior to joining CNL, Ms. Rose was a partner with Robert A.
Bourne in the accounting firm of Bourne & Rose, P.A., Certified Public
Accountants. Ms. Rose holds a B.A. in Sociology from the University of Central
Florida. She was licensed as a certified public accountant in 1979.
INDEPENDENT DIRECTORS
Under the Articles of Incorporation, a majority of the Board of
Directors must consist of Independent Directors, except for a period of 90 days
after the death, removal or resignation of an Independent Director. The
Independent Directors shall nominate replacements for vacancies in the
Independent Director positions. An Independent Director may not, directly or
indirectly (including through a member of his immediately family), own any
interest in, be employed by, have any present business or professional
relationship with, serve as an officer or director of the Advisor or its
Affiliates, or serve as a director of more than three REITs organized by the
Advisor or its Affiliates. Except to carry out the responsibilities of a
Director, an Independent Director may not perform material services for the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has a standing Audit Committee, the members of which are
selected by the full Board of Directors each year. The Audit Committee makes
recommendations to the Board of Directors in accordance with those of the
independent accountants of the Company. The Board of Directors shall review with
such accounting firm the scope of the audit and the results of the audit upon
its completion.
In addition, the Company has formed a Compensation Committee, the
members of which are selected by the full Board of Directors each year.
At least a majority of the members of each committee of the Company's
Board of Directors must be Independent Directors.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Each Director is entitled to receive $6,000 annually for serving on the
Board of Directors, as well as fees of $750 per meeting attended ($375 for each
telephonic meeting in which the Director participates), including committee
meetings. No executive officer or Director of the Company has received a bonus
from the Company. The Company will not pay any compensation to the officers and
Directors of the Company who also serve as officers and directors of the
Advisor.
MANAGEMENT COMPENSATION
For a description of the types, recipients, methods of computation, and
estimated amounts of all compensation, fees, and distributions to be paid
directly or indirectly by the Company to the Advisor, Managing Dealer, and their
Affiliates, see "Management Compensation."
THE ADVISOR AND THE ADVISORY AGREEMENT
THE ADVISOR
CNL Hospitality Advisors, Inc. (formerly CNL Real Estate Advisors,
Inc.) is a Florida corporation organized in January 1997 to provide management,
advisory and administrative services. The Company originally entered into the
Advisory Agreement with the Advisor effective July 9, 1997. CNL Hospitality
Advisors, Inc., as Advisor, has a fiduciary responsibility to the Company and
the stockholders.
The directors and officers of the Advisor are as follows:
James M. Seneff, Jr...........Chairman of the Board, Chief Executive
Officer, and Director
Robert A. Bourne..............President and Director
Matthew W. Kaplan.............Director
Charles A. Muller.............Chief Operating Officer and Executive Vice
President
C. Brian Strickland...........Vice President of Finance and Administration
Jeanne A. Wall................Executive Vice President and Director
Lynn E. Rose..................Secretary, Treasurer and Director
The backgrounds of these individuals are described above under
"Management -- Directors and Executive Officers."
The Advisor employs personnel, in addition to the directors and
executive officers listed above, who have extensive experience in selecting and
managing restaurant properties similar to the Properties.
The Advisor currently owns 20,000 shares of Common Stock. The Advisor
may not sell these shares while the Advisory Agreement is in effect, although
the Advisor may transfer such shares to Affiliates. Neither the Advisor, a
Director, or any Affiliate may vote or consent on matters submitted to the
stockholders regarding removal of, or any transaction between the Company and
the Advisor, Directors, or an Affiliate. In determining the requisite percentage
in interest of shares of Common Stock necessary to approve a matter on which the
Advisor, Directors, and any Affiliate may not vote or consent, any shares of
Common Stock owned by any of them will not be included.
THE ADVISORY AGREEMENT
Under the terms of the Advisory Agreement, the Advisor has
responsibility for the day-to-day operations of the Company, administers the
Company's bookkeeping and accounting functions, serves as the Company's
consultant in connection with policy decisions to be made by the Board of
Directors, manages the Company's Properties and Mortgage Loans, administers the
Company's Secured Equipment Lease program and renders other services as the
Board of Directors deems appropriate. The Advisor is subject to the supervision
of the Company's Board of Directors and has only such functions as are delegated
to it.
The Company will reimburse the Advisor for all of the costs it incurs
in connection with the services it provides to the Company, including, but not
limited to: (i) Organizational and Offering Expenses, which are defined to
include expenses attributable to preparing the documents relating to this
offering, the formation and organization of the Company, qualification of the
Shares for sale in the states, escrow arrangements, filing fees and expenses
attributable to selling the Shares, (ii) Selling Commissions, advertising
expenses, expense reimbursements, and legal and accounting fees, (iii) the
actual cost of goods and materials used by the Company and obtained from
entities not affiliated with the Advisor, including brokerage fees paid in
connection with the purchase and sale of securities, (iv) administrative
services (including personnel costs; provided, however that no reimbursement
shall be made for costs of personnel to the extent that such personnel perform
services in transactions for which the Advisor receives a separate fee, at the
lesser of actual cost or 90% of the competitive rate charged by unaffiliated
persons providing similar goods and services in the same geographic location),
(v) Acquisition Expenses, which are defined to include expenses related to the
selection and acquisition of Properties, for goods and services provided by the
Advisor at the lesser of actual cost or 90% of the competitive rate charged by
unaffiliated persons providing similar goods and services in the same geographic
location), and (vi) expenses related to negotiating and servicing the Mortgage
Loans and Secured Equipment Leases.
The Company shall not reimburse the Advisor at the end of any fiscal
quarter for Operating Expenses that, in the four consecutive fiscal quarters
then ended (the "Expense Year") exceed the greater of 2% of Average Invested
Assets or 25% of Net Income (the "2%/25% Guidelines") for such year. Within 60
days after the end of any fiscal quarter of the Company for which total
Operating Expenses for the Expense Year exceed the 2%/25% Guidelines, the
Advisor shall reimburse the Company the amount by which the total Operating
Expenses paid or incurred by the Company exceed the 2%/25% Guidelines.
The Company will not reimburse the Advisor or its Affiliates for
services for which the Advisor or its Affiliates are entitled to compensation in
the form of a separate fee.
Pursuant to the Advisory Agreement, the Advisor is entitled to receive
certain fees and reimbursements, as listed in "Management Compensation." The
Subordinated Incentive Fee payable to the Advisor under certain circumstances if
Listing occurs may be paid, at the option of the Company, in cash, in Shares, by
delivery of a promissory note payable to the Advisor, or by any combination
thereof. In the event the Subordinated Incentive Fee is paid to the Advisor
following Listing, no Performance Fee, as described below, will be paid to the
Advisor under the Advisory Agreement nor will any additional share of Net Sales
Proceeds be paid to the Advisor. The total of all Acquisition Fees and any
Acquisition Expenses payable to the Advisor and its Affiliates shall be
reasonable and shall not exceed an amount equal to 6% of the Real Estate Asset
Value of a Property, or in the case of a Mortgage Loan, 6% of the funds
advanced, unless a majority of the Board of Directors, including a majority of
the Independent Directors not otherwise interested in the transaction, approves
fees in excess of this limit subject to a determination that the transaction is
commercially competitive, fair and reasonable to the Company. The Acquisition
Fees payable in connection with the selection or acquisition of any Property
shall be reduced to the extent that, and if necessary to limit, the total
compensation paid to all persons involved in the acquisition of such Property to
the amount customarily charged in arm's-length transactions by other persons or
entities rendering similar services as an ongoing public activity in the same
geographical location and for comparable types of Properties, and to the extent
that other acquisition fees, finder's fees, real estate commissions, or other
similar fees or commissions are paid by any person in connection with the
transaction.
If the Advisor or a CNL Affiliate performs services that are outside of
the scope of the Advisory Agreement, compensation is at such rates and in such
amounts as are agreed to by the Advisor and the Independent Directors of the
Company.
Further, if Listing occurs, the Company automatically will become a
perpetual life entity. At such time, the Company and the Advisor will negotiate
in good faith a fee structure appropriate for an entity with a perpetual life,
subject to approval by a majority of the Independent Directors. In negotiating a
new fee structure, the Independent Directors shall consider all of the factors
they deem relevant. These are expected to include, but will not necessarily be
limited to: (i) the amount of the advisory fee in relation to the asset value,
composition, and profitability of the Company's portfolio; (ii) the success of
the Advisor in generating opportunities that meet the investment objectives of
the Company; (iii) the rates charged to other REITs and to investors other than
REITs by advisors that perform the same or similar services; (iv) additional
revenues realized by the Advisor and its Affiliates through their relationship
with the Company, including loan administration, underwriting or broker
commissions, servicing, engineering, inspection and other fees, whether paid by
the Company or by others with whom the Company does business; (v) the quality
and extent of service and advice furnished by the Advisor; (vi) the performance
of the investment portfolio of the Company, including income, conservation or
appreciation of capital, and number and frequency of problem investments; and
(vii) the quality of the Property, Mortgage Loan and Secured Equipment Lease
portfolio of the Company in relationship to the investments generated by the
Advisor for its own account. The Board of Directors, including a majority of the
Independent Directors, may not approve a new fee structure that, in its
judgment, is more favorable to the Advisor than the current fee structure.
The Advisory Agreement, which was entered into by the Company with the
unanimous approval of the Board of Directors, including the Independent
Directors, expires one year after the date of execution, subject to successive
one-year renewals upon mutual consent of the parties. The current Advisory
Agreement expires on July 10, 1999. In the event that a new Advisor is retained,
the previous Advisor will cooperate with the Company and the Directors in
effecting an orderly transition of the advisory functions. The Board of
Directors (including a majority of the Independent Directors) shall approve a
successor Advisor only upon a determination that the Advisor possesses
sufficient qualifications to perform the advisory functions for the Company and
that the compensation to be received by the new Advisor pursuant to the new
Advisory Agreement is justified.
The Advisory Agreement may be terminated without cause or penalty by
either party, or by the mutual consent of the parties (by a majority of the
Independent Directors of the Company or a majority of the directors of the
Advisor, as the case may be), upon 60 days' prior written notice. At that time,
the Advisor shall be entitled to receive the Performance Fee if performance
standards satisfactory to a majority of the Board of Directors, including a
majority of the Independent Directors, when compared to (a) the performance of
the Advisor in comparison with its performance for other entities, and (b) the
performance of other advisors for similar entities, have been met. If Listing
has not occurred, the Performance Fee, if any, shall equal 10% of the amount, if
any, by which (i) the appraised value of the assets of the Company on the date
of termination of the Advisory Agreement (the "Termination Date"), less the
amount of all indebtedness secured by the assets of the Company, plus the total
Distributions made to stockholders from the Company's inception through the
Termination Date, exceeds (ii) Invested Capital plus an amount equal to the
Stockholders' 8% Return from inception through the Termination Date. The Advisor
shall be entitled to receive all accrued but unpaid compensation and expense
reimbursements in cash within 30 days of the Termination Date. All other amounts
payable to the Advisor in the event of a termination shall be evidenced by a
promissory note and shall be payable from time to time. The Performance Fee
shall be paid in 12 equal quarterly installments without interest on the unpaid
balance, provided, however, that no payment will be made in any quarter in which
such payment would jeopardize the Company's REIT status, in which case any such
payment or payments will be delayed until the next quarter in which payment
would not jeopardize REIT status. Notwithstanding the preceding sentence, any
amounts which may be deemed payable at the date the obligation to pay the
Performance Fee is incurred which relate to the appreciation of the Company's
assets shall be an amount which provides compensation to the terminated Advisor
only for that portion of the holding period for the respective assets during
which such terminated Advisor provided services to the Company. If Listing
occurs, the Performance Fee, if any, payable thereafter will be as negotiated
between the Company and the Advisor. The Advisor shall not be entitled to
payment of the Performance Fee in the event the Advisory Agreement is terminated
because of failure of the Company and the Advisor to establish a fee structure
appropriate for a perpetual-life entity at such time, if any, as the Shares
become listed on a national securities exchange or over-the-counter market. The
Performance Fee, to the extent payable at the time of Listing, will not be paid
in the event that the Subordinated Incentive Fee is paid.
The Advisor has the right to assign the Advisory Agreement to an
Affiliate subject to approval by the Independent Directors of the Company. The
Company has the right to assign the Advisory Agreement to any successor to all
of its assets, rights, and obligations.
The Advisor will not be liable to the Company or its stockholders or
others, except by reason of acts constituting bad faith, fraud, misconduct, or
negligence, and will not be responsible for any action of the Board of Directors
in following or declining to follow any advice or recommendation given by it.
The Company has agreed to indemnify the Advisor with respect to acts or
omissions of the Advisor undertaken in good faith, in accordance with the
foregoing standards and pursuant to the authority set forth in the Advisory
Agreement. Any indemnification made to the Advisor may be made only out of the
net assets of the Company and not from stockholders.
CERTAIN TRANSACTIONS
The Managing Dealer is entitled to receive Selling Commissions
amounting to 7.5% of the total amount raised from the sale of Shares of common
stock for services in connection with the offering of Shares, a substantial
portion of which has been or will be paid as commissions to other
broker-dealers. For the years ended December 31, 1998 and 1997, the Company had
incurred $2,377,026 and $849,405, respectively, of such fees, of which
approximately $2,201,000 and $792,832, respectively, was paid by the Managing
Dealer as commissions to other broker-dealers.
In addition, the Managing Dealer is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of the total
amount raised from the sale of Shares, a portion of which may be reallowed to
other broker-dealers. For the years ended December 31, 1998 and 1997, the
Company had 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.
The Advisor is entitled to receive Acquisition Fees for services in
identifying the Properties and structuring the terms of the acquisition and
leases of the Properties and structuring the terms of the Mortgage Loans equal
to 4.5% of 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. For the years ended December 31, 1998 and 1997, the Company had incurred
$1,426,216 and $509,643, respectively, of such fees.
The Company and the Advisor have entered into an Advisory Agreement
pursuant to which the Advisor will receive a monthly Asset Management Fee of
one-twelfth of 0.60% of the Company's Real Estate Asset Value and the
outstanding principal balance of any Mortgage Loans as of the end of the
preceding month. The Asset Management Fee, which will not exceed fees which are
competitive for similar services in the same geographic area, may or may not be
taken, in whole or in part as to any year, in the sole discretion of the
Advisor. All or any portion of the Asset Management Fee not taken as to any
fiscal year shall be deferred without interest and may be taken in such other
fiscal year as the Advisor shall determine. During the year ended December 31,
1998, the Company incurred $68,114 of such fees.
The Company incurs Operating Expenses which, in general, are those
expenses relating to administration of the Company on an ongoing basis. Pursuant
to the Advisory Agreement described above, the Advisor is required to reimburse
the Company the amount by which the total Operating Expenses paid or incurred by
the Company exceed in any four consecutive fiscal quarters (the "Expense Year"),
the greater of 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.
The Advisor and its Affiliates provide accounting and administrative
services to the Company (including accounting and administrative services in
connection with the offering of Shares) on a day-to-day basis. For the years
ended December 31, 1998 and 1997, the Company incurred a total of $644,189 and
$192,224 , respectively, for these services, $494,729 and $185,335 ,
respectively, of such costs representing stock issuance costs , $9,084 and $0,
respectively, representing acquisition related costs and $140,376 and $6,889,
respectively, representing general operating and administrative expenses,
including costs related to preparing and distributing reports required by the
Securities and Exchange Commission.
All amounts paid by the Company to affiliates of the Company are believed
by the Company to be fair and comparable to amounts that would be paid for
similar services provided by unaffiliated third parties.
PRIOR PERFORMANCE INFORMATION
The information presented in this section represents the historical
experience of certain real estate programs organized by certain officers and
directors of the Advisor. Prior public programs have invested only in restaurant
Properties and have not invested in hotel Properties. Investors in the Company
should not assume that they will experience returns, if any, comparable to those
experienced by investors in such prior public real estate programs. Investors
who purchase Shares in the Company will not thereby acquire any ownership
interest in any partnerships or corporations to which the following information
relates.
Two Directors of the Company, Robert A. Bourne and James M. Seneff,
Jr., individually or with others have served as general partners of 88 and 89
real estate limited partnerships, respectively, including 18 publicly offered
CNL Income Fund partnerships, and as directors and officers of two unlisted
public REITs. None of these limited partnerships or the unlisted REITs have been
audited by the IRS. Of course, there is no guarantee that the Company will not
be audited. Based on an analysis of the operating results of the prior programs,
Messrs. Bourne and Seneff believe that each of such programs has met or is
meeting its principal investment objectives in a timely manner.
CNL Realty Corporation, which was organized as a Florida corporation in
November 1985 and whose sole stockholders are Messrs. Bourne and Seneff,
currently serves as the corporate general partner with Messrs. Bourne and Seneff
as individual general partners of 18 CNL Income Fund limited partnerships, all
of which were organized to invest in fast-food, family-style and in the case of
two of the partnerships, casual-dining restaurant properties similar to those
that the Company intends to acquire and have investment objectives similar to
those of the Company. In addition, Messrs. Bourne and Seneff currently serve as
directors and officers of CNL American Properties Fund, Inc., an unlisted public
REIT organized to invest in fast-food, family-style and casual-dining restaurant
properties, mortgage loans and secured equipment leases similar to those in
which the Company may invest in, and CNL Health Care Properties, Inc., an
unlisted public REIT organized to invest in health care and seniors' housing
facilities. Both of the unlisted public REITs have investment objectives similar
to those of the Company. As of December 31, 1998, the 18 partnerships and the
unlisted REITs had raised a total of $1,405,003,115 from a total of 82,987
investors, and had invested in 1,139 fast-food, family-style and casual-dining
restaurant properties. Certain additional information relating to the offerings
and investment history of the 18 public partnerships and the unlisted public
REITs is set forth below.
<PAGE>
<TABLE>
<CAPTION>
Number of Date 90% of Net
Limited Proceeds Fully
Maximum Partnership Invested or
Name of Offering Units or Shares Committed to
Entity Amount (1) Date Closed Sold Investment (2)
- ------ ---------- ----------- --------------- --------------
<S> <C>
CNL Income $15,000,000 December 31, 1986 30,000 December 1986
Fund, Ltd. (30,000 units)
CNL Income $25,000,000 August 21, 1987 50,000 November 1987
Fund II, Ltd. (50,000 units)
CNL Income $25,000,000 April 29, 1988 50,000 June 1988
Fund III, Ltd. (50,000 units)
CNL Income $30,000,000 December 6, 1988 60,000 February 1989
Fund IV, Ltd. (60,000 units)
CNL Income $25,000,000 June 7, 1989 50,000 December 1989
Fund V, Ltd. (50,000 units)
CNL Income $35,000,000 January 19, 1990 70,000 May 1990
Fund VI, Ltd. (70,000 units)
CNL Income $30,000,000 August 1, 1990 30,000,000 January 1991
Fund VII, Ltd. (30,000,000 units)
CNL Income $35,000,000 March 7, 1991 35,000,000 September 1991
Fund VIII, Ltd. (35,000,000 units)
CNL Income $35,000,000 September 6, 1991 3,500,000 November 1991
Fund IX, Ltd. (3,500,000 units)
CNL Income $40,000,000 April 22, 1992 4,000,000 June 1992
Fund X, Ltd. (4,000,000 units)
CNL Income $40,000,000 October 8, 1992 4,000,000 September 1992
Fund XI, Ltd. (4,000,000 units)
CNL Income $45,000,000 April 15, 1993 4,500,000 July 1993
Fund XII, Ltd. (4,500,000 units)
CNL Income $40,000,000 September 13, 1993 4,000,000 August 1993
Fund XIII, Ltd. (4,000,000 units)
CNL Income $45,000,000 March 23, 1994 4,500,000 May 1994
Fund XIV, Ltd. (4,500,000 units)
CNL Income $40,000,000 September 22, 1994 4,000,000 December 1994
Fund XV, Ltd. (4,000,000 units)
CNL Income $45,000,000 July 18, 1995 4,500,000 August 1995
Fund XVI, Ltd. (4,500,000 units)
CNL Income $30,000,000 October 10, 1996 3,000,000 December 1996
Fund XVII, Ltd. (3,000,000 units)
CNL Income $35,000,000 February 6, 1998 3,500,000 December 1997
Fund XVIII, Ltd. (3,500,000 units)
<PAGE>
Number of Date 90% of Net
Limited Proceeds Fully
Maximum Partnership Invested or
Name of Offering Units or Shares Committed to
Entity Amount (1) Date Closed Sold Investment (2)
- ------ ---------- ----------- --------------- --------------
CNL American $747,464,413 (3) (3) (3)
Properties Fund, (74,746,441 shares)
Inc.
CNL Health Care $155,000,000 (4) (4) (4)
Properties, Inc. (15,500,000 shares)
</TABLE>
(1) The amount stated includes the exercise by the general partners of each
partnership of their option to increase by $5,000,000 the maximum size
of the offering of CNL Income Fund, Ltd., CNL Income Fund II, Ltd., CNL
Income Fund III, Ltd., CNL Income Fund IV, Ltd., CNL Income Fund VI,
Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund X, Ltd., CNL Income
Fund XII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XVI, Ltd.
and CNL Income Fund XVIII, Ltd.
(2) For a description of the property acquisitions by these programs, see
the table set forth on the following page.
(3) In April 1995, CNL American Properties Fund, Inc. commenced an offering
of a maximum of 15,000,000 shares of common stock ($150,000,000),
excluding 1,500,000 shares ($15,000,000), available to investors
participating in the distribution reinvestment plan. On February 6,
1997, the initial offering closed upon receipt of subscriptions
totalling $150,591,765 (15,059,177 shares), including $591,765 (59,177
shares) through the reinvestment plan. Following completion of the
initial offering on February 6, 1997, CNL American Properties Fund,
Inc. commenced a subsequent offering (the "1997 Offering") of up to
27,500,000 shares ($275,000,000) of common stock. On March 2, 1998, the
1997 Offering closed upon receipt of subscriptions totalling
$251,872,648 (25,187,265 shares), including $1,872,648 (187,265 shares)
through the reinvestment plan. Following completion of the 1997
Offering on March 2, 1998, CNL American Properties Fund, Inc. commenced
a subsequent offering (the "1998 Offering") of up to 34,500,000 shares
($345,000,000) of common stock. As of December 31, 1998, CNL American
Properties Fund, Inc. had received subscriptions totalling $345,000,000
(34,500,000 shares), including $3,107,848 (310,785 shares) through the
reinvestment plan, from the 1998 Offering and had purchased 409
properties. The 1998 Offering closed in January 1999, upon receipt of
the proceeds from the last subscriptions.
(4) Effective September 18, 1998, CNL Health Care Properties, Inc.
commenced an offering of up to 15,500,000 shares ($155,000,000) of
common stock. As of December 31, 1998, CNL Health Care Properties, Inc.
had not yet acquired any properties.
As of December 31, 1998, Mr. Seneff and Mr. Bourne, directly or through
affiliated entities, also had served as joint general partners of 69 nonpublic
real estate limited partnerships. The offerings of all of these 69 nonpublic
limited partnerships had terminated as of December 31, 1998. These 69
partnerships raised a total of $185,927,353 from approximately 4,519 investors,
and purchased, directly or through participation in a joint venture or limited
partnership, interests in a total of 216 projects as of December 31, 1998. These
216 projects consist of 19 apartment projects (comprising 10% of the total
amount raised by all 69 partnerships), 13 office buildings (comprising 5% of the
total amount raised by all 69 partnerships), 169 fast-food, family-style, or
casual-dining restaurant property and business investments (comprising 69% of
the total amount raised by all 69 partnerships), one condominium development
(comprising 0.5% of the total amount raised by all 69 partnerships), four
hotels/motels (comprising 5% of the total amount raised by all 69 partnerships),
eight commercial/retail properties (comprising 10% of the total amount raised by
all 69 partnerships), and two tracts of undeveloped land (comprising 0.5% of the
total amount raised by all 69 partnerships).
Mr. Bourne also has served, without Mr. Seneff, as a general partner of
one additional nonpublic real estate limited partnership program which raised a
total of $600,000 from 13 investors and purchased, through participation in a
limited partnership, one apartment building located in Georgia with a purchase
price of $1,712,000.
Mr. Seneff also has served, without Mr. Bourne, as a general partner of
two additional nonpublic real estate limited partnerships which raised a total
of $240,000 from 12 investors and purchased two office buildings with an
aggregate purchase price of $928,390. Both of the office buildings are located
in Florida.
Of the 89 real estate limited partnerships whose offerings had closed
as of December 31, 1998 (including 18 CNL Income Fund limited partnerships) in
which Mr. Seneff and/or Mr. Bourne serve or have served as general partners in
the past, 39 invested in restaurant properties leased on a "triple-net" basis,
including eight which also invested in franchised restaurant businesses
(accounting for approximately 93% of the total amount raised by all 90 real
estate limited partnerships).
<PAGE>
The following table sets forth summary information, as of December 31,
1998, regarding property acquisitions by the 18 limited partnerships and the two
unlisted REITs that have investment objectives similar to those of the Company.
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
<S> <C>
CNL Income 22 fast-food or AL, AZ, CA, FL, GA, All cash Public
Fund, Ltd. family-style LA, MD, OK, PA, TX,
restaurants VA, WA
CNL Income 49 fast-food or AL, AZ, CO, FL, GA, All cash Public
Fund II, Ltd. family-style IL, IN, KS, LA, MI,
restaurants MN, MO, NC, NM, OH,
TN, TX, WA, WY
CNL Income 37 fast-food or AZ, CA, CO, FL, GA, All cash Public
Fund III, Ltd. family-style IA, IL, IN, KS, KY,
restaurants MD, MI, MN, MO, NC,
NE, OK, TX
CNL Income 46 fast-food or AL, DC, FL, GA, IL, All cash Public
Fund IV, Ltd. family-style IN, KS, MA, MD, MI,
restaurants MS, NC, OH, PA, TN,
TX, VA
CNL Income 35 fast-food or AZ, FL, GA, IL, IN, All cash Public
Fund V, Ltd. family-style MI, NH, NY, OH, SC,
restaurants TN, TX, UT, WA
CNL Income 56 fast-food or AR, AZ, FL, GA, IL, All cash Public
Fund VI, Ltd. family-style IN, KS, MA, MI, MN,
restaurants NC, NE, NM, NY, OH,
OK, PA, TN, TX, VA,
WA, WY
CNL Income 49 fast-food or AZ, CO, FL, GA, IN, All cash Public
Fund VII, Ltd. family-style LA, MI, MN, NC, OH,
restaurants SC, TN, TX, UT, WA
CNL Income 42 fast-food or AZ, FL, IN, LA, MI, All cash Public
Fund VIII, Ltd. family-style MN, NC, NY, OH, TN,
restaurants TX, VA
CNL Income 43 fast-food or AL, CO, FL, GA, IL, All cash Public
Fund IX, Ltd. family-style IN, LA, MI, MN, MS,
restaurants NC, NH, NY, OH, SC,
TN, TX
CNL Income 52 fast-food or AL, CA, CO, FL, ID, All cash Public
Fund X, Ltd. family-style IL, LA, MI, MO, MT,
restaurants NC, NH, NM, NY, OH,
PA, SC, TN, TX
<PAGE>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
CNL Income 41 fast-food or AL, AZ, CA, CO, CT, All cash Public
Fund XI, Ltd. family-style FL, KS, LA, MA, MI,
restaurants MS, NC, NH, NM, OH,
OK, PA, SC, TX, VA,
WA
CNL Income 50 fast-food or AL, AZ, CA, FL, GA, All cash Public
Fund XII, Ltd. family-style LA, MO, MS, NC, NM,
restaurants OH, SC, TN, TX, WA
CNL Income 50 fast-food or AL, AR, AZ, CA, CO, All cash Public
Fund XIII, Ltd. family-style FL, GA, IN, KS, LA,
restaurants MD, NC, OH, PA, SC,
TN, TX, VA
CNL Income 65 fast-food or AL, AZ, CO, FL, GA, All cash Public
Fund XIV, Ltd. family-style KS, LA, MN, MO, MS,
restaurants NC, NJ, NV, OH, SC,
TN, TX, VA
CNL Income 55 fast-food or AL, CA, FL, GA, KS, All cash Public
Fund XV, Ltd. family-style KY, MN, MO, MS, NC,
restaurants NJ, NM, OH, OK, PA,
SC, TN, TX, VA
CNL Income 48 fast-food or AZ, CA, CO, DC, FL, All cash Public
Fund XVI, Ltd. family-style GA, ID, IN, KS, MN,
restaurants MO, NC, NM, NV, OH,
TN, TX, UT, WI
CNL Income 29 fast-food, CA, FL, GA, IL, IN, All cash Public
Fund XVII, Ltd. family-style or MI, NC, NV, OH, SC,
casual-dining TN, TX
restaurant properties
<PAGE>
CNL Income 24 fast-food, AZ, CA, FL, GA, IL, All cash Public
Fund XVIII, Ltd. family-style or KY, MD, MN, NC, NV,
casual-dining NY, OH, TN, TX
restaurant properties
CNL American 409 fast-food, AL, AZ, CA, CO, CT, All cash Public REIT
Properties Fund, Inc. family-style or DE, FL, GA, IA, ID,
casual-dining IL, IN, KS, KY, MD,
restaurant properties MI, MN, MO, MS, NC,
NE, NJ, NM, NV, NY,
OH, OK, OR, PA, RI,
SC, TN, TX, UT, VA,
WA, WI, WV
<PAGE>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
CNL Health Care (1) (1) (1) Public REIT
Properties, Inc.
</TABLE>
(1) As of December 31, 1998, CNL Health Care Properties, Inc. had not
acquired any properties.
A more detailed description of the acquisitions by real estate limited
partnerships and the two unlisted REITs sponsored by Messrs. Bourne and Seneff
is set forth in prior performance Table VI, included in Part II of the
registration statement filed with the Securities and Exchange Commission for
this offering. A copy of Table VI is available to stockholders from the Company
upon request, free of charge. In addition, upon request to the Company, the
Company will provide, without charge, a copy of the most recent Annual Report on
Form 10-K filed with the Securities and Exchange Commission for CNL Income Fund,
Ltd., CNL Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV,
Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL Income Fund VII,
Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL Income Fund X,
Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL Income Fund XIII,
Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL Income Fund XVI,
Ltd., CNL Income Fund XVII, Ltd., CNL Income Fund XVIII, Ltd., CNL American
Properties Fund, Inc. and CNL Health Care Properties, Inc. as well as a copy,
for a reasonable fee, of the exhibits filed with such reports.
In order to provide potential purchasers of Shares in the Company with
information to enable them to evaluate the prior experience of the Messrs.
Seneff and Bourne as general partners of real estate programs and as directors
and officers of the two unlisted REITs, including those set forth in the
foregoing table, certain financial and other information concerning those
programs and the two unlisted REITs with investment objectives similar to one or
more of the Company's investment objectives, is provided in the Prior
Performance Tables included as Exhibit C. Information about the previous public
partnerships, the offerings of which became fully subscribed between July 1993
and June 1998, is included therein. Potential stockholders are encouraged to
examine the Prior Performance Tables attached as Exhibit C (in Table III), which
include information as to the operating results of these prior partnerships, for
more detailed information concerning the experience of Messrs.
Seneff and Bourne.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's Assets while (i) making quarterly Distributions; (ii)
obtaining fixed income through the receipt of base rent, and increasing the
Company's income (and Distributions) and providing protection against inflation
through automatic increases in base rent and/or receipt of percentage rent, and
obtaining fixed income through the receipt of payments on Mortgage Loans and
Secured Equipment Leases; (iii) continuing to qualify as a REIT for federal
income tax purposes; and (iv) providing stockholders of the Company with
liquidity of their investment, either in whole or in part, within five to ten
years after commencement of the offering, through (a) Listing, or, (b) if
Listing does not occur within ten years after commencement of the offering, the
commencement of orderly Sales of the Company's assets, outside the ordinary
course of business and consistent with its objective of qualifying as a REIT,
and distribution of the proceeds thereof. The sheltering from tax of income from
other sources is not an objective of the Company. If the Company is successful
in achieving its investment and operating objectives, the stockholders (other
than tax-exempt entities) are likely to recognize taxable income in each year.
While there is no order of priority intended in the listing of the Company's
objectives, stockholders should realize that the ability of the Company to meet
these objectives may be severely handicapped by any lack of diversification of
the Company's investments and the terms of the leases.
<PAGE>
The Company intends to meet its objectives through its investment
policies of (i) purchasing carefully selected, well-located Properties and
leasing them on a "triple-net" basis (which means that the tenant will be
responsible for paying the cost of all repairs, maintenance, property taxes, and
insurance) to operators of Restaurant Chains and Hotel Chains under leases
generally requiring the tenant to pay base annual rental, with automatic
increases in base rent and/or percentage rent based on gross sales, and (ii)
offering Mortgage Loans and Secured Equipment Leases to tenants and operators of
Restaurant Chains and Hotel Chains.
In accordance with its investment policies, the Company intends to
invest in Properties whose tenants are franchisors or franchisees of one of the
Restaurant Chains or Hotel Chains to be selected by the Company, based upon
recommendations by the Advisor. Although there is no limit on the number of
properties of a particular Restaurant Chain or Hotel Chain which the Company may
acquire, the Company currently does not expect to acquire a Property if the
Board of Directors, including a majority of the Independent Directors,
determines that the acquisition would adversely affect the Company in terms of
geographic, property type or chain diversification. Potential Mortgage Loan
borrowers and Secured Equipment Lease lessees or borrowers will similarly be
operators of Restaurant Chains and Hotel Chains selected by the Company,
following the Advisor's recommendations. The Company has undertaken, consistent
with its objective of qualifying as a REIT for federal income tax purposes, to
ensure that the value of all Secured Equipment Leases, in the aggregate, will
not exceed 25% of the Company's total assets, while Secured Equipment Leases to
any single lessee or borrower, in the aggregate, will not exceed 5% of the
Company's total assets. It is intended that investments will be made in
Properties, Mortgage Loans and Secured Equipment Leases in various locations in
an attempt to achieve diversification and thereby minimize the effect of changes
in local economic conditions and certain other risks. The extent of such
diversification, however, depends in part upon the amount raised in the
offering. See "Estimated Use of Proceeds" and "Risk Factors -- Investment Risks
- -- Possible Lack of Diversification." For a more complete description of the
manner in which the structure of the Company's business, including its
investment policies, will facilitate the Company's ability to meet its
investment objectives. See "Business."
The investment objectives of the Company may not be changed without the
approval of stockholders owning a majority of the shares of outstanding Common
Stock. The Bylaws of the Company require the Independent Directors to review the
Company's investment policies at least annually to determine that the policies
are in the best interests of the stockholders. The determination shall be set
forth in the minutes of the Board of Directors along with the basis for such
determination. The Directors (including a majority of the Independent Directors)
have the right, without a stockholder vote, to alter the Company's investment
policies but only to the extent consistent with the Company's investment
objectives and investment limitations. See "Certain Investment Limitations,"
below.
CERTAIN INVESTMENT LIMITATIONS
In addition to other investment restrictions imposed by the Directors
from time to time, consistent with the Company's objective of qualifying as a
REIT, the Articles of Incorporation or the Bylaws provide for the following
limitations on the Company's investments.
1. Not more than 10% of the Company's total assets shall be invested in
unimproved real property or mortgage loans on unimproved real property. For
purposes of this paragraph, "unimproved real property" does not include any
Property under construction, under contract for development or planned for
development within one year.
2. The Company shall not invest in commodities or commodity future
contracts. This limitation is not intended to apply to interest rate futures,
when used solely for hedging purposes.
3. The Company shall not invest in or make mortgage loans unless an
appraisal is obtained concerning the underlying property. Mortgage indebtedness
on any property shall not exceed such property's appraised value. In cases in
which the majority of Independent Directors so determine, and in all cases in
which the mortgage loan involves the Advisor, Directors, or Affiliates, such
appraisal must be obtained from an independent expert concerning the underlying
property. Such appraisal shall be maintained in the Company's records for at
least five years, and shall be available for inspection and duplication by any
stockholder. In addition to the appraisal, a mortgagee's or owner's title
insurance policy or commitment as to the priority of the mortgage or condition
of the title must be obtained. The Company may not invest in real estate
contracts of sale otherwise known as land sale contracts.
4. The Company may not make or invest in mortgage loans, including
construction loans, on any one Property if the aggregate amount of all mortgage
loans outstanding on the Property, including the loans of the Company, would
exceed an amount equal to 85% of the appraised value of the Property as
determined by appraisal unless substantial justification exists because of the
presence of other underwriting criteria. For purposes of this subsection, the
"aggregate amount of all mortgage loans outstanding on the Property, including
the loans of the Company" shall include all interest (excluding contingent
participation in income and/or appreciation in value of the mortgaged property),
the current payment of which may be deferred pursuant to the terms of such
loans, to the extent that deferred interest on each loan exceeds 5% per annum of
the principal balance of the loan.
5. The Company may not invest in indebtedness ("Junior Debt") secured
by a mortgage on real property which is subordinate to the lien or other
indebtedness ("Senior Debt"), except where the amount of such Junior Debt, plus
the outstanding amount of the Senior Debt, does not exceed 90% of the appraised
value of such property, if after giving effect thereto, the value of all such
investments of the Company (as shown on the books of the Company in accordance
with generally accepted accounting principles after all reasonable reserves but
before provision for depreciation) would not then exceed 25% of the Company's
Net Assets. The value of all investments in Junior Debt of the Company which
does not meet the aforementioned requirements is limited to 10% of the Company's
tangible assets (which is included within the 25% limitation).
6. The Company may not engage in any short sale, or borrow, on an
unsecured basis, if such borrowing will result in an asset coverage of less than
300%, except that such borrowing limitation shall not apply to a first mortgage
trust. "Asset coverage," for the purpose of this section, means the ratio which
the value of the total assets of an issuer, less all liabilities and
indebtedness except indebtedness for unsecured borrowings, bears to the
aggregate amount of all unsecured borrowings of such issuer.
7. Unless at least 80% of the Company's tangible assets are comprised
of Properties or first mortgage loans, the Company may not incur any
indebtedness which would result in an aggregate amount of indebtedness in excess
of 300% of Net Assets.
8. The Company may not make or invest in any mortgage loans that are
subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or Affiliates of the Company.
9. The Company will not invest in equity securities unless a majority
of the Directors (including a majority of Independent Directors) not otherwise
interested in such transaction approve the transaction as being fair,
competitive, and commercially reasonable and determine that the transaction will
not jeopardize the Company's ability to qualify and remain qualified as a REIT.
Investments in entities affiliated with the Advisor, a Director, the Company, or
Affiliates thereof are subject to the restrictions on joint venture investments.
In addition, the Company shall not invest in any security of any entity holding
investments or engage in activities prohibited by the Company's Articles of
Incorporation.
10. The Company will not issue (i) equity securities redeemable solely
at the option of the holder (except that stockholders may offer their Shares to
the Company as described under "Redemption of Shares"); (ii) debt securities
unless the historical debt service coverage (in the most recently completed
fiscal year), as adjusted for known charges, is sufficient to service that
higher level of debt properly; (iii) Shares on a deferred payment basis or under
similar arrangements; (iv) non-voting or assessable securities; or (v) options,
warrants, or similar evidences of a right to buy its securities (collectively,
"Options") unless (1) issued to all of its stockholders ratably, (2) as part of
a financing arrangement, or (3) as part of a stock option plan available to
Directors, officers, or employees of the Company or the Advisor. Options may not
be issued to the Advisor, Directors or any Affiliate thereof except on the same
terms as such Options are sold to the general public. Options may be issued to
persons other than the Advisor, Directors or any Affiliate thereof but not at
exercise prices less than the fair market value of the underlying securities on
the date of grant and not for consideration that in the judgment of the
Independent Directors has a market value less than the value of such Option on
the date of grant. Options issuable to the Advisor, Directors or any Affiliate
thereof shall not exceed 10% of the outstanding Shares on the date of grant.
11. A majority of the Directors shall authorize the consideration to be
paid for each Property, based on the fair market value of the Property. If a
majority of the Independent Directors determine, or if the Property is acquired
from the Advisor, a Director, or Affiliates thereof, such fair market value
shall be determined by a qualified independent real estate appraiser selected by
the Independent Directors.
12. The Company will not engage in underwriting or the agency
distribution of securities issued by others or in trading, as compared to
investment activities.
13. The Company will not invest in real estate contracts of sale unless
such contracts of sale are in recordable form and appropriately recorded in the
chain of title.
14. The Company will not invest in any foreign currency or bullion or
engage in short sales.
15. The Company will not issue senior securities except notes to banks
and other lenders and preferred shares.
16. The Company will not make loans to the Advisor or its Affiliates.
17. The Company will not operate so as to be classified as an
"investment company" under the Investment Company Act of 1940, as amended.
18. The Company will not make any investment that the Company believes
will be inconsistent with its objective of qualifying as a REIT.
The foregoing limitations may not be modified or eliminated without the
approval of a majority of the shares of outstanding Common Stock.
Except as set forth above or elsewhere in this Prospectus, the Company
does not intend to issue senior securities; borrow money; make loans to other
persons; invest in the securities of other issuers for the purpose of exercising
control; underwrite securities of other issuers; engage in the purchase and sale
(or turnover) of investments; offer securities in exchange for property,
repurchase or otherwise reacquire its shares or other securities; or make annual
or other reports to security holders. The Company evaluates investments in
Mortgage Loans on an individual basis and does not have a standard turnover
policy with respect to such investments.
DISTRIBUTION POLICY
GENERAL
In order to qualify as a REIT for federal income tax purposes, among
other things, the Company must make distributions each taxable year (not
including any return of capital for federal income tax purposes) equal to at
least 95% of its real estate investment trust taxable income, although the Board
of Directors, in its discretion, may increase that percentage as it deems
appropriate. See "Federal Income Tax Considerations -- Taxation of the Company
- -- Distribution Requirements." The declaration of Distributions is within the
discretion of the Board of Directors and depends upon the Company's
distributable funds, current and projected cash requirements, tax considerations
and other factors.
DISTRIBUTIONS
The following table reflects total Distributions and Distributions per
Share declared and paid by the Company for each month since the Company
commenced operations.
Total Distributions
Month Distributions Per Share
- ----- ------------- ---------
November 1997 $ 10,757 $0.002500
December 1997 19,019 0.002500
January 1998 28,814 0.002500
February 1998 32,915 0.002500
March 1998 39,627 0.002500
April 1998 46,677 0.002500
May 1998 52,688 0.002500
June 1998 56,365 0.002500
July 1998 99,589 0.041700
<PAGE>
Total Distributions
Month Distributions Per Share
- ----- ------------- ---------
August 1998 105,708 0.041700
September 1998 156,747 0.058300
October 1998 167,848 0.058300
November 1998 183,302 0.058300
December 1998 197,865 0.058300
In addition, in January, February and March 1999 , the Company declared
Distributions totalling $251,967, $314,928 and $431,754, respectively (each
representing $0.0583 per share). The Company intends to continue to make regular
Distributions to stockholders. The payment of Distributions commenced in
December 1997. Distributions will be made to those stockholders who are
stockholders as of the record date selected by the Directors. Distributions will
be declared monthly during the offering period, declared monthly during any
subsequent offering, paid on a quarterly basis during an offering period, and
declared and paid quarterly thereafter. The Company is required to distribute
annually at least 95% of its real estate investment trust taxable income to
maintain its objective of qualifying as a REIT. Generally, income distributed
will not be taxable to the Company under federal income tax laws if the Company
complies with the provisions relating to qualification as a REIT. If the cash
available to the Company is insufficient to pay such Distributions, the Company
may obtain the necessary funds by borrowing, issuing new securities, or selling
Assets. These methods of obtaining funds could affect future Distributions by
increasing operating costs. To the extent that Distributions to stockholders
exceed earnings and profits, such amounts constitute a return of capital for
federal income tax purposes, although such Distributions will not reduce
stockholders' aggregate Invested Capital. Distributions in kind shall not be
permitted, except for distributions of readily marketable securities;
distributions of beneficial interests in a liquidating trust established for the
dissolution of the Company and the liquidation of its assets in accordance with
the terms of the Articles of Incorporation; or distributions of in-kind property
as long as the Directors (i) advise each stockholder of the risks associated
with direct ownership of the property, (ii) offer each stockholder the election
of receiving in-kind property distributions, and (iii) distribute in-kind
property only to those stockholders who accept the Directors' offer.
For the year ended December 31, 1998, and the period October 15, 1997
(the date operations of the Company commenced) through December 31, 1997,
approximately 76% and 100%, respectively, of the Distributions declared and paid
were considered to be ordinary income and for the year ended December 31, 1998,
approximately 24% was considered a return of capital for federal income tax
purposes. Due to the fact that the Company had not yet acquired any Properties
and was still in the offering stage as of December 31, 1998, the
characterization of Distributions for federal income tax purposes is not
necessarily considered by management to be representative of the
characterization of Distributions in future years.
Distributions will be made at the discretion of the Directors,
depending primarily on net cash from operations (which includes cash received
from tenants except to the extent that such cash represents a return of
principal in regard to the lease of a Property consisting of building only,
distributions from joint ventures, and interest income from lessees of Equipment
and borrowers under Mortgage Loans, less expenses paid) and the general
financial condition of the Company, subject to the obligation of the Directors
to cause the Company to qualify and remain qualified as a REIT for federal
income tax purposes. The Company intends to increase Distributions in accordance
with increases in net cash from operations.
SUMMARY OF THE
ARTICLES OF INCORPORATION AND BYLAWS
GENERAL
The Company is organized as a corporation under the laws of the State
of Maryland. As a Maryland corporation, the Company is governed by the Maryland
General Corporation Law. Maryland corporate law deals with a variety of matters
regarding Maryland corporations, including liabilities of the Company,
stockholders, directors, and officers, the amendment of the Articles of
Incorporation, and mergers of a Maryland corporation with other entities. Since
many matters are not addressed by Maryland corporate law, it is customary for a
Maryland corporation to address these matters through provisions in its Articles
of Incorporation.
The Articles of Incorporation and the Bylaws of the Company contain
certain provisions that could make it more difficult to acquire control of the
Company by means of a tender offer, a proxy contest, or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with its Board of Directors.
The Company believes that these provisions increase the likelihood that
proposals initially will be on more attractive terms than would be the case in
their absence and facilitate negotiations which may result in improvement of the
terms of an initial offer.
The Articles of Incorporation also permit Listing by the Board of
Directors after completion or termination of this offering.
The discussion below sets forth material provisions of governing laws,
instruments and guidelines applicable to the Company. For more complete
provisions, reference is made to the Maryland General Corporation Law, the
guidelines for REITs published by the North American Securities Administrators
Association and the Company's Articles of Incorporation and Bylaws.
DESCRIPTION OF CAPITAL STOCK
The Company has authorized a total of 126,000,000 shares of capital
stock, consisting of 60,000,000 shares of Common Stock, $.01 par value per
share, 3,000,000 shares of Preferred Stock ("Preferred Stock"), and 63,000,000
additional shares of excess stock ("Excess Shares"), $.01 par value per share.
Of the 63,000,000 Excess Shares, 60,000,000 are issuable in exchange for Common
Stock and 3,000,000 are issuable in exchange for Preferred Stock as described
below at " -- Restriction of Ownership." As of February 26, 1999, the Company
had 7,380,551 shares of Common Stock outstanding (including 20,000 shares issued
to the Advisor prior to the commencement of this offering and 3,730 Shares
issued pursuant to the Reinvestment Plan) and no Preferred Stock or Excess
Shares outstanding. The Board of Directors may determine to engage in future
offerings of Common Stock of up to the number of unissued authorized shares of
Common Stock available.
The Company will not issue share certificates except to stockholders
who make a written request to the Company. Each stockholder's investment will be
recorded on the books of the Company, and information concerning the
restrictions and rights attributable to Shares (whether in connection with an
initial issuance or a transfer) will be sent to the stockholder receiving Shares
in connection with an issuance or transfer. A stockholder wishing to transfer
his or her Shares will be required to send only an executed form to the Company,
and the Company will provide the required form upon a stockholder's request. The
executed form and any other required documentation must be received by the
Company at least one calendar month prior to the last date of the current
quarter. Subject to restrictions in the Articles of Incorporation, transfers of
Shares shall be effective, and the transferee of the Shares will be recognized
as the holder of such Shares as of the first day of the following quarter on
which the Company receives properly executed documentation. Stockholders who are
residents of New York may not transfer fewer than 250 shares at any time.
Stockholders have no preemptive rights to purchase or subscribe for
securities that the Company may issue subsequently. Each Share is entitled to
one vote per Share, and Shares do not have cumulative voting rights. The
Stockholders are entitled to Distributions in such amounts as may be declared by
the Board of Directors from time to time out of funds legally available for such
payments and, in the event of liquidation, to share ratably in any assets of the
Company remaining after payment in full of all creditors.
All of the Shares offered hereby will be fully paid and nonassessable
when issued.
The Articles of Incorporation authorize the Board of Directors to
designate and issue from time to time one or more classes or series of Preferred
Shares without stockholder approval. The Board of Directors may determine the
relative rights, preferences, and privileges of each class or series of
Preferred Stock so issued. Because the Board of Directors has the power to
establish the preferences and rights of each class or series of Preferred Stock,
it may afford the holders of any series or class of Preferred Stock preferences,
powers, and rights senior to the rights of holders of Common Stock; however, the
voting rights for each share of Preferred Stock shall not exceed voting rights
which bear the same relationship to the voting rights of the Shares as the
consideration paid to the Company for each share of Preferred Stock bears to the
book value of the Shares on the date that such Preferred Stock is issued. The
issuance of Preferred Stock could have the effect of delaying or preventing a
change in control of the Company. The Board of Directors has no present plans to
issue any Preferred Stock.
Similarly, the voting rights per share of equity securities of the
Company (other than the publicly held equity securities of the Company) sold in
a private offering shall not exceed the voting rights which bear the same
relationship to the voting rights of the publicly held equity securities as the
consideration paid to the Company for each privately offered Company share bears
to the book value of each outstanding publicly held equity security. The Board
of Directors currently has no plans to offer equity securities of the Company in
a private offering.
For a description of the characteristics of the Excess Shares, which
differ from Common Stock and Preferred Stock in a number of respects, including
voting and economic rights, see "Restriction of Ownership," below.
BOARD OF DIRECTORS
The Articles of Incorporation provide that the number of Directors of
the Company cannot be less than three nor more than 15. A majority of the Board
of Directors will be Independent Directors. See "Management -- Independent
Directors." Each Director, other than a Director elected to fill the unexpired
term of another Director, will be elected at each annual meeting or at any
special meeting of the stockholders called for that purpose, by a majority of
the shares of Common Stock present in person or by proxy and entitled to vote.
Independent Directors will nominate replacements for vacancies among the
Independent Directors. Under the Articles of Incorporation, the term of office
for each Director will be one year, expiring each annual meeting of
stockholders; however, nothing in the Articles of Incorporation prohibits a
director from being reelected by the stockholders. The Directors may not (a)
amend the Articles of Incorporation, except for amendments which do not
adversely affect the rights, preferences and privileges of stockholders; (b)
sell all or substantially all of the Company's assets other than in the ordinary
course of business or in connection with liquidation and dissolution; (c) cause
the merger or other reorganization of the Company; or (d) dissolve or liquidate
the Company, other than before the initial investment in property. The Directors
may establish such committees as they deem appropriate (provided that the
majority of the members of each committee are Independent Directors).
STOCKHOLDER MEETINGS
An annual meeting will be held for the purpose of electing Directors
and for the transaction of such other business as may come before the meeting,
and will be held not less than 30 days after delivery of the annual report.
Under the Company's Bylaws, a special meeting of stockholders may be called by
the chief executive officer, a majority of the Directors, or a majority of the
Independent Directors. Special meetings of the stockholders also shall be called
by an officer of the Company upon the written request of stockholders holding in
the aggregate not less than 10% of the outstanding Common Stock entitled to vote
at such meeting. Upon receipt of such a written request, either in person or by
mail, stating the purpose or purposes of the meeting, the Company shall provide
all stockholders, within ten days of receipt of the written request, written
notice, either in person or by mail, of a meeting and its purpose. Such meeting
will be held not less than fifteen nor more than sixty days after distribution
of the notice, at a time and place specified in the request, or if none is
specified, at a time and place convenient to stockholders.
At any meeting of stockholders, each stockholder is entitled to one
vote per share of Common Stock owned of record on the applicable record date. In
general, the presence in person or by proxy of 50% of the shares of Common Stock
then outstanding shall constitute a quorum, and the majority vote of the shares
of Common Stock present in person or by proxy will be binding on all the
stockholders of the Company.
ADVANCE NOTICE FOR STOCKHOLDER NOMINATIONS FOR
DIRECTORS AND PROPOSALS OF NEW BUSINESS
The Bylaws of the Company require notice at least 60 days and not more
than 90 days before the anniversary of the prior annual meeting of stockholders
in order for a stockholder to (a) nominate a Director, or (b) propose new
business other than pursuant to the notice of the meeting or by or on behalf of
the Directors. The Bylaws contain a similar notice requirement in connection
with nominations for Directors at a special meeting of stockholders called for
the purpose of electing one or more Directors. Accordingly, failure to comply
with the notice provisions will make stockholders unable to nominate Directors
or propose new business.
<PAGE>
AMENDMENTS TO THE ARTICLES OF INCORPORATION
Pursuant to the Company's Articles of Incorporation, the Directors can
amend the Articles of Incorporation by a two-thirds majority from time to time
if necessary in order to qualify initially or in order to continue to qualify as
a REIT. Except as set forth above, the Articles of Incorporation may be amended
only by the affirmative vote of a majority, and, in some cases a two-thirds
majority, of the shares of Common Stock outstanding and entitled to vote. The
stockholders may vote to amend the Articles of Incorporation, terminate or
dissolve the Company or remove one or more Directors without necessity for
concurrence by the Board of Directors.
MERGERS, COMBINATIONS, AND SALE OF ASSETS
A merger, combination, sale, or other disposition of all or
substantially all of the Company's assets other than in the ordinary course of
business must be approved by the Directors and a majority of the shares of
Common Stock outstanding and entitled to vote. In addition, any such transaction
involving an Affiliate of the Company or the Advisor also must be approved by a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction as fair and reasonable to the
Company and on terms and conditions not less favorable to the Company than those
available from unaffiliated third parties.
TERMINATION OF THE COMPANY AND REIT STATUS
The Articles of Incorporation provide for the voluntary termination and
dissolution of the Company by the affirmative vote of a majority of the shares
of Common Stock outstanding and entitled to vote at a meeting called for that
purpose. In addition, the Articles of Incorporation permit the stockholders to
terminate the status of the Company as a REIT under the Code only by the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding and entitled to vote.
Under the Articles of Incorporation, the Company automatically will
terminate and dissolve on December 31, 2007, unless Listing occurs, in which
event the Company automatically will become a perpetual life entity.
RESTRICTION OF OWNERSHIP
To qualify as a REIT under the Code (i) not more than 50% of the value
of the REIT's outstanding stock may be owned, directly or indirectly (applying
certain attribution rules), by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of a taxable year, (ii) the
REIT's stock must be beneficially owned (without reference to any attribution
rules) by 100 or more persons during at least 335 days of a taxable year of 12
months or during a proportionate part of a shorter taxable year; and (iii)
certain other requirements must be satisfied.
See "Federal Income Tax Considerations -- Taxation of the Company."
To ensure that the Company satisfies these requirements, the Articles
of Incorporation restrict the direct or indirect ownership (applying certain
attribution rules) of shares of Common Stock and Preferred Stock by any Person
(as defined in the Articles of Incorporation) to no more than 9.8% of the
outstanding shares of such Common Stock or 9.8% of any series of Preferred
Shares (the "Ownership Limit"). However, the Articles of Incorporation provide
that this Ownership Limit may be modified, either entirely or with respect to
one or more Persons, by a vote of a majority of the Directors, if such
modification does not jeopardize the Company's status as a REIT. As a condition
of such modification, the Board of Directors may require opinions of counsel
satisfactory to it and/or an undertaking from the applicant with respect to
preserving the status of the Company as a REIT.
It is the responsibility of each Person (as defined in the Articles of
Incorporation) owning (or deemed to own) more than 5% of the outstanding shares
of Common Stock or any series of outstanding Preferred Stock to give the Company
written notice of such ownership. In addition, to the extent deemed necessary by
the Directors, the Company can demand that each stockholder disclose to the
Company in writing all information regarding the Beneficial and Constructive
Ownership (as such terms are defined in the Articles of Incorporation) of the
Common Stock and Preferred Stock.
If the ownership, transfer or acquisition of shares of Common or
Preferred Stock, or change in capital structure of the Company or other event or
transaction would result in (i) any Person owning (applying certain attribution
rules) Common Stock or Preferred Stock in excess of the Ownership Limit, (ii)
fewer than 100 Persons owning the Common Stock and Preferred Stock, (iii) the
Company being "closely held" within the meaning of section 856(h) of the Code,
or (iv) the Company failing any of the gross income requirements of section
856(c) of the Code or otherwise failing to qualify as a REIT, then the
ownership, transfer, or acquisition, or change in capital structure or other
event or transaction that would have such effect will be void as to the
purported transferee or owner, and the purported transferee or owner will not
have or acquire any rights to the Common Stock and/or Preferred Stock, as the
case may be, to the extent required to avoid such a result. Common Stock or
Preferred Stock owned, transferred or proposed to be transferred in excess of
the Ownership Limit or which would otherwise jeopardize the Company's status as
a REIT will automatically be converted to Excess Shares. A holder of Excess
Shares is not entitled to Distributions, voting rights, and other benefits with
respect to such shares except for the right to payment of the purchase price for
the shares (or, in the case of a devise or gift or similar event which results
in the issuance of Excess Shares, the fair market value at the time of such
devise or gift or event) and the right to certain distributions upon
liquidation. Any Distribution paid to a proposed transferee or holder of Excess
Shares shall be repaid to the Company upon demand. Excess Shares shall be
subject to repurchase by the Company at its election. The purchase price of any
Excess Shares shall be equal to the lesser of (a) the price paid in such
purported transaction (or, in the case of a devise or gift or similar event
resulting in the issuance of Excess Shares, the fair market value at the time of
such devise or gift or event), or (b) the fair market value of such Shares on
the date on which the Company or its designee determines to exercise its
repurchase right. If the foregoing transfer restrictions are determined to be
void or invalid by virtue of any legal decision, statute, rule or regulation,
then the purported transferee of any Excess Shares may be deemed, at the option
of the Company, to have acted as an agent on behalf of the Company in acquiring
such Excess Shares and to hold such Excess Shares on behalf of the Company.
For purposes of the Articles of Incorporation, the term "Person" shall
mean an individual, corporation, partnership, estate, trust (including a trust
qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside to be used exclusively for the purposes described in
Section 642(c) of the Code, association, private foundation within the meaning
of Section 509(a) of the Code, joint stock company or other entity, or a group
as that term is used for purposes of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended; but does not include (i) CNL Hospitality Advisors, Inc.
(formerly CNL Real Estate Advisors, Inc.), during the period ending on December
31, 1997, or (ii) an underwriter which participated in a public offering of
Shares for a period of sixty (60) days following the purchase by such
underwriter of Shares therein, provided that the foregoing exclusions shall
apply only if the ownership of such Shares by CNL Hospitality Advisors, Inc.
(formerly CNL Real Estate Advisors, Inc.) or an underwriter would not cause the
Company to fail to qualify as a REIT by reason of being "closely held" within
the meaning of Section 856(a) of the code or otherwise cause the Company to fail
to qualify as a REIT.
RESPONSIBILITY OF DIRECTORS
Directors serve in a fiduciary capacity and shall have a fiduciary duty
to the stockholders of the Company, which duty shall include a duty to supervise
the relationship of the Company with the Advisor. See "Management -- Fiduciary
Responsibilities of the Board of Directors."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to Maryland corporate law and the Company's Articles of
Incorporation, the Company is required to indemnify and hold harmless a present
or former Director, officer, Advisor, or Affiliate and may indemnify and hold
harmless a present or former employee or agent of the Company (the "Indemnitee")
against any or all losses or liabilities reasonably incurred by the Indemnitee
in connection with or by reason of any act or omission performed or omitted to
be performed on behalf of the Company while a Director, officer, Advisor,
Affiliate, employee, or agent and in such capacity, provided, that the
Indemnitee has determined, in good faith, that the act or omission which caused
the loss or liability was in the best interests of the Company. The Company will
not indemnify or hold harmless the Indemnitee if: (i) the loss or liability was
the result of negligence or misconduct, or if the Indemnitee is an Independent
Director, the loss or liability was the result of gross negligence or willful
misconduct, (ii) the act or omission was material to the loss or liability and
was committed in bad faith or was the result of active or deliberate dishonesty,
(iii) the Indemnitee actually received an improper personal benefit in money,
property, or services, (iv) in the case of any criminal proceeding, the
Indemnitee had reasonable cause to believe that the act or omission was
unlawful, or (v) in a proceeding by or in the right of the Company, the
Indemnitee shall have been adjudged to be liable to the Company. In addition,
the Company will not provide indemnification for any loss or liability arising
from an alleged violation of federal or state securities laws unless one or more
of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular Indemnitee; (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular Indemnitee; or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular Indemnitee and finds that
indemnification of the settlement and the related costs should be made, and the
court considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published position
of any state securities regulatory authority in which securities of the Company
were offered or sold as to indemnification for violations of securities laws.
Pursuant to its Articles of Incorporation, the Company is required to pay or
reimburse reasonable expenses incurred by a present or former Director, officer,
Advisor or Affiliate and may pay or reimburse reasonable expenses incurred by
any other Indemnitee in advance of final disposition of a proceeding if the
following are satisfied: (i) the Indemnitee was made a party to the proceeding
by reasons of his or her service as a Director, officer, Advisor, Affiliate,
employee or agent of the Company, (ii) the Indemnitee provides the Company with
written affirmation of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification by the Company as authorized
by the Articles of Incorporation, (iii) the Indemnitee provides the Company with
a written agreement to repay the amount paid or reimbursed by the Company,
together with the applicable legal rate of interest thereon, if it is ultimately
determined that the Indemnitee did not comply with the requisite standard of
conduct, and (iv) the legal proceeding was initiated by a third party who is not
a stockholder or, if by a stockholder of the Company acting in his or her
capacity as such, a court of competent jurisdiction approves such advancement.
The Company's Articles of Incorporation further provide that any
indemnification, payment, or reimbursement of the expenses permitted by the
Articles of Incorporation will be furnished in accordance with the procedures in
Section 2-418 of the Maryland General Corporation Law.
Any indemnification may be paid only out of Net Assets of the Company,
and no portion may be recoverable from the stockholders.
There are certain defenses under Maryland law available to the
Directors, officers and the Advisor in the event of a stockholder action against
them. One such defense is the "business judgment rule." A Director, officer or
the Advisor can argue that he or she performed the action giving rise to the
stockholder's action in good faith and in a manner he or she reasonably believed
to be in the best interests of the Company, and with such care as an ordinarily
prudent person in a like position would have used under similar circumstances.
The Directors, officers and the Advisor are also entitled to rely on
information, opinions, reports or records prepared by experts (including
accountants, consultants, counsel, etc.) who were selected with reasonable care.
However, the Directors, officers and the Advisor may not invoke the business
judgment rule to further limit the rights of the stockholders to access records
as provided in the Articles of Incorporation.
The Company has entered into indemnification agreements with each of
the Company's officers and Directors. The indemnification agreements will
require, among other things, that the Company indemnify its officers and
Directors to the fullest extent permitted by law, and advance to the officers
and Directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. In accordance
with this agreement, the Company must indemnify and advance all expenses
reasonably incurred by officers and Directors seeking to enforce their rights
under the indemnification agreements. The Company also must cover officers and
Directors under the Company's directors' and officers' liability insurance.
Although these indemnification agreements offer substantially the same scope of
coverage afforded by the indemnification provisions in the Articles of
Incorporation and the Bylaws, it provides greater assurance to Directors and
officers that indemnification will be available because these contracts cannot
be modified unilaterally by the Board of Directors or by the stockholders.
REMOVAL OF DIRECTORS
Under the Articles of Incorporation, a Director may resign or be
removed with or without cause by the affirmative vote of a majority of the
capital stock of the Company outstanding and entitled to vote.
INSPECTION OF BOOKS AND RECORDS
The Advisor will keep, or cause to be kept, on behalf of the Company,
full and true books of account on an accrual basis of accounting, in accordance
with generally accepted accounting principles. All of such books of account,
together with all other records of the Company, including a copy of the Articles
of Incorporation and any amendments thereto, will at all times be maintained at
the principal office of the Company, and will be open to inspection,
examination, and, for a reasonable charge, duplication upon reasonable notice
and during normal business hours by a stockholder or his agent.
As a part of its books and records, the Company will maintain at its
principal office an alphabetical list of names of stockholders, along with their
addresses and telephone numbers and the number of Shares held by each
stockholder. Such list shall be updated at least quarterly and shall be
available for inspection at the Company's home office by a stockholder or his or
her designated agent upon such stockholder's request. Such list also shall be
mailed to any stockholder requesting the list within 10 days of a request. The
copy of the stockholder list shall be printed in alphabetical order, on white
paper, and in readily readable type size that is not smaller than 10-point type.
The Company may impose a reasonable charge for expenses incurred in reproducing
such list. The list may not be sold or used for commercial purposes.
If the Advisor or Directors neglect or refuse to exhibit, produce or
mail a copy of the stockholder list as requested, the Advisor and the Directors
shall be liable to any stockholder requesting the list for the costs, including
attorneys' fees, incurred by that stockholder for compelling the production of
the stockholder list. It shall be a defense that the actual purpose and reason
for the requests for inspection or for a copy of the stockholder list is to
secure such list of stockholders or other information for the purpose of selling
such list or copies thereof, or of using the same for a commercial purpose other
than in the interest of the applicant as a stockholder relative to the affairs
of the Company. The Company may require the stockholder requesting the
stockholder list to represent that the list is not requested for a commercial
purpose unrelated to the stockholder's interest in the Company. The remedies
provided by the Articles of Incorporation to stockholders requesting copies of
the stockholder list are in addition to, and do not in any way limit, other
remedies available to stockholders under federal law, or the law of any state.
RESTRICTIONS ON "ROLL-UP" TRANSACTIONS
In connection with a proposed Roll-Up Transaction, which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity that would be created or would survive after the
successful completion of the Roll-Up Transaction, an appraisal of all Properties
shall be obtained from an Independent Expert. In order to qualify as an
Independent Expert for this purpose(s), the person or entity shall have no
material current or prior business or personal relationship with the Advisor or
Directors and shall be engaged to a substantial extent in the business of
rendering opinions regarding the value of assets of the type held by the
Company. The Properties shall be appraised on a consistent basis, and the
appraisal shall be based on the evaluation of all relevant information and shall
indicate the value of the Properties as of a date immediately prior to the
announcement of the proposed Roll-Up Transaction. The appraisal shall assume an
orderly liquidation of Properties over a 12-month period. The terms of the
engagement of such Independent Expert shall clearly state that the engagement is
for the benefit of the Company and the stockholders. A summary of the
independent appraisal, indicating all material assumptions underlying the
appraisal, shall be included in a report to stockholders in connection with a
proposed Roll-Up Transaction. In connection with a proposed Roll-Up Transaction
which has not been approved by at least two-thirds of the stockholders, the
person sponsoring the Roll-Up Transaction shall offer to stockholders who vote
against the proposal the choice of:
(i) accepting the securities of the Roll-Up Entity offered in the
proposed Roll-Up Transaction; or
(ii) one of the following:
(A) remaining stockholders of the Company and preserving their
interests therein on the same terms and conditions as existed
previously; or
(B) receiving cash in an amount equal to the stockholder's pro
rata share of the appraised value of the net assets of the Company.
The Company is prohibited from participating in any proposed Roll-Up
Transaction:
(i) which would result in the stockholders having democracy rights in
the Roll-Up Entity that are less than those provided in the Company's Articles
of Incorporation, Sections 8.1, 8.2, 8.4, 8.5, 8.6 and 9.1 and described
elsewhere in this Prospectus, including rights with respect to the election and
removal of Directors, annual reports, annual and special meetings, amendment of
the Articles of Incorporation, and dissolution of the Company. See "Description
of Capital Stock" and "Stockholder Meetings," above;
<PAGE>
(ii) which includes provisions that would operate as a material
impediment to, or frustration of, the accumulation of shares by any purchaser of
the securities of the Roll-Up Entity (except to the minimum extent necessary to
preserve the tax status of the Roll-Up Entity), or which would limit the ability
of an investor to exercise the voting rights of its securities of the Roll-Up
Entity on the basis of the number of shares held by that investor;
(iii) in which investor's rights to access of records of the Roll-Up
Entity will be less than those provided in Sections 8.4 and 8.5 of the Company's
Articles of Incorporation and described in "Inspection of Books and Records,"
above; or
(iv) in which any of the costs of the Roll-Up Transaction would be
borne by the Company if the Roll-Up Transaction is not approved by the
stockholders.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
consequences of the ownership of Shares of the Company, prepared by Shaw Pittman
Potts & Trowbridge, as Counsel. This discussion is based upon the laws,
regulations, and reported judicial and administrative rulings and decisions in
effect as of the date of this Prospectus, all of which are subject to change,
retroactively or prospectively, and to possibly differing interpretations. This
discussion does not purport to deal with the federal income or other tax
consequences applicable to all investors in light of their particular investment
or other circumstances, or to all categories of investors, some of whom may be
subject to special rules (including, for example, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States). No ruling on the federal, state or local tax considerations relevant to
the operation of the Company, or to the purchase, ownership or disposition of
the Shares, has been requested from the Internal Revenue Service (the "IRS" or
the "Service") or other tax authority. Counsel has rendered certain opinions
discussed herein and believes that if the Service were to challenge the
conclusions of Counsel, such conclusions should prevail in court. However,
opinions of counsel are not binding on the Service or on the courts, and no
assurance can be given that the conclusions reached by Counsel would be
sustained in court. Prospective investors should consult their own tax advisors
in determining the federal, state, local, foreign and other tax consequences to
them of the purchase, ownership and disposition of the Shares of the Company,
the tax treatment of a REIT and the effect of potential changes in applicable
tax laws.
TAXATION OF THE COMPANY
General. The Company has elected to be taxed as a REIT for federal
income tax purposes, as defined in Sections 856 through 860 of the Code,
commencing with its taxable year ending December 31, 1997. The Company believes
that it is organized and will operate in such a manner as to qualify as a REIT,
and the Company intends to continue to operate in such a manner, but no
assurance can be given that it will operate in a manner so as to qualify or
remain qualified as a REIT. The provisions of the Code pertaining to REITs are
highly technical and complex. Accordingly, this summary is qualified in its
entirety by the applicable Code sections, rules and regulations issued
thereunder, and administrative and judicial interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its net income that is currently
distributed to holders of Shares. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from an investment in a corporation. However, the Company will be
subject to federal income tax in the following circumstances. First, the Company
will be taxed at regular corporate rates on any undistributed real estate
investment trust taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
alternative minimum tax on its items of tax preference. Third, if the Company
has net income from foreclosure property, it will be subject to tax on such
income at the highest corporate rate. Foreclosure property generally means real
property (and any personal property incident to such real property) which is
acquired as a result of a default either on a lease of such property or on
indebtedness which such property secured and with respect to which an
appropriate election is made. Fourth, if the Company has net income derived from
prohibited transactions, such income will be subject to a 100% tax. A prohibited
transaction generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of business. Fifth, if the Company should fail to satisfy the
75% gross income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% test. Sixth, if, during each calendar year, the Company fails to distribute
at least the sum of (i) 85% of its real estate investment trust ordinary income
for such year; (ii) 95% of its real estate investment trust capital gain net
income for such year; and (iii) any undistributed taxable income from prior
periods, the Company will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
Company acquires any asset from a C corporation (i.e. a corporation generally
subject to full corporate level tax) in a transaction in which the basis of the
asset in the Company's hands is determined by reference to the basis of the
asset (or any other property) in the hands of the corporation, and the Company
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by the Company, then, to
the extent of such property's "built-in gain'" (the excess of the fair market
value of such property at the time of acquisition by the Company over the
adjusted basis in such property at such time), such gain will be subject to tax
at the highest regular corporate rate applicable (as provided in regulations
promulgated by the United States Department of Treasury under the Code
("Treasury Regulations") that have not yet been promulgated). (The results
described above with respect to the recognition of "built-in gain" assume that
the Company will make an election pursuant to IRS Notice 88-19.)
If the Company fails to qualify as a REIT for any taxable year and
certain relief provisions do not apply, the Company will be subject to federal
income tax (including alternative minimum tax) as an ordinary corporation on its
taxable income at regular corporate rates without any deduction or adjustment
for distributions to holders of Shares. To the extent that the Company would, as
a consequence, be subject to tax liability for any such taxable year, the amount
of cash available for satisfaction of its liabilities and for distribution to
holders of Shares would be reduced. Distributions made to holders of Shares
generally would be taxable as ordinary income to the extent of current and
accumulated earnings and profits and, subject to certain limitations, would be
eligible for the corporate dividends received deduction, but there can be no
assurance that any such Distributions would be made. The Company would not be
eligible to elect REIT status for the four taxable years after the taxable year
during which it failed to qualify as a REIT, unless its failure to qualify was
due to reasonable cause and not willful neglect and certain other requirements
were satisfied.
Opinion of Counsel. Based upon representations made by officers of the
Company with respect to relevant factual matters, upon the existing Code
provisions, rules and regulations promulgated thereunder (including proposed
regulations) and reported administrative and judicial interpretations thereof,
upon Counsel's independent review of such documents as Counsel deemed relevant
in the circumstances and upon the assumption that the Company will operate in
the manner described in this Prospectus, Counsel has advised the Company that,
in its opinion, the Company qualified as a REIT under the Code for the taxable
year ending December 31, 1997, the Company is organized in conformity with the
requirements for qualification as a REIT, and the Company's proposed method of
operation will enable it to continue to meet the requirements for qualification
as a REIT. It must be emphasized, however, that the Company's ability to qualify
and remain qualified as a REIT is dependent upon actual operating results and
future actions by and events involving the Company and others, and no assurance
can be given that the actual results of the Company's operations and future
actions and events will enable the Company to satisfy in any given year the
requirements for qualification and taxation as a REIT.
Requirements for Qualification as a REIT. As discussed more fully
below, the Code defines a REIT as a corporation, trust or association (i) which
is managed by one or more trustees or directors; (ii) the beneficial ownership
of which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) which , but for Sections 856 through 860 of the Code,
would be taxable as a domestic corporation; (iv) which is neither a financial
institution nor an insurance company; (v) the beneficial ownership of which is
held (without reference to any rules of attribution) by 100 or more persons;
(vi) which is not closely held as defined in section 856(h) of the Code; and
(vii) which meets certain other tests regarding the nature of its assets and
income and the amount of its distributions.
In the case of a REIT which is a partner in a partnership, Treasury
regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
asset tests described below.
<PAGE>
Thus, the Company's proportionate share of the assets, liabilities and items of
income of any Joint Venture, as described in "Business -- Joint Venture
Arrangements," will be treated as assets, liabilities and items of income of the
Company for purposes of applying the asset and gross income tests described
herein.
Ownership Tests. The ownership requirements for qualification as a REIT
are that (i) during the last half of each taxable year not more than 50% in
value of the REIT's outstanding shares may be owned, directly or indirectly
(applying certain attribution rules), by five or fewer individuals (or certain
entities as defined in the Code) and (ii) there must be at least 100
stockholders (without reference to any attribution rules) on at least 335 days
of such 12-month taxable year (or a proportionate number of days of a short
taxable year). These two requirements do not apply to the first taxable year for
which an election is made to be treated as a REIT. In order to meet these
requirements for subsequent taxable years, or to otherwise obtain, maintain, or
reestablish REIT status, the Articles of Incorporation generally prohibit any
person or entity from actually, constructively or beneficially acquiring or
owning (applying certain attribution rules) more than 9.8% of the outstanding
Common Stock or 9.8% of any series of outstanding Preferred Stock. Among other
provisions, the Articles of Incorporation empower the Board of Directors to
redeem, at its option, a sufficient number of Shares to bring the ownership of
Shares of the Company in conformity with these requirements or to assure
continued conformity with such requirements.
Under the Articles of Incorporation, each holder of Shares is required,
upon demand, to disclose to the Board of Directors in writing such information
with respect to actual, constructive or beneficial ownership of Shares of the
Company as the Board of Directors deems necessary to comply with provisions of
the Code applicable to the Company or the provisions of the Articles of
Incorporation, or the requirements of any other appropriate taxing authority.
Certain Treasury regulations govern the method by which the Company is required
to demonstrate compliance with these stock ownership requirements and the
failure to satisfy such regulations could cause the Company to fail to qualify
as a REIT. The Company has represented that it expects to meet these stock
ownership requirements for each taxable year and it will be able to demonstrate
its compliance with these requirements.
Asset Tests. At the end of each quarter of a REIT's taxable year, at
least 75% of the value of its total assets must consist of "real estate assets,"
cash and cash items (including receivables) and certain government securities.
The balance of a REIT's assets generally may be invested without restriction,
except that holdings of securities not within the 75% class of assets generally
must not, with respect to any issuer, exceed 5% of the value of the REIT's
assets or 10% of the issuer's outstanding voting securities. The term "real
estate assets" includes real property, interests in real property, leaseholds of
land or improvements thereon, and mortgages on the foregoing and any property
attributable to the temporary investment of new capital (but only if such
property is stock or a debt instrument and only for the one-year period
beginning on the date the REIT receives such capital). When a mortgage is
secured by both real property and other property, it is considered to constitute
a mortgage on real property to the extent of the fair market value of the real
property when the REIT is committed to make the loan (or, in the case of a
construction loan, the reasonably estimated cost of construction). Initially,
the bulk of the Company's assets will be real property. However, the Company
will also hold the Secured Equipment Leases. Counsel is of the opinion, based on
certain assumptions, that the Secured Equipment Leases will be treated as loans
secured by personal property for federal income tax purposes. See "Federal
Income Tax Considerations -- Characterization of the Secured Equipment Leases."
Therefore, the Secured Equipment Leases will not qualify as "real estate
assets." However, the Company has represented that at the end of each quarter
the value of the Secured Equipment Leases, together with any personal property
owned by the Company, will in the aggregate represent less than 25% of the
Company's total assets and that the value of the Secured Equipment Leases
entered into with any particular tenant will represent less than 5% of the
Company's total assets. No independent appraisals will be acquired to support
this representation, and Counsel, in rendering its opinion as to the
qualification of the Company as a REIT, is relying on the conclusions of the
Company and its senior management as to the relative values of its assets. There
can be no assurance, however, that the IRS may not contend that either (i) the
value of the Secured Equipment Leases entered into with any particular tenant
represents more than 5% of the Company's total assets, or (ii) the value of the
Secured Equipment Leases, together with any personal property owned by the
Company, exceeds 25% of the Company's total assets.
As indicated in "Business -- Joint Venture Arrangements," the Company
may participate in Joint Ventures. If a Joint Venture were classified, for
federal income tax purposes, as an association taxable as a corporation rather
than as a partnership, the Company's ownership of a 10% or greater interest in
the Joint Venture would cause the Company to fail to meet the requirement that
it not own 10% or more of an issuer's voting securities. However, Counsel is of
the opinion, based on certain assumptions, that any Joint Ventures will
constitute partnerships for federal income tax purposes. See "Federal Income Tax
Considerations -- Investment in Joint Ventures."
Income Tests. A REIT also must meet two separate tests with respect to
its sources of gross income for each taxable year.
(a) The 75 Percent and 95 Percent Tests. In general, at least 75% of a
REIT's gross income for each taxable year must be from "rents from real
property," interest on obligations secured by mortgages on real property, gains
from the sale or other disposition of real property and certain other sources,
including "qualified temporary investment income." For these purposes,
"qualified temporary investment income" means any income (i) attributable to a
stock or debt instrument purchased with the proceeds received by the REIT in
exchange for stock (or certificates of beneficial interest) in such REIT (other
than amounts received pursuant to a distribution reinvestment plan) or in a
public offering of debt obligations with a maturity of at least five years and
(ii) received or accrued during the one-year period beginning on the date the
REIT receives such capital. In addition, a REIT must derive at least 95% of its
gross income for each taxable year from any combination of the items of income
which qualify under the 75% test, from dividends and interest, and from gains
from the sale, exchange or other disposition of certain stock and securities.
Initially, the bulk of the Company's income will be derived from rents
with respect to the Properties. Rents from Properties received by the Company
qualify as "rents from real property" in satisfying these two tests only if
several conditions are met. First, the rent must not be based in whole or in
part, directly or indirectly, on the income or profits of any person. However,
an amount received or accrued generally will not be excluded from the term
"rents from real property" solely by reason of being based on a fixed percentage
or percentages of receipts or sales. Second, the Code provides that rents
received from a tenant will not qualify as "rents from real property" if the
REIT, or a direct or indirect owner of 10% or more of the REIT owns, directly or
constructively, 10% or more of such tenant (a "Related Party Tenant"). Third, if
rent attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, for rents to qualify as "rents from real
property," a REIT generally must not operate or manage the property or furnish
or render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no revenue, except that a REIT
may directly perform services which are "usually or customarily rendered" in
connection with the rental of space for occupancy, other than services which are
considered to be rendered to the occupant of the property. However, a REIT is
currently permitted to earn up to one percent of its gross income from tenants,
determined on a property-by-property basis, by furnishing services that are
noncustomary or provided directly to the tenants, without causing the rental
income to fail to qualify as rents from real property.
The Company has represented with respect to its leasing of the
Properties that it will not (i) charge rent for any Property that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a percentage or percentages of receipts or sales, as described
above); (ii) charge rent that will be attributable to personal property in an
amount greater than 15% of the total rent received under the applicable lease;
(iii) directly perform services considered to be rendered to the occupant of a
Property or which are not usually or customarily furnished or rendered in
connection with the rental of real property; or (iv) enter into any lease with a
Related Party Tenant. Specifically, the Company expects that virtually all of
its income will be derived from leases of the type described in "Business --
Description of Property Leases," and it does not expect such leases to generate
income that would not qualify as rents from real property for purposes of the
75% and 95% income tests.
In addition, the Company will be paid interest on the Mortgage Loans.
All interest income qualifies under the 95% gross income test. If a Mortgage
Loan is secured by both real property and other property, all the interest on it
will nevertheless qualify under the 75% gross income test if the amount of the
loan did not exceed the fair market value of the real property at the time of
the loan commitment. The Company has represented that this will always be the
case. Therefore, in the opinion of Counsel, income generated through the
Company's investments in Mortgage Loans will be treated as qualifying income
under the 75% gross income test.
The Company will also receive payments under the terms of the Secured
Equipment Leases. Although the Secured Equipment Leases will be structured as
leases or loans, Counsel is of the opinion that, subject to certain assumptions,
they will be treated as loans secured by personal property for federal income
tax purposes. See "Federal Income Tax Considerations -- Characterization of the
Secured Equipment Leases." If the Secured Equipment Leases are treated as loans
secured by personal property for federal income tax purposes, then the portion
of the payments under the terms of the Secured Equipment Leases that represent
interest, rather than a return of capital for federal income tax purposes, will
not satisfy the 75% gross income test (although it will satisfy the 95% gross
income test). The Company believes, however, that the aggregate amount of such
non-qualifying income will not cause the Company to exceed the limits on
non-qualifying income under the 75% gross income test.
If, contrary to the opinion of Counsel, the Secured Equipment Leases
are treated as true leases, rather than as loans secured by personal property
for federal income tax purposes, the payments under the terms of the Secured
Equipment Leases would be treated as rents from personal property. Rents from
personal property will satisfy either the 75% or 95% gross income tests if they
are received in connection with a lease of real property and the rent
attributable to the personal property does not exceed 15% of the total rent
received from the tenant in connection with the lease. However, if rents
attributable to personal property exceed 15% of the total rent received from a
particular tenant, then the portion of the total rent attributable to personal
property will not satisfy either the 75% or 95% gross income tests.
If, notwithstanding the above, the Company fails to satisfy one or both
of the 75% or 95% tests for any taxable year, it may still qualify as a REIT if
(i) such failure is due to reasonable cause and not willful neglect; (ii) it
reports the nature and amount of each item of its income on a schedule attached
to its tax return for such year; and (iii) the reporting of any incorrect
information is not due to fraud with intent to evade tax. However, even if these
three requirements are met and the Company is not disqualified as a REIT, a
penalty tax would be imposed by reference to the amount by which the Company
failed the 75% or 95% test (whichever amount is greater).
(b) The Impact of Default Under the Secured Equipment Leases. In
applying the gross income tests to the Company, it is necessary to consider the
impact that a default under one or more of the Secured Equipment Leases would
have on the Company's ability to satisfy such tests. A default under one or more
of the Secured Equipment Leases would result in the Company directly holding the
Equipment securing such leases for federal income tax purposes. In the event of
a default, the Company may choose either to lease or sell such Equipment.
However, any income resulting from a rental or sale of Equipment not
incidental to the rental or sale of real property would not qualify under the
75% and 95% gross income tests. In addition, in certain circumstances, income
derived from a sale or other disposition of Equipment could be considered "net
income from prohibited transactions," subject to a 100% tax. The Company does
not, however, anticipate that its income from the rental or sale of Equipment
would be material in any taxable year.
Distribution Requirements. A REIT must distribute to its stockholders
for each taxable year ordinary income dividends in an amount equal to at least
(a) 95% of the sum of (i) its "real estate investment trust taxable income"
(before deduction of dividends paid and excluding any net capital gains) and
(ii) the excess of net income from foreclosure property over the tax on such
income, minus (b) certain excess non-cash income. Real estate investment trust
taxable income generally is the taxable income of a REIT computed as if it were
an ordinary corporation, with certain adjustments. Distributions must be made in
the taxable year to which they relate or, if declared before the timely filing
of the REIT's tax return for such year and paid not later than the first regular
dividend payment after such declaration, in the following taxable year.
The Company has represented that it intends to make Distributions to
stockholders that will be sufficient to meet the 95% distribution requirement.
Under some circumstances, however, it is possible that the Company may not have
sufficient funds from its operations to make cash Distributions to satisfy the
95% distribution requirement. For example, in the event of the default or
financial failure of one or more tenants or lessees, the Company might be
required to continue to accrue rent for some period of time under federal income
tax principles even though the Company would not currently be receiving the
corresponding amounts of cash. Similarly, under federal income tax principles,
the Company might not be entitled to deduct certain expenses at the time those
expenses are incurred. In either case, the Company's cash available for making
Distributions might not be sufficient to satisfy the 95% distribution
requirement. If the cash available to the Company is insufficient, the Company
might raise cash in order to make the Distributions by borrowing funds, issuing
new securities or selling assets. If the Company ultimately were unable to
satisfy the 95% distribution requirement, it would fail to qualify as a REIT
and, as a result, would be subject to federal income tax as an ordinary
corporation without any deduction or adjustment for dividends paid to holders of
the Shares. If the Company fails to satisfy the 95% distribution requirement, as
a result of an adjustment to its tax returns by the Service, under certain
circumstances, it may be able to rectify its failure by paying a "deficiency
dividend" (plus a penalty and interest) within 90 days after such adjustment.
This deficiency dividend will be included in the Company's deductions for
Distributions paid for the taxable year affected by such adjustment. However,
the deduction for a deficiency dividend will be denied, if any part of the
adjustment resulting in the deficiency is attributable to fraud with intent to
evade tax or to willful failure to timely file an income tax return.
<PAGE>
TAXATION OF STOCKHOLDERS
Taxable Domestic Stockholders. For any taxable year in which the
Company qualifies as a REIT for federal income tax purposes, Distributions made
by the Company to its stockholders that are United States persons (generally,
any person other than a nonresident alien individual, a foreign trust or estate
or a foreign partnership or corporation) generally will be taxed as ordinary
income. Amounts received by such United States persons that are properly
designated as capital gain dividends by the Company generally will be taxed as
long-term capital gain, without regard to the period for which such person has
held its Shares, to the extent that they do not exceed the Company's actual net
capital gain for the taxable year. Corporate stockholders may be required to
treat up to 20% of certain capital gains dividends as ordinary income. Such
ordinary income and capital gain are not eligible for the dividends received
deduction allowed to corporations. In addition, the Company may elect to retain
and pay income tax on its long-term capital gains. If the Company so elects,
each stockholder will take into income the stockholder's share of the retained
capital gain as long-term capital gain and will receive a credit or refund for
that stockholder's share of the tax paid by the Company. The stockholder will
increase the basis of such stockholder's share by an amount equal to the excess
of the retained capital gain included in the stockholder's income over the tax
deemed paid by such stockholder. Distributions to such United States persons in
excess of the Company's current or accumulated earnings and profits will be
considered first a tax-free return of capital for federal income tax purposes,
reducing the tax basis of each stockholder's Shares, and then, to the extent the
Distribution exceeds each stockholder's basis, a gain realized from the sale of
Shares. The Company will notify each stockholder as to the portions of each
Distribution which, in its judgment, constitute ordinary income, capital gain or
return of capital for federal income tax purposes. Any Distribution that is (i)
declared by the Company in October, November or December of any calendar year
and payable to stockholders of record on a specified date in such months and
(ii) actually paid by the Company in January of the following year, shall be
deemed to have been received by each stockholder on December 31 of such calendar
year and, as a result, will be includable in gross income of the stockholder for
the taxable year which includes such December 31. Stockholders who elect to
participate in the Reinvestment Plan will be treated as if they received a cash
Distribution from the Company and then applied such Distribution to purchase
Shares in the Reinvestment Plan. Stockholders may not deduct on their income tax
returns any net operating or net capital losses of the Company.
Upon the sale or other disposition of the Company's Shares, a
stockholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the sale or other disposition and the
adjusted basis of the Shares involved in the transaction. Such gain or loss will
be long-term capital gain or loss if, at the time of sale or other disposition,
the Shares involved have been held for more than one year. In addition, if a
stockholder receives a capital gain dividend with respect to Shares which he has
held for six months or less at the time of sale or other disposition, any loss
recognized by the stockholder will be treated as long-term capital loss to the
extent of the amount of the capital gain dividend that was treated as long-term
capital gain.
Generally, the redemption of Shares by the Company will result in
recognition of ordinary income by the stockholder unless the stockholder
completely terminates or substantially reduces his or her interest in the
Company. A redemption of Shares for cash will be treated as a distribution that
is taxable as a dividend to the extent of the Company's current or accumulated
earnings and profits at the time of the redemption under Section 302 of the Code
unless the redemption (a) results in a "complete termination" of the
stockholder's interest in the Company under Section 302(b)(3) of the Code, (b)
is "substantially disproportionate" with respect to the stockholder under
Section 302(b)(2) of the Code, or (c) is "not essentially equivalent to a
dividend" with respect to the stockholder under Section 302(b)(1) of the Code.
Under Code Section 302(b)(2) a redemption is considered "substantially
disproportionate" if the percentage of the voting stock of the corporation owned
by a stockholder immediately after the redemption is less than eighty percent of
the percentage of the voting stock of the corporation owned by such stockholder
immediately before the redemption. In determining whether the redemption is not
treated as a dividend, Shares considered to be owned by a stockholder by reason
of certain constructive ownership rules set forth in Section 318 of the Code, as
well as Shares actually owned, must generally be taken into account. A
distribution to a stockholder will be "not essentially equivalent to a dividend"
if its results in a "meaningful reduction" in the stockholder's interest in the
Company. The Service has published a ruling indicating that a redemption which
results in a reduction in the proportionate interest in a corporation (taking
into account the Section 318 constructive ownership rules) of a stockholder
whose relative stock interest is minimal (an interest of less than 1% should
satisfy this requirement) and who exercises no control over the corporation's
affairs should be treated as being "not essentially equivalent to a dividend."
<PAGE>
If the redemption is not treated as a dividend, the redemption of the
Shares for cash will result in taxable gain or loss equal to the difference
between the amount of cash received and the stockholder's tax basis in the
Shares redeemed. Such gain or loss would be capital gain or loss if the Shares
were held as a capital asset and would be long-term capital gain or loss if the
holding period for the Shares exceeds one year.
The Company will report to its U.S. stockholders and the Service the
amount of dividends paid or treated as paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A stockholder that does not
provide the Company with a correct taxpayer identification number may also be
subject to penalties imposed by the Service. Any amount paid to the Service as
backup withholding will be creditable against the stockholder's income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain dividends to any stockholders who fail to certify their non-foreign
status to the Company. See "Foreign Stockholders" below.
The state and local income tax treatment of the Company and its
stockholders may not conform to the federal income tax treatment described
above. As a result, stockholders should consult their own tax advisors for an
explanation of how other state and local tax laws would affect their investment
in Shares.
Tax-Exempt Stockholders. Dividends paid by the Company to a stockholder
that is a tax-exempt entity generally will not constitute "unrelated business
taxable income" ("UBTI") as defined in Section 512(a) of the Code, provided that
the tax-exempt entity has not financed the acquisition of its Shares with
"acquisition indebtedness" within the meaning of Section 514(c) of the Code and
the Shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity.
Notwithstanding the foregoing, qualified trusts that hold more than 10%
(by value) of the shares of certain REITs may be required to treat a certain
percentage of such REIT's distributions as UBTI. This requirement will apply
only if (i) treating qualified trusts holding REIT shares as individuals would
result in a determination that the REIT is "closely held" within the meaning of
Section 856(h)(1) of the Code and (ii) the REIT is "predominantly held" by
qualified trusts. A REIT is predominantly held if either (i) a single qualified
trust holds more than 25% by value of the REIT interests or (ii) one or more
qualified trusts, each owning more than 10% by value of the REIT interests, hold
in the aggregate more than 50% of the REIT interests. The percentage of any REIT
dividend treated as UBTI is equal to the ratio of (a) the UBTI earned by the
REIT (treating the REIT as if it were a qualified trust and therefore subject to
tax on UBTI) to (b) the total gross income (less certain associated expenses) of
the REIT. A de minimis exception applies where the ratio set forth in the
preceding sentence is less than 5% for any year. For these purposes, a qualified
trust is any trust described in Section 401(a) of the Code and exempt from tax
under Section 501(a) of the Code. The restrictions on ownership of Shares in the
Articles of Incorporation will prevent application of the provisions treating a
portion of REIT distributions as UBTI to tax-exempt entities purchasing Shares
in the Company, absent a waiver of the restrictions by the Board of Directors.
See "Summary of the Articles of Incorporation and Bylaws -- Restriction of
Ownership."
Assuming that there is no waiver of the restrictions on ownership of
Shares in the Articles of Incorporation and that a tax-exempt stockholder does
not finance the acquisition of its Shares with "acquisition indebtedness" within
the meaning of Section 514(c) of the Code or otherwise use its Shares in an
unrelated trade or business, in the opinion of Counsel the distributions of the
Company with respect to such tax-exempt stockholder will not constitute UBTI.
The tax discussion of distributions by qualified retirement plans,
IRAs, Keogh plans and other tax-exempt entities is beyond the scope of this
discussion, and such entities should consult their own tax advisors regarding
such questions.
Foreign Stockholders. The rules governing United States federal income
taxation of nonresident alien individuals, foreign corporations, foreign
participants and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex, and no attempt will be made herein to provide more
than a summary of such rules. The following discussion assumes that the income
from investment in the Shares will not be effectively connected with the
Non-U.S. Stockholders' conduct of a United States trade or business. Prospective
Non-U.S. Stockholders should
<PAGE>
consult with their own tax advisors to determine the impact of federal, state
and local laws with regard to an investment in Shares, including any reporting
requirements. Non-U.S. Stockholders will be admitted as stockholders with the
approval of the Advisor.
Distributions that are not attributable to gain from sales or exchanges
by the Company of United States real property interests and not designated by
the Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current and accumulated earnings
and profits of the Company. Such dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend, unless an
applicable tax treaty reduces or eliminates that tax. A number of U.S. tax
treaties that reduce the rate of withholding tax on corporate dividends do not
reduce, or reduce to a lesser extent, the rate of withholding applied to
distributions from a REIT. The Company expects to withhold U.S. income tax at
the rate of 30% on the gross amount of any such distributions paid to a Non-U.S.
Stockholder unless (i) a lower treaty rate applies (and, with regard to payments
on or after January 1, 1999, the Non-U.S. Stockholder files IRS Form W-8 with
the Company and, if the Shares are not traded on an established securities
market, acquires a taxpayer identification number from the IRS) or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 (or, with respect to payments on or
after January 1, 1999, files IRS Form W-8 with the Company) with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of the Company's current and accumulated earnings and profits will not be
taxable to a stockholder to the extent that such distributions paid do not
exceed the adjusted basis of the stockholder's Shares, but rather will reduce
the adjusted basis of such Shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Stockholders' Shares, such distributions will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on any
gain from the sale or disposition of the Shares, as described below. If it
cannot be determined at the time a distribution is paid whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions will be subject to withholding at the rate of 30%. However, a
Non-U.S. Stockholder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of the
Company's current and accumulated earnings and profits. Beginning with payments
made on or after January 1, 1999, the Company will be permitted, but not
required, to make reasonable estimates of the extent to which distributions
exceed current or accumulated earnings and profits. Such distributions will
generally be subject to a 10% withholding tax, which may be refunded to the
extent they exceed the stockholder's actual U.S. tax liability, provided the
required information is furnished to the IRS.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of United
States real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales
of United States real property interests are taxed to a Non-U.S. Stockholder as
if such gain were effectively connected with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. Stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate stockholder not entitled to treaty exemption or
rate reduction. The Company is required by applicable Treasury Regulations to
withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend. This amount is creditable against the Non-U.S.
Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. It is currently anticipated that the Company
will be a "domestically controlled REIT," and in such case the sale of Shares
would not be subject to taxation under FIRPTA. However, gain not subject to
FIRPTA nonetheless will be taxable to a Non-U.S. Stockholder if (i) investment
in the Shares is treated as "effectively connected" with the Non-U.S.
Stockholders' U.S. trade or business or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain other conditions are met.
Effectively connected gain realized by a foreign corporate shareholder may be
subject to an additional 30% branch profits tax, subject to possible exemption
or rate reduction under an applicable tax treaty. If the gain on the sale of
Shares were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as U.S. Stockholders with respect to such
gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals), and the purchaser of
the Shares would be required to withhold and remit to the Service 10% of the
purchase price.
<PAGE>
STATE AND LOCAL TAXES
The Company and its shareholders may be subject to state and local
taxes in various states and localities in which it or they transact business,
own property, or reside. The tax treatment of the Company and the stockholders
in such jurisdictions may differ from the federal income tax treatment described
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws upon an investment in
the Common Stock of the Company.
CHARACTERIZATION OF PROPERTY LEASES
The Company will purchase both new and existing Properties and lease
them to franchisees or corporate franchisors pursuant to leases of the type
described in "Business -- Description of Property Leases." The ability of the
Company to claim certain tax benefits associated with ownership of the
Properties, such as depreciation, depends on a determination that the lease
transactions engaged in by the Company are true leases, under which the Company
is the owner of the leased Property for federal income tax purposes, rather than
a conditional sale of the Property or a financing transaction. A determination
by the Service that the Company is not the owner of the Properties for federal
income tax purposes may have adverse consequences to the Company, such as the
denying of the Company's depreciation deductions. Moreover, a denial of the
Company's depreciation deductions could result in a determination that the
Company's Distributions to stockholders were insufficient to satisfy the 95%
distribution requirement for qualification as a REIT. However, as discussed
above, if the Company has sufficient cash, it may be able to remedy any past
failure to satisfy the distribution requirements by paying a "deficiency
dividend" (plus a penalty and interest). See "Taxation of the Company --
Distribution Requirements," above. Furthermore, in the event that the Company
was determined not to be the owner of a particular Property, in the opinion of
Counsel the income that the Company would receive pursuant to the
recharacterized lease would constitute interest qualifying under the 95% and 75%
gross income tests by reason of being interest on an obligation secured by a
mortgage on an interest in real property, because the legal ownership structure
of such Property will have the effect of making the building serve as collateral
for the debt obligation.
The characterization of transactions as leases, conditional sales, or
financings has been addressed in numerous cases. The courts have not identified
any one factor as being determinative of whether the lessor or the lessee of
property is to be treated as the owner. Judicial decisions and pronouncements of
the Service with respect to the characterization of transactions as either
leases, conditional sales, or financing transactions have made it clear that the
characterization of leases for tax purposes is a question which must be decided
on the basis of a weighing of many factors, and courts have reached different
conclusions even where characteristics of two lease transactions were
substantially similar.
While certain characteristics of the leases anticipated to be entered
into by the Company suggest the Company might not be the owner of the
Properties, such as the fact that such leases are "triple-net" leases, a
substantial number of other characteristics indicate the bona fide nature of
such leases and that the Company will be the owner of the Properties. For
example, under the types of leases described in "Business -- Description of
Property Leases," the Company will bear the risk of substantial loss in the
value of the Properties, since the Company will acquire its interests in the
Properties with an equity investment, rather than with nonrecourse indebtedness.
Further, the Company, rather than the tenant, will benefit from any appreciation
in the Properties, since the Company will have the right at any time to sell or
transfer its Properties, subject to the tenant's right to purchase the property
at a price not less than the Property's fair market value (determined by
appraisal or otherwise).
Other factors that are consistent with the ownership of the Properties
by the Company are (i) the tenants are liable for repairs and to return the
Properties in reasonably good condition; (ii) insurance proceeds generally are
to be used to restore the Properties and, to the extent not so used, belong to
the Company; (iii) the tenants agree to subordinate their interests in the
Properties to the lien of any first mortgage upon delivery of a nondisturbance
agreement and agree to attorn to the purchaser upon any foreclosure sale; and
(iv) based on the Company's representation that the Properties can reasonably be
expected to have at the end of their lease terms (generally a maximum of 30 to
40 years) a fair market value of at least 20% of the Company's cost and a
remaining useful life of at least 20% of their useful lives at the beginning of
the leases, the Company has not relinquished the Properties to the tenants for
their entire useful lives, but has retained a significant residual interest in
them. Moreover, the Company will not be primarily dependent upon tax benefits in
order to realize a reasonable return on its investments.
<PAGE>
Concerning the Properties for which the Company owns the buildings and
the underlying land, on the basis of the foregoing, assuming (i) the Company
leases the Properties on substantially the same terms and conditions described
in "Business -- Description of Property Leases," and (ii) as is represented by
the Company, the residual value of the Properties remaining after the end of
their lease terms (including all renewal periods) may reasonably be expected to
be at least 20% of the Company's cost of such Properties, and the remaining
useful lives of the Properties after the end of their lease terms (including all
renewal periods) may reasonably be expected to be at least 20% of the
Properties' useful lives at the beginning of their lease terms, it is the
opinion of Counsel that the Company will be treated as the owner of the
Properties for federal income tax purposes and will be entitled to claim
depreciation and other tax benefits associated with such ownership. In the case
of Properties for which the Company does not own the underlying land, Counsel
cannot opine that such transactions will be characterized as leases.
CHARACTERIZATION OF SECURED EQUIPMENT LEASES
The Company will purchase Equipment and lease it to franchisees or
corporate franchisors pursuant to leases of the type described in "Business --
General." The ability of the Company to qualify as a REIT depends on a
determination that the Secured Equipment Leases are financing arrangements,
under which the lessees acquire ownership of the Equipment for federal income
tax purposes. If the Secured Equipment Leases are instead treated as true
leases, the Company may be unable to satisfy the income tests for REIT
qualification. See "Federal Income Tax Considerations -- Taxation of the Company
- -- Income Tests."
While certain characteristics of the Secured Equipment Leases to be
entered into by the Company suggest that the Company retains ownership of the
Equipment, such as the fact that certain of the Secured Equipment Leases are
structured as leases, with the Company retaining title to the Equipment, a
substantial number of other characteristics indicate that the Secured Equipment
Leases are financing arrangements and that the lessees are the owners of the
Equipment for federal income tax purposes. For example, under the types of
Secured Equipment Leases described in "Business -- General," the lease term will
equal or exceed the useful life of the Equipment, and the lessee will have the
option to purchase the Equipment at the end of the lease term for a nominal sum.
Moreover, under the terms of the Secured Equipment Leases, the Company and the
lessees will each agree to treat the Secured Equipment Leases as loans secured
by personal property, rather than leases, for tax purposes.
On the basis of the foregoing, assuming (i) the Secured Equipment
Leases are made on substantially the same terms and conditions described in
"Business -- General," and (ii) as represented by the Company, each of the
Secured Equipment Leases will have a term that equals or exceeds the useful life
of the Equipment subject to the lease, it is the opinion of Counsel that the
Company will not be treated as the owner of the Equipment that is subject to the
Secured Equipment Leases for federal income tax purposes and that the Company
will be able to treat the Secured Equipment Leases as loans secured by personal
property. Counsel's opinion that the Company will be organized in conformity
with the requirements for qualification as a REIT is based, in part, on the
assumption that each of the Secured Equipment Leases will conform to the
conditions outlined in clauses (i) and (ii) of the preceding sentence.
INVESTMENT IN JOINT VENTURES
As indicated in "Business -- Joint Venture Arrangements," the Company
may participate in Joint Ventures which own and lease Properties. Assuming that
the Joint Ventures have the characteristics described in "Business -- Joint
Venture Arrangements," and are operated in the same manner that the Company
operates with respect to Properties that it owns directly, it is the opinion of
Counsel that (i) the Joint Ventures will be treated as partnerships, as defined
in Sections 7701(a)(2) and 761(a) of the Code and not as associations taxable as
corporations, and that the Company will be subject to tax as a partner pursuant
to Sections 701-761 of the Code and (ii) all material allocations to the Company
of income, gain, loss and deduction as provided in the Joint Venture agreements
and as discussed in the Prospectus will be respected under Section 704(b) of the
Code. The Company has represented that it will not become a participant in any
Joint Venture unless the Company has first obtained advice of Counsel that the
Joint Venture will constitute a partnership for federal income tax purposes and
that the allocations to the Company contained in the Joint Venture agreement
will be respected.
If, contrary to the opinion of Counsel, a Joint Venture were to be
treated as an association taxable as a corporation, the Company would be treated
as a stockholder for tax purposes and would not be treated as owning a pro rata
share of the Joint Venture's assets. In addition, the items of income and
deduction of the Joint Venture would not pass through to the Company. Instead,
the Joint Venture would be required to pay income tax at regular corporate tax
rates on its net income, and distributions to partners would constitute
dividends that would not be deductible in computing the Joint Venture's taxable
income. Moreover, a determination that a Joint Venture is taxable as a
corporation could cause the Company to fail to satisfy the asset tests for
qualification as a REIT. See "Taxation of the Company -- Asset Tests" and
"Taxation of the Company -- Income Tests," above.
REPORTS TO STOCKHOLDERS
The Company will furnish each stockholder with its audited annual
report within 120 days following the close of each fiscal year. These annual
reports will contain the following: (i) financial statements, including a
balance sheet, statement of operations, statement of stockholders' equity, and
statement of cash flows, prepared in accordance with generally accepted
accounting principles which are audited and reported on by independent certified
public accountants; (ii) the ratio of the costs of raising capital during the
period to the capital raised; (iii) the aggregate amount of advisory fees and
the aggregate amount of other fees paid to the Advisor and any Affiliate of the
Advisor by the Company and including fees or charges paid to the Advisor and any
Affiliate of the Advisor by third parties doing business with the Company; (iv)
the Operating Expenses of the Company, stated as a percentage of the Average
Invested Assets (the average of the aggregate book value of the assets of the
Company, for a specified period, invested, directly or indirectly, in equity
interests in and loans secured by real estate, before reserves for depreciation
or bad debts or other similar non-cash reserves, computed by taking the average
of such values at the end of each month during such period) and as a percentage
of its Net Income; (v) a report from the Independent Directors that the policies
being followed by the Company are in the best interest of its stockholders and
the basis for such determination; (vi) separately stated, full disclosure of all
material terms, factors and circumstances surrounding any and all transactions
involving the Company, Directors, Advisor and any Affiliate thereof occurring in
the year for which the annual report is made, and the Independent Directors
shall be specifically charged with a duty to examine and comment in the report
on the fairness of such transactions; and (vii) Distributions to the
stockholders for the period, identifying the source of such Distributions and if
such information is not available at the time of the distribution, a written
explanation of the relevant circumstances will accompany the Distributions (with
the statement as to the source of Distributions to be sent to stockholders not
later than 60 days after the end of the fiscal year in which the distribution
was made).
Within 75 days following the close of each Company fiscal year, each
stockholder that is a Qualified Plan will be furnished with an annual statement
of Share valuation to enable it to file annual reports required by ERISA as they
relate to its investment in the Company. The statement will report an estimated
value of each Share, prior to the termination of the offering, of $10 per Share
and, after the termination of the offering, based on (i) appraisal updates
performed by the Company based on a review of the existing appraisal and lease
of each Property, focusing on a re-examination of the capitalization rate
applied to the rental stream to be derived from that Property; and (ii) a review
of the outstanding Mortgage Loans and Secured Equipment Leases focusing on a
determination of present value by a re-examination of the capitalization rate
applied to the stream of payments due under the terms of each Mortgage Loan and
Secured Equipment Leases. The Company may elect to deliver such reports to all
stockholders. Stockholders will not be forwarded copies of appraisals or
updates. In providing such reports to stockholders, neither the Company nor its
Affiliates thereby make any warranty, guarantee, or representation that (i) the
stockholders or the Company, upon liquidation, will actually realize the
estimated value per Share, or (ii) the stockholders will realize the estimated
net asset value if they attempt to sell their Shares.
If the Company is required by the Securities Exchange Act of 1934, as
amended, to file quarterly reports with the Securities and Exchange Commission
on Form 10-Q, stockholders will be furnished with a summary of the information
contained in each such report within 60 days after the end of each fiscal
quarter. Such summary information generally will include a balance sheet, a
quarterly statement of income, and a statement of cash flows, and any other
pertinent information regarding the Company and its activities during the
quarter. Stockholders also may receive a copy of any Form 10-Q upon request to
the Company. If the Company is not subject to this filing requirement,
stockholders will be furnished with a semi-annual report within 60 days after
each six-month period containing information similar to that contained in the
quarterly report but applicable to such six-month period.
Stockholders and their duly authorized representatives are entitled to
inspect and copy, at their expense, the books and records of the Company at all
times during regular business hours, upon reasonable prior notice to the
Company, at the location where such reports are kept by the Company.
Stockholders, upon request and at their expense, may obtain full information
regarding the financial condition of the Company, a copy of the Company's
federal, state, and local income tax returns for each fiscal year of the
Company, and, subject to certain confidentiality requirements, a list containing
the name, address, and Shares held by each stockholder.
The fiscal year of the Company will be the calendar year.
The Company's federal tax return (and any applicable state income tax
returns) will be prepared by the accountants regularly retained by the Company.
Appropriate tax information will be submitted to the stockholders within 30 days
following the end of each fiscal year of the Company. A specific reconciliation
between GAAP and income tax information will not be provided to the
stockholders; however, such reconciling information will be available in the
office of the Company for inspection and review by any interested stockholder.
THE OFFERING
As of February 26, 1999, the Company had received aggregate
subscription proceeds of $73,605,508 (7,360,551 Shares), including 3,730 Shares
($37,299) issued pursuant to the Reinvestment Plan, from 2,937 stockholders. Net
proceeds to the Company after deduction of Selling Commissions, marketing
support and due diligence expense reimbursement fees and Offering Expenses
totalled approximately $65,901,000. As of February 26, 1999, the Company had
invested , either directly or indirectly, approximately $51,230,000 of such
proceeds in six hotel Properties, had paid $5,000,000 as a deposit on three
additional hotel Properties and had incurred approximately $4,836,000 in
Acquisition Fees and certain Acquisition Expenses, leaving approximately
$4,835,000 in Net Offering Proceeds available for investment in additional
Properties and Mortgage Loans.
GENERAL
A maximum of 15,000,000 Shares ($150,000,000) are being offered at a
purchase price of $10.00 per share. In addition, the Company has registered an
additional 1,500,000 Shares ($15,000,000) available only to stockholders who
receive a copy of this Prospectus and who elect to participate in the
Reinvestment Plan. Any participation in such plan by a person who becomes a
stockholder otherwise than by participating in this offering will require
solicitation under a separate prospectus. See "Summary of Reinvestment Plan."
The Board of Directors may determine to engage in future offerings of Common
Stock of up to the number of unissued authorized shares of Common Stock
available following termination of this offering.
A minimum investment of 250 Shares ($2,500) is required, except for
Nebraska, New York, and North Carolina investors who must make a minimum
investment of 500 Shares ($5,000). IRAs, Keogh plans, and pension plans must
make a minimum investment of at least 100 Shares ($1,000), except for Iowa
tax-exempt investors who must make a minimum investment of 250 Shares ($2,500).
For Minnesota investors only, IRAs and qualified plans must make a minimum
investment of 200 Shares ($2,000). Any investor who makes the required minimum
investment may purchase additional Shares in increments of one Share. Maine
investors, however, may not purchase additional Shares in amounts less than the
applicable minimum investment except at the time of the initial subscription or
with respect to Shares purchased pursuant to the Reinvestment Plan. See "The
Offering -- General," "The Offering -- Subscription Procedures," and "Summary of
Reinvestment Plan."
PLAN OF DISTRIBUTION
The Shares are being offered to the public on a "best efforts" basis
(which means that no one is guaranteeing that any minimum amount will be sold)
through the Soliciting Dealers, who will be members of the National Association
of Securities Dealers, Inc. (the "NASD") or other persons or entities exempt
from broker-dealer registration, and the Managing Dealer. The Soliciting Dealers
will use their best efforts during the offering period to find eligible persons
who desire to subscribe for the purchase of Shares from the Company. Both James
M. Seneff, Jr. and Robert A. Bourne are Affiliates and licensed principals of
the Managing Dealer, and the Advisor is an Affiliate of the Managing Dealer.
Prior to a subscriber's admission to the Company as a stockholder,
funds paid by such subscriber will be deposited in an interest-bearing escrow
account with SouthTrust Asset Management Company of Florida, N.A. The Company,
within 30 days after the date a subscriber is admitted to the Company, will pay
to such subscriber the interest (generally calculated on a daily basis) actually
earned on the funds of such subscribers whose funds have been held in escrow by
such bank for at least 20 days. Stockholders otherwise are not entitled to
interest earned on Company funds or to receive interest on their Invested
Capital. See "Escrow Arrangements" below.
Subject to the provisions for reduced Selling Commissions described
below, the Company will pay the Managing Dealer an aggregate of 7.5% of the
Gross Proceeds as Selling Commissions. The Managing Dealer shall reallow fees of
up to 7% to the Soliciting Dealers with respect to Shares sold by them. In
addition, the Company will pay the Managing Dealer, as an expense allowance, a
marketing support and due diligence expense reimbursement fee equal to 0.5% of
Gross Proceeds. The Managing Dealer, in its sole discretion, may reallow to any
Soliciting Dealer all or any portion of this fee based on such factors as the
number of Shares sold by such Soliciting Dealer, the assistance, if any, of such
Soliciting Dealer in marketing the offering, and bona fide due diligence
expenses incurred. Stockholders who elect to participate in the Reinvestment
Plan will be charged Selling Commissions and the marketing support and due
diligence fee on Shares purchased for their accounts on the same basis as
investors who purchase Shares in the offering. See "Summary of Reinvestment
Plan."
A registered principal or representative of the Managing Dealer or a
Soliciting Dealer, employees, officers, and Directors of the Company, or
employees, officers and directors of the Advisor, any of their Affiliates and
any Plan established exclusively for the benefit of such persons or entities may
purchase Shares net of 7% commissions, at a per Share purchase price of $9.30.
Clients of an investment adviser registered under the Investment Advisers Act of
1940, as amended, who have been advised by such adviser on an ongoing basis
regarding investments other than in the Company, and who are not being charged
by such adviser or its Affiliates, through the payment of commissions or
otherwise, for the advice rendered by such adviser in connection with the
purchase of the Shares, may purchase the Shares net of 7% commissions. In
addition, Soliciting Dealers that have a contractual arrangement with their
clients for the payment of fees which is consistent with accepting Selling
Commissions, in their sole discretion, may elect not to accept any Selling
Commissions offered by the Company for Shares that they sell. In that event,
such Shares shall be sold to the investor net of all Selling Commissions, at a
per Share purchase price of $9.30. In connection with the purchases of certain
minimum numbers of Shares, the amount of Selling Commissions otherwise payable
to the Managing Dealer or a Soliciting Dealer shall be reduced in accordance
with the following schedule:
<TABLE>
<CAPTION>
Dollar Amount
of Shares Purchase Price Reallowed Commissions on Sales Per Share
Purchased Per Share Percent Dollar Amount
--------- --------- ------- -------------
<S> <C>
$10 -- $249,990 $10.00 7.0% $0.70
$250,000 -- $499,990 9.90 6.0% 0.60
$500,000 -- $999,990 9.70 4.0% 0.40
$1,000,000 -- $1,499,990 9.60 3.0% 0.30
$1,500,000 or more 9.50 2.0% 0.20
</TABLE>
For example, if an investor purchases 100,000 Shares, the investor
could pay as little as $960,000 rather than $1,000,000 for the Shares, in which
event the Selling Commissions on the sale of such Shares would be $35,000 ($0.35
per Share). The net proceeds to the Company will not be affected by such
discounts.
Subscriptions may be combined for the purpose of determining the volume
discounts in the case of subscriptions made by any "purchaser," provided all
such Shares are purchased through the same Soliciting Dealer or through the
Managing Dealer. The volume discount will be prorated among the separate
subscribers considered to be a single "purchaser." Shares purchased pursuant to
the Reinvestment Plan on behalf of a Participant in the Reinvestment Plan will
not be combined with other subscriptions for Shares by the investor in
determining the volume discount to which such investor may be entitled. See
"Summary of Reinvestment Plan." Further subscriptions for Shares will not be
combined for purposes of the volume discount in the case of subscriptions by any
"purchaser" who subscribes for additional Shares subsequent to the purchaser's
initial purchase of Shares.
Any request to combine more than one subscription must be made in
writing in a form satisfactory to the Company and must set forth the basis for
such request. Any such request will be subject to verification by the Managing
Dealer that all of such subscriptions were made by a single "purchaser." If a
"purchaser" does not reduce the per Share purchase price, the excess purchase
price over the discounted purchase price will be returned to the actual separate
subscribers for Shares.
For purposes of such volume discounts, "purchaser" includes (i) an
individual, his or her spouse, and their children under the age of 21, who
purchase the Shares for his or her or their own accounts, and all pension or
trust funds established by each such individual; (ii) a corporation,
partnership, association, joint-stock company, trust fund, or any organized
group of persons, whether incorporated or not (provided that the entities
described in this clause (ii) must have been in existence for at least six
months before purchasing the Shares and must have formed such group for a
purpose other than to purchase the Shares at a discount); (iii) an employee's
trust, pension, profit-sharing, or other employee benefit plan qualified under
Section 401 of the Code; and (iv) all pension, trust, or other funds maintained
by a given bank. In addition, the Company, in its sole discretion, may aggregate
and combine separate subscriptions for Shares received during the offering
period from (i) the Managing Dealer or the same Soliciting Dealer, (ii)
investors whose accounts are managed by a single investment adviser registered
under the Investment Advisers Act of 1940, (iii) investors over whose accounts a
designated bank, insurance company, trust company, or other entity exercises
discretionary investment responsibility, or (iv) a single corporation,
partnership, trust association, or other organized group of persons, whether
incorporated or not, and whether such subscriptions are by or for the benefit of
such corporation, partnership, trust association, or group. Except as provided
in this paragraph, subscriptions will not be cumulated, combined, or aggregated.
Any reduction in commissions will reduce the effective purchase price
per Share to the investor involved but will not alter the net proceeds payable
to the Company as a result of such sale. All investors will be deemed to have
contributed the same amount per Share to the Company whether or not the investor
receives a discount. Accordingly, for purposes of Distributions, investors who
pay reduced commissions will receive higher returns on their investments in the
Company as compared to investors who do not pay reduced commissions.
In connection with the sale of Shares, certain registered principals or
representatives of the Managing Dealer may perform wholesaling functions for
which they will receive compensation payable by the Managing Dealer in an
aggregate amount not in excess of one percent of Gross Proceeds. The first 0.5%
of Gross Proceeds of any such fee will be paid from the 7.5% of Gross Proceeds
payable to the Managing Dealer as Selling Commissions. In addition, the Advisor
and its Affiliates, including the Managing Dealer and its registered principals
or representatives, may incur due diligence fees and other expenses, including
expenses related to sales seminars and wholesaling activities, a portion of
which may be paid by the Company.
The Company or its Affiliates also may provide incentive items for
registered representatives of the Managing Dealer and the Soliciting Dealers,
which in no event shall exceed an aggregate of $100 per annum per participating
salesperson. In the event other incentives are provided to registered
representatives of the Managing Dealer or the Soliciting Dealers, they will be
paid only in cash, and such payments will be made only to the Managing Dealer or
the Soliciting Dealers rather than to their registered representatives. Any such
sales incentive program must first have been submitted for review by the NASD,
and must comply with Rule 2710(c)(6)(B)(xii). Costs incurred in connection with
such sales incentive programs, if any, will be considered underwriting
compensation. See "Estimated Use of Proceeds."
The Company will also reimburse the Managing Dealer and the Soliciting
Dealers for bona fide due diligence expenses and certain expenses as incurred in
connection with the offering.
The total amount of underwriting compensation, including commissions
and reimbursement of expenses, paid in connection with the offering will not
exceed 10.5% of Gross Proceeds.
The Managing Dealer and the Soliciting Dealers severally will indemnify
the Company and its officers and Directors, the Advisor and its officers and
directors and their Affiliates, against certain liabilities, including
liabilities under the Securities Act of 1933.
SUBSCRIPTION PROCEDURES
Procedures Applicable to All Subscriptions. In order to purchase
Shares, the subscriber must complete and execute the Subscription Agreement. Any
subscription for Shares must be accompanied by cash or check payable to
"SouthTrust Asset Management Company of Florida, N.A., Escrow Agent" (or to the
Company after subscription funds are released from escrow), in the amount of
$10.00 per Share. See "Escrow Arrangements" below. Certain Soliciting Dealers
who have "net capital," as defined in the applicable federal securities
regulations, of $250,000 or more may instruct their customers to make their
checks for Shares for which they have subscribed payable directly to the
Soliciting Dealer. In such case, the Soliciting Dealer will issue a check made
payable to the order of the Escrow Agent for the aggregate amount of the
subscription proceeds.
Each subscription will be accepted or rejected by the Company within 30
days after its receipt, and no sale of Shares shall be completed until at least
five business days after the date on which the subscriber receives a copy of
this Prospectus. If a subscription is rejected, the funds will be returned to
the subscriber within ten business days after the date of such rejection,
without interest and without deduction. A form of the Subscription Agreement is
set forth as Exhibit D to this Prospectus. The subscription price of each Share
is payable in full upon execution of the Subscription Agreement. A subscriber
whose subscription is accepted shall be sent a confirmation of his or her
purchase.
The Advisor and each Soliciting Dealer who sells Shares on behalf of
the Company have the responsibility to make every reasonable effort to determine
that the purchase of Shares is appropriate for an investor and that the
requisite suitability standards are met. See "Suitability Standards and How to
Subscribe -- Suitability Standards." In making this determination, the
Soliciting Dealers will rely on relevant information provided by the investor,
including information as to the investor's age, investment objectives,
investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. Each investor should be aware
that determining suitability is the responsibility of the Soliciting Dealer.
The Advisor and each Soliciting Dealer shall maintain records of the
information used to determine that an investment in the Shares is suitable and
appropriate for an investor. The Advisor and each Soliciting Dealer shall
maintain these records for at least six years.
Subscribers will be admitted as stockholders not later than the last
day of the calendar month following acceptance of their subscriptions.
Procedures Applicable to Non-Telephonic Orders. Each Soliciting Dealer
receiving a subscriber's check made payable solely to the bank escrow agent
(where, pursuant to such Soliciting Dealer's internal supervisory procedures,
internal supervisory review must be conducted at the same location at which
subscription documents and checks are received from subscribers), will deliver
such checks to the Managing Dealer no later than the close of business of the
first business day after receipt of the subscription documents by the Soliciting
Dealer except that, in any case in which the Soliciting Dealer maintains a
branch office, and, pursuant to a Soliciting Dealer's internal supervisory
procedures, final internal supervisory review is conducted at a different
location, the branch office shall transmit the subscription documents and check
to the Soliciting Dealer conducting such internal supervisory review by the
close of business on the first business day following their receipt by the
branch office and the Soliciting Dealer shall review the subscription documents
and subscriber's check to ensure their proper execution and form and, if they
are acceptable, transmit the check to the Managing Dealer by the close of
business on the first business day after the check is received by the Soliciting
Dealer. The Managing Dealer will transmit the check to the Escrow Agent by no
later than the close of business on the first business day after the check is
received from the Soliciting Dealer.
Procedures Applicable to Telephonic Orders. Certain Soliciting Dealers
may permit investors to subscribe for Shares by telephonic order to the
Soliciting Dealer. There are no additional fees associated with telephonic
orders. Subscribers who wish to subscribe for Shares by telephonic order to the
Soliciting Dealer may complete the telephonic order either by delivering a check
in the amount necessary to purchase the Shares to be covered by the subscription
agreement to the Soliciting Dealer or by authorizing the Soliciting Dealer to
pay the purchase price for the Shares to be covered by the subscription
agreement from funds available in an account maintained by the Soliciting Dealer
on behalf of the subscriber. A subscriber must specifically authorize the
registered representative and branch manager to execute the subscription
agreement on behalf of the subscriber and must already have made or agreed to
make payment for the Shares covered by the subscription agreement.
To the extent that customers of any Soliciting Dealer wish to subscribe
and pay for Shares with funds held by or to be deposited with those firms, then
such firms shall, subject to Rule 15c2-4 promulgated under the Securities
Exchange Act of 1934, either (i) upon receipt of an executed subscription
agreement or direction to execute a subscription agreement on behalf of a
customer, to forward the offering price for the Shares covered by the
subscription agreement on or before the close of business of the first business
day following receipt or execution of a subscription agreement by such firms to
the Managing Dealer (except that, in any case in which the Soliciting Dealer
maintains a branch office, and, pursuant to a Soliciting Dealer's internal
supervisory procedures, final internal supervisory review is conducted at a
different location, the branch office shall transmit the subscription documents
and subscriber's check to the Soliciting Dealer conducting such internal
supervisory review by the close of business on the first business day following
their receipt by the branch office and the Soliciting Dealer shall review the
subscription documents and subscriber's check to ensure their proper execution
and form and, if they are acceptable, transmit the check to the Managing Dealer
by the close of business on the first business day after the check is received
by the Soliciting Dealer), or (ii) to solicit indications of interest in which
event (a) such Soliciting Dealers must subsequently contact the customer
indicating interest to confirm the interest and give instructions to execute and
return a subscription agreement or to receive authorization to execute the
subscription agreement on the customer's behalf, (b) such Soliciting Dealers
must mail acknowledgments of receipt of orders to each customer confirming
interest on the business day following such confirmation, (c) such Soliciting
Dealers must debit accounts of such customers on the fifth business day (the
"debit date") following receipt of the confirmation referred to in (a), and (d)
such Soliciting Dealers must forward funds to the Managing Dealer in accordance
with the procedures and on the schedule set forth in clause (i) of this
sentence. If the procedure in (ii) is adopted, subscribers' funds are not
required to be in their accounts until the debit date. The Managing Dealer will
transmit the check to the Escrow Agent by no later than the close of business on
the first business day after the check is received from the Soliciting Dealer.
Investors, however, who are residents of Florida, Iowa, Maine,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico,
North Carolina, Ohio, Oregon, South Dakota, Tennessee or Washington must
complete and sign the Subscription Agreement in order to subscribe for Shares
and, therefore, may not subscribe for Shares by telephone. Representatives of
Soliciting Dealers who accept telephonic orders will execute the Subscription
Agreement on behalf of investors who place such orders. All investors who
telephonically subscribe for Shares will receive, with confirmation of their
subscription, a second copy of the Prospectus.
Residents of California, Oklahoma, and Texas who telephonically
subscribe for Shares will have the right to rescind such subscriptions within
ten days from receipt of the confirmation. Such investors who do not rescind
their subscriptions within such ten-day period shall be deemed to have assented
to all of the terms and conditions of the Subscription Agreement.
Additional Subscription Procedures. Investors who have questions or who
wish to place orders for Shares by telephone or to participate in the
Reinvestment Plan should contact their Soliciting Dealer. Certain Soliciting
Dealers do not permit telephonic subscriptions or participation in the
Reinvestment Plan. See "Summary of Reinvestment Plan." The form of Subscription
Agreement for certain Soliciting Dealers who do not permit telephonic
subscriptions or participation in the Reinvestment Plan differs slightly from
the form attached hereto as Exhibit D, primarily in that it will eliminate one
or both of these options.
Investors who wish to establish an IRA for the purpose of investing
solely in Shares may do so by completing, in addition to the Subscription
Agreement, the special IRA account form attached hereto as a part of Exhibit D
appointing Franklin Bank, N.A., an unaffiliated bank, to act as their IRA
custodian. The custodian will not have the authority to vote any of the Shares
held in an IRA except in accordance with written instructions from the
beneficiary of the IRA, although it will hold the Shares on behalf of the
beneficiary and make distributions and, at the direction and in the discretion
of the beneficiary, investments in Shares or in other securities issued by
Affiliates of the Advisor. The custodian will not have authority at any time to
make investments through any such IRA on behalf of the beneficiary if the
investments do not constitute Shares or other securities issued by Affiliates of
the Advisor. The investors will not be required to pay any initial or annual
fees in connection with any such IRA. The fees for establishing and maintaining
all such IRAs will be paid by the Advisor initially and annually up to an
aggregate amount of $5,000, and by the Company above such amount.
ESCROW ARRANGEMENTS
The Escrow Agreement between the Company and the Bank provides that
escrowed funds will be invested by the Bank in an interest-bearing account with
the power of investment in short-term, highly liquid securities issued or
guaranteed by the U.S. Government, other investments permitted under Rule 15c2-4
of the Securities Exchange Act of 1934, as amended, or, in other short-term,
highly liquid investments with appropriate safety of principal. Such
subscription funds will be released periodically (at least once per month) upon
admission of stockholders to the Company.
The interest, if any, earned on subscription proceeds will be payable
only to those subscribers whose funds have been held in escrow by the Bank for
at least 20 days. Stockholders will not otherwise be entitled to interest earned
on Company funds or to receive interest on their Invested Capital.
<PAGE>
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to prospective investors. This discussion does not purport to deal with
all aspects of ERISA or the Code that may be relevant to particular investors in
light of their particular circumstances.
A prospective investor that is an employee benefit plan subject to
ERISA, a tax-qualified retirement Plan, an IRA, or a governmental, church, or
other Plan that is exempt from ERISA is advised to consult its own legal advisor
regarding the specific considerations arising under applicable provisions of
ERISA, the Code, and state law with respect to the purchase, ownership, or sale
of the Shares by such Plan or IRA.
Fiduciary Duties and Prohibited Transactions. A fiduciary of a pension,
profit-sharing, retirement or other employee benefit plan subject to ERISA (an
"ERISA Plan") should consider the fiduciary standards under ERISA in the context
of the ERISA Plan's particular circumstances before authorizing an investment of
any portion of the ERISA Plan's assets in the Common Stock. Accordingly, such
fiduciary should consider (i) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of ERISA; (ii) whether the
investment is in accordance with the documents and instruments governing the
ERISA Plan as required by Section 404(a)(1)(D) of ERISA; (iii) whether the
investment is prudent under Section 404(a)(1)(B) of ERISA; and (iv) whether the
investment is solely in the interests of the ERISA Plan participants and
beneficiaries and for the exclusive purpose of providing benefits to the ERISA
Plan participants and beneficiaries and defraying reasonable administrative
expenses of the ERISA Plan as required by Section 404(a)(1)(A) of ERISA.
In addition to the imposition of fiduciary standards, ERISA and Section
4975 of the Code prohibit a wide range of transactions between an ERISA Plan, an
IRA, or certain other plans (collectively, a "Plan") and persons who have
certain specified relationships to the Plan ("parties in interest" within the
meaning of ERISA and "disqualified persons" within the meaning of the Code).
Thus, a Plan fiduciary or person making an investment decision for a Plan also
should consider whether the acquisition or the continued holding of the Shares
might constitute or give rise to a direct or indirect prohibited transaction.
Plan Assets. The prohibited transaction rules of ERISA and the Code
apply to transactions with a Plan and also to transactions with the "plan
assets" of the Plan. The "plan assets" of a Plan include the Plan's interest in
an entity in which the Plan invests and, in certain circumstances, the assets of
the entity in which the Plan holds such interest. The term "plan assets" is not
specifically defined in ERISA or the Code, nor, as of the date hereof, has it
been interpreted definitively by the courts in litigation. On November 13, 1986,
the United States Department of Labor, the governmental agency primarily
responsible for administering ERISA, adopted a final regulation (the "DOL
Regulation") setting out the standards it will apply in determining whether an
equity investment in an entity will cause the assets of such entity to
constitute "plan assets." The DOL Regulation applies for purposes of both ERISA
and Section 4975 of the Code.
Under the DOL Regulation, if a Plan acquires an equity interest in an
entity, which equity interest is not a "publicly-offered security," the Plan's
assets generally would include both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The DOL Regulation defines a publicly-offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the offering occurred). The Shares
are being sold in an offering registered under the Securities Act of 1933, as
amended, and will be registered within the relevant time period under Section
12(b) of the Exchange Act.
The DOL Regulation provides that a security is "widely held" only if it
is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. However, a class of securities
will not fail to be "widely held" solely because the number of independent
investors falls below 100 subsequent to the initial public offering as a result
of events beyond the issuer's control. The Company expects the Shares to be
"widely held" upon completion of the offering.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The DOL Regulation further provides that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with this offering, certain restrictions ordinarily will
not affect, alone or in combination, the finding that such securities are freely
transferable. The Company believes that the restrictions imposed under the
Articles of Incorporation on the transfer of the Common Stock are limited to
restrictions on transfer generally permitted under the DOL Regulation and are
not likely to result in the failure of the Common Stock to be "freely
transferable." See "Summary of the Articles of Incorporation and Bylaws --
Restriction on Ownership." The DOL Regulation only establishes a presumption in
favor of a finding of free transferability and, therefore, no assurance can be
given that the Department of Labor and the U.S. Treasury Department would not
reach a contrary conclusion with respect to the Common Stock.
Assuming that the Shares will be "widely held" and "freely
transferable," the Company believes that the Shares will be publicly-offered
securities for purposes of the DOL Regulation and that the assets of the Company
will not be deemed to be "plan assets" of any Plan that invests in the Shares.
DETERMINATION OF OFFERING PRICE
The offering price per Share was determined by the Company based upon
the estimated costs of investing in the Properties and the Mortgage Loans, the
fees to be paid to the Advisor and its Affiliates, as well as fees to third
parties, and the expenses of this offering.
SUPPLEMENTAL SALES MATERIAL
Shares are being offered only through this Prospectus. In addition to
this Prospectus, the Company may use certain sales materials in connection with
this offering, although only when accompanied or preceded by the delivery of
this Prospectus. No sales material may be used unless it has first been approved
in writing by the Company. As of the date of this Prospectus, it is anticipated
that the following sales material will be authorized for use by the Company in
connection with this offering: (i) a brochure entitled CNL Hospitality
Properties, Inc. (formerly CNL American Realty Fund, Inc.); (ii) a fact sheet
describing the general features of the Company; (iii) a cover letter
transmitting the Prospectus; (iv) a summary description of the offering; (v) a
slide presentation; (vi) broker updates; (vii) an audio cassette presentation;
(viii) a video presentation; (ix) an electronic media presentation; (x) a cd-rom
presentation; (xi) a script for telephonic marketing; (xii) seminar
advertisements and invitations; and (xiii) certain third-party articles. All
such materials will be used only by registered broker-dealers which are members
of the NASD. The Company also may respond to specific questions from Soliciting
Dealers and prospective investors. Additional materials relating to the offering
may be made available to Soliciting Dealers for their internal use.
LEGAL OPINIONS
The legality of the Shares being offered hereby has been passed upon
for the Company by Shaw Pittman Potts & Trowbridge. Statements made under "Risk
Factors -- Federal Income Tax Risks" and "Federal Income Tax Considerations"
have been reviewed by Shaw Pittman Potts & Trowbridge, who have given their
opinion that such statements as to matters of law are correct in all material
respects. Shaw Pittman Potts & Trowbridge serves as securities and tax counsel
to the Company and to the Advisor and certain of their Affiliates. Certain
members of the firm have invested in prior programs sponsored by the Affiliates
of the Company in aggregate amounts which do not exceed one percent of the
amounts sold by any such program, and members of the firm also may invest in the
Company.
EXPERTS
The audited balance sheets of the Company as of December 31, 1998 and
1997 , and the related statements of earnings, stockholders' equity and cash
flows for the years ended December 31, 1998 and 1997, and for the period June
12, 1996 (date of inception) through December 31, 1996, included in this
Prospectus, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
<PAGE>
ADDITIONAL INFORMATION
A Registration Statement has been filed with the Securities and
Exchange Commission with respect to the securities offered hereby. This
Prospectus does not contain all information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. The information so omitted may be obtained from
the principal office of the Commission in Washington, D.C., upon payment of the
fee prescribed by the Commission, or examined at the principal office of the
Commission without charge. The Commission maintains a Web site located at
http://www.sec.gov. that contains information regarding registrants that file
electronically with the Commission.
DEFINITIONS
"Acquisition Expenses" means any and all expenses incurred by the
Company, the Advisor, or any Affiliate of either in connection with the
selection or acquisition of any Property or the making of any Mortgage Loan,
whether or not acquired, including, without limitation, legal fees and expenses,
travel and communication expenses, costs of appraisals, nonrefundable option
payments on property not acquired, accounting fees and expenses, and title
insurance.
"Acquisition Fees" means any and all fees and commissions, exclusive of
Acquisition Expenses, paid by any person or entity to any other person or entity
(including any fees or commissions paid by or to any Affiliate of the Company or
the Advisor) in connection with making or investing in Mortgage Loans or the
purchase, development or construction of a Property, including, without
limitation, real estate commissions, acquisition fees, finder's fees, selection
fees, development fees, construction fees, nonrecurring management fees,
consulting fees, loan fees, points, the Secured Equipment Lease Servicing Fee,
or any other fees or commissions of a similar nature. Excluded shall be
development fees and construction fees paid to any person or entity not
affiliated with the Advisor in connection with the actual development and
construction of any Property.
"Advisor" means CNL Hospitality Advisors, Inc. (formerly CNL Real
Estate Advisors, Inc.), a Florida corporation, any successor advisor to the
Company, or any person or entity to which CNL Hospitality Advisors, Inc. or any
successor advisors subcontracts substantially all of its functions.
"Advisory Agreement" means the Advisory Agreement between the Company
and the Advisor, pursuant to which the Advisor will act as the advisor to the
Company and provide specified services to the Company.
"Affiliate" means (i) any person or entity directly or indirectly
through one or more intermediaries controlling, controlled by, or under common
control with another person or entity; (ii) any person or entity directly or
indirectly owning, controlling, or holding with power to vote ten percent (10%)
or more of the outstanding voting securities of another person or entity; (iii)
any officer, director, partner, or trustee of such person or entity; (iv) any
person ten percent (10%) or more of whose outstanding voting securities are
directly or indirectly owned, controlled or held, with power to vote, by such
other person; and (v) if such other person or entity is an officer, director,
partner, or trustee of a person or entity, the person or entity for which such
person or entity acts in any such capacity.
"Articles of Incorporation" means the Articles of Incorporation, as the
same may be amended from time to time, of the Company.
"Asset Management Fee" means the fee payable to the Advisor for
day-to-day professional management services in connection with the Company and
its investments in Properties and Mortgage Loans pursuant to the Advisory
Agreement.
"Assets" means Properties, Mortgage Loans and Secured Equipment Leases,
collectively.
"Average Invested Assets" means, for a specified period, the average of
the aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
such period.
"Bank" means SouthTrust Asset Management Company of Florida, N.A.,
escrow agent for the offering.
"Board of Directors" means the Directors of the Company.
"Bylaws" means the bylaws of the Company.
"CNL" means CNL Group, Inc., the parent company of the Advisor and the
Managing Dealer.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
"Competitive Real Estate Commission" means a real estate or brokerage
commission for the purchase or sale of property which is reasonable, customary,
and competitive in light of the size, type, and location of the property. The
total of all real estate commissions paid by the Company to all persons and
entities (including the subordinated real estate disposition fee payable to the
Advisor) in connection with any Sale of one or more of the Company's Properties
shall not exceed the lesser of (i) a Competitive Real Estate Commission or (ii)
six percent of the gross sales price of the Property or Properties.
"Counsel" means tax counsel to the Company.
"Director" means a member of the Board of Directors of the Company.
"Distributions" means any distributions of money or other property by
the Company to owners of Shares, including distributions that may constitute a
return of capital for federal income tax purposes.
"Equipment" means the furniture, fixtures and equipment used at
Restaurant Chains and Hotel Chains.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, retirement, or other
employee benefit plan subject to ERISA.
"Excess Shares" means the excess shares exchanged for shares of Common
Stock or Preferred Stock, as the case may be, transferred or proposed to be
transferred in excess of the Ownership Limit or which would otherwise jeopardize
the Company's status as a REIT under the Code.
"Front-End Fees" means fees and expenses paid by any person or entity
to any person or entity for any services rendered in connection with the
organization of the Company and investing in Properties and Mortgage Loans,
including Selling Commissions, marketing support and due diligence expense
reimbursement fees, Organizational and Offering Expenses, Acquisition Expenses
and Acquisition Fees paid out of Gross Proceeds, and any other similar fees,
however designated. During the term of the Company, Front-End Fees shall not
exceed 20% of Gross Proceeds.
"Gross Proceeds" means the aggregate purchase price of all Shares sold
for the account of the Company through the offering, without deduction for
Selling Commissions, volume discounts, the marketing support and due diligence
expense reimbursement fee or Organization 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 the
full offering price, currently $10.00.
"Hotel Chains" means the national and regional hotel chains, primarily
limited service, extended stay and full service hotel chains, to be selected by
the Advisor, and who themselves or their franchisees will either (i) lease
Properties purchased by the Company, (ii) become borrowers under Mortgage Loans,
or (iii) become lessees or borrowers under Secured Equipment Leases.
"Independent Director" means a Director who is not and within the last
two years has not been directly or indirectly associated with the Advisor by
virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii)
employment by the Advisor or its Affiliates, (iii) service as an officer or
director of the Advisor or its Affiliates, (iv) the performance of services,
other than as a Director, for the Company, (v) service as a director or trustee
of more than three real estate investment trusts advised by the Advisor, or (vi)
maintenance of a material business or professional relationship with the Advisor
or any of its Affiliates. An indirect relationship shall include circumstances
in which a Director's spouse, parents, children, siblings, mothers- or
fathers-in-law or sons- or daughters-in-law, or brothers- or sisters-in-law is
or has been associated with the Advisor, any of its affiliates, or the Company.
A business or professional relationship is considered material if the gross
revenue derived by the Director from the Advisor and Affiliates exceeds 5% of
either the Director's annual gross revenue during either of the last two years
or the Director's net worth on a fair market value basis.
"Independent Expert" means a person or entity with no material current
or prior business or personal relationship with the Advisor or the Directors and
who is engaged to a substantial extent in the business of rendering opinions
regarding the value of assets of the type held by the Company.
"Invested Capital" means the amount calculated by multiplying the total
number of shares of Common Stock purchased by stockholders by the issue price,
reduced by the portion of any Distribution that is attributable to Net Sales
Proceeds and by any amounts paid by the Company to repurchase Shares pursuant to
the plan for redemption of Shares.
"IRA" means an Individual Retirement Account.
"IRS" means the Internal Revenue Service.
"Joint Ventures" means the joint venture or general partnership
arrangements in which the Company is a co-venturer or general partner which are
established to acquire Properties.
"Leverage" means the aggregate amount of indebtedness of the Company
for money borrowed (including purchase money mortgage loans) outstanding at any
time, both secured and unsecured.
"Line of Credit" means one or more lines of credit in an aggregate
amount up to $45,000,000, the proceeds of which will be used to acquire
Properties and make Mortgage Loans and Secured Equipment Leases and to pay the
Secured Equipment Lease Servicing Fee. The Line of Credit may be in addition to
any Permanent Financing.
"Listing" means the listing of the Shares of the Company on a national
securities exchange or over-the-counter market.
"Managing Dealer" means CNL Securities Corp., an Affiliate of the
Advisor, or such other person or entity selected by the Board of Directors to
act as the managing dealer for the offering. CNL Securities Corp. is a member of
the National Association of Securities Dealers, Inc.
"Mortgage Loans" means, in connection with mortgage financing provided
by the Company, notes or other evidences of indebtedness or obligations which
are secured or collateralized by real estate owned by the borrower.
"Net Assets" means the total assets of the Company (other than
intangibles) at cost before deducting depreciation or other non-cash reserves
less total liabilities, calculated quarterly by the Company, on a basis
consistently applied.
"Net Income" means for any period, the total revenues applicable to
such period, less the total expenses applicable to such period excluding
additions to reserves for depreciation, bad debts, or other similar non-cash
reserves; provided, however, Net Income for purposes of calculating total
allowable Operating Expenses (as defined herein) shall exclude the gain from the
sale of the Company's assets.
"Net Offering Proceeds" means Gross Proceeds less (i) Selling
Commissions, (ii) Organizational and Offering Expenses, and (iii) the marketing
support and due diligence expense reimbursement fee.
"Net Sales Proceeds" means, in the case of a transaction described in
clause (i)(A) of the definition of Sale, the proceeds of any such transaction
less the amount of all real estate commissions and closing costs paid by the
Company. In the case of a transaction described in clause (i)(B) of such
definition, Net Sales Proceeds means the proceeds of any such transaction less
the amount of any legal and other selling expenses incurred in connection with
such transaction. In the case of a transaction described in clause (i)(C) of
such definition, Net Sales Proceeds means the proceeds of any such transaction
actually distributed to the Company from the Joint Venture. In the case of a
transaction or series of transactions described in clause (i)(D) of the
definition of Sale, Net Sales Proceeds means the proceeds of any such
transaction less the amount of all commissions and closing costs paid by the
Company. In the case of a transaction described in clause (ii) of the definition
of Sale, Net Sales Proceeds means the proceeds of such transaction or series of
transactions less all amounts generated thereby and reinvested in one or more
Properties within 180 days thereafter and less the amount of any real estate
commissions, closing costs, and legal and other selling expenses incurred by or
allocated to the Company in connection with such transaction or series of
transactions. Net Sales Proceeds shall also include, in the case of any lease of
a Property consisting of a building only, any Mortgage Loan or any Secured
Equipment Lease, any amounts from tenants, borrowers or lessees that the Company
determines, in its discretion, to be economically equivalent to proceeds of a
Sale. Net Sales Proceeds shall not include, as determined by the Company in its
sole discretion, any amounts reinvested in one or more Properties, Mortgage
Loans or Secured Equipment Leases, to repay outstanding indebtedness, or to
establish reserves.
"Operating Expenses" includes all costs and expenses incurred by the
Company, as determined under generally accepted accounting principles, which in
any way are related to the operation of the Company or to Company business,
including (a) advisory fees, (b) 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
debt reserves, (v) the Advisor's subordinated 10% share of Net Sales Proceeds,
and (vi) Acquisition Fees and Acquisition Expenses, real estate commissions on
the sale of property and other expenses connected with the acquisition and
ownership of real estate interests, mortgage loans, or other property (such as
the costs of foreclosure, insurance premiums, legal services, maintenance,
repair, and improvement of property).
"Organizational and Offering Expenses" means 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. The Organizational and Offering Expenses paid by
the Company in connection with the formation of the Company, together with the
7.5% Selling Commissions, the 0.5% marketing support and due diligence
reimbursement fee, and the Soliciting Dealer Servicing Fee incurred by the
Company will not exceed thirteen percent (13%) of the proceeds raised in
connection with this offering.
"Ownership Limit" means, with respect to shares of Common Stock and
Preferred Stock, the percent limitation placed on the ownership of Common Stock
and Preferred Stock by any one Person (as defined in the Articles of
Incorporation). As of the initial date of this Prospectus, the Ownership Limit
is 9.8% of the outstanding Common Stock and 9.8% of the outstanding Preferred
Stock.
"Participants" means those stockholders who elect to participate in the
Reinvestment Plan.
"Performance Fee" means the fee payable to the Advisor under certain
circumstances if certain performance standards have been met and the
Subordinated Incentive Fee has not been paid.
"Permanent Financing" means financing (i) to acquire Assets, (ii) to
pay the Secured Equipment Lease Servicing Fee, (iii) to pay a fee of 4.5% of any
Permanent Financing, excluding amounts to fund Secured Equipment Leases, as
Acquisition Fees, and, possibly, (iv) to refinance outstanding amounts on the
Line of Credit. Permanent Financing may be in addition to any borrowing under
the Line of Credit.
"Plan" means ERISA Plans, IRAs, Keogh plans, stock bonus plans, and
certain other plans.
"Preferred Stock" means any class or series of preferred stock of the
Company that may be issued in accordance with the terms of the Articles of
Incorporation and applicable law.
<PAGE>
"Properties" means (i) the real properties, including the buildings
located thereon and with respect to hotel Properties, including Equipment, (ii)
the real properties only, or (iii) the buildings only, which are acquired by the
Company and with respect to hotel Properties, including Equipment, either
directly or through joint venture arrangements or other partnerships.
"Prospectus" means the final prospectus included in the Company's
Registration Statement filed with the Securities and Exchange Commission,
pursuant to which the Company will offer Shares to the public, as the same may
be amended or supplemented from time to time after the effective date of such
Registration Statement.
"Qualified Plans" means qualified pension, profit-sharing, and stock
bonus plans, including Keogh plans and IRAs.
"Real Estate Asset Value" means the amount actually paid or allocated
to the purchase, development, construction or improvement of a Property,
exclusive of Acquisition Fees and Acquisition Expenses.
"Reinvestment Agent" or "Agent" means the independent agent, which
currently is MMS Securities, Inc., for Participants in the Reinvestment Plan.
"Reinvestment Plan" means the Reinvestment Plan, in the form attached
hereto as Exhibit A.
"Reinvestment Proceeds" means net proceeds available from the sale of
Shares under the Reinvestment Plan to redeem Shares or, under certain
circumstances, to invest in additional Properties or Mortgage Loans.
"REIT" means real estate investment trust, as defined pursuant to
Sections 856 through 860 of the Code.
"Related Party Tenant" means a related party tenant, as defined
pursuant to Section 856(d)(2)(B) of the Code.
"Restaurant Chains" means 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.
"Roll-Up Entity" means a partnership, real estate investment trust,
corporation, trust, or similar entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
"Roll-Up Transaction" means a transaction involving the acquisition,
merger, conversion, or consolidation, directly or indirectly, of the Company and
the issuance of securities of a Roll-Up Entity. Such term does not include: (i)
a transaction involving securities of the Company that have been listed on a
national securities exchange or the National Association of Securities Dealers
Automated Quotation National Market System for at least 12 months; or (ii) a
transaction involving the conversion to corporate, trust, or association form of
only the Company if, as a consequence of the transaction, there will be no
significant adverse change in stockholder voting rights, the term of existence
of the Company, compensation to the Advisor, or the investment objectives of the
Company.
"Sale" (i) means any transaction or series of transactions whereby: (A)
the Company sells, grants, transfers, conveys, or relinquishes its ownership of
any Property or portion thereof, including the lease of any Property consisting
of the building only, and including any event with respect to any Property which
gives rise to a significant amount of insurance proceeds or condemnation awards;
(B) the Company sells, grants, transfers, conveys, or relinquishes its ownership
of all or substantially all of the interest of the Company in any Joint Venture
in which it is a co-venturer or partner; (C) any Joint Venture in which the
Company as a co-venturer or partner sells, grants, transfers, conveys, or
relinquishes its ownership of any Property or portion thereof, including any
event with respect to any Property which gives rise to insurance claims or
condemnation awards or, (D) the Company sells, grants, conveys or relinquishes
its interest in any Mortgage Loan or Secured Equipment Lease or portion thereof,
including any event with respect to any Mortgage Loan or Secured Equipment Lease
which gives rise to a significant amount of insurance proceeds or similar
awards, but (ii) shall not include any transaction or series of transactions
specified in clause (i)(A), (i)(B) or (i)(C) above in which the proceeds of such
transaction or series of transactions are reinvested in one or more Properties
within 180 days thereafter.
"Secured Equipment Leases" means the Equipment financing made available
by the Company to operators of 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" means the fee payable to the
Advisor by the Company out of the proceeds of the Line of Credit or Permanent
Financing for negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program equal to 2% of the purchase price of the Equipment
subject to each Secured Equipment Lease and paid upon entering into such lease
or loan.
"Selling Commissions" means any and all commissions payable to
underwriters, managing dealers, or other broker-dealers in connection with the
sale of Shares as described in the Prospectus, including, without limitation,
commissions payable to CNL Securities Corp.
"Shares" means the up to 16,500,000 shares of Common Stock of the
Company to be sold in the offering.
"Soliciting Dealer Servicing Fee" means an annual fee of .20% of
Invested Capital on December 31 of each year following the year in which the
offering terminates, payable to the Managing Dealer, which, in its sole
discretion, in turn may reallow all or a portion of such fee to the Soliciting
Dealers whose clients hold Shares on such date.
"Soliciting Dealers" means those broker-dealers that are members of the
National Association of Securities Dealers, Inc., or that are exempt from
broker-dealer registration, and that, in either case, enter into participating
broker or other agreements with the Managing Dealer to sell Shares.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Company or any person who will control,
manage or participate in the management of the Company, and any Affiliate of
such Person. Not included is any Person whose only relationship with the Company
is that of an independent property manager of Company assets, and whose only
compensation is as such. Sponsor does not include independent third parties such
as attorneys, accountants, and underwriters whose only compensation is for
professional services. A Person may also be deemed a Sponsor of the Company by:
a. taking the initiative, directly or indirectly, in founding or
organizing the business or enterprise of the Company, either
alone or in conjunction with one or more other Persons;
b. receiving a material participation in the Company in
connection with the founding or organizing of the business of
the Company, in consideration of services or property, or both
services and property;
c. having a substantial number of relationships and contacts with
the Company;
d. possessing significant rights to control Company properties;
e. receiving fees for providing services to the Company which are
paid on a basis that is not customary in the industry; or
f. providing goods or services to the Company on a basis which
was not negotiated at arms length with the Company.
"Stockholders' 8% Return," as of each date, shall mean an aggregate
amount equal to an 8% cumulative, noncompounded, annual return on Invested
Capital.
"Subscription Agreement" means the Subscription Agreement in the form
attached hereto as Exhibit D.
"Subordinated Incentive Fee" means the fee payable to the Advisor under
certain circumstances if the Shares are listed on a national securities exchange
or over-the-counter market.
"Termination Date" means the date of termination of the Advisory
Agreement.
"Total Proceeds" means Gross Proceeds, loan proceeds from Permanent
Financing and amounts outstanding on the Line of Credit, if any, at the time of
Listing, but excluding loan proceeds used to finance Secured Equipment Leases.
"Triple-Net Lease" generally means a Property lease pursuant to which
the tenant is responsible for property costs associated with ongoing operations,
including repairs, maintenance, property taxes, utilities and insurance.
"Unimproved Real Property" means Property in which the Company has an
equity interest that is not acquired for the purpose of producing rental or
other operating income, that has no development or construction in process and
for which no development or construction is planned, in good faith, to commence
within one year.
EXHIBIT A
FORM OF
REINVESTMENT PLAN
<PAGE>
FORM OF
REINVESTMENT PLAN
CNL HOSPITALITY PROPERTIES, INC. a Maryland corporation (the
"Company"), pursuant to its Articles of Incorporation, adopted a Reinvestment
Plan (the "Reinvestment Plan") on the terms and conditions set forth below.
1. Reinvestment of Distributions. MMS Securities Inc., the agent (the
"Reinvestment Agent") for participants (the "Participants") in the Reinvestment
Plan, will receive all cash distributions made by the Company with respect to
shares of common stock of the Company (the "Shares") owned by each Participant
(collectively, the "Distributions"). The Reinvestment Agent will apply such
Distributions as follows:
(a) At any period during which the Company is making a public
offering of Shares, the Reinvestment Agent will invest Distributions in
Shares acquired from the managing dealer or participating brokers for
the offering at the public offering price per Share, or $10.00 per
Share. During such period, commissions and the marketing support and
due diligence fee equal to 0.5% of the total amount raised from sale of
the Shares may be reallowed to the broker who made the initial sale of
Shares to the Participant at the same rate as for initial purchases.
(b) If no public offering of Shares is ongoing, the Reinvestment
Agent will purchase Shares from any additional shares which the Company
elects to register with the Securities and Exchange Commission (the
"SEC") for the Reinvestment Plan, at a per Share price equal to the
fair market value of the Shares determined by (i) quarterly appraisal
updates performed by the Company based on a review of the existing
appraisal and lease of each Property, focusing on a re-examination of
the capitalization rate applied to the rental stream to be derived from
that Property; and (ii) a review of the outstanding Mortgage Loans and
Secured Equipment Leases focusing on a determination of present value
by a re-examination of the capitalization rate applied to the stream of
payments due under the terms of each Mortgage Loan and Secured
Equipment Lease. The capitalization rate used by the Company and, as a
result, the price per Share paid by Participants in the Reinvestment
Plan prior to Listing will be determined by the Advisor in its sole
discretion. The factors that the Advisor will use to determine the
capitalization rate include (i) its experience in selecting, acquiring
and managing properties similar to the Properties; (ii) an examination
of the conditions in the market; and (iii) capitalization rates in use
by private appraisers, to the extent that the Advisor deems such
factors appropriate, as well as any other factors that the Advisor
deems relevant or appropriate in making its determination. The
Company's internal accountants will then convert the most recent
quarterly balance sheet of the Company from a "GAAP" balance sheet to a
"fair market value" balance sheet. Based on the "fair market value"
balance sheet, the internal accountants will then assume a sale of the
Company's assets and the liquidation of the Company in accordance with
its constitutive documents and applicable law and compute the
appropriate method of distributing the cash available after payment of
reasonable liquidation expenses, including closing costs typically
associated with the sale of assets and shared by the buyer and seller,
and the creation of reasonable reserves to provide for the payment of
any contingent liabilities. Upon listing of the Shares on a national
securities exchange or over-the-counter market, the Reinvestment Agent
may purchase Shares either through such market or directly from the
Company pursuant to a registration statement relating to the
Reinvestment Plan, in either case at a per Share price equal to the
then-prevailing market price on the national securities exchange or
over-the-counter market on which the Shares are listed at the date of
purchase by the Reinvestment Agent. In the event that, after Listing
occurs, the Reinvestment Agent purchases Shares on a national
securities exchange or over-the- counter market through a registered
broker-dealer, the amount to be reinvested shall be reduced by any
brokerage commissions charged by such registered broker-dealer. In the
event that such registered broker-dealer charges reduced brokerage
commissions, additional funds in the amount of any such reduction shall
be left available for the purchase of Shares.
(c) For each Participant, the Reinvestment Agent will maintain a
record which shall reflect for each fiscal quarter the Distributions
received by the Reinvestment Agent on behalf of such Participant. The
Reinvestment Agent will use the aggregate amount of Distributions to
all Participants for each fiscal quarter to purchase Shares for the
Participants. If the aggregate amount of Distributions to Participants
exceeds the amount required to purchase all Shares then available for
purchase, the Reinvestment Agent will purchase all available Shares and
will return all remaining Distributions to the Participants within 30
days after the date such Distributions are made. The purchased Shares
will be allocated among the Participants based on the portion of the
aggregate Distributions received by the Reinvestment Agent on behalf of
each Participant, as reflected in the records maintained by the
Reinvestment Agent. The ownership of the Shares purchased pursuant to
the Reinvestment Plan shall be reflected on the books of the Company.
(d) Distributions shall be invested by the Reinvestment Agent in
Shares promptly following the payment date with respect to such
Distributions to the extent Shares are available. If sufficient Shares
are not available, Distributions shall be invested on behalf of the
Participants in one or more interest-bearing accounts in Franklin Bank,
N.A., Southfield, Michigan, or in another commercial bank approved by
the Company which is located in the continental United States and has
assets of at least $100,000,000, until Shares are available for
purchase, provided that any Distributions that have not been invested
in Shares within 30 days after such Distributions are made by the
Company shall be returned to Participants.
(e) The allocation of Shares among Participants may result in the
ownership of fractional Shares, computed to four decimal places.
(f) Distributions attributable to Shares purchased on behalf of
the Participants pursuant to the Reinvestment Plan will be reinvested
in additional Shares in accordance with the terms hereof.
(g) No certificates will be issued to a Participant for Shares
purchased on behalf of the Participant pursuant to the Reinvestment
Plan except to Participants who make a written request to the
Reinvestment Agent. Participants in the Reinvestment Plan will receive
statements of account in accordance with Paragraph 7 below.
2. Election to Participate. Any stockholder who participates in a
public offering of Shares and who has received a copy of the related final
prospectus included in the Company's registration statement filed with the SEC
may elect to participate in and purchase Shares through the Reinvestment Plan at
any time by written notice to the Company and would not need to receive a
separate prospectus relating solely to the Reinvestment Plan. A person who
becomes a stockholder otherwise than by participating in a public offering of
Shares may purchase Shares through the Reinvestment Plan only after receipt of a
separate prospectus relating solely to the Reinvestment Plan. Participation in
the Reinvestment Plan will commence with the next Distribution made after
receipt of the Participant's notice, provided it is received more than ten days
prior to the last day of the fiscal month or quarter, as the case may be, to
which such Distribution relates. Subject to the preceding sentence, regardless
of the date of such election, a shareholder will become a Participant in the
Reinvestment Plan effective on the first day of the fiscal month (prior to
termination of the offering of Shares) or fiscal quarter (after termination of
the offering of Shares) following such election, and the election will apply to
all Distributions attributable to the fiscal quarter or month (as the case may
be) in which the shareholder makes such written election to participate in the
Reinvestment Plan and to all fiscal quarters or months thereafter. A Participant
who has terminated his participation in the Reinvestment Plan pursuant to
Paragraph 11 will be allowed to participate in the Reinvestment Plan again upon
receipt of a current version of a final prospectus relating to participation in
the Reinvestment Plan which contains, at a minimum, the following: (i) the
minimum investment amount; (ii) the type or source of proceeds which may be
invested; and (iii) the tax consequences of the reinvestment to the Participant,
by notifying the Reinvestment Agent and completing any required forms.
3. Distribution of Funds. In making purchases for Participants'
accounts, the Reinvestment Agent may commingle Distributions attributable to
Shares owned by Participants in the Reinvestment Plan.
4. Proxy Solicitation. The Reinvestment Agent will distribute to
Participants proxy solicitation material received by it from the Company which
is attributable to Shares held in the Reinvestment Plan. The Reinvestment Agent
will vote any Shares that it holds for the account of a Participant in
accordance with the Participant's written instructions. If a Participant gives a
proxy to person(s) representing the Company covering Shares registered in the
Participant's name, such proxy will be deemed to be an instruction to the
Reinvestment Agent to vote the full Shares
<PAGE>
in the Participant's account in like manner. If a Participant does not direct
the Reinvestment Agent as to how the Shares should be voted and does not give a
proxy to person(s) representing the Company covering these Shares, the
Reinvestment Agent will not vote said Shares.
5. Absence of Liability. Neither the Company nor the Reinvestment Agent
shall have any responsibility or liability as to the value of the Company's
Shares, any change in the value of the Shares acquired for the Participant's
account, or the rate of return earned on, or the value of, the interest-bearing
accounts, in which Distributions are invested. Neither the Company nor the
Reinvestment Agent shall be liable for any act done in good faith, or for any
good faith omission to act, including, without limitation, any claims of
liability (a) arising out of the failure to terminate a Participant's
participation in the Reinvestment Plan upon such Participant's death prior to
receipt of notice in writing of such death and the expiration of 15 days from
the date of receipt of such notice and (b) with respect to the time and the
prices at which Shares are purchased for a Participant. Notwithstanding the
foregoing, liability under the federal securities laws cannot be waived.
Similarly, the Company and the Reinvestment Agent have been advised that in the
opinion of certain state securities commissioners, indemnification is also
considered contrary to public policy and therefore unenforceable.
6. Suitability.
(a) Within 60 days prior to the end of each fiscal year, CNL
Securities Corp. ("CSC"), will mail to each Participant a participation
agreement (the "Participation Agreement"), in which the Participant
will be required to represent that there has been no material change in
the Participant's financial condition and confirm that the
representations made by the Participant in the Subscription Agreement
(a form of which shall be attached to the Participation Agreement) are
true and correct as of the date of the Participation Agreement, except
as noted in the Participation Agreement or the attached form of
Subscription Agreement.
(b) Each Participant will be required to return the executed
Participation Agreement to CSC within 30 days after receipt. In the
event that a Participant fails to respond to CSC or return the
completed Participation Agreement on or before the fifteenth (15th) day
after the beginning of the fiscal year following receipt of the
Participation Agreement, the Participant's Distribution for the first
fiscal quarter of that year will be sent directly to the Participant
and no Shares will be purchased on behalf of the Participant for that
fiscal quarter and, subject to (c) below, any fiscal quarters
thereafter, until CSC receives an executed Participation Agreement from
the Participant.
(c) If a Participant fails to return the executed Participation
Agreement to CSC prior to the end of the second fiscal quarter for any
year of the Participant's participation in the Reinvestment Plan, the
Participant's participation in the Reinvestment Plan shall be
terminated in accordance with Paragraph 11 below.
(d) Each Participant shall notify CSC in the event that, at any
time during his participation in the Reinvestment Plan, there is any
material change in the Participant's financial condition or inaccuracy
of any representation under the Subscription Agreement.
(e) For purposes of this Paragraph 6, a material change shall
include any anticipated or actual decrease in net worth or annual gross
income or any other change in circumstances that would cause the
Participant to fail to meet the suitability standards set forth in the
Company's Prospectus.
7. Reports to Participants. Within 60 days after the end of each fiscal
quarter, the Reinvestment Agent will mail to each Participant a statement of
account describing, as to such Participant, the Distributions received during
the quarter, the number of Shares purchased during the quarter, the per Share
purchase price for such Shares, the total administrative charge to such
Participant, and the total Shares purchased on behalf of the Participant
pursuant to the Reinvestment Plan. Each statement shall also advise the
Participant that, in accordance with Paragraph 6(d) hereof, he is required to
notify CSC in the event that there is any material change in his financial
condition or if any representation under the Subscription Agreement becomes
inaccurate. Tax information for income earned on Shares under the Reinvestment
Plan will be sent to each participant by the Company or the Reinvestment Agent
at least annually.
8. Administrative Charges, Commissions, and Plan Expenses. The Company
shall be responsible for all administrative charges and expenses charged by the
Reinvestment Agent. The administrative charge for each Participant for each
fiscal quarter shall be the lesser of 5% of the amount reinvested for the
Participant or $2.50, with a minimum charge of $.50. Any interest earned on
Distributions will be paid to the Company to defray costs relating to the
Reinvestment Plan. Additionally, in connection with any Shares purchased from
the Company both prior to and after the termination of a public offering of the
Shares, the Company will pay to CSC selling commissions of 7.5%, a marketing
support and due diligence expense reimbursement fee of .5%, and, in the event
that proceeds of the sale of Shares pursuant to the Reinvestment Plan are used
to acquire Properties or to invest in Mortgage Loans, will pay to CNL
Hospitality Advisors, Inc. acquisition fees of 4.5% of the purchase price of the
Shares sold pursuant to the Reinvestment Plan.
9. No Drawing. No Participant shall have any right to draw checks or
drafts against his account or give instructions to the Company or the
Reinvestment Agent except as expressly provided herein.
10. Taxes. Taxable Participants may incur a tax liability for
Distributions made with respect to such Participant's Shares, even though they
have elected not to receive their Distributions in cash but rather to have their
Distributions held in their account under the Reinvestment Plan.
11. Termination.
(a) A Participant may terminate his participation in the
Reinvestment Plan at any time by written notice to the Company. To be
effective for any Distribution, such notice must be received by the
Company at least ten business days prior to the last day of the fiscal
month or quarter to which such Distribution relates.
(b) The Company or the Reinvestment Agent may terminate a
Participant's individual participation in the Reinvestment Plan, and
the Company may terminate the Reinvestment Plan itself at any time by
ten days' prior written notice mailed to a Participant, or to all
Participants, as the case may be, at the address or addresses shown on
their account or such more recent address as a Participant may furnish
to the Company in writing.
(c) After termination of the Reinvestment Plan or termination of a
Participant's participation in the Reinvestment Plan, the Reinvestment
Agent will send to each Participant (i) a statement of account in
accordance with Paragraph 7 hereof, and (ii) a check for (a) the amount
of any Distributions in the Participant's account that have not been
reinvested in Shares, and (b) the value of any fractional Shares
standing to the credit of a Participant's account based on the market
price of the Shares. The record books of the Company will be revised to
reflect the ownership of record of the Participant's full Shares and
any future Distributions made after the effective date of the
termination will be sent directly to the former Participant.
12. Notice. Any notice or other communication required or permitted to
be given by any provision of this Reinvestment Plan shall be in writing and
addressed to Investor Services Department, CNL Securities Corp., 400 East South
Street, Orlando, Florida 32801, if to the Company, or to MMS Securities, Inc.,
1845 Maxwell, Suite 101, Troy, Michigan 48084-4510, if to the Reinvestment
Agent, or such other addresses as may be specified by written notice to all
Participants. Notices to a Participant may be given by letter addressed to the
Participant at the Participant's last address of record with the Company. Each
Participant shall notify the Company promptly in writing of any change of
address.
13. Amendment. The terms and conditions of this Reinvestment Plan may
be amended or supplemented by an agreement between the Reinvestment Agent and
the Company at any time, including but not limited to an amendment to the
Reinvestment Plan to add a voluntary cash contribution feature or to substitute
a new Reinvestment Agent to act as agent for the Participants or to increase the
administrative charge payable to the Reinvestment Agent, by mailing an
appropriate notice at least 30 days prior to the effective date thereof to each
Participant at his last address of record; provided, that any such amendment
must be approved by a majority of the Independent Directors of the Company. Such
amendment or supplement shall be deemed conclusively accepted by each
Participant except those Participants from whom the Company receives written
notice of termination prior to the effective date thereof.
14. Governing Law. THIS REINVESTMENT PLAN AND A PARTICIPANT'S ELECTION
TO PARTICIPATE IN THE REINVESTMENT PLAN SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF FLORIDA; PROVIDED, HOWEVER, THAT CAUSES OF ACTION FOR VIOLATIONS OF
FEDERAL OR STATE SECURITIES LAWS SHALL NOT BE GOVERNED BY THIS SECTION 14.
<PAGE>
EXHIBIT B
FINANCIAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
Page
----
Pro Forma Consolidated Financial Information (unaudited):
Pro Forma Consolidated Balance Sheet as of December 31, 1998 B-2
Pro Forma Consolidated Statement of Earnings for the year ended
December 31, 1998 B-3
Notes to Pro Forma Consolidated Financial Statements for the year
ended December 31, 1998 B-4
Audited Financial Statements:
Report of Independent Accountants B-8
Consolidated Balance Sheets as of December 31, 1998 and 1997 B-9
Consolidated Statements of Earnings for the years ended December
31, 1998 and 1997, and the period June 12, 1996 (Date of
inception) through December 31, 1996 B-10
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998 and 1997, and the period June 12, 1996
(Date of inception) through December 31, 1996 B-11
Consolidated Statements of Cash Flows for the years ended December
31, 1998 and 1997, and the period June 12, 1996 (Date of inception)
through December 31, 1996 B-12
Notes to Consolidated Financial Statements for the years ended
December 31, 1998 and 1997, and the period June 12, 1996 (Date of
inception) through December 31, 1996 B-14
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 1998 B-23
Notes to Schedule III - Real Estate and Accumulated Depreciation as
of December 31, 1998 B-25
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Balance Sheet of CNL
Hospitality Properties, Inc. and subsidiaries (the "Company") gives effect to
(i) the receipt of $43,019,080 in gross offering proceeds from the sale of
4,301,908 shares of common stock pursuant to a registration statement on Form
S-11 under the Securities Act of 1933, as amended, effective July 9, 1997, for
the period from inception through December 31, 1998 and the application of such
funds to purchase two properties, and to pay offering expenses, acquisition fees
and miscellaneous acquisition expenses, (ii) the receipt of $30,586,428 in gross
offering proceeds from the sale of 3,058,643 additional shares and $3,684,745
from borrowings on a convertible loan, for the period January 1, 1999 through
February 26, 1999, and (iii) the application of such funds to purchase four
properties indirectly through an investment in a private real estate investment
trust, to pay down the three advances on the line of credit totalling
$9,600,000, and to pay offering expenses, acquisition fees and miscellaneous
acquisition expenses, all as reflected in the pro forma adjustments described in
the related notes. The Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 1998, includes the transactions described in (i) above, from its
historical balance sheet, adjusted to give effect to the transactions in (ii)
and (iii) above, as if they had occurred on December 31, 1998.
The Unaudited Pro Forma Consolidated Statement of Earnings for the year
ended December 31, 1998, includes the historical operating results of the
properties described in (i) above that were acquired by the Company during the
year ended December 31, 1998 and in (iii) above that were acquired by the
Company during the period January 1, 1999 through February 26, 1999, from the
later of (1) the date the property became operational or (2) January 1, 1998 to
the end of the pro forma period presented.
This pro forma financial information is presented for informational
purposes only and does not purport to be indicative of the Company's financial
results or condition if the various events and transactions reflected therein
had occurred on the dates, or been in effect during the periods, indicated. This
pro forma financial information should not be viewed as predictive of the
Company's financial results or conditions in the future.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro Forma
ASSETS Historical Adjustments Pro Forma
------------- -------------- --------------
<S> <C>
Land, building and equipment on operating leases,
less accumulated depreciation of $384,166 $28,368,383 $ -- $28,368,383
Investment in private real estate investment trust -- 26,107,084 (a) 26,107,084
Cash and cash equivalents 13,228,923 (2,926,680 ) (a) 10,302,243
Restricted cash 82,407 -- 82,407
Certificate of deposit 5,016,575 -- 5,016,575
Receivables 28,257 -- 28,257
Prepaid expenses 9,391 -- 9,391
Organization costs, less accumulated amortization
of $5,221 19,752 -- 19,752
Accrued rental income 44,160 -- 44,160
Loan costs, less accumulated amortization of $12,980 78,282 -- 78,282
Other assets 1,980,560 (1,100,923 ) (a) 879,637
------------- ------------- --------------
$48,856,690 $22,079,481 $70,936,171
============== ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $9,600,000 $( 9,600,000 ) (a) $ --
Convertible loan -- 3,684,745 (a) 3,684,745
Accounts payable and accrued expenses 333,726 (324,521 ) (a) 9,205
Due to related parties 318,937 (292,872 ) (a) 26,065
Security deposits 1,417,500 -- 1,417,500
Rents paid in advance 3,489 -- 3,489
Interest payable 66,547 -- 66,547
-------------- ------------- --------------
Total liabilities 11,740,199 (6,532,648 ) 5,207,551
-------------- ------------- --------------
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 shares; issued and
outstanding, as adjusted, 7,380,551 shares 43,219 30,586 (a) 73,805
Capital in excess of par value 37,289,402 28,581,543 (a) 65,870,945
Accumulated distributions in excess of net earnings (216,130 ) -- (216,130 )
-------------- ------------- --------------
Total stockholders' equity 37,116,491 28,612,129 65,728,620
------------- ------------- --------------
$48,856,690 $22,079,481 $70,936,171
============== ============= ==============
See accompanying notes to unaudited pro
forma consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
Pro Forma
Historical Adjustments Pro Forma
------------ -------------- --------------
Revenues:
Rental income from
operating leases $1,218,500 $1,706,732 (1) $2,925,232
FF&E Reserve income 98,099 140,000 (2) 238,099
Interest income 638,862 (609,975 )(3) 28,887
Dividend income -- 423,938 (4) 423,938
-------------
---------------- ----------------
1,955,461 1,660,695 3,616,156
------------- ---------------- ----------------
Expenses:
Interest expense 350,322 441,467 (5) 791,789
General operating and
administrative 167,951 92,733 (6) 260,684
Asset management fees to
related party 68,114 106,571 (7) 174,685
Professional services 21,581 -- 21,581
Depreciation and amortization 388,554 545,376 (8) 933,930
------------- ---------------- ----------------
996,522 1,186,147 2,182,669
------------- ---------------- ----------------
Earnings Before Equity in Loss
of Private Real Estate
Investment Trust 958,939 474,548 1,443,487
Equity in Loss of Private Real
Estate Investment Trust -- (56,464 )(9) (56,464 )
------------- ---------------- ----------------
Net Earnings $ 958,939 $ 418,084 $ 1,377,023
============= ================ ================
Earnings Per Share of Common
Stock (Basic and Diluted) (10) $ 0.40 $ 0.51
============= ================
Weighted Average Number of
Shares of Common Stock
Outstanding (10) 2,402,344 2,697,355
============= ================
</TABLE>
See accompanying notes to unaudited pro
forma consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Balance Sheet:
(a) Represents gross proceeds of $30,586,428 from the sale of 3,058,643
shares during the period January 1, 1999 through February 26, 1999, the
receipt of $3,684,745 from borrowings on a convertible loan, and
$2,926,680 in cash and cash equivalents, used (i) to invest, together
with an institutional investor, in the formation of a separate, private
real estate investment trust for $24,778,933 ($1,295,216 of which had
been recorded as other assets as of December 31, 1998), (ii) to pay
down three advances on the line of credit totalling $9,600,000, (iii)
to pay acquisition fees and costs of $1,950,217 ($427,773 of which was
accrued as due to related parties at December 31, 1998), to reclassify
from other assets $1,100,923 of acquisition fees and costs previously
incurred relating to the indirectly held properties and to pay selling
commissions and offering expenses of $2,163,919 which have been netted
against stockholders' equity (a total of $189,621 of which was accrued
as of December 31, 1998).
The pro forma adjustment to investment in private real estate
investment trust as a result of the above transactions was as follows:
<TABLE>
<CAPTION>
Acquisition Fees
Estimated Allocated to
Investment Investment Total
-------------------- -------------------- ------------------
<S> <C>
Investment in private
real estate investment
trust $24,778,933 $1,328,151 $26,107,084
==================== ==================== ==================
</TABLE>
The Company indirectly acquired an interest in four hotel properties
through an investment in a separate, private real estate investment
trust, CNL Hotel Investors, Inc. (the "Private REIT"). The Company
acquired $24,778,630 of 9.76% Class B cumulative preferred stock and
$303 of common stock of the Private REIT. The common stock owned by the
Company represents a 49% interest in the Private REIT.
The investment in common stock will be accounted for using the equity
method in accordance with generally accepted accounting principles.
Common stock dividends received from the Private REIT will decrease the
investment while equity in the net earnings or loss of the Private REIT
will increase or decrease the investment.
The investment in preferred stock of the Private REIT will be accounted
for using the cost method with dividends declared by the Private REIT
recorded as income on the statement of earnings of the Company.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Statement of Earnings:
(1) Represents rental income from operating leases for the properties
acquired as of December 31, 1998, which were operational prior to the
acquisition of the property by the Company (the "Pro Forma Properties
"), for the period commencing the later of (i) the date the Pro Forma
Property became operational by the previous owner or (ii) January 1,
1998, to the end of the pro forma period presented. The following
presents the actual date the Pro Forma Properties were acquired or
placed in service by the Company as compared to the date the Pro Forma
Properties were treated as becoming operational as a rental property
for purposes of the Pro Forma Consolidated Statement of Earnings.
Date Pro Forma
Date Placed Property Became
in Service Operational as
By the Company Rental Property
-------------- ---------------
Residence Inn Buckhead (Lenox
Park) in Atlanta, GA July 31, 1998 January 1, 1998
Residence Inn Gwinnett Place
in Duluth, GA July 31, 1998 January 1, 1998
Generally, the leases provide for the payment of percentage rent in
addition to base rental income. However, due to the fact that no
percentage rent was due under the leases for the Pro Forma Properties
during the portion of 1998 that the Company held the properties, no pro
forma adjustment was made for percentage rental income for the years
ended December 31, 1998.
(2) Represents capital expenditure reserve funds which will be used for the
replacement and renewal of furniture, fixtures and equipment relating
to the Pro Forma Properties (the "FF&E Reserve"). The funds in the FF&E
Reserve and all property purchased with funds from the FF&E Reserve
will be paid, granted and assigned to the Company as additional rent.
In connection therewith, FF&E Reserve income was earned at
approximately $10,000 per month, per Pro Forma Property.
(3) Represents adjustment to interest income due to the decrease in the
amount of cash available for investment in interest bearing accounts
during the periods commencing the later of (i) the dates the Pro Forma
Properties became operational by the previous owners and the dates the
Private REIT properties became operational or (ii) January 1, 1998,
through the end of the pro forma period presented, as described in Note
(1) above. The estimated pro forma adjustment is based upon the fact
that (i) all of the net offering proceeds received during the year
ended December 31, 1998 and invested in interest bearing accounts for
historical purposes were considered invested in Pro Forma Properties or
the investment in the Private REIT for pro forma purposes and (ii)
interest income from interest bearing accounts was earned at a rate of
approximately four percent per annum by the Company during the year
ended December 31, 1998.
(4) Represents dividend income earned on the Company's $24,778,630
investment in the 9.76% Class B cumulative preferred stock of the
Private REIT between October 1, 1998 and December 31, 1998, from the
dates each of the Private REIT properties became operational. The cash
from the Company's investment, along with loan proceeds and funds from
an institutional investor were used to purchase four hotel properties
which were operational prior to the Company's investment in the Private
REIT. The following presents the
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Statement of Earnings - Continued:
actual date the Private REIT's properties were acquired or placed in
service by the Private REIT as compared to the date the Private REIT's
properties were treated as becoming operational as a rental property
for purposes of the Pro Forma Consolidated Statement of Earnings:
<TABLE>
<CAPTION>
Date Private REIT
Date Placed Properties Became
in Service Operational as
By the Private REIT Rental Property
------------------- ---------------
<S> <C>
Residence Inn Las Vegas, NV February 25, 1999 October 1, 1998
Residence Inn Plano, TX February 25, 1999 October 12, 1998
Marriott Suites Dallas, TX February 25, 1999 November 11, 1998
Courtyard Plano, TX February 25, 1999 December 23, 1998
</TABLE>
(5) Represents interest expense incurred at a rate of 8.8% per annum in
connection with the assumed borrowings from the line of credit of
$8,600,000 on October 15, 1997 and $1,000,000 on September 10, 1998. It
was assumed that the $9,600,000 was paid off on December 31, 1998 with
proceeds from the convertible loan and offering proceeds.
(6) The Company has incurred operating expenses which, in general, are
those expenses relating to administration of the Company on an ongoing
basis. Pursuant to the advisory agreement, CNL Hospitality Advisors,
Inc. (the "Advisor") is required to reimburse the Company the amount by
which the total operating expenses paid or incurred by the Company
exceed in any four consecutive fiscal quarters the greater of two
percent of average invested assets or 25 percent of net income (the
"Expense Cap"). During the year ended December 31, 1998, the Company's
operating expenses exceeded the Expense Cap by $92,733; therefore, the
Advisor reimbursed the Company such amount in accordance with the
advisory agreement. However, as a result of the increase in pro forma
earnings for the year ended December 31, 1998, the Company's operating
expenses no longer exceeded the Expense Cap. Therefore, this
reimbursement was reversed for pro forma purposes.
(7) Represents asset management fees relating to the Pro Forma Properties
for the period commencing the later of (i) the date the Pro Forma
Properties became operational by the previous owners or (ii) January 1,
1998, through the end of the pro forma period presented, as described
in Note (1) above. Asset management fees are equal to 0.60% per year of
the Company's Real Estate Asset Value including investment in the
Private REIT (excluding acquisition fees).
(8) Represents depreciation expense of the building and the furniture,
fixture and equipment ("FF&E") portions of the Pro Forma Properties
accounted for as operating leases using the straight-line method. The
buildings and FF&E are depreciated over useful lives of 40 and seven
years, respectively. Also represents amortization of the loan
origination fee of $48,000 (.5% on the $9,600,000 from borrowings on
the line of credit) and $20,762 of other miscellaneous closing costs,
amortized under the straight-line method over a period of five years.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly CNL American Realty Fund, Inc.)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Statement of Earnings - Continued:
(9) Represents equity in loss of the investment in the Private REIT. This
represents the Company's share of net earnings or loss after deduction
of preferred stock dividends declared as described below:
<TABLE>
<CAPTION>
<S> <C>
Private REIT Earnings Before Preferred Dividends $ 752,368
8% Class A Cumulative Preferred Stock (institutional investor) (442,261)
9.76% Class B Cumulative Preferred Stock (the Company) (423,938)
8% Class C Cumulative Preferred Stock (other investors) ( 1,402)
---------
Net Loss of Private REIT After Preferred Dividends $(115,233)
=========
The Company's 49% Interest in the Loss of the Private REIT $( 56,464)
=========
</TABLE>
(10) Historical earnings per share were calculated based upon the weighted
average number of shares of common stock outstanding during the year
ended December 31, 1998.
As a result of the two Pro Forma Properties being treated in the Pro
Forma Consolidated Statement of Earnings as operational since January
1, 1998, the Company assumed approximately 2,206,573 shares of common
stock were sold, and the net offering proceeds were available for
purchase of these properties. Due to the fact that approximately
1,929,115, of these shares of common stock were actually sold
subsequently, during the period January 1, 1998 through May 21, 1998,
the weighted average number of shares outstanding for the pro forma
period was adjusted.
In addition, as a result of the investment in the Private REIT being
treated in the Pro Forma Consolidated Statement of Earnings as invested
pro rata beginning on October 1, 1998 (the date the first property
became operational), the Company assumed additional shares of common
stock were sold and net offering proceeds were available for investment
during the period October 1, 1998 through December 31, 1998. Due to the
fact that approximately 857,020 of these shares of common stock were
actually sold during the period January 1, 1999 through February 26,
1999, the weighted average number of shares outstanding for the pro
forma period was adjusted. Pro forma earnings per share were calculated
based upon the weighted average number of shares of common stock
outstanding, as adjusted, during the period January 1, 1998 through
December 31, 1998.
<PAGE>
Report of Independent Accountants
To the Board of Directors
CNL Hospitality Properties, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings and of stockholders' equity and of cash
flows present fairly in all material respects, the financial position of CNL
Hospitality Properties, Inc. (a Maryland corporation) and its subsidiaries at
December 31, 1998 and 1997 and the results of their operations and their cash
flows for each of the two years ended December 31, 1998 and 1997 and the period
June 12, 1996 (date of inception) through December 31, 1996, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinions expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Orlando, Florida
January 19, 1999
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C>
December 31,
1998 1997
------------ ------------
ASSETS
Land, building and equipment on operating leases,
less accumulated depreciation $28,368,383 $ --
Cash and cash equivalents 13,228,923 8,869,838
Restricted cash 82,407 --
Certificate of deposit 5,016,575 --
Receivables 28,257 --
Due from related party -- 7,500
Prepaid expenses 9,391 11,179
Organization costs, less accumulated amortization of
$5,221 and $833, respectively 19,752 19,167
Loan costs, less accumulated amortization of $12,980 78,282 --
Accrued rental income 44,160 --
Other assets 1,980,560 535,792
------------- -------------
$48,856,690 $9,443,476
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $9,600,000 $ --
Accounts payable and accrued expenses 333,726 16,305
Due to related parties 318,937 193,254
Security deposits 1,417,500 --
Rents paid in advance 3,489 --
Interest payable 66,547 --
------------- -------------
Total liabilities 11,740,199 209,559
------------- -------------
Commitments (Note 10)
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000 shares -- --
Excess shares, $.01 par value per share.
Authorized and unissued 63,000,000 shares -- --
Common stock, $.01 par value per share. Authorized
60,000,000 shares, issued and outstanding
4,321,908 and 1,152,540 shares, respectively 43,219 11,525
Capital in excess of par value 37,289,402 9,229,316
Accumulated distributions in excess of net earnings (216,130 ) (6,924 )
------------- -------------
Total stockholders' equity 37,116,491 9,233,917
------------- -------------
$48,856,690 $ 9,443,476
============= =============
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONSOLIDATED STATEMENTS OF EARNINGS
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1998 1997 1996
------------ ------------- ------------
Revenues:
Rental income from
operating leases $1,218,500 $ -- $ --
FF&E Reserve income 98,099 -- --
Interest and other income 638,862 46,071 --
------------ ------------ ------------
1,955,461 46,071 --
------------ ------------ ------------
Expenses:
Interest and loan cost
amortization 350,322 -- --
General operating and
administrative 167,951 22,386 --
Professional services 21,581 -- --
Asset management fees to
related party 68,114 -- --
Depreciation and amortization 388,554 833 --
------------ ------------ ------------
996,522 23,219 --
------------ ------------ ------------
Net Earnings $ 958,939 $ 22,852 $ --
============ ============ ============
Earnings Per Share of Common
Stock (Basic and Diluted) $ 0.40 $ 0.03 $ --
============ ============ ============
Weighted Average Number of
Shares of Common Stock
Outstanding 2,402,344 686,063 --
============ ============ ============
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
Accumulated
Common stock distributions
------------------------ Capital in in excess
Number Par excess of of net
of Shares value par value earnings Total
----------- --------- ------------- -------------- -------------
Balance at June 12, 1996 -- $ -- $ -- $ -- $ --
Sale of common stock to
related party 20,000 200 199,800 -- 200,000
----------- --------- ------------- ------------- ------------
Balance at December 31, 1996 20,000 200 199,800 -- 200,000
Subscriptions received for common
stock through public offering
and distribution reinvestment
plan 1,132,540 11,325 11,314,077 -- 11,325,402
Stock issuance costs -- -- (2,284,561 ) -- (2,284,561 )
Net earnings -- -- -- 22,852 22,852
Distributions declared and paid
($.05 per share) -- -- -- (29,776 ) (29,776 )
----------- --------- ------------- ------------- ------------
Balance at
December 31, 1997 1,152,540 11,525 9,229,316 (6,924 ) 9,233,917
Subscriptions received for common
stock through public offering
and distribution reinvestment
plan 3,169,368 31,694 31,661,984 -- 31,693,678
Stock issuance costs -- -- (3,601,898 ) -- (3,601,898 )
Net earnings -- -- -- 958,939 958,939
Distributions declared and paid
($.46 per share) -- -- -- (1,168,145 ) (1,168,145 )
----------- --------- ------------- ------------- ------------
Balance at
December 31, 1998 4,321,908 $43,219 $37,289,402 $ (216,130 ) $37,116,491
=========== ========= ============= ============= ============
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1998 1997 1996
----------- ------------- -------------
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants $2,665,171 $ -- $ --
Interest received 622,237 46,071 --
Cash paid for expenses (239,648 ) (23,602 ) --
Cash paid for interest (270,795 ) -- --
------------ ------------ -----------
Net cash provided by operating
activities 2,776,965 22,469 --
------------ ------------ -----------
Cash Flows from Investing Activities:
Additions to land, buildings and equipment
on (28,216,757 ) -- --
operating leases
Investment in certificate of deposit (5,000,000 ) -- --
Increase in restricted cash (82,407 ) -- --
Increase in other assets (1,211,818 ) (463,470 ) --
------------ ------------ -----------
Net cash used in investing
activities (34,510,982 ) (463,470 ) --
------------ ------------ -----------
Cash Flows from Financing Activities:
Reimbursement of acquisition, organization,
deferred offering and stock issuance
costs paid by related parties on behalf of
the Company (862,068 ) (1,003,031 ) (197,916 )
Sale of common stock to related party -- -- 200,000
Proceeds from borrowing on line of credit 9,600,000 -- --
Payment of loan costs (91,262 ) -- --
Subscriptions received from stockholders 31,693,678 11,325,402 --
Distributions to stockholders (1,168,145 ) (29,776 ) --
Payment of stock issuance costs (3,086,630 ) (986,338 ) --
Other 7,529 2,498 --
------------ ------------ -----------
Net cash provided by financing
activities 36,093,102 9,308,755 2,084
------------ ------------ -----------
Net Increase in Cash and Cash Equivalents 4,359,085 8,867,754 2,084
Cash and Cash Equivalents at Beginning
of Period 8,869,838 2,084 --
------------ ------------ -----------
Cash and Cash Equivalents at End of
Period $13,228,923 $8,869,838 $ 2,084
============ ============ ===========
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
STATEMENTS OF CASH FLOWS - CONTINUED
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1998 1997 1996
------------- ----------- -----------
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
Net earnings $ 958,939 $ 22,852 $ --
------------ ----------- -----------
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 384,166 -- --
Amortization 17,368 833 --
Increase in receivables (44,832 ) -- --
Decrease (increase) in prepaid
expenses 1,788 (11,179 ) --
Increase in accrued rental income (44,160 ) -- --
Increase in accounts payable
and other accrued expenses 71,869 6,141 --
Increase in due to related
parties, excluding reimbursement
of acquisition,organization,
deferred offering and stock
issuance costs paid on behalf
of the Company 10,838 3,822 --
Increase in security deposits 1,417,500 -- --
Increase in rents paid in advance 3,489 -- --
------------ ----------- -----------
Total adjustments 1,818,026 (383 ) --
------------ ----------- -----------
Net Cash Provided by Operating Activities $2,776,965 $ 22,469 $ --
============ =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain
acquisition, organization,deferred
offering and stock issuance costs
on behalf of the Company as
follows:
Acquisition costs $ 392,863 $ 26,149 $ --
Organization costs 4,973 -- 20,000
Deferred offering costs -- -- 535,812
Stock issuance costs 454,277 638,274 --
============ =========== ===========
$ 852,113 $ 664,423 $ 555,812
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Hospitality Properties, Inc.,
formerly known as CNL American Realty Fund, Inc., was organized in
Maryland on June 12, 1996. CNL Hospitality GP Corp. and CNL Hospitality
LP Corp. are wholly owned subsidiaries of CNL Hospitality Properties,
Inc., each of which were organized in Delaware in June 1998. CNL
Hospitality Partners, LP is a Delaware limited partnership formed in
June 1998. CNL Hospitality GP Corp. and CNL Hospitality LP Corp. are
the general and limited partners, respectively, of CNL Hospitality
Partners, LP. The term "Company" includes, unless the context otherwise
requires, CNL Hospitality Properties, Inc., CNL Hospitality Partners,
LP, CNL Hospitality GP Corp. and CNL Hospitality LP Corp.
The Company was formed primarily to acquire properties (the
"Properties") located across the United States to be leased on a
long-term, triple-net basis. The Company intends to invest the proceeds
from its public offering, after deducting offering expenses, in hotel
Properties to be leased to operators of national and regional limited
service, extended stay and full service hotel chains (the "Hotel
Chains") and in restaurant properties to be leased to operators of
selected national and regional fast-food, family-style and casual
dining restaurant chains (the "Restaurant Chains"). While the Company
may currently invest in both restaurant and hotel Properties,
management believes that over time the Company will focus its Property
investments exclusively on hotel Properties. The Company may also
provide mortgage financing (the "Mortgage Loans"). The Company also
intends to offer furniture, fixture and equipment financing ("Secured
Equipment Leases") to operators of Hotel Chains and Restaurant Chains.
The Company was a development stage enterprise from June 12, 1996
through October 15, 1997. Since operations had not begun, activities
through October 15, 1997 were devoted to organization of the Company.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of CNL Hospitality Properties, Inc.,
and its wholly owned subsidiaries, CNL Hospitality GP Corp. and CNL
Hospitality LP Corp., as well as the accounts of CNL Hospitality
Partners, LP. All significant intercompany balances and transactions
have been eliminated.
Real Estate and Lease Accounting - The Company records the acquisition
of land, buildings and equipment at cost, including acquisition and
closing costs. Land, buildings and equipment are leased to unrelated
third parties on a triple-net basis, whereby the tenant is generally
responsible for all operating expenses relating to the Property,
including property taxes, insurance, maintenance and repairs.
The Property leases are accounted for using the operating method. Under
the operating method, land, building and equipment leases are recorded
at cost, revenue is recognized as rentals are earned and depreciation
is charged to operations as incurred. Buildings and equipment are
depreciated on the straight-line method over their estimated useful
lives of 40 and seven years, respectively. When scheduled rentals vary
during the lease term, income is recognized on a straight-line basis so
as to produce a constant periodic rent over the lease term commencing
on the date the Property is placed in service. Accrued rental income
represents the aggregate amount of income recognized on a straight-line
basis in excess of scheduled rental payments to date.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies - Continued:
When the Properties or equipment are sold, the related cost and
accumulated depreciation, plus any accrued rental income, will be
removed from the accounts and any gain or loss from sale will be
reflected in income. Management reviews its Properties for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through operations.
Management determines whether an impairment in value has occurred by
comparing the estimated future undiscounted cash flows, including the
residual value of the Property, with the carrying cost of the
individual Property. If an impairment is indicated, the assets are
adjusted to their fair value.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds. Cash equivalents
are stated at cost plus accrued interest, which approximates market
value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Company has not experienced any losses in such
accounts. The Company limits investment of temporary cash investments
to financial institutions with high credit standing; therefore,
management believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Organization Costs - Organization costs are amortized over five years
using the straight-line method.
Loan Costs - Loan costs incurred in connection with the Company's
$9,600,000 line of credit and a $5,000,000 letter of credit have been
capitalized and are being amortized over the term of the loan and
letter of credit commitment, respectively, using the straight-line
method which approximates the effective interest method.
Income Taxes - The Company has made an election to be taxed as a real
estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, and related regulations. The
Company generally will not be subject to federal corporate income taxes
on amounts distributed to stockholders, providing it distributes at
least 95 percent of its REIT taxable income and meets certain other
requirements for qualifying as a REIT. Accordingly, no provision for
federal income taxes has been made in the accompanying consolidated
financial statements. Notwithstanding the Company's qualification for
taxation as a REIT, the Company is subject to certain state taxes on
its income and property.
Earnings Per Share - Basic earnings per share are calculated based upon
net earnings (income available to common stockholders) divided by the
weighted average number of shares of common stock outstanding during
the reporting period. The Company does not have any dilutive potential
common shares.
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform with the 1998
presentation. These reclassifications had no effect on stockholders'
equity or net earnings.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies - Continued:
Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
New Accounting Standards - In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities," which will be
effective for the Company as of January 1, 1999. This SOP requires
start-up and organization costs to be expensed as incurred and also
requires previously deferred start-up costs to be recognized as a
cumulative effect adjustment in the statement of earnings. Management
of the Company does not believe that adoption of this SOP will have a
material effect on the Company's financial position or results of
operations.
2. Public Offerings:
The Company has a currently effective registration statement on Form
S-11 with the Securities and Exchange Commission for the sale of
16,500,000 shares of common stock (the "Offering"). Of the 16,500,000
shares of common stock, the Company has registered 1,500,000 shares
($15,000,000) which are available only to stockholders who elect to
participate in the Company's reinvestment plan. The Company has adopted
a reinvestment plan pursuant to which stockholders may elect to have
the full amount of their cash distributions from the Company reinvested
in additional shares of common stock of the Company. As of December 31,
1998, the Company had received subscription proceeds of $43,019,080
(4,301,908 shares), including $37,299 (3,730 shares) through the
reinvestment plan.
On November 23, 1998, the Company filed a registration statement on
Form S-11 with the Securities and Exchange Commission in connection
with the proposed sale by the Company of up to 27,500,000 additional
shares of common stock ($275,000,000) (the "Secondary Offering") in an
offering expected to commence immediately following the completion of
the Company's current Offering. Of the 27,500,000 shares of common
stock to be offered, 2,500,000 will be available only to stockholders
purchasing shares through the reinvestment plan. The price per share
and the other terms of the Secondary Offering, including the percentage
of gross proceeds payable (i) to the managing dealer for selling
commissions and expenses in connection with the offering and (ii) the
advisor for acquisition fees and acquisition expenses, will be
substantially the same as those for the Company's current Offering. The
Company expects to use net proceeds from the Secondary Offering to
purchase additional Properties and, to a lesser extent, make Mortgage
Loans.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
3. Land, Buildings and Equipment on Operating Leases:
The Company leases its land, buildings and equipment to a hotel
operator. The leases are accounted for under the provisions of
Statement of Financial Accounting Standards No. 13, "Accounting for
Leases," and have been classified as operating leases. The leases are
for 19 years, provide for minimum and contingent rentals and require
the tenant to pay executory costs. In addition, the tenant pays all
property taxes and assessments and carries insurance coverage for
public liability, property damage, fire and extended coverage. The
lease options allow the tenant to renew each of the leases for three
successive five-year periods subject to the same terms and conditions
of the initial leases. The leases also require the establishment of
capital expenditure reserve funds which will be used for the
replacement and renewal of furniture, fixtures and equipment relating
to the hotel Properties (the "FF&E Reserve"). Funds in the FF&E Reserve
have been earned, granted and assigned to the Company as additional
rent. For the year ended December 31, 1998, revenues from the FF&E
Reserve totalled $98,099, of which $15,692 is included in receivables
and $82,407 is restricted cash.
Land, buildings and equipment on operating leases consisted of the
following at:
December 31, December 31,
1998 1997
------------- -------------
Land $2,926,976 $ --
Buildings 23,476,442 --
Equipment 2,349,131 --
-------------- -------------
28,752,549 --
Less accumulated depreciation (384,166 ) --
============== =============
$28,368,383 $ --
============== =============
The leases provide an increase in the minimum annual rent at a
predetermined interval during the terms of the leases. Such amount is
recognized on a straight-line basis over the terms of the leases
commencing on the date the Property is placed in service. For the year
ended December 31, 1998, the Company recognized $44,160 of such rental
income.
The following is a schedule of future minimum lease payments to be
received on the noncancellable operating leases at December 31, 1998:
1999 $2,889,162
2000 2,928,895
2001 2,928,895
2002 2,928,895
2003 2,928,895
Thereafter 40,028,238
===============
$54,632,980
===============
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
3. Land, Buildings and Equipment on Operating Leases - Continued:
Since leases are renewable at the option of the tenant, the above table
only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for
future contingent rents which may be received on the leases based on a
percentage of the tenant's gross sales.
4. Other Assets:
Other assets as of December 31, 1998 and 1997 were $1,980,560 and
$535,792, respectively, which consisted of acquisition fees and
miscellaneous acquisition expenses that will be allocated to future
Properties.
5. Line of Credit:
On July 31, 1998, the Company entered into an initial revolving line of
credit and security agreement with a bank to be used by the Company to
acquire hotel Properties. The line of credit provides that the Company
may receive advances of up to $30,000,000 until July 30, 2003, with an
annual review to be performed by the bank to indicate that there has
been no substantial deterioration, in the bank's reasonable discretion,
of the credit quality. Interest expense on each advance shall be
payable monthly, with all unpaid interest and principal due no later
than five years from the date of the advance. Advances under the line
of credit will bear interest at either (i) a rate per annum equal to
318 basis points above the London Interbank Offered Rate (LIBOR) or
(ii) a rate per annum equal to 30
basis points above the bank's base rate, whichever the Company selects
at the time advances are made. In addition, a fee of .5% per advance
will be due and payable to the bank on funds as advanced. Each advance
made under the line of credit will be collateralized by the assignment
of rents and leases. In addition, the line of credit provides that the
Company will not be able to further encumber the applicable hotel
Property during the term of the advance without the bank's consent. The
Company will be required, at each closing, to pay all costs, fees and
expenses arising in connection with the line of credit. The Company
must also pay the bank's attorneys fees, subject to a maximum cap,
incurred in connection with the line of credit and each advance.
As of December 31, 1998, the Company had obtained three advances
totalling $9,600,000 relating to the line of credit. In connection with
the line of credit, the Company incurred a commitment fee, legal fees
and closing costs of $68,762. The proceeds were used in connection with
the purchase of two hotel Properties and the commitment to acquire
three additional Properties (see Note 10). The interest rate of the
line of credit at December 31, 1998 was 8.05% (bank's base rate plus 30
basis points).
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
6. Stock Issuance Costs:
The Company has incurred certain expenses of its Offering, including
commissions, marketing support and due diligence expense reimbursement
fees, filing fees, legal, accounting, printing and escrow fees, which
have been deducted from the gross proceeds of the Offering. Preliminary
costs incurred prior to raising capital were advanced by an affiliate
of the Company, CNL Hospitality Advisors, Inc., (formerly known as CNL
Real Estate Advisors, Inc.) (the "Advisor"). The Advisor has agreed to
pay all organizational and offering expenses (excluding commissions and
marketing support and due diligence expense reimbursement fees) which
exceed three percent of the gross Offering proceeds received from the
sale of shares of the Company in connection with the Offering.
During the years ended December 31, 1998 and 1997, the Company incurred
$3,606,871 and $2,304,561, respectively, in organizational and offering
costs, including $2,535,494 and $906,032, respectively, in commissions
and marketing support and due diligence expense reimbursement fees (see
Note 8). Of these amounts $3,601,898 and $2,284,561, respectively, have
been treated as stock issuance costs and $4,973 and $20,000,
respectively, have been treated as organization costs. The stock
issuance costs have been charged to stockholders' equity subject to the
three percent cap described above.
7. Distributions:
For the years ended December 31, 1998 and 1997, approximately 76
percent and 100 percent, respectively, of the distributions paid to
stockholders were considered ordinary income, and for the year ended
December 31, 1998, approximately 24 percent was considered a return of
capital to stockholders for federal income tax purposes. No amounts
distributed to the stockholders for the years ended December 31, 1998
and 1997 are required to be or have been treated by the Company as a
return of capital for purposes of calculating the stockholders' return
on their invested capital.
8. Related Party Transactions:
Certain affiliates of the Company received fees and compensation in
connection with the Offering, and the acquisition, management and sale
of the assets of the Company.
On June 12, 1996 (date of inception), CNL Fund Advisors, Inc.
contributed $200,000 in cash to the Company and became its sole
stockholder. In February 1997, the Advisor purchased the Company's
outstanding common stock from CNL Fund Advisors, Inc. and became the
sole stockholder of the Company.
During the years ended December 31, 1998 and 1997, the Company incurred
$2,377,026 and $849,405, respectively, in selling commissions due to
CNL Securities Corp. for services in connection with the Offering. A
substantial portion of these amounts ($2,200,516 and $792,832,
respectively) were or will be paid by CNL Securities Corp. as
commissions to other broker-dealers.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
8. Related Party Transactions - Continued:
In addition, CNL Securities Corp. is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of
the total amount raised from the sale of shares, a portion of which may
be reallowed to other broker-dealers. During the years ended December
31, 1998 and 1997, the Company incurred $158,468 and $56,627,
respectively, of such fees, the majority of which were reallowed to
other broker-dealers and from which all bona fide due diligence
expenses were paid.
CNL Securities Corp. will also receive, in connection with the
Offering, a soliciting dealer servicing fee payable annually by the
Company beginning on December 31 of the year following the year in
which the Offering is completed in the amount of 0.20% of the invested
capital of the stockholders that invest in the Company through this
Offering. CNL Securities Corp. in turn may reallow all or a portion of
such fee to soliciting dealers whose clients held shares on such date.
As of December 31, 1998, no such fees had been incurred.
The Advisor is entitled to receive acquisition fees for services in
identifying the Properties and structuring the terms of the acquisition
and leases of the Properties and Mortgage Loans equal to 4.5% of the
gross proceeds of the Offering, loan proceeds from permanent financing
and amounts outstanding on the line of credit, if any, at the time of
listing, but excluding that portion of the permanent financing used to
finance Secured Equipment Leases. During the years ended December 31,
1998 and 1997, the Company incurred $1,426,216 and $509,643,
respectively, of such fees. Such fees are included in land, buildings
and equipment on operating leases and other assets.
The Company and the Advisor have entered into an advisory agreement
pursuant to which the Advisor will receive a monthly asset management
fee of one-twelfth of 0.60% of the Company's real estate asset value
and the outstanding principal balance of any Mortgage Loans as of the
end of the preceding month. The management fee, which will not exceed
fees which are competitive for similar services in the same geographic
area, may or may not be taken, in whole or in part as to any year, in
the sole discretion of the Advisor. All or any portion of the
management fee not taken as to any fiscal year shall be deferred
without interest and may be taken in such other fiscal year as the
Advisor shall determine. During the year ended December 31, 1998, the
Company incurred $68,114 of such fees. No such fees were incurred by
the Company for 1997.
The Company incurs operating expenses which, in general, are those
expenses relating to administration of the Company on an ongoing basis.
Pursuant to the advisory agreement described above, the Advisor is
required to reimburse the Company the amount by which the total
operating expenses paid or incurred by the Company exceed in any four
consecutive fiscal quarters, the greater of two percent of average
invested assets or 25 percent of net income (the "Expense Cap"). During
the year ended December 31, 1998, the Company's operating expenses
exceeded the Expense Cap by $92,733; therefore the Advisor reimbursed
the Company such amount in accordance with the advisory agreement.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
8. Related Party Transactions - Continued:
The Advisor and its affiliates provide various administrative services
to the Company, including services related to accounting; financial,
tax and regulatory compliance reporting; stockholder distributions and
reporting; due diligence and marketing; and investor relations
(including administrative services in connection with the Offering), on
a day-to-day basis. The expenses incurred for these services were
classified as follows:
<TABLE>
<CAPTION>
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1998 1997 1996
--------------- ------------- --------------
<S> <C>
Deferred offering costs $ -- $ -- $28,665
Stock issuance costs 494,729 185,335 --
Land, buildings and equipment
on operating leases and
other assets 9,084 -- --
General operating and
administrative expenses 140,376 6,889 --
============= ============ ============
$644,189 $192,224 $28,665
============= ============ ============
The amounts due to related parties consisted of the following at
December 31:
1998 1997
------------ ------------
Due to CNL Securities Corp.:
Commissions $66,063 $100,709
Marketing support and due diligence
expense reimbursement fee 4,404 7,268
------------ ------------
70,467 107,977
------------ ------------
Due to the Advisor:
Expenditures incurred on behalf
of the Company and for
accounting, administrative and
acquisition services 110,496 39,105
Acquisition fees 137,974 46,172
------------ ------------
248,470 85,277
============ ============
$318,937 $193,254
============ ============
</TABLE>
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
(formerly known as CNL American Realty Fund, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
9. Concentration of Credit Risk:
All of the Company's rental income for the year ended December 31,
1998 was earned from one lessee, STC Leasing Associates, LLC, which
operates each of the two Properties as a Residence Inn by Marriott.
Although the Company intends to acquire Properties located in various
states and regions and to carefully screen its tenants in order to
reduce risks of default, failure of this Hotel Chain or lessee could
significantly impact the results of operations of the Company. However,
management believes that the risk of such a default is reduced due to
the essential or important nature of these Properties for the ongoing
operations of the lessee.
It is expected that the percentage of total rental income contributed
by this lessee will decrease as additional Properties are acquired and
leased in subsequent years.
10. Commitments:
In July 1998, the Company entered into agreements to acquire three
additional hotel Properties for an anticipated aggregate purchase price
of approximately $100 million. In connection with these agreements, the
Company was required by the seller to obtain a letter of credit. The
letter of credit is collateralized by a $5,000,000 certificate of
deposit.
11. Subsequent Events:
During the period January 1, 1999 through January 19, 1999, the Company
received subscription proceeds for an additional 561,565 shares
($5,615,647) of common stock.
On January 1, 1999, the Company declared distributions totalling
$251,967 or $0.0583 per share of common stock, payable in March 1999,
to stockholders of record on January 1, 1999.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
--------------------------------- -------------------
Encum- Improve- Carrying
brances Land Buildings Equipment ments Costs
------- ---- --------- --------- ----- --------
Properties the Company
has Invested in Under
Operating Leases:
Residence Inns by Marriott(R):
Atlanta, Georgia (b) $1,907,479 $13,459,040 $1,234,689 $ - $ -
Duluth, Georgia (c) 1,019,497 10,017,402 1,114,442 - -
---------- ----------- ---------- ------- -------
$ 2,926,976 $23,476,442 $2,349,131 $ - $ -
=========== =========== ========== ======== =======
<PAGE>
Life
on Which
Depreciation
in Latest
Gross Amount at Which Carried Date Income
at Close of Period (d) Accumulated of Con- Date Statement is
Land Buildings Equipment Total Depreciation struction Acquired Computed
---- --------- --------- ----- ------------ --------- -------- -------------
$1,907,479 $13,459,040 $1,234,689 $16,601,208 $213,483 1997 07/98 (e)
1,019,497 10,017,402 1,114,442 12,151,341 170,683 1997 07/98 (e)
- ---------- ----------- ---------- ----------- --------
$2,926,976 $23,476,442 $2,349,131 $28,752,549 $384,166
========== =========== ========== =========== ========
</TABLE>
<PAGE>
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(a) Transactions in real estate and accumulated depreciation during 1998
and 1997 are summarized as follows:
Accumulated
Cost (d) Depreciation
---------- ------------
Properties the Company
has Invested in Under
Operating Leases:
Balance, December 31, 1997 $ - $ -
Acquisitions 28,752,549 384,166
----------- --------
Balance, December 31, 1998 $28,752,549 $384,166
=========== ========
(b) In connection with the purchase of this Property, the Company has
obtained a loan in the amount of $6,000,000 collateralized by the
assignment of the rents and leases related to the Property.
(c) In connection with the purchase of this Property, the Company has
obtained a loan in the amount of $3,600,000 collateralized by the
assignment of the rents and leases related to the Property.
(d) As of December 31, 1998, the aggregate cost of the Properties owned by
the Company and its subsidiaries for federal income tax purposes is
$28,752,549. All of the leases are treated as operating leases for
federal income tax purposes.
(e) Depreciation expense is computed for buildings and equipment based upon
estimated lives of 40 and seven years, respectively.
(f) During the years ended December 31, 1998 and 1997, the Company incurred
acquisition fees totalling $1,426,216 and $509,643, respectively, paid
to the Advisor. Acquisition fees are included in land and buildings on
operating leases and other assets at December 31, 1998 and 1997.
INDEX TO OTHER FINANCIAL STATEMENTS
The following financial information is provided in connection with the Company's
acquisition of the Buckhead (Lenox Park) and the Gwinnett Place Properties. Due
to the fact that the tenant of the Company is a newly formed entity, the
information presented represents the historical financial performance of the
hotel businesses. The Buckhead (Lenox Park) Property and the Gwinnett Place
Property became operational on August 7, 1997 and July 29, 1997, respectively.
This information was obtained from the seller of the Properties. The Company has
acquired the hotel Properties and does not own any interest in the hotel
businesses. For information on the Properties and the long-term, triple-net
leases in which the Company has entered, see "Business -- Property
Acquisitions."
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
Updated Financial Statements (unaudited):
Balance Sheet as of June 30, 1998 B-27
Statement of Loss for the six months ended June 30, 1998 B-28
Audited Financial Statements:
Report of Independent Public Accountants B-29
Balance Sheet as of December 31, 1997 B-30
Statement of Loss for the year ended December 31, 1997 B-31
Statement of Member's Equity for the year ended December
31, 1997 B-32
Statement of Cash Flows for the year ended December 31,
1997 B-33
Notes to Financial Statement for the year ended December
31, 1997 B-34
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
Updated Financial Statements (unaudited):
Balance Sheet as of June 30, 1998 B-39
Statement of Loss for the six months ended June 30, 1998 B-40
Audited Financial Statements:
Report of Independent Public Accountants B-41
Balance Sheet as of December 31, 1997 B-42
Statement of Loss for the year ended December 31, 1997 B-43
Statement of Member's Deficit for the year ended December
31, 1997 B-44
Statement of Cash Flows for the year ended December 31,
1997 B-45
Notes to Financial Statement for the year ended December 31,
1997 B-46
B-26
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' EQUITY
------ -------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $ 1,229,955 Accounts payable $ 711,974
Accounts receivable, net 173,287 Accrued liabilities 427,306
-----------
Prepaid expenses 18,080
------------ Total current liabilities 1,139,280
Total current assets 1,421,322
------------
PROPERTY, at cost: FIRST MORTGAGE LOAN 10,634,958
Land 1,505,591
Buildings 8,842,642
Furniture, fixtures, and equipment 1,470,899 MEZZANINE LOAN 1,601,152
------------ -----------
11,819,132 Total liabilities 13,375,390
Less accumulated depreciation (467,063)
------------
Net property 11,352,069
------------
LOAN COSTS, net of accumulated MEMBERS' EQUITY 62,078
amortization of $109,395 377,910 -----------
------------
ORGANIZATION COSTS, net of Total liabilities and members'
accumulated amortization of equity $13,437,468
$38,269 43,272 ===========
------------
FRANCHISE COSTS, net of
accumulated amortization of
$2,750 57,250
------------
DEVELOPMENT IN PROGRESS 185,645
------------
Total assets $ 13,437,468
============
</TABLE>
B-27
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
REVENUES:
Rooms $ 2,007,424
Telephone 79,188
Other 50,203
-------------
Total revenues 2,136,815
-------------
EXPENSES:
Rooms 453,769
Telephone 18,730
Other operating departments 9,368
Administrative and general 158,036
Credit card commissions 44,111
Franchise fees 80,337
Advertising, marketing, and promotion 141,041
Repairs and maintenance 66,750
Utilities 52,275
Property insurance and taxes 117,165
Management fees 64,098
Other 5,134
Interest 604,186
Depreciation and amortization 337,891
-------------
Total expenses 2,152,891
-------------
NET LOSS $ (16,076)
=============
B-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Buckhead Residence Associates, L.L.C.:
We have audited the accompanying balance sheet of BUCKHEAD RESIDENCE ASSOCIATES,
L.L.C. as of December 31, 1997 and the related statement of loss, members'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Buckhead Residence Associates,
L.L.C. as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
February 27, 1998
B-29
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' EQUITY
------ -------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and short-term investments, including Accounts payable $ 285,134
restricted cash of $18,387 $ 225,703 Accrued liabilities 140,911
Accounts receivable, net of allowance for doubtful Current portion of mortgage loan 38,522
accounts of $1,973 114,685 -----------
Prepaid expenses 12,398 Total current liabilities 464,567
------------
Total current assets 352,786
------------
PROPERTY, at cost: DEFERRED DEVELOPMENT FEE 619,000
Land 1,505,591
Buildings 8,969,838
Furniture, fixtures, and equipment 1,470,899 FIRST MORTGAGE LOAN, less current portion 9,949,319
------------ (Note 2)
11,946,328
Less accumulated depreciation (211,216)
Net property 11,735,112 MEZZANINE LOAN (Note 2) 1,533,202
------------ -----------
LOAN COSTS, net of accumulated amortization of $49,725 437,580 Total liabilities 12,566,088
------------
ORGANIZATION COSTS, net of accumulated amortization of
$17,395 64,146 COMMITMENTS AND CONTINGENCIES (Note 2)
------------
FRANCHISE COSTS, net of accumulated amortization of
$1,250 58,750 MEMBERS' EQUITY 82,286
------------ -----------
Total assets $ 12,648,374 Total liabilities and members'
============ equity $12,648,374
===========
</TABLE>
The accompanying notes are an integral part of
this balance sheet.
B-30
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1997
REVENUES:
Rooms $ 862,815
Telephone 40,832
Other 15,684
----------
Total revenues 919,331
----------
EXPENSES:
Rooms 280,204
Telephone 8,603
Other operating departments 2,725
Administrative and general 103,471
Credit card commissions 19,124
Franchise fees 34,513
Advertising, marketing, and promotion 88,954
Repairs and maintenance 46,188
Utilities 37,097
Property insurance and taxes 18,758
Management fees 27,580
Other 34,541
Interest 447,026
Depreciation and amortization 279,586
----------
Total expenses 1,428,370
----------
NET LOSS $ (509,039)
==========
The accompanying notes are an integral part of this statement.
B-31
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
Stormont
Trice
Development RI HWE
Corporation Partners IV Total
----------- -------- --- -----
BALANCE, December 31, 1996 $ 193,800 $ 193,800 $ 203,725 $ 591,325
Net loss (193,800) (193,800) (121,439) (509,039)
---------- ---------- --------- ---------
BALANCE, December 31, 1997 $ 0 $ 0 $ 82,286 $ 82,286
========== ========== ========= =========
The accompanying notes are an integral part of this statement.
B-32
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (509,039)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 279,586
Changes in assets and liabilities:
Accounts receivable, net (114,685)
Prepaid expenses (12,398)
Accounts payable 285,134
Accrued liabilities 130,196
-----------
Total adjustments 567,833
-----------
Net cash provided by operating activities 58,794
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,627,218)
Organization costs (7,361)
-----------
Net cash used in investing activities (8,634,579)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal received from loans payable 8,715,244
Loan costs (7,362)
-----------
Net cash provided by financing activities 8,707,882
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 132,097
-----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 93,606
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 225,703
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the year $ 0
===========
The accompanying notes are an integral part of this statement.
B-33
<PAGE>
BUCKHEAD RESIDENCE ASSOCIATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Buckhead Residence Associates, L.L.C. (the "Company") is a Georgia limited
liability company that was organized for the purpose of constructing,
operating, and owning the Residence Inn Lenox Park (the "Hotel") in
Atlanta, Georgia. The Hotel is comprised of 150 suites and became
operational on August 7, 1997.
The members of the Company (the"Members"), their ownership percentages, and
their initial capital contributions are as follows:
Initial
Ownership Capital
Percentage Contribution
---------- ------------
Members:
Stormont Trice Development
Corporation ("STDC" or the
"Manager ") 40.74% $212,000
RI Partners ( "RI ") 40.74 212,000
HWE IV 18.52 212,000
The operating agreement provides for allocation of profits, losses, and
cash distributions, as follows:
Profits
o To the Members in proportion to their respective ownership
percentage interests, as defined in the agreement
Losses
o First, to the Members in proportion to their respective ownership
percentage interests until any Member's capital account is reduced
to zero
o Second, to the Member, if any, to the extent of its remaining
positive capital account balance (as adjusted to reflect any prior
allocation of loss)
B-34
<PAGE>
o Third, to the partners in proportion to their respective ownership
percentage interests
Notwithstanding the above loss allocations, to the extent losses
allocated to a Member would cause a Member to have an adjusted capital
account deficit, such losses shall not be allocated to such Member but
instead shall be allocated to other Members in proportion to, and to
the extent that, the amounts in which losses may be allocated to the
other Members without causing the other Members to have an adjusted
capital account deficit and then to the Members in proportion to their
respective contribution percentage interests.
Cash Distributions
o First, to the repayment or prepayment of such debts or
liabilities, other than any debts of the Company to any of the
Members, as the Manager shall determine to be in the best interest
of the Company
o Second, to the establishment of such reserves as the Manager deems
appropriate
o Third, to the repayment or prepayment of any back-up loans, as
defined in the agreement
o Fourth, to the repayment or prepayment of any Member loans
o Fifth, to the Members in equal shares until such time as $63,600
has been distributed to the Members
o Sixth, in equal amounts to the Manager and RI until such time as
$50,871 has been distributed to the Members
o Seventh, the balance available to the Members in proportion to
their respective ownership percentage interests
Allocation of profits, losses, and cash distributions from the sale or
refinancing of the property are allocated in a different manner and will be
affected by the terms of notes payable agreements discussed in Note 2.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash on hand,
deposits in banks, and short-term investments with original maturities of
90 days or less to be cash and cash equivalents.
The first mortgage, mezzanine loan, and management agreements require the
Hotel to establish a furniture, fixtures, and equipment reserve, as
follows: 0% in year one, 2% in year two, 3% in year three, 4% in year four,
and 5% in year five of gross revenues, as defined in the loan agreement. As
of December 31, 1997, $18,387 of cash and cash equivalents was designated
as the furniture, fixtures, and equipment reserve.
B-35
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Franchise and Organization Expenses
A franchise application fee has been capitalized and is being amortized
over the 20-year life of the franchise agreement. Organization costs have
been capitalized and are being amortized over 5 years.
Property
Property is recorded at cost, including capitalized interest, and is
depreciated using the straight-line method over the estimated useful lives
of the assets, which are 30 years for buildings and 3 to 7 years for
furniture, fixtures, and equipment. Expenditures for replacements and
betterments are capitalized, while expenditures for maintenance and repairs
are expensed as incurred.
Income Taxes
No provisions for income taxes have been made in the accounts of the
Company, since the Members report their respective shares of taxable income
and loss in their individual tax returns.
2. NOTES PAYABLE
First Mortgage Loan
On August 29, 1996, the Company entered into a loan agreement with Ocwen
Federal Bank FSB ("Ocwen"), formerly Berkeley Federal Bank & Trust FSB, for
a total available amount of $11,262,500 to fund costs of developing and
operating the Hotel. The note bears 10.25% interest until its maturity date
of August 31, 2001. The loan is collateralized by the Company's interest in
the Hotel. Interest accrues monthly and is added to the outstanding balance
until the budgeted interest reserve is depleted or September 1, 1998,
whichever is earlier. Beginning October 1, 1998, interest and principal are
due monthly, with all remaining repaid principal and interest being due on
August 31, 2001. The principal outstanding at December 31, 1997 is
repayable as follows:
1998 $ 38,522
1999 164,304
2000 181,960
2001 9,603,055
-----------
$ 9,987,841
===========
B-36
<PAGE>
In addition, Ocwen receives noncumulative participating interest based on a
percentage of the Company's excess cash flow, as defined in the loan
agreement. These percentages are as follows: 22.5% in year one, 25% in
years two and three, and 30% in years four and five. No amounts were
payable in 1997.
In the event the Company sells the Hotel or refinances the loan, an amount
shall be due to Ocwen as follows: in year one, the greater of $525,000 or
22.5% of the greater of the net proceeds or net economic value, as defined
in the loan; in years two or three, the greater of $525,000 or 25% of the
greater of the net proceeds or net economic value; in year four, the
greater of $800,000 or 30% of the greater of the net proceeds or net
economic value; in year five, the greater of $1,300,000 or 30% of the
greater of the net proceeds or net economic value.
Mezzanine Loan
On August 29, 1996, the Company entered into a loan agreement with Heller
Financial, Inc. ("Heller") for a total available amount of $1,621,800. At
December 31, 1997, $1,533,202 is outstanding, including $181,702 of accrued
interest. The note bears an interest rate of 10% and is interest only until
its maturity date of August 31, 2001. Interest is due monthly, commencing
when the accrued interest exceeds $270,300 or 20% of the outstanding
principal amount of the loan or when distributable cash flow, as defined,
is available. In addition, Heller receives quarterly, as additional
consideration, the excess of the percentage of the Company's excess cash
flow, as defined in the loan agreement, over the amount of interest accrued
during the previous quarter. These percentages are as follows: 42.625% in
year one, 41.25% in years two and three, and 38.5% in years four and five
(effectively, this equals 55% of the cash flow after paying Ocwen's
participating interest).
Through August 31, 2006, upon the occurrence of any participation event, as
defined in the loan agreement, Heller will receive an amount calculated as
follows: in year one, the greater of $800,000 or 55% of the net adjusted
proceeds, as defined in the loan agreement, less $250,000 and the Company's
equity (the "Participation Amount"); in year two, the greater of $1,100,000
or 55% of the Participation Amount; in year three, the greater of
$1,200,000 or 55% of the Participation Amount; in year four, the greater of
$1,400,000 or 55% of the Participation Amount; in year five and thereafter,
the greater of $1,500,000 or 55% of the Participation Amount. In no event
may Heller's participation exceed 49.9% of the total profit of the
participation event.
3. FRANCHISE AND MANAGEMENT AGREEMENTS
The Hotel is operated under a franchise agreement with Marriott
International, Inc. ("Marriott"). The term of the agreement is 20 years
unless otherwise extended or terminated. The Company paid Marriott an
application fee of $60,000. This has been capitalized as franchise costs in
the accompanying balance sheet. Amortization began when the Hotel became
operational, and the cost is being amortized over the life of the franchise
agreement. The agreement provides for the Hotel to reimburse Marriott for
certain common expenses, including, but not limited to, the use of
Marriott's national reservation system. The Hotel also pays Marriott
certain fees, as follows:
B-37
<PAGE>
o Royalty Fee. Percent of the gross sales, as defined in the
agreement. Royalty fees for the year ended December 31, 1997 were
$34,513.
o Marketing Fund Fee. Percent of gross sales. Marketing fund fees
for the year ended December 31, 1997 were $21,571 and are included
in advertising, marketing, and promotion expenses in the
accompanying statement of loss.
The Hotel is operated under a management agreement with Stormont Trice
Management Corporation ("STMC"), an affiliate of STDC. The term of the
management agreement is ten years. Under the terms of the agreement, the
Company pays STMC 3% of gross revenues, as defined in the agreement. At
December 31, 1997, $6,907 in management fees were payable to STMC.
Management fee expense for 1997 was $27,580.
4. RELATED-PARTY TRANSACTIONS
In addition to the management agreement (Note 3), Stormont Trice
Corporation, an affiliate of STDC, provides workers' compensation, group
insurance, and certain employee benefits to all of the Stormont Trice
Corporation group of hotels, and a pro rata portion of the total insurance
and certain employee benefits expense is allocated to each hotel. The
amount allocated to the Company for the year ended December 31, 1997 was
$11,493.
Stormont Trice Corporation also provides property, umbrella, and casualty
insurance to all of the Stormont Trice Corporation group of hotels, and a
pro rata portion of the total insurance expense is allocated to each hotel.
The amount allocated to the Company for the year ended December 31, 1997
was $15,925.
STDC provided development management services to the Company in
construction of the Hotel. The costs for these services in 1997 were
$619,000 and are included in buildings in the accompanying balance sheet.
Amounts due to STDC for these services are $619,000 at December 31, 1997.
In accordance with the terms of the agreement, the fee will not be payable
until the Company repays all of the Ocwen loan obligation and a portion of
the Heller loan obligation, as defined.
STDC also provided the director of design and development for the Hotel.
The cost for these services in 1997 was $34,082 and is included in
buildings in the accompanying balance sheet. Amounts due to STDC for these
services were approximately $14,000 at December 31, 1997 and are included
in accounts payable in the accompanying balance sheet.
B-38
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' DEFICIT
------ --------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $ 768,261 Accounts payable $ 459,653
Accounts receivable, net 106,194 Accrued liabilities 292,461
-----------
Prepaid expenses 18,985
----------- Total current liabilities 752,114
Total current assets 893,440
-----------
PROPERTY, at cost: FIRST MORTGAGE LOAN 7,691,138
Land 800,000
Buildings 6,509,423
Furniture, fixtures, and equipment 1,311,137 MEZZANINE LOAN 1,204,270
----------- -----------
8,620,560 Total liabilities 9,647,522
Less accumulated depreciation (369,063)
-----------
Net property 8,251,497
-----------
LOAN COSTS, net of accumulated MEMBERS' DEFICIT (75,739)
amortization of $86,686 299,461 -----------
-----------
ORGANIZATION COSTS, net of Total liabilities and members'
accumulated amortization of deficit $ 9,571,783
$39,585 44,664 ===========
-----------
FRANCHISE COSTS, net of
accumulated amortization of
$2,420 50,380
-----------
DEVELOPMENT IN PROGRESS 32,341
-----------
Total assets $ 9,571,783
===========
</TABLE>
B-39
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
REVENUES:
Rooms $ 1,454,846
Telephone 66,129
Other 44,609
------------
Total revenues 1,565,584
------------
EXPENSES:
Rooms 290,519
Telephone 10,900
Other operating departments 14,259
Administrative and general 134,926
Credit card commissions 33,083
Franchise fees 58,194
Advertising, marketing, and promotion 120,237
Repairs and maintenance 64,418
Utilities 62,361
Property insurance and taxes 66,783
Management fees 62,623
Other 4,010
Interest 439,034
Depreciation and amortization 272,287
------------
Total expenses 1,633,634
------------
NET LOSS $ (68,050)
============
B-40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Gwinnett Residence Associates, L.L.C.:
We have audited the accompanying balance sheet of GWINNETT RESIDENCE ASSOCIATES,
L.L.C. as of December 31, 1997 and the related statement of loss, members'
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gwinnett Residence Associates,
L.L.C. as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
February 27, 1998
B-41
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND MEMBERS' DEFICIT
------ --------------------------------
<S> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and short-term investments, including Accounts payable $ 311,598
restricted cash of $15,483 $ 212,745 Accrued liabilities 105,740
Accounts receivable, net of allowance for Current portion of mortgage loan 27,736
doubtful accounts of $744 51,372 ----------
Prepaid expenses 24,414 Total current liabilities 445,074
------------
Total current assets 288,531
------------
PROPERTY, at cost: DEFERRED DEVELOPMENT FEE 451,000
Land 800,000
Buildings 6,509,423
Furniture, fixtures, and equipment 1,311,137 FIRST MORTGAGE LOAN, less current portion 7,163,684
------------ (Note 2)
8,620,560
Less accumulated depreciation (166,971)
------------
Net property 8,453,589 MEZZANINE LOAN (Note 2) 1,153,163
------------- ----------
LOAN COSTS, net of accumulated amortization Total liabilities 9,212,921
of $39,403 346,744
------------
ORGANIZATION COSTS, net of accumulated
amortization of $17,993 66,256 COMMITMENTS AND CONTINGENCIES (Note 2)
------------
FRANCHISE COSTS, net of accumulated amortization of
$1,100 51,700 MEMBERS' DEFICIT (6,101)
------------ ----------
Total assets $ 9,206,820 Total liabilities and members' deficit $9,206,820
============ ==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
B-42
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1997
REVENUES:
Rooms $ 691,864
Telephone 32,821
Other 19,473
----------
Total revenues 744,158
----------
EXPENSES:
Rooms 226,612
Telephone 4,079
Other operating departments 3,257
Administrative and general 100,206
Credit card commissions 15,073
Franchise fees 27,675
Advertising, marketing, and promotion 62,531
Repairs and maintenance 46,072
Utilities 46,892
Property insurance and taxes 17,298
Management fees 29,759
Other 9,030
Interest 328,707
Depreciation and amortization 225,467
---------
Total expenses 1,142,658
---------
NET LOSS $(398,500)
=========
The accompanying notes are an integral part of this statement.
B-43
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF MEMBERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
Stormont
Trice
Development RI HWE
Corporation Partners IV Total
----------- -------- --- -----
BALANCE, December 31, 1996 $ 128,197 $ 128,197 $ 136,005 $ 392,399
Net loss (130,703) (130,703) (137,094) (398,500)
--------- --------- --------- ---------
BALANCE, December 31, 1997 $ (2,506) $ (2,506) $ (1,089) $ (6,101)
========= ========= ========= =========
The accompanying notes are an integral part of this statement.
B-44
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (398,500)
-----------
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 225,467
Changes in assets and liabilities:
Accounts receivable, net (51,372)
Prepaid expenses (24,414)
Accounts payable 311,598
Accrued liabilities 97,282
-----------
Total adjustments 558,561
-----------
Net cash provided by operating activities 160,061
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,086,029)
Start-up costs (7,129)
-----------
Net cash used in investing activities (6,093,158)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal received from loans payable 6,142,121
Loan costs (7,129)
-----------
Net cash provided by financing activities 6,134,992
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 201,895
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,850
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 212,745
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the year $ 0
===========
The accompanying notes are an integral part of this statement.
B-45
<PAGE>
GWINNETT RESIDENCE ASSOCIATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Gwinnett Residence Associates, L.L.C. (the "Company") is a Georgia limited
liability company that was organized for the purpose of constructing,
operating, and owning the Gwinnett Residence Inn (the "Hotel") in Atlanta,
Georgia. The Hotel is comprised of 132 suites and became operational on
July 29, 1997.
The members of the Company (the"Members"), their ownership percentages, and
their initial capital contributions are as follows:
Initial
Ownership Capital
Percentage Contribution
---------- ------------
Members:
Stormont Trice Development
Corporation ("STDC" or the
"Manager ") 41.08% $142,000
RI Partners ( "RI ") 41.08 142,000
HWE IV 17.84 142,000
The operating agreement provides for allocation of profits, losses, and
cash distributions, as follows:
Profits
o To the Members in proportion to their respective ownership
percentage interests, as defined in the agreement
Losses
o First, to the Members in proportion to their respective ownership
percentage interests until any Member's capital account is reduced
to zero
o Second, to the Member, if any, to the extent of its remaining
positive capital account balance (as adjusted to reflect any prior
allocation of loss)
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o Third, to the partners in proportion to their respective ownership
percentage interests
Notwithstanding the above loss allocations, to the extent losses
allocated to a Member would cause a Member to have an adjusted capital
account deficit, such losses shall not be allocated to such Member but
instead shall be allocated to other Members in proportion to, and to
the extent that, the amounts in which losses may be allocated to the
other Members without causing the other Members to have an adjusted
capital account deficit and then to the Members in proportion to their
respective ownership percentage interests.
Cash Distributions
o First, to the repayment or prepayment of such debts or
liabilities, other than any debts of the Company to any of the
Members, as the Manager shall determine to be in the best interest
of the Company
o Second, to the establishment of such reserves as the Manager deems
appropriate
o Third, to the repayment or prepayment of any back-up loans, as
defined in the agreement
o Fourth, to the repayment or prepayment of any Member loans
o Fifth, to the Members in equal shares until such time as $42,600
has been distributed to the Members
o Sixth, in equal amounts to the Manager and RI until such time as
$36,996 has been distributed to the Members
o Seventh, the balance available to the Members in proportion to
their respective ownership percentage interests
Allocation of profits, losses, and cash distributions from the sale or
refinancing of the property are allocated in a different manner and will be
affected by the terms of notes payable agreements discussed in Note 2.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash on hand,
deposits in banks, and short-term investments with original maturities of
90 days or less to be cash and cash equivalents.
The first mortgage, mezzanine loan, and management agreements require the
Hotel to establish a furniture, fixtures, and equipment reserve, as
follows: 0% in year one, 2% in year two, 3% in year three, 4% in year four,
and 5% in year five of gross revenues, as defined in the loan agreement. As
of December 31, 1997, $15,483 of cash and cash equivalents was designated
as the furniture, fixtures, and equipment reserve.
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<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Franchise and Organization Expenses
A franchise application fee has been capitalized and is being amortized
over the 20-year life of the franchise agreement. Organization costs have
been capitalized and are being amortized over 5 years.
Property
Property is recorded at cost, including capitalized interest, and is
depreciated using the straight-line method over the estimated useful lives
of the assets, which are 30 years for buildings and 3 to 7 years for
furniture, fixtures, and equipment. Expenditures for replacements and
betterments are capitalized, while expenditures for maintenance and repairs
are expensed as incurred.
Income Taxes
No provisions for income taxes have been made in the accounts of the
Company since the Members report their respective shares of taxable income
and loss in their individual tax returns.
2. NOTES PAYABLE
First Mortgage Loan
On August 29, 1996, the Company entered into a loan agreement with Ocwen
Federal Bank FSB ("Ocwen"), formerly Berkeley Federal Bank & Trust FSB, for
a total available amount of $8,174,500 to fund costs of developing and
operating the Hotel. The note bears 10.25% interest until its maturity date
of August 31, 2001. The loan is collateralized by the Company's interest in
the Hotel. Interest accrues monthly and is added to the outstanding balance
until the budgeted interest reserve is depleted or September 1, 1998,
whichever is earlier. Beginning October 1, 1998, interest and principal are
due monthly, with all remaining repaid principal and interest being due on
August 31, 2001. The principal outstanding at December 31, 1997 is
repayable as follows:
1998 $ 27,736
1999 118,301
2000 131,014
2001 6,914,369
----------
$7,191,420
==========
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<PAGE>
In addition, Ocwen receives noncumulative participating interest based on a
percentage of the Company's excess cash flow, as defined in the loan
agreement. These percentages are as follows: 22.5% in year one, 25% in
years two and three, and 30% in years four and five. No amounts were
payable in 1997.
In the event the Company sells the Hotel or refinances the loan, an amount
shall be due to Ocwen as follows: in year one, the greater of $400,000 or
22.5% of the greater of the net proceeds or net economic value, as defined
in the loan; in years two or three, the greater of $400,000 or 25% of the
greater of the net proceeds or net economic value; in year four, the
greater of $700,000 or 30% of the greater of the net proceeds or net
economic value; in year five, the greater of $1,000,000 or 30% of the
greater of the net proceeds or net economic value.
Mezzanine Loan
On August 29, 1996, the Company entered into a loan agreement with Heller
Financial, Inc. ("Heller") for a total available amount of $1,219,800. At
December 31, 1997, $1,153,163 is outstanding, including $136,663 of accrued
interest. The note bears an interest rate of 10% and is interest only until
its maturity date of August 31, 2001. Interest is due monthly, commencing
when the accrued interest exceeds $203,300 or 20% of the outstanding
principal amount of the loan or when distributable cash flow, as defined,
is available. In addition, Heller receives quarterly, as additional
consideration, the excess of the percentage of the Company's excess cash
flow, as defined in the loan agreement, over the amount of interest accrued
during the previous quarter. These percentages are as follows: 44.175% in
year one, 42.75% in years two and three, and 39.9% in years four and five
(effectively, this equals 57% of the cash flow after paying Ocwen's
participating interest).
Through August 31, 2006, upon the occurrence of any participation event, as
defined in the loan agreement, Heller will receive an amount calculated as
follows: in year one, the greater of $700,000 or 57% of the net adjusted
proceeds, as defined in the loan agreement, less $451,000 and the Company's
equity (the "Participation Amount"); in year two, the greater of $1,000,000
or 57% of the Participation Amount; in year three, the greater of
$1,100,000 or 57% of the Participation Amount; in year four, the greater of
$1,200,000 or 57% of the Participation Amount; in year five and thereafter,
the greater of $1,300,000 or 57% of the Participation Amount. In no event
may Heller's participation exceed 49.9% of the total profit of the
participation event.
3. FRANCHISE AND MANAGEMENT AGREEMENTS
The Hotel is operated under a franchise agreement with Marriott
International, Inc. ("Marriott"). The term of the agreement is 20 years
unless otherwise extended or terminated. The Company paid Marriott an
application fee of $52,800. This has been capitalized as franchise costs in
the accompanying balance sheet. Amortization began when the Hotel became
operational, and the cost is being amortized over the life of the franchise
agreement. The agreement provides for the Hotel to reimburse Marriott for
certain common expenses, including, but not limited to, the use of
Marriott's national reservation system. The Hotel also pays Marriott
certain fees, as follows:
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<PAGE>
o Royalty Fee. Percent of the gross sales, as defined in the
agreement. Royalty fees for the year ended December 31, 1997 were
$27,675.
o Marketing Fund Fee. Percent of gross sales. Marketing fund fees
for the year ended December 31, 1997 were $17,296 and are included
in advertising, marketing, and promotion expenses in the
accompanying statement of loss.
The Hotel is operated under a management agreement with Stormont Trice
Management Corporation ("STMC"), an affiliate of STDC. The term of the
management agreement is ten years. Under the terms of the agreement, the
Company pays STMC 4% of gross revenues, as defined in the agreement. At
December 31, 1997, $6,622 in management fees were payable to STMC.
Management fee expense for 1997 was $29,759.
4. RELATED-PARTY TRANSACTIONS
Julian LeCraw & Co, Inc. ("LeCraw"), which is related to one of the Members
through common ownership, provided general contracting services to the
Company in construction of the Hotel. The costs for these services in 1997
were approximately $3,682,183 and are included in buildings in the
accompanying balance sheet. Amounts due to LeCraw for these services are
approximately $20,000 at December 31, 1997 and are included in accounts
payable in the accompanying balance sheet.
In addition to the management agreement (Note 3), Stormont Trice
Corporation, an affiliate of STDC, provides workers' compensation, group
insurance, and certain employee benefits to all of the Stormont Trice
Corporation group of hotels, and a pro rata portion of the total insurance
and certain employee benefits expense is allocated to each hotel. The
amount allocated to the Company for the year ended December 31, 1997 was
$9,388.
Stormont Trice Corporation also provides property, umbrella, and casualty
insurance to all of the Stormont Trice Corporation group of hotels, and a
pro rata portion of the total insurance expense is allocated to each hotel.
The amount allocated to the Company for the year ended December 31, 1997
was $14,379.
STDC provided development management services to the Company in
construction of the Hotel. The costs for these services in 1997 were
$451,000 and are included in buildings in the accompanying balance sheet.
Amounts due to STDC for these services are approximately $451,000 at
December 31, 1997. In accordance with the terms of the agreement, the fee
will not be payable until the Company repays all of the Ocwen loan
obligation and a portion of the Heller loan obligation, as defined.
STDC also provided the director of design and development for the Hotel.
The cost for these services in 1997 was $40,982 and is included in
buildings in the accompanying balance sheet. Amounts due to STDC for these
services were $20,900 at December 31, 1997 and are included in accounts
payable in the accompanying balance sheet.
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<PAGE>
EXHIBIT C
PRIOR PERFORMANCE TABLES
<PAGE>
EXHIBIT C
PRIOR PERFORMANCE TABLES
The information in this Exhibit C contains certain relevant summary
information concerning certain prior public programs sponsored by two of the
Company's principals (who also serve as the Chairman of the Board and President
of the Company) and their Affiliates (the "Prior Public Programs") which like
the Company, were formed to invest in restaurant properties leased on a
triple-net basis to operators of national and regional fast-food and
family-style restaurant chains similar to those in which the Company may invest.
No Prior Public Programs sponsored by the Company's Affiliates have invested in
hotel properties leased on a triple-net basis to operators of national and
regional limited-service, extended-stay and full-service hotel chains.
A more detailed description of the acquisitions by the Prior Public
Programs is set forth in Part II of the registration statement filed with the
Securities and Exchange Commission for this Offering and is available from the
Company upon request, without charge. In addition, upon request to the Company,
the Company will provide, without charge, a copy of the most recent Annual
Report on Form 10-K filed with the Securities and Exchange Commission for CNL
Income Fund, Ltd., CNL Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL
Income Fund IV, Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL
Income Fund VII, Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL
Income Fund X, Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL
Income Fund XIII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL
Income Fund XVI, Ltd., CNL Income Fund XVII, Ltd., CNL Income Fund XVIII, Ltd.,
and CNL American Properties Fund, Inc., as well as a copy, for a reasonable fee,
of the exhibits filed with such reports.
The investment objectives of the Prior Public Programs generally
include preservation and protection of capital, the potential for increased
income and protection against inflation, and potential for capital appreciation,
all through investment in restaurant properties. In addition, the investment
objectives of the Prior Public Programs included making partially tax-sheltered
distributions.
STOCKHOLDERS SHOULD NOT CONSTRUE INCLUSION OF THE FOLLOWING TABLES AS
IMPLYING THAT THE COMPANY WILL HAVE RESULTS COMPARABLE TO THOSE REFLECTED IN
SUCH TABLES. DISTRIBUTABLE CASH FLOW, FEDERAL INCOME TAX DEDUCTIONS, OR OTHER
FACTORS COULD BE SUBSTANTIALLY DIFFERENT. STOCKHOLDERS SHOULD NOTE THAT, BY
ACQUIRING SHARES IN THE COMPANY, THEY WILL NOT BE ACQUIRING ANY INTEREST IN ANY
PRIOR PUBLIC PROGRAMS.
Description of Tables
The following Tables are included herein:
Table I - Experience in Raising and Investing Funds
Table II - Compensation to Sponsor
Table III - Operating Results of Prior Programs
Table V - Sales or Disposal of Properties
Unless otherwise indicated in the Tables, all information contained in
the Tables is as of June 30, 1998. The following is a brief description of the
Tables:
Table I - Experience in Raising and Investing Funds
Table I presents information on a percentage basis showing the
experience of two of the principals of the Company and their Affiliates in
raising and investing funds for the Prior Public Programs, the offerings of
which became fully subscribed between July 1993 and June 1998.
C-1
<PAGE>
The Table sets forth information on the offering expenses incurred and
amounts available for investment expressed as a percentage of total dollars
raised. The Table also shows the percentage of property acquisition cost
leveraged, the date the offering commenced, and the time required to raise funds
for investment.
Table II - Compensation to Sponsor
Table II provides information, on a total dollar basis, regarding
amounts and types of compensation paid to the general partners of the Prior
Public Programs.
The Table indicates the total offering proceeds and the portion of such
offering proceeds paid or to be paid to two of the principals of the Company and
their Affiliates in connection with the Prior Public Programs, the offerings of
which became fully subscribed between July 1993 and June 1998. The Table also
shows the amounts paid to two of the principals of the Company and their
Affiliates from cash generated from operations and from cash generated from
sales or refinancing by each of the Prior Public Programs on a cumulative basis
commencing with inception and ending June 30, 1998.
Table III - Operating Results of Prior Programs
Table III presents a summary of operating results for the period from
inception through June 30, 1998, of the Prior Public Programs, the offerings of
which became fully subscribed between July 1993 and June 1998.
The Table includes a summary of income or loss of the Prior Public
Programs, which are presented on the basis of generally accepted accounting
principles ("GAAP"). The Table also shows cash generated from operations, which
represents the cash generated from operations of the properties of the Prior
Public Programs, as distinguished from cash generated from other sources
(special items). The section of the Table entitled "Special Items" provides
information relating to cash generated from or used by items which are not
directly related to the operations of the properties of the Prior Public
Programs, but rather are related to items of a partnership nature. These items
include proceeds from capital contributions of limited partners and
disbursements made from these sources of funds, such as syndication and
organizational costs, acquisition of the properties and other costs which are
related more to the organization of the partnership and the acquisition of
properties than to the actual operations of the partnerships.
The Table also presents information pertaining to investment income,
returns of capital on a GAAP basis, cash distributions from operations, sales
and refinancing proceeds expressed in total dollar amounts as well as
distributions and tax results on a per $1,000 investment basis.
Table IV - Results of Completed Programs
Table IV is omitted from this Exhibit C because none of the directors
of the Company or their Affiliates has been involved in completed programs which
made investments similar to those of the Company.
Table V - Sales or Disposal of Properties
Table V provides information regarding the sale or disposal of
properties owned by the Prior Public Programs between July 1993 and June 1998.
The Table includes the selling price of the property, the cost of the
property, the date acquired and the date of sale.
C-2
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
----------- ----------- ----------- -----------
<S> <C>
Dollar amount offered $40,000,000 $45,000,000 $40,000,000 $45,000,000
=========== =========== =========== ===========
Dollar amount raised 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- -----------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5) (8.5) (8.5)
Organizational expenses (3.0) (3.0) (3.0) (3.0)
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated
entities) (0.5) (0.5) (0.5) (0.5)
----------- ----------- ----------- -----------
(12.0) (12.0) (12.0) (12.0)
----------- ----------- ----------- -----------
Reserve for operations -- -- -- --
----------- ----------- ----------- -----------
Percent available for
investment 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== ============
Acquisition costs:
Cash down payment 82.5% 82.5% 82.5% 82.5%
Acquisition fees paid
to affiliates 5.5 5.5 5.5 5.5
Loan costs -- -- -- --
----------- ----------- ----------- ------------
Total acquisition costs 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== ============
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- -- --
Date offering began 3/31/93 8/27/93 2/23/94 9/02/94
Length of offering (in
months) 5 6 6 9
Months to invest 90% of
amount available for
investment measured
from date of offering 10 11 10 11
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective March 29, 1995, CNL American
Properties Fund, Inc. ("APF") registered for sale $165,000,000 of
shares of common stock (the "Initial Offering"), including $15,000,000
available only to stockholders participating in the company's
reinvestment plan. The Initial Offering of APF commenced April 19,
1995, and upon completion of the Initial Offering on February 6, 1997,
had received subscription proceeds of $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) issued pursuant to the
reinvestment plan. Pursuant to a Registration Statement on Form S-11
under the Securities Act of 1933, as amended, effective January 31,
1997, APF registered for sale $275,000,000 of shares of common stock
(the "1997 Offering"), including $25,000,000 available only to
stockholders participating in the company's reinvestment plan. The
1997 Offering of APF commenced following the completion of the Initial
Offering on February 6, 1997, and upon completion of the 1997 Offering
on March 2, 1998, had received subscription proceeds of $251,872,648
(25,187,265 shares), including $1,872,648 (187,265 shares) issued
pursuant to the reinvestment plan. Pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933, as amended,
effective May 12, 1998, APF registered for sale $345,000,000 of shares
of common stock (the "1998 Offering"), including $20,000,000 available
only to stockholders participating in the company's reinvestment plan.
The 1998 Offering of APF commenced following the completion of the
1997 Offering on March 2, 1998. As of June 30, 1998, APF had received
subscriptions totalling $111,835,687 from the 1998 Offering, including
$1,823,518 issued pursuant to the company's reinvestment plan.
C-3
<PAGE>
<TABLE>
<CAPTION>
CNL American CNL Income CNL Income
Properties Fund, Fund XVII, Fund XVIII,
Inc. Ltd. Ltd.
(Note 1)
------------ ----------- -----------
<S> <C>
Dollar amount offered $400,000,000 $30,000,000 $35,000,000
============ =========== ===========
Dollar amount raised 100.0% 100.0% 100.0%
------------ ----------- -----------
Less offering expenses:
Selling commissions
and discounts (7.5) (8.5) (8.5)
Organizational expenses (3.0) (3.0) (3.0)
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated
entities) (0.5) (0.5) (0.5)
------------ ----------- -----------
(11.0) (12.0) (12.0)
------------ ----------- -----------
Reserve for operations -- -- --
------------ ----------- ----------
Percent available for
investment 89.0% 88.0% 88.0%
============ =========== ===========
Acquisition costs:
Cash down payment 84.5% 83.5% 83.5%
Acquisition fees paid
to affiliates 4.5 4.5 4.5
Loan costs -- -- --
------------ ----------- ----------
Total acquisition costs 89.0% 88.0% 88.0%
============ =========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- --
Date offering began 4/19/95 and 9/02/95 9/20/96
2/06/97
Length of offering (in
months) 22 and 13 12 17
Months to invest 90% of
amount available for
investment measured
from date of offering 23 and 16 15 17
</TABLE>
C-4
<PAGE>
TABLE II
COMPENSATION TO SPONSOR
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
----------- ----------- ----------- -----------
<S> <C>
Date offering commenced 3/31/93 8/27/93 2/23/94 9/02/94
Dollar amount raised $40,000,000 $45,000,000 $40,000,000 $45,000,000
Amount paid to sponsor from =========== =========== =========== ===========
proceeds of offering:
Selling commissions and
discounts 3,400,000 3,825,000 3,400,000 3,825,000
Real estate commissions - - - -
Acquisition fees 2,200,000 2,475,000 2,200,000 2,475,000
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 200,000 225,000 200,000 225,000
---------- ----------- ----------- -----------
Total amount paid to sponsor 5,800,000 6,525,000 5,800,000 6,525,000
=========== =========== =========== ===========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1998 (6 months) 1,782,788 1,898,767 1,755,734 1,969,826
1997 3,395,200 3,734,726 3,419,967 3,909,781
1996 3,494,528 3,841,163 3,557,073 3,911,609
1995 3,482,461 3,823,939 3,361,477 2,619,840
1994 3,232,046 2,897,432 1,154,454 212,171
1993 1,148,550 329,957 - -
Amount paid to sponsor from
operations (administrative,
accounting and
management fees):
1998 (6 months) 48,887 53,039 44,829 47,605
1997 121,643 128,536 113,372 129,357
1996 126,947 134,867 122,391 157,883
1995 103,083 114,095 122,107 138,445
1994 83,046 84,801 37,620 7,023
1993 27,003 8,220 - -
Dollar amount of property
sales and refinancing
before deducting payments
to sponsor:
Cash (Note 3) 1,769,260 4,770,015 3,312,297 1,385,384
Notes - - - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - - - -
Incentive fees - - - -
Other (Note 2) - - - -
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective March 29, 1995, CNL American
Properties Fund, Inc. ("APF") registered for sale $165,000,000 of
shares of common stock (the "Initial Offering"), including $15,000,000
available only to stockholders participating in the company's
reinvestment plan. The Initial Offering of APF commenced April 19,
1995, and upon completion of the Initial Offering on February 6, 1997,
had received subscription proceeds of $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) issued pursuant to the
reinvestment plan. Pursuant to a Registration Statement on Form S-11
under the Securities Act of 1933, as amended, effective January 31,
1997, APF registered for sale $275,000,000 of shares of common stock
(the "1997 Offering"), including $25,000,000 available only to
stockholders participating in the company's reinvestment plan. The
1997 Offering of APF commenced following the completion of the Initial
Offering on February 6, 1997, and upon completion of the 1997 Offering
on March 2, 1998, had received subscription proceeds of $251,872,648
(25,187,265 shares), including $1,872,648 (187,265 shares) issued
pursuant to the reinvestment plan. Pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933, as amended,
effective May 12, 1998, APF registered for sale $345,000,000 of shares
of common stock (the "1998 Offering"), including $20,000,000 available
only to stockholders participating in the company's reinvestment plan.
The 1998 Offering of APF commenced following the completion of the
1997 Offering on March 2, 1998. As of June 30, 1998, APF had received
subscriptions totalling $111,835,687 from the 1998 Offering, including
$1,823,518 issued pursuant to the company's reinvestment plan. The
amounts shown represent the combined results of the Initial Offering,
the 1997 Offering and the 1998 Offering as of June 30, 1998, including
shares issued pursuant to the company's reinvestment plans.
Note 2: For negotiating secured equipment leases and supervising the secured
equipment lease program, APF is entitled to receive a one-time secured
equipment lease servicing fee of two percent of the purchase price of
the equipment that is the subject of a secured equipment lease. During
the six months ended June 30, 1998 and the years ended December 31,
1997 and 1996, APF incurred $36,899, $366,865 and $70,070,
respectively, in secured equipment lease servicing fees.
Note 3: Excludes properties sold and substituted with replacement properties,
as permitted under the terms of the lease agreements.
C-5
<PAGE>
<TABLE>
<CAPTION>
CNL American CNL Income CNL Income
Properties Fund, Fund XVII, Fund XVIII,
Inc. Ltd. Ltd.
------------ ----------- -----------
(Note 1)
<S> <C>
Date offering commenced 4/19/95 and 2/06/97 9/02/95 9/20/96
Dollar amount raised $514,300,100 $30,000,000 $35,000,000
============ =========== ===========
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts
Real estate commissions 38,572,508 2,550,000 2,975,000
Acquisition fees - - -
Marketing support and 23,143,505 1,350,000 1,575,000
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities)
Total amount paid to sponsor 2,571,501 150,000 175,000
------------ ----------- -----------
64,287,514 4,050,000 4,725,000
Dollar amount of cash generated ============ =========== ===========
from operations before
deducting payments to
sponsor:
1998 (6 months)
1997
1996 17,846,454 1,315,440 1,517,300
1995 18,514,122 2,611,191 1,459,963
1994 6,096,045 1,340,159 30,126
1993 594,425 11,671 -
Amount paid to sponsor from - - -
operations (administrative, - - -
accounting and
management fees):
1998 (6 months)
1997
1996 1,245,501 41,356 58,088
1995 1,437,908 116,077 98,207
1994 613,505 107,211 2,980
1993 95,966 2,659 -
Dollar amount of property - - -
sales and refinancing - - -
before deducting payments
to sponsor:
Cash (Note 3)
Notes
Amount paid to sponsors 7,894,390 - -
from property sales and - - -
refinancing:
Real estate commissions
Incentive fees
Other (Note 2) - - -
- - -
- - -
</TABLE>
C-6
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIII, LTD.
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ -------------
<S> <C>
Gross revenue $ 0 $ 966,564 $ 3,558,447 $ 3,806,944
Equity in earnings of joint ventures 0 1,305 43,386 98,520
Profit (loss) from sale of properties
(Notes 4, 5 and 6) 0 0 0 (29,560)
Interest income 0 181,568 77,379 51,410
Less: Operating expenses 0 (59,390) (183,311) (214,705)
Interest expense 0 0 0 0
Depreciation and amortization 0 (148,170) (378,269) (393,435)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 941,877 3,117,632 3,319,174
============ ============ ============ ============
Taxable income
- from operations 0 978,535 2,703,252 2,920,859
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,121,547 3,149,000 3,379,378
Cash generated from sales (Notes 4, 5 and 6) 0 0 0 286,411
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,121,547 3,149,000 3,665,789
Less: Cash distributions to investors
(Note 7)
- from operating cash flow 0 (528,364) (2,800,004) (3,350,014)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after
cash distributions 0 593,183 348,996 315,775
Special items (not including sales
and refinancing):
Limited partners' capital
contributions 0 40,000,000 0 0
General partners' capital
contributions 1,000 0 0 0
Syndication costs 0 (3,932,017) (181) 0
Acquisition of land and buildings 0 (19,691,630) (5,764,308) (336,116)
Investment in direct financing leases 0 (6,760,624) (1,365,075) 0
Investment in joint ventures 0 (314,998) (545,139) (140,052)
Increase (decrease) in restricted cash 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIII, Ltd. by related parties 0 (799,980) (25,036) (3,074)
Increase in other assets 0 (454,909) 9,226 0
Loan to tenant 0 0 0 0
Collections on loan to tenant 0 0 0 0
Other 0 0 0 954
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 8,639,025 (7,341,517) (162,513)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 67 72
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4, 5 and 6) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ --------------
<S> <C>
Gross revenue $ 3,685,280 $ 3,654,128 $ 1,488,274
Equity in earnings of joint ventures 60,654 150,417 121,482
Profit (loss) from sale of properties
(Notes 4, 5 and 6) 82,855 (48,538) 0
Interest income 49,820 27,925 22,448
Less: Operating expenses (253,360) (354,206) (122,065)
Interest expense 0 0 0
Depreciation and amortization (393,434) (394,099) (196,413)
------------ ------------ ------------
Net income - GAAP basis 3,231,815 3,035,627 1,313,726
============ ============ ============
Taxable income 2,972,159 2,470,268 1,512,381
============ ============ ============
- from operations 0 (9,715) 0
============ ============ ============
- from gain (loss) on sale
3,367,581 3,273,557 1,733,901
Cash generated from operations 550,000 932,849 0
(Notes 2 and 3) 0 0 0
Cash generated from sales (Notes 4, 5 and 6) ------------ ------------ ------------
Cash generated from refinancing
3,917,581 4,206,406 1,733,901
Cash generated from operations, sales
and refinancing
Less: Cash distributions to investors (3,367,581) (3,273,557) (1,700,004)
(Note 7) 0 0 0
- from operating cash flow (32,427) (126,451) 0
- from sale of properties ------------ ------------ ------------
- from cash flow from prior period
517,573 806,398 33,897
Cash generated (deficiency) after
cash distributions
Special items (not including sales
and refinancing): 0 0 0
Limited partners' capital
contributions 0 0 0
General partners' capital 0 0 0
contributions 0 0 0
Syndication costs 0 0 0
Acquisition of land and buildings 0 (1,482,849) 0
Investment in direct financing leases (550,000) 550,000 0
Investment in joint ventures
Increase (decrease) in restricted cash
Reimbursement of organization,
syndication and acquisition costs 0 0 0
paid on behalf of CNL Income Fund 0 0 0
XIII, Ltd. by related parties 0 (196,980) 0
Increase in other assets 0 127,843 0
Loan to tenant 0 0 0
Collections on loan to tenant ------------ ------------ ------------
Other
Cash generated (deficiency) after cash
distributions and special items (32,427) (195,588) 33,897
============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 74 61 37
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) (Notes 4, 5 and 6) 0 0 0
============ ============ ============
</TABLE>
C-8
<PAGE>
TABLE III - CNL INCOME FUND XIII, LTD. (continued)
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ -------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 18 70 82
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 2
- from return of capital 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 7) 0 18 70 84
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 18 70 84
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 7) 0 18 70 84
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 8) 0.00% 5.33% 7.56% 8.44%
Total cumulative cash distributions per
$1,000 investment from inception 0 18 88 172
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Notes 4, 5 and 6) N/A 100% 100% 100%
</TABLE>
Note 1: The registration statement relating to the offering of Units by
CNL Income Fund XIII, Ltd. became effective on March 17, 1993.
Activities through April 15, 1993, were devoted to organization of
the partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint ventures, less cash paid
for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XIII, Ltd.
Note 4: During 1995, the partnership sold one of its properties to a
tenant for its original purchase price, excluding acquisition fees
and miscellaneous acquisition expenses. The net sales proceeds
were used to acquire an additional property. As a result of this
transaction, the partnership recognized a loss for financial
reporting purposes of $29,560 primarily due to acquisition fees
and miscellaneous acquisition expenses the partnership had
allocated to the property and due to the accrued rental income
relating to future scheduled rent increases that the partnership
had recorded and reversed at the time of sale.
Note 5: In November 1996, CNL Income Fund XIII, Ltd. sold one of its
properties and received net sales proceeds of $550,000, resulting
in a gain of $82,855 for financial reporting purposes. In January
1997, the partnership reinvested the net sales proceeds in an
additional property as tenants-in-common with an affiliate of the
general partners.
Note 6: In October 1997, the partnership sold one of its properties and
received net sales proceeds of $932,849, resulting in a loss of
$48,538 for financial reporting purposes. In December 1997, the
partnership reinvested the net sales proceeds in an additional
property as tenants-in-common with affiliates of the general
partners.
Note 7: As a result of the partnership's change in investor services
agents in 1993, distributions are now declared at the end of each
quarter and paid in the following quarter. Since this table
generally presents distributions on a cash basis (rather than
amounts declared), distributions on a cash basis for 1993 only
reflect payments for three quarters. Distributions declared for
the quarters ended December 31, 1993, 1994, 1995, 1996 and 1997,
are reflected in the 1994, 1995, 1996, 1997 and 1998 columns,
respectively, for distributions on a cash basis due to the
payment of such distributions in January 1994, 1995, 1996, 1997
and 1998, respectively. As a result of 1994, 1995, 1996, 1997 and
1998 distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998, are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 8: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 7 above)
Note 9: Certain data for columns representing less than 12 months have
been annualized.
C-9
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ -------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis) 78 75 33
- from investment income 2 0 0
- from capital gain
- from investment income from prior 5 10 4
period 0 0 6
- from return of capital ------------ ------------ ------------
85 85 43
Total distributions on GAAP basis (Note 7) ============ ============ ============
Source (on cash basis)
- from sales 0 0 0
- from refinancing 0 0 0
- from operations 84 82 43
- from cash flow from prior period 1 3 0
------------ ------------ ------------
Total distributions on cash basis (Note 7) 85 85 43
============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 8)
Total cumulative cash distributions per 8.50% 8.50% 8.50%
$1,000 investment from inception
Amount (in percentage terms) remaining 257 342 385
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Notes 4, 5 and 6)
100% 99% 100%
</TABLE>
C-10
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIV, LTD.
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 256,234 $ 3,135,716 $ 4,017,266
Equity in earnings of joint ventures 0 1,305 35,480 338,717
Profit (Loss) from sale of properties
(Notes 4, 5, 6 and 7) 0 0 0 (66,518)
Interest income 0 27,874 200,499 50,724
Less: Operating expenses 0 (14,049) (181,980) (248,840)
Interest expense 0 0 0 0
Depreciation and amortization 0 (28,918) (257,640) (340,112)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 242,446 2,932,075 3,751,237
============ ============ ============ ============
Taxable income
- from operations 0 278,845 2,482,240 3,162,165
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 321,737 2,812,631 3,709,844
Cash generated from sales (Notes 4, 6,
7 and 8) 0 0 0 696,012
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 321,737 2,812,631 4,405,856
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (9,050) (2,229,952) (3,543,751)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 312,687 582,679 862,105
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 28,785,100 16,214,900 0
General partners' capital
contributions 1,000 0 0 0
Syndication costs 0 (2,771,892) (1,618,477) 0
Acquisition of land and buildings 0 (13,758,004) (11,859,237) (964,073)
Investment in direct financing leases 0 (4,187,268) (5,561,748) (75,352)
Investment in joint ventures 0 (315,209) (1,561,988) (1,087,218)
Return of capital from joint venture 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIV, Ltd. by related parties 0 (706,215) (376,738) (577)
Increase in other assets 0 (444,267) 0 0
Increase in restricted cash 0 0 0 0
Other 0 0 0 5,530
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 6,914,932 (4,180,609) (1,259,585)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 16 56 70
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4, 6, 7 and 8) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ -------------
<S> <C>
Gross revenue $ 3,999,813 $ 3,918,582 $ 1,626,212
Equity in earnings of joint ventures 459,137 309,879 164,631
Profit (Loss) from sale of properties
(Notes 4, 5, 6 and 7) 0 0 112,206
Interest income 44,089 40,232 42,434
Less: Operating expenses (246,621) (262,592) (140,356)
Interest expense 0 0 0
Depreciation and amortization (340,089) (340,161) (170,106)
------------ ------------ ------------
Net income - GAAP basis 3,916,329 3,665,940 1,635,021
============ ============ ============
Taxable income
- from operations 3,236,329 3,048,675 1,742,143
============ ============ ============
- from gain (loss) on sale 0 47,256 33,783
============ ============ ============
Cash generated from operations
(Notes 2 and 3) 3,706,296 3,606,190 1,845,728
Cash generated from sales (Notes 4, 6,
7 and 8) 0 0 1,250,140
Cash generated from refinancing 0 0 0
------------ ------------ ------------
Cash generated from operations, sales
and refinancing 3,706,296 3,606,190 3,095,868
Less: Cash distributions to investors
(Note 5)
- from operating cash flow (3,706,296) (3,606,190) (1,845,728)
- from sale of properties 0 0 0
- from cash flow from prior period (6,226) (106,330) (10,532)
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions (6,226) (106,330) 1,239,608
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 0 0
General partners' capital
contributions 0 0 0
Syndication costs 0 0 0
Acquisition of land and buildings 0 0 0
Investment in direct financing leases 0 0 0
Investment in joint ventures (7,500) (121,855) (310,097)
Return of capital from joint venture 0 51,950 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIV, Ltd. by related parties 0 0 0
Increase in other assets 0 0 0
Increase in restricted cash 0 0 (193,654)
Other 0 0 0
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items (13,726) (176,235) 735,857
============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 71 67 38
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) (Notes 4, 6, 7 and 8) 0 1 1
============ ============ ============
</TABLE>
C-12
<PAGE>
TABLE III - CNL INCOME FUND XIV, LTD. (continued)
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ -------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 51 79
- from capital gain 0 0 0 0
- from return of capital 0 0 0 0
- from investment income from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 0 1 51 79
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from operations 0 1 51 79
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 5) 0 1 51 79
============ ============ ============ ============
Total cash distributions as a percentage of
original $1,000 investment (Note 9) 0.00% 4.50% 6.50% 8.06%
Total cumulative cash distributions
per $1,000 investment from inception 0 1 52 131
Amount (in percentage terms) remaining invest-
ed in program properties at the end of each
year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition
cost of all properties in program)
(Notes 4, 6, 7 and 8) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, CNL Income Fund XIV, Ltd.
("CNL XIV") and CNL Income Fund XIII, Ltd. each registered for
sale $40,000,000 units of limited partnership interests ("Units").
The offering of Units of CNL Income Fund XIII, Ltd. commenced
March 17, 1993. Pursuant to the registration statement, CNL XIV
could not commence until the offering of Units of CNL Income Fund
XIII, Ltd. was terminated. CNL Income Fund XIII, Ltd. terminated
its offering of Units on August 26, 1993, at which time the
maximum offering proceeds of $40,000,000 had been received. Upon
the termination of the offering of Units of CNL Income Fund XIII,
Ltd., CNL XIV commenced its offering of Units. Activities through
September 13, 1993, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint ventures, less cash paid
for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XIV, Ltd.
Note 4: During 1995, the partnership sold two of its properties to a
tenant for its original purchase price, excluding acquisition fees
and miscellaneous acquisition expenses. The net sales proceeds
were used to acquire two additional properties. As a result of
these transactions, the partnership recognized a loss for
financial reporting purposes of $66,518 primarily due to
acquisition fees and miscellaneous acquisition expenses the
partnership had allocated to the property and due to the accrued
rental income relating to future scheduled rent increases that the
partnership had recorded and reversed at the time of sale. In
addition, during 1996, Wood-Ridge Real Estate Joint Venture, in
which the partnership owns a 50% interest, sold its two properties
to the tenant and recognized a gain of approximately $261,100 for
financial reporting purposes. As a result, the partnership's pro
rata share of such gain of approximately $130,550 is included in
equity in earnings of unconsolidated joint ventures for 1996.
Note 5: As a result of the partnership's change in investor services
agents in 1993, distributions are now declared at the end of each
quarter and paid in the following quarter. Since this table
generally presents distributions on a cash basis (rather than
amounts declared), distributions on a cash basis for 1993 only
reflect payments for three quarters. Distributions declared for
the quarters ended December 31, 1993, 1994, 1995, 1996 and 1997,
are reflected in the 1994, 1995, 1996, 1997 and 1998 columns,
respectively, for distributions on a cash basis due to the payment
of such distributions in January 1994, 1995, 1996, 1997 and 1998,
respectively. As a result of 1994, 1995, 1996, 1997 and 1998
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998 are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 6: In January 1998, the partnership sold its property in Madison,
Alabama, to a third party for $740,000 and received net sales
proceeds of $696,486. Due to the fact that during 1997 the
partnership wrote off $13,314 in accrued rental income (non-cash
accounting adjustments relating to the straight-lining of future
scheduled rent increases over the lease term in accordance with
generally accepted accounting principles), no gain or loss was
incurred for financial reporting purposes in January 1998 relating
to this sale. In April 1998, the partnership reinvested a portion
of the net sales proceeds from the sale of the property in
Madison, Alabama in Melbourne Joint Venture, with an affiliate of
the partnership which has the same general partners. The
partnership intends to use the remaining proceeds to invest in an
additional property or for other partnership purposes.
Note 7: In January 1998, the partnership sold one of its properties in
Richmond, Virginia for $512,462 and received net sales proceeds of
$512,246, resulting in a gain of $70,798 for financial reporting
purposes. The partnership intends to reinvest the net sales
proceeds from the sale of the property in Richmond, Virginia in an
additional property.
Note 8: In April 1998, the partnership reached an agreement to accept
$360,000 for the property in Riviera Beach, Florida, which was
taken through a right of way taking in December 1997. The
partnership had received preliminary sales proceeds of $318,592 as
of December 31, 1997. Upon agreement and receipt of the final
sales price of $360,000, the partnership recognized a gain of
$41,408 for financial reporting purposes. The partnership intends
to reinvest the net sales proceeds from the sale of this property
in an additional property.
Note 9: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 5 above)
Note 10: Certain data for columns representing less than 12 months have
been annualized.
C-13
<PAGE>
<TABLE>
<CAPTION>
6 months
1996 1997 1998
------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 83 81 36
- from capital gain 0 0 0
- from return of capital 0 0 0
- from investment income from prior
period 0 2 5
------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 83 83 41
============ ============ ============
Source (on cash basis)
- from sales 0 0 0
- from operations 83 81 41
- from cash flow from prior period 0 2 0
------------ ------------ ------------
Total distributions on cash basis (Note 5) 83 83 41
============ ============ ============
Total cash distributions as a percentage of
original $1,000 investment (Note 9) 8.25% 8.25% 8.25%
Total cumulative cash distributions
per $1,000 investment from inception 214 297 338
Amount (in percentage terms) remaining invest-
ed in program properties at the end of each
year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition
cost of all properties in program)
(Notes 4, 6, 7 and 8) 100% 100% 100%
</TABLE>
C-14
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XV, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 1,143,586 $ 3,546,320 $ 3,632,699
Equity in earnings of joint ventures 0 8,372 280,606 392,862
Profit (Loss) from sale of properties
(Note 4) 0 0 (71,023) 0
Interest income 0 167,734 88,059 43,049
Less: Operating expenses 0 (62,926) (228,319) (235,319)
Interest expense 0 0 0 0
Depreciation and amortization 0 (70,848) (243,175) (248,232)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 1,185,918 3,372,468 3,585,059
============ ============ ============ ============
Taxable income
- from operations 0 1,026,715 2,861,912 2,954,318
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,116,834 3,239,370 3,434,682
Cash generated from sales (Note 4) 0 0 811,706 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,116,834 4,051,076 3,434,682
Less: Cash distributions to investors
(Notes 5, 6 and 8)
- from operating cash flow 0 (635,944) (2,650,003) (3,200,000)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 480,890 1,401,073 234,682
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 40,000,000 0 0
General partners' capital contri-
butions 1,000 0 0 0
Syndication costs 0 (3,892,003) 0 0
Acquisition of land and buildings 0 (22,152,379) (1,625,601) 0
Investment in direct financing
leases 0 (6,792,806) (2,412,973) 0
Investment in joint ventures 0 (1,564,762) (720,552) (129,939)
Return of capital from joint venture 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XV, Ltd. by related parties 0 (1,098,197) (23,507) 0
Increase in other assets 0 (187,757) 0 0
Other (38) (6,118) 25,150 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 962 4,786,868 (3,356,410) 104,743
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 71 73
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Note 4) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-15
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ -----------
<S> <C>
Gross revenue $ 3,622,123 $ 1,498,779
Equity in earnings of joint ventures 239,249 120,294
Profit (Loss) from sale of properties
(Note 4) 0 0
Interest income 46,642 33,275
Less: Operating expenses (224,761) (128,176)
Interest expense 0 0
Depreciation and amortization (248,348) (124,200)
------------ -----------
Net income - GAAP basis 3,434,905 1,399,972
============ ===========
Taxable income
- from operations 2,856,893 1,492,168
============ ===========
- from gain on sale 47,256 0
============ ===========
Cash generated from operations
(Notes 2 and 3) 3,306,595 1,710,905
Cash generated from sales (Note 4) 0 0
Cash generated from refinancing 0 0
------------ -----------
Cash generated from operations, sales
and refinancing 3,306,595 1,710,905
Less: Cash distributions to investors
(Notes 5, 6 and 8)
- from operating cash flow (3,280,000) (1,710,905)
- from sale of properties 0 0
- from cash flow from prior period 0 (89,095)
------------ -------------
Cash generated (deficiency) after cash
distributions 26,595 (89,095)
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 0
General partners' capital contri-
butions 0 0
Syndication costs 0 0
Acquisition of land and buildings 0 0
Investment in direct financing
leases 0 0
Investment in joint ventures 0 (207,986)
Return of capital from joint venture 51,950 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XV, Ltd. by related parties 0 0
Increase in other assets 0 0
Other 0 0
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 78,545 (297,081)
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 71 37
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) (Note 4) 1 0
============ ============
</TABLE>
C-16
<PAGE>
TABLE III - CNL INCOME FUND XV, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ -----------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 21 66 80
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 0 21 66 80
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 21 66 80
- from investment income from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 5) 0 21 66 80
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 6,
7 and 8). 0.00% 5.00% 7.25% 8.20%
Total cumulative cash distributions per
$1,000 investment from inception 0 21 87 167
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Note 4) N/A 100% 100% 100%
</TABLE>
Note 1 The registration statement relating to this offering of Units of
CNL Income Fund XV, Ltd. became effective February 23, 1994.
Activities through March 23, 1994, were devoted to organization of
the partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint venture, less cash paid for
expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XV, Ltd.
Note 4: During 1995, the partnership sold three of its properties to a
tenant for its original purchase price, excluding acquisition fees
and miscellaneous acquisition expenses. The majority of the net
sales proceeds were used to acquire additional properties. As a
result of these transactions, the partnership recognized a loss
for financial reporting purposes of $71,023 primarily due to
acquisition fees and miscellaneous acquisition expenses the
partnership had allocated to the three properties and due to the
accrued rental income relating to future scheduled rent increases
that the partnership had recorded and reversed at the time of
sale. In addition, during 1996, Wood-Ridge Real Estate Joint
Venture, in which the partnership owns a 50% interest, sold its
two properties to the tenant and recognized a gain of
approximately $261,100 for financial reporting purposes. As a
result, the partnership's pro rata share of such gain of
approximately $130,550 is included in equity in earnings of
unconsolidated joint ventures for 1996.
Note 5: Distributions declared for the quarters ended December 31, 1994,
1995, 1996 and 1997 are reflected in the 1995, 1996, 1997 and 1998
columns, respectively, due to the payment of such distributions in
January 1995, 1996, 1997 and 1998, respectively. As a result of
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998 are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 6: On December 31, 1996, CNL Income Fund XV, Ltd. declared a special
distribution of cumulative excess operating reserves equal to .20%
of the total invested capital. Accordingly, the total yield for
1996 was 8.20%
Note 7: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 5 above)
Note 8: Cash distributions for 1998 include an additional amount equal to
0.50% of invested capital which was earned in 1997 or prior years,
but declared payable in the first quarter of 1998
Note 9: Certain data for columns representing less than 12 months have
been annualized.
C-17
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 82 35
- from capital gain 0 0
- from investment income from prior
period 0 10
------------ ------------
Total distributions on GAAP basis (Note 5) 82 45
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 82 43
- from investment income from prior period 0 2
------------ ------------
Total distributions on cash basis (Note 5)
82 45
Total cash distributions as a percentage ============ ============
of original $1,000 investment (Notes 6,
7 and 8). 8.00% 8.50%
Total cumulative cash distributions per
$1,000 investment from inception 249 294
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented (original
total acquisition cost of properties
retained, divided by original total
acquisition cost of all properties
in program) (Note 4) 100% 100%
</TABLE>
C-18
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVI, LTD.
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 186,257 $ 2,702,504 $ 4,343,390
Equity in earnings from joint venture 0 0 0 19,668
Profit from sale of properties (Notes 4
and 5) 0 0 0 124,305
Interest income 0 21,478 321,137 75,160
Less: Operating expenses 0 (10,700) (274,595) (261,878)
Interest expense 0 0 0 0
Depreciation and amortization 0 (9,458) (318,205) (552,447)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 187,577 2,430,841 3,748,198
============ ============ ============ ============
Taxable income
- from operations 0 189,864 2,139,382 3,239,830
============ ============ ============ ============
- from gain on sale (Notes 4 and 5) 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 205,148 2,481,395 3,753,726
Cash generated from sales (Notes 4 and 5) 0 0 0 775,000
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 205,148 2,481,395 4,528,726
Less: Cash distributions to investors
(Note 6)
- from operating cash flow 0 (2,845) (1,798,921) (3,431,251)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 202,303 682,474 1,097,475
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 20,174,172 24,825,828 0
General partners' capital contri-
butions 1,000 0 0 0
Syndication costs 0 (1,929,465) (2,452,743) 0
Acquisition of land and buildings 0 (13,170,132) (16,012,458) (2,355,627)
Investment in direct financing
leases 0 (975,853) (5,595,236) (405,937)
Investment in joint ventures 0 0 0 (775,000)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVI, Ltd. by related parties 0 (854,154) (405,569) (2,494)
Increase in other assets 0 (443,625) (58,720) 0
Increase (decrease) in restricted cash 0 0 0 0
Reimbursement from developer of
construction costs 0 0 0 0
Other (36) (20,714) 20,714 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 964 2,982,532 1,004,290 (2,441,583)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 17 53 71
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Notes 4 and 5) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-19
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ -------------
<S> <C>
Gross revenue $ 4,308,853 $ 1,987,937
Equity in earnings from joint venture 73,507 64,956
Profit from sale of properties (Notes 4
and 5) 41,148 0
Interest income 73,634 34,195
Less: Operating expenses (272,932) (132,020)
Interest expense 0 0
Depreciation and amortization (563,883) (268,997)
------------ ------------
Net income - GAAP basis 3,660,327 1,686,071
============ ============
Taxable income
- from operations 3,178,911 1,629,897
============ ============
- from gain on sale (Notes 4 and 5) 64,912 0
============ ============
Cash generated from operations
(Notes 2 and 3) 3,780,424 1,922,221
Cash generated from sales (Notes 4 and 5) 610,384 0
Cash generated from refinancing 0 0
------------ ------------
Cash generated from operations, sales
and refinancing 4,390,808 1,922,221
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,600,000) (1,890,000)
- from sale of properties 0 0
-------------- -------------
Cash generated (deficiency) after cash
distributions 790,808 32,221
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 0
General partners' capital contri-
butions 0 0
Syndication costs 0 0
Acquisition of land and buildings (23,501) 0
Investment in direct financing
leases (29,257) (31,504)
Investment in joint ventures 0 (607,896)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVI, Ltd. by related parties 0 0
Increase in other assets 0 0
Increase (decrease) in restricted cash (610,384) 610,384
Reimbursement from developer of
construction costs 0 161,204
Other 0 0
-------------- -------------
Cash generated (deficiency) after cash
distributions and special items 127,666 164,409
============== =============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 70 36
============== ==============
- from recapture 0 0
============= ==============
Capital gain (loss) (Notes 4 and 5) 1 0
============= ==============
</TABLE>
C-20
<PAGE>
TABLE III - CNL INCOME FUND XVI, LTD. (continued)
<TABLE>
<CAPTION>
1993
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 45 76
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 6) 0 1 45 76
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 1 45 76
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 6) 0 1 45 76
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 7
and 8) 0.00% 4.50% 6.00% 7.88%
Total cumulative cash distributions per
$1,000 investment from inception 0 1 46 122
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Notes 4 and 5) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, CNL Income Fund XVI, Ltd.
("CNL XVI") and CNL Income Fund XV, Ltd. each registered for sale
$40,000,000 units of limited partnership interests ("Units"). The
offering of Units of CNL Income Fund XV, Ltd. commenced February
23, 1994. Pursuant to the registration statement, CNL XVI could
not commence until the offering of Units of CNL Income Fund XV,
Ltd. was terminated. CNL Income Fund XV, Ltd. terminated its
offering of Units on September 1, 1994, at which time the maximum
offering proceeds of $40,000,000 had been received. Upon the
termination of the offering of Units of CNL Income Fund XV, Ltd.,
CNL XVI commenced its offering of Units. Activities through
September 22, 1994, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL Income Fund XVI, Ltd.
Note 4: In April 1996, CNL Income Fund XVI, Ltd. sold one of its
properties and received net sales proceeds of $775,000, resulting
in a gain of $124,305 for financial reporting purposes. In October
1996, the partnership reinvested the net sales proceeds in an
additional property as tenants-in-common with an affiliate of the
general partners.
Note 5: In March 1997, CNL Income Fund XVI, Ltd. sold one of its
properties and received net sales proceeds of $610,384, resulting
in a gain of $41,148 for financial reporting purposes. In January
1998, the partnership reinvested the net sales proceeds in an
additional property as tenants-in-common with affiliates of the
general partners.
Note 6: Distributions declared for the quarters ended December 31, 1994,
1995, 1996 and 1997 are reflected in the 1995, 1996, 1997 and 1998
columns, respectively, due to the payment of such distributions in
January 1995, 1996, 1997 and 1998, respectively. As a result of
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1994, 1995, 1996, 1997 and
June 30, 1998 are not included in the 1994, 1995, 1996, 1997 and
1998 totals, respectively.
Note 7: Cash distributions for 1998 include an additional amount equal to
0.20% of invested capital which was earned in 1997 but declared
payable in the first quarter of 1998.
Note 8: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 6 above)
Note 9: Certain data for columns representing less than 12 months have
been annualized.
C-21
<PAGE>
<TABLE>
<CAPTION>
6 months
1997 1998
------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income
- from capital gain 80 37
- from investment income from 0 0
prior period 0 5
------------ ------------
80 42
Total distributions on GAAP basis (Note 6) ============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 80 42
------------ ------------
Total distributions on cash basis (Note 6) 80 42
============ ============
Total cash distributions as a percentage
of original $1,000 investment (Notes 7
and 8) 8.00% 8.20%
Total cumulative cash distributions per
$1,000 investment from inception 202 244
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Notes 4 and 5) 100% 100%
</TABLE>
C-22
<PAGE>
TABLE III Operating Results
of Prior Programs CNL AMERICAN
PROPERTIES FUND, INC.
<TABLE>
<CAPTION>
1994 1997
(Note 1) 1995 1996 (Note 2)
------------ ------------ ------------ ----------
<S> <C>
Gross revenue $ 0 $ 539,776 $ 4,363,456 $ 15,516,102
Interest income 0 119,355 1,843,228 3,941,831
Less: Operating expenses 0 (186,145) (908,924) (2,066,962)
Interest expense 0 0 0 0
Depreciation and amortization 0 (104,131) (521,871) (1,795,062)
Minority interest in income of
consolidated joint venture 0 (76) (29,927) (31,453)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 368,779 4,745,962 15,564,456
============ ============ ============ ============
Taxable income
- from operations (Note 8) 0 379,935 4,894,262 15,727,311
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 (41,115)
============ ============ ============ ============
Cash generated from operations
(Notes 4 and 5) 0 498,459 5,482,540 17,076,214
Cash generated from sales (Note 7) 0 0 0 6,289,236
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 498,459 5,482,540 23,365,450
Less: Cash distributions to investors (Note 9)
- from operating cash flow 0 (498,459) (5,439,404) (16,854,297)
- from sale of properties 0 0 0 0
- from return of capital (Note 10) 0 (136,827) 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 (136,827) 43,136 6,511,153
Special items (not including sales of
real estate and refinancing):
Subscriptions received from
stockholders 0 38,454,158 100,792,991 222,482,560
Sale of common stock to CNL Fund
Advisors, Inc. 200,000 0 0 0
Contributions from minority interest 0 200,000 97,419 0
Distributions to holder of minority
interest 0 0 (39,121) (34,020)
Stock issuance costs (19) (3,680,704) (8,486,188) (19,542,862)
Acquisition of land and buildings 0 (18,835,969) (36,104,148) (143,542,667)
Investment in direct financing
leases 0 (1,364,960) (13,372,621) (39,155,974)
Proceeds from sale of equipment direct
financing leases 0 0 0 962,274
Investment in joint venture 0 0 0 0
Investment in mortgage notes
receivable 0 0 (13,547,264) (4,401,982)
Collections on mortgage notes
receivable 0 0 133,850 250,732
Investment in notes receivable 0 0 0 (12,521,401)
Collections on notes receivable 0 0 0 0
Investment in certificate of deposit 0 0 0 (2,000,000)
Proceeds of borrowing on line of
credit 0 0 3,666,896 19,721,804
Payment on line of credit 0 0 (145,080) (20,784,577)
Reimbursement of organization, acquisition,
and deferred offering and stock issuance
costs paid on behalf of CNL American
Properties Fund, Inc. by related parties (199,036) (2,500,056) (939,798) (2,857,352)
Increase in other assets 0 (628,142) (1,103,896) 0
Other 0 0 (54,333) 49,001
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 945 11,507,500 30,941,643 5,136,689
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED (Note 6)
Federal income tax results:
Ordinary income (loss) (Note 11)
- from operations (Note 8) 0 20 61 67
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-23
<PAGE>
<TABLE>
<CAPTION>
6 months
1998
(Note 3)
--------------
<S> <C>
Gross revenue $ 13,829,348
Interest income 3,799,730
Less: Operating expenses (1,949,398)
Interest expense 0
Depreciation and amortization (1,648,827)
Minority interest in income of
consolidated joint venture (15,380)
--------------
Net income - GAAP basis 14,015,473
==============
Taxable income
- from operations (Note 8) 13,876,482
==============
- from gain (loss) on sale (108,690)
==============
Cash generated from operations
(Notes 4 and 5) 16,600,953
Cash generated from sales (Note 7) 1,233,679
Cash generated from refinancing 0
---------------
Cash generated from operations, sales
and refinancing 17,834,632
Less: Cash distributions to investors (Note 9)
- from operating cash flow (15,992,806)
- from sale of properties 0
- from return of capital (Note 10) 0
---------------
Cash generated (deficiency) after cash
distributions 1,841,826
Special items (not including sales of
real estate and refinancing):
Subscriptions received from
stockholders 152,570,391
Sale of common stock to CNL Fund
Advisors, Inc. 0
Contributions from minority interest 0
Distributions to holder of minority
interest (16,956)
Stock issuance costs (13,840,339)
Acquisition of land and buildings (36,742,586)
Investment in direct financing
leases (71,360,700)
Proceeds from sale of equipment direct
financing leases 0
Investment in joint venture (112,847)
Investment in mortgage notes
receivable 0
Collections on mortgage notes
receivable 147,051
Investment in notes receivable (2,903,600)
Collections on notes receivable 666,633
Investment in certificate of deposit 0
Proceeds of borrowing on line of
credit 2,979,403
Payment on line of credit 0
Reimbursement of organization, acquisition,
and deferred offering and stock issuance
costs paid on behalf of CNL American
Properties Fund, Inc. by related parties (2,570,126)
Increase in other assets (1,845,005)
Other (30,842)
--------------
Cash generated (deficiency) after cash
distributions and special items 28,782,303
==============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED (Note 6)
Federal income tax results:
Ordinary income (loss) (Note 11)
- from operations (Note 8) 32
==============
- from recapture 0
==============
Capital gain (loss) 0
==============
</TABLE>
C-24
<PAGE>
TABLE III - CNL AMERICAN PROPERTIES FUND, INC. (continued)
<TABLE>
<CAPTION>
1994 1997
(Note 1) 1995 1996 (Note 2)
------------ ------------ ------------ ----------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 19 59 66
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
- from return of capital (Note 10) 0 14 8 6
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 11) 0 33 67 72
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 26 67 72
- from return of capital (Note 10) 0 7 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 11) 0 33 67 72
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 6 and 9) 0.00% 5.34% 7.06% 7.45%
Total cumulative cash distributions per
$1,000 investment from inception 0 33 100 172
Amount (in percentage terms) remaining
invested in program properties at the end of
each year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition cost
of all properties in program) (Note 7) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the
Securities Act of 1933, as amended, effective March 29, 1995, CNL
American Properties Fund, Inc. ("APF") registered for sale
$165,000,000 of shares of common stock (the "Initial Offering"),
including $15,000,000 available only to stockholders participating
in the company's reinvestment plan. The Initial Offering of APF
commenced April 19, 1995, and upon completion of the Initial
Offering on February 6, 1997, had received subscription proceeds
of $150,591,765 (15,059,177 shares), including $591,765 (59,177
shares) issued pursuant to the reinvestment plan. Pursuant to a
Registration Statement on Form S-11 under the Securities Act of
1933, as amended, effective January 31, 1997, APF registered for
sale $275,000,000 of shares of common stock (the "1997 Offering"),
including $25,000,000 available only to stockholders participating
in the company's reinvestment plan. The 1997 Offering of APF
commenced following the completion of the Initial Offering on
February 6, 1997, and upon completion of the 1997 Offering on
March 2, 1998, had received subscription proceeds of $251,872,648
(25,187,265 shares), including $1,872,648 (187,265 shares) issued
pursuant to the reinvestment plan. Pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933, as
amended, effective May 12, 1998, APF registered for sale
$345,000,000 of shares of common stock (the "1998 Offering"),
including $20,000,000 available only to stockholders participating
in the company's reinvestment plan. The 1998 Offering of APF
commenced following the completion of the 1997 Offering on March
2, 1998. As of June 30, 1998, APF had received subscriptions
totalling $111,835,687 from the 1998 Offering, including
$1,823,518 issued pursuant to the company's reinvestment plan.
Activities through June 1, 1995, were devoted to organization of
APF and operations had not begun.
Note 2: The amounts shown represent the combined results of the Initial
Offering and the 1997 Offering. Note 3: The amounts shown
represent the combined results of the Initial Offering, 1997
Offering and 1998 Offering.
Note 4: Cash generated from operations includes cash received from
tenants, less cash paid for expenses, plus interest received.
Note 5: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of APF.
Note 6: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period.
Note 7: In May 1997 and July 1997, APF sold four properties and one
property, respectively, to a tenant for $5,254,083 and $1,035,153,
respectively, which was equal to the carrying value of the
properties at the time of sale. In May 1998, APF sold two
properties to third parties for $1,605,154 (and received net sales
proceeds of approximately $1,233,700 after deduction of
construction costs incurred but not paid by APF as of the date of
the sale) which approximated the carrying value of the properties
at the time of sale. As a result, no gain or loss was recognized
for financial reporting purposes. The company reinvested the
proceeds from the sale of properties in additional properties.
Note 8: Taxable income presented is before the dividends paid deduction.
Note 9: For the six months ended June 30, 1998 and the years ended
December 31, 1997, 1996 and 1995, 86.37%, 93.33%, 90.25% and
59.82%, respectively, of the distributions received by
stockholders were considered to be ordinary income and 13.63%,
6.67%, 9.75% and 40.18%, respectively, were considered a return of
capital for federal income tax purposes. No amounts distributed to
stockholders for the six months ended June 30, 1998 and the years
ended December 31, 1997, 1996 and 1995 are required to be or have
been treated by the company as a return of capital for purposes of
calculating the stockholders' return on their invested capital.
C-25
<PAGE>
<TABLE>
<CAPTION>
6 months
1998
(Note 3)
-------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 32
- from capital gain 0
- from investment income from
prior period 0
- from return of capital (Note 10) 5
------------
37
============
Total distributions on GAAP basis (Note 11)
Source (on cash basis)
- from sales 0
- from refinancing 0
- from operations 37
- from return of capital (Note 10) 0
------------
Total distributions on cash basis (Note 11) 37
============
Total cash distributions as a percentage
of original $1,000 investment (Note 6 and 9) 7.62%
Total cumulative cash distributions per
$1,000 investment from inception 209
Amount (in percentage terms) remaining
invested in program properties at the end of
each year (period) presented (original total
acquisition cost of properties retained,
divided by original total acquisition cost
of all properties in program) (Note 7) 100%
</TABLE>
Note 10: Cash distributions presented above as a return of capital on a
GAAP basis represent the amount of cash distributions in excess of
accumulated net income on a GAAP basis. Accumulated net income
includes deductions for depreciation and amortization expense and
income from certain non-cash items. This amount is not required to
be presented as a return of capital except for purposes of this
table, and APF has not treated this amount as a return of capital
for any other purpose.
Note 11: Tax and distribution data and total distributions on GAAP basis
were computed based on the weighted average shares outstanding
during each period presented.
C-26
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVII, LTD.
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ -------------
<S> <C>
Gross revenue $ 0 $ 1,195,263 $ 2,643,871 $ 1,417,608
Equity in earnings of unconsolidated
joint ventures 0 4,834 100,918 69,785
Interest income 12,153 244,406 69,779 24,834
Less: Operating expenses (3,493) (169,536) (181,865) (93,411)
Interest expense 0 0 0 0
Depreciation and amortization (309) (179,208) (387,292) (176,959)
Minority interest in income of
consolidated joint venture 0 (41,854) (31,219)
------------ ------------ ------------ ------------
Net income - GAAP basis 8,351 1,095,759 2,203,557 1,210,638
============ ============ ============ ============
Taxable income
- from operations 12,153 1,114,964 2,058,601 1,062,296
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 9,012 1,232,948 2,495,114 1,274,084
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 9,012 1,232,948 2,495,114 1,274,084
Less: Cash distributions to investors
(Note 4)
- from operating cash flow (1,199) (703,681) (2,177,584) (1,200,000)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 7,813 529,267 317,530 74,084
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 5,696,921 24,303,079 0 0
General partners' capital contri-
butions 1,000 0 0 0
Contributions from minority interest 0 140,676 278,170 0
Distribution to holder of minority
interest 0 0 (41,507) (24,426)
Syndication costs (604,348) (2,407,317) 0 0
Acquisition of land and buildings (332,928) (19,735,346) (1,740,491) 0
Investment in direct financing
leases 0 (1,784,925) (1,130,497) 0
Investment in joint ventures 0 (201,501) (1,135,681) (127,807)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVII, Ltd. by related parties (347,907) (326,483) (25,444) 0
Increase in other assets (221,282) 0 0 0
Reimbursement from developer of
construction costs 0 0 0 322,897
Other (410) 410 0 (16,797)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 4,198,859 517,860 (3,477,920) 227,951
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 36 37 69 35
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-27
<PAGE>
TABLE III - CNL INCOME FUND XVII, LTD. (continued)
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 4 23 73 40
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
----------- ------------ ------------ ------------
Total distributions on GAAP basis (Note 4) 0 23 73 40
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 4 23 73 40
------------ ------------ ------------ -------------
Total distributions on cash basis (Note 4) 4 23 73 40
============ ============ ============ =============
Total cash distributions as a percentage
of original $1,000 investment (Note 5) 5.00% 5.50% 7.625% 8.00
Total cumulative cash distributions per
$1,000 investment from inception 4 27 100 140
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 6) N/A 98% 100% 99%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, effective August 11, 1995, CNL
Income Fund XVII, Ltd. ("CNL XVII") and CNL Income Fund XVIII,
Ltd. each registered for sale $30,000,000 units of limited
partnership interests ("Units"). The offering of Units of CNL
Income Fund XVII, Ltd. commenced September 2, 1995. Pursuant to
the registration statement, CNL XVIII could not commence until the
offering of Units of CNL Income Fund XVII, Ltd. was terminated.
CNL Income Fund XVII, Ltd. terminated its offering of Units on
September 19, 1996, at which time subscriptions for the maximum
offering proceeds of $30,000,000 had been received. Upon the
termination of the offering of Units of CNL Income Fund XVII,
Ltd., CNL XVIII commenced its offering of Units. Activities
through November 3, 1995, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, plus distributions from joint ventures, less cash paid
for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL XVII.
Note 4: Distributions declared for the quarters ended December 31, 1995,
1996 and 1997 are reflected in the 1996, 1997 and 1998
columns, respectively, due to the payment of such distributions in
January 1996, 1997 and 1998, respectively. As a result of
distributions being presented on a cash basis, distributions
declared and unpaid as of December 31, 1996, 1997 and June 30,
1998 are not included in the 1996, 1997 and 1998 totals,
respectively.
Note 5: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 4 above)
Note 6: During 1998, CNL Income Fund XVII, Ltd. received approximately
$322,900 from the developer of the properties in Aiken, South
Carolina and Weatherford, Texas. This represents a reimbursement
from the developer upon final reconciliation of total construction
costs, to the total construction costs funded by the partnership
in accordance with the development agreement. The partnership
intends to reinvest the funds in additional properties.
Note 7: Certain data for columns representing less than 12 months have
been annualized.
C-28
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVIII, LTD.
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ --------
<S> <C>
Gross revenue $ 0 $ 1,373 $ 1,291,416 $ 1,447,579
Equity in earnings of joint venture 0 0 0 0
Interest income 0 30,241 161,826 99,885
Less: Operating expenses 0 (3,992) (156,403) (103,375)
Interest expense 0 0 0 0
Depreciation and amortization 0 (712) (142,079) (178,935)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 26,910 1,154,760 1,265,154
============ ============ ============ ============
Taxable income
- from operations 0 30,223 1,318,750 1,206,888
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 27,146 1,361,756 1,459,212
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 27,146 1,361,756 1,459,212
Less: Cash distributions to investors
(Note 4)
- from operating cash flow 0 (2,138) (855,957) (1,112,150)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 25,008 505,799 347,062
Special items (not including sales and
refinancing):
Limited partners' capital contri-
butions 0 8,498,815 25,723,944 854,241
General partners' capital contri-
butions 1,000 0 0 0
Contributions from minority interest 0 0 0 0
Syndication costs 0 (845,657) (2,450,214) (161,141)
Acquisition of land and buildings 0 (1,533,446) (18,581,999) (2,219,267)
Investment in direct financing leases 0 0 (5,962,087) (877,348)
Investment in joint venture 0 0 0 0
Increase in restricted cash 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVIII, Ltd. by related parties 0 (497,420) (396,548) (35,055)
Increase in other assets 0 (276,848) 0 (48,378)
Other (20) (107) (66,893) (10,000)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 980 5,370,345 (1,227,998) (2,149,886)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 6 57 34
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
C-29
</TABLE>
<PAGE>
TABLE III - CNL INCOME FUND XVIII, LTD. (continued)
<TABLE>
<CAPTION>
1995 6 months
(Note 1) 1996 1997 1998
------------ ------------ ------------ ---------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 0 38 32
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 0
------------ ------------ ------------ -----------
Total distributions on GAAP basis (Note 4) 0 0 38 32
============ ============ ============ ===========
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 0 38 32
------------ ------------ ------------ -----------
Total distributions on cash basis (Note 4) 0 0 38 32
============ ============ ============ ===========
Total cash distributions as a percentage
of original $1,000 investment from
inception 0.00 % 5.00 % 5.75 % 7.25 %
Total cumulative cash distributions per
$1,000 investment (Note 5) 0 0 38 70
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 83 % 95 % 99 %
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, effective August 11, 1995, CNL
Income Fund XVIII, Ltd ("CNL XVIII") and CNL Income Fund XVII,
Ltd. each registered for sale $30,000,000 units of limited
partnership interest ("Units"). The offering of Units of CNL
Income Fund XVII, Ltd. commenced September 2, 1995. Pursuant to
the registration statement, CNL XVIII could not commence until the
offering of Units of CNL Income Fund XVII, Ltd. was terminated.
CNL Income Fund XVII, Ltd. terminated its offering of Units on
September 19, 1996, at which time the maximum offering proceeds of
$30,000,000 had been received. Upon the termination of the
offering of Units of CNL Income Fund XVII, Ltd., CNL XVIII
commenced its offering of Units. Activities through October 11,
1996, were devoted to organization of the partnership and
operations had not begun.
Note 2: Cash generated from operations includes cash received from
tenants, less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included
in the financial statements of CNL XVIII.
Note 4: Distributions declared for the quarters ended December 1996 and
1997 are reflected in the 1997 and 1998 columns, respectively, due
to the payment of such distributions in January 1997 and 1998,
respectively. As a result of distributions being presented on a
cash basis, distributions declared and unpaid as of December 31,
1997 and June 30, 1998 are not included in the 1997 and 1998
totals, respectively.
Note 5: Total cash distributions as a percentage of original $1,000
investment are calculated based on actual distributions declared
for the period. (See Note 4 above)
Note 6: Certain data for columns representing less than 12 months have
been annualized.
C-30
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
==========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
==========================================================================================================================
<S> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA (14) 02/05/87 06/12/92 $1,169,021 0 0 0 $1,169,021
Wendy's -
Fairfield, CA (14) 07/01/87 10/03/94 1,018,490 0 0 0 1,018,490
Wendy's -
Casa Grande, AZ 12/10/86 08/19/97 795,700 0 0 0 795,700
Wendy's -
North Miami, FL (9) 02/18/86 08/21/97 473,713 0 0 0 473,713
Popeye's -
Kissimmee, FL (14) 12/31/86 04/30/98 661,300 0 0 0 661,300
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 05/29/87 07/21/93 746,800 0 0 0 746,800
Pizza Hut -
Graham, TX 08/24/87 07/28/94 261,628 0 0 0 261,628
Golden Corral -
Medina, OH (11) 11/18/87 11/30/94 825,000 0 0 0 825,000
Denny's -
Show Low, AZ (8) 05/22/87 01/31/97 620,800 0 0 0 620,800
KFC -
Eagan, MN 06/01/87 06/02/97 623,882 0 42,000 0 665,882
KFC -
Jacksonville, FL 09/01/87 09/09/97 639,363 0 0 0 639,363
Wendy's -
Farmington Hills, MI (12) 05/18/87 10/09/97 833,031 0 0 0 833,031
Wendy's -
Farmington Hills, MI (13) 05/18/87 10/09/97 1,085,259 0 0 0 1,085,259
Denny's -
Plant City, FL 11/23/87 10/24/97 910,061 0 0 0 910,061
Pizza Hut -
Mathis, TX 12/17/87 12/04/97 297,938 0 0 0 297,938
KFC -
Avon Park, FL 09/02/87 12/10/97 501,975 0 0 0 501,975
CNL Income Fund III, Ltd.:
Wendy's -
Chicago, IL (14) 06/02/88 01/10/97 496,418 0 0 0 496,418
Perkins -
Bradenton, FL 06/30/88 03/14/97 1,310,001 0 0 0 1,310,001
Pizza Hut -
Kissimmee, FL 02/23/88 04/08/97 673,159 0 0 0 673,159
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
Cost of Properties
Including Closing and
Soft Costs
------------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA (14) 0 $955,000 $ 955,000 $214,021
Wendy's -
Fairfield, CA (14) 0 861,500 861,500 156,990
Wendy's -
Casa Grande, AZ 0 667,255 667,255 128,445
Wendy's -
North Miami, FL (9) 0 385,000 385,000 88,713
Popeye's -
Kissimmee, FL (14) 0 475,360 475,360 185,940
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 0 642,800 642,800 104,000
Pizza Hut -
Graham, TX 0 205,500 205,500 56,128
Golden Corral -
Medina, OH (11) 0 743,000 743,000 82,000
Denny's -
Show Low, AZ (8) 0 484,185 484,185 136,615
KFC -
Eagan, MN 0 601,100 601,100 64,782
KFC -
Jacksonville, FL 0 405,000 405,000 234,363
Wendy's -
Farmington Hills, MI (12) 0 679,000 679,000 154,031
Wendy's -
Farmington Hills, MI (13) 0 887,000 887,000 198,259
Denny's -
Plant City, FL 0 820,717 820,717 89,344
Pizza Hut -
Mathis, TX 0 202,100 202,100 95,838
KFC -
Avon Park, FL 0 345,000 345,000 156,975
CNL Income Fund III, Ltd.:
Wendy's -
Chicago, IL (14) 0 591,362 591,362 (94,944)
Perkins -
Bradenton, FL 0 1,080,500 1,080,500 229,501
Pizza Hut -
Kissimmee, FL 0 474,755 474,755 198,404
</TABLE>
C-31
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
==========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
==========================================================================================================================
<S> <C>
Burger King -
Roswell, GA 06/08/88 06/20/97 257,981 0 685,000 0 942,981
Wendy's -
Mason City, IA 02/29/88 10/24/97 217,040 0 0 0 217,040
Taco Bell -
Fernandina Beach, FL (14) 04/09/88 01/15/98 721,655 0 0 0 721,655
Denny's -
Daytona Beach, FL (14) 07/12/88 01/23/98 1,008,976 0 0 0 1,008,976
Wendy's -
Punta Gorda, FL 02/03/88 02/20/98 665,973 0 0 0 665,973
Po' Folks -
Hagerstown, MD 06/21/88 06/10/98 788,884 0 0 0 788,884
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 03/22/89 04/27/94 712,000 0 0 0 712,000
Burger King -
Hastings, MI 08/12/88 12/15/95 518,650 0 0 0 518,650
Wendy's -
Tampa, FL 12/30/88 09/20/96 1,049,550 0 0 0 1,049,550
Checkers -
Douglasville, GA 12/08/94 11/07/97 380,695 0 0 0 380,695
Taco Bell -
Fort Myers, FL (14) 12/22/88 03/02/98 794,690 0 0 0 794,690
Denny's -
Union Township, OH (14) 11/01/88 03/31/98 674,135 0 0 0 674,135
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 02/28/90 08/25/95 0 0 1,040,000 0 1,040,000
Ponderosa -
St. Cloud, FL (6) (14) 06/01/89 10/24/96 73,713 0 1,057,299 0 1,131,012
Franklin National Bank -
Franklin, TN 06/26/89 01/07/97 960,741 0 0 0 960,741
Shoney's -
Smyrna, TN 03/22/89 05/13/97 636,788 0 0 0 636,788
KFC -
Salem, NH 05/31/89 09/22/97 1,272,137 0 0 0 1,272,137
Perkins -
Port St. Lucie, FL 11/14/89 09/23/97 1,216,750 0 0 0 1,216,750
Hardee's -
Richmond, VA 02/17/89 11/07/97 397,785 0 0 0 397,785
Wendy's -
Tampa, FL 02/16/89 12/29/97 805,175 0 0 0 805,175
</TABLE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
=============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
Burger King -
Roswell, GA 0 775,226 775,226 167,755
Wendy's -
Mason City, IA 0 190,252 190,252 26,788
Taco Bell -
Fernandina Beach, FL (14) 0 559,570 559,570 162,085
Denny's -
Daytona Beach, FL (14) 0 918,777 918,777 90,799
Wendy's -
Punta Gorda, FL 0 684,342 684,342 (18,369)
Po' Folks -
Hagerstown, MD 0 1,188,315 1,188,315 (399,431)
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 0 616,501 616,501 95,499
Burger King -
Hastings, MI 0 419,936 419,936 98,714
Wendy's -
Tampa, FL 0 828,350 828,350 221,200
Checkers -
Douglasville, GA 0 363,768 363,768 16,927
Taco Bell -
Fort Myers, FL (14) 0 597,998 597,998 196,692
Denny's -
Union Township, OH (14) 0 872,850 872,850 (198,715)
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 0 986,418 986,418 53,582
Ponderosa -
St. Cloud, FL (6) (14) 0 996,769 996,769 134,243
Franklin National Bank -
Franklin, TN 0 1,138,164 1,138,164 (177,423)
Shoney's -
Smyrna, TN 0 554,200 554,200 82,588
KFC -
Salem, NH 0 1,079,310 1,079,310 192,827
Perkins -
Port St. Lucie, FL 0 1,203,207 1,203,207 13,543
Hardee's -
Richmond, VA 0 695,464 695,464 (297,679)
Wendy's -
Tampa, FL 0 657,800 657,800 147,375
</TABLE>
C-32
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
==========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
===========================================================================================================================
<S> <C>
Denny's -
Port Orange, FL (14) 07/10/89 01/23/98 1,283,096 0 0 0 1,283,096
Shoney's -
Tyler, TX 03/20/89 02/17/98 844,229 0 0 0 894,229
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 11/02/89 05/24/94 791,211 0 0 0 791,211
Hardee's -
Heber Springs, AR 02/13/90 05/24/94 638,270 0 0 0 638,270
Hardee's -
Little Canada, MN 11/28/89 06/29/95 899,503 0 0 0 899,503
Jack in the Box -
Dallas, TX 06/28/94 12/09/96 982,980 0 0 0 982,980
Denny's -
Show Low, AZ (8) 05/22/87 01/31/97 349,200 0 0 0 349,200
KFC -
Whitehall Township, MI 02/26/90 07/09/97 629,888 0 0 0 629,888
Perkins -
Naples, FL 12/26/89 07/09/97 1,487,725 0 0 0 1,487,725
Burger King -
Plattsmouth, NE 01/19/90 07/18/97 699,400 0 0 0 699,400
Shoney's -
Venice, FL 08/03/89 09/17/97 1,206,696 0 0 0 1,206,696
Jack in the Box -
Yuma, AZ (10) 07/14/94 10/31/97 510,653 0 0 0 510,653
Denny's -
Deland, FL 03/22/90 01/23/98 1,236,97 0 0 0 1,236,97
Wendy's -
Liverpool, NY 12/08/89 02/09/98 145,221 0 0 0 145,221
Perkin's -
Melbourne, FL 02/03/90 02/12/98 552,910 0 0 0 552,910
Hardee's
Bellevue, NE 05/03/90 06/05/98 900,000 0 0 0 900,000
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 06/14/90 05/19/92 700,000 0 0 0 700,000
Hardee's -
St. Paul, MN 08/09/90 05/24/94 869,036 0 0 0 869,036
Perkins -
Florence, SC (3) 08/28/90 08/25/95 0 0 1,160,000 0 1,160,000
</TABLE>
<TABLE>
<CAPTION>
===========================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
============================================================================================
<S> <C>
Denny's -
Port Orange, FL (14) 0 1,021,000 1,021,000 262,096
Shoney's -
Tyler, TX 0 770,300 770,300 73,929
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 0 605,500 605,500 185,711
Hardee's -
Heber Springs, AR 0 532,893 532,893 105,377
Hardee's -
Little Canada, MN 0 821,692 821,692 77,811
Jack in the Box -
Dallas, TX 0 964,437 964,437 18,543
Denny's -
Show Low, AZ (8) 0 272,354 272,354 76,846
KFC -
Whitehall Township, MI 0 725,604 725,604 (95,716)
Perkins -
Naples, FL 0 1,083,869 1,083,869 403,856
Burger King -
Plattsmouth, NE 0 561,000 561,000 138,400
Shoney's -
Venice, FL 0 1,032,435 1,032,435 174,261
Jack in the Box -
Yuma, AZ (10) 0 448,082 448,082 62,571
Denny's -
Deland, FL 0 1,000,000 1,000,000 236,971
Wendy's -
Liverpool, NY 0 341,440 341,440 (196,219)
Perkin's -
Melbourne, FL 0 692,850 692,850 (139,940)
Hardee's
Bellevue, NE 0 899,512 899,512 488
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 0 560,202 560,202 139,798
Hardee's -
St. Paul, MN 0 742,333 742,333 126,703
Perkins -
Florence, SC (3) 0 1,084,905 1,084,905 75,095
</TABLE>
C-33
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
=========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
=========================================================================================================================
<S> <C>
Church's Fried Chicken -
Jacksonville, FL (4) (14) 04/30/90 12/01/95 0 0 240,000 0 240,000
Shoney's -
Colorado Springs, CO 07/03/90 07/24/96 1,044,909 0 0 0 1,044,909
Hardee's -
Hartland, MI 07/10/90 10/23/96 617,035 0 0 0 617,035
Hardee's -
Columbus, IN 09/04/90 05/30/97 223,590 0 0 0 223,590
KFC -
Dunnellon, FL 08/02/90 10/07/97 757,800 0 0 0 757,800
Jack in the Box -
Yuma, AZ (10) 07/14/94 10/31/97 471,372 0 0 0 471,372
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 03/16/91 07/31/95 1,184,865 0 0 0 1,184,865
Church's Fried Chicken -
Jacksonville, FL (4) (14) 09/28/90 12/01/95 0 0 240,000 0 240,000
Church's Fried Chicken -
Jacksonville, FL (5) (14) 09/28/90 12/01/95 0 0 220,000 0 220,000
Ponderosa -
Orlando, FL (6) (14) 12/17/90 10/24/96 0 0 1,353,775 0 1,353,775
CNL Income Fund IX, Ltd.:
Burger King -
Woodmere, OH (15) 05/31/91 12/12/96 918,445 0 0 0 918,445
Burger King -
Alpharetta, GA 09/20/91 06/30/97 1,053,571 0 0 0 1,053,571
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 03/04/92 08/11/95 1,050,186 0 0 0 1,050,186
Jack in the Box -
Freemont, CA 03/26/92 09/23/97 1,366,550 0 0 0 1,366,550
Jack in the Box -
Sacramento, CA 12/19/91 01/20/98 1,234,175 0 0 0 1,234,175
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 09/29/92 11/07/96 1,044,750 0 0 0 1,044,750
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 12/28/92 04/10/96 1,640,000 0 0 0 1,640,000
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
================================================================================================
<S> <C>
Church's Fried Chicken -
Jacksonville, FL (4) (14) 0 233,728 233,720 6,272
Shoney's -
Colorado Springs, CO 0 893,739 893,739 151,170
Hardee's -
Hartland, MI 0 841,642 841,642 (224,607)
Hardee's -
Columbus, IN 0 219,676 219,676 3,914
KFC -
Dunnellon, FL 0 546,333 546,333 211,467
Jack in the Box -
Yuma, AZ (10) 0 413,614 413,614 57,758
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 0 949,199 949,199 235,666
Church's Fried Chicken -
Jacksonville, FL (4) (14) 0 238,153 238,153 1,847
Church's Fried Chicken -
Jacksonville, FL (5) (14) 0 215,845 215,845 4,155
Ponderosa -
Orlando, FL (6) (14) 0 1,179,210 1,179,210 174,565
CNL Income Fund IX, Ltd.:
Burger King -
Woodmere, OH (15) 0 918,445 918,445 0
Burger King -
Alpharetta, GA 0 713,866 713,866 339,705
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 0 987,679 987,679 62,507
Jack in the Box -
Freemont, CA 0 1,102,766 1,102,766 263,784
Jack in the Box -
Sacramento, CA 0 969,423 969,423 264,752
CNL Income Fund XI, Ltd.:
Burger King -
Philadelphia, PA 0 818,850 818,850 225,900
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 0 1,636,643 1,636,643 3,357
</TABLE>
C-34
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
========================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
========================================================================================================================
<S> <C>
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 03/31/94 04/24/95 286,411 0 0 0 286,411
Checkers -
Richmond, VA 03/31/94 11/21/96 550,000 0 0 0 550,000
Denny's -
Orlando, FL 09/01/93 10/24/97 932,849 0 0 0 932,849
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 03/31/94 03/01/95 339,031 0 0 0 339,031
Checkers -
Dallas, TX 03/31/94 03/01/95 356,981 0 0 0 356,981
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0 1,753,533
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0 747,058
Hardee's -
Madison, AL 12/14/93 01/08/98 700,950 0 0 0 700,950
Checkers -
Richmond, VA (#548) 03/31/94 01/29/98 512,462 0 0 0 512,462
Checkers -
Riviera Beach, FL 03/31/94 04/14/98 360,000 0 0 0 360,000
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 05/27/94 03/01/95 263,221 0 0 0 263,221
Checkers -
Leavenworth, KS 06/22/94 03/01/95 259,600 0 0 0 259,600
Checkers -
Knoxville, TN 07/08/94 03/01/95 288,885 0 0 0 288,885
TGI Friday's -
Woodridge, NJ (7) 01/01/95 09/27/96 1,753,533 0 0 0 1,753,533
Wendy's -
Woodridge, NJ (7) 11/28/94 09/27/96 747,058 0 0 0 747,058
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 06/24/95 04/24/96 775,000 0 0 0 775,000
Checker's -
Oviedo, FL 11/14/94 02/28/97 610,384 0 0 0 610,384
Boston Market -
Madison, TN (16) 05/05/95 05/08/98 774,851 0 0 0 774,851
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
================================================================================================
<S> <C>
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 0 286,411 286,411 0
Checkers -
Richmond, VA 0 413,288 413,288 136,712
Denny's -
Orlando, FL 0 934,120 934,120 (1,271)
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 0 339,031 339,031 0
Checkers -
Dallas, TX 0 356,981 356,981 0
TGI Friday's -
Woodridge, NJ (7) 0 1,510,245 1,510,245 243,288
Wendy's -
Woodridge, NJ (7) 0 672,746 672,746 74,312
Hardee's -
Madison, AL 0 658,977 658,977 41,973
Checkers -
Richmond, VA (#548) 0 382,435 382,435 130,027
Checkers -
Riviera Beach, FL 0 276,409 276,409 83,591
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 0 263,221 263,221 0
Checkers -
Leavenworth, KS 0 259,600 259,600 0
Checkers -
Knoxville, TN 0 288,885 288,885 0
TGI Friday's -
Woodridge, NJ (7) 0 1,510,245 1,510,245 243,288
Wendy's -
Woodridge, NJ (7) 0 672,746 672,746 74,312
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 0 613,838 613,838 161,162
Checker's -
Oviedo, FL 0 506,311 506,311 104,073
Boston Market -
Madison, TN (16) 0 774,851 774,851 0
</TABLE>
C-35
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
======================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
----------------------------------------------------
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP Total
======================================================================================================================
<S> <C>
Boston Market -
Chattanooga, TN (17) 05/05/95 06/16/98 713,386 0 0 0 713,386
CNL Income Fund XVII, Ltd.:
Boston Market -
Troy, OH (18) 07/24/96 06/16/98 857,487 0 0 0 857,487
CNL American Properties Fund, Inc.:
TGI Friday's -
Orange, CT 10/30/95 05/08/97 1,312,799 0 0 0 1,312,799
TGI Friday's -
Hazlet, NJ 07/15/96 05/08/97 1,324,109 0 0 0 1,324,109
TGI Friday's -
Marlboro, NJ 08/01/96 05/08/97 1,372,075 0 0 0 1,372,075
TGI Friday's -
Hamden, CT 08/26/96 05/08/97 1,245,100 0 0 0 1,245,100
Boston Market -
Southlake, TX 07/02/97 07/21/97 1,035,153 0 0 0 1,035,135
Boston Market -
Franklin, TN (19) 08/18/95 04/14/98 950,361 0 0 0 950,361
Boston Market -
Grand Island, NE (20) 09/19/95 04/14/98 837,656 0 0 0 837,656
Burger King -
Indian Head Park, IL 04/03/96 05/05/98 674,320 0 0 0 674,320
Boston Market -
Dubuque, IA (21) 10/04/95 05/08/98 969,159 0 0 0 969,159
Boston Market -
Merced, CA (22) 10/06/96 05/08/98 930,834 0 0 0 930,834
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
Cost of Properties
Including Closing and
Soft Costs
-----------------------------------
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
Boston Market -
Chattanooga, TN (17) 0 713,386 713,386 0
CNL Income Fund XVII, Ltd.:
Boston Market -
Troy, OH (18) 0 857,487 857,487 0
CNL American Properties Fund, Inc.:
TGI Friday's -
Orange, CT 0 1,310,980 1,310,980 1,819
TGI Friday's -
Hazlet, NJ 0 1,294,237 1,294,237 29,872
TGI Friday's -
Marlboro, NJ 0 1,324,288 1,324,288 47,787
TGI Friday's -
Hamden, CT 0 1,203,136 1,203,136 41,964
Boston Market -
Southlake, TX 0 1,035,135 1,035,135 0
Boston Market -
Franklin, TN (19) 0 950,361 950,361 0
Boston Market -
Grand Island, NE (20) 0 837,656 837,656 0
Burger King -
Indian Head Park, IL 0 670,867 670,867 3,453
Boston Market -
Dubuque, IA (21) 0 969,159 969,159 0
Boston Market -
Merced, CA (22) 0 930,834 930,834 0
</TABLE>
(1) Amounts shown do not include pro rata share of original offering costs or
acquisition fees.
(2) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,006,004 in July 2000.
(3) Amount shown is face value and does not represent discounted current value
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,106,657 in July 2000.
(4) Amounts shown are face value and do not represent discounted current value.
Each mortgage note bears interest at a rate of 10.00% per annum and
provides for a balloon payment of $218,252 in December 2005.
(5) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.00% per annum and provides
for a balloon payment of $200,324 in December 2005.
(6) Amounts shown are face value and do not represent discounted current value.
Each mortgage note bears interest at a rate of 10.75% per annum and
provides for 12 monthly payments of interest only and thereafter, 168 equal
monthly payments of principal and interest.
(7) CNL Income Fund XIV, Ltd. and CNL Income Fund XV, Ltd. each owned a 50
percent interest in Wood-Ridge Real Estate Joint Venture, which owned two
properties. The amounts presented for CNL Income Fund XIV, Ltd. and CNL
Income Fund XV, Ltd. represent each partnership's 50 percent interest in
the properties owned by Wood-Ridge Real Estate Joint Venture.
C-36
<PAGE>
(8) CNL Income Fund II, Ltd. owns a 64 percent interest and CNL Income Fund VI,
Ltd. owns a 36 percent interest in this joint venture. The amounts
presented for CNL Income Fund II, Ltd. and CNL Income Fund VI, Ltd.
represent each partnership's percent interest in the property owned by Show
Low Joint Venture.
(9) CNL Income Fund, Ltd. owns a 50 percent interest in this joint venture. The
amounts presented represent the partnerships percent interest in the
property owned by Seventh Avenue Joint Venture. A third party owns the
remaining 50 percent interest in this joint venture.
(10) CNL Income Fund VI, Ltd. and CNL Income Fund VII, Ltd. own a 52 percent and
48 percent interest, respectively, in the property in Yuma, Arizona. The
amounts presented for CNL Income Fund VI, Ltd. and CNL Income Fund VII,
Ltd. represent each partnership's respective interest in the property.
(11) Cash received net of closing costs includes $198,000 received as a lease
termination fee.
(12) Cash received net of closing costs includes $93,885 received as a lease
termination fee.
(13) Cash received net of closing costs includes $120,115 received as a lease
termination fee.
(14) Closing costs deducted from net sales proceeds do not include deferred,
subordinated real estate disposition fees payable to CNL Fund Advisors or
its affiliates.
(15) The Burger King property in Woodmere, Ohio was exchanged on December 12,
1996 for a Burger King property in Carrboro, NC at the option of the tenant
as permitted under the terms of the lease agreement. Due to the exchange,
the Burger King property in Carrboro, NC is being leased under the same
lease as the Burger King property in Woodmere, OH.
(16) The Boston Market property in Madison, TN was exchanged on May 8, 1998 for
a Boston Market property in Lawrence, KS at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Lawrence, KS is being leased under the same lease
as the Boston Market property in Madison, TN.
(17) The Boston Market property in Chattanooga, TN was exchanged on June 16,
1998 for a Boston Market property in Indianapolis, IN at the option of the
tenant as permitted under the terms of the lease agreement. Due to the
exchange, the Boston Market property in Indianapolis, IN is being leased
under the same lease as the Boston Market property in Chattanooga, TN.
(18) The Boston Market property in Troy, OH was exchanged on June 16, 1998 for a
Boston Market property in Inglewood, CA at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Inglewood, CA is being leased under the same
lease as the Boston Market property in Troy, OH.
(19) The Boston Market property in Franklin, TN was exchanged on April 14, 1998
for a Boston Market property in Glendale, AZ at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Glendale, AZ is being leased under the same terms
as the Boston Market property in Franklin, TN.
(20) The Boston Market property in Grand Island, NE was exchanged on April 14,
1998 for a Boston Market property in Warwick, RI at the option of the
tenant as permitted under the terms of the lease agreement. Due to the
exchange, the Boston Market property in Warwick, RI is being leased under
the same terms as the Boston Market property in Grand Island, NE.
(21) The Boston Market property in Dubuque, IA was exchanged on May 8, 1998 for
a Boston Market property in Columbus, OH at the option of the tenant as
permitted under the terms of the lease agreement. Due to the exchange, the
Boston Market property in Columbus, OH is being leased under the same terms
as the Boston Market property in Dubuque, IA.
(22) Cash received net of closing costs includes $362,949 in construction costs
incurred but not paid by CNL American Properties Fund, Inc. as of the
closing date, which were deducted from the actual net sales proceeds
received by CNL American Properties Fund, Inc.
C-37
<PAGE>
EXHIBIT D
SUBSCRIPTION AGREEMENT
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
- --------------------------------------------------------------------------------
Up to 16,500,000 Shares -- $10.00 per Share
Minimum Purchase -- 250 Shares ($2,500)
100 Shares ($1,000) for IRAs, Keogh, and Qualified Plans
(Minimum purchase may be higher in certain states)
================================================================================
PLEASE READ CAREFULLY this Subscription Agreement and the Notices (on the back
of the Agreement) before completing this document. TO SUBSCRIBE FOR SHARES,
complete and sign, where appropriate, and deliver the Subscription Agreement,
along with your check, to your Registered Representative. YOUR CHECK SHOULD BE
MADE PAYABLE TO:
SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.
ALL ITEMS ON THE SUBSCRIPTION AGREEMENT MUST BE COMPLETED IN ORDER FOR YOUR
SUBSCRIPTION TO BE PROCESSED.
================================================================================
Overnight Packages: Regular Mail Packages:
Attn: Investor Services Attn: Investor Services
400 E. South Street Post Office Box 1033
Orlando, Florida 32801 Orlando, Florida 32802-1033
For Telephone Inquiries:
CNL SECURITIES CORP.
(407) 650-1000 OR (800) 522-3863
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
- --------------------------------------------------------------------------------
1. --------------- INVESTMENT --------------------------------------------------
This subscription is in the amount of $___________ for the purchase of
___________ Shares ($10.00 per Share). The minimum initial subscription is 250
Shares ($2,500); 100 Shares ($1,000) for IRA, Keogh and qualified plan accounts
(except in states with higher minimum purchase requirements).
|_| ADDITIONAL PURCHASE |_| REINVESTMENT PLAN - Investor elects to participate
in Plan (See prospectus for details.)
2. --------------- SUBSCRIBER INFORMATION --------------------------------------
Name (1st)_______________________ |_| M |_| F Date of Birth (MM/DD/YY)__________
Name (2nd)_______________________ |_| M |_| F Date of Birth (MM/DD/YY)__________
Address_________________________________________________________________________
City___________________________________ State___________ Zip Code_______________
Custodian Account No._____________________ Daytime Phone # ( )_______________
|_| U.S. Citizen |_| Resident Alien |_| Foreign Resident Country___________
|_| Check if Subscriber is a U.S. citizen residing outside the U.S.
Income Tax Filing State_________________________________________________________
ALL SUBSCRIBERS: State of Residence of Subscriber/Plan Beneficiary
(required)_____________________________________________________
Taxpayer Identification Number: For most individual taxpayers, it is their
Social Security number. Note: If the purchase is in more than one name, the
number should be that of the first person listed. For IRAs, Keoghs and qualified
plans, enter both the Social Security number and the custodian taxpayer
identification number.
Taxpayer ID#________ - _________ Social Security #_______ -_______ - ________
3. --------------- INVESTOR MAILING ADDRESS ------------------------------------
For the Subscriber of an IRA, Keogh, or qualified plan to receive informational
mailings, please complete if different from address in Section 2.
Name____________________________________________________________________________
Address_________________________________________________________________________
City____________________________ State_____________ Zip Code__________________
Daytime Phone #____________________________________
4. ---------------- DIRECT DEPOSIT ADDRESS -------------------------------------
Investors requesting direct deposit of distribution checks to another financial
institution or mutual fund, please complete below. In no event will the Company
or Affiliates be responsible for any adverse consequences of direct deposit.
Company_________________________________________________________________________
Address_________________________________________________________________________
City_________________________________ State_______________ Zip Code___________
Account No._________________________________ Phone #___________________________
5. --------------- FORM OF OWNERSHIP -------------------------------------------
(Select only one)
|_|INDIVIDUAL-one signature required (1)
|_|HUSBAND AND WIFE, AS COMMUNITY PROPERTY- two signatures required (15)
|_|TENANTS IN COMMON-two signatures required (9)
|_|TENANTS BY THE ENTIRETY-two signatures required (31)
|_|S-CORPORATION (22)
|_|C-CORPORATION (5)
|_|IRA-custodian signature required (23)
|_|SEP-custodian signature required (38)
|_|TAXABLE TRUST (7)
|_|TAX-EXEMPT TRUST (20)
|_|JOINT TENANTS WITH RIGHT OF SURVIVORSHIP-all parties must sign (8)
|_|A MARRIED PERSON/SEPARATE PROPERTY-one signature required (34)
|_|KEOGH (H.R.10)-trustee signature required (24)
|_|CUSTODIAN-custodian signature required (33)
|_|PARTNERSHIP (3)
|_|NON-PROFIT ORGANIZATION (12)
|_|PENSION PLAN-trustee signature(s) required (19)
|_|PROFIT SHARING PLAN-trustee signature(s) required (27)
|_|CUSTODIAN UGMA-STATE of _________ -custodian signature required (16)
|_|CUSTODIAN UTMA-STATE of _________ -custodian signature required (42)
|_|ESTATE-Personal Representative signature required (13)
|_|REVOCABLE GRANTOR TRUST-grantor signature required (25)
|_|IRREVOCABLE TRUST-trustee signature required (21)
|_| SUBSCRIBER elects to have the Shares covered by this subscription placed
in a new sponsored IRA account offered by Franklin Bank as custodian. IRA
documents will be sent to subscriber upon receipt of subscription
documents. There is no annual fee involved for CNL Hospitality Properties,
Inc. investments.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
6. -------------- SUBSCRIBER SIGNATURES ----------------------------------------
If the Subscriber is executing the Subscriber Signature Page, the Subscriber
understands that, BY EXECUTING THIS AGREEMENT A SUBSCRIBER DOES NOT WAIVE ANY
RIGHTS HE MAY HAVE UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE
ACT OF 1934 OR UNDER ANY STATE SECURITIES LAW:
X
----------------------------------------------- -------------------
Signature of 1st Subscriber Date
X
---------------------------------------------- -------------------
Signature of 2nd Subscriber Date
7. -------------- BROKER/DEALER INFORMATION ------------------------------------
Broker/Dealer NASD Firm Name____________________________________________________
Registered Representative_______________________________________________________
Branch Mail Address_____________________________________________________________
City_________________________________ State _____________ Zip Code_____________
|_| Please check if new address
Phone #______________________ Fax #______________________ |_| Sold CNL before
Shipping Address________________________________________________________________
City___________________________ State____________________ Zip Code______________
|_| Telephonic Subscriptions (check here): If the Registered Representative
and Branch Manager are executing the signature page on behalf of the
Subscriber, both must sign below. Registered Representatives and Branch
Managers may not sign on behalf of residents of Florida, Iowa, Maine,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New
Mexico, North Carolina, Ohio, Oregon, South Dakota, Tennessee, or
Washington. [NOTE: Not to be executed until Subscriber(s) has (have)
acknowledged receipt of final prospectus.] Telephonic subscriptions may
not be completed for IRA accounts.
|_| Registered Investment Advisor (RIA) (check here): This investment is
made through the RIA in its capacity as a RIA and not in its capacity as
a Registered Representative, if applicable. If an owner or principal or
any member of the RIA firm is a NASD licensed Registered Representative
affiliated with a Broker/Dealer, the transaction should be conducted
through that Broker/Dealer, not through the RIA.
PLEASE READ CAREFULLY THE REVERSE SIDE OF THIS SIGNATURE PAGE AND SUBSCRIPTION
AGREEMENT BEFORE COMPLETING
X
----------------------------- ------------------ --------------------------
Principal, Branch Manager or Date Print or Type Name of
Other Authorized Signature Person Signing
X
----------------------------- ------------------ --------------------------
Registered Representative/ Date Print or Type Name of
Investment Advisor Signature Person Signing
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Make check payable to : SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.,
ESCROW AGENT
Please remit check and For overnight delivery, please send to:
subscription document to: For Office Use Only
CNL SECURITIES CORP. CNL SECURITIES CORP. Sub.#______________
Attn: Investor Services Attn: Investor Services Admit Date_________
Post Office Box 1033 400 E. South Street
Orlando, FL 32802-1033 Orlando, FL 32801 Amount_____________
(800) 522-3863 (407) 650- 1000
(800) 522-3863 Region_____________
RSVP#______________
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
NOTICE TO ALL INVESTORS:
(a) The purchase of Shares by an IRA, Keogh, or other tax-qualified plan does
not, by itself, create the plan.
(b) The Company, in its sole and absolute discretion, may accept or reject the
Subscriber's subscription which if rejected will be promptly returned to the
Subscriber, without interest. Non-U.S. stockholders (as defined in the
Prospectus) will be admitted as stockholders with the approval of the Advisor.
(c) THE SALE OF SHARES SUBSCRIBED FOR HEREUNDER MAY NOT BE COMPLETED UNTIL AT
LEAST FIVE BUSINESS DAYS AFTER THE DATE THE SUBSCRIBER RECEIVES A FINAL
PROSPECTUS. EXCEPT AS PROVIDED IN THIS NOTICE, THE NOTICE BELOW, AND IN THE
PROSPECTUS, THE SUBSCRIBER WILL NOT BE ENTITLED TO REVOKE OR WITHDRAW HIS
SUBSCRIPTION.
NOTICE TO CALIFORNIA RESIDENTS: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER
OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION
THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS
OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
California investors who do not execute the Subscription Agreement will receive
a confirmation of investment accompanied by a second copy of the final
Prospectus, and will have the opportunity to rescind the investment within ten
(10) days from the date of confirmation.
NOTICE TO NORTH CAROLINA RESIDENTS: By signing this Subscription Agreement,
North Carolina investors acknowledge receipt of the Prospectus and represent
that they meet the suitability standards for North Carolina investors listed in
the Prospectus.
BROKER/DEALER AND FINANCIAL ADVISOR:
By signing this subscription agreement, the signers certify that they recognize
and have complied with their obligations under the NASD's Conduct Rules, and
hereby further certify as follows: (i) a copy of the Prospectus, including the
Subscription Agreement attached thereto as Exhibit D, as amended and/or
supplemented to date, has been delivered to the Subscriber; (ii) they have
discussed such investor's prospective purchase of Shares with such investor and
have advised such investor of all pertinent facts with regard to the liquidity,
valuation, and marketability of the Shares; and (iii) they have reasonable
grounds to believe that the purchase of Shares is a suitable investment for such
investor, that such investor meets the suitability standards applicable to such
investor set forth in the Prospectus and related supplements, if any, that such
investor is legally capable of purchasing such Shares and will not be in
violation of any laws for having engaged in such purchase, and that such
investor is in a financial position to enable such investor to realize the
benefits of such an investment and to suffer any loss that may occur with
respect thereto and will maintain documentation on which the determination was
based for a period of not less than six years; (iv) under penalties of perjury,
(a) the information provided in this Subscription Agreement to the best of our
knowledge and belief is true, correct, and complete, including, but not limited
to, the number shown above as the Subscriber's taxpayer identification number;
(b) to the best of our knowledge and belief, the Subscriber is not subject to
backup withholding either because the Subscriber has not been notified that the
Subscriber is subject to backup withholding as result of failure to report all
interest or dividends or the Internal Revenue Service has notified the
subscriber that the Subscriber is no longer subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code of 1986, as amended; and (c)
to the best of our knowledge and belief, the Subscriber is not a nonresident
alien, foreign corporation, foreign trust, or foreign estate for U.S. tax
purposes, and we hereby agree to notify the Company if it comes to the attention
of either of us that the Subscriber becomes such a person within sixty (60) days
of any event giving rise to the Subscriber becoming such a person.
<PAGE>
Franklin Bank, N.A.
- --------------------------------------------------------------------------------
FRANKLIN BANK, N.A., INDIVIDUAL RETIREMENT ACCOUNT APPLICATION
ACCOUNTHOLDER INFORMATION: NAME ________________________________________________
DISCLAIMER:
Franklin Bank, N.A. is a national bank, not associated with CNL Group,
Inc. or any CNL entity. Franklin Bank, N.A. is a custodian for IRAs and will act
in a custodial capacity for all beneficial owners of IRAs. CNL has no
affiliation with Franklin Bank, N.A.
It is not reasonable to project the growth of your IRA investments
including assets other than bank time deposits or savings accounts. Therefore,
your final account balance will depend upon many factors - the amount of your
contributions, the amount of time the funds are invested, the earnings and/or
losses from the investments, expenses incurred such as brokerage commissions and
trustee's fees and the overall performance of your investments.
We expressly state that the growth in the value of your IRA cannot be guaranteed
or projected.
SIGNATURES IMPORTANT: Please read before signing.
I understand the eligibility requirements for the type of
IRA deposit I am making and I state that I do qualify to
make the deposit. I understand that the terms and conditions
which apply to the Individual Retirement Account are
contained in this Application and Form 5305A (which will be
provided within 10 days of our receipt of this application).
I agree to be bound by those terms and conditions. I
understand that I will not be required to pay an annual fee
as long as all investments in this IRA are sponsored by a
CNL entity. Within seven (7) days from the date I establish
the Individual Retirement Account I may revoke it without
penalty by mailing or delivering a written notice to the
Custodian.
I assume complete responsibility for:
1. Determining that I am eligible for an IRA each year I
make a contribution.
2. Insuring that all contributions I make are within the
limits set forth by the tax laws.
3. The tax consequences of any contribution (including
rollover contributions) and distributions.
Signature _______________________________________________
Accountholder
__________________________________ ____________________
Authorized Signature Trustee Date
DESIGNATION OF
BENEFICIARY(IES): I designate the individual(s) named below as my
primary and contingent Beneficiary(ies) of the IRA.
I revoke all prior IRA Beneficiary designations, if
any, made by me. I understand that I may change or
add Beneficiaries at any time by completing and
delivering the proper form to the Custodian. (If
you wish to name more than one Beneficiary, attach
a list of each Beneficiary's name, social security
number, relationship to you and percentage share in
this IRA.) If any primary or contingent Beneficiary
dies before me, his or her interest and the
interest of his or her heirs shall terminate
completely, and the percentage share of any
remaining Beneficiary(ies) shall be increased on a
pro rata basis.
<TABLE>
<CAPTION>
<S> <C>
Primary The following individual(s) shall be my Primary Beneficiary(ies):
Beneficiary(ies)
Name________________________________________________________ Social Security #___________________
Address_____________________________________________________ Date of Birth__________ Share______
____________________________________________________________ Relationship________________________
Contingent If none of the Primary Beneficiaries survive me, the following
Beneficiary(ies) individual(s) shall be my Beneficiary(ies):
Name________________________________________________________ Social Security #___________________
Address_____________________________________________________ Date of Birth__________ Share______
____________________________________________________________ Relationship________________________
</TABLE>
Spousal Consent
I am the spouse of IRA accountholder named above. I agree to
my spouse's naming of a primary Beneficiary other than
myself. I acknowledge that I have received a fair and
reasonable disclosure of my spouse's property and financial
obligation. I also acknowledge that I shall have no claim
whatsoever against the Custodian for any payments to my
spouse's Beneficiary(ies).
--------------------------------- ------------------------
Spouse's Signature Date
- --------------------------------------------------------------------------------
Custodial Services P.O. Box 7090 Troy, MI 48007-7090
1-800-344-0667
<PAGE>
INVESTMENT OPTIONS:
|_| I would like to receive information regarding mutual fund investments.
|_| I would like to receive information regarding money market accounts.
Note: Franklin Bank, N.A. may consider other investment options for your IRA.
Please provide the following information on your options.
Fund Name_______________________________________________________________________
Sponsor Name____________________________________________________________________
Address_________________________________________________________________________
Account No.______________________________ Telephone #_________________________
Registered Representative information:
Registered Representative's Name________________________________________________
Company_________________________________________________________________________
Address_________________________________________________________________________
Telephone #_____________________________________________________________________
<PAGE>
EXHIBIT E
STATEMENT OF ESTIMATED
TAXABLE OPERATING RESULTS
BEFORE DIVIDENDS PAID DEDUCTION
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
STATEMENT OF ESTIMATED TAXABLE OPERATING RESULTS
BEFORE DIVIDENDS PAID DEDUCTION
PROPERTIES ACQUIRED FROM INCEPTION
THROUGH FEBRUARY 26, 1999
For the Year Ended December 31, 1998 (Unaudited)
The following schedule presents unaudited estimated taxable operating
results before dividends paid deduction of each Property acquired directly by
the Company from inception through February 26, 1999. The statement presents
unaudited estimated taxable operating results for each Property that was
operational as if the Property had been acquired and operational on January 1,
1998 through December 31, 1998. The schedule should be read in light of the
accompanying footnotes.
These estimates do not purport to present actual or expected operations
of the Company for any period in the future. These estimates were prepared on
the basis described in the accompanying notes which should be read in
conjunction herewith.
<TABLE>
<CAPTION>
Residence Inn by Marriott Residence Inn by Marriott
Buckhead (Lenox Park) (6) Gwinnett Place (6) Total
------------------------- ------------------------- -----------
<S> <C>
Estimated Taxable Operating
Results Before Dividends
Paid Deduction:
Rental Income (1) $1,651,798 $1,208,983 $2,860,781
Asset Management Fees (2) (94,388) (69,085) (163,473)
Interest Expense (3) (440,000) (316,800) (756,800)
General and Administrative
Expenses (4) (132,144) (96,719) (228,863)
---------- ---------- ----------
Estimated Cash Available from
Operations 985,266 726,379 1,711,645
Depreciation Expense (5) (738,159) (612,656) (1,350,815)
---------- ---------- ----------
Estimated Taxable Operating
Results Before Dividends
Paid Deduction $ 247,107 $ 113,723 $ 360,830
========== ========== ==========
</TABLE>
E-1
<PAGE>
- ----------------------
FOOTNOTES:
(1) Rental income does not include percentage rents which will become due
if specified levels of gross receipts are achieved.
(2) The Properties will be managed pursuant to an advisory agreement
between the Company and CNL Hospitality Advisors, Inc. (the "Advisor"),
pursuant to which the Advisor will receive monthly asset management
fees in an amount equal to one-twelfth of .60% of the Company's Real
Estate Asset Value as of the end of the preceding month as defined in
such agreement. See "Management Compensation."
(3) Estimated at 8.8% per annum based on the bank's base rate as of July
31, 1998, plus 30 basis points assuming $5 million was borrowed on the
Company's line of credit to acquire the Buckhead (Lenox Park) Property
and $3.6 million for the Gwinnett Place Property. The Company repaid,
in February 1999, amounts it had borrowed to acquire these Properties.
(4) Estimated at 8% of gross rental income, based on the previous
experience of an Affiliate of the Advisor with another public REIT.
Amount does not include soliciting dealer servicing fee due to the fact
that such fee will not be incurred until December 31 of the year
following the year in which the offering terminates.
(5) The estimated federal tax basis of the depreciable portion of each
Property and the number of years the assets have been depreciated on
the straight-line method is as follows:
Furniture and
Buildings Fixtures
(39 years) (5-15 years)
---------- ------------
Buckhead (Lenox Park) Property $13,459,000 $1,235,000
Gwinnett Place Property 10,017,000 1,114,000
(6) The lessee of the Buckhead (Lenox Park) and the Gwinnett Place
Properties is the same unaffiliated lessee.
E-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 35. Financial Statements and Exhibits.
Financial Statements:
The following financial statements are included in the Prospectus.
(1) Pro Forma Consolidated Balance Sheet as of December 31,
1998
(2) Pro Forma Consolidated Statement of Earnings for the year
ended December 31, 1998
(3) Notes to Pro Forma Consolidated Financial Statements for
the year ended December 31, 1998
(4) Report of Independent Accountants for CNL Hospitality
Properties, Inc.
(5) Balance Sheets at December 31, 1998 and 1997
(6) 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
(7) 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
(8) 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
(9) Notes to Financial Statements for the years ended December
31, 1998 and 1997 and the period June 12, 1996 (date of
inception) through December 31, 1996
(10) Schedule III - Real Estate and Accumulated Depreciation as
of December 31, 1998.
(11) Notes to Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 1998.
Other Financial Statements:
The following other financial statements are included in the
Prospectus.
Buckhead Residence Associates, L.L.C.
(12) Balance Sheet as of June 30, 1998
(13) Statement of Loss for the six months ended June 30, 1998
(14) Report of Independent Public Accountants
(15) Balance Sheet as of December 31, 1997
- --------------------
* Previously filed.
<PAGE>
(16) Statement of Loss for the year ended December 31, 1997
(17) Statement of Members' Equity for the year ended December
31, 1997
(18) Statement of Cash Flows for the year ended December 31,
1997
(19) Notes to Financial Statements for the year ended December
31, 1997
Gwinnett Residence Associates, L.L.C.
(20) Balance Sheet as of June 30, 1998
(21) Statement of Loss for the six months ended June 30, 1998
(22) Report of Independent Public Accountants
(23) Balance Sheet as of December 31, 1997
(24) Statement of Loss for the year ended December 31, 1997
(25) Statement of Members' Deficit for the year ended December
31, 1997
(26) Statement of Cash Flows for the year ended December 31,
1997
(27) Notes to Financial Statements for the year ended December
31, 1997
All other Schedules have been omitted as the required information
is inapplicable or is presented in the financial statements or related notes.
(b) Exhibits:
*1.1 Form of Managing Dealer Agreement
*1.2 Form of Participating Broker Agreement
*3.1 CNL American Realty Fund, Inc. Articles of Incorporation
*3.2 CNL American Realty Fund, Inc. Amended and Restated
Articles of Incorporation
*3.3 CNL American Realty Fund, Inc. Bylaws
*3.4 Articles of Amendment to the Amended and Restated Articles
of Incorporation of CNL American Realty Fund, Inc. dated
June 3, 1998.
*4.1 CNL American Realty Fund, Inc. Articles of Incorporation
(Previously filed as Exhibit 3.1 and incorporated herein
by reference.)
*4.2 CNL American Realty Fund, Inc. Amended and Restated
Articles of Incorporation (Previously filed as Exhibit 3.2
and incorporated herein by reference.)
*4.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as
Exhibit 3.3 and incorporated herein by reference.)
- --------------------
* Previously filed.
<PAGE>
4.4 Form of Reinvestment Plan (Filed herewith as Exhibit A to
the Prospectus and incorporated herein by reference.)
*4.5 Articles of Amendment to the Amended and Restated Articles
of Incorporation of CNL American Realty Fund, Inc. dated
June 3, 1998. (Previously filed as Exhibit 3.4 and
incorporated herein by reference.)
*5 Opinion of Shaw Pittman Potts & Trowbridge as to the
legality of the securities being registered by CNL
American Realty Fund, Inc.
*8 Opinion of Shaw Pittman Potts & Trowbridge regarding
certain material tax issues relating to CNL American
Realty Fund, Inc.
*10.1 Form of Escrow Agreement between CNL American Realty Fund,
Inc. and SouthTrust Asset Management Company of Florida,
N.A.
*10.2 Form of Advisory Agreement
*10.3 Form of Joint Venture Agreement
*10.4 Form of Indemnification and Put Agreement
*10.5 Form of Unconditional Guaranty of Payment and Performance
*10.6 Form of Purchase Agreement
*10.7 Form of Lease Agreement including Rent Addendum,
Construction Addendum and Memorandum of Lease
10.8 Form of Reinvestment Plan (Filed herewith as Exhibit A to
the Prospectus and incorporated herein by reference.)
*10.9 Form of Indemnification Agreement dated as of July 9,
1997, between CNL American Realty Fund, Inc. and each of
James M. Seneff, Jr., Robert A. Bourne, G. Richard
Hostetter, J. Joseph Kruse, Richard C. Huseman, Charles A.
Muller, John T. Walker, Jeanne A. Wall and Lynn E. Rose,
dated as of October 31, 1998, between CNL Hospitality
Properties, Inc. and C. Brian Strickland, dated as of
January 7, 1999, between CNL Hospitality Properties, Inc.
and John A. Griswold, dated as of February 10, 1999,
between CNL Hospitality Properties, Inc. and each of
Charles E. Adams and Craig M. McAllaster and dated as of
February 24, 1999, between CNL Hospitality Properties,
Inc. and each of Matthew W. Kaplan and Lawrence A. Dustin
*10.10 Agreement of Limited Partnership of CNL Hospitality
Partners, LP
*10.11 Hotel Purchase and Sale Contract between CNL Real Estate
Advisors, Inc. and Gwinnett Residence Associates, LLC,
relating to the Residence Inn - Gwinnett Place
*10.12 Assignment and Assumption Agreement between CNL Real
Estate Advisors, Inc. and CNL Hospitality Partners, LP,
relating to the Residence Inn - Gwinnett Place
*10.13 Hotel Purchase and Sale Contract between CNL Real Estate
Advisors, Inc. and Buckhead Residence Associates, LLC,
relating to the Residence Inn - Buckhead (Lenox Park)
- -------------------
* Previously filed.
<PAGE>
*10.14 Assignment and Assumption Agreement between CNL Real
Estate Advisors, Inc. and CNL Hospitality Partners, LP,
relating to the Residence Inn - Buckhead (Lenox Park)
*10.15 Lease Agreement between CNL Hospitality Partners, L.P. and
STC Leasing Associates, LLC, dated August 1, 1998,
relating to the Residence Inn - Gwinnett Place
*10.16 Lease Agreement between CNL Hospitality Partners, L.P. and
STC Leasing Associates, LLC, dated August 1, 1998,
relating to the Residence Inn - Buckhead (Lenox Park)
*10.17 Master Revolving Line of Credit Loan Agreement with CNL
Hospitality Properties, Inc. and Colonial Bank, dated July
31, 1998
10.18 Master Loan Agreement by and between CNL Hotel Investors,
Inc. and Jefferson-Pilot Life Insurance Company, dated
February 24, 1999 (Filed herewith.)
10.19 Securities Purchase Agreement between CNL Hospitality
Properties, Inc. and Five Arrows Realty Securities II
L.L.C., dated February 24, 1999 (Filed herewith.)
10.20 Subscription and Stockholders' Agreement among CNL Hotel
Investors, Inc., Five Arrows Realty Securities II L.L.C.,
CNL Hospitality Partners, LP and CNL Hospitality
Properties, Inc., dated February 24, 1999 (Filed
herewith.)
10.21 Registration Rights Agreement by and between CNL
Hospitality Properties, Inc. and Five Arrows Realty
Securities II L.L.C., dated February 24, 1999 (Filed
herewith)
23.1 Consent of PricewaterhouseCoopers LLP, Certified Public
Accountants, dated March 12, 1999 (Filed herewith.)
*23.2 Consent of Shaw, Pittman, Potts & Trowbridge (Contained in
its opinion filed herewith as Exhibit 5 and incorporated
herein by reference.)
23.3 Consent of Arthur Andersen LLP, Certified Public
Accountants, dated March 12, 1999 (Filed herewith.)
*27.1 Financial Data Schedule
*99.1 Consents of Certain Persons Named as Directors
- -------------------
* Previously filed.
<PAGE>
TABLE VI
ACQUISITION OF PROPERTIES BY PROGRAMS
Table VI presents information concerning the acquisition of real
properties by the public real estate limited partnerships and the unlisted
public REIT sponsored by Affiliates of the Company through June 30, 1998. The
information includes the gross leasable space or number of units and total
square feet of units, dates of purchase, locations, cash down payment and
contract purchase price plus acquisition fee. This information is intended to
assist the prospective investor in evaluating the terms involved in acquisitions
by such prior programs.
<PAGE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund, Fund II, Fund III, Fund IV,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ---------- ----------
(Note 2) (Note 3) (Note 4) (Note 5)
<S> <C>
AL,AZ,CO,FL, AZ,CA,CO,FL, AL,DC,FL,GA,
GA,IL,IN,KS, GA,IA,IL,IN, IL,IN,KS,MA,
AL,AZ,CA,FL, LA,MI,MN,MO, KS,KY,MD,MI, MD,MI,MS,NC,
GA,LA,MD,OK, NC,NM,OH,TN, MN,MO,NC,NE, OH,PA,TN,TX,
Locations PA,TX,VA,WA TX,WA,WY OK,TX VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 22 units 49 units 37 units 45 units
total square feet
of units 80,314 s/f 185,717 s/f 158,819 s/f 159,196 s/f
Dates of purchase 6/17/86 - 2/11/87- 10/04/87- 6/24/88-
12/31/97 1/13/98 5/1/98 12/31/96
Cash down payment (Note 1) $13,435,137 $26,654,961 $22,413,070 $27,611,441
Contract purchase price
plus acquisition fee $13,361,435 $26,501,721 $22,296,185 $27,506,106
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 73,702 153,240 116,885 105,335
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $13,435,137 $26,654,961 $22,413,070 $27,611,441
=========== =========== =========== ===========
</TABLE>
Note 1: This amount was derived from capital contributions or proceeds from
partners or stockholders, respectively, and net sales proceeds
reinvested in other properties.
Note 2: The partnership owns a 50% interest in three separate joint ventures
which each own a restaurant property. In addition, the partnership owns
a 12.17% interest in one restaurant property held as tenants-in-common
with affiliates.
Note 3: The partnership owns a 49%, 50% and 64% interest in three separate
joint ventures. Each joint venture owns one restaurant property. In
addition, the partnership owns a 33.87%, a 57.77%, a 47%, a 37.01%, a
39.42% and a 13.38% interest in six restaurant properties held
separately as tenants-in-common with affiliates.
Note 4: The partnership owns a 73.4%, 69.07% and 46.89% interest in three
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 32.77%, a 9.84% and a
25.84% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 5: The partnership owns a 51%, 26.6%, 57%, 96.1% and 68.87% interest in
five separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 53.68% interest in one
restaurant property held as tenants-in-common with affiliates.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund V, Fund VI, Fund VII, Fund VIII,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ---------- ----------
(Note 6) (Note 7) (Note 8) (Note 9)
<S> <C>
AR,AZ,FL,GA,
IL,IN,KS,MA,
AZ,FL,GA,IL, MI,MN,NC,NE, AZ,CO,FL,GA,
IN,MI,NH,NY, NM,NY,OH,OK, IN,LA,MI,MN, AZ,FL,IN,LA,
OH,SC,TN,TX, PA,TN,TX,VA, NC,OH,SC,TN, MI,MN,NC,NY,
Locations UT,WA WA,WY TX,UT,WA OH,TN,TX,VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 35 units 55 units 49 units 42 units
total square feet
of units 143,344 s/f 222,003 s/f 184,412 s/f 179,885 s/f
Dates of purchase 2/06/89- 7/13/89- 3/30/90- 9/13/90-
5/1/98 6/16/98 12/31/97 5/31/96
Cash down payment (Note 1) $26,329,791 $39,944,526 $30,416,598 $31,985,071
Contract purchase price
plus acquisition fee $25,946,991 $39,413,526 $29,745,103 $31,450,507
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 382,800 531,000 671,495 534,564
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $26,329,791 $39,944,526 $30,416,598 $31,985,071
=========== =========== =========== ===========
</TABLE>
Note 6: The partnership owns a 43%, 49%, 66.5% and 53.11% interest in four
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 42.23% and a 27.78%
interest in two restaurant properties held separately as
tenants-in-common with affiliates.
Note 7: The partnership owns a 3.9%, 14.5%, 36%, 66.14%, and a 50% interest
in five separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 51.67%, a 17.93%, a
23.04%, a 34.74%, a 46.2% and a 85.07% interest in six restaurant
properties held separately as tenants-in-common with affiliates.
Note 8: The partnership owns a 51%, 83.3%, 4.79%, 18%, and 79% interest in
five separate joint ventures. Four of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties. In addition, the partnership owns a 48.33%, a 53% and a
35.64% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 9: The partnership owns a 85.5%, 87.68%, 36.8% and a 12% interest in
four separate joint ventures. Three of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund IX, Fund X, Fund XI, Fund XII,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ----------- ----------
(Note 10) (Note 11) (Note 12) (Note 13)
<S> <C>
AL,AZ,CA,CO,
AL,CO,FL,GA, AL,CA,CO,FL, CT,FL,KS,LA,
IL,IN,LA,MI, ID,IL,LA,MI, MA,MI,MS,NC, AL,AZ,CA,FL,
MN,MS,NC,NH, MO,MT,NC,NH, NH,NM,OH,OK, GA,LA,MO,MS,
NY,OH,SC,TN, NM,NY,OH,PA, PA,SC,TX,VA, NC,NM,OH,SC,
Locations TX SC,TN,TX WA TN,TX,WA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 43 units 51 units 40 units 49 units
total square feet
of units 185,636 s/f 214,433 s/f 176,062 s/f 206,865 s/f
Dates of purchase 5/31/91- 10/01/91- 5/18/92- 11/20/92-
7/16/97 12/31/97 1/28/97 5/31/96
Cash down payment (Note 1) $32,812,908 $37,444,525 $36,245,591 $40,840,795
Contract purchase price
plus acquisition fee $32,068,289 $36,735,362 $35,644,633 $40,339,796
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 744,619 709,163 600,958 500,999
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $32,812,908 $37,444,525 $36,245,591 $40,840,795
=========== =========== =========== ===========
</TABLE>
Note 10: The partnership owns a 50%, 45.2% and 27.3% interest in three
separate joint ventures. One of the joint ventures owns one
restaurant property and the other two joint ventures own six
restaurant properties each. In addition, the partnership owns a
67.23% interest in one restaurant property held as
tenants-in-common with an affiliate.
Note 11: The partnership owns a 50%, 88.3%, 40.95% and 10.5% interest
in four separate joint ventures. Three of the joint ventures own
one restaurant property each and the other joint venture owns six
restaurant properties. In addition, the partnership owns a 13.37%
and a 6.69% interest in two restaurant properties held separately
as tenants-in-common with affiliates.
Note 12: The partnership owns a 62.2%, 77.33%, 85% and 76.6% interest
in four separate joint ventures. Each joint venture owns one
restaurant property. In addition, the partnership owns a 72.5%
interest in one restaurant property held as tenants-in-common with
an affiliate.
Note 13: The partnership owns a 31.13%, 59.05%, 18.61% and 88% interest
in four separate joint ventures. Each joint venture owns one
restaurant property.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
---------- ---------- ---------- ----------
(Note 14) (Note 15) (Note 16) (Note 17)
<S> <C>
AL,AR,AZ,CA, AL,AZ,CO,FL, AL,CA,FL,GA, AZ,CA,CO,DC,
CO,FL,GA,IN, GA,KS,LA,MN, KS,KY,MN,MO, FL,GA,ID,IN,
KS,LA,MD,NC, MO,MS,NC,NJ, MS,NC,NJ,NM, KS,MN,MO,NC,
OH,PA,SC,TN, NV,OH,SC,TN, OH,OK,PA,SC, NM,NV,OH,TN,
Locations TX,VA TX,VA TN,TX,VA TX,UT,WI
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 50 units 64 units 55 units 47 units
total square feet
of units 167,286 s/f 190,448 s/f 172,379 s/f 180,110 s/f
Dates of purchase 5/18/93- 9/27/93- 4/28/94- 10/21/94-
12/31/97 4/30/98 6/16/98 6/16/98
Cash down payment (Note 1) $36,388,084 $42,748,602 $38,446,910 $42,394,592
Contract purchase price
plus acquisition fee $36,019,958 $42,321,171 $38,054,069 $42,004,434
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 368,126 427,431 392,841 390,158
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $36,388,084 $42,748,602 $38,446,910 $42,394,592
=========== =========== =========== ===========
</TABLE>
Note 14: The partnership owns a 50% and a 28% interest in two separate
joint ventures. Each joint venture owns one restaurant property.
In addition, the Partnership owns a 66.13%, a 63.03% and a 47.83%
interest in three restaurant properties held separately as
tenants-in-common with affiliates.
Note 15: The partnership owns a 50% interest in three separate joint
ventures and a 72% and a 39.94% interest in two additional joint
ventures. Three of the joint ventures each own one restaurant
property and the other joint venture owns six restaurant
properties.
Note 16: The partnership owns a 50% interest in a joint venture which
owns six restaurant properties. In addition, the partnership owns
a 15.02% and a 14.93% interest in two restaurant properties held
as tenants-in-common with affiliates.
Note 17: The partnership owns a 80.27% and a 40.42% interest in two
restaurant properties held as tenants-in-common with affiliates.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL American CNL Income CNL Income
Properties Fund, Fund XVII, Fund XVIII,
Inc. Ltd. Ltd.
---------------- ---------- -----------
(Note 18) (Note 19)
<S> <C>
AL,AZ,CA,CO,
CT,DE,FL,GA,
IA,ID,IL,IN,
KS,KY,MD,MI,
MN,MO,NC,NE,
NJ,NM,NV,NY,
OH,OK,OR,PA, AZ,CA,FL,GA,
RI,SC,TN,TX, CA,FL,GA,IL, IL,KY,MD,MN,
UT,VA,WA,WI, IN,MI,NC,NV, NC,NV,NY,OH,
Locations WV OH,SC,TN,TX TN,TX
Type of property Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 320 units 29 units 23 units
total square feet
of units 1,622,754 s/f 119,664 s/f 123,355 s/f
Dates of purchase 6/30/95 - 12/20/95 - 12/27/96 -
6/17/98 6/16/98 06/16/98
Cash down payment (Note 1) $357,943,014 $25,525,954 $29,477,274
Contract purchase price
plus acquisition fee $356,906,132 $25,490,918 $29,369,572
Other cash expenditures
expensed - - -
Other cash expenditures
capitalized 1,036,882 35,036 107,702
------------ ----------- -----------
Total acquisition cost
(Note 1) $357,943,014 $25,525,954 $29,477,274
============ =========== ===========
</TABLE>
Note 18: CNL American Properties Fund, Inc. owns an 85.47% and a 13.11%
interest in two separate joint ventures. Each joint venture owns
one restaurant property.
Note 19: The partnership owns an 80%, a 21% and a 60.06% interest in three
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 19.73%, 27.5% and
36.97% interest in three restaurant properties held separately as
tenants-in-common with affiliates.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
Post-Effective Amendment No. 7 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Orlando,
State of Florida, on the 12th day of March, 1999.
CNL HOSPITALITY PROPERTIES, INC.
(Registrant)
By: /s/ James M. Seneff, Jr.
James M. Seneff, Jr.
Chairman of the Board and Chief
Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 7 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
/s/ James M. Seneff, Jr. Chairman of the Board and March 12, 1999
JAMES M. SENEFF, JR. Chief Executive Officer
(Principal Executive Officer)
/s/ Robert A. Bourne Director and President March 12, 1999
ROBERT A. BOURNE (Principal Financial Officer)
/s/ Mathew W. Kaplan Director March 12, 1999
MATHEW W. KAPLAN
/s/ Charles E. Adams Independent Director March 12, 1999
CHARLES E. ADAMS
/s/ John A. Griswold Independent Director March 12, 1999
JOHN A. GRISWOLD
/s/ Craig M. McAllaster Independent Director March 12, 1999
CRAIG M. MCALLASTER
/s/ Lawrence A. Dustin Independent Director March 12, 1999
LAWRENCE A. DUSTIN
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibits
--------
*1.1 Form of Managing Dealer Agreement
*1.2 Form of Participating Broker Agreement
*3.1 CNL American Realty Fund, Inc. Articles of Incorporation
*3.2 Form of CNL American Realty Fund, Inc. Amended and Restated Articles
of Incorporation
*3.3 Form of CNL American Realty Fund, Inc. Bylaws
*3.4 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL American Realty Fund, Inc. dated June 3, 1998
*4.1 CNL American Realty Fund, Inc. Articles of Incorporation (Previously
filed as Exhibit 3.1 and incorporated herein by reference.)
*4.2 Form of CNL American Realty Fund, Inc. Amended and Restated Articles
of Incorporation (Previously filed as Exhibit 3.2 and incorporated
herein by reference.)
*4.3 Form of CNL American Realty Fund, Inc. Bylaws (Previously filed as
Exhibit 3.3 and incorporated herein by reference.)
4.4 Form of Reinvestment Plan (Filed herewith as Exhibit A to the
Prospectus and incorporated herein by reference.)
*4.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL American Realty Fund, Inc. dated June 3, 1998
(Previously filed as Exhibit 3.4 and incorporated herein by
reference.)
*5 Opinion of Shaw Pittman Potts & Trowbridge as to the legality of the
securities being registered by CNL American Realty Fund, Inc
*8 Opinion of Shaw Pittman Potts & Trowbridge regarding certain
material tax issues relating to CNL American Realty Fund, Inc
*10.1 Form of Escrow Agreement between CNL American Realty Fund, Inc. and
SouthTrust Asset Management Company of Florida, N.A.
*10.2 Form of Advisory Agreement
*10.3 Form of Joint Venture Agreement
*10.4 Form of Indemnification and Put Agreement
*10.5 Form of Unconditional Guaranty of Payment and Performance
*10.6 Form of Purchase Agreement
- -------------------
* Previously filed.
<PAGE>
*10.7 Form of Lease Agreement including Rent Addendum, Construction
Addendum and Memorandum of Lease
10.8 Form of Reinvestment Plan (Filed herewith as Exhibit A to the
Prospectus and incorporated herein by reference.)
*10.9 Form of Indemnification Agreement dated as of July 9, 1997, between
CNL American Realty Fund, Inc. and each of James M. Seneff, Jr.,
Robert A. Bourne, G. Richard Hostetter, J. Joseph Kruse, Richard C.
Huseman, Charles A. Muller, John T. Walker, Jeanne A. Wall and Lynn
E. Rose, dated as of October 31, 1998, between CNL Hospitality
Properties, Inc. and C. Brian Strickland, dated as of January 7,
1999, between CNL Hospitality Properties, Inc. and John A. Griswold,
dated as of February 10, 1999, between CNL Hospitality Properties,
Inc. and each of Charles E. Adams and Craig M. McAllaster and dated
as of February 24, 1999 between CNL Hospitality Properties, Inc. and
each of Matthew W. Kaplan and Lawrence A. Dustin
*10.10 Agreement of Limited Partnership of CNL Hospitality Partners, LP
*10.11 Hotel Purchase and Sale Contract between CNL Real Estate Advisors,
Inc. and Gwinnett Residence Associates, LLC, relating to the
Residence Inn - Gwinnett Place
*10.12 Assignment and Assumption Agreement between CNL Real Estate
Advisors, Inc. and CNL Hospitality Partners, LP, relating to the
Residence Inn - Gwinnett Place
*10.13 Hotel Purchase and Sale Contract between CNL Real Estate Advisors,
Inc. and Buckhead Residence Associates, LLC, relating to the
Residence Inn - Buckhead (Lenox Park)
*10.14 Assignment and Assumption Agreement between CNL Real Estate
Advisors, Inc. and CNL Hospitality Partners, LP, relating to the
Residence Inn - Buckhead (Lenox Park)
*10.15 Lease Agreement between CNL Hospitality Partners, L.P. and STC
Leasing Associates, LLC, dated August 1, 1998, relating to the
Residence Inn - Gwinnett Place
*10.16 Lease Agreement between CNL Hospitality Partners, L.P. and STC
Leasing Associates, LLC, dated August 1, 1998, relating to the
Residence Inn - Buckhead (Lenox Park)
*10.17 Master Revolving Line of Credit Loan Agreement with CNL Hospitality
Properties, Inc. and Colonial Bank, dated July 31, 1998
10.18 Master Loan Agreement by and between CNL Hotel Investors, Inc. and
Jefferson-Pilot Life Insurance Company, dated February 24, 1999
(Filed herewith.)
10.19 Securities Purchase Agreement between CNL Hospitality Properties,
Inc. and Five Arrows Realty Securities II L.L.C., dated February
24, 1999 (Filed herewith.)
10.20 Subscription and Stockholders' Agreement among CNL Hotel Investors,
Inc., Five Arrows Realty Securities II L.L.C., CNL Hospitality
Partners, LP and CNL Hospitality Properties, Inc., dated February
24, 1999 (Filed herewith.)
10.21 Registration Rights Agreement by and between CNL Hospitality
Properties, Inc. and Five Arrows Realty Securities II L.L.C., dated
February 24, 1999 (Filed herewith.)
- -------------------
* Previously filed.
<PAGE>
23.1 Consent of PricewaterhouseCoopers LLP, Certified Public
Accountants, dated March 12, 1999 (Filed herewith.)
*23.2 Consent of Shaw, Pittman, Potts & Trowbridge (Contained in its
opinion filed herewith as Exhibit 5 and incorporated herein by
reference.)
23.3 Consent of Arthur Andersen LLP, Certified Public Accountants, dated
March 12, 1999 (Filed herewith.)
*27.1 Financial Data Schedule
*99.1 Consents of Certain Persons Named as Directors
- -------------------
* Previously filed.
Exhibit 10.18
Master Loan Agreement by and between
CNL Hotel Investors, Inc. and
Jefferson-Pilot Life Insurance Company,
dated February 24, 1999
MASTER LOAN AGREEMENT
THIS MASTER LOAN AGREEMENT is made and entered into as of the 24th day
of February, 1999, by and between CNL HOTEL INVESTORS, INC., a Maryland
corporation and JEFFERSON-PILOT LIFE INSURANCE COMPANY, a North Carolina
corporation.
BACKGROUND
The Borrower desires to borrow from the Lender the total principal
amount of $96,567,501.00 in the form of eight separate loan transactions more
particularly referenced in Article 2 hereof, and the Lender is willing to make
such loans to the Borrower on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the promises
herein contained, and each intending to be legally bound hereby, the parties
agree as follows:
ARTICLE 1.
DEFINITIONS
-----------
For the purposes of this Agreement:
Section 1.01 Definitions.
"Agreement" shall mean this Agreement.
"Agreement Date" shall mean the date as of which this Agreement is
dated.
"Applicable Law" shall mean in respect of any Person, all provisions of
constitutions, statutes, rules, regulations and orders of governmental bodies or
regulatory agencies applicable to such Person, and all orders and decrees of all
courts and arbitrators in proceedings or actions to which the Person in question
is a party or by which such Person or its properties are bound.
"Assignment of Leases" shall mean each Absolute Assignment of Rents and
Profits and Collateral Assignment of Leases executed by the Borrower in favor of
the Lender in connection with the closing of each Loan.
"Authorized Signatory" shall mean such senior personnel of the Borrower
as may be duly authorized and designated in writing by the Borrower to execute
documents, agreements and instruments on behalf of the Borrower.
"Borrower" shall mean CNL Hotel Investors, Inc., a Maryland
corporation, its successors and permitted assigns.
"Business Day" shall mean a day on which national banks are open for
the transaction of business required for this Agreement in Greensboro, North
Carolina.
<PAGE>
"Collateral" shall mean and include all real and personal property of
the Borrower, whether now owned or hereafter acquired by the Borrower or in
which the Borrower has or hereafter acquires any interest, to the extent of such
interest, with respect to each Security Agreement, Deed of Trust, Assignment of
Leases, or any other instrument or agreement now or hereafter effective in favor
of the Lender as security for the payment and performance of all or any portion
of the Obligations.
"Collateral Hotels" shall mean any of the hotels identified in Section
2.01 of this Agreement which have been conveyed to Lender under a Deed of Trust.
"Deed of Trust" shall mean each deed of trust, security agreement and
fixture filing executed by Borrower to a trustee for the benefit of Lender in
connection with the closing of each Loan.
"Lender" shall mean Jefferson-Pilot Life Insurance Company, a North
Carolina corporation.
"Lien" shall mean, with respect to any property, any deed of trust,
lien, pledge, assignment, charge, security interest, title retention agreement,
levy, execution, seizure, attachment, garnishment, or other encumbrance of any
kind in respect of such property, whether or not choate, vested, or perfected.
"Loan" shall mean and include any single loan transaction made by the
Lender to or for the benefit of the Borrower as more particularly detailed in
Article 2, and "Loans" shall mean and include all eight loans made by the Lender
to or for the benefit of the Borrower as more particularly detailed in Article
2.
"Loan Commitments" shall mean the eight separate Mortgage Loan
Commitments issued by the Lender in favor of the Borrower dated December 1,
1998, and accepted by CNL Hospitality Advisors, Inc. on behalf of the Borrower
on January 18, 1999, copies of which are attached hereto as Exhibits "A" through
"H".
"Loan Documents" shall mean this Agreement, the Note, the Security
Agreement, the Deed of Trust, the Assignment of Leases, the Uniform Commercial
Code financing statements, and all other documents or agreements executed in
connection herewith and therewith.
"Materially Adverse Effect" shall mean any materially adverse effect
upon the business, assets, liabilities, financial condition, results of
operations, or business prospects of the Borrower or upon the ability of the
Borrower to perform any material obligations under this Agreement or any other
Loan Document resulting from any act, omission, situation, status, event, or
undertaking, either singly or taken together.
"Maturity Date" shall mean July 31, 2009, or such earlier date as
payment of the Loan shall be due (whether by acceleration or otherwise).
"Necessary Authorizations" shall mean all authorizations, consents,
approvals, permits, licenses and exemptions of, filings and registrations with,
and reports to, all governmental and other regulatory authorities, whether
federal, state, or local, and all agencies thereof.
"Note" shall mean each promissory note executed by the Borrower in
favor of the Lender in connection with the closing of each Loan.
"Obligations" shall mean all payment and performance duties,
liabilities, and obligations of the Borrower to the Lender, including without
limitation, all liabilities now or at any time or times hereafter owing to the
Lender under this Agreement, each Note, Deed of Trust, Assignment of Leases,
Security Agreement, and the other Loan Documents.
"Person" shall mean an individual, corporation, partnership, trust, or
unincorporated organization, or a government or any agency or political
subdivision thereof.
"Security Agreement" shall mean the Security Agreement from the
Borrower in favor of the Lender, in form and substance approved by the Lender.
Each definition of a document in this Article 1 shall include such document as
amended, modified, or supplemented from time to time with the prior consent of
the Lender, and as actually executed by the parties thereto, and, except where
the context otherwise requires, definitions imparting the singular and referring
to an individual Loan shall include the plural referring to all Loans, and vice
versa. Except where specifically restricted, reference to a party to a Loan
Document includes that party and its successors and permitted assigns.
ARTICLE 2.
THE LOANS
Section 2.01 The Loans. The Lender has agreed to lend the total
principal sum of not more than $96,567,501.00 to the Borrower as more
particularly set forth in the Loan Commitments, and the terms and conditions of
the Loan Commitments are incorporated into this Agreement by reference thereto.
The amount and security address for each Loan pursuant to the Loan Commitments
is as follows:
Loans Loan Number Loan Amount Security
- ----- ----------- ----------- --------
1. 099217 $17,695,748.00 Residence Inn, 370 Hughes Center Drive,
Las Vegas, Nevada;
2. 099218 $ 8,776,371.00 Marriott Courtyard, Quorum Drive,
Addison, Texas;
3. 099219 $10,455,733.00 Residence Inn, 801 N. 44th Street,
Phoenix, Arizona;
4. 099220 $18,654,195.00 Marriott Courtyard, 925 Westlake Avenue,
North, Seattle, Washington;
5. 099221 $10,818,150.00 Marriott Courtyard, 3309 N. Scottsdale
Road, Scottsdale, Arizona;
<PAGE>
Loans Loan Number Loan Amount Security
- ----- ----------- ----------- --------
6. 099222 $17,629,632.00 Marriott Suites, 2493 North Stemmons
Freeway, Dallas, Texas;
7. 099223 $ 6,651,333.00 Marriott Courtyard, Legacy Park and
Dallas North Tollway, Plano, Texas; and
8. 099224 $ 5,886,339.00 Residence Inn, 5001 Whitestone Lane,
Plano, Texas.
Each Loan shall be consummated in accordance with the applicable Loan Commitment
and shall be evidenced by a Note and secured by a Deed of Trust, an Assignment
of Leases and a Security Agreement.
Section 2.02 Cross-Default. The Borrower covenants and agrees for the
benefit of the Lender that any default, which continues beyond applicable notice
and cure periods, under any of the Loan Commitments or under any of the Loans,
or any of the documentation evidencing, securing or otherwise relating to the
Loans, shall be and constitute a default under all Loan Commitments and under
all Loans and the documentation evidencing, securing or otherwise relating to
Loan Commitments and the Loans; and the Loan Commitments and the Loan Documents
are so cross-defaulted. Specifically, Borrower agrees, subject to the provisions
and limitations contained in Paragraphs 9, 10 and 12 of the Loan Commitments,
that:
(a) A default, which continues beyond applicable notice and
cure periods, under any of the Loan Commitments or under any of the
documents evidencing, securing or otherwise relating to any individual
Loan shall also constitute a default under all other Loan Commitments
and under the documents, securing or otherwise relating to all other
Loans and shall entitle the Lender to terminate all Loan Commitments
and to exercise any and all rights provided in the documents
evidencing, securing or otherwise relating to all other Loans, or
otherwise available at law or in equity; and
(b) Borrower hereby acknowledges and agrees that, in the case
of a default, which continues beyond applicable notice and cure
periods, under any of the Loan Documents evidencing, securing or
otherwise relating to any of the Loans, the Lender may, at its option,
foreclose any Deed of Trust or avail itself of any other remedy
provided in any other Loan Document. If and when the Lender shall
foreclosure any Deed of Trust, or so avail itself of any other remedy,
then the sale by the Lender of any property so secured, or the exercise
of any other remedy, shall not exhaust Lender's power of sale contained
in the other Deeds of Trust, or remedies contained in the other Loan
Documents, and the Lender is specifically empowered to make successive
sales and exercise other remedies, until all Collateral shall be sold
and all remedies exercised, or the entire indebtedness created under
the Loans has been extinguished.
Section 2.03 Cross-Collateralization. All Loans are
cross-collateralized; specifically, the Borrower agrees that in the event any
Deed of Trust is foreclosed, or any remedy under any of the other Loan Documents
exercised, and the proceeds of such foreclosure or other remedy exceed the
primary indebtedness secured by such Loan Document (the Note referenced in each
Loan Document which grants security being the primary indebtedness secured by
that Loan Document), the excess proceeds shall be retained by the Lender and
immediately applied to the outstanding indebtedness secured by the other Loan
Documents. The Lender shall be entitled to retain all proceeds of any such
foreclosure sale or exercise of such remedy until all indebtedness secured by
all Loan Documents shall have been paid in full.
Section 2.04 No Release. The Borrower shall be permitted to prepay the
Notes as provided in Exhibit B attached to each Note; however, no Collateral
shall be released from the provisions of any Loan Document until such time as
all Loans have been paid in full, except as otherwise provided in the Deeds of
Trust or other Loan Documents.
Section 2.05 Incorporation by Reference. If any Loan Document shall
reference the cross-default provisions of Section 2.02 and the
cross-collateralization provisions of Section 2.03, said provisions shall be
incorporated by reference to the same extent as if set forth in full in each
Loan Document.
Section 2.06 Interest. The Borrower shall pay interest on the
outstanding unpaid principal amount of the Loans at the times, in the amounts
and in the manner provided in the Loan Documents.
Section 2.07 Repayment. The Loans shall be repaid at the times, in the
amounts and in the manner provided in the Loan Documents.
ARTICLE 3.
GENERAL COVENANTS
So long as any of the Obligations is outstanding and unpaid and unless
the Lender shall otherwise consent in writing:
Section 3.01 Preservation of Existence and Similar Matters. The
Borrower will (a) preserve and maintain its existence, rights, franchises,
licenses, and privileges in its jurisdiction of incorporation including, without
limitation, all Necessary Authorizations and (b) qualify and remain qualified
and authorized to do business in each jurisdiction in which the character of its
properties or the nature of its businesses requires such qualification or
authorization.
Section 3.02 Compliance with Applicable Law. The Borrower will comply
with all requirements of Applicable Law.
Section 3.03 Compliance with Covenants. The Borrower will comply with
all covenants and agreements contained in the Loan Documents.
Section 3.04 Use of Proceeds. The Borrower will use the proceeds of the
Loans solely for the purpose of acquiring the Collateral.
Section 3.05 Further Assurances. The Borrower will promptly cure, or
cause to be cured, defects in the creation and issuance of the Notes, and the
execution and delivery of the Loan Documents (including this Agreement), and the
perfection of any Liens in favor of the Lender resulting from any act or failure
to act by the Borrower or any employee or officer thereof. The Borrower at its
expense will promptly execute and deliver to the Lender, or cause to be executed
and delivered to the Lender, all such other and further documents, agreements,
and instruments which are necessary in compliance with or accomplishment of the
covenants and agreements of the Borrower in the Loan Documents, including this
Agreement, or to evidence further and more fully describe the Collateral, or to
correct any omissions or errors in the Loan Documents, or more fully to state
the obligations set out herein or in any of the Loan Documents, or to perfect,
protect, or preserve any Liens created pursuant to any of the Loan Documents, or
to make any recordings, to file any notices, or to obtain any consents, all as
may be necessary or appropriate in connection therewith as may be reasonably
requested.
Section 3.06 Broker's Claims. Borrower and Lender each acknowledge that
there are no brokers involved with the Loans, other than Holliday Fenoglio, L.P.
The Borrower hereby indemnifies and agrees to hold the Lender harmless from and
against any and all losses, liabilities, damages, costs and expenses (including
reasonable attorneys' fees and expenses) which may be suffered or incurred by
the Lender in respect of any claim, suit, action or cause of action now or
hereafter asserted by a broker or any Person acting in a similar capacity
arising from or in connection with the execution and delivery of this Agreement
or any other Loan Document or the consummation of the transactions contemplated
herein or therein.
ARTICLE 4.
MISCELLANEOUS
Section 4.01 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute but one and the same instrument.
Section 4.02 Severability. Any provision of this Agreement which is
prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof in that jurisdiction or affecting the validity or enforceability of such
provision in any other jurisdiction.
Section 4.03 Headings. Headings used in this Agreement are for
convenience only and shall not be used in connection with the interpretation of
any provision hereof.
Section 4.04 Use of Defined Terms. All terms defined in this Agreement
shall have the same defined meanings when used in any of the other Loan
Documents, unless otherwise defined therein or unless the context shall require
otherwise, and all terms not otherwise defined in this Agreement shall have the
same meaning as defined in the other Loan Documents, unless the context shall
require otherwise.
Section 4.05 Terminology. All personal pronouns used in this Agreement,
whether used in the masculine, feminine or neuter gender, shall include all
other genders; the singular shall include the plural, and the plural shall
include the singular. Titles of Articles and Sections in this Agreement are for
convenience only, and neither limit nor amplify the provisions of this
Agreement.
Section 4.06 Entire Agreement; Amendments. This Agreement and the other
Loan Documents represent the entire agreement between the Borrower and the
Lender with respect to the subject matter of this transaction. No amendment or
modification of the terms and provisions of this Agreement shall be effective
unless in writing and signed by the Lender and the Borrower.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
have caused it to be executed under seal by their duly authorized officers, all
as of the day and year first above.
BORROWER:
CNL HOTEL INVESTORS, INC., a Maryland
corporation
BY: /s/ Charles A. Muller (SEAL)
(Name: Charles A. Muller )
(Title: Executive Vice President )
LENDER:
JEFFERSON-PILOT LIFE INSURANCE COMPANY,
a North Carolina corporation
BY: /s/ William M. Stephens (SEAL)
(Name: William M. Stephens )
(Title: Assistant Vice President )
Exhibit 10.19
Securities Purchase Agreement between
CNL Hospitality Properties, Inc. and
Five Arrows Realty Securities II L.L.C.,
dated February 24, 1999
SECURITIES PURCHASE AGREEMENT
Dated as of February 24, 1999
among
CNL HOSPITALITY PROPERTIES, INC.,
CNL HOTEL INVESTORS, INC.
and
FIVE ARROWS REALTY SECURITIES II L.L.C.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I................................................................... 2
1. PURCHASE OF CHP COMMON STOCK.................................. 2
1.1. Purchase of CHP Common Stock......................... 2
1.2. Timing of Purchases.................................. 2
1.3. Use of Proceeds...................................... 3
1.4. Purchase Price....................................... 3
1.5. Issuance of Note in lieu of CHP Common
Stock................................................ 3
1.6. Conversion of Note................................... 3
ARTICLE II.................................................................. 3
2. REPRESENTATIONS AND WARRANTIES OF CHP......................... 3
2.1. Corporate Power and Authority........................ 3
2.2. Consents and Approvals; Authorization
and Noncontravention................................. 4
2.3. Existence and Good Standing.......................... 4
2.4. Capital Stock........................................ 6
2.5. Valid Issuance of Shares; No Personal
Liability............................................ 6
2.6. Subsidiaries and Investments......................... 6
2.7. Financial Statements and No Material Changes......... 7
2.8. Title to Properties; Encumbrances.................... 8
2.9. Leases............................................... 8
2.10. Contracts............................................ 9
2.11. Restrictive Documents................................ 9
2.12. Litigation........................................... 9
2.13. ERISA................................................10
2.14. Environmental Matters................................11
2.15. Taxes................................................13
2.16. Compliance with Laws.................................14
2.17. No Changes Since Balance Sheet Date..................14
2.18. Disclosure...........................................14
2.19. Broker's or Finder's Fees............................15
2.20. Insurance............................................16
ARTICLE III.................................................................16
3. REPRESENTATIONS AND WARRANTIES OF FIVE ARROWS.................16
3.1. Power and Authority..................................16
3.2. Existence and Good Standing..........................16
3.3. Consents; Authorization..............................16
3.4. Accredited Investor..................................16
3.5. Investment...........................................16
3.6. Rule 144.............................................17
3.7. Brokers or Finders...................................17
3.8. Ownership Limits.....................................17
ARTICLE IV..................................................................17
4. COVENANTS.....................................................17
4.1. Use of Proceeds......................................17
4.2. Notice of Default....................................17
4.3. Stockholder Approval.................................17
4.4. Appointment of Five Arrows Director..................19
4.5. Further Assurances...................................19
4.6 Supplemental Disclosure..............................19
4.7 Prohibition on Issuance of Securities................19
ARTICLE V...................................................................19
5. CONDITIONS TO CHP'S OBLIGATIONS...............................19
5.1. Representations and Warranties.......................19
5.2. Approvals............................................20
5.3. Proceedings..........................................20
ARTICLE VI..................................................................20
6. CONDITIONS TO THE INITIAL PURCHASE............................20
6.1. Representations and Warranties.......................20
6.2. Performance of Agreements............................20
6.3. Approvals............................................20
6.4. Opinion of CHP's Counsel.............................21
6.5. Good Standing and Other Certificates.................21
6.6. No Material Adverse Change...........................21
6.7. Registration Rights Agreement........................21
6.8. Hotel Investors Subscription Agreement...............21
6.9. Valid Issuance.......................................21
6.10. Appointment of Five Arrows Director..................21
6.11. D&O Insurance........................................21
6.12. Investment in Advisor................................22
6.13. Proceedings..........................................22
6.14 Opinion of CHP's Tax Counsel.........................22
6.15 Approval of Financing and Other
Material Documents...................................22
ARTICLE VII.................................................................22
7. CONDITIONS TO SUBSEQUENT PURCHASES............................22
7.1. Representations and Warranties.......................22
7.2. Performance of Agreements............................22
7.3. Assurance of Performance.............................23
7.4. Performance of Hotel Investors
Subscription Agreement...............................23
7.5. No Material Adverse Change...........................23
7.6. Valid Issuance.......................................23
7.7. Five Arrows Director.................................23
7.8. D&O Insurance........................................23
ARTICLE VIII................................................................24
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNITY.....................................................24
8.1. Survival.............................................24
8.2. Indemnification......................................24
ARTICLE IX..................................................................26
9. MISCELLANEOUS.................................................26
9.1. Preservation of Confidential Information.............26
9.2. Governing Law........................................26
9.3. Prevailing Party.....................................26
9.4. Captions.............................................26
9.5. Publicity............................................26
9.6. Notices..............................................26
9.7. Successors and Assigns...............................28
9.8. Counterparts.........................................28
9.9. Entire Agreement.....................................28
9.10. Amendments...........................................29
9.11. Severability.........................................29
9.12. Termination of Agreement.............................29
<PAGE>
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of
February 24, 1999, among CNL Hospitality Properties, Inc., a Maryland
corporation ("CHP"), CNL Hotel Investors, Inc., a Maryland corporation ("Hotel
Investors"), and Five Arrows Realty Securities II L.L.C., a Delaware limited
liability company ("Five Arrows").
W I T N E S S E T H:
WHEREAS, Five Arrows, CHP and CNL Hospitality Partners, LP, a
Delaware limited partnership ("Hospitality Partners") 100% of the partnership
interests of which are owned by CHP through its wholly owned subsidiaries have
formed Hotel Investors to be operated as a real estate investment trust ("REIT")
within the meaning of Section 856 of the Internal Revenue Code of 1986, as
amended (the "Code"); and
WHEREAS, a purpose of Hotel Investors is to acquire from
various sellers affiliated with Western International ("WI") 100% of the
partnership interests in partnerships that own certain hotels identified on
Exhibit 1 hereto or, with the consent of Five Arrows, such other hotels as may
be substituted in lieu thereof of similar quality, characteristics and subject
to the same cross-default obligations as the hotels on Exhibit 1 (the "Hotels")
and to manage the Hotels (collectively, the "Business"); and
WHEREAS, the Hotels are expected to be subject to leases with
a new entity affiliated with WI; and
WHEREAS, in accordance with the Subscription and Stockholders'
Agreement, (the "Hotel Investors Subscription Agreement") dated as of February
24, 1999, among Five Arrows, CHP and Hospitality Partners, Five Arrows has
agreed to contribute to Hotel Investors up to a maximum amount of $50,886,508.86
(the "Five Arrows Commitment"), and Hospitality Partners has agreed to
contribute to Hotel Investors up to a maximum of $39,982,488.90 (the
"Hospitality Commitment"), for the acquisition of the Hotels; and
WHEREAS, pursuant to the Hotel Investors Subscription
Agreement upon making advances on the Five Arrows Commitment and in
consideration therefor, Five Arrows will purchase from Hotel Investors shares of
8% Class A Cumulative Preferred Stock of Hotel Investors (the "Class A Preferred
Stock") having an aggregate liquidation preference equal to the aggregate amount
of such advances; and
WHEREAS, the Class A Preferred Stock shall be exchangeable for
newly issued shares of CHP common stock, par value $.01 per share ("CHP Common
Stock"), upon the terms set forth in the Hotel Investors Subscription Agreement;
and
WHEREAS, to provide a portion of the funds necessary in order
for Hospitality Partners to satisfy the Hospitality Commitment therefor, CHP
desires to issue the CHP Common Stock required to be delivered to the holders of
the Class A Preferred Stock upon any such exchange; and
WHEREAS, Five Arrows desires to purchase and CHP desires to
sell up to an additional 1,578,947 shares of CHP Common Stock, at purchase price
of $9.50 per share, for a maximum aggregate investment of $14,999,996.50, each
upon the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the
respective representations and warranties hereinafter set forth and the
respective covenants and agreements contained herein and intending to be legally
bound hereby, the parties hereto agree as follows:
ARTICLE I
1. PURCHASE OF CHP COMMON STOCK.
1.1. Purchase of CHP Common Stock. Upon the terms and
subject to the conditions herein stated, CHP agrees to issue and sell to Five
Arrows, and Five Arrows agrees to purchase from CHP, up to 1,578,947 shares of
CHP Common Stock (the "Shares") at a purchase price (the "Purchase Price") of
$9.50 per share, for a maximum aggregate investment of $14,999,996.50 (the "Five
Arrows Investment"). On any Closing Date (as defined in Section 1.2 hereof) on
which Five Arrows purchases Shares, CHP shall deliver to Five Arrows a
certificate registered in Five Arrows' name (or satisfactory evidence of such
issuance), representing the Shares to be issued to Five Arrows at the closing on
the applicable Closing Date (each a "Closing"). Five Arrows may elect to pay
that portion of the Purchase Price required to be paid by Five Arrows at each
Closing by wire transfer to either (i) an account designated by CHP within two
days before the applicable Closing Date or (ii) an account designated by
Hospitality Partners, for the benefit of Hotel Investors and on behalf of CHP,
within two days before the applicable Closing Date.
1.2. Timing of Purchases. At any time or from time to
time between the date hereof and December 31, 1999, Five Arrows shall be
required, subject to the conditions set forth below, to purchase Shares within
10 days of receipt of a notice from CHP (a "Notice of Purchase") which notice
shall (a) state that CHP has received notice from Hospitality Partners
requesting that Hospitality Partners fund all or any portion of the Hospitality
Commitment (each such amount to be funded to be referred to as an "Incremental
Funding") and (b) specify the portion of the Five Arrows Investment to be made
which shall not exceed the lesser of the balance of the Five Arrows Commitment
or 37.52% of the applicable Incremental Funding; provided, however, that such
portion shall be rounded down to the nearest whole share so as to avoid the
issuance of fractional shares of CHP Common Stock, and the date (each a "Closing
Date") such Shares are to be purchased (a "Purchase," and the first Purchase,
the "Initial Purchase").
1.3. Use of Proceeds. In no event shall Five Arrows
be required to purchase any Shares other than by reason of the funding of any
Hospitality Commitment.
1.4. Purchase Price. Five Arrows shall, on each
Closing Date, pay to CHP (or, in accordance with Section 1.1 hereof, to
Hospitality Partners) the Purchase Price for the number of Shares specified in
the applicable Notice of Purchase. Upon receipt of such Purchase Price, CHP
shall deliver to Five Arrows that number of Shares equal to the Purchase Price
divided by 9.5. For example, if the portion of the Hospitality Commitment
required by Hotel Investors on a particular Closing Date (i.e., the Incremental
Funding) is $22,000,000, then the Purchase Price shall be $8,254,400 for 868,884
Shares and the remaining Five Arrows Commitment shall be $6,745,596.
1.5. Issuance of Note in lieu of CHP Common Stock.
Notwithstanding the foregoing, in the event that Five Arrows would own more than
9.8% of the outstanding CHP Common Stock as a result any purchase of Shares
hereunder and the ownership limitations set forth in the Articles of
Incorporation of CHP (the "Ownership Limits") have not theretofore been amended
or waived to permit Five Arrows to hold in excess of such limitations, Five
Arrows shall (i) purchase in the aggregate that number of whole Shares that
would cause Five Arrows to own up to but not in excess of 9.8% of the
outstanding CHP Common Stock and (ii) loan to CHP the balance of any Incremental
Funding in exchange for the promissory note of CHP and Hotel Investors
substantially in the form of Exhibit 1.5 attached hereto (the "Note").
1.6. Conversion of Note. The principal amount of the
Note shall be converted automatically into shares of CHP Common Stock, at one
time or from time to time as the holder of the Note is permitted under the
amended or waived Ownership Limits to own additional shares of CHP Common Stock.
The per share conversion price shall be equal to the principal amount converted
divided by 9.5 and upon any such conversion, the accrued and unpaid interest on
the converted portion of the Note shall be paid immediately by CHP. All shares
of CHP Common Stock issued upon such conversion shall be fully paid and
nonassessable, and the Holder (as defined below) thereof shall be entitled to
the same rights with respect to such shares (including, without limitation,
registration rights) as if such shares were purchased pursuant to Section 1.4
hereof.
ARTICLE II
2. REPRESENTATIONS AND WARRANTIES OF CHP. CHP, with respect to
itself and each of its Subsidiaries (as such term is defined in Section 2.6
hereof), represents and warrants, as of the date hereof (except as otherwise
specified herein), and as may be updated pursuant to Section 4.6 hereof as of
each Closing Date as if made on such Closing Date, as follows:
2.1. Corporate Power and Authority. CHP has the full
legal right, power and authority to enter into this Agreement, the Note, the
Registration Rights Agreement, dated February 24, 1999 by and between CHP and
Five Arrows (the "CHP Registration Rights Agreement"), the Hotel Investors
Subscription Agreement and any other agreements executed in connection herewith
or therewith (collectively with this Agreement, the "Transaction Documents"),
and to issue and sell the Shares to be issued pursuant to this Agreement and to
consummate the other transactions contemplated hereby and thereby.
2.2. Consents and Approvals; Authorization and
Noncontravention. Except as set forth in Schedule 2.2 attached hereto, there is
no requirement applicable to CHP or any of its Subsidiaries to make any filing
with, or obtain any permit, authorization, consent or approval of, any
governmental authority or any other person as a condition to the lawful
consummation by CHP and any of its Subsidiaries of the transactions contemplated
by this Agreement and the Transaction Documents. This Agreement and each other
Transaction Document has been duly and validly authorized, executed and
delivered by CHP and any of its Subsidiaries party thereto and constitute the
valid and legally binding agreements of CHP and each Subsidiary who is a party
thereto, enforceable against them in accordance with their terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles. The execution and delivery by CHP and such subsidiaries of this
Agreement, and the other agreements and instruments to be executed and delivered
by CHP in connection herewith and therewith, do not and the consummation of the
transactions contemplated hereby and thereby will not, in any manner which would
have a material adverse effect on CHP: (i) violate any provision of the Articles
of Incorporation or By-Laws of CHP or of any of CHP's Subsidiaries; (ii) except
as set forth on Schedule 2.2, violate any provision of, or result in the
termination or acceleration of, or default under, or entitle any party to
accelerate (whether after the filing of notice or lapse of time or both) any
obligation under, or result in the creation or imposition of any lien, charge,
pledge, security interest or other encumbrance upon any of the assets of CHP or
of any of CHP's Subsidiaries pursuant to any provision of any mortgage, lien,
lease, agreement, license, or instrument, or violate any law, regulation, order,
arbitration award, judgment or decree to which CHP or any of CHP's Subsidiaries
is a party or by which CHP or any of CHP's Subsidiaries or any of their
respective properties is bound, or (iii) violate or conflict with, or create a
default under, any other material contract, including, without limitation, those
contracts listed on Schedule 2.10 attached hereto, or restriction of any kind or
character to which CHP or any of its Subsidiaries is bound or subject.
2.3. Existence and Good Standing.
(a) CHP and each of CHP's Subsidiaries is a
corporation or partnership, duly formed or organized, validly existing and in
good standing under the laws of its organization, as the case may be. CHP and
each of CHP's Subsidiaries has the requisite power, corporate or otherwise, to
own its property and to carry on its business as it is now being conducted. CHP
is duly qualified to do business and is in good standing in the jurisdictions
listed on Schedule 2.3 attached hereto, which are the only jurisdictions in
which the character or location of the properties owned or leased by CHP or the
nature of the business conducted by CHP makes such qualification necessary,
except where the failure to so qualify would not have a material adverse effect
on CHP.
(b) CHP has qualified as a REIT under the Code and
has taken no action or omitted to take any action, the effect of which
reasonably could be expected to disqualify CHP as a REIT under the Code.
<PAGE>
2.4. Capital Stock.
(a) The authorized capital stock of CHP consists of:
(i) 60,000,000 shares of Common Stock; (ii) 3,000,000 shares of preferred stock,
par value $.01 per share (the "Preferred Stock"); and (iii) 63,000,000 shares of
excess stock, par value $.01 per share (the "Excess Stock"). As of November 20,
1998, (i) 3,290,417.022 shares of Common Stock were validly issued and
outstanding, fully paid and nonassessable, and no shares of Preferred Stock or
Excess Stock have been issued or are outstanding; and (ii) no shares of Common
Stock and no shares of Preferred Stock were reserved for issuance. All of such
shares of capital stock of CHP have been duly authorized, validly issued, are
fully paid and nonassessable and were issued in compliance with all applicable
federal and state securities laws. Except as set forth on Schedule 2.4, (i) no
shares of capital stock of CHP or any of CHP's Subsidiaries are subject to
preemptive rights or any other similar rights; (ii) no securities, directly or
indirectly, are convertible into or exchangeable for any of the capital stock of
CHP or any of CHP's Subsidiaries; and (iii) no options, warrants, rights, calls
or commitments relating to such shares or other such securities, are
outstanding.
(b) Except as set forth on Schedule 2.4, neither CHP
nor any of its Subsidiaries are subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock nor are there any outstanding rights to repurchase capital stock
of CHP or any of its Subsidiaries, except as set forth in or contemplated by
this Agreement. Except as set forth on Schedule 2.4, there are no agreements
between CHP's shareholders with respect to the voting, transfer or registration
of CHP's capital stock.
2.5. Valid Issuance of Shares; No Personal Liability.
(a) When issued, sold and delivered in accordance
with the terms hereof for the consideration expressed herein, the Shares will be
duly and validly issued, fully paid and non-assessable. The Shares are not
subject to preemptive rights or any other similar rights and will be issued in
compliance with all applicable federal and state securities laws. Five Arrows,
upon purchase of the Shares, will not be subject to personal liability by reason
of being a holder of Shares.
(b) The shares of CHP Common Stock when issued and
delivered upon exchange for shares of Class A Preferred Stock in accordance with
the terms hereof will be duly and validly issued, fully paid and non-assessable
and will not be subject to preemptive rights or any other similar rights. Such
shares of CHP Common Stock will be issued in compliance with all applicable
federal and state securities laws. Five Arrows, upon issuance of such shares of
CHP Common Stock, will not be subject to personal liability by reason of being a
holder of such shares.
2.6. Subsidiaries and Investments. CHP's only direct
or indirect Subsidiaries are listed in Schedule 2.6 attached hereto. The
outstanding shares of capital stock, partnership or other equity interests of
each Subsidiary have been duly authorized and validly issued and are fully paid
and non-assessable, as applicable, and are owned by CHP, directly or through one
or more Subsidiaries, free and clear of any lien, charge, encumbrance or other
security interests except as set forth in Schedule 2.6. For purposes of this
Agreement, "Subsidiary" shall mean a Person (as defined in Section 2.10) in
which CHP has the ability, whether by the direct or indirect ownership of shares
or other equity interests, by contract or otherwise, to elect a majority of the
directors of a corporation or the trustees of a real estate investment trust, to
select the managing partner of a partnership, or otherwise to select, or have
the power to remove and then select, a majority of those persons exercising
governing authority over such Person. In the case of a limited partnership, the
sole general partner, all of the general partners to the extent each has equal
management control and authority, or the managing general partner or managing
general partners thereof shall be deemed to have control of such partnership
and, in the case of a trust other than a real estate investment trust, any
trustee thereof or any Person having the right to select any such trustee shall
be deemed to have control of such trust.
2.7. Financial Statements and No Material Changes.
(a) CHP has heretofore furnished Five Arrows with
true and correct copies of (i) the audited consolidated balance sheet and the
related statements of income and cash flows, including the footnotes thereto, of
CHP and CHP's Subsidiaries as of the end of their latest fiscal year ended
December 31, 1997 ("Fiscal 1997"), all of which were audited by Coopers &
Lybrand L.L.P., and (ii) the unaudited consolidated balance sheet of CHP and
CHP's Subsidiaries and the related statements of income and cash flows as of
September 30, 1998 prepared by CHP. (The balance sheet of CHP and CHP's
Subsidiaries at December 31, 1997 is hereinafter referred to as the "Balance
Sheet" and such date is hereinafter referred to as the "Balance Sheet Date").
Such financial statements including the footnotes thereto, except as indicated
therein, have been prepared in accordance with generally accepted accounting
principles ("GAAP"), consistently applied throughout the periods presented. The
Balance Sheet fairly presents the financial condition of CHP and CHP's
Subsidiaries at the date thereof and, except as indicated therein, reflects all
known or asserted material claims against and all material debts and liabilities
of CHP and CHP's Subsidiaries, fixed or contingent, as at the date thereof, and
the related statements of income and retained earnings fairly present the
results of the operations of CHP and CHP's Subsidiaries and the changes in its
financial position for the period indicated each in accordance with GAAP, except
as specified therein.
(b) CHP has filed all forms, reports and documents
(the "SEC Reports") required to be filed by it pursuant to the Securities Act of
1933, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), with the Securities and Exchange
Commission (the "SEC") since September 30, 1998. As of their respective dates,
the SEC Reports complied in all material respects with the requirements of the
Exchange Act and the Securities Act and the applicable rules and regulations
promulgated by the SEC thereunder. None of the SEC Reports, as of their
respective dates, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements made, in light of the circumstances under which they were
made, not misleading. CHP has heretofore furnished or offered to furnish Five
Arrows with true and correct copies of all SEC Reports and Exhibits and
Schedules thereto required to be filed by CHP with SEC.
(c) Since the respective dates of the material SEC
Reports, except as otherwise listed on Schedule 2.7(c) attached hereto, there
has been no material adverse change in the assets or liabilities, or in the
business affairs or business prospects of CHP or any of its Subsidiaries
(present or anticipated) or condition, financial or otherwise, or in the results
of operations of CHP or any of CHP's Subsidiaries; and to the best knowledge,
information and belief of CHP, no fact or condition (not of general knowledge)
exists or is contemplated or threatened which might reasonably be expected to
cause such a change in the future.
2.8. Title to Properties; Encumbrances. Except as set
forth on Schedule 2.8 attached hereto and except for properties and assets
reflected in the Balance Sheet or acquired since the Balance Sheet Date which
have been sold or otherwise disposed of in the ordinary course of business, CHP
and each of CHP's Subsidiaries has, and on each Closing Date, will have, good,
valid and marketable title to (a) all of its material properties and assets
(real and personal, tangible and intangible), including, without limitation, all
of the properties and assets reflected in the Balance Sheet, except as indicated
in the notes thereto or in a Schedule to this Agreement, and (b) all of the
material properties and assets purchased by CHP or any of CHP's Subsidiaries
since the Balance Sheet Date, in each case subject to no material encumbrance,
lien, charge or other restriction of any kind or character, except for (i) liens
reflected in the Balance Sheet or in a Schedule to this Agreement, (ii) liens
consisting of zoning or planning restrictions, easements, permits and other
restrictions or limitations on the use of real property or irregularities in
title thereto which do not detract from the value of, or impair the use of, such
property by CHP or any of CHP's Subsidiaries in the operation of their
respective businesses, and (iii) liens for current taxes, assessments or
governmental charges or levies on property not yet due and delinquent and liens
of carriers, warehousemen, vendors and material men incurred in the ordinary
course of business securing sums not yet due and payable (liens of the type
described in clauses (i), (ii) and (iii) above are hereinafter sometimes
referred to as "Permitted Liens").
2.9. Leases. Except as set forth on Schedule 2.9,
each lease of material real or personal property to which CHP and each of its
Subsidiaries is a party is in full force and effect, and there exists no event
of default or event, occurrence, condition or act (including the purchase of the
Shares or any of the conditions precedent hereunder) which, with the giving of
notice, the lapse of time or the happening of any further event or condition,
would become a default under such lease to real or personal property. CHP and
each of its Subsidiaries is not currently in default of any of the terms or
conditions under any such lease to real or personal property and, to the best
knowledge, information and belief of CHP, all of the material covenants to be
performed by any other party under any such lease to real or personal property
have been fully performed. The real or personal property leased by CHP and each
of its Subsidiaries is in a state of good maintenance and repair in all material
respects.
2.10. Contracts. Except as set forth on Schedule 2.10
attached hereto, neither CHP nor any of CHP's Subsidiaries is bound by (a) any
material contract or other agreements relating to the acquisition or disposition
by CHP or any of CHP's Subsidiaries of any operating business or the capital
stock or assets of any person, (b) any material agreement, contract or
commitment relating to the employment of any person by CHP or any of CHP's
Subsidiaries, or any bonus, deferred compensation, pension, profit sharing,
stock option, employee stock purchase, retirement or other employee benefit
plan, (c) any material agreement, indenture or other instrument which contains
restrictions with respect to payment of dividends or any other distribution in
respect of its capital stock, (d) any material agreement, contract or commitment
relating to capital expenditures not yet made, (e) any material loan or advance
to, or material investment in, any individual, partnership, limited liability
company, joint venture, corporation, trust, unincorporated organization,
government or other entity (each a "Person") or any material agreement, contract
or commitment relating to the making of any such loan, advance or investment,
(f) any material guarantee or other contingent liability in respect of any
indebtedness or obligation of any Person (other than the endorsement of
negotiable instruments for collection in the ordinary course of business), (g)
any material management service, consulting or any other similar type of
contract, unless entered into or incurred in the ordinary course of business,
(h) any material agreement, contract or commitment limiting the freedom of CHP
or any of CHP's Subsidiaries to engage in any line of business or to compete
with any Person, (i) any material bank debt, loan, credit or other financing
arrangement, and (j) except as otherwise disclosed in this Agreement or a
Schedule or Exhibit annexed hereto, any material agreement, contract or
commitment not entered into in the ordinary course of business. Each contract or
agreement set forth on Schedule 2.10 (or required to be set forth on Schedule
2.10) is in full force and effect and except as set forth on Schedule 2.10,
there exists no default or event of default or event, occurrence, condition or
act (including the purchase of the Shares, or any of the conditions precedent
hereunder) which, with the giving of notice, the lapse of time or the happening
of any further event or condition, would become a default or event of default
thereunder.
2.11. Restrictive Documents. Except as set forth on
Schedule 2.11 attached hereto, neither CHP nor any of CHP's Subsidiaries is
subject to, or a party to, any charter, by-law, mortgage, lien, lease, license,
permit, agreement, contract, instrument, law, rule, ordinance, regulation,
order, judgment or decree, or any other restriction of any kind or character, in
any such case which is material to CHP, which would prevent consummation of the
transactions contemplated by this Agreement, compliance by CHP with the terms,
conditions and provisions hereof or the continued operation of CHP's or any of
CHP's Subsidiaries' business after the date hereof or each Closing Date on
substantially the same basis as heretofore operated or which would restrict the
ability of CHP or any of CHP's Subsidiaries to acquire any property or conduct
business in any area.
2.12. Litigation. Except as set forth on Schedule
2.12 attached hereto, there is no material action, suit, proceeding at law or in
equity, arbitration or administrative or other proceeding by or before or any
investigation by any governmental or other instrumentality or agency, pending,
or, to the best knowledge, information and belief of CHP threatened, against or
affecting CHP or any of CHP's Subsidiaries, or any of their respective
properties or rights, and CHP does not know of any valid basis for any action,
proceeding or investigation. Except as set forth on Schedule 2.12, neither CHP
nor any of CHP's Subsidiaries is subject to any judgment, order or decree
entered in any lawsuit or proceeding which is reasonably likely to have a
material adverse effect on its operations, business practices, present or
anticipated, or ability to acquire any property or conduct business.
2.13. ERISA. (i) Each employee benefit plan defined
in Section 3(3) of ERISA in respect of which CHP or any ERISA Affiliate is, or
within the immediately preceding six (6) years was, an "employer" as defined in
Section 3(5) of ERISA of CHP (each a "Plan") is in substantial compliance with
the applicable provisions of the Employee Retirement Income Security Act of
1974, as amended, ("ERISA") and the Code, (ii) no Termination Event has occurred
nor is reasonably expected to occur with respect to any Benefit Plan, (iii) the
most recent annual report (Form 5500 Series) with respect to each Plan,
including Schedule B (Actuarial Information) thereto, copies of which have been
filed with the Internal Revenue Service, is complete and correct in all material
respects and fairly presents the funding status of such Benefit Plan, and since
the date of such report there has been no material adverse change in such
funding status, (iv) no Benefit Plan had an accumulated (whether or not waived)
funding deficiency or permitted decreases which would create a deficiency in its
funding standard account within the meaning of Section 412 of the Code at any
time during the previous 60 months, and (v) no lien imposed under the Code or
ERISA exists or is likely to arise on account of any Benefit Plan within the
meaning of Section 412 of the Code. Neither CHP nor any of its ERISA Affiliates
has incurred any withdrawal liability under ERISA with respect to any
Multiemployer Plan, and CHP is not aware of any facts indicating that CHP or any
of its ERISA Affiliates may in the future incur any such withdrawal liability.
Except as required by Section 4980B of the Code, CHP does not maintain a welfare
plan (as defined in Section 3(1) of ERISA) which provides benefits or coverage
after a participant's termination of employment. Neither CHP nor any of its
ERISA Affiliates have incurred any liability under the Worker Adjustment and
Retraining Notification Act. All Plans in existence on the initial Closing Date
are set forth on Schedule 2.13 attached hereto. For purposes of this Agreement,
(i) "Termination Event" means (a) a Reportable Event with respect to any Benefit
Plan (with respect to which the 30 day notice requirement has not been waived);
(b) the withdrawal of CHP or any ERISA Affiliate from a Benefit Plan during a
plan year in which CHP or any ERISA Affiliate was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA; (c) providing a written notice of intent
to terminate a Benefit Plan to affected parties of a distress termination
described in Section 4041(c) of ERISA; or (d) the institution by the Pension
Benefit Guarantee Corporation of proceedings to terminate a Benefit Plan, (ii)
"Benefit Plan" means a defined benefit plan as defined in Section 3(35) of ERISA
that is subject to Title IV of ERISA (other than a Multiemployer Plan) and in
respect of which CHP or any ERISA Affiliate is or within the immediately
preceding six (6) years was an "employer" as defined in Section 3(5) of ERISA,
(iii) "Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA and subject to Title IV of ERISA which is, or within the
immediately preceding six (6) years was, contributed to by CHP or any ERISA
Affiliate, (iv) "ERISA Affiliate" means any (a) corporation which is a member of
the same controlled group of corporations (within the meaning of Section 414(b)
of the Code) as CHP, (b) partnership or other trade or business (whether or not
incorporated) under common control (within the meaning of Section 414(c) of the
Code) with CHP, or (c) member of the same affiliated service group (within the
meaning of Section 414(m) of the Code) as CHP, any corporation described in
clause (a) above or any partnership or trade or business described in clause (b)
above and (v) "Reportable Event" means any of the events described in Section
4043(b) of ERISA (other than events for which the notice requirements have been
waived).
2.14. Environmental Matters. Except as set forth in
Schedule 2.14 attached hereto, to the best knowledge of the Company and its
Subsidiaries:
(a) The operations and properties of CHP and
its Subsidiaries are in material compliance with Environmental Laws;
(b) CHP and its Subsidiaries have obtained
and is in compliance with all necessary permits or authorizations that are
required under Environmental Laws to operate the facilities, assets and business
of CHP and its Subsidiaries;
(c) There has been no Release (i) at any
assets, properties or businesses owned or operated by CHP, any of its
Subsidiaries or any predecessor in interest; (ii) from adjoining properties or
businesses; or (iii) from or onto any facilities which received Hazardous
Materials generated by CHP, any of its Subsidiaries or any predecessor in
interest that would result in any Environmental Liabilities except to the extent
that any such Release is not reasonably likely to have a material adverse effect
on the business (present or anticipated) or condition (financial or otherwise),
properties, results of operations or prospects of CHP or its Subsidiaries;
(d) No Environmental Claims have been
asserted against CHP, any of its Subsidiaries or any predecessor in interest nor
does CHP or any of its Subsidiaries have knowledge or notice of any threatened
or pending Environmental Claims against CHP or any of its Subsidiaries which is
reasonably likely to result in Environmental Liabilities except to the extent
that any such Environmental Claims are not reasonably likely to have a material
adverse effect on the business (present or anticipated) or condition (financial
or otherwise), properties, results of operations or prospects of CHP or its
Subsidiaries;
(e) No Environmental Claims have been
asserted against any facilities that may have received Hazardous Materials
generated by CHP, any of its Subsidiaries or any predecessor in interest which
is reasonably likely to result in Environmental Liabilities except to the extent
that any such Environmental Claims are not reasonably likely to have a material
adverse effect on the business (present or anticipated) or condition (financial
or otherwise), properties, results of operations or prospects of CHP or its
Subsidiaries;
(f) CHP has delivered to Five Arrows true
and complete copies of all Phase I environmental assessments, environmental
reports, studies, material correspondence or investigations in their possession
regarding any Environmental Liabilities, or any environmental conditions, at the
assets, properties or businesses of CHP or any of its Subsidiaries; and
(g) To the extent that any of the assets,
properties or businesses owned or operated by CHP or any of its Subsidiaries are
located in "wetlands" regulated under Environmental Laws, CHP and its
Subsidiaries are in compliance with Environmental Laws regulating those
"wetlands" except to the extent that any such failure to comply is not
reasonably expected to have a material adverse effect on the business (present
or anticipated) or condition of CHP or its Subsidiaries or any predecessor in
interest.
(h) Schedule 2.14(h) is a true, complete and
accurate list of each instance where the operations of CHP and its Subsidiaries
or the environmental conditions of the real estate presently or formerly owned
or operated by CHP or its Subsidiaries or its predecessors in interest are not
in material compliance with an Environmental Law or give rise to Environmental
Liabilities. None of the items listed on Schedule 2.14 individually or in the
aggregate would have a material adverse effect on CHP and its Subsidiaries.
For purposes of this Agreement, (i)
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq., as amended;
the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. 6901 et seq., as
amended; the Clean Air Act ("CAA"), 42 U.S.C. 7401 et seq., as amended; the
Clean Water Act ("CWA"), 33 U.S.C. 1251 et seq., as amended; the Occupational
Safety and Health Act ("OSHA"), 29 U.S.C. 655 et seq.; and any other federal,
state, local or municipal laws, statutes, regulations, rules or ordinances
imposing liability or establishing standards of conduct for protection of the
environment, (ii) "Environmental Liabilities" means any monetary obligations,
losses, liabilities (including strict liability), damages, punitive damages,
consequential damages, treble damages, costs and expenses (including all
reasonable out-of-pocket fees, disbursements and expenses of counsel,
out-of-pocket expert and consulting fees and out-of-pocket costs for
environmental site assessments, remedial investigation and feasibility studies),
fines, penalties, sanctions and interest incurred as a result of any
Environmental Claim filed by any governmental authority or any third party
against CHP or its Subsidiaries or any predecessors in interest which relate to
any violations of Environmental Laws, Remedial Actions, Releases or threatened
Releases of Hazardous Materials from or onto (a) any assets, properties or
businesses presently or formerly owned by CHP, its Subsidiaries or a predecessor
in interest, or (b) any facility which received Hazardous Materials generated by
the Company, its Subsidiaries or a predecessor in interest, (iii) "Environmental
Claim" means any complaint, summons, citation, notice, directive, order, claim,
litigation, investigation, judicial or administrative proceeding, judgment,
letter or other communication from any governmental agency, department, bureau,
office or other authority, or any third party alleging violations of
Environmental Laws or Releases of Hazardous Materials (a) from any assets,
properties or businesses of CHP and its Subsidiaries or any predecessor in
interest, (b) from adjoining properties or businesses, or (c) from or onto any
facility, which received hazardous materials generated by CHP and its
Subsidiaries or any predecessor in interest, (iv) "Hazardous Materials" include
(a) any element, compound, or chemical that is defined, listed or otherwise
classified as a contaminant, pollutant, toxic pollutant, toxic or hazardous
substances, extremely hazardous substance or chemical, hazardous waste, medical
waste, biohazardous or infectious waste, special waste, or solid waste under
Environmental Laws; (b) petroleum, petroleum-based or petroleum-derived
products; (c) polychlorinated biphenyls; (d) any substance exhibiting a
hazardous waste characteristic including but not limited to corrosivity,
ignitibility toxicity or reactivity as well as any radioactive or explosive
materials; and (e) any raw materials, building components exhibiting a Hazardous
Material characteristic, including but not limited to asbestos-containing
materials, (v) "Release" means any spilling, leaking, pumping, emitting,
emptying, discharging, injecting, escaping, leaching, migrating, dumping, or
disposing of Hazardous Materials (including the abandonment or discarding of
barrels, containers or other closed receptacles containing Hazardous Materials)
into the environment, (vi) "Remedial Action" means all actions taken to (a)
clean up, remove, remediate, contain, treat, monitor, assess, evaluate or in any
other way address Hazardous Materials in the indoor or outdoor environment; (b)
prevent or minimize a Release or threatened Release of Hazardous Materials so
they do not migrate to cause substantial danger to public health or welfare or
the indoor or outdoor environment; (c) perform pre-remedial studies and
investigations and post-remedial operation and maintenance activities; or (d)
any other actions authorized by 42 U.S.C. 9601.
2.15. Taxes. Except as set forth on Schedule 2.15
attached hereto:
(a) All taxes and assessments, including,
without limitation, income, property, sales, use, franchise, value added,
employees' income withholding and social security taxes and import duties,
including interest and penalties thereon, imposed by the United States or by any
foreign country or by any state, municipality, subdivision or instrumentality of
the United States or of any foreign country, or by any other taxing authority,
for which CHP or any of CHP's Subsidiaries may be liable in respect of all
periods prior to each Closing Date (including taxes in respect of tax periods
ending on each Closing Date and taxes in respect of tax periods ending after
each Closing Date to the extent attributable to the portion of that period which
ends on each Closing Date), either have been paid when due or will be paid when
due. All tax returns required to be filed through the date hereof taking into
account all lawful extensions of due dates (and each Closing Date), including,
without limitation, information returns, have been (or will be) duly and timely
filed taking into account all lawful extensions of due dates and are (or will
be) true, complete and correct in all material respects and all deposits and
payments required by law to be made by CHP or any of CHP's Subsidiaries,
including with respect to employees' withholding taxes, have been duly made in
accordance with all applicable laws, except to the extent that such failure to
make such payment would not reasonably be expected to have a material adverse
effect on CHP or any of its Subsidiaries. As of the date hereof, no such returns
have been the subject of an audit or examination by any taxing authority. There
is not now in force any waiver or agreement by CHP or any of CHP's Subsidiaries
for the extension of time for the assessment of any tax.
(b) There are no tax sharing agreements or
arrangements or tax indemnity agreements between CHP or any of CHP's
Subsidiaries and any other person, including any agreements or undertakings
provided by CHP or any of CHP's Subsidiaries to any Person requiring CHP or such
Subsidiary to take any action, or refrain from taking any action, to reduce or
defer the tax liability of such other Person.
(c) Neither CHP nor any of CHP's
Subsidiaries has ever been an includable corporation in any affiliated group of
corporations within the meaning of Section 1504 of the Code of 1986 (or any
similar provision of state or other tax law).
(d) Neither CHP nor any of CHP's
Subsidiaries has filed a consent pursuant to the collapsible corporation
provisions of section 341(f) of the Code (or any similar provision of state or
other tax law) or agreed to have section 341(f)(2) of the Code or any similar
provision of state or other tax law) apply to any disposition of any asset owned
by CHP or any of CHP's Subsidiaries.
2.16. Compliance with Laws. Except as set forth on
Schedule 2.16 attached hereto, CHP and each of CHP's Subsidiaries is in
compliance in all material respects with all applicable laws, regulations,
orders, judgments and decrees. Neither CHP nor any of CHP's Subsidiaries, any
employee of CHP nor any of CHP's Subsidiaries nor any of CHP's affiliates acting
upon CHP's request has at any time made any payments for unlawful political
contributions or made any bribes, kickback payments or other illegal payments.
2.17. No Changes Since Balance Sheet Date. Since the
Balance Sheet Date, except as expressly contemplated hereby or as disclosed in a
Schedule or Exhibit hereto (including, without limitation, Schedule 2.17) or any
SEC Report, neither CHP nor any of CHP's Subsidiaries has (a) incurred any
material liability or obligation of any nature (whether accrued, absolute,
contingent or otherwise), except in the ordinary course of business (and neither
CHP nor any of CHP's Subsidiaries is in default in respect of the terms or
conditions of any indebtedness), (b) permitted any of its assets to be subjected
to any material mortgage, pledge, lien, security interest, encumbrance,
restriction or charge of any kind (other than Permitted Liens), (c) sold,
transferred or otherwise disposed of any material assets except in the ordinary
course of business, (d) made any material capital expenditure or commitment
therefor, except in the ordinary course of business, (e) declared or paid any
dividend or made any distribution on any shares of its capital stock, or
redeemed, purchased or otherwise acquired any shares of its capital stock or any
option, warrant or other right to purchase or acquire any such shares, other
than regularly scheduled cash dividends, (f) made any material bonus or profit
sharing distribution or payment of any kind, (g) materially increased its
indebtedness for borrowed money or made any material loan to any Person, (h)
written off as uncollectible any notes or accounts receivable, except write-offs
in the ordinary course of business charged to applicable reserves, (i) granted
any increase in the rate of wages, salaries, bonuses or other remuneration of
any executive employee or other employees, except in the ordinary course of
business, (j) canceled or waived any claims or rights of substantial value, (k)
made any material change in any method of accounting or audit practice, (l)
otherwise conducted its business or entered into any transaction, except in the
ordinary course of business, or (m) agreed, whether or not in writing, to do any
of the foregoing.
2.18. Disclosure. None of this Agreement, the
financial statements referred to in Section 2.7 hereof (including the footnotes
thereto), any Schedule, Exhibit or certificate attached hereto or delivered in
accordance with the terms hereof or any document or statement in writing which
has been supplied by CHP or by any of its directors or officers in connection
with the transactions contemplated by this Agreement contains any untrue
statement of material fact, or omits any statement of material fact necessary in
order to make the statements contained herein or therein not misleading in light
of the circumstances under which made.
2.19. Broker's or Finder's Fees. Except for a fee
payable by CHP to CNL Hospitality Advisors, Inc. in the amount of $600,000, CHP
has not incurred, and will not incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any other Transaction Document or any of the
transactions contemplated hereby.
<PAGE>
2.20. Insurance. CHP and each of its Subsidiaries
maintains insurance policies, including but not limited to fire and casualty and
worker's compensation policies, which provide with reputable third party
insurers coverage customary for companies similarly situated and otherwise
adequate for its businesses.
ARTICLE III
3. REPRESENTATIONS AND WARRANTIES OF FIVE ARROWS. Five Arrows
hereby represents, warrants and agrees, as of the date hereof and as of each
Closing Date, as if made on such Closing Date, as follows:
3.1. Power and Authority. Five Arrows has the full
legal right, power and authority to enter into this Agreement and the
Transaction Documents, and to consummate the other transactions contemplated
hereby and thereby.
3.2. Existence and Good Standing. Five Arrows is a
limited liability company, duly formed or organized, validly existing and in
good standing under the laws of its organization.
3.3. Consents; Authorization. There is no requirement
applicable to Five Arrows to make any filing with, or obtain any permit,
authorization, consent or approval of, any governmental authority or any other
person as a condition to the lawful consummation by Five Arrows of the
transactions contemplated by this Agreement and the Transaction Documents. This
Agreement, when executed and delivered by Five Arrows, will constitute a valid
and legally binding obligation of Five Arrows, enforceable against it in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
creditor's rights generally and of general principles of equity (regardless of
whether considered in a proceeding at law or in equity).
3.4. Accredited Investor. Five Arrows is an
accredited investor as defined in Rule 501 under the Securities Act.
3.5. Investment. Five Arrows is acquiring the Shares
for investment for its own account, not as a nominee or agent, and not with the
view to, or for resale in connection with, any distribution thereof. Five Arrows
understands that the Shares have not been, and will not be, registered under the
Securities Act by reason of a specific exemption from the registration
provisions of the Securities Act, and cannot be transferred by it unless
subsequently registered under the Securities Act or if an exemption from the
registration requirements exists.
3.6. Rule 144. Five Arrows acknowledges that the
Shares must be held indefinitely unless subsequently registered under the
Securities Act, or unless an exemption from such registration is available. Five
Arrows is aware of the provisions of Rule 144 promulgated under the Securities
Act which permit limited resale of securities purchased in a private placement
subject to the satisfaction of certain conditions, which presently include,
among other things, in most circumstances (i) the existence of a public market
for the Shares, (ii) the availability of certain current public information
about CHP, (iii) the resale occurring not less than one year after a party has
purchased and fully paid for the securities to be sold from CHP or affiliate of
CHP, (iv) the sale being effected through a "broker's transaction" or in
transactions directly with a "market maker" (as provided by Rule 144(f)), and
(v) the number of shares being sold during any three-month period not exceeding
specified limitations.
3.7. Brokers or Finders. Five Arrows has not
incurred, and will not incur, directly or indirectly, as a result of any action
taken by Five Arrows, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
3.8. Ownership Limits. The issuance of shares of CHP
Common Stock to Five Arrows pursuant to this Agreement will not cause Five
Arrows or any member of Five Arrows to Beneficially or Constructively Own (as
such terms are defined in the Articles of Incorporation of CHP) shares in excess
of the Ownership Limits that are applicable to Five Arrows and its members
pursuant to Section 7.6 and 7.7 of the Articles of Incorporation of CHP as such
Articles are in effect at the time of any issuance, taking into account the
waiver of certain Ownership Limits referred to in Section 4.3(a) hereof.
ARTICLE IV
4. COVENANTS.
4.1. Use of Proceeds. Any portion of the Five Arrows
Investment received by CHP on account of Five Arrows' purchase of Shares
pursuant to this Agreement shall immediately be contributed by CHP to
Hospitality Partners to immediately fund its corresponding capital commitment to
Hotel Investors.
4.2. Notice of Default. As soon as practicable and in
any event within 5 business days of the occurrence of a default or failure by
CHP or Hospitality Partners to perform or observe any covenant, agreement, or
obligation contained in this Agreement, the Registration Rights Agreement, the
Hotel Investors Subscription Agreement or any Transaction Document contemplated
hereby or thereby, CHP shall notify Five Arrows of such default or failure.
4.3. Stockholder Approval.
(a) CHP covenants that it will call a meeting of
stockholders of CHP to be held no later than June 30, 1999 (the "Stockholder
Meeting Deadline"), for purposes of securing stockholder approval for the waiver
of the Ownership Limits set forth in Section 7.6(ii)(a) and (b) of the Articles
of Incorporation of CHP. Notwithstanding anything to the contrary contained
herein, any waiver of the Ownership Limits shall neither waive nor purport to
waive the limitations contained in Sections 7.6(ii)(c), (d) or (e) of CHP's
Articles of Incorporation. CHP will promptly prepare and file and will provide
to each of its stockholders entitled to vote at such meeting in advance of such
meeting, a proxy statement complying with Section 14 of the Exchange Act
soliciting each such stockholder's affirmative vote at such stockholder meeting
in favor of the amendment of CHP's Articles of Incorporation to permit the Board
of Directors of CHP to waive the Ownership Limits with respect to issuance of
the shares of CHP Common Stock and upon the exchange of Class A Preferred Stock
pursuant to the Hotel Investors Subscription Agreement. Such proxy statement
shall reflect that the Board of Directors has approved the waiver of such
ownership limitation with respect to Five Arrows, subject to stockholder
approval. CHP and its Board of Directors shall recommend to the stockholders
that they approve such proposal and shall use its best efforts to solicit its
stockholders' approval of such amendment. Such proxy statement shall not seek
approval of any matters other than the approval described in the preceding
sentence and the election of directors, which shall include a nominee designated
by Five Arrows, which may be the director designated pursuant to Section 4.4
hereof. CHP shall file such proxy statement with the SEC on a timely basis so as
to permit the stockholders' meeting to be held by the Stockholder Meeting
Deadline. Five Arrows shall have the opportunity to review and comment on each
version of the Proxy Statement submitted to or filed with the SEC.
(b) Upon approval by CHP's stockholders of the
amendment of CHP's Articles of Incorporation to permit the Board of Directors of
CHP to waive the Ownership Limits with respect to the issuance of shares and the
exchange of shares of Class A Preferred Stock for shares of CHP Common Stock
pursuant to the Hotel Investors Subscription Agreement, (i) CHP shall deliver to
Five Arrows (A) a certificate of the Secretary of CHP certifying that the
stockholders of the Company have approved such amendment and (B) a certified
copy of the amended Articles of Incorporation of CHP as filed with the State of
Maryland and (ii) the balance of the outstanding principal amount of the Note
shall be converted into shares of CHP Common Stock as provided in Section 1.6
hereof and any accrued and unpaid interest thereon shall be paid to the holder
of the Note as set forth in Section 1.6 hereof.
(c) Notwithstanding anything to the contrary
contained herein, any waiver of the Ownership Limits shall (i) neither waive nor
purport to waive the limitations contained in Sections 7.6(ii)(c), (d) or (e) of
CHP's Articles of Incorporation and (ii) be subject to the condition that Five
Arrows make representations at the time of such waiver that the issuance of
shares of CHP Common Stock in excess of the Ownership Limits to Five Arrows
pursuant to this Agreement or the exchange of shares of Class A Preferred Stock
for shares of CHP Common Stock in excess of the Ownership Limits pursuant to the
Hotel Investors Subscription Agreement will neither (a) cause any individual
within the meaning of Section 542(a)(2) of the Code, as modified by Section
856(h) of the Code, to own more than 9.9% of the stock of CHP, directly or
indirectly through the application of Section 544 of the Code, as modified by
Section 856(h) of the Code nor (b) cause the Company to own (directly or
Constructively (as defined in Section 7.6(i) of CHP's Articles of
Incorporation)) an interest in an tenant that is described in Section
856(d)(2)(B) of the Code.
4.4. Appointment of Five Arrows Director. CHP shall
use it best efforts to qualify, nominate and recommend to the stockholders that
they elect to the Board of Directors the nominee designated by Five Arrows from
time to time (the "Five Arrows Director") at each meeting of stockholders at
which directors are generally elected.
4.5. Further Assurances. CHP and Five Arrows shall
take any and all actions, in a manner satisfactory to the other, to meet each
condition to closing set forth herein, keep all its respective representations
and warranties hereunder true, complete and correct and effect all applicable
actions contemplated by this Agreement required to be effected on or prior to
each Closing Date.
4.6 Supplemental Disclosure. CHP shall have the
continuing obligation up to and until the entire amount of the Five Arrows
Investment has been invested in CHP to supplement promptly or amend the
Schedules with respect to any matter hereafter arising or discovered which, if
existing or known at the date of this Agreement, would have been required to be
set forth or listed in the Schedules; provided, however, that for the purpose of
the rights and obligations of Five Arrows hereunder, (a) any such supplemental
disclosure that may be reasonably considered by Five Arrows to be material and
adverse to Five Arrows, CHP or any of its Subsidiaries shall not be deemed to
have been disclosed as of the date of this Agreement unless so agreed to in
writing by Five Arrows and (b) such supplemental disclosure other than as
described in clause (a) shall be deemed to have been disclosed as of the date of
this Agreement.
4.7 Prohibition on Issuance of Securities. For so
long as any shares of Class A Preferred Stock are outstanding, other than in
accordance with and pursuant to employee benefit plans approved by the Board of
Directors of CHP, CHP shall not issue any shares of CHP Common Stock (or rights,
warrants or other securities convertible into or exchangeable for CHP Common
Stock) after the date hereof at a purchase price per share (or having a
conversion, exchange or exercise price per share of CHP Common Stock) (excluding
the value of services and other intangible assets) of less than $9.50.
ARTICLE V
5. CONDITIONS TO CHP'S OBLIGATIONS. The obligation of CHP to
consummate the transactions contemplated by this Agreement on each Closing Date
is conditioned upon satisfaction, on or prior to such date, of the following
conditions:
5.1. Representations and Warranties. The
representations and warranties of Five Arrows contained in this Agreement shall
be true, complete and correct in all material respects (except that
representations and warranties qualified by materiality, material adverse effect
or knowledge shall, as so qualified, be true and correct in all respects) on and
as of the applicable Closing Date with the same effect as though such
representations and warranties had been made on and as of such date.
5.2. Approvals. All governmental and other consents
and approvals, if any, necessary to permit the consummation of the transactions
contemplated by this Agreement shall have been received (including but not
limited to the waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, having expired, if applicable).
5.3. Proceedings. All proceedings to be taken in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to CHP and its counsel, and CHP shall have received copies of all such
documents and other evidences as it or its counsel may reasonably request in
order to establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
ARTICLE VI
6. CONDITIONS TO THE INITIAL PURCHASE. The obligation of Five
Arrows to purchase Shares pursuant to the Notice of Purchase for the Initial
Purchase on such Closing Date is conditioned upon satisfaction, on or prior to
such date, of the following conditions:
6.1. Representations and Warranties. The
representations and warranties of CHP contained in this Agreement or in any
Exhibit or Schedule attached hereto shall be true, complete and correct in all
material respects (except that representations and warranties qualified by
materiality, material adverse effect or knowledge shall, as so qualified, be
true and correct in all respects) on and as of such Closing Date with the same
effect as though such representations and warranties had been made on and as of
such date, and CHP shall have delivered to Five Arrows a certificate, dated such
Closing Date, to such effect.
6.2. Performance of Agreements. All of the covenants
and agreements of CHP to be performed on or before such Closing Date pursuant to
the terms hereof or the terms of any Exhibit hereto, shall have been duly
performed in all material respects, and CHP shall have delivered to Five Arrows
a certificate, dated such Closing Date, to such effect.
6.3. Approvals. All material governmental and other
material consents, filings and approvals necessary to permit the consummation of
the transactions contemplated by this Agreement shall have been received and be
in full force and effect (including but not limited to the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, having
expired, if applicable).
6.4. Opinion of CHP's Counsel. CHP shall have
furnished Five Arrows with a favorable opinions, dated such Closing Date, of
both of Shaw Pittman Potts & Trowbridge, special counsel to CHP, and Lowndes
Drosdick Kantor & Reed, P.A., Florida counsel to CHP, each in form and substance
satisfactory to Five Arrows and its counsel, to the effect set forth on Exhibit
6.4 attached hereto.
6.5. Good Standing and Other Certificates. CHP shall
have delivered to Five Arrows a certificate from the Secretary of State or other
appropriate official of the State of Maryland, and such other states as
applicable to the effect that CHP and each of CHP's Subsidiaries are in good
standing or subsisting in each such State and listing all charter documents of
CHP and each of CHP's Subsidiaries on file with each such State.
6.6. No Material Adverse Change. Since the Balance
Sheet Date and prior to such Closing Date, there shall be no material adverse
change in the assets or liabilities, the business (present or anticipated), or
condition, financial or otherwise, the results of operations, of CHP and each of
CHP's Subsidiaries and CHP shall have delivered to Five Arrows a certificate,
dated such Closing Date, to such effect.
6.7. Registration Rights Agreement. On such Closing
Date, CHP shall have properly and validly executed the Registration Rights
Agreement in the form of Exhibit 6.7 annexed hereto.
6.8. Hotel Investors Subscription Agreement. On such
Closing Date, Hotel Investors, CHP and Hospitality Partners shall have properly
and validly executed the Hotel Investors Subscription Agreement and taken all
actions required to be taken by it hereunder.
6.9. Valid Issuance. The Shares to be issued and sold
by CHP and to be acquired by Five Arrows shall be duly authorized and validly
issued to Five Arrows, free and clear of all liens, encumbrances, restrictions
and claims of every kind. Five Arrows shall have received properly completed
stock certificates representing the number of Shares being purchased by Five
Arrows on such Closing Date.
6.10. Appointment of Five Arrows Director. Prior to
or concurrent with the Initial Purchase, the Five Arrows Director shall have
been elected and qualified to become a member of the Board of Directors of CHP.
6.11. D&O Insurance. CHP shall have purchased
officers' and directors' liability insurance with respect to the Five Arrows
Director and on such terms and with such carrier as are reasonably acceptable to
Five Arrows.
6.12. Investment in Advisor. Prior to or concurrent
with the Initial Closing, the investment by Five Arrows in CNL Hospitality
Advisors, Inc. shall be occurring substantially with the Initial Purchase.
6.13. Proceedings. All proceedings to be taken in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be satisfactory in form and substance to Five
Arrows and its counsel, and Five Arrows shall have received copies of all such
documents and other evidences as it or its counsel may request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
6.14 Opinion of CHP's Tax Counsel. CHP shall have
furnished Five Arrows with a reasoned opinion satisfactory to Five Arrows and
its counsel, dated the Closing Date, of PriceWaterhouseCoopers LLP, or other tax
counsel satisfactory to Five Arrows and its counsel, that Five Arrows should not
recognize "unrelated business taxable income" within the meaning of Section 512
of the Code as a result of Five Arrows' investment in CNL Hotel Investors, Inc.
6.15 Approval of Financing and Other Material
Documents. CHP shall have furnished Five Arrows with all documents related to
the financing of the Hotels by Hotel Investors and all other material documents
required to be delivered by Hotel Investors thereunder or in connection with the
transactions contemplated hereunder and thereunder, and all such documents
including any material changes, amendments, modifications or waivers thereto
shall have been approved by Five Arrows and its counsel, in their sole
discretion.
ARTICLE VII
7. CONDITIONS TO SUBSEQUENT PURCHASES. The obligation of Five
Arrows to purchase Shares pursuant to any Notice of Purchase after the Initial
Purchase on such Closing Date is conditioned upon satisfaction, on or prior to
such date, of the following conditions:
7.1. Representations and Warranties. Subject to
Section 4.6 hereof, the representations and warranties of CHP contained in this
Agreement or in any Exhibit or Schedule attached hereto shall be true, complete
and correct in all material respects (except that representations and warranties
qualified by materiality, material adverse effect or knowledge shall, as so
qualified, be true and correct in all respects) on and as of such Closing Date
with the same effect as though such representations and warranties had been made
on and as of such date.
7.2. Performance of Agreements. All of the covenants
and agreements of Hotel Investors, CHP and Hospitality Partners to be performed
on or before such Closing Date pursuant to the terms hereof, the Note or the
terms of any other agreement contemplated hereby and thereby, shall have been
duly performed in all material respects.
7.3. Assurance of Performance. CHP shall have
delivered to Five Arrows evidence that the Purchase Price to be paid at any
Closing hereunder shall immediately be contributed by CHP to Hospitality
Partners who in turn will use such proceeds to fund its capital commitment to
Hotel Investors.
7.4. Performance of Hotel Investors Subscription
Agreement. All of the agreements to be performed or observed by Hotel Investors,
CHP and Hospitality Partners pursuant to the terms of the Hotel Investors
Subscription Agreement or the terms of the Articles Supplementary shall have
been duly performed or observed.
7.5. No Material Adverse Change. Prior to such
Closing Date, there shall be no material adverse change in the assets or
liabilities, the business (present or anticipated), or condition, financial or
otherwise, the results of operations, of CHP and each of CHP's Subsidiaries.
7.6. Valid Issuance. The Shares to be issued and sold
by CHP and to be acquired by Five Arrows on such Closing Date shall be duly
authorized and validly issued to Five Arrows, free and clear of all liens,
encumbrances, restrictions and claims of every kind. Five Arrows shall have
received properly completed stock certificates representing the number of Shares
being purchased by Five Arrows on such Closing Date.
7.7. Five Arrows Director. The Five Arrows Director
shall be serving as a member of the Board of Directors of CHP.
7.8. D&O Insurance. CHP shall have maintained
officers' and directors' liability insurance with respect to the Five Arrows
Director and on such terms and with such carrier as are reasonably acceptable to
Five Arrows.
ARTICLE VIII
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNITY.
8.1. Survival . The respective representations and
warranties and covenants and agreements of CHP and Five Arrows contained in this
Agreement or in any Schedule or Exhibit attached hereto shall survive the
Closing and shall terminate on January 1, 2002, except that the representations
and warranties and covenants and agreements contained in Sections 2.13, 2.14 and
2.15 (and any applicable Schedule) shall terminate upon the expiration of the
applicable statute of limitations giving effect to any extensions thereof.
8.2. Indemnification.
(a) Each of CHP and Five Arrows, as the case may be
(each, an "Indemnifying Party"), agrees to indemnify and hold the other and such
other's respective stockholders, partners, officers, directors, members,
employees, counsel, accountants and agents (each, an "Indemnified Party")
harmless from any damages, liabilities, losses, costs or expenses (including,
without limitation, reasonable counsel fees and expenses) suffered or paid,
directly or indirectly, as a result of or arising out of (without regard to any
materiality, material adverse effect or knowledge qualifier) (i) the breach or
non-compliance with any covenant, agreement or obligation contained herein by an
Indemnifying Party, (ii) the breach of or the failure of any respective
representation or warranty contained herein made by an Indemnifying Party, (iii)
any breach of any covenant, agreement or obligation contained in the
Registration Rights Agreement, or any other Transaction Document by an
Indemnifying Party, (iv) all Taxes resulting from CHP being severally liable for
any Taxes pursuant to Section 1.1502-6 of the Treasury Regulations or any
analogous state or local provision or (v) any Environmental Liabilities arising
out of any (A) any Releases or threatened Releases of Hazardous Materials at or
from the properties of CHP or its Subsidiaries; (B) any violations of
Environmental Laws; (C) any Environmental Claim related to the conditions
existing prior to each applicable Closing Date; and (D) any personal injury
(including wrongful death) or property damage (real or personal) arising out of
exposure to Hazardous Material used, handled, generated, transported or disposed
by CHP, any of its Subsidiaries or any predecessor in interest at the properties
of CHP or its Subsidiaries. However, the Indemnifying Party shall be obligated
to indemnify the Indemnified Party only when the aggregate of all damages,
liabilities, losses, costs or expenses suffered or paid by the Indemnified Party
as to which a right of indemnification is provided under this Article VIII
exceeds $200,000 (the "Threshold Amount"). After the aggregate amount of all
damages, liabilities, losses, costs or expenses suffered or paid by the
Indemnified Party exceeds the Threshold Amount, the Indemnifying Party shall be
obligated to indemnify the Indemnified Party for all such damages, liabilities,
losses, costs or expenses suffered or paid. Notwithstanding anything in this
Agreement to the contrary, the liability of CHP hereunder shall in no event
exceed the Five Arrows Investment received by CHP pursuant to this Agreement
(except for CHP's liability under clause (iv) of this paragraph (a).
(b) If any action, suit, proceeding or investigation
is commenced, as to which an Indemnified Party proposes to demand
indemnification, it shall notify the Indemnifying Party with reasonable
promptness and the Indemnifying Party shall have the right to assume the defense
thereof; provided, however, that any failure by an Indemnified Party to notify
the Indemnifying Party shall not relieve the Indemnifying Party from its
obligations hereunder, except to the extent that the Indemnifying Party shall
have been materially prejudiced in its ability to defend the action, suit,
proceedings or investigation for which such indemnification is sought by reason
of such failure. An Indemnified Party shall have the right to retain counsel of
its own choice in its sole discretion, and the Indemnifying Party shall pay the
reasonable fees, reasonable expenses and reasonable disbursements of such
counsel only if the Indemnifying Party has declined or failed to assume the
defense thereof or if the Indemnifying Party's counsel would be unable to defend
such claim on behalf of the Indemnified Party by virtue of a conflict of
interest; and such counsel shall to the extent consistent with its professional
responsibilities cooperate with the Indemnifying Party and any counsel
designated by the Indemnifying Party. The Indemnifying Party shall be liable for
any settlement of any claim against an Indemnified Party made with the
Indemnifying Party's written consent, which consent shall not be unreasonably
withheld. The Indemnifying Party shall not, without prior written consent of an
Indemnified Party, settle or compromise any claim, or permit a default or
consent to the entry of any judgment in respect thereof, unless such settlement,
compromise or consent includes, as an unconditional term thereof, the giving by
the claimant to an Indemnified Party of an unconditional release from all
liability in respect to such claim.
(c) In order to provide for just and equitable
contribution, if a claim for indemnification pursuant to these indemnification
provisions is made but it is found in a final judgment by a court of competent
jurisdiction (not subject to further appeal) that such indemnification may not
be enforced in such case, even though the express provisions hereof provide for
indemnification in such case, then the Indemnifying Party, on the one hand, and
an Indemnified Party, on the other, shall contribute to the losses, claims,
damages, obligations, penalties, judgments, awards, liabilities, costs and
expenses to which the indemnified persons may be subject in accordance with the
relative benefits received by the Indemnifying Party, on the one hand, and an
Indemnified Party, on the other hand, in connection with the statements, acts or
omissions which resulted in expenses and the relevant equitable considerations
shall also be considered. No person found liable for a fraudulent
misrepresentation shall be entitled to contribution on account thereof from any
person who is not also found liable for such fraudulent misrepresentation.
(d) The obligations to indemnify and hold harmless
pursuant to this Section 8.2 shall survive each Closing Date and shall terminate
with respect to any unasserted claim based on a breach of or the non-compliance
with any covenant, agreement or obligation or a breach of or a failure of any
representation or warranty contained in (i) this Agreement (other than Sections
2.13, 2.14 and 2.15) on January 1, 2002 and (ii) Sections 2.13, 2.14 and 2.15
and the obligation set forth in Section 8.2(a)(iv) hereof upon expiration of the
applicable statute of limitations giving effect to any extensions thereof.
ARTICLE IX
9. MISCELLANEOUS.
9.1. Preservation of Confidential Information. Five
Arrows shall keep confidential any and all non-public information obtained from
CHP concerning CHP's properties, operations and business (unless readily
ascertainable from public or published information or trade sources) until the
same ceases to be non-public (or becomes so ascertainable).
9.2. Governing Law. The interpretation and
construction of this Agreement, and all matters relating hereto, shall be
governed by the laws of the State of New York applicable to agreements executed
and to be performed solely within such State.
9.3. Prevailing Party. The prevailing party or
parties in any litigation shall be entitled to receive from the losing party or
parties all costs and expenses, including reasonable counsel fees, incurred by
the prevailing party or parties.
9.4. Captions. The Article and Section captions used
herein are for reference purposes only, and shall not in any way affect the
meaning or interpretation of this Agreement.
9.5. Publicity. Except as otherwise required by law,
none of the parties hereto shall issue any press release or take any other
public statement, in each case relating to, connected with or arising out of
this Agreement or the matters contained herein. Any statement so issued or made
shall require the reasonable prior approval of the other parties hereto as to
the contents and the manner of presentation and publication thereof.
9.6. Notices. All notices, statements, instructions
or other documents required to be given hereunder, shall be in writing and shall
be given either by hand delivery, by overnight delivery service, by facsimile
transmission or by mailing the same in a sealed envelope, first-class mail,
postage prepaid and either certified or registered, return receipt requested,
addressed as follows:
if to Five Arrows, to:
Five Arrows Realty Securities II L.L.C.
c/o Rothschild Realty, Inc.
1251 Avenue of the Americas
51st Floor
New York, New York 10020
Facsimile No. (212) 403-3520
Attention: Matthew W. Kaplan
<PAGE>
with a copy to its counsel:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022-4728
Facsimile No. (212) 593-5955
Attention: Andre Weiss
if to CHP or Hotel Investors, to:
CNL Hospitality Properties, Inc.
or CNL Hotel Investors, Inc. (as the case may be)
c/o CNL Hospitality Group
400 E. South Street
Orlando, FL 32801
Facsimile No. (407) 428-9370
Attention: C. Brian Strickland
with a copy to its counsel:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Facsimile No. (202) 663-8007
Attention: Thomas H. McCormick
and to any other parties at their addresses reflected in the stock records of
CHP. Five Arrows, by written notice given to CHP in accordance with this Section
9.6, and CHP by written notice to Five Arrows, may change the address to which
notices, statements, instruction or other documents are to be sent to such
party. All notices, statements, instructions and other documents delivered
hereunder shall be deemed effective upon receipt.
9.7. Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns.
9.8. Counterparts. This Agreement may be executed in
two or more counterparts, all of which taken together shall constitute one
instrument.
9.9. Entire Agreement. This Agreement, including the
other documents referred to herein or annexed as Exhibits or Schedules hereto
which form a part hereof, contains the entire understanding of the parties
hereto with respect to the subject matter contained herein and therein and
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
9.10. Amendments. This Agreement may not be changed
orally, but only by an agreement in writing signed by the parties hereto.
9.11. Severability. In case any provision in this
Agreement shall be held invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions hereof will not in any
way be affected or impaired thereby.
9.12. Termination of Agreement. The Agreement may be
terminated upon mutual written agreement of the parties.
[The remainder of this page has been intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the day and year first above written.
CNL HOSPITALITY PROPERTIES, INC.
By: /s/ James M. Seneff, Jr.
-----------------------------
Name:James M. Seneff, Jr.
Title:Chairman and Chief Executive
Officer
FIVE ARROWS REALTY SECURITIES II L.L.C.
By: /s/ Matthew W. Kaplan
-------------------------
Name:Matthew W. Kaplan
Title:Manager
CNL HOTEL INVESTORS, INC.
By: /s/ James M. Seneff, Jr.
-----------------------------
Name:James M. Seneff, Jr.
Title:Chairman and Chief Executive
Officer
<PAGE>
EXHIBIT 1
Hotels
Project Owner
- --------------------------------------------------------------------------------
Courtyard:
Addison, TX Acourt Property, Ltd.
Plano, TX PLC Hotel Property, Ltd.
Scottsdale, AZ SAHD Property, L.P.
Seattle, WA Westlake Hotel Property, L.P.
Residence Inn:
Las Vegas, NV LVHC Hotel Property,
Limited Partnership
Phoenix, AZ PARI Hotel Property, L.P.
Plano, TX PLRI Hotel Property, Ltd.
Marriott Suites:
Dallas, TX Marcen Property, Ltd.
<PAGE>
EXHIBIT 1.5
Form of Promissory Note
<PAGE>
Exhibits and Schedules
Schedule 2.1 - Liens, Encumbrances, Restrictions and Claims
Schedule 2.2 - Contravention
Schedule 2.3 - Jurisdictions Where CHP is Qualified to Do Business
Schedule 2.4 - Capitalization
Schedule 2.6 - Subsidiaries and Investments
Schedule 2.7(b) - Material Adverse Changes
Schedule 2.8 - Title to Properties Encumbrances
Schedule 2.9 - Leases
Schedule 2.10 - Material Contracts
Schedule 2.11 - Restrictive Documents
Schedule 2.12 - Litigation
Schedule 2.13 - ERISA Plans
Schedule 2.14 - Environmental Matters
Schedule 2.15 - Taxes
Schedule 2.16 - Non-Compliance
Exhibit 1 - Hotels
Exhibit 1.2 - Promissory Note
Exhibit 6.4 - Opinion of CHP's Counsel
Exhibit 6.7 - Registration Rights Agreement
Exhibit 10.20
Subscription and Stockholders' Agreement among
CNL Hotel Investors, Inc.,
Five Arrows Realty Securities II L.L.C.,
CNL Hospitality Partners, LP
and CNL Hospitality Properties, Inc.,
dated February 24, 1999
SUBSCRIPTION
AND
STOCKHOLDERS' AGREEMENT
dated as of February 24, 1999
among
CNL HOTEL INVESTORS, INC.
and
THE STOCKHOLDERS
NAMED HEREIN
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I CAPITAL STRUCTURE........................................ 2
1.1 Authorized Capital................................................ 2
1.2 Capital Commitments............................................... 2
1.3 Drawdowns of Capital Commitment of the Capital Stockholders....... 3
1.4 Default and Consequences of Default............................... 4
1.5 Conditions to each Drawdown....................................... 5
1.6 Purchase of Class D Junior Preferred Stock........................ 7
ARTICLE II CORPORATE GOVERNANCE..................................... 7
2.1 Articles of Incorporation and By-laws............................. 7
2.2 Number of Directors............................................... 7
2.3 Initial Board of Directors........................................ 7
2.4 Director Approval Required For Certain Action..................... 9
2.5 Covenant to Vote..................................................10
2.6 No Voting or Conflicting Agreements...............................11
2.7 Actions Consistent with Agreement.................................11
2.8 Conflict with Articles or Bylaws..................................11
ARTICLE III RESTRICTIONS ON TRANSFER OR ISSUANCE OF COMMON STOCK.....12
3.1 General Prohibition on Transfers..................................12
3.2 Compliance with Securities Laws...................................12
3.3 Permitted Transfers...............................................13
3.4 Sales of Stock by Five Arrows; Company Sale Transactions..........13
3.5 Hospitality Partners' Right of First Offer........................15
3.6 Mandatory Exchange at the Option of Hospitality Partners..........16
ARTICLE IV EXCHANGE OF CLASS A PREFERRED STOCK......................17
4.1 Definitions.......................................................17
4.2 Exchange of Class A Preferred Stock...............................19
ARTICLE V LEGENDS ON STOCK CERTIFICATES............................24
5.1 Legends on Stock Certificates.....................................24
ARTICLE VI CLOSING..................................................25
6.1 Closing .........................................................25
ARTICLE VII REPRESENTATIONS AND COVENANTS............................25
7.1 Representations of CHP............................................25
7.2 Covenants of CHP..................................................25
7.3 Representations of Five Arrows....................................27
7.4 Covenants of Five Arrows..........................................27
7.5 Representations of Hospitality Partners...........................27
ARTICLE VIII MISCELLANEOUS............................................28
8.1 Expenses .........................................................28
8.2 Injunctive Relief.................................................28
8.3 Notice .........................................................28
8.4 Successors and Assigns............................................28
8.5 Governing Law.....................................................29
8.6 Headings .........................................................29
8.7 Entire Agreement; Amendment.......................................29
8.8 Inspection........................................................29
8.9 Counterparts......................................................29
<PAGE>
SUBSCRIPTION AND STOCKHOLDERS' AGREEMENT
AGREEMENT, dated as of February 24, 1999, by and among CNL
Hotel Investors, Inc., a Maryland corporation (the "Company"), Five Arrows
Realty Securities II L.L.C., a Delaware limited liability company ("Five
Arrows"), CNL Hospitality Partners, LP, a Delaware limited partnership
("Hospitality Partners", and together with Five Arrows, individually and
collectively, the "Capital Stockholders") and CNL Hospitality Properties, Inc.,
a Maryland corporation ("CHP"), which owns, through its wholly-owned
subsidiaries, all of the outstanding equity interests of Hospitality Partners.
Five Arrows, Hospitality Partners, CHP and any other person who shall hereafter
acquire shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") or shares of Class A Preferred Stock, Class B Preferred Stock, Class C
Preferred Stock or Class D Junior Preferred Stock of the Company (the "Preferred
Stock" together with the Common Stock, the "Stock"), pursuant to the provisions
of, and subject to the restrictions and rights set forth in, this Agreement are
sometimes hereinafter referred to individually as a "Stockholder" or,
collectively, as the "Stockholders." Capitalized terms not otherwise defined
herein shall have the meanings ascribed to such terms in the Articles and the
Articles Supplementary (each as defined herein) of the Company.
RECITALS
Five Arrows, CHP, and Hospitality Partners have formed the
Company to acquire, hold, own, develop, maintain, operate, sell, transfer,
exchange and otherwise dispose of real property as a real estate investment
trust within the meaning of Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the "Code").
A purpose of the Company is to acquire from various sellers
affiliated with Western International ("WI") 100% of the partnership interests
in partnerships that own certain hotels identified on Exhibit 1.3 hereto or,
with the consent of Five Arrows, such other hotels as may be substituted in lieu
thereof of similar quality, characteristics and subject to the same
cross-default obligations as the hotels identified on Exhibit 1.3 (the "Hotels")
and to manage the Hotels (the "Business").
The Hotels are expected to be subject to leases with a new
entity affiliated with WI.
Concurrently herewith, Five Arrows and CHP are entering into
that certain Securities Purchase Agreement (the "CHP Securities Purchase
Agreement"), dated the date hereof, pursuant to which Five Arrows has committed
to purchase from time to time up to 1,578,947 shares of CHP common stock, par
value $.01 per share ("CHP Common Stock") for a maximum aggregate purchase price
of up to $14,999,996.50 (the "CHP Investment Amount").
Concurrently herewith, Five Arrows and CNL Hospitality
Advisors, Inc. ("Advisor"), an affiliate of CHP and Hospitality Partners, are
entering into that certain Securities Purchase Agreement, dated the date hereof
(together with the agreements contemplated thereby, the "Advisor Investment
Documents"), pursuant to which Advisor will sell to Five Arrows 200 shares of
Advisor Class A common stock.
Concurrently herewith, the Company and Advisor are entering
into the Management Agreement, dated the date hereof, pursuant to which Advisor
will provide to the Company the services provided therein with respect to the
Hotels.
In connection with the acquisition of the Hotels and to
provide a portion of the funds required therefor, the Stockholders have agreed,
among other things, to contribute to the Company up to a maximum amount of
$90,868,997.76, upon the terms and conditions set forth herein.
The Company and the Stockholders also deem it in their
respective best interests to provide for the corporate governance of the Company
and desire to enter into this Agreement in order to effectuate that purpose. The
Stockholders also desire to restrict the sale, assignment, transfer, encumbrance
or other disposition of the Stock (including Stock issued and outstanding as of
the date hereof, as well as Stock which may be issued hereafter), and to provide
for certain rights and obligations in respect thereto as hereinafter provided.
In consideration of the promises and of the terms and
conditions herein contained, the parties hereto mutually further agree as
follows:
ARTICLE I
CAPITAL STRUCTURE
1.1 Authorized Capital. As of the date hereof, the Company
represents and warrants that it has the following authorized capital stock, none
of which has been issued: (i) 99,776 shares of Common Stock; and (ii) 151,854
shares of Preferred Stock of which 50,886 shares have been designated as 8%
Class A Cumulative Preferred Stock, liquidation preference $1,000 per share (the
"Class A Preferred Stock"), 39,982 shares of 9.76% Class B Cumulative Preferred
Stock, liquidation preference $1,000 per share (the "Class B Preferred Stock"),
50,986 shares of 8% Class C Cumulative Preferred Stock, liquidation preference
$1,000 per share (the "Class C Preferred Stock"), and 10,000 shares of Class D
Junior Preferred Stock, liquidation preference $1,000 per share (the "Class D
Junior Preferred Stock"). The foregoing Stock has the rights, privileges and
limitations provided in the Articles of Incorporation and the respective
Articles Supplementary designating each a class of preferred stock.
1.2 Capital Commitments. By its execution hereof, (a) Five
Arrows hereby commits to purchase, upon the terms and subject to the conditions
set forth herein, from the Company up to 50,886 shares of Common Stock at a
purchase price of $.01 per share, and up to 50,886 shares of Class A Preferred
Stock at a purchase price of $1,000 per share for a maximum aggregate purchase
price of up to $50,886,508.86 (the "Five Arrows Capital Commitment"), and (b)
Hospitality Partners hereby commits to purchase, upon the terms and subject to
the conditions set forth herein, from the Company up to 48,890 shares of Common
Stock at a purchase price of $.01 per share and up to 39,982 shares of Class B
Preferred Stock at a purchase price of $1,000 per share for a maximum aggregate
purchase price of up to $39,982,488.90 (the "Hospitality Partners Capital
Commitment", and together with the Five Arrows Capital Commitment, the "Capital
Commitments").
1.3 Drawdowns of Capital Commitments of the Capital
Stockholders. Subject to Section 1.4 hereof, the Capital Stockholders shall be
required to fund a portion of their Capital Commitments from time to time,
subject to the following terms and conditions:
(a) Each Capital Stockholder shall be required to fund its
Capital Commitment only in connection with and for the purposes of
facilitating (by the use of the proceeds for the acquisition price and
related unaffiliated third party expenses including, without
limitation, costs related to the incorporation of the Company, purchase
price deposits and fees and expenses incurred by the Company in
connection with the Senior Loan Facility) the acquisition of a Hotel
identified on Exhibit 1.3 attached hereto (each Hotel acquisition and
the related acquisition expenses thereof, a "Portfolio Investment") by
the Company pursuant to the related Hotel purchase agreement.
(b) The Company shall provide to each Capital Stockholder
notice (a "Notice of Drawdown") at least 10 business days prior to the
date any portion of the Capital Commitment is required (a "Drawdown").
Each Notice of Drawdown shall give in reasonable detail a description
of the Portfolio Investment, the material terms and conditions of the
acquisition, any purchase price deposit or other expenditure, and the
proposed closing date of such Portfolio Investment. The Notice of
Drawdown shall specify the aggregate purchase price of the Portfolio
Investment and the portion of such Capital Stockholder's Capital
Commitment required in connection with such Drawdown (determined in
accordance with subparagraph (d) below) and number of shares of Class A
or Class B Preferred Stock, as applicable, and Common Stock to be
purchased by such Capital Stockholder in proportion to such Capital
Stockholder's Capital Commitment.
(c) Each Capital Stockholder shall deliver to the Company the
portion of such Capital Stockholder's Capital Commitment specified in
the Notice of Drawdown, in cash or other immediately available funds,
on the date of Drawdown specified in the Notice of Drawdown. Upon
receipt of such portion of such Capital Stockholder's Capital
Commitment, the Company shall deliver to each Capital Stockholder that
number of shares of Class A or Class B Preferred Stock, as applicable,
and Common Stock equal to the amount specified in the Notice of
Drawdown.
(d) Subject to Section 1.4, the required portion of each
Capital Stockholder's Capital Commitment shall be equal to the lesser
of (A) such Capital Stockholder's pro rata share (based on remaining
Capital Commitments of the Capital Stockholders) of the aggregate
amount required for the Company to acquire such Portfolio Investment
(or to make the purchase price deposit or other expenditure which is
the subject of the applicable Notice of Drawdown) and (B) such Capital
Stockholder's remaining Capital Commitment.
(e) No Capital stockholder shall be required to contribute to
the Company any portion of such Capital Stockholder's Capital
Commitment after December 31, 1999.
1.4 Default and Consequences of Default. (a) In the event that
a Stockholder fails to contribute to the Company its required Capital Commitment
by the date specified in the Notice of Drawdown (a "Default") any portion of the
Capital Commitment required to be contributed (a "Defaulted Capital Commitment")
by such Stockholder (a "Defaulting Stockholder"), the non-Defaulting
Stockholder, in its sole discretion, may take or cause to be taken any and all
of the following actions individually but not in combination:
(i) loan to the Company an amount equal to the
Defaulted Capital Commitment, bearing an interest rate equal to the
prime rate as announced by Citibank, N.A. on the date of such loan plus
400 basis points per annum and on such other terms and conditions as
are satisfactory to the non-Defaulting Stockholder;
(ii) contribute to the Company an amount equal to the
Defaulted Capital Commitment in exchange for additional shares of
either Class A or Class B Preferred Stock as determined by the
non-Defaulting Stockholder (in either case at a purchase price of
$1,000 per share) and Common Stock (calculated as provided in Section
1.4(b); or
(iii) notwithstanding any provision to the contrary
contained in this Agreement, arrange for and cause the Company to
borrow from a third party an amount not to exceed the Defaulted Capital
Commitment.
(b) (i) If the non-Defaulting Stockholder funds such Defaulted
Capital Commitment (or causes it to be funded) pursuant to this Section
1.4, then the percentage ownership of the Common Stock owned by the
non-Defaulting Stockholder (the "Default Adjusted Percentage") shall be
equal to the sum of (A) the product of (1) 200% times (2) a fraction
the numerator of which is the Defaulted Capital Commitment and the
denominator of which is $90,868,000 plus (B) 51%, if Five Arrows is the
non-Defaulting Stockholder, or 49%, if Hospitality Partners is the
non-Defaulting Stockholder, as the case may be. The percentage
ownership of Common Stock owned by the Defaulting Stockholder, if any,
shall be, after giving effect to the Default Adjusted Percentage, to
the extent a positive number, 100% minus the Default Adjusted
Percentage. The Company shall promptly issue to the non-Defaulting
Stockholder, for no additional consideration, such shares of Common
Stock as are necessary to implement this Section 1.4(b)(i).
(ii) Notwithstanding the foregoing, if the Defaulting
Stockholder shall contribute within 60 days of the date originally
specified in the Notice of Drawdown an amount equal to all of the
Defaulted Capital Commitment, plus an amount equal to 10% of such
Defaulted Capital Commitment, plus, if any, the amount of premiums,
prepayments penalties, charges and reasonable out-of-pocket expenses
incurred by the Company and the non-Defaulting Stockholder, as the case
may be, in connection with the alternative financing arranged pursuant
to Section 1.4(a) above (the "Increased Capital Commitment"), then the
percentage ownership of Common Stock by the Defaulting Stockholder and
the non-Defaulting Stockholder shall revert back to the amount it would
have been without giving effect to the adjustment provided in Section
1.4(b)(i), and any shares of Preferred Stock and Common Stock purchased
by the non-Defaulting Stockholder by contributing the Defaulted Capital
Commitment shall be canceled (and in connection therewith the Company
shall refund to the non-Defaulting Stockholder the Defaulted Capital
Commitment) and the Defaulting Stockholder shall receive the class and
number of shares of Preferred Stock and Common Stock that such
Stockholder would have received had no such default occurred. Within 5
days of the receipt of the Increased Capital Commitment by the Company,
the Company shall pay to the non-Defaulting Stockholder the excess, if
any, of the Increased Capital Commitment over (A) any premiums,
prepayment penalties, charges and out-of-pocket expenses reasonably
incurred and paid by the Company in connection with the alternative
Financing arranged pursuant to clause (iii) above and (B) the Defaulted
Capital Commitment.
(c) In no event shall Hospitality Partners be deemed a
Defaulting Stockholder to the extent the amount of any Defaulted
Capital Commitment is less than or equal to the amount that Five Arrows
has defaulted on its obligation to contribute capital to CHP in
accordance with and to the extent required by the CHP Securities
Purchase Agreement.
1.5 Conditions to each Drawdown.
(a) The obligation of Five Arrows to make contributions
pursuant to any Notice of Drawdown shall be subject to the following
conditions precedent (and, if any such condition is not satisfied,
other than solely due to actions or omissions of Five Arrows, then Five
Arrows shall not be deemed to be a Defaulting Stockholder with respect
to such Notice of Drawdown):
(i) no default by Hospitality Partners in the
observance or performance of any material agreement contained in this
Agreement shall have occurred and be continuing;
(ii) no Event of Default under Section 11(a) of the
Articles Supplementary designating the Class A Preferred Stock shall
have occurred and be continuing;
(iii) no default by the Company in the observance or
performance of any material agreement contained in this Agreement or
the Articles Supplementary designating the Class A Preferred Stock
shall have occurred and be continuing;
(iv) no default by CHP in the observance or
performance of any material agreement contained in the CHP Securities
Purchase Agreement or the agreements contemplated thereby shall have
occurred and be continuing;
(v) all documents related to the financing of the
Hotels by the Company and all other material documents required to be
delivered by the Company thereunder or in connection with the
transactions contemplated hereunder and thereunder and any material
changes, amendments, modifications or waivers thereto shall have been
approved by Five Arrows, in its sole discretion;
(vi) all documents related to the leases of the
Hotels and all the governing documents relating to each of the tenants
thereunder shall have been approved by Five Arrows, in its sole
discretion;
(vii) the acquisition of the Portfolio Investment to
which such Notice of Drawdown relates shall be made by the Company in
all material respects in accordance with the purchase agreement related
to such acquisition and any material amendment, modification, changes
or waiver thereto shall have been approved by each Stockholder;
(viii) no material default or breach under any
Advisor Investment Document shall have occurred and be continuing and
such agreements shall be in full force and effect; and
(ix) the Company shall have purchased officers' and
directors' liability insurance in such amounts and on such terms as are
customary for entities engaged in the same or similar business as the
Company and as are reasonably acceptable to Five Arrows.
(b) The obligation of Hospitality Partners to make
contributions pursuant to any Notice of Drawdown shall be subject to
the following conditions precedent (and, if any such condition is not
satisfied, other than solely due to actions or omissions of Hospitality
Partners, then Hospitality Partners shall not be deemed to be a
Defaulting Stockholder with respect to such Notice of Drawdown):
(i) no default by Five Arrows in the observance or
performance of any material agreement contained in this Agreement shall
have occurred and be continuing;
(ii) in the event that the directors designated by
Five Arrows constitute a majority of the Board (as defined herein), no
default by the Company in the observance or performance of any material
agreement contained in the Articles Supplementary designating the Class
B Preferred Stock shall have occurred and be continuing;
(iii) no default by Five Arrows in the observance or
performance of any material agreement contained in the CHP Securities
Purchase Agreement or the agreements contemplated thereby shall have
occurred and be continuing;
(iv) in the event that the directors designated by
Five Arrows constitute a majority of the Board, the acquisition of the
Portfolio Investment to which such Notice of Drawdown relates shall be
made by the Company in all material respects in accordance with the
purchase agreement related to such acquisition and any material
amendment, modification, changes or waiver thereto shall have been
approved by each Stockholder;
(v) no material default or breach under any Advisor
Investment Document shall have occurred and be continuing and such
agreements shall be in full force and effect; and
(vi) the Company shall have purchased officers' and
directors' liability insurance in such amounts and against such risks
as is customary for an entity engaged in the same or similar business
as the Company.
1.6 Purchase of Class D Junior Preferred Stock. If a
Distribution Nonpayment Event under the Articles Supplementary designating the
Class A Preferred Stock occurs and the election has been made to increase the
Distribution Rate by 2.5% per annum as provided in Section 11(A) of such
Articles Supplementary, then Hospitality Partners may, if it desires, within 15
days of such election purchase from the Company a sufficient number of shares of
Class D Junior Preferred Stock (and no more than such number rounded to the
nearest whole share) as is necessary to permit the Company to pay to the holders
of Class A Preferred Stock the defaulted amount of any such distribution and
shall be entitled, if it desires, to purchase on or before any subsequent
Distribution Payment Date on the Class A Preferred Stock a sufficient number of
shares of Class D Junior Preferred Stock (and no more than such number rounded
to the nearest whole share) to permit the Company to pay the full distribution
due on such Distribution Payment Date in respect of the outstanding Class A
Preferred Stock. The Company shall promptly distribute, in cash, the proceeds of
any sale of Class D Junior Preferred Stock to the holders of shares of Class A
Preferred Stock.
ARTICLE II
CORPORATE GOVERNANCE
2.1 Articles of Incorporation and By-laws. The Articles of
Incorporation (the "Articles"), the Articles Supplementary to the Articles (the
"Articles Supplementary") and the By-laws of the Company (the "By-laws") are
annexed hereto as Schedule 2.1A, Schedule 2.1B and Schedule 2.1C, respectively.
2.2 Number of Directors. The Company shall be governed by a
Board of Directors (the "Board") initially consisting of three (3) members. The
number of directors may thereafter be increased or decreased in accordance with
the Certificate and the By-laws and the provisions of this Agreement.
2.3 Initial Board of Directors.
(a) Initially, and until the next meeting of stockholders, the
Board shall consist of the following directors:
James M. Seneff, Jr.
Robert A. Bourne
Matthew W. Kaplan
Each initial director shall hold his office until the 1999
annual meeting of stockholders of the Company (or a special meeting of
stockholders in lieu thereof) and until his successor is duly elected
and qualified or until his earlier resignation or removal. Each Capital
Stockholder agrees to vote all of its shares of Common Stock and use
its best efforts to elect to the Board at the 1999 annual meeting of
stockholders of the Company and subsequent annual meetings or at any
special stockholders' meeting at which directors are to be elected
(except as otherwise provided in this Section 2.3) two directors to be
designated by Hospitality Partners, and one director to be designated
by Five Arrows; provided that each such director designated pursuant to
this Section 2.3(a) is reasonably acceptable to the Capital Stockholder
not designating such director. Each Capital Stockholder agrees to take
all actions necessary to vote all of its shares of Common Stock and use
its best efforts to elect a successor to such director designated by
the Capital Stockholder or Capital Stockholders that designated such
former director; provided that such successor is reasonably acceptable
to the non-designating Capital Stockholder. Except as otherwise
provided herein and subject to the rights of holders of one or more
classes or series of Preferred Stock to elect or remove one or more
directors, any director or the entire Board may be removed from office
at any time with cause by the affirmative vote of a majority of the
votes of all shares of capital stock of the Company then outstanding
entitled to vote in the election of directors, voting as a single
class. Any director shall be removed upon a showing of cause by a
Capital Stockholder that did not designate such director reasonably
satisfactory to the Capital Stockholder that designated such director,
and the designating Capital Stockholder agrees to take all actions
necessary to vote all of its shares of Common Stock and use its best
efforts to remove such director.
(b) Notwithstanding the preceding paragraphs of this Section
2.3, (i) if an Event of Default (as defined in the Articles
Supplementary designating the Class A Preferred Stock ) shall have
occurred and the holders of Class A Preferred Stock elect, under the
Articles Supplementary classifying such class, the remedy of
designating two (2) additional directors, the number of directors
constituting the Board shall be increased by two (2) directors, and the
holders of shares of Class A Preferred Stock voting as a single class
shall be entitled to elect the two additional directors to serve on the
Board until no Event of Default is continuing (at which time the
holders of Class A Preferred Stock shall vote to remove such additional
directors) or (ii) if Hospitality Partners is the Defaulting
Stockholder in connection with a Defaulted Capital Commitment, the
number of directors constituting the Board shall be increased by two
(2) directors, and the holders of shares of Class A Preferred Stock
voting as a single class shall be entitled to elect the two additional
directors to serve on the Board as a permanent and fixed right of the
Class A Preferred Stock; provided that such right shall terminate (at
which time the holders of Class A Preferred Stock shall vote to remove
such additional directors) if Hospitality Partners pays the Increased
Capital Commitment in accordance with Section 1.4.
Any director elected to the Board by the holders of Class A
Preferred Stock shall be removed, with or without cause, only by the affirmative
vote of a majority of votes of all shares of Class A Preferred Stock then
outstanding entitled to vote thereon or in accordance with the provisions of the
Articles Supplementary of such preferred stock.
2.4 Director Approval Required For Certain Action.
(a) Subject to paragraph (b) of this Section 2.4, so long as
at least 5% of the shares of Class A Preferred Stock issued pursuant to
the terms hereof remain outstanding, the Company hereby agrees that
none of the following actions may be taken by the Company without the
consent of Five Arrows or the director(s) of the Company designated by
Five Arrows:
(i) the sale, lease, assignment, transfer or other
disposition of any of the Company's property, business or assets
(including, without limitation, receivables and leasehold interests),
whether now owned or hereafter acquired and whether by distribution or
otherwise, or, in the case of any Subsidiary, the issuance or sale any
shares of such Subsidiary's Capital Interest to any Person other than
the Company or any wholly owned Subsidiary of the Company or the
entering into a merger or consolidation with another Person, other than
sales of furniture, fixtures and equipment (i) in the ordinary course
of business and not exceeding in the aggregate $300,000 in any twelve
month period, or (ii) that the Board deems necessary to insure that the
rents received by the Company from personal property leased by the
Company with real property do not exceed 10%, as provided in the
regulations promulgated under Section 512 of the Code;
(ii) the acquisition or leasing of assets (other than
pursuant to the leases or management agreements related to the
management of the Hotels) or Investments by the Company other than (A)
the Portfolio Investments and (B) Investments in U.S. government backed
securities or "no-load" mutual funds that are restricted to investing
solely in U.S. government backed securities of reserves taken for
working capital accounts;
(iii) the material amendment or modification of the
Management Agreement (the "Management Agreement"), dated the date
hereof, between the Company and CNL Hospitality Advisors, Inc.;
(iv) the discontinuance or disqualification of the
Company's status as a Real Estate Investment Trust within the meaning
of the Code; provided, however, that the consent of the director(s) of
the Company designated by Hospitality Partners would be required if CHP
would (with or without the passage of time) be disqualified as a Real
Estate Investment Trust thereby and;
(v) the incurrence of Indebtedness, other than (A)
Indebtedness outstanding pursuant to the Senior Loan Facility as in
existence on the Effective Date and (B) other Indebtedness in
connection with (1) capital expenditures so long as such Indebtedness
incurred for such capital expenditures is, in the aggregate, in an
amount not exceeding $1,500,000 at any one time outstanding or (2) the
payment of distributions required for the Company to maintain its REIT
status and (C) Permitted Refinancing.
(b) The Company hereby agrees that none of the following
actions may be taken by the Company without the consent of both (1)
Five Arrows or the directors of the Company designated by Five Arrows,
and (2) Hospitality Partners or the directors of the Company designated
by Hospitality Partners:
(i) the entering into or conducting any business
other than the Business and matters reasonably related to the Business;
(ii) even if the Articles of Incorporation were
amended to provide otherwise, for so long as the Company is or may be a
"pension-held REIT" as defined in Section 856(h)(3)(D) of the Code as
determined by the counsel to the holders of a majority of shares of
Class A Preferred Stock, engaging in any business or taking any action
that would result in the Company realizing "unrelated business taxable
income" within the meaning of Section 512 of the Code, if the Company
were a "qualified trust' as defined in Section 856(h)(3)(E) of the
Code; and
(iii) the entering into any transaction or series of
related transactions (including, without limitation, any purchase,
sale, lease or exchange of property or the rendering of any service or
the making of any Investment) with or in any affiliate other than (A)
as provided by the Management Agreement and (B) leases to tenants
affiliated with Rothschild Realty, Inc.
2.5 Covenant to Vote.
(a) Each Stockholder shall appear in person or by proxy at any
annual or special meeting of stockholders for the purpose of
establishing a quorum and shall vote all of the shares of Common Stock
owned by such Stockholder upon any matter in a manner so as to be
consistent and not in conflict with, and to implement, the terms of
this Agreement. Each Stockholder also agrees to execute and deliver
unanimous written consents in lieu of special meetings of stockholders
to implement the terms of this Agreement if requested to do so by any
Stockholder.
(b) In accordance with the provisions of Section 2.5(a) above
and subject to Section 3.5 below, (i) if (A) an Event of Default under
the Articles Supplementary designating the Class A Preferred Stock has
occurred, (B) CHP shall breach or default under any provision of the
CHP Securities Purchase Agreement, or (C) by the sixth anniversary of
this Agreement, (1) shares of CHP Common Stock have not been listed on
a recognized U.S. national securities exchange or included in the
National Association of Securities Dealers Inc.-National Market System,
or (2) shares of CHP Common Stock shall have been so listed or included
but shall have failed to achieve a 30 trading day average trading price
per share (during any 30-day period) of $12.50 or greater, or (3) upon
exchange of all shares of Class A Preferred Stock held by Five Arrows
into shares of CHP Common Stock, Five Arrows would own more than 10% of
the outstanding shares of CHP Common Stock (each of the events
described in clause (1), (2) and (3) individually and collectively, a
"Trigger Date Event"), then each Stockholder shall, at the request of
holders of a majority of the shares of Class A Preferred Stock,
promptly vote all shares of Common Stock or Preferred Stock owned by
such Stockholder to liquidate, dissolve or wind-up the Company or (ii)
if the holders of a majority of Class A Preferred Stock desire to sell,
transfer or otherwise dispose of any or all of the Hotels (a "Hotel
Sale"), then each Stockholder shall, at the request of such holders of
Class A Preferred Stock, promptly vote all shares of Common Stock and
Preferred Stock owned by such Stockholder in favor of the resolution
proposed by the holders of a majority of the Class A Preferred Stock to
sell, transfer or otherwise dispose of any or all such Hotels. Each of
the Stockholders hereby agrees that in the event of a liquidation,
dissolution or winding-up of the Company, such liquidation, dissolution
or winding-up shall be completed and the proceeds therefrom shall be
distributed within two years from the date thereof.
(c) If Five Arrows is a Defaulting Stockholder and has not
cured its default within 60 days, then at the request of the holders of
shares of Class B Preferred Stock, Five Arrows shall promptly vote all
shares of Common Stock and Class A Preferred Stock then owned by Five
Arrows in favor of the liquidation, dissolution or winding-up of the
Company.
2.6 No Voting or Conflicting Agreements. No Stockholder shall
grant any proxy or enter into or agree to be bound by any voting trust with
respect to its Common Stock, nor shall any Stockholder enter into any
stockholder agreements or arrangements of any kind with any person with respect
to Preferred Stock or Common Stock, inconsistent with the provisions of this
Agreement (whether or not such agreements and arrangements are with other
Stockholders or holders of Preferred Stock or Common Stock that are not parties
to this Agreement). The foregoing prohibition includes, but is not limited to,
agreements or arrangements with respect to the acquisition, disposition or
voting of shares of Preferred Stock or Common Stock. No Stockholder shall act,
for any reason, as a member of a group or in concert with any other persons in
connection with the acquisition, disposition or voting of Preferred Stock or
Common Stock in any manner which is inconsistent with the provisions of this
Agreement. Actions taken by the Board or the Stockholders to find purchasers to
acquire shares of capital stock or to find purchasers to acquire the Company as
contemplated by this Agreement shall not be deemed prohibited hereunder.
2.7 Actions Consistent with Agreement. Neither the Company nor
the Stockholders shall circumvent this Agreement by taking any action indirectly
through a subsidiary, affiliate or otherwise that would be prohibited under this
Agreement.
2.8 Conflict with Articles or By-laws. In the event of any
conflict or inconsistency between or among the provisions of this Agreement and
the Articles, Articles Supplementary or By-laws in effect at any time during the
term of this Agreement, the provisions of this Agreement shall govern and be
deemed controlling and each Stockholder agrees to vote all of its or his shares
of capital stock and to cause the Board to authorize and approve such amendments
to the Articles and/or the By-laws as shall resolve and remove any such
conflicts or inconsistencies.
<PAGE>
ARTICLE III
RESTRICTIONS ON TRANSFER OR ISSUANCE OF COMMON STOCK
3.1 General Prohibition on Transfers.
(a) Notwithstanding anything to the contrary set forth herein,
(i) no Stockholder shall directly or indirectly Transfer (as defined in
the Articles) any shares of Preferred Stock without at the same time
transferring a proportionate number of shares of Common Stock then held
by it, and vice versa, and (ii) except as provided in Section 3.3
(Permitted Transfers), 3.4 (Sales of Preferred and Common Stock by Five
Arrows and Company Sale Transactions), and 3.5 (Hospitality Partners'
Right of First Refusal), and except for sales pursuant to any
registration statement which becomes effective under the Securities Act
of 1933, as amended (the "Securities Act"), no Stockholder shall
directly or indirectly Transfer any Stock during the term hereof,
unless such Transfer shall have been effected in accordance with the
terms of this Agreement or with the prior written consent of all of the
Stockholders.
(b) Except in the event of (i) the Transfer of all of the then
outstanding Preferred Stock and Common Stock of the Company to one or
more purchasers in a contemporaneous transaction, (ii) the merger or
consolidation of the Company, (iii) the sale or other transfer of all
or substantially all of the assets and business of the Company or (iv)
any similar transaction resulting in a change in control of the
Company, in each case consummated with another person or entity which
is not an affiliate of the Company prior to the consummation of such
transaction (each such transaction being a "Company Sale Transaction"),
no Transfer by any Stockholder of any Preferred Stock or Common Stock
permitted under this Agreement shall be effective at any time prior to
the termination of this Agreement unless the transferee shall have
executed an appropriate document confirming that (i) the transferee
takes such Stock subject to all of the terms and conditions of this
Agreement and (ii) the certificates or other instruments representing
such Stock shall bear a legend that such Stock is subject to the terms
of this Agreement, and such document shall have been delivered to the
Board prior to such transferee's acquisition of Stock. The Company
shall not transfer upon its books any Stock held or owned by any
Stockholder to any person except in accordance with this Agreement.
3.2 Compliance with Securities Laws. Unless otherwise
explicitly provided herein, except in connection with a sale of Stock included
in a registered public offering in accordance with the Securities Act, or sales
of Stock pursuant to Rule 144 thereunder, no Stockholder shall Transfer any
Stock to any person (regardless of the manner in which such Stockholder
initially acquired such Stock) at any time prior to the termination of this
Agreement unless the certificates or other instruments representing such
securities bear legends as provided in Article IV to the effect that such
securities are not registered under the Securities Act and are subject to the
terms of this Agreement. No Stockholder shall Transfer any Stock at any time if
such action would constitute a violation of any state securities or blue sky
laws or a breach of the conditions to any exemption from registration of Stock
under any such laws or a breach of any undertaking or agreement of such
Stockholder entered into pursuant to such laws or in connection with obtaining
an exemption thereunder.
3.3 Permitted Transfers. Except as otherwise provided in this
Agreement, the restrictions contained in Section 3.1(a) of this Agreement with
respect to Transfers of Stock shall not apply to: (a) any Transfer to a
Stockholder or to a designee of a Stockholder permitted by this Agreement; (b)
any Transfer to any wholly-owned subsidiary or parent entity of any Stockholder,
or any other wholly-owned subsidiary of such parent entity (it being understood
with respect to a wholly-owned subsidiary or parent entity or other wholly-owned
subsidiary of such parent entity that the later sale of such subsidiary or any
shares of capital stock of such subsidiary or parent entity or any other
wholly-owned subsidiary of such parent entity would constitute an indirect sale
of Stock by such corporate Stockholder which sale may only be made within the
terms of this Agreement); (c) any Transfer that would not violate the Company's
obligations under Section 2.1 of the Consent and Amendment to Management
Agreements, each dated as of February 24, 1999, among the Company, the
respective tenant and the respective property of manager named therein by Five
Arrows to a third party (a "Section 3.3.(c) Transferee") which has a similar
reputation and financial stability to that of Five Arrows and which is not a
direct competitor of CHP; (d) any Transfer to the members, partners or
stockholders of any Stockholder; (e) any Transfer to a party to this Agreement;
and (f) any Transfer approved by the unanimous vote of the Board; provided, that
(i) in each of clauses (a) through (f), such Transfer otherwise complies with
the provisions of this Agreement, with each transferee, donee or distributee (a
"Permitted Transferee") agreeing in writing to take subject to and to comply
with all of the provisions of this Agreement in accordance with Section 3.1(b)
and each such Permitted Transferee shall be deemed to take such securities
subject to all of the other provisions of this Agreement, and shall be deemed to
take such securities subject to the restrictions endorsed thereon, and any
certificates issued by the Company to reflect such transfer shall be
appropriately legended, and (ii) in the case of a Transfer by a corporate
Stockholder to a wholly-owned subsidiary or parent entity or any other
wholly-owned subsidiary of such parent entity, such subsidiary or parent entity
or other wholly-owned subsidiary of such parent entity shall agree to have its
shares of equity stock legended to note the restrictions on transfer contained
in this Agreement as if they were Stock, any Permitted Transferee so acquiring
Stock, as a successor or assignee hereunder, be deemed to take such securities
subject to all of the other provisions of this Agreement, and shall be deemed to
take such securities subject to the restrictions endorsed thereon, and any
certificates issued by the Company to reflect such Transfer shall be
appropriately legended.
3.4 Sales of Stock by Five Arrows; Company Sale Transactions.
(a) Subject to the provisions of paragraph (b) of this Section
3.4 relating to Company Sale Transactions (as defined in Section 3.1(b)
hereof) and Section 3.5, at any time from and after a Trigger Date
Event if Five Arrows seeks to Transfer any of its shares of Common
Stock and an equal number of shares of Class A Preferred Stock (a
"Share Sale Transaction") to one or more unaffiliated third parties
(other than a Permitted Transferee) (each an "Independent Third
Party"), Five Arrows shall give Hospitality Partners and the other
Stockholders, (the "Remaining Stockholders") a written notice which
specifies the identity of the proposed purchaser(s), the number of
shares of Common Stock and Class A Preferred Stock proposed to be
purchased and the consideration proposed to be paid by such
purchaser(s) for each share of Common Stock and Class A Preferred Stock
(the "Share Sale Notice"). If the Share Sale Notice so directs, the
Remaining Stockholders shall Transfer, on the same terms and conditions
as Five Arrows proposes to Transfer shares of Common Stock and Class A
Preferred Stock, the number of shares of Common Stock and Preferred
Stock, owned by the Remaining Stockholders (the "Included Shares")
which is calculated in the manner specified the second succeeding
sentence. If the Share Sale Notice does not direct the Remaining
Stockholders to include their shares in the proposed Transfer, then the
Remaining Stockholders shall have the option, exercisable in writing no
later than within fifteen (15) days following the delivery to the
Remaining Stockholders of the Share Sale Notice, to require Five Arrows
to include in such proposed Transfer, on the same terms and conditions
as Five Arrows proposes to Transfer its shares of Common Stock and
Class A Preferred Stock, the Included Shares of such Remaining
Stockholders, calculated in the manner specified in the following
sentence. The Included Shares of any Remaining Stockholders shall equal
the number which is determined by multiplying the number of shares of
Common Stock or Preferred Stock owned by the Remaining Stockholders on
the date that the Sale Notice is delivered by a fraction, the numerator
of which is the number of shares of Common Stock or Preferred Stock
which the proposed purchaser desires to purchase and the denominator of
which is the total number of shares of Common Stock or Preferred Stock
which are outstanding on the date that the Sale Notice is mailed. In
the event that the number so determined includes a fraction which is
greater than .50, the Included Shares shall be the next larger whole
integer and in the event that the number so determined includes a
fraction which is equal to or less than .50, the Included Shares shall
be the next smaller whole integer. Without limiting the generality of
the preceding sentence, if Five Arrows proposes to Transfer all shares
owned by Five Arrows then the Included Shares would include all shares
owned by the Remaining Stockholder. The net consideration per share of
Common Stock or Preferred Stock sold in accordance with this paragraph
(a) shall be computed based on (and, to the extent available, equal to)
the amount that would be payable to the Stockholders upon a liquidation
of the Company. All fees and expenses associated with any Transfer of
shares of Common Stock or Preferred Stock pursuant to this Section
3.4(a) shall be shared by the Stockholders in proportion to the
respective number of their shares of Common Stock or Preferred Stock
which are included in such Transfer. Subject to the provisions of
Section 3.4(d), the Remaining Stockholders shall cooperate and take all
necessary action to facilitate consummation of any Share Sale
Transaction, including the Transfer of all Included Shares owned by the
Remaining Stockholders.
(b) Subject to the provisions of Section 3.5, at any time from
and after a Trigger Date Event, Five Arrows shall have the right to
effectuate a Company Sale Transaction to or with an Independent Third
Party. Five Arrows may propose a Company Sale Transaction by giving the
Company and the Board notice of its intention to commence an initiative
to seek a Company Sale Transaction to an Independent Third Party. To
the extent Five Arrows seeks to provide any potential purchasers with
confidential information regarding the Company or any of its
subsidiaries, the Company and all other Stockholders shall provide to
such potential purchasers any information regarding the Company and its
subsidiaries, if any, requested by Five Arrows, provided that Five
Arrows shall, on behalf of the Company, obtain confidentiality
agreements in customary form signed by such potential purchasers. Five
Arrows shall deliver written notice to the Company setting forth the
net consideration per share of Common Stock and Preferred Stock to be
paid in connection with any such Company Sale Transaction and the terms
of payment thereof (the "Company Sale Notice") and the Company shall
promptly upon receipt thereof deliver a copy thereof to the Remaining
Stockholder. If the Company Sale Transaction is structured as a sale of
assets, the net consideration per share of Common Stock shall be
computed based upon the consideration that would be payable to the
Stockholders upon a liquidation of the Company immediately after such
sale of assets, taking into account any taxes payable by the Company
and any liabilities retained by the Company, in connection with such
sale of assets. The Remaining Stockholders shall cooperate and take all
necessary action including without limitation, voting their shares in
favor of such transaction and transfer of all shares owned by the
Remaining Stockholders to facilitate consummation of any Company Sale
Transaction.
(c) In the event of any proposed Share Sale Transaction or
Company Sale Transaction, the Company and all Stockholders shall
cooperate in all reasonable respects with the efforts of Five Arrows in
connection with any such proposed transaction, including without
limitation, by voting all Common Stock to approve such transaction and
agreeing to sell all Common Stock or Preferred Stock owned by them in
such transaction.
3.5 Hospitality Partners' Right of First Offer.
(a) In the event Five Arrows seeks to (i) effect a Hotel Sale,
or a Share Sale Transaction or a Company Sale Transaction, (ii) at any
time after a Trigger Date Event, liquidate, dissolve or wind-up the
Company or (iii) Transfer shares to a Section 3.3(c) Transferee, Five
Arrows shall deliver a notice notifying Hospitality Partners of its
intent to effect such a transaction.
(b) Hospitality Partners shall have the option (the "Option"),
exercisable in writing (the "Option Notice") no later than 15 days
following the delivery to Hospitality Partners of notice by Five
Arrows, to agree to:
(i) in the case of a Share Sale Transaction or a
Transfer to a Section 3.3 Transferee, purchase all or a portion of such
shares of Preferred Stock and Common Stock proposed to be disposed of
by Five Arrows for an amount equal to that which Five Arrows would have
received had the Company sold all of its assets and liquidated and
distributed the net proceeds to the Stockholders;
(ii) in the case of a Company Sale Transaction or a
liquidation, dissolution or winding-up of the Company, purchase all
shares of Preferred Stock and Common Stock then held by Five Arrows for
an amount equal to that which Five Arrows would have received had the
Company sold all of its assets and liquidated and distributed the net
proceeds to the Stockholders; or
(iii) in the case of a Hotel Sale, purchase such
number of shares of Preferred Stock and Common stock then held by Five
Arrows that would have been redeemed pursuant to the Mandatory
Redemption provisions of the Articles Supplementary applicable to Asset
Sales (as defined therein) had such Hotel Sale been an Asset Sale.
The amount payable to Five Arrows pursuant to this Section 3.5
shall be determined by a nationally recognized investment bank engaged by the
Company and selected by Five Arrows from a list of three investments banks
selected by Hospitality Partners from the investment banks listed on Exhibit 3.5
attached hereto, whose determination shall be final and binding on the parties.
(c) If at any time during and up until the third anniversary
of this Agreement Hospitality Partners has elected to exercise the
Option, Hospitality Partners shall pay to Five Arrows upon delivery of
the Option Notice $500,000 in cash, which shall be credited against the
purchase price of such shares of Stock, and shall consummate such
purchase within 90 days after delivery of the Option Notice to Five
Arrows. If at any time after the third anniversary of this Agreement
Hospitality Partners has elected to exercise the Option, Hospitality
Partners shall pay to Five Arrows upon delivery of the Option Notice
$200,000 in cash, which shall be credited against the purchase price of
such shares of Stock, and shall consummate such purchase within 45 days
after delivery of the Option Notice to Five Arrows. In the event
Hospitality Partners fails to consummate such purchase within the
applicable period, the payment made to Five Arrows upon delivery of the
Option Notice shall be forfeited.
(d) In the event Hospitality Partners does not elect to
purchase the shares of Stock held by Five Arrows within such 15-day
period, Five Arrows shall be entitled to dispose of such shares of
Stock, effect a Company Sale Transaction or Hotel Sale, or liquidate,
dissolve or wind-up the Company, as the case may be, in accordance with
the terms hereof.
3.6 Mandatory Exchange at the Option of Hospitality Partners.
Hospitality Partners shall have the option, exercisable in writing, to require
Five Arrows to exchange all shares of Class A Preferred Stock held by Five
Arrows into shares of CHP Common Stock in accordance with the terms of Article
IV hereof, if (i) shares of CHP Common Stock are listed on a recognized U.S.
national securities exchange or over-the-counter market, (ii) the 30 day average
trading price per share of the CHP Common Stock is $12.50 or greater (during any
30-day period) and (iii) after such exchange Five Arrows would not own more than
10% of the outstanding shares of CHP Common Stock.
ARTICLE IV
EXCHANGE OF CLASS A PREFERRED STOCK
4.1 Definitions. For purposes of this Article IV, the
following terms shall have the following meanings:
"Adjusting Distribution" shall have the meaning set forth in
paragraph (d)(ii) of Section 4.2 hereof.
"CHP Common Stock" shall mean the Common Stock, par value $.01
per share, of CHP.
"Capital Interests" shall mean any shares, interests,
participations or other equivalents (however designated) of capital stock of a
corporation (other than the Class A Preferred Stock of the Company), any and all
units or interests, participations (however designated) or other equivalents of
a partnership, and any and all equivalent ownership interests in a Person (other
than a partnership or a corporation) and any and all warrants or options to
purchase any of the foregoing.
"Company Operation Funds" of the Company for any Reported
Quarter, shall mean the sum of (a) $20, unless no cash dividends have been paid
to the holders of shares of Class B Preferred Stock with respect to such
Reported Quarter, in which event the lesser of $20 and the amount of cash
dividends per share of Class A Preferred Stock actually paid to the holders of
shares of Class A Preferred Stock during such Reported Quarter, (b) the amount
of cash dividends per share actually paid to the holders of shares of Common
Stock who also hold shares of Class A Preferred Stock during such Reported
Quarter, (c) the quotient obtained by dividing (i) the amount of all loan
principal amortization during such Reported Quarter by (ii) the number of shares
of Common Stock outstanding at the end of such Reported Quarter, and (d) the
quotient obtained by dividing (i) the amount of any increase in reserves in
working capital accounts during such Reported Quarter by (ii) the number of
shares of Common Stock outstanding at the end of such Reported Quarter, less (e)
the quotient obtained by dividing (i) the sum of (a) the amount of amortization
expense for capitalized financing costs (excluding amortization of goodwill and
other intangibles) incurred during such Reported Quarter and (b) the amount of
amortization expense for organizational costs and expenses of the Company
incurred during such Reported Quarter by (ii) the number of shares of Common
Stock outstanding at the end of such Reported Quarter.
"Constituent Person" shall have the meaning set forth in
paragraph (e) of Section 4.2 hereof.
"Exchange Date" shall mean a date on which any of the shares
of Class A Preferred Stock are exchanged for shares of CHP Common Stock pursuant
to Section 4.2 hereof.
"Exchange Ratio" shall mean the ratio for which the Class A
Preferred Stock is exchangeable as of any date, which shall be equal to the
quotient obtained by dividing the Company Operation Funds per share by the CHP
Funds From Operations per share, as such Exchange Ratio may be adjusted pursuant
to Section 4.2 hereof.
"Exchange Shares" shall have the meaning set forth in
paragraph (a) of Section 4.2 hereof.
"Fair Market Value" on any date of determination with respect
to the CHP Common Stock or any other Capital Interest, shall mean (a) $10 at
such time as the CHP Common Stock is not listed on a national securities
exchange and does not have its quotations reported through the National
Association of Securities Dealers, Inc. Automated Quotation System or (b) at
such time as the CHP Common Stock is so listed or its quotations so reported,
the average of the daily Market Prices for the 10 consecutive Trading Days
immediately preceding such date. The term "Market Price" on any date shall mean
the Closing Price for CHP Common Stock on such date. The "Closing Price" on any
date shall mean the last sale price for CHP Common Stock, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, for CHP Common Stock, as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if CHP Common Stock is
not listed or admitted to trading on the New York Stock Exchange, as reported on
the principal national securities exchange on which CHP Common Stock is are
listed or admitted to trading or, if CHP Common Stock is not listed or admitted
to trading on any national securities exchange, the last sale price in the
over-the counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System.
"Funds From Operations" shall mean as to any Person the funds
from operations of such Person per quarter as computed using such Person's most
recent quarterly financial statements but calculated in accordance with the
guidelines of the National Association of Real Estate Investment Trusts in
effect on the date hereof.
"Market Price" shall have the meaning set forth in the
definition of "Fair Market Value".
"Non-Electing Share" shall have the meaning set forth in
paragraph (e) of Section 4.2 hereof.
"Regular Quarterly Distribution" shall mean any regular cash
distributions of CHP that do not in the aggregate exceed the CHP Funds From
Operations for the quarter relating to such distribution.
"Reported Quarter" shall mean as to any Person the most recent
quarter for which Funds From Operations have been publicly reported (or would
have been reported if such Person were required to publicly report).
"Rights" shall have the meaning set forth in paragraph
(d)(iii) of Section 4.2 hereof.
"Rights Agreement" shall have the meaning set forth in
paragraph (d)(iii) of Section 4.2 hereof.
"Trading Day" shall mean any day on which the securities in
question are traded on the New York Stock Exchange, or if such securities are
not listed or admitted for trading on the New York Stock Exchange, on the
principal national securities exchange on which such securities are listed or
admitted, or if not listed or admitted for trading on any national securities
exchange, on the NASDAQ National Market, or if such securities are not quoted on
such NASDAQ National Market, in the applicable securities market in which the
securities are traded.
"Transaction" shall have the meaning set forth in paragraph
(e) of Section 4.2 hereof.
4.2 Exchange of Class A Preferred Stock. Subject to the
ownership limitations contained in Sections 7.6 and 7.7 of CHP's Articles of
Incorporation as such Articles are in effect at the time of any such exchange,
taking into account the waiver of certain ownership limitations referred to in
Section 4.3(a) of the CHP Securities Purchase Agreement, Holders of shares of
Class A Preferred Stock shall have the right to exchange all or a portion of
such shares for shares of CHP Common Stock, as follows:
(a) Subject to and upon compliance with the provisions of this
Section 4.2, holders of shares of Class A Preferred Stock shall have
the right, at any time and from time to time, to exchange all or a
portion of such stock into the number of fully paid and non-assessable
shares of CHP Common Stock obtained by multiplying the number of shares
of Class A Preferred Stock to be exchanged (the "Exchange Shares") by
the then extant Exchange Ratio, by surrendering the Exchange Shares
together with an equal number of shares of Common Stock, such surrender
to be made in the manner provided in paragraph (b) of this Section 4.2.
(b) (i) In order to exercise the exchange right, the holder of
Exchange Shares shall surrender the certificate representing such
Exchange Shares and the certificate representing an equal number of
shares Common Stock to CHP, accompanied by written notice to the
Company and CHP that the holder thereof elects to exchange such
Exchange Shares.
(ii) Holders of Exchange Shares at the close of
business on a Distribution Payment Record Date shall be entitled to
receive the distribution payable with respect to such Exchange Shares
on the corresponding Distribution Payment Date, notwithstanding the
exchange or transfer thereof following such Distribution Payment Record
Date and prior to such Distribution Payment Date. Except as provided
above, the Company shall make no payment or allowance for unpaid
distributions, whether or not in arrears, on exchanged Exchange Shares
at the time of such exchange.
(iii) Subject to Section 4.2(c), each exchange shall
be deemed to have been effected immediately prior to the close of
business on the date on which the certificates for Exchange Shares and
the applicable number of shares of Common Stock shall have been
surrendered and such notice shall have been received by the Company and
CHP, and the person or persons in whose name or names any certificate
or certificates for shares of CHP Common Stock shall be issuable upon
such exchange shall be deemed to have become the holder or holders of
record of the shares of CHP Common Stock represented thereby at such
time on such date, and such exchange shall be at the Exchange Ratio in
effect at such time and on such date; provided, however, that if CHP
fails to deliver the CHP Common Stock deliverable upon any such
exchange, the holder of the Exchange Shares and the applicable number
of shares of Common Stock surrendered for exchange shall continue to be
deemed the holder thereof until CHP complies with such exchange.
(iv) Upon the delivery of the Exchange Shares and the
applicable number of shares of Common Stock to CHP and the consummation
of the exchange, the Exchange Shares then held by CHP shall
automatically be converted on a one for one basis into shares of Class
C Preferred Stock.
(c) The consummation of the exchange of Exchange Shares shall
be subject to compliance with any required approvals of CHP's
Stockholders or required filings with the Securities and Exchange
Commission or any stock exchange on which the shares of CHP Common
Stock may at the time be listed and the expiration or termination of
the applicable waiting period, if any, under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. CHP shall make, at its
sole cost and expense, all filings necessary to secure such approval or
compliance and achieve such expiration or termination, if applicable,
promptly after receiving notice of the holder's election to exchange.
Each holder of Exchange Shares shall cooperate with CHP in providing
information relating to such holder as may be reasonably required in
connection with such filings and approvals.
(d) (i) The CHP Funds From Operation per share of CHP Common
Stock as reported in the Reported Quarter shall be adjusted from time
to time as follows:
If CHP shall (A) make a distribution on its
CHP Common Stock (other than Regular Quarterly Distributions), (B)
subdivide its outstanding CHP Common Stock into a greater number of
shares or (C) combine its outstanding CHP Common Stock into a smaller
number of shares after the most recent Reported Quarter, then the CHP
Funds From Operations per share of CHP Common Stock as reported in the
Reported Quarter shall be recalculated to give effect to such
distribution, subdivision or combination.
(ii) If CHP shall, by dividend or otherwise,
distribute to any holders of shares of its CHP Common Stock evidence of
its indebtedness or assets (other than Regular Quarterly Distributions)
or rights or warrants to subscribe for or purchase any of its
securities or any shares of CHP Common Stock (excluding those which are
referred to in and treated under subparagraph (i) above) (any of the
foregoing being hereinafter in this subparagraph (ii) called the
"Securities" and any dividend or distribution referred to in this
subparagraph (ii) called an "Adjusting Distribution"), then, and in
each such case, the holders of Class A Preferred Stock shall be
entitled to receive concurrently with the receipt by holders of the CHP
Common Stock the kind and amount of such Securities or Adjusting
Distribution that they would have owned or been entitled to receive had
such Class A Preferred Stock been exchanged immediately prior to such
distribution or the related record date, as the case may be. In the
event of any dividend or distribution to holders of Class A Preferred
Stock pursuant to this Section 4.2(d)(ii) in the form of assets,
properties or evidence of indebtedness, the fair market value of such
dividend or distribution, as of the date of such dividend or
distribution, shall be deducted from any amounts payable to holders of
Class A Preferred Stock upon the liquidation, dissolution or winding-up
of the Company. The fair market value of any dividend or distribution
received by the holders of Class A Preferred Stock pursuant to this
Section 4.2(d)(ii) shall be determined by a nationally recognized
investment bank engaged by the Company and selected by the holders of a
majority of Class A Preferred Stock from a list of three investments
banks selected by the Company from the investment banks listed on
Exhibit 3.5 attached hereto, whose determination shall be final and
binding on the parties.
(iii) The occurrence of a distribution or the
occurrence of any other event as a result of which holders of shares of
CHP Common Stock shall be entitled to receive rights, including
exchange rights (the "Rights"), pursuant to any shareholders protective
rights agreement (the "Rights Agreement") that may be adopted by CHP
shall not be deemed a distribution of Securities for the purposes of
any dividend or distribution pursuant to this subparagraph (ii) or
otherwise give rise to any adjustment of the CHP Funds From Operation
pursuant to this Section 4.2; provided, however, that in lieu of any
dividend, distribution or adjustment as a result of any such a
distribution or occurrence, CHP shall make provision so that Rights, to
the extent issuable at the time of exchange of any shares of Class A
Preferred Stock into shares of CHP Common Stock, shall issue and attach
to such shares of CHP Common Stock then issued upon exchange in the
amount and manner and to the extent and as provided in the Rights
Agreement in respect of issuances at the time of shares of CHP Common
Stock other than upon exchange.
(iv) All calculations under this Section 4.2
(including, without limitation, the calculation of Company Operation
Funds, Exchange Ratio and Funds From Operations) shall be made out to
the sixth decimal place (with $.000005 being rounded upward) or to the
nearest whole share, as the case may be.
(e) If CHP shall be a party to any transaction (including
without limitation a merger, consolidation, statutory share exchange,
self tender offer for all or substantially all shares of CHP Common
Stock, sale of all or substantially all of its assets or
recapitalization of the CHP Common Stock (excluding any transaction as
to which subparagraph (d)(i) of this Section 4.2 applies) (each of the
foregoing being referred to herein as a "Transaction"), in each case as
a result of which shares of CHP Common Stock shall be converted into
the right to receive stock, partnership interests, securities or other
property (including cash or any combination thereof), each share of
Class A Preferred Stock shall thereafter be exchangeable for the kind
and amount of shares of stock, partnership interests, securities and
other property (including cash or any combination thereof) receivable
upon the consummation of such Transaction by a holder of that number of
shares of CHP Common Stock for which one share of Class A Preferred
Stock was exchangeable immediately prior to such Transaction, assuming
such holder of shares of CHP Common Stock (i) is not a Person with
which CHP consolidated or into which the CHP merged or which merged
into the CHP or to which such sale or transfer was made, as the case
may be (a "Constituent Person"), or an Affiliate of a Constituent
Person, and (ii) failed to exercise his or her rights of the election,
if any, as to the kind or amount of stock, partnership interests,
securities and other property (including cash) receivable upon such
Transaction (provided that if the kind or amount of stock, partnership
interests, securities and other property (including cash) receivable
upon such Transaction is not the same for each share of CHP Common
Share held immediately prior to such Transaction by other than a
Constituent Person or an Affiliate thereof and in respect of which such
rights of election shall not have been exercised ("Non-Electing
Share"), then for the purpose of this paragraph (e) the kind and amount
of stock, partnership interests, securities and other property
(including cash) receivable upon such Transaction by each Non-Electing
Share shall be deemed to be the kind and amount so receivable per share
by a plurality of the Non-Electing Shares). The provisions of this
paragraph (e) shall similarly apply to successive Transactions.
(f) (i) If:
(1) CHP shall declare an Adjusting
Distribution; or
(2) CHP shall authorize the granting to the
holders of shares of CHP Common Stock or rights or warrants to
subscribe for or purchase any shares of any class or any other rights
or warrants (other than Rights to which the subparagraph (d)(ii) of
this Section 4.2 applies); or
(3) there shall be any reclassification of
the CHP Common Stock (other than an event to which subparagraph
(d)(i)(A) of this Section 4.2 applies) or any consolidation or merger
to which CHP is a party and for which approval of any shareholders of
CHP is required, or a statutory share exchange involving the conversion
or exchange of CHP Common Stock into securities or other property, or a
self tender offer by CHP for all or substantially all of its
outstanding CHP Common Stock, or the sale or transfer of all or
substantially all of the assets of CHP as an entirety and for which
approval of any shareholders of CHP is required; or
(4) there shall occur the voluntary or
involuntary liquidation, dissolution or winding-up of the Company or
CHP,
then the Company shall cause to be mailed to
the holders of the Class A Preferred Stock at their addresses as shown
on the records of the Company, as promptly as possible, but at least 15
days prior to the applicable date hereinafter specified, a notice
stating (A) the date on which a record is to be taken for the purpose
of such Adjusting Distribution, or granting of rights or warrants, or,
if a record is not to be taken, the date as of which the holders of
record of shares of CHP Common Stock to be entitled to such Adjusting
Distribution, or granting of rights or warrants are to be determined or
(B) the date on which such reclassification, consolidation, merger,
statutory share exchange, sale, transfer, liquidation, dissolution or
winding-up is expected to become effective, and the date as of which it
is expected that holders or record of shares of CHP Common Stock shall
be entitled to exchange their CHP Common Stock for securities or other
property, if any, deliverable upon such reclassification,
consolidation, merger, statutory share exchange, sale, transfer,
liquidation, dissolution or winding-up or (C) the date on which shares
are to be redeemed and the number of shares to be redeemed. Failure to
give or receive such notice or any defect therein shall not affect the
legality or validity of the proceedings described in this Section 4.2.
(ii) If any holders of Class A Preferred Stock have
exercised their exchange rights after receiving a notice pursuant to
this paragraph (f) but are unable to exchange such Exchange Shares for
CHP Common Stock (including, without limitation, as a result of the
circumstances described in paragraph (c) of this Section 4.2 hereof ),
CHP shall make appropriate arrangements to enable such holders to
receive the intended protections afforded by this paragraph (f).
(g) Whenever the CHP Funds From Operations per share of CHP
Common Stock as reported in the Reported Quarter is adjusted as herein
provided, CHP shall (i) promptly prepare (A) an officer's certificate
setting forth the CHP Funds From Operations per share of CHP Common
Stock after such adjustment and setting forth a brief statement of the
facts requiring such adjustment, and (B) a notice of such adjustment of
the CHP Funds From Operations per share of CHP Common Stock setting
forth the adjusted CHP Funds From Operations per share of CHP Common
Stock and the effective date that such adjustment becomes effective,
which certificate and notice shall be conclusive evidence of the
correctness of such adjustment absent manifest error, and (ii) promptly
mail such notice of such adjustment of the Exchange Ratio and a copy of
such certificate to the holders of shares of Class A Preferred Stock at
such holders' last address as shown on the records of the Company.
(h) In any case in which paragraph (d) of this Section 4.2
provides that an adjustment shall become effective on the day next
following the record date for an event, CHP may defer until the
occurrence of such event issuing to the holder of any Exchange Shares
exchanged after such record date and before the occurrence of such
event the additional shares of CHP Common Stock issuable upon such
exchange by reason of the adjustment required by such event over and
above the CHP Common Stock issuable upon such exchange before giving
effect to such adjustment.
(i) If any action or transaction would require adjustment of
the Exchange Ratio pursuant to more than one paragraph of this Section
4.2, only one adjustment shall be made, and such adjustment shall be
the amount of adjustment that results in the lowest Exchange Ratio.
(j) If CHP shall take any action affecting the CHP Common
Stock, other than action described in this Section 4.2, that would
materially adversely affect the exchange rights of the holders of
shares of the Class A Preferred Stock, the Exchange Ratio for the Class
A Preferred Stock shall be adjusted, to the extent permitted by law, in
such manner, if any, and at such time, as the holders of a majority of
the then outstanding shares of Class A Preferred Stock and the
Independent Directors (as defined in the Articles of Incorporation of
CHP) of the Board of Directors of CHP shall mutually agree.
(k) CHP shall pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of
shares of CHP Common Stock or other securities or property on exchange
of the Exchange Shares pursuant hereto.
(l) The giving of a Redemption Notice by the Company shall not
affect the right of the holders of Class A Preferred Stock to exercise
the exchange right pursuant to this Section 4.2 prior to the Redemption
Date; provided, however, that if a majority of such holders require the
Company to sell, transfer or otherwise dispose of any or all of the
Hotels pursuant to Section 2.5(b)(ii) hereof, none of the holders of
Class A Preferred Stock shall be entitled to exercise such exchange
right after receiving a Notice of Redemption with respect to such sold,
transferred or otherwise disposed of Hotel or Hotels, as the case may
be.
ARTICLE V
LEGENDS ON STOCK CERTIFICATES
5.1 Legends on Stock Certificates. A copy of this Agreement
shall be filed with the Secretary of the Company and kept with the records of
the Company. Each Stockholder hereby agrees that each outstanding certificate or
other instrument representing Common Stock or Class A Preferred Stock or Class B
Preferred Stock shall bear legends reading substantially as follows:
"The securities represented by this certificate were acquired
for investment only and not for resale. They have not been registered under the
Securities Act of 1933, as amended, or any state securities law. These
securities may not be sold, transferred, pledged, or hypothecated or otherwise
disposed of unless first registered under such laws, or unless the Company has
received evidence satisfactory to it that registration under such laws is not
required."
"The securities represented by this certificate are subject to
significant restrictions on resale and transfer and certain other restrictions
as set forth in a Subscription and Stockholder's Agreement, dated as of February
24, 1999, a copy of which may be obtained from the Company or from the holder of
this certificate. No transfer of such securities will be made on the books of
the Company unless accompanied by evidence of compliance with the terms of such
Agreement."
Each such certificate or other instrument shall bear any
additional legends which may be required for compliance with state securities or
blue sky laws.
ARTICLE VI
CLOSING
6.1 Closing. Any Stockholder who is selling (a "Selling
Stockholder") and any person who is purchasing any Common Stock or Preferred
Stock from a Stockholder pursuant to Section 3.3 or 3.4 shall mutually determine
a closing date (the "Closing Date") no later than 30 days after the notice
triggering such sale has been delivered in a manner consistent with any
applicable provisions contained in this Agreement. The closing shall be held at
such time or place as the parties may agree. On the Closing Date, any Selling
Stockholder shall deliver certificates with appropriate transfer tax stamps
affixed and with stock powers endorsed in blank, representing the shares of
Common Stock or Preferred Stock to be purchased by the person exercising an
option hereunder, who shall deliver to such Stockholder the purchase price which
is payable in cash, by wire transfer of immediately available funds or by
certified check payment in New York Clearing House funds, and/or the other
consideration, if any, permitted by the terms of this Agreement to be given in
exchange for such shares.
ARTICLE VII
REPRESENTATIONS AND COVENANTS
7.1 Representations of CHP. CHP hereby represents and
warrants, as of the date hereof and as of each date Capital Stockholders are
required to contribute to the Company any portion of their respective Capital
Commitments, as follows:
(a) CHP has the full legal right, power and authority to enter
into this Agreement, the CHP Securities Purchase Agreement and the
other agreements contemplated hereby and thereby, and such instruments
do not conflict with any contract or agreement to which it is a party
or by which it is bound.
(b) The acquisition of the Portfolio Investments by the
Company does not conflict with any agreement or contract to which CHP
is bound or constitute a taking of a corporate opportunity by the
Company from CHP.
7.2 Covenants of CHP. CHP hereby covenants, for so long as any
shares of Class A Preferred Stock are outstanding, as follows:
(a) CHP shall not be a party to any sale, merger or
consolidation transaction unless the terms of such transaction are
consistent with the provisions hereof, and it shall not consent or
agree to the occurrence of any such transaction until CHP has entered
into an agreement with the successor or purchasing entity, as the case
may be, for the benefit of the holders of the Class A Preferred Stock
that will contain provisions enabling the holders of the Class A
Preferred Stock that remain outstanding after such transaction to
exchange their shares of Class A Preferred Stock into the consideration
received by holders of shares of CHP Common Stock at the Exchange Ratio
in effect, immediately prior to such transaction.
(b) CHP shall at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued shares of
CHP Common Stock, for the purpose of effecting the exchange of shares
of Class A Preferred Stock, the full number of shares of CHP Common
Stock that at any time and from time to time would be deliverable upon
the exchange of all of the shares of Class A Preferred Stock not
theretofore exchanged.
(c) CHP further covenants that any shares of CHP Common Stock
issued upon exchange of shares of CHP Common Stock into which the
shares of Class A Preferred Stock are exchangeable shall be validly
issued, fully paid and non-assessable. Before taking any action that
would cause an adjustment reducing the Exchange Ratio below the
then-par value of shares of CHP Common Stock deliverable upon such
exchange, CHP shall take any corporate action that in the opinion of
its counsel, may be necessary in order that CHP may validly and legally
issue fully paid and non-assessable shares of CHP Common Stock at such
adjusted Exchange Ratio.
(d) CHP further covenants that as promptly as practicable
after the surrender of certificates of shares of Class A Preferred
Stock, CHP shall cause to be delivered to such holder, or on such
holders written order, a certificate or certificates for the number of
shares of CHP Common Stock issuable upon exchange of such Class A
Preferred Stock in accordance with the terms hereof.
(e) CHP further covenants that upon receipt of any certificate
representing shares of Class A Preferred Stock, which pursuant to
Section 4.2(b)(iv) hereof shall have been automatically converted into
shares of Class C Preferred Stock, CHP shall promptly deliver such
certificate to the Company so that the Company may issue to CHP a
certificate or certificates representing an identical number of shares
of Class C Preferred Stock.
(f) Other than in accordance with and pursuant to employee
benefit plans approved by the Board of Directors of CHP, CHP shall not
issue any shares of CHP Common Stock (or rights, warrants or other
securities convertible into or exchangeable for CHP Common Stock) after
the date hereof at a purchase price per share (or having a conversion,
exchange or exercise price per share of CHP Common Stock) (excluding
the value of services and other intangible assets) of less than $9.50.
7.3 Representations of Five Arrows. Five Arrows hereby
represents and warrants, as of the date hereof and as of each date Capital
Stockholders are required to contribute to the Company any portion of their
respective Capital Commitments as follows:
(a) Five Arrows has the full legal right, power and authority
to enter into this Agreement, the CHP Securities Purchase Agreement and
the other agreements contemplated hereby and thereby.
(b) The acquisition of the Portfolio Investments by the
Company does not conflict with any agreement or contract to which Five
Arrows is bound or constitute a taking of a corporate opportunity by
the Company from Five Arrows.
(c) Five Arrows is an accredited investor as defined in Rule
501 under the Securities Act of 1933, as amended.
7.4 Covenants of Five Arrows. If at any time Five Arrows takes
control of a majority of the Board in accordance with the terms hereof and the
Articles Supplementary, and at such time terminates the Management Agreement and
elects to enter into another agreement pursuant to which the Company would
receive services similar to those provided under the Management Agreement, Five
Arrows covenants that it will cause the Company to enter into such agreement,
having a term of not more than two (2) years and that may be terminated within
six (6) months of such termination date (or such other term or termination
provisions as are required by then applicable rules, guidelines or regulations),
only with unaffiliated third parties.
7.5 Representations of Hospitality Partners. Hospitality
Partners hereby represents and warrants, as of the date hereof and as of each
date Capital Stockholders are required to contribute to the Company any portion
of their respective Capital Commitments, as follows:
(a) Hospitality Partners has the full legal right, power and
authority to enter into this Agreement and the other agreements
contemplated hereby, and such instruments do not conflict with any
contract or agreement to which it is a party or by which it is bound.
(b) The acquisition of the Portfolio Investments by the
Company does not conflict with any agreement or contract to which
Hospitality Partners is bound or constitute a taking of a corporate
opportunity by the Company from Hospitality Partners.
(c) Hospitality Partners is an accredited investor as defined
in Rule 501 under the Securities Act of 1933, as amended.
<PAGE>
ARTICLE VIII
MISCELLANEOUS
8.1 Expenses. The reasonable costs and expenses, including,
without limitation, attorney's and accountant's fees and expenses, of each of
Five Arrows, Rothschild Realty, Inc. ("Rothschild") and Hospitality Partners
shall be paid by the Company on the date on which Five Arrows and Hospitality
Partners contribute the initial portion of their respective Capital Commitments
hereunder. In addition, the Company shall pay to Rothschild a commitment fee in
an amount equal to $523,860 (the "Commitment Fee") in cash, by wire transfer to
an account specified by Rothschild. Prior to the date hereof, the Company has
paid $100,000 to Rothschild and shall pay to Rothschild the balance of the
Commitment Fee shall be payable on the date on which Five Arrows contributes the
initial portion of its Capital Commitment hereunder.
8.2 Injunctive Relief. It is acknowledged that it will be
impossible to measure in money the damages that would be suffered if the parties
hereto fail to comply with any of the obligations herein imposed on them and
that in the event of any such failure, an aggrieved person will be irreparably
damaged and will not have an adequate remedy at law. Except with respect to
Section 1.3 hereof, in addition to any other remedies available at law or in
equity, any such person shall, therefore, be entitled to injunctive relief,
including specific performance, to enforce such obligations, and if any action
should be brought in equity to enforce any of the provisions of this Agreement,
none of the parties hereto shall raise the defense that there is an adequate
remedy at law.
8.3 Notice. All notices, statements, instructions or other
documents required to be given hereunder, shall be in writing and shall be given
either personally, by telecopy (followed by first class U.S. mail), by Federal
Express or other reputable express delivery service for overnight delivery, or
by mailing the same in a sealed envelope, first-class mail, postage prepaid and
either certified or registered, return receipt requested, addressed to the
Company at its principal offices and to the other parties at their addresses
reflected in the stock records of the Company. Each Stockholder, by written
notice given to the Company in accordance with this Section 8.3 may change the
address to which notices, statements, instructions or other documents are to be
sent to such Stockholder. All notices, statements, instructions and other
documents shall be deemed to have been given on the date of delivery, if given
personally, by telecopy, or by overnight courier, or two days after the date of
mailing, if mailed. Whenever pursuant to this Agreement any notice is required
to be given by any Stockholder to any other Stockholder or Stockholders, such
Stockholder may request from the Company a list of addresses of all Stockholders
of the Company, which list shall be promptly furnished to such Stockholder.
8.4 Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties, and their respective
successors and assigns. If any transferee of any Stockholder shall acquire any
Common Stock, in any manner, whether by operation of law or otherwise, such
Common Stock shall be held subject to all of the terms of this Agreement, and by
taking and holding such Common Stock such person shall be conclusively deemed to
have agreed to be bound by and to perform all of the terms and provisions of
this Agreement; provided, however, that nothing in this Section 8.4 shall give
any Stockholder any right to transfer any shares of Common Stock on
contravention of the terms of this Agreement.
8.5 Governing Law. Regardless of the place of execution, this
Agreement shall be governed by and construed in accordance with the laws of the
State of Maryland, applicable to agreements made and to be wholly performed in
such State, without regard to principles of conflicts of laws of Maryland or of
any other jurisdiction.
8.6 Headings. Section headings are inserted herein for
convenience only and do not form a part of this Agreement. Unless otherwise
indicated, reference in this Agreement to a Section shall be deemed to refer to
such Section of this Agreement.
8.7 Entire Agreement; Amendment. This Agreement (together with
all exhibits hereto) contains the entire agreement among the parties hereto with
respect to the transactions contemplated herein, supersede all prior written
agreements and negotiations and oral understandings among the parties hereto,
and may not be discharged except by performance, or amended or supplemented
except by an instrument in writing signed by the Company, CHP, and each person
or entity which at the time of such amendment beneficially owns any shares of
Class A Preferred Stock or Class B Preferred Stock. The parties hereto
acknowledge and agree that in the event that any conflict or inconsistency
between the provisions of this Agreement and the CNL Hospitality Properties,
Inc. Subscription Agreement to be delivered pursuant to the CHP prospectus, the
provisions of this Agreement shall govern and be deemed controlling.
8.8 Inspection. So long as this Agreement shall be in effect,
this Agreement shall be made available for inspection by any stockholder of the
Company at the principal offices of the Company.
8.9 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[The remainder of this page has been intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on the date first written above.
CNL HOTEL INVESTORS, INC.
By:/s/ James M. Seneff, Jr.
----------------------------
Name:James M. Seneff, Jr.
Title:Chairman and Chief Executive
Officer
FIVE ARROWS REALTY SECURITIES II L.L.C.
By: /s/ Matthew W. Kaplan
------------------------
Name: Matthew W. Kaplan
Title: Manager
CNL HOSPITALITY PARTNERS, LP
By: CNL Hospitality GP Corp., its
general partner
By: /s/ James M. Seneff, Jr.
------------------------
Name: James M. Seneff, Jr.
Title:Chairman and Chief Executive
Officer
CNL HOSPITALITY PROPERTIES, INC.
By:/s/ James M. Seneff, Jr.
---------------------------
Name:James M. Seneff, Jr.
Title:Chairman and Chief Executive
Officer
<PAGE>
SCHEDULE 2.1A
Articles of Incorporation of the Company
<PAGE>
SCHEDULE 2.1B
Articles Supplementary of the Company
<PAGE>
SCHEDULE 2.1C
Bylaws of the Company
<PAGE>
EXHIBIT 1.3
Hotels
Project Owner
- ------------------------------- ----------------------------------
Courtyard:
Addison, TX Acourt Property, Ltd.
Plano, TX PLC Hotel Property, Ltd.
Scottsdale, AZ SAHD Property, L.P.
Seattle, WA Westlake Hotel Property, L.P.
Residence Inn:
Las Vegas, NV LVHC Hotel Property,
Limited Partnership
Phoenix, AZ PARI Hotel Property, L.P.
Plano, TX PLRI Hotel Property, Ltd.
Marriott Suites:
Dallas, TX Marcen Property, Ltd.
<PAGE>
EXHIBIT 3.5
Investment Bank Choices
AG Edwards
Allen & Company Incorporated
BancBoston Robertson Stephens Inc.
Bear Stearns & Co. Inc.
BT Alex. Brown Incorporated
CS First Boston Corporation
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman Sachs & Co.
ING Barings Furman Selz L.L.C.
Legg Mason
JP Morgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
Nationsbanc Montgomery Securities L.L.C.
Paine Webber Incorporated
Salomon Smith Barney Inc.
Exhibit 10.21
Registration Rights Agreement by and between
CNL Hospitality Properties, Inc. and
Five Arrows Realty Securities II L.L.C.,
dated February 24, 1999
REGISTRATION RIGHTS AGREEMENT
by and between
CNL HOSPITALITY PROPERTIES, INC.
and
FIVE ARROWS REALTY SECURITIES II L.L.C.
Dated as of February 24, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. DEFINITIONS...................................................... 1
2. REGISTRATION UNDER THE SECURITIES ACT............................ 6
2.1 Demand Registration...................................... 6
2.2 Incidental Registration.................................. 9
2.3 Shelf Registration....................................... 11
2.4 Expenses................................................. 12
2.5 Underwritten Offerings................................... 12
2.6 Postponements............................................ 13
3. HOLDBACK ARRANGEMENTS............................................ 14
3.1 Restrictions on Sale by Holders of Registrable
Securities............................................... 14
3.2 Restrictions on Sale by the Company and Others........... 14
4. REGISTRATION PROCEDURES.......................................... 14
4.1 Obligations of the Company............................... 14
4.2 Seller Information....................................... 19
4.3 Notice to Discontinue.................................... 20
5. INDEMNIFICATION; CONTRIBUTION.................................... 20
5.1 Indemnification by the Company........................... 20
5.2 Indemnification by Holders............................... 21
5.3 Conduct of Indemnification Proceedings................... 21
5.4 Contribution............................................. 22
5.5 Other Indemnification.................................... 23
5.6 Indemnification Payments................................. 23
6. GENERAL.......................................................... 23
6.1 Adjustments Affecting Registrable Securities............. 23
6.2 Registration Rights to Others............................ 23
6.3 Availability of Information; Rule 144; Rule 144A;
Other Exemptions......................................... 24
6.4 Amendments and Waivers................................... 24
6.5 Notices.................................................. 25
6.6 Successors and Assigns................................... 26
6.7 Counterparts............................................. 26
6.8 Descriptive Headings, Etc................................ 27
6.9 Severability............................................. 27
6.10 Governing Law............................................ 27
6.11 Remedies; Specific Performance........................... 27
6.12 Entire Agreement......................................... 28
6.13 Nominees for Beneficial Owners........................... 28
6.14 Consent to Jurisdiction.................................. 28
6.15 Further Assurances....................................... 28
6.16 No Inconsistent Agreements............................... 29
6.17 Construction............................................. 29
<PAGE>
REGISTRATION RIGHTS AGREEMENT (this or the "Agreement") dated
as of February 24, 1999, by and between CNL Hospitality Properties, Inc.
Maryland, a Maryland corporation (the "Company"), and Five Arrows Realty
Securities II L.L.C. a limited liability company organized under the laws of the
State of Delaware (the "Initial Holder").
W I T N E S S E T H :
WHEREAS, simultaneously herewith, the Company and the Initial
Holder are entering into a Securities Purchase Agreement (the "Subscription
Agreement"), pursuant to which the Company is issuing, and the Initial Holder is
purchasing, certain securities of the Company;
WHEREAS, simultaneously herewith, the Initial Holder is
purchasing, pursuant to the Subscription and Stockholders' Agreement, (the
"Hotel Investors Subscription Agreement") dated February 24, 1999 among CNL
Hotel Investors, Inc., Hospitality Partners, LP, a limited partnership of which
all of the equity interests are owned by the Company, the Company, the Initial
Holder and the other signatories thereto, shares of 8% Class A Cumulative
Exchangeable Preferred Stock of CNL Hotel Investors, Inc. (the "Class A
Preferred Stock") which are exchangeable into Common Shares; and
WHEREAS, in order to induce the Initial Holder to enter into
the Subscription Agreement and purchase shares of Class A Preferred Stock, the
Company has agreed to provide certain registration rights on the terms and
subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements contained herein, and for other good and valuable
consideration the receipt and sufficiency of which is hereby acknowledged, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Definitions. As used in this Agreement, the following terms shall have
the following meanings:
"Affiliate" shall mean (i) with respect to any Person, any
other Person directly or indirectly controlling or controlled by or under direct
or indirect common control with such Person, and (ii) with respect to any
individual, shall also mean the spouse, sibling, child, step-child, grandchild,
niece, nephew or parent of such Person, or the spouse thereof; provided,
however, that none of the Initial Holder, its partners, members or Affiliates
shall be considered an Affiliate of the Company or any of its Subsidiaries for
purposes of this Agreement.
"Blackout Period" shall have the meaning set forth in Section
2.6.
"Certificate of Designations" shall mean the Articles
Supplementary classifying 50,886 shares of preferred stock as 8% Class A
Cumulative Preferred Stock, par value $.01 per share, liquidation preference
$1,000 per share, as filed with the Secretary of State of the State of Maryland.
"Class A Preferred Stock" shall have the meaning set forth in
the recitals.
"Common Shares" shall mean shares of common stock, par value
$0.01 per share, of the Company.
"Company" shall have the meaning set forth in the preamble.
"Conversion Shares" shall mean the Common Shares or other
equity securities issued or issuable upon exchange of the Class A Preferred
Stock.
"Demand Registration" shall mean a registration (shelf
registration or otherwise) under the Securities Act of Registrable Securities
required to be effected by the Company pursuant to Section 2.1.
"Demand Registration Statement" shall mean a registration
statement of the Company which covers the Registrable Securities requested to be
included therein pursuant to the provisions of Section 2.1 and all amendments
and supplements to such registration statement, including post-effective
amendments, in each case including the Prospectus contained therein, all
exhibits thereto and all material incorporated by reference (or deemed to be
incorporated by reference) therein.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time, and the rules and regulations thereunder, or any
successor statute.
"Holders" shall mean the Initial Holder for so long as it owns
any Registrable Securities and such of its respective heirs, successors and
permitted assigns (including any permitted transferees of Registrable
Securities) who acquire or are otherwise the transferee of Registrable
Securities, directly or indirectly, from such Initial Holder (or any subsequent
Holder), for so long as such heirs, successors and permitted assigns own any
Registrable Securities. For purposes of this Agreement, a Person will be deemed
to be a Holder whenever such Person holds an option to purchase, or a security
convertible into or exercisable or exchangeable for, Registrable Securities,
whether or not such purchase, conversion, exercise or exchange has actually been
effected and disregarding any legal restrictions upon the exercise of such
rights. Registrable Securities issuable upon exercise of an option or upon
conversion, exchange or exercise of another security shall be deemed outstanding
for the purposes of this Agreement.
"Holders' Counsel" shall mean one firm of counsel (per
registration) to the Holders of Registrable Securities participating in such
registration, which counsel shall be selected (i) in the case of a Demand
Registration by the Initiating Holders holding a majority of the Registrable
Securities for which registration was requested in the Request, and (ii) in all
other cases, by the Majority Holders of the Registration.
"Incidental Registration" shall mean a registration required
to be effected by the Company pursuant to Section 2.2.
"Incidental Registration Statement" shall mean a registration
statement of the Company which covers the Registrable Securities requested to be
included therein pursuant to the provisions of Section 2.2 and all amendments
and supplements to such registration statement, including post-effective
amendments, in each case including the Prospectus contained therein, all
exhibits thereto and all material incorporated by reference (or deemed to be
incorporated by reference) therein.
"Initial Holder" shall have the meaning set forth in the
preamble.
"Initial Public Offering" shall mean the first public offering
of any class of securities of the Company pursuant to a registration statement
filed with and declared effective by the SEC.
"Initiating Holders" shall mean, with respect to a particular
registration, the Holders who initiated the Request for such registration.
"Inspectors" shall have the meaning set forth in Section
4.1(g).
"Majority Holders" shall mean (a) the Initial Holder, so long
as the Initial Holder and its Affiliates, collectively, hold at least 25% of the
outstanding Registrable Securities, or (b) one or more Holders of Registrable
Securities who would hold a majority of the Registrable Securities then
outstanding.
"Majority Holders of the Registration" shall mean, with
respect to a particular registration, one or more Holders of Registrable
Securities who would hold a majority of the Registrable Securities to be
included in such registration.
"NASD" shall mean the National Association of Securities
Dealers, Inc.
"Person" shall mean any individual, firm, partnership,
corporation, trust, joint venture, association, joint stock company, limited
liability company, unincorporated organization or any other entity or
organization, including a government or agency or political subdivision thereof,
and shall include any successor (by merger or otherwise) of such entity.
"Prospectus" shall mean the prospectus included in a
Registration Statement (including, without limitation, any preliminary
prospectus and any prospectus that includes any information previously omitted
from a prospectus filed as part of an effective registration statement in
reliance upon Rule 430A promulgated under the Securities Act), and any such
Prospectus as amended or supplemented by any prospectus supplement, and all
other amendments and supplements to such Prospectus, including post-effective
amendments, and in each case including all material incorporated by reference
(or deemed to be incorporated by reference) therein.
"Registrable Securities" shall mean (i) any Common Shares
issued to the Initial Holder pursuant to the Subscription Agreement; (ii) any
Conversion Shares issued or issuable upon exchange of the Class A Preferred
Stock issued to the Initial Holder pursuant to the Hotel Investors Subscription
Agreement, (iii) any Common Shares otherwise or hereafter purchased or acquired
by the Holders or their Affiliates and (iv) any other securities of the Company
(or any successor or assign of the Company, whether by merger, consolidation,
sale of assets or otherwise) which may be issued or issuable with respect to, in
exchange for, or in substitution of, Registrable Securities referenced in
clauses (i) through (iv) above by reason of any dividend or stock split,
combination of shares, merger, consolidation, recapitalization,
reclassification, reorganization, sale of assets or similar transaction. As to
any particular Registrable Securities, such securities shall cease to be
Registrable Securities when (A) a registration statement with respect to the
sale of such securities shall have been declared effective under the Securities
Act and such securities shall have been disposed of in accordance with such
registration statement, (B) such securities can be sold pursuant to Rule 144 (or
any similar provisions then in force) under the Securities Act, (C) such
securities have been otherwise transferred, a new certificate or other evidence
of ownership for them not bearing the legend restricting further transfer shall
have been delivered by the Company and subsequent public distribution of them
shall not require registration under the Securities Act, or (D) such securities
shall have ceased to be outstanding.
"Registration Expenses" shall mean any and all expenses
incident to performance of or compliance with this Agreement by the Company and
its subsidiaries, including, without limitation (i) all SEC, stock exchange,
NASD and other registration, listing and filing fees, (ii) all fees and expenses
incurred in connection with compliance with state securities or blue sky laws
and compliance with the rules of any stock exchange (including fees and
disbursements of counsel in connection with such compliance and the preparation
of a blue sky memorandum and legal investment survey), (iii) all expenses of any
Persons in preparing or assisting in preparing, word processing, printing,
distributing, mailing and delivering any Registration Statement, any Prospectus,
any underwriting agreements, transmittal letters, securities sales agreements,
securities certificates and other documents relating to the performance of or
compliance with this Agreement, (iv) the fees and disbursements of counsel for
the Company, (v) the reasonable fees and disbursements of Holders' Counsel, (vi)
the fees and disbursements of all independent public accountants (including the
expenses of any audit and/or "cold comfort" letters) and the fees and expenses
of other Persons, including experts, retained by the Company, (vii) the expenses
incurred in connection with making road show presentations and holding meetings
with potential investors to facilitate the distribution and sale of Registrable
Securities which are customarily borne by the issuer, (viii) any fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities, and (ix) premiums and other costs of policies of Company insurance
against liabilities arising out of the public offering of the Registrable
Securities being registered; provided, however, Registration Expenses shall not
include discounts and commissions payable to underwriters, selling brokers,
dealer managers or other similar Persons engaged in the distribution of any of
the Registrable Securities; and provided further, that in any case where
Registration Expenses are not to be borne by the Company, such expenses shall
not include salaries of Company personnel or general overhead expenses of the
Company, auditing fees, premiums or other expenses relating to liability
insurance required by underwriters of the Company or other expenses for the
preparation of financial statements or other data normally prepared by the
Company in the ordinary course of its business or which the Company would have
incurred in any event; and provided, further, that in the event the Company
shall, in accordance with Section 2.2 or Section 2.6 hereof, not register any
securities with respect to which it had given written notice of its intention to
register to Holders, notwithstanding anything to the contrary in the foregoing,
all of the costs incurred by the Holders in connection with such registration
shall be deemed to be Registration Expenses.
"Registration Statement" shall mean any registration statement
of the Company which covers any Registrable Securities and all amendments and
supplements to any such Registration Statement, including post-effective
amendments, in each case including the Prospectus contained therein, all
exhibits thereto and all material incorporated by reference (or deemed to be
incorporated by reference) therein.
"Request" shall have the meaning set forth in Section 2.1(a).
"SEC" shall mean the Securities and Exchange Commission, or
any successor agency having jurisdiction to enforce the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as
amended from time to time, and the rules and regulations thereunder, or any
successor statute.
"Shelf Registration" shall have the meaning set forth in
Section 2.1(a).
"Subscription Agreement" shall have the meaning set forth in
the preamble.
"Underwriters" shall mean the underwriters, if any, of the
offering being registered under the Securities Act.
"Underwritten Offering" shall mean a sale of securities of the
Company to an Underwriter or Underwriters for reoffering to the public.
"Withdrawn Demand Registration" shall have the meaning set
forth in Section 2.1(a).
"Withdrawn Request" shall have the meaning set forth in
Section 2.1(a).
2. REGISTRATION UNDER THE SECURITIES ACT.
2.1 Demand Registration.
(a) Right to Demand Registration.
(i) Subject to Section 2.1(c), at any time or from
time to time the Majority Holders shall have the right to request in writing
that the Company register all or part of such Holders' Registrable Securities (a
"Request") (which Request shall specify the amount of Registrable Securities
intended to be disposed of by such Holders and the intended method of
disposition thereof) by filing with the SEC a Demand Registration Statement;
provided, however, that the Company shall not be required to effect a Demand
Registration if the proposed Demand Registration would not cover at least the
lesser of $10 million of Registrable Securities or the total Registrable
Securities held by the Majority Holders.
(ii) As promptly as practicable, but no later than 10
days after receipt of a Request, the Company shall give written notice of such
requested registration to all Holders of Registrable Securities. Subject to
Section 2.1(b), the Company shall include in a Demand Registration (A) the
Registrable Securities intended to be disposed of by the Initiating Holders and
(B) the Registrable Securities intended to be disposed of by any other Holder
which shall have made a written request (which request shall specify the amount
of Registrable Securities to be registered and the intended method of
disposition thereof) to the Company for inclusion thereof in such registration
within 20 days after the receipt of such written notice from the Company.
(iii) The Company shall, as expeditiously as possible
following a Request, use its best efforts to cause to be filed with the SEC a
Demand Registration Statement providing for the registration under the
Securities Act of the Registrable Securities which the Company has been so
requested to register by all such Holders, to the extent necessary to permit the
disposition of such Registrable Securities so to be registered in accordance
with the intended methods of disposition thereof specified in such Request or
further requests (including, without limitation, by means of a shelf
registration pursuant to Rule 415 under the Securities Act (a "Shelf
Registration") if so requested and if the Company is then eligible to use such a
registration).
(iv) The Company shall use its best efforts to have
such Demand Registration Statement declared effective by the SEC as soon as
practicable thereafter and to keep such Demand Registration Statement
continuously effective for the period specified in Section 4.1(b).
(b) Priority in Demand Registrations. If a Demand Registration
involves an Underwritten Offering, and the sole or lead managing Underwriter, as
the case may be, of such Underwritten Offering shall advise the Company in
writing (with a copy to each Holder requesting registration) on or before the
date five days prior to the date then scheduled for commencement of such
offering that, in its opinion, the amount of Registrable Securities requested to
be included in such Demand Registration exceeds the number which can be sold in
such offering within a price range acceptable to the Majority Holders of the
Registration (such writing to state the basis of such opinion and the
approximate number of Registrable Securities which may be included in such
offering), the Company shall include in such Demand Registration, to the extent
of the number which the Company is so advised may be included in such offering,
the Registrable Securities requested to be included in the Demand Registration
by the Holders allocated pro rata in proportion to the number of Registrable
Securities requested to be included in such Demand Registration by each of them.
In the event the Company shall not, by virtue of this Section 2.1(b), include in
any Demand Registration all of the Registrable Securities of any Holder
requesting to be included in such Demand Registration, such Holder may, upon
written notice to the Company given within five days of the time such Holder
first is notified of such matter, reduce the amount of Registrable Securities it
desires to have included in such Demand Registration, whereupon only such amount
of Registrable Securities, will be so included and the Holders not so reducing
shall be entitled to a corresponding increase in the amount of Registrable
Securities to be included in such Demand Registration.
(c) Limitations on Registrations. The rights of Holders of
Registrable Securities to request Demand Registrations pursuant to Section
2.1(a) are subject to the following limitations: (i) in no event shall the
Company be required to effect a Demand Registration until the earlier of (A) the
third anniversary of this Agreement, (B) the completion of the continuous
offering of Common Shares (or follow-on continuous offering of Common Shares),
(C) the initial public offering of Common Shares in an Underwritten Offering, or
(D) the listing of Common Shares on a national securities exchange or
over-the-counter-market, (ii) the Company shall not be obligated to effect a
Demand Registration unless 120 days have elapsed since the last day that a prior
Demand Registration Statement remained effective (or, if earlier, the day on
which the last of the Registrable Securities covered by such prior Demand
Registration Statement was sold), and (iii) in no event shall the Company be
required to effect more than 6 Demand Registrations (the "Initial Demands"),
provided that when the Majority Holders own less than 35% of the issued and
outstanding Common Shares on a fully diluted basis, the Company shall be
required to effect no more than the lesser of the number of Initial Demands
remaining and 3 Demand Registrations; provided, however, that such number shall
be increased to the extent the Company does not include in what would otherwise
be the final registration for which the Company is required to pay Registration
Expenses at least 75% of the number of Registrable Securities requested to be
registered by the Holders by reason of Section 2.1(b); and provided, further,
that the Registration Expenses in connection with each other Demand Registration
shall be allocated pro rata among all Persons on whose behalf securities of the
Company are included in such registration, on the basis of the respective
amounts of the securities then being registered on their behalf.
(d) Underwriting; Selection of Underwriters. Notwithstanding
anything to the contrary contained in Section 2.1(a), if the Initiating Holders
holding a majority of the Registrable Securities for which registration was
requested in the Request so elect, the offering of such Registrable Securities
pursuant to such Demand Registration shall be in the form of a firm commitment
Underwritten Offering; and such Initiating Holders may require that all Persons
(including other Holders) participating in such registration sell their
Registrable Securities to the Underwriters at the same price and on the same
terms of underwriting applicable to the Initiating Holders. If any Demand
Registration involves an Underwritten Offering, the Request relating thereto
shall include a list of at least five firms from the firms named in Schedule
2.1(d) to act as the sole or managing Underwriters and any additional investment
bankers and managers to be used in connection with such registration. The
Company shall make the selection from, and designate the capacities for, such
firms within 10 days of receipt of such Request.
(e) Registration of Other Securities. Whenever the Company
shall effect a Demand Registration, no securities other than the Registrable
Securities shall be covered by such registration unless the Majority Holders of
the Demand Registration shall have consented in writing to the inclusion of such
other securities; provided, however, that such consent shall not be required if
the sole or managing Underwriters deliver to the majority Holders of such Demand
Registration an unqualified opinion that the inclusion of such other securities
would not impair the price, timing or quality of such Demand Registration.
(f) Effective Registration Statement; Suspension. A Demand
Registration Statement shall not be deemed to have become effective (and the
related registration will not be deemed to have been effected) (i) unless it has
been declared effective by the SEC and remains effective in compliance with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by such Demand Registration Statement for the
time period specified in Section 4.1(b), (ii) if the offering of any Registrable
Securities pursuant to such Demand Registration Statement is interfered with by
any stop order, injunction or other order or requirement of the SEC or any other
governmental agency or court, or (iii) if, in the case of an Underwritten
Offering, the conditions to closing specified in an underwriting agreement to
which the Company is a party are not satisfied other than by the sole reason of
any breach or failure by the Holders of Registrable Securities or are not
otherwise waived.
(g) Other Registrations. During the period (i) beginning on
the date of a Request and (ii) ending on the date that is 90 days after the date
that a Demand Registration Statement filed pursuant to such Request has been
declared effective by the SEC or, if the Holders shall withdraw such Request or
such Demand Registration Statement, on the date of such Withdrawn Request or
such Withdrawn Registration Statement, the Company shall not, without the
consent of the Majority Holders of the Registration, file a registration
statement pertaining to any other securities of the Company, which consent shall
not be unreasonably withheld.
(h) Registration Statement Form. Registrations under this
Section 2.1 shall be on such appropriate registration form of the SEC (i) as
shall be selected by the Initiating Holders holding a majority of the
Registrable Securities for which registration was requested in the Request and
as shall be reasonably acceptable to the Company, and (ii) which shall be
available for the sale of Registrable Securities in accordance with the intended
method or methods of disposition specified in the requests for registration. The
Company agrees to include in any such Registration Statement all information
which any selling Holder, upon advice of counsel, shall reasonably request.
(i) Withdrawal of a Request. A Request may be withdrawn prior
to the filing of the Demand Registration Statement by the Majority Holders of
the Registration (a "Withdrawn Request") and a Demand Registration Statement may
be withdrawn prior to the effectiveness thereof by the Majority Holders of the
Registration (a "Withdrawn Demand Registration"), and such withdrawals shall be
treated as a Demand Registration which shall have been effected pursuant to this
Section 2.1 (and shall be counted toward the number of Demand Registrations
permitted hereunder), unless the Holders of Registrable Securities to be
included in such Registration Statement reimburse the Company for its reasonable
out-of-pocket Registration Expenses relating to the preparation and filing of
such Demand Registration Statement (to the extent actually incurred); provided;
however, that if a Withdrawn Request or Withdrawn Registration Statement is made
(i) because of a material adverse change in the business, financial condition or
prospects of the Company following the Request date, or (ii) because of a
postponement of such registration pursuant to Section 2.6 for at least 60 days,
then such withdrawal shall not be treated as a Demand Registration effected
pursuant to this Section 2.1 (and shall not be counted toward the number of
Demand Registrations permitted hereunder), and the Company shall pay all
Registration Expenses in connection therewith. Any Holder requesting inclusion
in a Demand Registration may, at any time prior to the effective date of the
Demand Registration Statement (and for any reason), revoke such request by
delivering written notice to the Company revoking such requested inclusion.
The registration rights granted pursuant to the provisions of
this Section 2.1 shall be in addition to the registration rights granted
pursuant to the other provisions of Section 2 hereof.
2.2 Incidental Registration.
(a) Right to Include Registrable Securities. If the Company at
any time or from time to time proposes to register any of its Common Shares
under the Securities Act (other than (i) in a registration on Form S-4 or S-8 or
any successor form to such forms, (ii) in a continuous offering of Common Shares
(or follow-on continuous offering of Common Shares), and (iii) pursuant to
Section 2.1 or 2.3) for sale for its own account, the Company shall deliver
prompt written notice (which notice shall be given at least 30 days prior to
such proposed registration) to all Holders of Registrable Securities of its
intention to undertake such registration, describing in reasonable detail the
proposed registration and distribution (including the anticipated range of the
proposed offering price, the class and number of securities proposed to be
registered and the distribution arrangements) and of such Holders' right to
participate in such registration under this Section 2.2 as hereinafter provided.
Subject to the other provisions of this paragraph (a) and Section 2.2(b), upon
the written request of any Holder made within 20 days after the receipt of such
written notice (which request shall specify the amount of Registrable Securities
to be registered and the intended method of disposition thereof), the Company
shall effect the registration under the Securities Act of all Registrable
Securities requested by Holders to be so registered (an "Incidental
Registration"), to the extent requisite to permit the disposition (in accordance
with the intended methods thereof as aforesaid) of the Registrable Securities so
to be registered, by inclusion of such Registrable Securities in the
Registration Statement which covers the securities which the Company proposes to
register and shall use its best efforts to cause such Registration Statement to
become and remain effective with respect to such Registrable Securities in
accordance with the registration procedures set forth in Section 4. If an
Incidental Registration involves an Underwritten Offering, promptly upon
notification to the Company from the Underwriter of the price at which such
securities are to be sold, the Company shall so advise each participating
Holder. The Holders requesting inclusion in an Incidental Registration may, at
any time prior to the effective date of the Incidental Registration Statement
(and for any reason), revoke such request by delivering written notice to the
Company revoking such requested inclusion.
If at any time after giving written notice of its intention to
register any securities and prior to the effective date of the Incidental
Registration Statement filed in connection with such registration, the Company
shall determine for any reason not to register or to delay registration of such
securities, the Company may, at its election, give written notice of such
determination to each Holder of Registrable Securities and, thereupon, (A) in
the case of a determination not to register, the Company shall be relieved of
its obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses
incurred in connection therewith), without prejudice, however, to the rights of
Holders to cause such registration to be effected as a registration under
Section 2.1 or and (B) in the case of a determination to delay such
registration, the Company shall be permitted to delay the registration of such
Registrable Securities for the same period as the delay in registering such
other securities; provided, however, that if such delay shall extend beyond 120
days from the date the Company received a request to include Registrable
Securities in such Incidental Registration, then the Company shall again give
all Holders the opportunity to participate therein and shall follow the
notification procedures set forth in the preceding paragraph. There is no
limitation on the number of such Incidental Registrations pursuant to this
Section 2.2 which the Company is obligated to effect.
The registration rights granted pursuant to the provisions of
this Section 2.2 shall be in addition to the registration rights granted
pursuant to the other provisions of Section 2 hereof.
(b) Priority in Incidental Registration. If an Incidental
Registration involves an Underwritten Offering (on a firm commitment basis), and
the sole or the lead managing Underwriter, as the case may be, of such
Underwritten Offering shall advise the Company in writing (with a copy to each
Holder requesting registration) on or before the date five days prior to the
date then scheduled for such offering that, in its opinion, the amount of
securities (including Registrable Securities) requested to be included in such
registration exceeds the amount which can be sold in such offering without
interfering with the successful marketing of the securities being offered (such
writing to state the basis of such opinion and the approximate number of such
securities which may be included in such offering without such effect), the
Company shall include in such registration, to the extent of the number which
the Company is so advised may be included in such offering without such effect,
in the case of a registration initiated by the Company, (A) first, the
securities that the Company proposes to register for its own account and (B)
second, the Registrable Securities requested to be included in such registration
by the Holders, allocated pro rata in proportion to the number of Registrable
Securities requested to be included in such registration by each of them;
provided, however, that in the event the Company will not, by virtue of this
Section 2.2(b), include in any such registration all of the Registrable
Securities of any Holder requested to be included in such registration, such
Holder may, upon written notice to the Company given within three days of the
time such Holder first is notified of such matter, reduce the amount of
Registrable Securities it desires to have included in such registration,
whereupon only the Registrable Securities, if any, it desires to have included
will be so included and the Holders not so reducing shall be entitled to a
corresponding increase in the amount of Registrable Securities to be included in
such registration.
(c) Selection of Underwriters. If any Incidental Registration
involves an Underwritten Offering, the sole or managing Underwriter(s) and any
additional investment bankers and managers to be used in connection with such
registration shall be subject to the approval of the Majority Holders of the
Registration (such approval not to be unreasonably withheld).
2.3 Shelf Registration.
If a request made pursuant to Section 2.1 is for a Shelf
Registration and if the Company is obligated pursuant to Section 2.1 to effect a
registration, the Company shall use its best efforts to keep the Shelf
Registration continuously effective through the date on which all of the
Registrable Securities covered by such Shelf Registration may be sold pursuant
to Rule 144(k) under the Securities Act (or any successor provision having
similar effect); provided, however, that prior to the termination of such Shelf
Registration, the Company shall first furnish to each Holder of Registrable
Securities participating in such Shelf Registration (i) an opinion, in form and
substance satisfactory to the Majority Holders of the Registration, of counsel
for the Company satisfactory to the Majority Holders of the Registration stating
that such Registrable Securities are freely saleable pursuant to Rule 144(k)
under the Securities Act (or any successor provision having similar effect) or
(ii) a "No-Action Letter" from the staff of the SEC stating that the SEC would
not recommend enforcement action if the Registrable Securities included in such
Shelf Registration were sold in a public sale other than pursuant to an
effective registration statement.
2.4 Expenses. The Company shall pay all Registration Expenses in
connection with any Demand Registration, Incidental Registration or Shelf
Registration, whether or not such registration shall become effective and
whether or not all Registrable Securities originally requested to be included in
such registration are withdrawn or otherwise ultimately not included in such
registration, except as otherwise provided with respect to a Withdrawn Request
and a Withdrawn Demand Registration in Section 2.1(a). Each Holder shall pay all
discounts and commissions payable to underwriters, selling brokers, managers or
other similar Persons engaged in the distribution of such Holder's Registrable
Securities pursuant to any registration pursuant to this Section 2.
2.5 Underwritten Offerings.
(a) Demand Underwritten Offerings. If requested by the sole or
lead managing Underwriter for any Underwritten Offering effected pursuant to a
Demand Registration, the Company shall enter into a customary underwriting
agreement with the Underwriters for such offering, such agreement to be
reasonably satisfactory in substance and form to each Holder of Registrable
Securities participating in such offering and to contain such representations
and warranties by the Company and such other terms as are generally prevailing
in agreements of that type, including, without limitation, indemnification and
contribution to the effect and to the extent provided in Section 5.
(b) Holders of Registrable Securities to be Parties to
Underwriting Agreement. The Holders of Registrable Securities to be distributed
by Underwriters in an Underwritten Offering contemplated by Section 2 shall be
parties to the underwriting agreement between the Company and such Underwriters
and may, at such Holders' option, require that any or all of the representations
and warranties by, and the other agreements on the part of, the Company to and
for the benefit of such Underwriters shall also be made to and for the benefit
of such Holders of Registrable Securities and that any or all of the conditions
precedent to the obligations of such Underwriters under such underwriting
agreement be conditions precedent to the obligations of such Holders of
Registrable Securities; provided, however, that the Company shall not be
required to make any representations or warranties with respect to written
information specifically provided by a selling Holder for inclusion in the
Registration Statement. No Holder shall be required to make any representations
or warranties to, or agreements with, the Company or the Underwriters other than
representations, warranties or agreements regarding such Holder, such Holder's
Registrable Securities and such Holder's intended method of disposition.
(c) Participation in Underwritten Registration.
Notwithstanding anything herein to the contrary, no Person may participate in
any underwritten registration hereunder unless such Person (i) agrees to sell
its securities on the same terms and conditions provided in any underwritten
arrangements approved by the Persons entitled hereunder to approve such
arrangement and (ii) accurately completes and executes in a timely manner all
questionnaires, powers of attorney, indemnities, custody agreements,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
2.6 Postponements. The Company shall be entitled to postpone a Demand
Registration and to require the Holders of Registrable Securities to discontinue
the disposition of their securities covered by a Shelf Registration during any
Blackout Period (as defined below) (i) if the Board of Directors of the Company
determines in good faith that effecting such a registration or continuing such
disposition at such time would have a material adverse effect upon a proposed
sale of all (or substantially all) of the assets of the Company or a merger,
reorganization, recapitalization or similar current transaction materially
affecting the capital structure or equity ownership of the Company, or (ii) if
the Company is in possession of material information which the Board of
Directors of the Company determines in good faith it is not in the best
interests of the Company to disclose in a registration statement at such time,
or (iii) if the Company has delivered a notice pursuant to Section 2.2 that it
is undertaking an underwritten offering in which the Holders will be entitled to
exercise their incidental registration rights; provided, however, that the
Company may only delay a Demand Registration not constituting a Shelf
Registration pursuant to this Section 2.6 by delivery of a Blackout Notice (as
defined below) within 30 days of delivery of the request for such Registration
under Section 2.1 and may delay a Demand Registration and require the Holders of
Registrable Securities to discontinue the disposition of their securities
covered by a Shelf Registration only for a reasonable period of time not to
exceed 75 days (or such earlier time as such transaction is consummated or no
longer proposed or the material information has been made public) (the "Blackout
Period"). There shall be at least 60 consecutive days during which there is no
Blackout Period following any Blackout Period, and the aggregate Blackout
Periods during any 12-month period shall not exceed 150 days. The Company shall
promptly notify the Holders in writing (a "Blackout Notice") of any decision to
postpone a Demand Registration or to discontinue sales of Registrable Securities
covered by a Shelf Registration pursuant to this Section 2.6 and shall include a
general statement of the reason for such postponement, an approximation of the
anticipated delay and an undertaking by the Company promptly to notify the
Holders as soon as a Demand Registration may be effected or sales of Registrable
Securities covered by a Shelf Registration may resume. In making any such
determination to initiate or terminate a Blackout Period, the Company shall not
be required to consult with or obtain the consent of any Holder, and any such
determination shall be the Company's sole responsibility. Each Holder shall
treat all notices received from the Company pursuant to this Section 2.6 in the
strictest confidence and shall not disseminate such information. If the Company
shall postpone the filing of a Demand Registration Statement for more than 15
days, the Majority Holders of Registrable Securities who were to participate
therein shall have the right to withdraw the request for registration. Any such
withdrawal shall be made by giving written notice to the Company within 30 days
after receipt of the Blackout Notice. Such withdrawn registration request shall
not be treated as a Demand Registration effected pursuant to Section 2.1 (and
shall not be counted towards the number of Demand Registrations effected), and
the Company shall pay all Registration Expenses in connection therewith.
3. HOLDBACK ARRANGEMENTS.
3.1 Restrictions on Sale by Holders of Registrable Securities. Each
Holder of Registrable Securities agrees, by acquisition of such Registrable
Securities, if timely requested in writing by the sole or lead managing
Underwriter in an Underwritten Offering of any Registrable Securities, not make
any short sale of, loan, grant any option for the purchase of or effect any
public sale or distribution, including a sale pursuant to Rule 144 (or any
successor provision having similar effect) under the Securities Act of any
Registrable Securities or any other equity security of the Company (or any
security convertible into or exchangeable or exercisable for any equity security
of the Company) (except as part of such underwritten registration), during the
nine business days (as such term is used in Regulation M under the Exchange Act)
prior to, and during the time period reasonably requested by the sole or lead
managing Underwriter not to exceed 90 days beginning on the effective date of
the applicable Registration Statement.
3.2 Restrictions on Sale by the Company and Others. The Company agrees
that (i) if timely requested in writing by the sole or lead managing Underwriter
in an Underwritten Offering of any Registrable Securities, it will not make any
short sale of, loan, grant any option for the purchase of or effect any public
sale or distribution of any of the Company's equity securities (or any security
convertible into or exchangeable or exercisable for any of the Company's equity
securities) during the nine business days (as such term is used in Regulation M
under the Exchange Act) prior to, and during the time period reasonably
requested by the sole or lead managing Underwriter not to exceed 90 days,
beginning on the effective date of the applicable Registration Statement (except
as part of such underwritten registration or pursuant to registrations on Forms
S-4 or S-8 or any successor form to such forms), and (ii) it will use its best
efforts to cause each holder of equity securities (or any security convertible
into or exchangeable or exercisable for any of its equity securities) of the
Company purchased from the Company at any time after the date of this Agreement
(other than in a registered public offering) that is a director, executive
officer or a holder of 5% or more of the Common Shares to so agree.
4. REGISTRATION PROCEDURES.
4.1 Obligations of the Company. Whenever the Company is required to
effect the registration of Registrable Securities under the Securities Act
pursuant to Section 2 of this Agreement, the Company shall, as expeditiously as
possible:
(a) prepare and file with the SEC (promptly, and in any event
within 30 days after receipt of a request to register Registrable Securities)
the requisite Registration Statement to effect such registration, which
Registration Statement shall comply as to form in all material respects with the
requirements of the applicable form and include all financial statements
required by the SEC to be filed therewith, and the Company shall use its best
efforts to cause such Registration Statement to become effective (provided, that
the Company may discontinue or delay any registration of its securities that are
not Registrable Securities, and, under the circumstances specified in Section
2.2 or 2.6, its securities that are Registrable Securities); provided, however,
that before filing a Registration Statement or Prospectus or any amendments or
supplements thereto, or comparable statements under securities or blue sky laws
of any jurisdiction, the Company shall (i) provide Holders' Counsel and any
other Inspector with an adequate and appropriate opportunity to participate in
the preparation of such Registration Statement and each Prospectus included
therein (and each amendment or supplement thereto or comparable statement) to be
filed with the SEC, which documents shall be subject to the review and comment
of Holders' Counsel, and (ii) not file any such Registration Statement or
Prospectus (or amendment or supplement thereto or comparable statement) with the
SEC to which Holder's Counsel, any selling Holder or any other Inspector shall
have reasonably objected on the grounds that such filing does not comply in all
material respects with the requirements of the Securities Act or of the rules or
regulations thereunder;
(b) prepare and file with the SEC such amendments and
supplements to such Registration Statement and the Prospectus used in connection
therewith as may be necessary (i) to keep such Registration Statement effective,
and (ii) to comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities covered by such Registration
Statement, in each case until such time as all of such Registrable Securities
have been disposed of in accordance with the intended methods of disposition by
the seller(s) thereof set forth in such Registration Statement; provided, that
except with respect to any Shelf Registration, such period need not extend
beyond nine months after the effective date of the Registration Statement; and
provided further, that with respect to any Shelf Registration, such period need
not extend beyond the time period provided in Section 2.3, and which periods, in
any event, shall terminate when all Registrable Securities covered by such
Registration Statement have been sold (but not before the expiration of the 90
day period referred to in Section 4(3) of the Securities Act and Rule 174
thereunder, if applicable);
(c) furnish, without charge, to each selling Holder of such
Registrable Securities and each Underwriter, if any, of the securities covered
by such Registration Statement, such number of copies of such Registration
Statement, each amendment and supplement thereto (in each case including all
exhibits), and the Prospectus included in such Registration Statement (including
each preliminary Prospectus) in conformity with the requirements of the
Securities Act, and other documents, as such selling Holder and Underwriter may
reasonably request in order to facilitate the public sale or other disposition
of the Registrable Securities owned by such selling Holder (the Company hereby
consenting to the use in accordance with applicable law of each such
Registration Statement (or amendment or post-effective amendment thereto) and
each such Prospectus (or preliminary prospectus or supplement thereto) by each
such selling Holder of Registrable Securities and the Underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered by
such Registration Statement or Prospectus);
(d) prior to any public offering of Registrable Securities,
use its best efforts to register or qualify all Registrable Securities and other
securities covered by such Registration Statement under such other securities or
blue sky laws of such jurisdictions as any selling Holder of Registrable
Securities covered by such Registration Statement or the sole or lead managing
Underwriter, if any, may reasonably request to enable such selling Holder to
consummate the disposition in such jurisdictions of the Registrable Securities
owned by such selling Holder and to continue such registration or qualification
in effect in each such jurisdiction for as long as such Registration Statement
remains in effect (including through new filings or amendments or renewals), and
do any and all other acts and things which may be necessary or advisable to
enable any such selling Holder to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such selling Holder;
provided, however, that the Company shall not be required to (i) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 4.1(d), (ii) subject itself to taxation
in any such jurisdiction, or (iii) consent to general service of process in any
such jurisdiction;
(e) use its best efforts to obtain all other approvals,
consents, exemptions or authorizations from such governmental agencies or
authorities as may be necessary to enable the selling Holders of such
Registrable Securities to consummate the disposition of such Registrable
Securities;
(f) promptly notify Holders' Counsel, each Holder of
Registrable Securities covered by such Registration Statement and the sole or
lead managing Underwriter, if any: (i) when the Registration Statement, any
pre-effective amendment, the Prospectus or any prospectus supplement related
thereto or post-effective amendment to the Registration Statement has been filed
and, with respect to the Registration Statement or any post-effective amendment,
when the same has become effective, (ii) of any request by the SEC or any state
securities or blue sky authority for amendments or supplements to the
Registration Statement or the Prospectus related thereto or for additional
information, (iii) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation or threat of any
proceedings for that purpose, (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification of any
Registrable Securities for sale under the securities or blue sky laws of any
jurisdiction or the initiation of any proceeding for such purpose, (v) of the
existence of any fact of which the Company becomes aware or the happening of any
event which results in (A) the Registration Statement containing an untrue
statement of a material fact or omitting to state a material fact required to be
stated therein or necessary to make any statements therein not misleading, or
(B) the Prospectus included in such Registration Statement containing an untrue
statement of a material fact or omitting to state a material fact required to be
stated therein or necessary to make any statements therein, in the light of the
circumstances under which they were made, not misleading, (vi) if at any time
the representations and warranties contemplated by Section 2.5(b) cease to be
true and correct in all material respects, and (vii) of the Company's reasonable
determination that a post-effective amendment to a Registration Statement would
be appropriate or that there exists circumstances not yet disclosed to the
public which make further sales under such Registration Statement inadvisable
pending such disclosure and post-effective amendment; and, if the notification
relates to an event described in any of the clauses (ii) through (vii) of this
Section 4.1(f), the Company shall promptly prepare a supplement or
post-effective amendment to such Registration Statement or related Prospectus or
any document incorporated therein by reference or file any other required
document so that (1) such Registration Statement shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(2) as thereafter delivered to the purchasers of the Registrable Securities
being sold thereunder, such Prospectus shall not include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein in the light of the circumstances
under which they were made not misleading (and shall furnish to each such Holder
and each Underwriter, if any, a reasonable number of copies of such Prospectus
so supplemented or amended); and if the notification relates to an event
described in clause (iii) of this Section 4.1(f), the Company shall take all
reasonable action required to prevent the entry of such stop order or to remove
it if entered;
(g) make available for inspection by any selling Holder of
Registrable Securities, any sole or lead managing Underwriter participating in
any disposition pursuant to such Registration Statement, Holders' Counsel and
any attorney, accountant or other agent retained by any such seller or any
Underwriter (each, an "Inspector" and, collectively, the "Inspectors"), all
financial and other records, pertinent corporate documents and properties of the
Company and any subsidiaries thereof as may be in existence at such time
(collectively, the "Records") as shall be necessary, in the opinion of such
Holders' and such Underwriters' respective counsel, to enable them to exercise
their due diligence responsibility and to conduct a reasonable investigation
within the meaning of the Securities Act, and cause the Company's and any
subsidiaries' officers, directors and employees, and the independent public
accountants of the Company, to supply all information reasonably requested by
any such Inspectors in connection with such Registration Statement;
(h) obtain an opinion from the Company's counsel and a "cold
comfort" letter from the Company's independent public accountants who have
certified the Company's financial statements included or incorporated by
reference in such Registration Statement, in each case dated the effective date
of such Registration Statement (and if such registration involves an
Underwritten Offering, dated the date of the closing under the underwriting
agreement), in customary form and covering such matters as are customarily
covered by such opinions and "cold comfort" letters delivered to underwriters in
underwritten public offerings, which opinion and letter shall be reasonably
satisfactory to the sole or lead managing Underwriter, if any, and to the
Majority Holders of the Registration, and furnish to each Holder participating
in the offering and to each Underwriter, if any, a copy of such opinion and
letter addressed to such Holder (in the case of the opinion) and Underwriter (in
the case of the opinion and the "cold comfort" letter);
(i) provide a CUSIP number for all Registrable Securities and
provide and cause to be maintained a transfer agent and registrar for all such
Registrable Securities covered by such Registration Statement not later than the
effectiveness of such Registration Statement;
(j) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC and any other governmental agency or
authority having jurisdiction over the offering, and make available to its
security holders, as soon as reasonably practicable but no later than 90 days
after the end of any 12-month period, an earnings statement (i) commencing at
the end of any month in which Registrable Securities are sold to Underwriters in
an Underwritten Offering and (ii) commencing with the first day of the Company's
calendar month next succeeding each sale of Registrable Securities after the
effective date of a Registration Statement, which statement shall cover such
12-month periods, in a manner which satisfies the provisions of Section 11(a) of
the Securities Act and Rule 158 thereunder;
(k) if so requested by the Majority Holders of the
Registration and if at such time the Company is not engaged in a continuous
offering (or follow-on continuous offering) of Common Shares, use its best
efforts to cause all such Registrable Securities to be listed (i) on each
national securities exchange on which the Company's securities are then listed
or (ii) if securities of the Company are not at the time listed on any national
securities exchange (or if the listing of Registrable Securities is not
permitted under the rules of each national securities exchange on which the
Company's securities are then listed), on a national securities exchange or
over-the-counter-market designated (subject to the Company's approval, which
shall not be unreasonably withheld) by the Majority Holders of the Registration;
(l) keep each selling Holder of Registrable Securities advised
in writing as to the initiation and progress of any registration under Section 2
hereunder;
(m) enter into and perform customary agreements (including, if
applicable, an underwriting agreement in customary form) and provide officers'
certificates and other customary closing documents;
(n) cooperate with each selling Holder of Registrable
Securities and each Underwriter participating in the disposition of such
Registrable Securities and their respective counsel in connection with any
filings required to be made with the NASD and make reasonably available its
employees and personnel and otherwise provide reasonable assistance to the
Underwriters (taking into account the needs of the Company's businesses and the
requirements of the marketing process) in the marketing of Registrable
Securities in any Underwritten Offering;
(o) furnish to each Holder participating in the offering and
the sole or lead managing Underwriter, if any, without charge, at least one
manually-signed copy of the Registration Statement and any post-effective
amendments thereto, including financial statements and schedules, all documents
incorporated therein by reference and all exhibits (including those deemed to be
incorporated by reference);
(p) cooperate with the selling Holders of Registrable
Securities and the sole or lead managing Underwriter, if any, to facilitate the
timely preparation and delivery of certificates not bearing any restrictive
legends representing the Registrable Securities to be sold, and cause such
Registrable Securities to be issued in such denominations and registered in such
names in accordance with the underwriting agreement prior to any sale of
Registrable Securities to the Underwriters or, if not an Underwritten Offering,
in accordance with the instructions of the selling Holders of Registrable
Securities at least three business days prior to any sale of Registrable
Securities;
(q) if requested by the sole or lead managing Underwriter or
any selling Holder of Registrable Securities, immediately incorporate in a
prospectus supplement or post-effective amendment such information concerning
such Holder of Registrable Securities, the Underwriters or the intended method
of distribution as the sole or lead managing Underwriter or the selling Holder
of Registrable Securities reasonably requests to be included therein and as is
appropriate in the reasonable judgment of the Company, including, without
limitation, information with respect to the number of shares of the Registrable
Securities being sold to the Underwriters, the purchase price being paid
therefor by such Underwriters and with respect to any other terms of the
Underwritten Offering of the Registrable Securities to be sold in such offering;
make all required filings of such Prospectus supplement or post-effective
amendment as soon as notified of the matters to be incorporated in such
Prospectus supplement or post-effective amendment; and supplement or make
amendments to any Registration Statement if requested by the sole or lead
managing Underwriter of such Registrable Securities; and
(r) use its best efforts to take all other steps necessary to
expedite or facilitate the registration and disposition of the Registrable
Securities contemplated hereby.
4.2 Seller Information. The Company may require each selling Holder of
Registrable Securities as to which any registration is being effected to furnish
to the Company such information regarding such Holder, such Holder's Registrable
Securities and such Holder's intended method of disposition as the Company may
from time to time reasonably request in writing; provided that such information
shall be used only in connection with such registration.
If any Registration Statement or comparable statement under
"blue sky" laws refers to any Holder by name or otherwise as the Holder of any
securities of the Company, then such Holder shall have the right to require (i)
the insertion therein of language, in form and substance reasonably satisfactory
to such holder and the Company, to the effect that the holding by such Holder of
such securities is not to be construed as a recommendation by such Holder of the
investment quality of the Company's securities covered thereby and that such
holding does not imply that such Holder will assist in meeting any future
financial requirements of the Company, and (ii) in the event that such reference
to such Holder by name or otherwise is not in the judgment of the Company, as
advised by counsel, required by the Securities Act or any similar federal
statute or any state "blue sky" or securities law then in force, the deletion of
the reference to such Holder.
4.3 Notice to Discontinue. Each Holder of Registrable Securities agrees
by acquisition of such Registrable Securities that, upon receipt of any notice
from the Company of the happening of any event of the kind described in Section
4.1(f)(ii) through (vii), such Holder shall forthwith discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 4.1(f) and, if so
directed by the Company, such Holder shall deliver to the Company (at the
Company's expense) all copies, other than permanent file copies, then in such
Holder's possession of the Prospectus covering such Registrable Securities which
is current at the time of receipt of such notice. If the Company shall give any
such notice, the Company shall extend the period during which such Registration
Statement shall be maintained effective pursuant to this Agreement (including,
without limitation, the period referred to in Section 4.1(b)) by the number of
days during the period from and including the date of the giving of such notice
pursuant to Section 4.1(f) to and including the date when the Holder shall have
received the copies of the supplemented or amended prospectus contemplated by
and meeting the requirements of Section 4.1(f).
5. INDEMNIFICATION; CONTRIBUTION.
5.1 Indemnification by the Company. The Company agrees to indemnify and
hold harmless, to the fullest extent permitted by law, each Holder of
Registrable Securities, its officers, directors, partners, members,
shareholders, employees, Affiliates and agents (collectively, "Agents") and each
Person who controls such Holder (within the meaning of the Securities Act) and
its Agents, with respect to each registration which has been effected pursuant
to this Agreement, against any and all losses, claims, damages or liabilities,
joint or several, actions or proceedings (whether commenced or threatened) in
respect thereof, and expenses (as incurred or suffered and including, but not
limited to, any and all expenses incurred in investigating, preparing or
defending any litigation or proceeding, whether commenced or threatened, and the
reasonable fees, disbursements and other charges of legal counsel) in respect
thereof (collectively, "Claims"), insofar as such Claims arise out of or are
based upon any untrue or alleged untrue statement of a material fact contained
in any Registration Statement or Prospectus (including any preliminary, final or
summary prospectus and any amendment or supplement thereto) related to any such
registration or any omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, provided, however, that the Company will not be liable in any such
case to the extent that any such Claims arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact or omission or
alleged omission of a material fact so made in reliance upon and in conformity
with written information furnished to the Company by such Holder specifically
for use therein. The Company shall also indemnify any Underwriters of the
Registrable Securities, their Agents and each Person who controls any such
Underwriter (within the meaning of the Securities Act) to the same extent as
provided above with respect to the indemnification of the Holders of Registrable
Securities. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of any Person who may be entitled to
indemnification pursuant to this Section 5 and shall survive the transfer of
securities by such Holder or Underwriter.
5.2 Indemnification by Holders. Each Holder, if Registrable Securities
held by it are included in the securities as to which a registration is being
effected, agrees to, severally and not jointly, indemnify and hold harmless, to
the fullest extent permitted by law, the Company, its directors and officers,
each other Person who participates as an Underwriter in the offering or sale of
such securities and its Agents and each Person who controls the Company or any
such Underwriter (within the meaning of the Securities Act) and its Agents,
against any and all Claims, insofar as such Claims arise out of or are based
upon any untrue or alleged untrue statement of a material fact contained in any
Registration Statement or Prospectus (including any preliminary, final or
summary prospectus and any amendment or supplement thereto) related to such
registration, or any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Holder specifically for use therein; provided, however, that the
aggregate amount which any such Holder shall be required to pay pursuant to this
Section 5.2 shall in no event be greater than the amount of the net proceeds
received by such Holder upon the sale of the Registrable Securities pursuant to
the Registration Statement giving rise to such Claims less all amounts
previously paid by such Holder with respect to any such Claims. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such indemnified party and shall survive the transfer of such
securities by such Holder or Underwriter.
5.3 Conduct of Indemnification Proceedings. Promptly after receipt by
an indemnified party of notice of any Claim or the commencement of any action or
proceeding involving a Claim under this Section 5, such indemnified party shall,
if a claim in respect thereof is to be made against the indemnifying party
pursuant to Section 5, (i) notify the indemnifying party in writing of the Claim
or the commencement of such action or proceeding; provided, that the failure of
any indemnified party to provide such notice shall not relieve the indemnifying
party of its obligations under this Section 5, except to the extent the
indemnifying party is materially and actually prejudiced thereby, and shall not
relieve the indemnifying party from any liability which it may have to any
indemnified party otherwise than under this Section 5, and (ii) permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party; provided, however, that any indemnified
party shall have the right to employ separate counsel and to participate in the
defense of such claim, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (A) the indemnifying party has agreed
in writing to pay such fees and expenses, (B) the indemnifying party shall have
failed to assume the defense of such claim and employ counsel reasonably
satisfactory to such indemnified party within 10 days after receiving notice
from such indemnified party that the indemnified party believes it has failed to
do so, (C) in the reasonable judgment of any such indemnified party, based upon
advice of counsel, a conflict of interest may exist between such indemnified
party and the indemnifying party with respect to such claims (in which case, if
the indemnified party notifies the indemnifying party in writing that it elects
to employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such claim
on behalf of such indemnified party) or (D) such indemnified party is a
defendant in an action or proceeding which is also brought against the
indemnifying party and reasonably shall have concluded that there may be one or
more legal defenses available to such indemnified party which are not available
to the indemnifying party. No indemnifying party shall be liable for any
settlement of any such claim or action effected without its written consent,
which consent shall not be unreasonably withheld. In addition, without the
consent of the indemnified party (which consent shall not be unreasonably
withheld), no indemnifying party shall be permitted to consent to entry of any
judgment with respect to, or to effect the settlement or compromise of any
pending or threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified party is an
actual or potential party to such action or claim), unless such settlement,
compromise or judgment (1) includes an unconditional release of the indemnified
party from all liability arising out of such action or claim, (2) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of any indemnified party, and (3) does not provide for any
action on the part of any party other than the payment of money damages which is
to be paid in full by the indemnifying party.
5.4 Contribution. If the indemnification provided for in Section 5.1 or
5.2 from the indemnifying party for any reason is unavailable to (other than by
reason of exceptions provided therein), or is insufficient to hold harmless, an
indemnified party hereunder in respect of any Claim, then the indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such Claim in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party, on the one hand, and the indemnified party, on the other
hand, in connection with the actions which resulted in such Claim, as well as
any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action. If, however, the foregoing allocation is not permitted by applicable
law, then each indemnifying party shall contribute to the amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not
only such relative faults but also the relative benefits of the indemnifying
party and the indemnified party as well as any other relevant equitable
considerations.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5.4 were determined by pro
rata allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by a party as a result of any Claim
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth in Section 5.3, any legal or other fees,
costs or expenses reasonably incurred by such party in connection with any
investigation or proceeding. Notwithstanding anything in this Section 5.4 to the
contrary, no indemnifying party (other than the Company) shall be required
pursuant to this Section 5.4 to contribute any amount in excess of the net
proceeds received by such indemnifying party from the sale of the Registrable
Securities pursuant to the Registration Statement giving rise to such Claims,
less all amounts previously paid by such indemnifying party with respect to such
Claims. No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
5.5 Other Indemnification. Indemnification similar to that specified in
the preceding Sections 5.1 and 5.2 (with appropriate modifications) shall be
given by the Company and each selling Holder of Registrable Securities with
respect to any required registration or other qualification of securities under
any Federal or state law or regulation of any governmental authority, other than
the Securities Act. The indemnity agreements contained herein shall be in
addition to any other rights to indemnification or contribution which any
indemnified party may have pursuant to law or contract.
5.6 Indemnification Payments. The indemnification and contribution
required by this Section 5 shall be made by periodic payments of the amount
thereof during the course of any investigation or defense, as and when bills are
received or any expense, loss, damage or liability is incurred.
6. General.
6.1 Adjustments Affecting Registrable Securities. The Company agrees
that it shall not effect or permit to occur any combination or subdivision of
shares which would adversely affect the ability of the Holder of any Registrable
Securities to include such Registrable Securities in any registration
contemplated by this Agreement or the marketability of such Registrable
Securities in any such registration.
6.2 Registration Rights to Others. The Company has not previously
entered into an agreement with respect to its securities granting any
registration rights to any Person. If the Company shall at any time hereafter
provide to any holder of any securities of the Company rights with respect to
the registration of such securities under the Securities Act, (i) such rights
shall not be in conflict with or adversely affect any of the rights provided in
this Agreement to the Holders and (ii) if such rights are provided on terms or
conditions more favorable to such holder than the terms and conditions provided
in this Agreement, the Company shall provide (by way of amendment to this
Agreement or otherwise) such more favorable terms or conditions to the Holders.
6.3 Availability of Information; Rule 144; Rule 144A; Other Exemptions.
So long as the Company shall not have filed a registration statement pursuant to
Section 12 of the Exchange Act or a registration statement pursuant to the
requirements of the Securities Act, the Company shall, at any time and from time
to time, upon the request of any Holder of Registrable Securities and upon the
request of any Person designated by such Holder as a prospective purchaser of
any Registrable Securities, furnish in writing to such Holder or such
prospective purchaser, as the case may be, a statement as of a date not earlier
than 12 months prior to the date of such request of the nature of the business
of the Company and the products and services it offers and copies of the
Company's most recent balance sheet and profit and loss and retained earnings
statements, together with similar financial statements for such part of the two
preceding fiscal years as the Company shall have been in operation, all such
financial statements to be audited to the extent audited statements are
reasonable available, provided that, in any event the most recent financial
statements so furnished shall include a balance sheet as of a date less than 16
months prior to the date of such request, statements of profit and loss and
retained earnings for the 12 months preceding the date of such balance sheet,
and, if such balance sheet is not as of a date less than 6 months prior to the
date of such request, additional statements of profit and loss and retained
earnings for the period from the date of such balance sheet to a date less than
6 months prior to the date of such request. If the Company shall have filed a
registration statement pursuant to the requirements of Section 12 of the
Exchange Act or a registration statement pursuant to the requirements of the
Securities Act, the Company covenants that it shall timely file any reports
required to be filed by it under the Securities Act or the Exchange Act
(including, but not limited to, the reports under Sections 13 and 15(d) of the
Exchange Act referred to in subparagraph (c) of Rule 144 under the Securities
Act), and that it shall take such further action as any Holder of Registrable
Securities may reasonably request, all to the extent required from time to time
to enable such Holder to sell Registrable Securities without registration under
the Securities Act within the limitation of the exemptions provided by (i) Rule
144 and Rule 144A under the Securities Act, as such rules may be amended from
time to time, or (ii) any other rule or regulation now existing or hereafter
adopted by the SEC. Upon the request of any Holder of Registrable Securities,
the Company shall deliver to such Holder a written statement as to whether it
has complied with such requirements.
6.4 Amendments and Waivers. The provisions of this Agreement may not be
amended, modified, supplemented or terminated, and waivers or consents to
departures from the provisions hereof may not be given, without the written
consent of the Company and the Holders holding more than 50% of the Registrable
Securities then outstanding; provided, however, that no such amendment,
modification, supplement, waiver or consent to departure shall reduce the
aforesaid percentage of Registrable Securities without the written consent of
all of the Holders of Registrable Securities; and provided further, that nothing
herein shall prohibit any amendment, modification, supplement, termination,
waiver or consent to departure the effect of which is limited only to those
Holders who have agreed to such amendment, modification, supplement,
termination, waiver or consent to departure.
6.5 Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, telecopier, any
courier guaranteeing overnight delivery or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to the applicable
party at the address set forth below or such other address as may hereafter be
designated in writing by such party to the other parties in accordance with the
provisions of this Section:
(i) If to the Company, to:
CNL Hospitality Properties, Inc.
CNL Group
400 E. South Street
Orlando, Florida 32801
Attn: C. Brian Strickland
Telecopy: (407) 428-9370
Telephone: (407) 650-1084
With a copy to:
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: Thomas H. McCormick
Telecopy: (202) 663-8007
Telephone: (202) 663-8000
(ii) If to the Initial Holder, to:
Five Arrows Realty Securities II L.L.C.
c/o Rothschild Realty, Inc.
1251 Avenue of the Americas
51st Floor
New York, New York 10026
Attn: Matthew W. Kaplan
Telecopy: (212) 403-3520
Telephone: (2120 403-3515
With a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Attn: Andre Weiss
Telecopy: (212) 593-5955
Telephone: (212) 756-2000
(iii) If to any subsequent Holder, to the address of such
Person set forth in the records of the Company.
All notices, communications, or other documents required to be
given hereunder, shall be in writing and shall be given either personally, by
telecopy (followed by first class U.S. mail), by Federal Express or other
reputable express delivery service for overnight delivery, or by mailing the
same in a sealed envelope, first-class mail, postage prepaid and either
certified or registered, return receipt requested. All such notices,
communications and documents shall be deemed to have been given on the date of
delivery, if given personally, by telecopy, or by overnight courier, or two days
after the date of mailing, if mailed.
6.6 Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective heirs, successors
and permitted assigns (including any permitted transferee of Registrable
Securities). Any Holder may assign to any permitted (as determined under the
Subscription Agreement and the Hotel Investors Subscription Agreement)
transferee of its Registrable Securities (other than a transferee that acquires
such Registrable Securities in a registered public offering or pursuant to a
sale under Rule 144 of the Securities Act (or any successor rule)), its rights
and obligations under this Agreement; provided, however, if any permitted
transferee shall take and hold Registrable Securities, such transferee shall
promptly notify the Company and by taking and holding such Registrable
Securities such permitted transferee shall automatically be entitled to receive
the benefits of and be conclusively deemed to have agreed to be bound by and to
perform all of the terms and provisions of this Agreement as if it were a party
hereto (and shall, for all purposes, be deemed a Holder under this Agreement).
If the Company shall so request, any heir, successor or permitted assign
(including any permitted transferee) shall agree in writing to acquire and hold
the Registrable Securities subject to all of the terms hereof. For purposes of
this Agreement, "successor" for any entity other than a natural person shall
mean a successor to such entity as a result of such entity's merger,
consolidation, sale of substantially all of its assets, or similar transaction.
Except as provided above or otherwise permitted by this Agreement, neither this
Agreement nor any right, remedy, obligation or liability arising hereunder or by
reason hereof shall be assignable by any Holder or by the Company without the
consent of the other parties hereto.
6.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which, when so executed and delivered, shall be deemed to
be an original, but all of which counterparts, taken together, shall constitute
one and the same instrument.
6.8 Descriptive Headings, Etc. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning of terms contained herein. Unless the context of this Agreement
otherwise requires: (1) words of any gender shall be deemed to include each
other gender; (2) words using the singular or plural number shall also include
the plural or singular number, respectively; (3) the words "hereof", "herein"
and "hereunder" and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement, and Section and paragraph references are to the Sections and
paragraphs of this Agreement unless otherwise specified; (4) the word
"including" and words of similar import when used in this Agreement shall mean
"including, without limitation," unless otherwise specified; (5) "or" is not
exclusive; and (6) provisions apply to successive events and transactions.
6.9 Severability. In the event that any one or more of the provisions,
paragraphs, words, clauses, phrases or sentences contained herein, or the
application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision, paragraph, word, clause, phrase or
sentence in every other respect and of the other remaining provisions,
paragraphs, words, clauses, phrases or sentences hereof shall not be in any way
impaired, it being intended that all rights, powers and privileges of the
parties hereto shall be enforceable to the fullest extent permitted by law.
6.10 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Maryland (without giving effect to
the conflict of laws principles thereof).
6.11 Remedies; Specific Performance. The parties hereto acknowledge
that money damages would not be an adequate remedy at law if any party fails to
perform in any material respect any of its obligations hereunder, and
accordingly agree that each party, in addition to any other remedy to which it
may be entitled at law or in equity, shall be entitled to seek to compel
specific performance of the obligations of any other party under this Agreement,
without the posting of any bond, in accordance with the terms and conditions of
this Agreement in any court of the United States or any State thereof having
jurisdiction, and if any action should be brought in equity to enforce any of
the provisions of this Agreement, none of the parties hereto shall raise the
defense that there is an adequate remedy at law. Except as otherwise provided by
law, a delay or omission by a party hereto in exercising any right or remedy
accruing upon any such breach shall not impair the right or remedy or constitute
a waiver of or acquiescence in any such breach. No remedy shall be exclusive of
any other remedy.All available remedies shall be cumulative.
6.12 Entire Agreement. This Agreement, the Subscription Agreement and
the Hotel Investors Subscription Agreement (collectively, the "Other
Agreements") are intended by the parties as a final expression of their
agreement and intended to be a complete and exclusive statement of the agreement
and understanding of the parties hereto in respect of the subject matter
contained herein. There are no restrictions, promises, representations,
warranties, covenants or undertakings relating to such subject matter, other
than those set forth or referred to herein or in the Other Agreements. This
Agreement and the Other Agreements supersede all prior agreements and
understandings between the Company and the other parties to this Agreement with
respect to such subject matter.
6.13 Nominees for Beneficial Owners. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election in writing delivered to the
Company, be treated as the holder of such Registrable Securities for purposes of
any request or other action by any holder or holders of Registrable Securities
pursuant to this Agreement or any determination of any number or percentage of
shares of Registrable Securities held by any holder or holders of Registrable
Securities contemplated by this Agreement. If the beneficial owner of any
Registrable Securities so elects, the Company may require assurances reasonably
satisfactory to it of such owner's beneficial ownership of such Registrable
Securities.
6.14 Consent to Jurisdiction. Each party to this Agreement hereby
irrevocably and unconditionally agrees that any legal action, suit or proceeding
arising out of or relating to this Agreement or any agreements or transactions
contemplated hereby may be brought in any federal court of the Southern District
of New York or any state court located in New York County, State of New York,
and hereby irrevocably and unconditionally expressly submits to the personal
jurisdiction and venue of such courts for the purposes thereof and hereby
irrevocably and unconditionally waives any claim (by way of motion, as a defense
or otherwise) of improper venue, that it is not subject personally to the
jurisdiction of such court, that such courts are an inconvenient forum or that
this Agreement or the subject matter may not be enforced in or by such court.
Each party hereby irrevocably submit to the exclusive jurisdiction of the
aforementioned courts in such action, suit or proceeding. Each party hereby
irrevocably and unconditionally consents to the service of process of any of the
aforementioned courts in any such action, suit or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to the address
set forth or provided for in Section 6.5 of this Agreement, such service to
become effective 10 days after such mailing. Nothing herein contained shall be
deemed to affect the right of any party to serve process in any manner permitted
by law or commence legal proceedings or otherwise proceed against any other
party in any other jurisdiction to enforce judgments obtained in any action,
suit or proceeding brought pursuant to this Section.
6.15 Further Assurances. Each party hereto shall do and perform or
cause to be done and performed all such further acts and things and shall
execute and deliver all such other agreements, certificates, instruments and
documents as any other party hereto reasonably may request in order to carry out
the intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.
6.16 No Inconsistent Agreements. The Company will not hereafter enter
into any agreement which is inconsistent with the rights granted to the Holders
in this Agreement.
6.17 Construction. The Company and the Initial Holder acknowledge that
each of them has had the benefit of legal counsel of its own choice and has been
afforded an opportunity to review this Agreement with its legal counsel and that
this Agreement shall be construed as if jointly drafted by the Company and the
Holders.
[The remainder of this page has been intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
CNL HOSPITALITY PROPERTIES, INC.
By: /s/ James M. Seneff, Jr.
------------------------
Name:James M. Seneff, Jr.
Title:Chairman and Chief Executive
Officer
FIVE ARROWS REALTY SECURITIES II L.L.C.
By: /s/ Matthew W. Kaplan
---------------------
Name:Matthew W. Kaplan
Title:Manager
<PAGE>
-30-
Schedule 2.1(d)
Underwriters Choice
-------------------
AG Edwards
Allen & Company Incorporated
BancBoston Robertson Stephens Inc.
Bear Stearns & Co. Inc.
BT Alex. Brown Incorporated
CS First Boston Corporation
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman Sachs & Co.
ING Barings Furman Selz L.L.C.
Legg Mason
JP Morgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
Nationsbanc Montgomery Securities L.L.C.
Paine Webber Incorporated
Salomon Smith Barney Inc.
i
EXHIBIT 23.1
Consent of PricewaterhouseCoopers LLP,
Certified Public Accountants,
dated March 12, 1999
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 (File
No. 333-9943) of our report dated January 19, 1999 on our audit of the financial
statements of CNL Hospitality Properties, Inc. We also consent to the reference
to our Firm under the caption "Experts".
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orlando, Florida
March 12, 1999
EXHIBIT 23.3
Consent of Arthur Andersen LLP,
Certified Public Accountants,
dated March 12, 1999
<PAGE>
CONSENT OF THE INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 27, 1998 with respect to the financial statements of Buckhead
Residence Associates, L.L.C. and our report dated February 27, 1998 with respect
to the financial statements of Gwinnett Residence Associates, L.L.C. included in
or made part of this Registration Statement (File No. 333-9943.)
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
March 12, 1999
