<PAGE>
As filed with the Securities and Exchange Commission on December 19, 1997
Registration No. 333-___
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
CRF Lodging Company, L.P.
(Exact name of registrant as specified in its governing instrument)
<TABLE>
<S> <C> <C>
Delaware 7011 52-2067660
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
----------------------
Robert E. Parsons, Jr.
President
CRF Lodging Company, L.P.
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
----------------------
Copies to:
J. Warren Gorrell, Jr., Esq.
Bruce W. Gilchrist, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
(202) 637-5600
----------------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
----------------------
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CALCULATION OF REGISTRATION FEE
=============================================================================================================================
Proposed Maximum Proposed Maximum
Title Of Each Class Of Amount Offering Price Per Aggregate Offering Amount Of
Securities To Be Registered To Be Registered Unit(1) Price(1) Registration Fee(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units of Limited Partnership Interest 22,500,000 (2) $20.00 $450,000,000 $132,750
- -----------------------------------------------------------------------------------------------------------------------------
Notes $ N/A $______(3) $ -0-(3)
=============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) promulgated under the Securities Act of 1933, as
amended.
(2) Represents the maximum number of Units issuable upon consummation of the
transactions described herein.
(3) The maximum principal amount of the Notes that will be issued is $____.
Investors whose securities are exchanged or canceled will receive Units or
Notes. To the extent Notes are issued in lieu of Units, the proposed
maximum aggregate offering price of the Units will be proportionately
reduced. Accordingly, no further fee is due for the registration of the
Notes.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a) may determine.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+ REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+ SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+ OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+ BECOMES EFFECTIVE. THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT SHALL NOT +
+ CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL +
+ THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, +
+ SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR +
+ QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
DATED DECEMBER 22, 1997
PROSPECTUS/CONSENT SOLICITATION STATEMENT
CRF Lodging Company, L.P.
CRF Lodging Company, L.P. (the "Company"), a newly formed Delaware
limited partnership, whose sole general partner will be CRF Lodging Trust
("CRFLT"), a Maryland real estate investment trust, is proposing the
consolidation (the "Consolidation") of six limited partnerships (the "Hotel
Partnerships") into an umbrella partnership real estate investment trust (an
"UPREIT"), as more fully described in this Prospectus/Consent Solicitation
Statement (the "Consent Solicitation"), in order to consolidate and expand the
limited service and extended-stay hotel businesses currently conducted
separately by the Hotel Partnerships and Host Marriott Corporation ("Host").
Following the Consolidation, the Company will own a portfolio of up to 221
limited service and extended-stay hotels operating under three Marriott brand
names (Courtyard by Marriott(R), Residence Inn by Marriott(R) and Fairfield Inn
by Marriott(R)) (the "Hotels"). Partners in the Hotel Partnerships will exchange
their partnership interests in the Hotel Partnerships (the "Hotel Partnership
Interests") for units of limited partnership interests in the Company ("Units")
through the Mergers (as more fully described herein).
Concurrently with the Consolidation, CRFLT will consummate an initial
public offering (the "Offering") of its common shares of beneficial interest,
par value $.01 per share (the "Common Shares"), and contribute the proceeds
thereof to the Company in exchange for Units. Following the Offering, CRFLT
anticipates that its Common Shares will be listed on the New York Stock Exchange
("NYSE"). Beginning one year after the Consolidation (the "Initial Holding
Period"), Limited Partners will have the right to redeem their Units and
receive, at the election of CRFLT, either Common Shares on a one-for-one basis
(subject to adjustment) or cash in an amount equal to the market value of such
shares (the "Unit Redemption Right"). CRFLT expects to qualify as a real estate
investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended
(the "Code").
Because REITs are not permitted under current federal income tax law
to derive revenues directly from the operation of hotels, the Company will lease
the Hotels to subsidiaries of Host (the "Lessees") under leases with initial
terms of __ years (the "Leases"). The Lessees will operate the Hotels pursuant
to management agreements (the "Management Agreements") with subsidiaries of
Marriott International, Inc. (the "Managers") that currently manage the Hotels.
The Lessees will pay rent to the Company equal to the greater of a fixed dollar
amount of base rent ("Base Rent") or specified percentages of gross sales from
the Lessees' operation of the Hotels ("Percentage Rent").
The allocation of Units among the Hotel Partnerships will be based
upon their respective Exchange Values, which in turn are based upon the
Appraised Value of each Hotel Partnership's Hotels, with certain adjustments for
non-real estate assets, indebtedness and certain other items. The estimated
Exchange Values set forth in this Consent Solicitation may increase or decrease
as a result of various adjustments, which will be finally calculated shortly
before the closing of the Consolidation (the "Closing Date").
See "Risk Factors" beginning on page 9 for certain factors relevant to
an investment in Units, including:
. There is uncertainty at the time of voting as to the Hotel Partnerships
that will participate in the Consolidation and thus, uncertainty as to
the size and leverage of the Company until after the end of the
Solicitation Period.
. The Consolidation involves a fundamental change in the nature of a
Limited Partner's investment from an investment in a fixed portfolio,
limited life partnership where a Limited Partner could receive a
distribution upon liquidation of the partnership into an investment in a
public real estate company which expects to acquire additional hotels
and where a Limited Partner likely may realize value from his investment
only through a sale of Common Shares received pursuant to the Unit
Redemption Right.
. As a result of the Consolidation, a Limited Partner will own an interest
in a much larger portfolio of Hotels, including multiple brands, and a
material adverse change affecting any of the Company's assets will
affect all Limited Partners regardless of whether a particular Limited
Partner previously held an interest in such asset.
. No independent representative was retained to negotiate on behalf of the
Limited Partners of the Hotel Partnerships. If one had been, the terms
of the Consolidation may have been more favorable to the Limited
Partners in the Hotel Partnerships.
. Conflicts of interest exist in connection with the structuring of the
Consolidation, including the fact that subsidiaries of Host serve as the
general partners of all of the Hotel Partnerships and other subsidiaries
of Host will serve as the Lessees of the Hotels. Such conflicts of
interest may result in decisions that do not fully reflect the interests
of all Partners in the Hotel Partnerships.
. Host and its subsidiaries will realize substantial benefits from the
Consolidation, including receipt of Units with an estimated value of at
least $____ million in exchange for their Hotel Partnership Interests
(based upon the estimated Exchange Values) and $____ million in cash
from the sale of two limited service and extended-stay hotels owned by
Host (the "Acquisition Hotels") based upon their aggregate Appraised
Value, as adjusted, economic benefits under the Leases and, because the
Consolidation has been structured to permit all Partners (including the
Limited Partners) to defer recognition of gain, the ability to defer
significant
<PAGE>
potential tax liabilities attributable to taxable gain in excess of sale
proceeds of approximately $____ million.
. The allocation of Units among the Hotel Partnerships is based upon their
respective Exchange Values, the calculation of which involves numerous
assumptions and estimates. There is no assurance that the value of the
Units to be received in the Consolidation equals the fair market value
of the Hotels and other assets contributed by the Hotel Partnerships.
. Current federal income tax law prohibits the Company from operating the
Hotels directly. Therefore, the Company will be substantially dependent
upon the Lessees and Managers for its revenue and the Company will have
limited control over the operations of the Hotels.
. Approval of the Consolidation by Limited Partners holding a majority of
the outstanding Partnership Units of a Hotel Partnership will bind all
Limited Partners of such Hotel Partnership.
. Limited Partners of Hotel Partnerships who vote against the
Consolidation and comply with certain specified procedures ("Dissenting
Partners") will not have a right to receive cash based on an appraisal
of their Hotel Partnership Interests but instead can elect to tender the
Units they receive in the Consolidation in exchange for unsecured notes
(the "Notes"), for which there will be no public market, in an amount
equal to the Liquidation Value (as defined herein) of their Hotel
Partnership Interests. As of September 12, 1997, on a pro forma basis
assuming the Full Consolidation Scenario (as defined herein), the
Company would have had aggregate consolidated liabilities to which the
Notes were effectively subordinated of approximately $939 million.
. There are limitations on actual or constructive ownership of more than
of 9.9% of the number or value of CRFLT's outstanding Common Shares.
. Taxation of CRFLT as a regular corporation if it fails to qualify as a
REIT, and taxation of the Company as a corporation if it fails to
qualify as a partnership for federal income tax purposes, either of
which would, among other things, result in a decrease in cash available
for distribution and a material reduction in the value of the Common
Shares and Units.
The Hotel Partnership GPs believe that the terms of the Consolidation
provide substantial benefits and are fair to the Limited Partners in each of the
Hotel Partnerships and recommend that all Limited Partners vote FOR the
Consolidation. See "Background and Reasons for the Consolidation -- Expected
Benefits of the Consolidation."
The Hotel Partnership GPs also have established certain additional
conditions to the consummation of the Consolidation, including the following:
. At least four Hotel Partnerships, including CBM1, CBM2 and RIBM1, must
participate in the Consolidation (the "Minimum Participation
Condition").
. The value of the Units received by each Partner in the Consolidation
(based on each Unit being considered to have a value equal to the price
per Common Share sold in the Offering) must be at least equal to the
Exchange Value attributable to the Partner's Hotel Partnership Interest
(the "Minimum Value Condition").
. Dissenting Partners who elect to tender the Units they receive in the
Consolidation in exchange for Notes cannot request Notes with an
aggregate principal amount in excess of either 15% of the aggregate
Exchange Values of the Participating Hotel Partnerships or 20% of the
Exchange Value of any individual Participating Hotel Partnership
(collectively, the "Maximum Note Limitation"), except that the Company,
in its sole discretion, may waive such condition if such waiver does not
result in violation of any other condition to the Consolidation.
THIS SOLICITATION OF CONSENTS EXPIRES AT 5:00 P.M., EASTERN TIME ON
__________ __, 1998, UNLESS EXTENDED.
THIS CONSENT SOLICITATION IS DIRECTED ONLY TO THE LIMITED PARTNERS IN THE
HOTEL PARTNERSHIPS DESCRIBED HEREIN AND IS NOT TO BE CONSIDERED AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES TO OR FROM ANYONE TO WHOM
DELIVERY OF THIS CONSENT SOLICITATION IS NOT AUTHORIZED BY THE COMPANY IN
CONNECTION WITH THE SOLICITATION OF CONSENTS FOR THE CONSOLIDATION. THIS CONSENT
SOLICITATION DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE UNITS
AND NOTES REFERRED TO HEREIN. THIS CONSENT SOLICITATION IS ONLY AUTHORIZED FOR
DELIVERY TO PARTNERS WHEN ACCOMPANIED BY ONE OR MORE SUPPLEMENTS RELATING TO THE
HOTEL PARTNERSHIPS IN WHICH SUCH PARTNERS HOLD INTERESTS. ALL INFORMATION
CONCERNING THE OFFERING PRICE OF THE COMMON SHARES IN THE OFFERING REFERRED TO
HEREIN, AND INFORMATION
<PAGE>
DERIVED FROM OR DEPENDENT UPON THAT PRICE, SHOULD NOT BE RELIED UPON AS
PREDICTIVE OF THE ACTUAL OFFERING PRICE.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/CONSENT
SOLICITATION. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus/Consent Solicitation Statement is ______ __, 1998.
<PAGE>
Forward-Looking Statements
Certain matters discussed herein are forward-looking statements and
as such may involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Among the factors that
could affect such forward-looking statements are: market and general economic
conditions, interest rates, capital expenditure requirements, the ability of the
Company to acquire additional properties and the risk that potential
acquisitions may not perform in accordance with expectations, the ability of the
Company to compete effectively in areas such as access, location, quality of
accommodations and room rate structures, changes in travel patterns, taxes and
government regulations which influence or determine wages, prices, construction
procedures and costs and the availability of credit. Although the Company
believes the expectations reflected in such forward-looking statements are based
upon reasonable assumptions, it can give no assurance that its expectations will
be attained. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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<S> <C>
SUMMARY................................................................................................................6
Summary of Transaction..........................................................................................6
Risk Factors....................................................................................................9
The Consolidation...............................................................................................13
Determination of Exchange Values and Allocation of Units........................................................17
Comparison of Alternatives......................................................................................19
Prices for Partnership Units in the Hotel Partnerships..........................................................20
Fairness Analysis and Opinion...................................................................................21
Solicitation Materials..........................................................................................22
Voting Procedures...............................................................................................22
Rights of Dissenting Partners...................................................................................23
Federal Income Tax Considerations...............................................................................23
Summary Financial Information...................................................................................25
RISK FACTORS...........................................................................................................27
Risks and Effects of the Consolidation..........................................................................27
Risks of Ownership of Units and Common Shares...................................................................32
Risks of Ownership of the Notes.................................................................................35
Risks of Operation..............................................................................................35
Federal Income Tax Risks........................................................................................37
Conflicts of Interest -- The Consolidation......................................................................41
Conflicts of Interests -- Operations............................................................................42
Miscellaneous Risks.............................................................................................42
CONFLICTS OF INTEREST..................................................................................................45
Affiliated General Partners.....................................................................................45
No Arm's Length Negotiations; Absence of Independent Representation.............................................45
Substantial Benefits to Related Parties.........................................................................46
Future Dealings with Related Parties............................................................................46
Host's Continued Ownership of Certain Limited Service and Extended-Stay Hotels..................................46
Tax Consequences upon Sale or Refinancing of Hotels.............................................................47
Policies with Respect to Conflicts of Interest..................................................................47
BACKGROUND AND REASONS FOR THE CONSOLIDATION...........................................................................48
Background of the Hotel Partnerships............................................................................48
Background of the Consolidation.................................................................................51
Reasons for the Consolidation...................................................................................51
Expected Benefits from the Consolidation........................................................................52
Reimbursements and Distributions to Hotel Partnership GPs.......................................................54
Alternatives to the Consolidation...............................................................................55
Comparison of Alternative Consideration.........................................................................57
RECOMMENDATION OF THE HOTEL PARTNERSHIP GPs.....................................................................59
THE CONSOLIDATION......................................................................................................60
General.........................................................................................................60
The Hotel Partnership Mergers...................................................................................62
Conditions to Consummation of the Consolidation.................................................................64
Right to Exclude Hotel Partnerships.............................................................................66
Extension, Amendment and Termination of the Consolidation.......................................................66
Restrictions on Transfer of Units...............................................................................66
Rights of Dissenting Partners...................................................................................67
Effect of Consolidation on Nonparticipating Hotel Partnerships..................................................67
</TABLE>
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<TABLE>
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Consolidation Expenses .........................................................................................68
Accounting Treatment............................................................................................69
The Offering....................................................................................................69
DETERMINATION OF EXCHANGE VALUES AND ALLOCATION OF UNITS...............................................................71
Overview........................................................................................................71
Methodology for Determining Exchange Values.....................................................................71
Allocation of Units in the Consolidation........................................................................74
FAIRNESS ANALYSIS AND OPINION..........................................................................................76
Fairness Analysis...............................................................................................76
Fairness Opinion................................................................................................77
BUSINESS AND PROPERTIES................................................................................................81
Business of the Company.........................................................................................81
Business Strategy...............................................................................................83
External Growth -- Acquisition/Development Strategy.............................................................83
Internal Growth Strategy........................................................................................85
Competitive Advantages..........................................................................................85
Hotel Lodging Properties........................................................................................86
The Acquisition Hotels..........................................................................................88
Marketing.......................................................................................................89
Properties......................................................................................................89
The Leases......................................................................................................93
Management Agreements...........................................................................................98
Noncompetition Agreements.......................................................................................108
Indebtedness....................................................................................................109
Credit Facility.................................................................................................111
Ground Leases...................................................................................................112
Competition.....................................................................................................114
Employees.......................................................................................................115
Environmental Matters...........................................................................................115
Legal Proceedings...............................................................................................116
DISTRIBUTION AND OTHER POLICIES........................................................................................117
Distribution Policy.............................................................................................117
Investment Policies.............................................................................................117
Financing Policies..............................................................................................118
Lending Policies................................................................................................119
Conflicts of Interest Policies..................................................................................119
Policies with Respect to Other Activities.......................................................................120
SELECTED FINANCIAL DATA................................................................................................121
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................123
MANAGEMENT.............................................................................................................132
Trustees, Executive Officers and Key Employees of CRFLT.........................................................132
Committees of the Board of Trustees.............................................................................132
Compensation of Trustees........................................................................................133
Executive Compensation..........................................................................................133
Employment Agreements...........................................................................................134
Option and Restricted Share Plans...............................................................................134
Incentive Compensation..........................................................................................134
Limitation of Liability and Indemnification.....................................................................134
The Lessees.....................................................................................................134
Executive Officers and Key Employees of the Lessees.............................................................136
Executive Officers and Key Employees of the Managers............................................................136
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................................................138
PRINCIPAL SECURITY HOLDERS.............................................................................................139
DESCRIPTION OF UNITS...................................................................................................140
General.........................................................................................................140
</TABLE>
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<TABLE>
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Formation.......................................................................................................140
Purposes, Business and Management...............................................................................141
Ability of CRFLT to Engage in Other Businesses; Conflicts of Interest...........................................141
Distributions; Allocations of Income and Loss...................................................................141
Borrowing by the Company........................................................................................142
Reimbursement of CRFLT; Transactions with CRFLT and its Affiliates..............................................142
Liability of CRFLT and Limited Partners.........................................................................143
Exculpation and Indemnification of CRFLT........................................................................143
Sales of Assets and Lock-out Provisions.........................................................................144
Removal of the General Partner; Transfer of CRFLT's Interests...................................................144
Certain Voting Rights of Holders of Units During the Initial Holding Period.....................................145
Restrictions on Transfers of Units by Limited Partners..........................................................145
Unit Redemption Right...........................................................................................146
No Withdrawal by Limited Partners...............................................................................146
Issuance of Limited Partnership Interests.......................................................................147
Meetings; Voting................................................................................................147
Amendment of the Partnership Agreement..........................................................................147
Books and Reports...............................................................................................148
Power of Attorney...............................................................................................148
Dissolution, Winding Up and Termination.........................................................................149
Ownership Limitation............................................................................................149
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST...........................................................................150
General.........................................................................................................150
Common Shares...................................................................................................150
Preferred Shares................................................................................................151
Power to Issue Additional Common Shares and Preferred Shares....................................................151
Restrictions on Ownership and Transfer..........................................................................151
Changes in Control Pursuant to Maryland Law.....................................................................154
DESCRIPTION OF THE NOTES...............................................................................................156
General.........................................................................................................156
Principal and Interest..........................................................................................157
Optional Redemption.............................................................................................157
Limitations on Incurrence of Debt...............................................................................158
Merger, Consolidation or Sale...................................................................................159
Events of Default, Notice and Waiver............................................................................159
Modification of the Indenture...................................................................................161
Satisfaction and Discharge......................................................................................162
No Conversion Rights............................................................................................162
Governing Law...................................................................................................162
COMPARISON OF OWNERSHIP OF HOTEL PARTNERSHIP INTERESTS, UNITS AND COMMON SHARES........................................163
ERISA CONSIDERATIONS...................................................................................................184
Status of CRFLT and the Company Under ERISA.....................................................................184
FEDERAL INCOME TAX CONSIDERATIONS......................................................................................186
Introduction....................................................................................................186
Summary of Tax Opinions.........................................................................................187
Tax Status of the Company.......................................................................................189
Tax Consequences of the Formation of the Company................................................................191
Tax Treatment of Limited Partners Who Exercise Dissenters' Rights in Connection with the Consolidation..........205
Tax Treatment of Limited Partners Who Hold Units Following the Consolidation....................................206
Federal Income Taxation of CRFLT Following the Consolidation....................................................219
Taxation of Taxable U.S. Shareholders of CRFLT Generally........................................................229
Backup Withholding for Limited Service REIT Distributions.......................................................231
</TABLE>
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<TABLE>
<S> <C>
Taxation of Tax-Exempt Shareholders of CRFLT....................................................................231
Taxation of Non-U.S. Shareholders of CRFLT......................................................................232
Tax Aspects of CRFLT's Ownership of Interests in the Company....................................................235
Other Tax Consequences for CRFLT and Its Shareholders...........................................................237
VOTING PROCEDURES......................................................................................................238
Distribution of Solicitation Materials..........................................................................238
No Special Meetings.............................................................................................239
Required Vote and Other Conditions..............................................................................239
EXPERTS................................................................................................................241
LEGAL MATTERS..........................................................................................................241
AVAILABLE INFORMATION..................................................................................................241
FINANCIAL STATEMENTS...................................................................................................F-1
</TABLE>
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<PAGE>
SUMMARY
This Summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus/Consent Solicitation
Statement, including the appendices hereto (this "Consent Solicitation"), and is
presented solely to provide an overview of the transactions described in detail
in the remainder of this Consent Solicitation and of the business and investment
considerations and risks related to the proposed transactions. Prospective
investors are advised not to rely on this Summary, but to review carefully this
entire Consent Solicitation.
As used in this Consent Solicitation, the term "Company" means CRF
Lodging Company, L.P., a Delaware limited partnership, or, as the context may
require, such entity together with its subsidiaries or any of such subsidiaries.
The term "Host" refers to Host Marriott Corporation, a Delaware corporation and
an affiliate of the general partner of each Hotel Partnership. The term "CRFLT"
means CRF Lodging Trust, a Maryland real estate investment trust, which will be
the sole general partner of the Company. The terms "Hotel Partnership" and
"Hotel Partnerships" mean individually and collectively: Courtyard by Marriott
Limited Partnership ("CBM1"), a Delaware limited partnership; Courtyard by
Marriott II Limited Partnership ("CBM2"), a Delaware limited partnership;
Marriott Residence Inn Limited Partnership ("RIBM1"), a Delaware limited
partnership; Marriott Residence Inn II Limited Partnership ("RIBM2"), a Delaware
limited partnership; Marriott Residence Inn USA Limited Partnership ("Res USA"),
a Delaware limited partnership; and Fairfield Inn by Marriott Limited
Partnership ("FIBM"), a Delaware limited partnership. The term "Hotel
Partnership GP" means the general partner of a Hotel Partnership, each of which
general partner is a wholly owned direct or indirect subsidiary of Host. The
term "Partners" means all partners of the Hotel Partnerships, including the
Hotel Partnership GPs. The term "Limited Partners" means only the limited
partners of the Hotel Partnerships. The proposed mergers of subsidiaries of the
Company into the Hotel Partnerships, the purchase by the Company of the
Acquisition Hotels from Host, the initial public offering of CRFLT (the
"Offering") and the related transactions described in detail herein are referred
to as the "Consolidation." See the "Glossary" for the definitions of other
capitalized terms used in this Consent Solicitation.
The information contained herein, unless otherwise indicated, assumes
the Consolidation occurs with an Offering yielding gross proceeds of $800
million, all Hotel Partnerships participate, no Notes are issued and $539
million of outstanding indebtedness is repaid (the "Full Consolidation
Scenario").
Summary of Transaction
This Consent Solicitation is being furnished to Limited Partners in
the Hotel Partnerships to solicit their approval of the Consolidation. If the
Consolidation is consummated as contemplated, the Company will acquire and own
up to 221 limited service and extended-stay hotels, located in 35 states across
the United States, containing 30,783 rooms and operating under three Marriott
brand names (Courtyard by Marriott(R), Residence Inn by Marriott(R) and
Fairfield Inn by Marriott(R)), including the Acquisition Hotels currently
owned by Host. These three Marriott brands are among the leading competitors
within their industry segments. Partners in the Hotel Partnerships will acquire
units of limited partnership interest ("Units") in the Company, which will be
one of the largest owners of hotels in the United States.
The following table sets forth certain information as of September
12, 1997 (or, in the case of average daily rate, average occupancy and revenues
per available room ("REVPAR"), the thirty-six weeks then ended) regarding the
Hotels that will comprise the Company's initial lodging portfolio:
6
<PAGE>
<TABLE>
<CAPTION>
Number of Number of Average Daily Average
Brand Name Hotels Rooms Rate Occupancy REVPAR/(1)/
---------- -------------- -------------- ---- --------- -----------
<S> <C> <C> <C> <C> <C>
Courtyard Hotels (moderate-priced)...... 120 17,558 $ 81.95 82.1% $ 67.31
Residence Inns (extended-stay).......... 49 5,910 $ 91.00 85.9% $ 78.14
Fairfield Inns (economy)................ 50 6,681 $ 50.89 78.4% $ 39.92
---- ---------
Subtotal 219 30,149
Acquisition Hotels
Chicago Downtown Courtyard........... 1 334 $ 133.90 84.1% $ 112.56
Pentagon City Residence Inn.......... 1 300 $ 120.52 81.1% $ 97.74
---- ---------
Total 221 30,783
=== =========
</TABLE>
- --------------
/(1)/ REVPAR is a commonly used indicator of market performance of hotels.
REVPAR measures daily room revenues generated on a per room basis by
combining the average daily room rate charged and the average daily
occupancy achieved. REVPAR excludes food and beverage and other ancillary
revenues generated by the hotel.
In connection with the Consolidation, CRFLT, which will be the sole
general partner of the Company, will consummate the Offering and contribute the
proceeds thereof to the Company. The Company will use the proceeds to pay off
certain indebtedness previously incurred by the Hotel Partnerships, to purchase
the Acquisition Hotels from Host and for other partnership purposes. Beginning
one year after the Consolidation (the "Initial Holding Period"), Limited
Partners will have the right to redeem their Units and receive, at the election
of CRFLT, either Common Shares of CRFLT on a one-for-one basis (subject to
adjustment) or cash in an amount equal to the market value of such Common Shares
(the "Unit Redemption Right"). CRFLT expects that its Common Shares will be
listed on the New York Stock Exchange ("NYSE"). The Company and CRFLT expect to
pay regular quarterly cash distributions following the Consolidation.
CRFLT expects to qualify as a real estate investment trust (a "REIT")
under the Internal Revenue Code of 1986, as amended (the "Code"). The Company
and CRFLT, which will be the sole general partner of the Company, have been
formed to consolidate and expand the limited service and extended-stay hotel
businesses currently conducted separately by the Hotel Partnerships and Host
through a structure referred to as an "umbrella partnership real estate
investment trust" (an "UPREIT"). The primary business objectives of the Company
and CRFLT will be to (i) achieve long-term sustainable growth in Funds From
Operations (as defined herein) per Unit or Common Share, (ii) increase asset
values by improving and expanding the initial Hotels, as appropriate, (iii)
acquire additional existing and newly developed hotels in targeted markets
across the United States and (iv) pursue other real estate investments. By
converting the existing private, non-traded limited partnerships into a publicly
traded real estate company focused on a more diverse and expanded ownership of
limited service and extended-stay hotels, Limited Partners will have the
opportunity to participate in the recent trend of ownership of real estate
through a publicly traded entity, which in many instances is resulting in market
valuations of public real estate companies in excess of the estimated net asset
values of those companies. Those Limited Partners who so desire will be able,
following the Initial Holding Period, to liquidate their investment in the
Company for cash at prices that reflect the public market valuation of CRFLT,
while Limited Partners who wish to continue their investments should be able to
defer recognition of at least a substantial portion of any built-in taxable gain
on their interests in the Hotel Partnerships.
Because REITs are not permitted under current federal income tax law
to derive revenues directly from the operation of hotels, the Company will lease
the Hotels to subsidiaries of Host (the "Lessees") under leases with initial
terms of __ years (the "Leases"). The Lessees will operate the Hotels under
their current Marriott brand names pursuant to management agreements (the
"Management Agreements") with the managers (the "Managers") that currently
manage the Hotels. The Managers are subsidiaries of Marriott International, Inc.
("Marriott International"). The Lessees will pay rent to the Company generally
equal to the greater of a fixed dollar amount of base rent ("Base Rent") or
specified percentages of gross sales from the Lessees' operation of the Hotels
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("Percentage Rent"). The Company is not obligated to use subsidiaries of Host as
a lessee with respect to any hotels acquired after the Consolidation. See
"Business and Properties -- The Leases."
Upon consummation of the Consolidation (and assuming all of the
related transactions occur in the manner described herein and the Full
Consolidation Scenario), the structure of, and ownership of interests in, the
Company and the leasing arrangements will be as shown in the following diagram:
[FLOW CHART APPEARS HERE]
The former general and Limited Partners in the Hotel Partnerships
will hold Units in the Company as limited partners and CRFLT will hold Units in
the Company as general partner and limited partner. CRFLT will be owned by the
public shareholders. The Company will own 100% of the equity interests in the
Hotel Partnerships and the Acquisition Hotels both directly and through other
direct or indirect wholly owned subsidiaries of the Company or CRFLT. The
Lessees of the Hotels, pursuant to the leases, are wholly owned subsidiaries of
Host Marriott Corporation. The Managers of the Hotels, pursuant to the
Management Agreements, are wholly owned subsidiaries of Marriott International,
Inc.
/(1)/ Dissenting Partners may elect to tender the Units they receive in the
Consolidation for Notes, subject to the Maximum Note Limitation (as
defined herein). See "Rights of Dissenting Partners."
/(2)/ The Company will own 100% of the equity interests in the Hotel
Partnerships and the Acquisition Hotels both directly and through other
direct or indirect wholly owned subsidiaries of the Company or CRFLT.
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Risk Factors
The following is a summary of the potential risks of the
Consolidation. This summary is qualified in its entirety by the detailed
discussion in the section entitled "Risk Factors" contained in this Consent
Solicitation. Some of the significant matters that Partners should consider
carefully include:
. Uncertainties at the Time of Voting. There are several
uncertainties at the time the Partners must vote on the
Consolidation, including (i) the identity of the Hotel
Partnerships that will participate in the Consolidation
and, thus, the Hotels that will be acquired by the Company
(which will affect such matters as the size, scope and
leverage of the Company), (ii) the Exchange Value for each
Hotel Partnership (which will be adjusted for changes in
working capital, indebtedness and various other items prior
to the Closing Date) and (iii) the costs of prepaying
certain indebtedness of the Hotel Partnerships (which costs
will be determined based upon the interest rates on
applicable U.S. Treasuries at the time of the prepayment).
See "Determination of Exchange Values and Allocation of
Units."
. Fundamental Change in Nature of Investment; Potential
Underperformance. The Consolidation involves a fundamental
change in the nature of a Limited Partner's investment from
holding an interest in one or more Hotel Partnerships, each
of which has a fixed portfolio of a single brand of hotels
where Limited Partners participate in the profits from the
operation of its Hotels, to holding an interest in an
operating company that owns interests in up to 221 Hotels
with multiple brands where limited partners will receive
rents from lessees who will bear the risks and receive the
benefits of the hotels' operations, has the ability to
acquire additional hotels, can reinvest proceeds from sales
or refinancings of existing hotels in other hotels, and has
a publicly traded general partner. In addition, each
Limited Partner's investment will change from an investment
in which a Limited Partner is entitled to receive
distributions from any net proceeds of a sale or
refinancing of the partnership's assets, to an investment
in an entity in which Limited Partners may likely realize
the value of their investment only through the exercise of
the Unit Redemption Right and sale of the Common Shares
received as a result thereof and not from liquidation
proceeds. Continuing the Hotel Partnerships could allow
Limited Partners eventually to receive liquidation
proceeds, if any, from the sale of the Hotel Partnership's
properties, and a Limited Partner's share of these sale
proceeds could be higher than the amount realized from the
sale of Units or exercise of the Unit Redemption Right (or
payments on any Notes received by Dissenting Partners). An
investment in the Company may not outperform an investment
in a single Hotel Partnership. See "Comparison of Hotel
Partnership Interests, Units and Common Shares."
. Exposure to Risks from Other Hotels. As a result of the
Consolidation, Limited Partners will own interests in a
much larger partnership with a broader range of assets,
including multiple brands, than any of the Hotel
Partnerships individually. A material adverse change
affecting one of the Company's assets will affect all
Limited Partners regardless of whether a particular Limited
Partner previously was an investor in such affected asset.
In addition, each of the three Marriott brands which
initially will comprise the Company operates in a different
market segment and targets different consumers and, as a
result, may be affected differently by different economic
and market conditions.
. Conflicts of Interest in the Consolidation. Conflicts of
interest exist in connection with the Consolidation which
include conflicts arising from the fact that subsidiaries
of Host have varying limited and general partner interests
in the different Hotel
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. Partnerships and other subsidiaries of Host will serve as
Lessees of the Hotels at the same time as the Hotel
Partnerships GPs, all of which are subsidiaries of Host,
are recommending the Consolidation and are involved in
establishing the terms and structure of the Consolidation,
including the structuring of the Leases. In addition, Host
and its subsidiaries will receive substantial benefits from
the Consolidation. These conflicts of interest may result
in decisions that do not fully reflect the interests of all
Limited Partners in the Hotel Partnerships.
. Substantial Benefits to Related Parties. The Consolidation
will permit Host to continue to be involved in the
ownership and operation of the Hotels and realize
substantial benefits therefrom. Host and its subsidiaries
will receive Units with an estimated value of at least $__
million in exchange for their Hotel Partnership Interests
(based upon the estimated Exchange Values) and $__ million
in cash from the sale of the Acquisition Hotels to the
Company (based upon their aggregate Appraised Value, as
adjusted). Subsidiaries of Host will be the Lessees of the
Hotels and may receive significant economic benefits in
connection with the Leases, including the receipt of income
to the extent sales from the Hotels exceed operating costs
and expenses payable by the Lessees, management fees and
rental payments to the Company. Because the Consolidation
has been structured to permit all Partners (including the
Limited Partners) to defer recognition of gain, the
Consolidation will also permit the Hotel Partnership GPs of
CBM1 and CBM2, which are subsidiaries of Host, to defer
significant tax liabilities attributable to taxable gain in
excess of sale proceeds (estimated at approximately $____
million) that otherwise would be incurred upon any sale of
the assets of CBM1 or CBM2 (the "Courtyard Hotels") (other
than in a tax-deferred exchange such as the Consolidation)
or upon substantial reductions in the amount of debt now
secured by the Courtyard Hotels. In the case of the
Courtyard Hotels, the Partnership Agreement imposes certain
restrictions on the sale of such Hotels and the
refinancing, prepayment or reduction of the debt secured by
the Courtyard Hotels for __ years from the Closing Date of
the Consolidation without the consent of Host in order to
defer the recognition of gain, which gain would be
disproportionately borne by the Hotel Partnership GPs of
CBM1 and CBM2 because of prior allocations to them of tax
losses. The Company also will repay, either in cash or
Common Shares, at the election of a subsidiary of Host, a
loan of approximately $13 million owed to such subsidiary
of Host by CBM1.
. Method of Allocation of Units. The allocation of Units
among the Hotel Partnerships will be based upon their
respective Exchange Values, which in turn are based upon
the Appraised Value of each Hotel Partnership's Hotels as
adjusted for such things, among others, as net non-real
estate assets (including cash, amounts due from Marriott
International and affiliates (i.e., working capital and
rent receivables) and cash reserves) ("Net Other Assets"),
existing indebtedness (including an adjustment for
prepayment and defeasance costs), deferred maintenance and
FF&E shortfalls, deferred management fees and Consolidation
Expenses (as defined herein). There is, however, no
assurance that the value of the Units to be received by
participants in the Consolidation will equal the fair
market value of the Hotels and other assets contributed by
such participants.
. Absence of Arm's Length Negotiations. No independent
representative was retained to negotiate on behalf of the
Limited Partners of the Hotel Partnerships. The Hotel
Partnership GPs have obtained an opinion from American
Appraisal Associates, an independent, nationally recognized
hotel valuation and financial advisory firm ("AAA"), as to
(i) the fairness, from a financial point of view, to the
Limited Partners of each Hotel Partnership, of the
methodologies used to determine the Exchange Value of each
Hotel Partnership and the allocation of Units among the
Hotel Partnerships in the Consolidation, (ii) the fairness
and reasonableness, from the standpoint of each Hotel
Partnership, of the underlying assumptions used to
determine the Exchange Value of each Hotel Partnership and
the purchase price of
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each Acquisition Hotel (including, without limitation, the
assumptions used to determine the various adjustments to
the Appraised Values of the Hotels), (iii) the fairness and
reasonableness to the Limited Partners of each Hotel
Partnership of the methodology used to allocate Units
received by each Hotel Partnership among its general and
Limited Partners, (iv) the fairness and reasonableness,
from the standpoint of each Hotel Partnership, of the
methodologies and underlying assumptions used to determine
the Continuation Value and the Liquidation Value of each
Hotel Partnership (including, without limitation, the
assumptions used to determine the various adjustments to
the Appraised Values of the Hotels) and (v) the fairness
and reasonableness, from the Company's standpoint, of the
economic terms of the Leases. However, AAA has not
negotiated with the Hotel Partnership GPs and has not
participated in establishing the terms of the
Consolidation. Consequently, the terms and conditions of
the Consolidation may have been more favorable to Limited
Partners in the Hotel Partnerships if such terms and
conditions were the result of arm's length negotiations.
. Lack of Control over Hotel Operations. Due to current
federal income tax law prohibitions on a REIT's ability to
derive revenues directly from the operation of a hotel, the
Company will lease its Hotels to the Lessees, which will
operate the Hotels by continuing to retain the Managers
pursuant to the Management Agreements. Neither CRFLT nor
the Company will operate the Hotels or participate in the
decisions affecting the daily operations of the Hotels.
Although the Company will have certain rights as lessor
under the Leases (including control over certain
owner-funded capital expenditures), neither CRFLT nor the
Company will have the authority to require the Lessees or
the Managers to operate the Hotels in any particular manner
or to govern any particular aspect of their operation.
. Expiration of Leases. The Leases expire at the end of __
years and there can be no assurance that such Leases will
be renewed. If such Leases are terminated at the end of
their terms, the Company will be required to find other
lessees (which lessees must be satisfactory to the
Managers). There can be no assurance as to whether
satisfactory lessees could be found or as to the terms and
conditions on which the Company would be able to enter into
new leases with such lessees.
. The Company's Dependence on the Lessees and Managers for
Revenue. The Company will be dependent upon the Lessees for
its revenue, and the Lessees' ability to pay rent to the
Company will be substantially dependent upon the Managers'
ability to operate the Hotels profitably.
. No Limitation on Debt. There are no limitations in
CRFLT's or the Company's organizational documents which
limit the amount of indebtedness either may incur.
. Risks of Leverage. The Company has substantial
indebtedness. As of September 12, 1997, on a pro forma
basis assuming the Full Consolidation Scenario, the Company
had outstanding indebtedness totaling $780 million. The
Company's business is capital intensive and the Company
will have significant capital requirements in the future.
The Company's leverage level could affect its ability to
(i) obtain financing in the future, (ii) undertake
refinancings on terms and subject to conditions deemed
acceptable by the Company, (iii) make distributions to
partners, (iv) pursue its acquisition strategy or (v)
compete effectively or operate successfully under adverse
economic conditions.
. Rental Revenues from Hotels Subject to Rights of Lenders.
In accordance with the loan agreements with respect to
outstanding indebtedness of the Hotel Partnerships, the
rental revenues received by the Company under the Leases
will first be used to
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satisfy the debt service on such outstanding indebtedness
and any cash flow remaining thereafter will be available to
satisfy all other obligations of the Company (including
paying property taxes and insurance, funding the required
FF&E reserves for the Hotels and capital improvements) and
to make distributions to partners (including CRFLT).
. Ownership Limitations. No person may own in excess of 9.9%
of the number or value of outstanding Common Shares of
CRFLT, without the consent of the Board of Trustees of
CRFLT, in its sole and absolute discretion. During the
period of time subsidiaries of Host are acting as Lessees,
Host and its affiliates are prohibited from owning in
excess of 4.9% (by value) of the Company.
. Majority Vote of Limited Partners of Hotel Partnerships
Bind All Limited Partners. Approval of the Consolidation by
Limited Partners holding a majority of the outstanding
limited partnership interests (the "Partnership Units") of
a Hotel Partnership will cause the Hotel Partnership to
participate in the Consolidation, and such approval will
bind all Limited Partners in such Hotel Partnership,
including Limited Partners who voted against or abstained
from voting with respect to the Consolidation.
. Effect of Subsequent Events upon Recognition of Gain. Even
though the Limited Partners who do not receive Notes as a
result of exercising Dissenters' Rights generally are not
expected to recognize significant taxable gain at the time
of the Consolidation, there are a variety of events and
transactions (including the sale of one or more of the
Hotels or the reduction of indebtedness securing one or
more of the Hotels) that could cause a Limited Partner to
recognize all or a part of the gain that otherwise has been
deferred through the Consolidation. See "Federal Income Tax
Considerations -- Tax Consequences of the Formation of the
Company -- Effect of Subsequent Events." The partnership
agreement of the Company, which is substantially in the
form attached hereto as Appendix A (the "Partnership
Agreement"), does not impose any restrictions on the
Company's ability to dispose of the Hotels or to refinance
debt secured by the Hotels, other than with respect to the
Courtyard Hotels (which restriction can be waived with the
consent of Host). In addition, the Partnership Agreement
expressly provides that CRFLT, as general partner of the
Company, is not required to take into account the tax
consequences of the limited partners in deciding whether to
cause the Company to undertake specific transactions, and
the limited partners have no right to approve or disapprove
such transactions. See "Description of Units -- Sales of
Assets and Lock-out Provisions."
. Failure of the Company to Qualify as a Partnership for Tax
Purposes. Taxation of the Company as a corporation if it
fails to qualify as a partnership, and the Company's
subsequent liability for federal, state and local taxes on
its income and property, would, among other things, have
the effect of reducing cash available for distribution to
holders of Units, would cause CRFLT to fail to qualify as a
REIT for tax purposes and could cause the holders of Units
to recognize taxable gain at the time the Company ceases to
qualify as a partnership.
. Failure of CRFLT to Qualify as a REIT for Tax Purposes.
Taxation of CRFLT as a corporation if it fails to qualify
as a REIT, and CRFLT's subsequent liability for federal,
state and local taxes on its income and property, would,
among other things, have the effect of reducing cash
available for distribution to CRFLT's shareholders and
materially reducing the value of the Common Shares and
Units.
. Dissenting Partners Have No Cash Appraisal Rights and May
Elect to Receive Only Notes. Limited Partners of Hotel
Partnerships who vote against the Consolidation
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and comply with certain specified procedures ("Dissenting
Partners") will not have a right to receive cash based on
an appraisal of their Hotel Partnership Interests or
otherwise, but instead can elect to tender the Units they
receive in the Consolidation in exchange for unsecured
seven-year notes (the "Notes"), for which there will be no
public market, in an amount equal to the Liquidation Value
of their Hotel Partnership Interests. If the Notes are
sold, they may sell at prices substantially below their
issuance price. Noteholders are likely to receive the full
face amount of the Notes only if they hold the Notes to
maturity, which is approximately seven years after the
Consolidation, or if the Company repays or refinances the
Notes at or prior to maturity or realizes net sales or
excess refinancing proceeds from Hotels owned by a
Noteholder's former Hotel Partnership. Because the Notes
are unsecured obligations of the Company, they will be
effectively subordinate to all secured debt of the Company
and all obligations of the Hotel Partnerships, which will
be the owners of the Hotels. As of September 12, 1997, on a
pro forma basis assuming the Full Consolidation Scenario,
the Company would have had aggregate consolidated
liabilities to which the Notes were effectively
subordinated of approximately $939 million. See "Rights of
Dissenting Partners" and "Description of the Notes."
The Consolidation
Reasons for the Consolidation. The Consolidation is being proposed at
this time for two principal reasons. First, the Hotel Partnership GPs believe
that the expected benefits of the Consolidation, as set forth below, outweigh
the risks of the Consolidation, as set forth in "Risk Factors" above. The
expected benefits include the following:
. Enhanced Liquidity of Investment. The Consolidation will
offer Limited Partners significantly enhanced liquidity
with respect to their investments in the Hotel Partnerships
because, after expiration of the Initial Holding Period,
Limited Partners would be able to exercise their Unit
Redemption Right (subject to certain limited exceptions)
and receive, at CRFLT's election, either freely tradeable
Common Shares of CRFLT or the cash equivalent thereof. The
exercise of the Unit Redemption Right, however, would
result in recognition of taxable income or gain at that
time.
. Public Market Valuation of Assets. The Hotel Partnership
GPs believe that the public market valuations of the equity
securities of many publicly traded real estate companies,
including REITs that focus on the lodging industry, are in
part based on the growth potential of such companies and
currently exceed the private market values of their real
estate assets. There can be no assurance, however, that the
Common Shares of CRFLT will trade at a premium to the
private market values of the Hotels or that the relative
pricing differential will not change or be eliminated in
the future.
. Regular Quarterly Cash Distributions. The Hotel Partnership
GPs expect that the Company will make regular quarterly
cash distributions to holders of Units in proportion to
their percentage interests in the Company. While these
distributions may not be higher than certain Hotel
Partnerships' current distributions, the ability to receive
distributions quarterly and in regular amounts would be
enhanced. See "Background and Reasons for the Consolidation
-- Expected Benefits of the Consolidation.
. Substantial Tax Deferral. The Hotel Partnership GPs expect
that Limited Partners who do not exercise Dissenters'
Rights generally should be able to obtain the benefits of
the Consolidation while continuing to defer recognition for
federal income tax purposes of at least a substantial
portion, if not all, of the gain with respect to their
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Hotel Partnership Interests that otherwise would be
recognized in the event of a liquidation of the Hotel
Partnership or a sale or other disposition of its Hotels in
a taxable transaction. Thereafter, such Limited Partners
generally should to be able to defer at least a substantial
portion of such built-in gain until they elect to exercise
their Unit Redemption Right, the Hotels currently owned by
their Hotel Partnerships are sold or otherwise disposed of
in a taxable transaction by the Company or, in the case of
CBM1, the debt now secured by such Hotels is repaid,
prepaid or substantially reduced. In the case of the
Courtyard Hotels, the Partnership Agreement imposes certain
restrictions on the sale of those Hotels and the
refinancing, prepayment or reduction of the debt secured by
those Hotels for the __ year period beginning with the
consummation of the Consolidation without the consent of
Host in order to defer the recognition of gain, which gain
would be disproportionately borne by the Hotel Partnership
GPs of CBM1 and CBM2 because of prior allocations to them
of tax losses. The federal income tax consequences of the
Consolidation are highly complex and, with respect to each
Limited Partner, are dependent upon many variables,
including the particular circumstances of such Limited
Partner. See "Federal Income Tax Considerations -- Tax
Consequences of the Formation of the Company." Each Limited
Partner is urged to consult with his own tax advisors as to
the consequences of the Consolidation in light of his
particular circumstances.
. Risk Diversification. The consolidation of the Hotels, as
well as future hotel acquisitions by the Company, will
diversify the investment risks to Limited Partners over a
broader group of hotels, range of product types, geographic
locations and market segments and will reduce the
dependence of an investment upon the performance of, and
the exposure to the risks associated with, any particular
group of Hotels currently owned by a Hotel Partnership and
the single market segment in which each Hotel Partnership
currently operates.
. Reduction in Leverage and Interest Costs. Upon consummation
of the Consolidation and the Offering, it is expected that
the aggregate amount of consolidated indebtedness of the
Company will be reduced, by application of a portion of the
net proceeds from the Offering, by between approximately
$390 million and $539 million (excluding prepayment and
defeasance costs which also will be required to be paid),
depending upon the Hotel Partnerships which participate in
the Consolidation and the proceeds raised in the Offering,
resulting in significant interest and debt service savings
and a reduced overall leverage level for Limited Partners
in the Hotel Partnerships.
. Growth Potential. The Hotel Partnership GPs believe that
substantial opportunities exist to acquire or develop
limited service and extended-stay hotel properties at
attractive prices and that the Hotel Partnerships are not
in a position to take advantage of such opportunities
because of their lack of access to additional sources of
capital on favorable terms and restrictions on additional
acquisitions and development imposed by their partnership
agreements. In addition, the Company's structure and
capitalization as part of an UPREIT should provide it with
substantial flexibility to structure acquisitions of
additional hotels utilizing debt, cash, Units or Common
Shares (or any combination thereof), which may permit the
Company to structure acquisitions of hotel properties on an
income tax-deferred basis to sellers.
. Greater Access to Capital. With publicly traded equity
securities, a larger base of assets and a greater equity
value than any of the Hotel Partnerships individually,
CRFLT expects to have greater access to the capital
necessary for funding the operations of the Company and
consummating acquisitions on more attractive terms than
would be available to any of the Hotel Partnerships
individually. This greater access to capital should provide
greater financial stability to the Company and reduce
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the level of risk associated with refinancing existing
loans upon maturity, as compared to the Hotel Partnerships
individually.
Second, the Hotel Partnership GPs believe the Consolidation is better
than any of the alternatives that they considered, such as (i) reorganization of
each Hotel Partnership into a separate UPREIT, (ii) continuation of the Hotel
Partnerships or (iii) liquidation of the Hotel Partnerships.
Terms of the Consolidation. If the requisite votes of the Limited
Partners and other required approvals are obtained and other conditions are
satisfied or waived, the following related transactions are expected to occur
(referred to collectively herein as the "Consolidation"):
. CRFLT will become the sole general partner and a
substantial limited partner of the Company.
. Each Hotel Partnership whose Limited Partners vote in favor
of participation in the Consolidation (a "Participating
Hotel Partnership") will merge (a "Merger") with a newly
formed direct or indirect wholly owned subsidiary of the
Company (a "Merger Partnership"). In each Merger, the
Partners will receive Units in exchange for their Hotel
Partnership Interests based upon the Exchange Value of each
Hotel Partnership. The Hotel Partnerships will be the
surviving entities of the Mergers and will continue in
existence as direct or indirect wholly owned subsidiaries
of the Company. Limited Partners who vote against the
Merger and comply with certain specified procedures, as
discussed below (see "Rights of Dissenting Partners"), will
tender the Units they receive in the Consolidation in
exchange for Notes.
. The Hotel Partnerships will lease the Hotels to the
Lessees pursuant to the Leases.
. The Hotels will be operated by the Lessees under their
existing Marriott brand names pursuant to the Management
Agreements, which will be assumed by the Lessees. See
"Business and Properties -- The Management Agreements."
. CRFLT will sell Common Shares in the Offering, which shares
are expected to trade on the NYSE. The proceeds from the
Offering will be contributed by CRFLT to the Company in
exchange for Units. The net proceeds of the Offering will
be used by the Company to: (i) prepay between $390 million
and $539 million of indebtedness (excluding prepayment and
defeasance costs which also will be required to be paid),
depending upon the Hotel Partnerships which participate in
the Consolidation and the proceeds raised in the Offering,
(ii) purchase the Acquisition Hotels from Host for $_____
million in cash, which represents their aggregate Appraised
Value, as adjusted, (iii) satisfy the $____ million
obligation of the Hotel Partnerships to Marriott
International relating to certain deferred management fees
by payment of approximately $____ million, (iv) repay a
loan, either in cash or Common Shares, at the election of a
subsidiary of Host, of approximately $13 million owed to
such subsidiary of Host by CBM1 and (v) pay expenses
incurred in connection with the Consolidation (the
"Consolidation Expenses") and the Offering. See "The
Consolidation -- General."
. The Company will purchase the Acquisition Hotels from Host
for $____ million in cash, which represents their aggregate
Appraised Value, as adjusted. See "The Consolidation --
General."
. The Company will obtain a revolving credit facility from
institutional lenders that will provide for borrowings of
up to $400 million for future acquisitions and other
purposes (the "Credit Facility").
. The Company, through the Hotel Partnerships and assuming
the Full Consolidation Scenario, will continue to have
approximately $780 million of indebtedness outstanding as
of June 30, 1998, less scheduled amortization payments,
which will
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result in a debt-to-total market capitalization ratio of
approximately __ % (assuming the value of the Units is just
equal to but does not exceed the estimated Exchange
Values).
Conditions to the Consolidation. The Hotel Partnership GPs have
established certain conditions that must be satisfied in order for the
Consolidation to be consummated, including the following:
. At least four Hotel Partnerships, including CBM1, CBM2 and
RIBM1, must participate in the Consolidation (the "Minimum
Participation Condition").
. The value of the Units received by each Partner in the
Consolidation (based on each Unit being considered to have a
value equal to the price per Common Share sold in the Offering)
must be at least equal to the Exchange Value attributable to
such Partner's Hotel Partnership Interests (the "Minimum Value
Condition").
. For any Hotel Partnership to participate in the Consolidation,
the Consolidation must be approved by Limited Partners holding a
majority of the limited partner interests in such Hotel
Partnership. See "Voting Procedures -- Required Vote and Other
Conditions." If Limited Partners of any Hotel Partnership do not
approve the Consolidation, such Hotel Partnership will not
participate in the Consolidation but the Hotel Partnerships for
which the requisite consent is obtained will participate,
subject to the satisfaction of Minimum Participation Condition
and the Minimum Value Condition and satisfaction or waiver of
the Maximum Note Limitation, the Maximum Debt Limitation and
other conditions.
. In order to consummate the Consolidation, Dissenting Partners
who elect to tender the Units they receive in the Consolidation
in exchange for Notes cannot request Notes with an aggregate
principal amount in excess of either 15% of the aggregate
Exchange Values of all of the Participating Hotel Partnerships
or 20% of the Exchange Value of any individual Participating
Hotel Partnership (collectively, the "Maximum Note Limitation").
Such condition may be waived, in the sole discretion of the
Company, so long as such waiver does not result in violation of
any other condition to the Consolidation.
. The Consolidation will not be consummated if the Company's
debt-to-total market capitalization ratio, including the Notes
to be issued to Dissenting Partners, exceeds 50% at the Closing
Date (the "Maximum Debt Limitation"). Such condition may be
waived, in the sole discretion of the Company, so long as such
waiver does not result in violation of any other condition of
the Consolidation.
. All required consents of third parties to the Consolidation,
including approvals of rating agencies and certain lenders in
connection with existing debt arrangements, must be obtained or
waived.
. The Consolidation must be consummated on or before December 31,
1999. This extended deadline has been set so that, in the event
market conditions are not favorable at the end of the
Solicitation Period, the Company will have significant
flexibility with respect to timing the Consolidation in order to
help maximize the value to be received by the Partners.
For a discussion of the conditions to the Consolidation, see "The
Consolidation -- Conditions to the Consolidation." Subject to the consummation
of the Consolidation, the managers (which are subsidiaries of Marriott
International) have waived their rights of first refusal under the Management
Agreements with respect to the Leases of the Hotels to the Lessees pursuant to
the Consolidation.
The Company has reserved the right to exclude any Hotel Partnership
from participation in the Consolidation (even if the requisite vote of Limited
Partners in a Hotel Partnership to approve of
16
<PAGE>
and participate in the Consolidation has been obtained and each of the other
conditions to the Consolidation has been satisfied) if the Company determines,
in its sole discretion, that such exclusion is in the best interest of the
Company. A Hotel Partnership that does not participate in the Consolidation (a
"Nonparticipating Hotel Partnership") will continue to operate as an independent
entity with its current Hotel Partnership GP remaining as general partner.
Consolidation Expenses. If the Consolidation is consummated, all
costs and expenses incurred in connection with the Consolidation ("Consolidation
Expenses") will be borne by the Company, with the result that Partners in each
Hotel Partnership (including the Hotel Partnership GPs) would bear the
Consolidation Expenses in proportion to the number of Units received in the
Consolidation. If the Consolidation is rejected, then each Hotel Partnership
would bear the portion of the total Consolidation Expenses allocated to the
Hotel Partnerships (based upon their relative Exchange Values) based upon the
percentage of "yes" votes and the Hotel Partnership GPs would bear the portion
of such Consolidation Expenses based upon the percentage of "no" votes and
abstentions. If the Consolidation is consummated but any Hotel Partnership fails
to approve the Consolidation, then such Hotel Partnership GPs would pay all
Consolidation Expenses attributable to such Hotel Partnership.
Determination of Exchange Values and Allocation of Units
Following consummation of the Consolidation, Units will be owned by
two different groups: (i) Partners (including the Hotel Partnership GPs) in the
Participating Hotel Partnerships, in exchange for the contribution of their
Hotel Partnership Interests through the Mergers; and (ii) CRFLT, which will be
the sole general partner and a substantial limited partner of the Company, in
exchange for the proceeds received from public investors in the Offering. The
equity interests in the Company to be received in the Consolidation by each of
these groups will be determined by the methods summarized below and set forth in
detail in the section entitled "Determination of Exchange Values and Allocation
of Units."
The total number of Units to be issued in connection with the
Consolidation and the Offering and the number of Units to be allocated to CRFLT
in exchange for the proceeds received from public investors in the Offering will
be based upon (i) the estimated total market value of the Company at the time of
the Offering, (ii) the percentage of the Company that must be sold in order to
raise the Offering proceeds and (iii) the price per Unit in the Consolidation
(which will be equal to the price per Common Share in the Offering, which is
assumed for purposes of this Consent Solicitation to be $20.00). The estimated
and actual total market value of the Company will be determined based upon
negotiations between CRFLT, as general partner of the Company, and the lead
underwriters of the Offering based upon then prevailing equity and debt market
conditions and other factors. See "Determination of Exchange Values and
Allocation of Units." All Units not required to be issued to CRFLT in connection
with the Offering will be allocated to the Hotel Partnerships as a group.
The Units allocated to the Hotel Partnerships as a group will be
allocated among the Participating Hotel Partnerships based upon the respective
Exchange Values of each such Participating Hotel Partnership relative to the
aggregate Exchange Values of all Participating Hotel Partnerships. The Exchange
Value for each Hotel Partnership has been established by the Company and the
Hotel Partnership GPs based upon the Appraised Values of each Hotel
Partnership's Hotels plus, among other things, the amount of its Net Other
Assets, existing indebtedness (including an adjustment for prepayment and
defeasance costs), deferred maintenance and FF&E shortfalls, deferred management
fees and Consolidation Expenses, with various adjustments to be made at the time
of the closing of the Consolidation, as described under "Determination of
Exchange Values and Allocation of Units." As a result of the Minimum Value
Condition, the value of the Units received by each Hotel Partnership will be at
least equal to the Exchange Value of each such Hotel Partnership.
17
<PAGE>
The following table sets forth the estimated Exchange Value of each
Hotel Partnership (based upon the Appraised Values of the Hotels and certain
estimates as of _______ __, 1998). The estimated Exchange Values set forth below
may increase or decrease as a result of various adjustments, which will be
finally calculated immediately prior to the closing of the Consolidation but
will not change as a result of less than all of the Hotel Partnerships
participating in the Consolidation.
<TABLE>
<CAPTION>
Estimated Percentage of
Exchange Aggregate Estimated
Hotel Partnership Value Exchange Value
- ----------------- -------------------- --------------------------
<S> <C> <C>
CBM1 $ %
CBM2
RIBM1
RIBM2
Res USA
FIBM
-------------------- --------------------------
$ 100.0%
==================== ===========================
</TABLE>
The Units allocated to each Participating Hotel Partnership will be
issued to and allocated between the Limited Partners, on the one hand, and the
applicable Hotel Partnership GP, on the other hand, in the same manner as net
liquidation proceeds would be distributed under the applicable partnership
agreement as if the Hotels were sold and the Hotel Partnership received net
liquidation proceeds in an amount equal to the total Exchange Value of such
Hotel Partnership.
The following table sets forth the allocation of Units among the
Partners of each Hotel Partnership, assuming that the aggregate value of the
Units to be issued to the Hotel Partnerships is just equal to (but does not
exceed) the estimated Exchange Value of such Hotel Partnership. As stated
above, the estimated Exchange Values for the Hotel Partnerships (and thus the
number and value of Units the Partners in each Hotel Partnership will receive)
are subject to various adjustments. As a result of the Minimum Value Condition,
in no event will the value of the Units allocated to any Hotel Partnership be
less than its actual Exchange Value.
<TABLE>
<CAPTION>
Limited Partners General Partners
---------------------------------- -----------------------------------
Estimated Value
Value of Units
per $1,000
Estimated % of Limited Estimated % of
Estimated Estimated % Units Received Partner Units Received Estimated Value
Total Value of by Hotel Original by Hotel of
Hotel Partnership of Units/(1)/ Total/(2)/ Partnership Investment/(2)/ Partnership Units/(1)/
- ----------------- ------------- ----------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CBM1 $ % % $ % $
CBM2
RIBM1
RIBM2
Res USA
FIBM
------------ ---------- ----------- --------------- ------------ ---------------
Totals: $ 100.0% % $ % $
============ ========== =========== =============== ============ ===============
</TABLE>
18
<PAGE>
- ----------------
(1) Assumes the value of the Units is equal to the Public Offering Price of
CRFLT's Common Shares and that the aggregate value of the Units received
by each Hotel Partnership is just equal to (but does not exceed) the
estimated Exchange Value.
(2) Represents the estimated percentage of the total value of the Units
allocated to the Hotel Partnerships as a group and does not reflect the
issuance of Units to CRFLT in exchange for the proceeds of the Offering
(which will reduce the percentage of each Hotel Partnership in the Company
in proportion to their respective Exchange Values). Thus, for example, if
CRFLT purchases 50% of the Company using the proceeds received from public
investors in the Offering, then each of the percentages set forth above
would be reduced by 50%. The estimated value of the Units would be not
affected.
Comparison of Alternatives
To assist Limited Partners in evaluating the Consolidation, the Hotel
Partnership GPs have attempted to compare the estimated value of Units to be
received in the Consolidation with: (i) the face amount of Notes that will be
issued to Dissenting Partners who elect to tender the Units they receive in
the Consolidation in exchange for Notes; (ii) estimates of the value of the
Hotel Partnership Interests assuming that the Hotel Partnerships continue as
operating businesses and their assets are sold in ten years (the "Continuation
Value"); and (iii) estimates of the value of the Hotel Partnership Interests on
a liquidation basis, assuming that the Hotel Partnerships' Hotels are sold at
their Appraised Values and the net proceeds (together with its net other
assets), after payment of debts and other obligations (including defeasance
costs or prepayment penalties and deferred management fees) and an allowance for
liquidation costs, expenses and contingencies equal to 2% of the Appraised
Values of the Hotels (the "Liquidation Value"), are distributed to the Partners
in accordance with their respective partnership agreements. The Hotel
Partnership GPs have not attempted to estimate the value of Hotel Partnership
Interests following standalone UPREIT reorganizations because the Hotel
Partnership GPs do not believe such reorganizations are feasible and such
valuation estimates would be subject to substantial uncertainties. Since the
estimated value of the Units and the estimated values under the alternatives to
the Consolidation are dependent upon a number of estimates, variables and
assumptions, as well as varying market conditions, no assurance can be given
that the estimated values indicated could be realized. However, the Hotel
Partnership GPs believe that analyzing the alternatives in terms of estimated
values, based upon currently available market data and reasonable estimates and
assumptions, establishes a reasonable basis for comparing the Units to the
alternatives. The results of this comparative analysis (including the
methodology and assumptions used to derive estimated values) are summarized
under "Background and Reasons for the Consolidation -- Comparison of Alternative
Consideration" and "Fairness Analysis and Opinion -- Comparison of
Alternatives."
The following table summarizes the results of the comparative
analysis described above. There can be no assurance, however, that the actual
value of Units received in the Consolidation, the actual face amount of Notes
offered to Dissenting Partners, the actual value of continuing the Hotel
Partnerships or the actual net liquidation proceeds would not differ
substantially from those estimated for purposes of this analysis.
19
<PAGE>
Summary of Comparative Valuation Alternatives/(1)/
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Face Amount of
Estimated Notes Offered Estimated Estimated Liquidation
Value to Dissenting Continuation Value if Assets Sold
Hotel Partnership of Units/(2)/ Partners/(3)/ Value/(4)/ at Appraised Value/(5)/
- ----------------- ------------- ------------- ------------ -----------------------
<S> <C> <C> <C> <C>
CBM1...................... $ $ $ $
CBM2......................
RIBM1.....................
RIBM2.....................
Res USA...................
FIBM......................
</TABLE>
- --------------------
/(1)/ The information shown on this table assumes all Hotel Partnerships are
Participating Hotel Partnerships. A limited partner original investment
of $1,000 equates to one Partnership Unit in RIBM1, RIBM2 and FIBM and
1/100th of a Partnership Unit in CBM1, CBM2 and Res USA.
/(2)/ Assumes that each Hotel Partnership is allocated Units with a value
equal only to its estimated Exchange Value. The amounts in this column
represent the portion of the estimated Exchange Value of each Hotel
Partnership that would be reflected in the Notes to be issued to
Dissenting Partners per $1,000 limited partner original investment.
/(3)/ The amounts in this column are equivalent to the portion of the
Liquidation Value of each Hotel Partnership that would be allocable to
Limited Partners per $1,000 limited partner original investment. See
footnote (5) below.
/(4)/ The amounts in this column represent the estimated amount that would be
distributed to Limited Partners per $1,000 limited partner original
investment if each Hotel Partnership were continued for ten years and
then sold for its estimated value, determined using a discounted cash
flow analysis applied to the anticipated cash flows from the operation
and sale of each Hotel and taking into account the terms of existing
debt obligations (the "Continuation Value").
/(5)/ The amounts in this column represent the amount that would be
distributed to Limited Partners per $1,000 limited partner original
investment if each Hotel Partnership sold its Hotels at their Appraised
Values as of _____ __, 1998, and distributed the net proceeds (after
payment of debts and other obligations (including defeasance costs or
prepayment penalties and deferred management fees) and an allowance for
liquidation costs, expenses and contingencies equal to 2% of the
Appraised Value of the Hotels), (the "Liquidation Value") in accordance
with its partnership agreement.
Prices for Partnership Units in the Hotel Partnerships
No formal market exists for the purchase and sale of Partnership
Units in the Hotel Partnerships, and because of provisions in the Code which tax
"publicly traded partnerships" as corporations, the partnership agreement for
each Hotel Partnership prohibits such a market from developing. The table below,
however, sets forth the highest, lowest and weighted average prices for sales of
Partnership Units in the Hotel Partnerships as reported to the Hotel Partnership
GPs for the twelve months ended November 30, 1997. The Hotel Partnership GPs do
not believe these prices generally reflect the current value of the Hotel
Partnerships' net assets. These prices are not indicative of total return to
Limited Partners in the respective Hotel Partnerships because prior cash
20
<PAGE>
distributions and tax benefits received by each Limited Partner are not
reflected in the price. There can be no assurance that transactions in
Partnership Units of any Hotel Partnership have not occurred at prices either
above the high price or below the low price set forth below.
Partnership Unit Prices
(All price information on a per unit basis)
<TABLE>
<CAPTION>
Transaction Number of
Period Partnership
Hotel 12 months Units Weighted Estimated
Partnership Original Cost ended Traded High Low Average Exchange Value/(1)/
- ----------- ------------- ------------- ----------- ---- --- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
CBM1............ $ 100,000 11/30/97 45 $ 60,000 $ 30,000 $ 45,635 $
CBM2............ $ 100,000 11/30/97 54 $ 78,500 $ 34,800 $ 47,169 $
RIBM1........... $ 1,000 11/30/97 2,096 $ 583 $ 275 $ 414 $
RIBM2........... $ 1,000 11/30/97 2,731 $ 600 $ 143 $ 500 $
Res USA......... $ 100,000 11/30/97 0 N/A N/A N/A $
FIBM............ $ 1,000 11/30/97 3,462 $ 887 $ 450 $ 621 $
</TABLE>
- --------------------
/(1)/ Based upon the Appraised Values of each Hotel Partnership's Hotels and
certain estimates as of ____ __, 1998. The actual Exchange Values will be
finally determined as of the Final Valuation Date (as defined herein).
Assumes that each Hotel Partnership is allocated Units with a value equal
only to its estimated Exchange Value. The amounts in this column represent
the portion of the estimated Exchange Value of each Hotel Partnership that
would be allocable to Limited Partners per $1,000 limited partner original
investment.
Fairness Analysis and Opinion
Fairness Analysis. The Hotel Partnership GPs believe that the terms
of the Consolidation provide substantial benefits and are fair to the Limited
Partners of each Hotel Partnership and recommend that all Limited Partners
consent to the Consolidation. In arriving at this conclusion, the Hotel
Partnership GPs have relied primarily on the following factors, as well as other
factors described under "Fairness Analysis and Opinion -- Fairness Analysis:"
(i) their view that the expected benefits of the Consolidation for the Limited
Partners outweigh the risks and potential detriments to the Limited Partners
(see "Background and Reasons for the Consolidation -- Reasons for the
Consolidation"), (ii) their view that the estimated Exchange Value established
for each Hotel Partnership and the resulting value allocable to the Limited
Partners in the Hotel Partnerships represent fair consideration for the
interests held by the Limited Partners of such Hotel Partnership and are fair to
such Limited Partners from a financial point of view and (iii) the fairness
opinion of AAA as described below.
Fairness Opinion. AAA, an independent, nationally recognized hotel
valuation and financial advisory firm, has rendered the fairness opinion (the
"Fairness Opinion"), attached as Appendix B to this Consent Solicitation, which
concluded that: (i) the methodologies used to determine the Exchange Value of
each Hotel Partnership and to allocate the Units among each of the Hotel
Partnerships are fair, from a financial point of view, to the Limited Partners
of each Hotel Partnership; (ii) the underlying assumptions used to determine the
Exchange Value of each Hotel Partnership and the purchase price of each
Acquisition Hotel (including, without limitation, the assumptions used to
determine the various adjustments to the Appraised Values of the Hotels) are
fair and reasonable from the standpoint of each Hotel Partnership; (iii) the
methodology used to allocate Units received by each
21
<PAGE>
Hotel Partnership among its general and Limited Partners is fair and reasonable
to the Limited Partners; (iv) the methodologies and the underlying assumptions
used to determine the Continuation Value and the Liquidation Value of each Hotel
Partnership (including, without limitation, the assumptions used to determine
the various adjustments to the Appraised Values of the Hotels) are fair and
reasonable from the standpoint of each Hotel Partnership; and (v) the economic
terms of the Leases are fair and reasonable from the standpoint of the Company.
See "Fairness Analysis and Opinion -- Fairness Opinion."
RECOMMENDATION
For the reasons stated herein, the Hotel Partnership GPs believe that
the terms of the Consolidation provide substantial benefits and are fair to the
Limited Partners of each Hotel Partnership and recommend that all Limited
Partners vote FOR the participation of their Hotel Partnership in the
Consolidation. See "Fairness Analysis and Opinion -- Fairness Analysis."
Solicitation Materials
This Consent Solicitation (including the accompanying transmittal
letter), together with the consent form and power of attorney (collectively, the
"Consent Form"), constitute the "Solicitation Materials" being distributed to
Limited Partners to obtain their consents to the Consolidation.
The date of first distribution of this Consent Solicitation is
___________ ____, 1998.
Voting Procedures
The voting procedures applicable to Limited Partners in each Hotel
Partnership are set forth in this Consent Solicitation under the heading "Voting
Procedures -- Required Vote and Other Conditions."
A Limited Partner may mark the Consent Form to vote "FOR" or
"AGAINST" participation in the Consolidation by the Hotel Partnership. The
failure of any Limited Partner to vote will have the same effect as if such
Limited Partner had voted "AGAINST" the Consolidation. The Hotel Partnership GP
of FIBM intends to vote its limited partner interests in FIBM "FOR" the
Consolidation. The Hotel Partnership GPs of CBM1 and CBM2 are not permitted to
vote their limited partner interests. The Hotel Partnership GPs of RIBM1, RIBM2
and Res USA do not own any limited partner interests in such Hotel Partnerships.
Whether or not a particular Hotel Partnership will participate in the
Consolidation will depend upon whether Limited Partners in such Hotel
Partnership vote to approve of and participate in the Consolidation by the
required vote, which is a majority of all outstanding limited partner interests
in such Hotel Partnership, and satisfaction or waiver of the other conditions to
the Consolidation.
The period during which consents will be solicited pursuant to this
Consent Solicitation (the "Solicitation Period") will commence on the date this
Consent Solicitation and the other Solicitation Materials are first distributed
to the Limited Partners and will continue until the later of (i) _______ ____,
1998 or (ii) such later date as the Company may elect, in its sole and absolute
discretion. Any Consent Form RECEIVED by the Company (in original or by
facsimile) prior to 5:00 p.m., Eastern time, on the last day of the Solicitation
Period will be effective, provided that such Consent Form has been properly
signed. A Consent Form that is properly signed but not marked will be voted FOR
the Consolidation. A Consent Form may be withdrawn or revoked at any time prior
to the expiration of the Solicitation Period.
22
<PAGE>
Investor Lists. Under Rule 14a-7 of the Exchange Act, each Hotel
Partnership (other than Res USA) is required, upon the written request of a
Limited Partner, to provide to the requesting Limited Partner (i) a statement of
the approximate number of Limited Partners in such Limited Partner's Hotel
Partnership, and (ii) the estimated cost of mailing a proxy statement, form of
proxy or other similar communication to such Limited Partners. In addition, a
Limited Partner has the right, at his option, either to (a) have his Hotel
Partnership mail (at the Limited Partner's expense) copies of any proxy
statement, proxy form or other soliciting material furnished by the Limited
Partner to the Hotel Partnership's Limited Partners designated by the Limited
Partner, or (b) have the Hotel Partnership deliver to the requesting Limited
Partner, within five business days of the receipt of the request, a reasonably
current list of the names, addresses and class of units held by the Hotel
Partnership's Limited Partners. The right to receive the list of Limited
Partners is subject to the requesting Limited Partner's payment of the cost of
mailing and duplication at a rate of $0.15 per page. See "Voting Procedures
- --Investor Lists."
Rights of Dissenting Partners
Upon consummation of the Consolidation, Dissenting Partners in
Participating Hotel Partnerships will have the right to tender the Units they
receive in the Consolidation in exchange for Notes by making the required
election on the Consent Form. If a Limited Partner votes against the
Consolidation but does not elect to receive Notes, the Limited Partner will
receive and retain Units. A Limited Partner in a Participating Hotel Partnership
that fails to vote also will receive and retain Units. The Notes will (i) be
unsecured obligations of the Company, (ii) have a face amount equal to the
Liquidation Value attributable to the Dissenting Partner's Hotel Partnership
Interests, (iii) have a maturity of seven years after the closing of the
Consolidation, (iv) bear interest at 120% of the applicable federal rate as of
the date of the last preliminary prospectus distributed to potential investors
in the Offering (the "Last Preliminary Prospectus") (estimated to be
approximately ___% as of ________ __, 1998), payable semi-annually, (v) provide
for prepayment of principal from a ratable portion of the net proceeds (after
repayment of debt, sales expenses and deferred management fees) realized from
any sale of Hotels formerly owned by the Dissenting Partner's Hotel Partnership
and from certain excess refinancing proceeds and (vi) provide for the payment of
the remaining principal balance at maturity. See "Description of the Notes."
Federal Income Tax Considerations
Tax Consequences of the Formation of the Company. Based on certain
assumptions and representations of the Hotel Partnership GPs, the Company and
CRFLT, Hogan & Hartson L.L.P., counsel to CRFLT and the Company, has opined that
the formation of the Company will not result in the recognition of taxable gain
or loss at the time of the Consolidation to a Limited Partner (i) who does not
exercise his Unit Redemption Right on a date sooner than the date two years
after the date of the consummation of the Consolidation; (ii) who does not
receive a cash distribution (or a deemed cash distribution resulting from relief
from liabilities, including as a result of the prepayment of debt with the
proceeds from the Offering), in connection with the Consolidation in excess of
such Limited Partner's aggregate adjusted basis in his Hotel Partnership
Interest at the time of the Consolidation; (iii) who does not receive Notes upon
exercise of Dissenters' Rights; (iv) who is not required to recognize gain by
reason of an election by other Limited Partners who exercise Dissenters' Rights
to receive Notes and (v) whose "at risk" amount does not fall below zero as a
result of the Consolidation.
With respect to the foregoing potential exceptions to nonrecognition
treatment, Hogan & Hartson L.L.P. has opined as follows: (i) it is more likely
than not that a Limited Partner's exercise of the Unit Redemption Right more
than one year after the date of consummation of the Consolidation but less than
two years after such date will not cause the Consolidation itself to be a
taxable transaction for such Limited Partner (or for the other Limited
Partners); (ii) although the matter is not free from doubt, a Limited Partner
who does not exercise Dissenters' Rights and receive
23
<PAGE>
Notes in connection with the Consolidation should not be required to recognize
gain by reason of another Limited Partner's exercise of such rights; and (iii) a
Limited Partner's relief from Hotel Partnership liabilities allocable to such
Limited Partner in connection with the Consolidation and the concurrent pay down
of certain Hotel Partnership debts with proceeds of the Offering will not cause
such Limited Partner to recognize taxable gain at the time of the Consolidation
unless (and only to the extent that) the amount thereof exceeds such Limited
Partner's adjusted basis in his Hotel Partnership Interest at the time of the
Consolidation. See "Federal Income Tax Considerations -- Tax Consequences of
Formation of the Company." An opinion of counsel, however, does not bind the
Internal Revenue Service (the "IRS") or the courts, and no assurance can be
provided that any such opinion will not be challenged by the IRS or will be
sustained by a court if so challenged. The Company has not sought any ruling
from the IRS with respect to the consequences of the Consolidation.
With respect to a Limited Partner's relief from Hotel Partnership
liabilities in connection with the Consolidation, the Hotel Partnership GPs and
the Company have determined, based on the intended allocation of Company
liabilities following the Consolidation and certain information compiled by the
Hotel Partnership GPs, that no Limited Partner in a Hotel Partnership whose
adjusted basis in his Hotel Partnership Interests is the same as or greater than
the "pro forma" basis used by CRFLT and Company in preparing Appendix C will
recognize taxable gain at the time of the Consolidation as a result either of
relief from Hotel Partnership liabilities allocable to such Limited Partner or
a reduction in his "at risk" amount below zero. See "Federal Income Tax
Considerations -- Tax Consequences of Formation of the Company -- Relief from
Liabilities/Deemed Cash Distribution" and Appendix C to this Consent
Solicitation. Limited Partners in Hotel Partnerships whose adjusted bases are
less than the "pro forma" basis used by CRFLT and the Company in preparing
Appendix C, however, could recognize gain, depending upon their particular
circumstances.
Even though a Limited Partner whose adjusted basis in his Hotel
Partnership Interests is the same as or greater than the "pro forma" basis used
by CRFLT and Company in preparing Appendix C is not expected to recognize gain
at the time of the Consolidation, a variety of events and transactions
subsequent to the Consolidation could cause the Limited Partner to recognize all
or part of the gain that has been deferred through the Consolidation. See
"Federal Income Tax Considerations -- Tax Consequences of the Formation of the
Company -- Effect of Subsequent Events." The Partnership Agreement expressly
provides that CRFLT is not required to take into account the tax consequences
for the limited partners in deciding whether to cause the Company to undertake
specific transactions, and the limited partners have no right to approve or
disapprove such transactions. See "Description of Units -- Sales of Assets and
Lock-out Provisions."
The particular tax consequences of the Consolidation for a Limited
Partner will depend upon a number of factors related to the tax situation of
that individual Limited Partner and the Hotel Partnerships in which he is a
Limited Partner, including, without limitation, such factors as the Limited
Partner's adjusted tax basis in his various Hotel Partnership Interests, the
extent to which the Limited Partner has unused passive losses with respect to
his Hotel Partnership Interests or other investments generating passive losses
that could offset income arising from the Consolidation, the actual allocation
of Company liabilities to the Limited Partner following the Consolidation and
the amount of built-in gain with respect to the Hotels contributed to the
Company by Hotel Partnerships in which he is a Limited Partner.
A Dissenting Partner will be treated as having made a taxable
disposition of his Hotel Partnership Interest. The amount realized in connection
with such disposition will equal the sum of the "issue price" of the Notes
(i.e., the face amount of the Notes) plus the portion of the Hotel Partnership's
liabilities allocable to the Dissenting Partner for federal income tax purposes.
To the extent the amount realized exceeds the Dissenting Partner's adjusted
basis in his Hotel Partnership Interest, the Dissenting Partner will recognize
gain. A Dissenting Partner may be eligible to defer at least a portion of that
gain under the "installment sale" rules, see "Federal Income Tax
24
<PAGE>
Considerations--Tax Treatment of Limited Partners Who Exercise Dissenters'
Rights in Connection with the Consolidation," but those rules may not permit a
Dissenting Partner to defer all of the gain (and may require that a Dissenting
Partner who defers gain pay to the IRS interest on a portion of the resulting
tax that has been deferred).
The discussion of federal income tax considerations in this Consent
Solicitation is not exhaustive of all possible tax considerations. For example,
it does not give a detailed discussion of any state, local or foreign tax
considerations. In addition, except to the extent discussed under the heading
"Federal Income Tax Considerations -- Taxation of Non-U.S. Shareholders of
CRFLT," it does not purport to deal with all tax considerations that might be
relevant to foreign corporations and persons who are not citizens or residents
of the United States.
The gain, if any, required to be recognized by a Limited Partner in
the Consolidation can be offset by unused passive activity losses from the Hotel
Partnerships and other investments.
EACH LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX
ADVISOR TO DETERMINE THE IMPACT OF SUCH LIMITED PARTNER'S PERSONAL TAX SITUATION
ON THE ANTICIPATED TAX CONSEQUENCES OF THE CONSOLIDATION.
Qualification of CRFLT as a REIT. CRFLT expects to qualify as a REIT
for federal income tax purposes. If it so qualifies, CRFLT will be permitted to
(i) deduct dividends paid to its shareholders, allowing the income represented
by such dividends to avoid taxation at the entity level and to be taxed only at
the shareholder level and (ii) treat retained net capital gains in a manner so
that such gains are taxed at the CRFLT level but effectively avoid taxation at
the shareholder level.
Summary Financial Information
The following table sets forth unaudited pro forma financial and
other information for the Company and combined consolidated historical financial
information for the Hotel Partnerships (as defined in Note 1 to the Notes to the
Combined Consolidated Financial Statements included herein). The following
summary financial information should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Consent Solicitation.
The unaudited pro forma financial statements as of September 12, 1997
for 100% Participation and the Minimum Participation and for the thirty-six
weeks ended September 12, 1997 (the "First Three Quarters 1997") and the fiscal
year ended January 3, 1997, are presented as if the Consolidation and the
repayment of certain related party balances, had occurred as of September 12,
1997 for the pro forma balance sheet and at the beginning of each period
presented for the pro forma statements of operations. The pro forma information
incorporates certain assumptions that are described in the Notes to the
Unaudited Pro Forma Financial Statements included elsewhere in this Consent
Solicitation.
The pro forma information does not purport to represent what the
Company's financial position or results of operations would actually have been
if these transactions had, in fact, occurred on such date or at the beginning of
the period indicated, or to project the Company's financial position or results
of operations at any future date or for any future period.
In addition, the historical information contained in the following
table is not comparable to the operations of the Company on a going-forward
basis because the historical information relates to an operating entity which
owns and operates its hotels while the Company will own the Hotels but lease
them to the lessees and receive rental payments in connection therewith.
25
<PAGE>
<TABLE>
<CAPTION>
Summary Financial Information
(in millions)
For the First Three Quarters
-------------------------------------------------------------------
1997 1997 1997 1996
----------- ----------- ------------ ------------
100%
Minimum Participation
Participation Pro Forma Historical
------------- ------------- ----------------------------
<S> <C> <C> <C> <C>
REVENUES:
Hotel revenues $ -- $ -- $ 269 $ 254
Rental income 167 211 -- --
----------- ----------- ------------ ------------
167 211 269 254
----------- ----------- ------------ ------------
OPERATING COSTS
AND EXPENSES:
Depreciation 41 55 53 54
Base, system and incentive
management fees -- -- 56 52
Ground rent 14 16 16 16
Property taxes 15 18 17 18
Insurance and other 4 6 6 5
----------- ----------- ------------ ------------
Total operating costs and expenses 74 95 148 145
----------- ----------- ------------ ------------
Operating profit 93 116 121 109
Corporate expenses/(1)/ -- -- -- --
Interest expense (42) (51) (83) (83)
Interest income 3 4 4 4
----------- ----------- ------------ ------------
Income before extraordinary item
and consolidation expenses $ 54 $ 69 $ 42 $ 30
=========== =========== ============ ============
<CAPTION>
As of September 12, 1997
------------------------------
100% Participation
Pro Forma/(2)/ Historical
-------------- ------------
<S> <C> <C>
Balance Sheet Data:
Property and equipment, net $ 1,284 $ 1,284
Total assets 1,629 1,467
Debt 780 1,319
Total liabilities 939 1,478
Equity (deficit) 690 (11)
<PAGE>
<CAPTION>
Summary Financial Information
(in millions)
Fiscal Year
-------------------------------------------------------------------
1996 1996 1996 1995
----------- ----------- ------------ ------------
Minimum 100%
Participation Participation
Pro Forma Pro Forma Historical
------------- ------------- ----------------------------
<S> <C> <C> <C> <C>
REVENUES:
Hotel revenues $ -- $ -- $ 358 $ 333
Rental income 223 285 -- --
----------- ----------- ------------ ------------
223 285 358 333
----------- ----------- ------------ ------------
OPERATING COSTS
AND EXPENSES:
Depreciation 58 79 77 78
Base, system and incentive
management fees -- -- 75 69
Ground rent 19 22 22 21
Property taxes 21 27 25 24
Insurance and other 6 7 7 7
----------- ----------- ------------ ------------
Total operating costs and expenses 104 135 206 199
----------- ----------- ------------ ------------
Operating profit 119 150 152 134
Corporate expenses/(1)/ -- -- -- --
Interest expense (61) (73) (120) (116)
Interest income 5 6 6 6
----------- ----------- ------------ ------------
Income before extraordinary item
and consolidation expenses $ 63 $ 83 $ 38 $ 24
=========== =========== ============ ============
<CAPTION>
January 3, 1997 December 29, 1995
------------------- -------------------
Historical
------------------------------------------
<S> <C> <C>
Balance Sheet Data:
Property and equipment, net $ 1,287 $ 1,318
Total assets 1,470 1,507
Debt 1,305 1,343
Total liabilities 1,476 1,521
Equity (deficit) (6) (14)
</TABLE>
- --------------------
/(1)/ The amount of corporate expenses to be incurred by the Company is not
known at this time and will be filed by amendment.
/(2)/ Does not include the impact of the purchase of the Acquisition Hotels as
the purchase price is not known at this time.
26
<PAGE>
RISK FACTORS
In considering whether to approve of or participate in the
Consolidation, Limited Partners should consider carefully, among other factors,
the matters described below.
Risks and Effects of the Consolidation
Uncertainties at the Time of Voting. Because the Consolidation may be
completed without all of the Hotel Partnerships participating, no assurance can
be given as to the Hotels that will be acquired by the Company until after the
end of the Solicitation Period. Limited Partners, therefore, cannot know at the
time they vote on the Consolidation the extent to which the actual level of
participation may affect the Company's business and operations, including the
size and amount of leverage of the Company. In addition, the Exchange Value for
each Hotel Partnership is subject to adjustment for working capital, debt and
various other items prior to the Closing Date. Also, the amount of the
prepayment premiums and/or defeasance costs on certain indebtedness, which will
affect the Exchange Values of the applicable Hotel Partnerships, will not be
known until immediately prior to the Closing Date since such premiums and/or
costs are calculated based on applicable U.S. Treasury rates in effect
immediately preceding the prepayment date. See "Determination of Exchange Values
and Allocation of Units."
Fundamental Change in Nature of Investment; Potential
Underperformance. The Consolidation involves a fundamental change in the nature
of a Limited Partner's investment from an investment in which a Limited Partner
could receive a distribution from the net proceeds of the sale of the Hotel
Partnership's assets to an investment in an entity in which Limited Partners
likely may realize value from their investment only through the exercise of the
Unit Redemption Right and sale of Common Shares received as a result thereof and
not from liquidation proceeds. In addition, each Limited Partner's investment
will change from holding an interest in one or more Hotel Partnerships, each of
which has a fixed portfolio of a single brand of hotels where Limited Partners
participate in the profits from the operation of its Hotels to holding an
interest in an operating company that (i) owns interests in up to 221 Hotels
with multiple brands where limited partners will receive rents from lessees who
will bear the risks and receive the benefits of the hotels' operations, (ii) has
the ability to acquire additional hotels (including hotels with additional
brands), (iii) can reinvest proceeds from sales on refinancings of existing
hotels in additional hotels and (iv) has a publicly traded general partner.
Continuing the Hotel Partnerships could allow Limited Partners to eventually
receive liquidation proceeds, if any, from the sale of the Hotel Partnership's
properties, and a Limited Partner's share of those sale proceeds could be higher
than the amount realized from the sale of Units or Common Shares received upon
exercise of the Unit Redemption Right (or from payments on the Notes received in
the Consolidation by Dissenting Partners who elect to receive such Notes). See
"Comparison of Hotel Partnership Interests, Units and Common Shares."
Assets Owned by Certain Hotel Partnerships May Outperform the
Portfolio of Assets Owned by the Company. The Consolidation will combine into a
single entity all of the assets and liabilities associated with the Hotel
Partnerships. Assets of certain Participating Hotel Partnerships may, over time,
outperform Units in the Company, which represent undivided interests in all of
the assets of the Company. Any Limited Partner who exchanges an interest in one
Hotel Partnership for an interest in the Company would receive a lower return on
investment if the assets of the Hotel Partnership in which the Limited Partner
held an interest prior to the Consolidation were to outperform the Units of the
Company.
Exposure to Risks from Other Hotels. As a result of the
Consolidation, Limited Partners will own interests in an operating company with
a broader range of assets, including multiple hotel brands, than any of the
Hotel Partnerships individually. A material adverse change affecting one of the
Company's assets will affect all Limited Partners regardless of whether a
particular Limited
27
<PAGE>
Partner previously was an investor in the affected asset. Absent the
Consolidation, a Limited Partner in a Hotel Partnership would not be exposed to
the risk of adverse events occurring with respect to assets of other Hotel
Partnerships in which such Limited Partner did not previously have an interest.
Substantial Benefits to Related Parties. The Consolidation will
permit Host to continue to be involved in the ownership of the Hotels and
realize substantial benefits therefrom. Host and its subsidiaries will receive
Units with an estimated value of at least $__________ million in exchange for
their Hotel Partnership Interests (general and limited) in the Hotel
Partnerships (based upon the estimated Exchange Values) and $___ million in cash
from the sale of the Acquisition Hotels to the Company (based upon their
aggregate Appraised Value, as adjusted). Subsidiaries of Host will be the
Lessees of the Hotels and may receive significant economic benefits in
connection with the Leases, including the receipt of future income to the extent
sales from the Hotels exceed operating costs and expenses payable by the
Lessees, management fees and rental payments to the Company. In addition,
because the Consolidation has been structured to permit all Partners (including
the Limited Partners) to defer recognition of gain, the Consolidation will
permit the Hotel Partnership GPs of CBM1 and CBM2, which are subsidiaries of
Host, to defer significant tax liabilities attributable to taxable gain in
excess of sale proceeds (estimated at approximately $____ million) that
otherwise would be incurred upon any sale of the Courtyard Hotels (other than in
a tax-deferred transaction such as the Consolidation) or upon substantial
reductions in the amount of debt now secured by the Courtyard Hotels. In the
case of the Courtyard Hotels, the Partnership Agreement imposes certain
restrictions on the sale of such Hotels and the refinancing, prepayment or
reduction of the debt secured by those Hotels for __ years from the Closing Date
of the Consolidation without the consent of Host in order to defer the
recognition of gain, which gain would be disproportionately borne by the Hotel
Partnership GPs of CBM1 and CBM2 because of prior allocations to them of tax
losses. The Company also will repay, either in cash or Common Shares, at the
election of a subsidiary of Host, a loan of approximately $13 million owed to
such subsidiary of Host by CBM1.
Method of Allocation of Units. The allocation of Units among the
Hotel Partnerships will be based upon their respective Exchange Values, which in
turn are based upon the Appraised Value of each Hotel Partnership's Hotels, as
adjusted for such things, among others, as Net Other Assets, existing
indebtedness (including an adjustment for prepayment and defeasance costs),
deferred maintenance and FF&E shortfalls, deferred management fees and
Consolidation Expenses. There is, however, no assurance that the value of the
Units to be received by participants in the Consolidation will equal the fair
market value of the Hotels and other assets contributed by such participants.
Absence of Arm's Length Negotiations. No independent representative
was retained to negotiate on behalf of the Limited Partners of the Hotel
Partnerships. The Hotel Partnership GPs have obtained an opinion from AAA as to
(i) the fairness, from a financial point of view, to the Limited Partners of
each Hotel Partnership, of the methodologies used to determine the Exchange
Value of each Hotel Partnership and the allocation of Units among each of the
Hotel Partnerships in the Consolidation, (ii) the fairness and reasonableness,
from the standpoint of each Hotel Partnership, of the underlying assumptions
used to determine the Exchange Value of each Hotel Partnership and the purchase
price of each Acquisition Hotel (including, without limitation, the assumptions
used to determine the various adjustments to the Appraised Values of the
Hotels), (iii) the fairness and reasonableness to the Limited Partners of each
Hotel Partnership of the methodology used to allocate Units received by each
Hotel Partnership among its general and Limited Partners, (iv) the fairness and
reasonableness, from the standpoint of each Hotel Partnership, of the
methodologies and underlying assumptions used to determine the Continuation
Value and the Liquidation Value of each Hotel Partnership (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) and (v) the fairness and reasonableness, from
the Company's standpoint, of the economic terms of the Leases. However, AAA has
not negotiated with the Hotel Partnership GPs and has not participated in
establishing the terms of the Consolidation. Consequently, the terms and
conditions of the Consolidation may have been more favorable to Limited Partners
in the Hotel Partnerships if such terms and conditions were the result of arm's
length negotiations or if an independent representative
28
<PAGE>
had been retained. See "Fairness Analysis and Opinion." In this regard, the
Fairness Opinion specifically does not conclude that other methodologies for
allocation of Units among the Hotel Partnerships might not have been more
favorable to the Limited Partners in certain of the Hotel Partnerships.
Lack of Control over Hotel Operations. Due to current federal income
tax law prohibitions on a REIT's ability to derive revenues from the operation
of hotels, the Company will lease its Hotels to the Lessees, which will operate
the Hotels pursuant to the Management Agreements with the Managers. Neither
CRFLT nor the Company will operate the Hotels or participate in the decisions
affecting the daily operations of the Hotels. Although the Company will have
certain rights as lessor under the Leases, including control over certain
owner-funded capital expenditures, neither CRFLT nor the Company will have the
authority to require the Lessees or the Managers to operate the Hotels in any
particular manner or to govern any particular aspect of their operation (e.g.,
setting room rates). Thus, even if CRFLT's management believes the Lessees or
the Managers are operating the Hotels inefficiently or in a manner that does not
result in the maximization of rental payments to the Company under the Leases,
neither CRFLT nor the Company may require the Lessees or the Managers to change
their method of operation. The Company is limited to seeking redress only if the
Lessees violate the terms of the Leases and then only to the extent of the
remedies set forth therein. Remedies under the Leases include the Company's
ability to terminate a Lease upon events of default by the applicable Lessee in
the payment of rent or failure to maintain certain net worth requirements or
other breaches of other specified obligations under the Leases. See "Business
and Properties -- The Leases." The exercise of that remedy, however, would
impair CRFLT's ability to qualify as a REIT and the Company's ability to qualify
as a partnership for federal income tax purposes unless another suitable lessee
could be found.
Expiration of the Leases. The Leases expire at the end of __ years
and there can be no assurance that such Leases will be renewed. If such Leases
are terminated at the end of their terms, the Company will be required to find
other lessees (which lessees must be satisfactory to the Managers). There can be
no assurance as to whether satisfactory lessees could be found or as to the
terms and conditions on which the Company would be able to enter into new leases
with such lessees.
Leases Could Impair the Sale or Other Disposition of the Company's
Hotels. Each Lease provides for a termination payment if the Lease is terminated
by the Company prior to the expiration of the term of such Lease, except for
cause and unless the Company leased to the Lessee a substitute hotel or hotels
that would create a leasehold interest in such substitute hotel or hotels with a
fair market value equal to or exceeding the fair market value of the Lessee's
remaining leasehold interest under the relevant Lease with respect to the Hotel
that is sold or otherwise transferred. The payment of such termination fee under
a Lease could have the effect of impairing the ability of the Company to sell
its Hotels if market conditions otherwise warrant such a sale. See "Business and
Properties -- The Leases -- Termination of Lease upon Disposition of the
Hotels."
Limitations on Sales or Refinancings of the Courtyard Hotels. Because
of the substantial taxable gains that would be recognized by the Hotel
Partnership GPs of CBM1 and CBM2 (which are subsidiaries of Host), none of the
Courtyard Hotels can be sold for a period of __ years from the Closing Date of
the Consolidation (other than pursuant to a tax-deferred exchange) without the
consent of Host (the "Lock-out Provisions"). Such Lock-out Provisions are only
applicable so long as Host holds the Units received in the Consolidation
relating to its Hotel Partnership Interests in CBM1 and CBM2 (the "Courtyard
Units") and has not transferred, sold or otherwise disposed of the Courtyard
Units in a taxable transaction. In addition, the Partnership Agreement contains
certain restrictions regarding the ability of the Company to repay or refinance
indebtedness secured by the Courtyard Hotels. See "Description of Units
- -Borrowing by the Company" and "-- Sales of Assets and Lock-out Provisions."
These restrictions will limit the ability of the Company to change its portfolio
in response to changing market conditions. To the extent the
29
<PAGE>
Courtyard Hotels do not perform as well as other hotels in its portfolio, the
Company will have limited flexibility to dispose of any such underperforming
assets. The Management Agreements also contain certain limitations on the
ability of the Company, as owner of the Hotels, to dispose of such assets. See
"Business and Properties -- The Management Agreements."
Reduced Control over Major Decisions. Currently, Limited Partners in
the Hotel Partnerships generally have the right to vote on certain major Hotel
Partnership transactions, such as (i) a sale of all or substantially all of a
Hotel Partnership's assets, (ii) a merger or consolidation of a Hotel
Partnership with another entity, (iii) incurrence of certain types and amounts
of debt, (iv) amendments to the partnership agreement or (v) removal of the
Hotel Partnership GP. In contrast, limited partners in the Company generally
will have no voting rights as to management (including a change in control of
management), debt financing (including reduction of mortgage indebtedness,
except for Host in certain limited circumstances), sale or other disposition of
one or more Hotels (except with respect to Host's rights relating to the
Courtyard Hotels or a sale of all or substantially all of the Hotels) and
removal of CRFLT as general partner of the Company. See "Description of Units
- -Borrowing by the Company" and "-- Sales of Assets and Lock-out Provisions."
However, limited partners in the Company will have certain voting rights during
the Initial Holding Period. See "Description of Units -- Certain Voting Rights
of Holders of Units During the Initial Holding Period." After the Consolidation,
substantially all decisions will be made by the management and Board of Trustees
(as constituted from time to time) of CRFLT, in its absolute discretion, as the
sole general partner of the Company.
Assumption of Debt of Other Hotel Partnerships. The Company will have
consolidated aggregate long-term indebtedness with an outstanding principal
balance upon consummation of the Consolidation of between approximately $780
million (based upon the Full Consolidation Scenario) and $930 million (if only
the CBM2 Certificates (as defined herein) are repaid). Limited Partners will be
exposed to the risks regarding the aggregate indebtedness of the Company, rather
than only the indebtedness of the Hotel Partnership in which they are currently
Limited Partners.
Foregoing Potential Benefits of Alternatives to the Consolidation.
The Hotel Partnership GPs considered other alternatives to the Consolidation,
including: (i) organizing each Hotel Partnership into a separate UPREIT, (ii)
continuation of the Hotel Partnerships in accordance with their existing
business plans and (iii) liquidation of the Hotel Partnerships. Each of such
strategies would avoid exposing the Limited Partners to certain of the risks
associated with the Consolidation and would offer the Limited Partners certain
potential benefits. See "Background and Reasons for the Consolidation
- -Alternatives to the Consolidation."
Consolidation Expenses. Significant expenses will be incurred by the
Hotel Partnerships and the Company in connection with the Consolidation. Such
Consolidation Expenses will be borne by the Company if the Consolidation is
successfully consummated (whether or not all of the Hotel Partnerships elect to
participate), with the result that Partners in each Hotel Partnership (including
the Hotel Partnership GPs) would bear the expenses in proportion to the number
of Units received by such Partners in the Consolidation. If the Consolidation is
rejected, then each Hotel Partnership would bear the portion of the total
Consolidation Expenses allocated to the Hotel Partnerships (based upon their
relative Exchange Values) based upon the percentage of "yes" votes and the Hotel
Partnership GP would bear the portion of such expenses based upon the percentage
of "no" votes and abstentions. If the Consolidation is consummated but any Hotel
Partnership fails to approve the Consolidation, then such Hotel Partnership GP
would bear those Consolidation Expenses attributable to such Hotel Partnership.
See "The Consolidation -- Consolidation Expenses."
No Limitation on Debt. Upon completion of the Consolidation, CRFLT's
debt-to-total market capitalization ratio will be approximately ___% (assuming
the value of the Units is just equal to but does not exceed the aggregate
estimated Exchange Value of the Hotel Partnerships). CRFLT will have a policy
of incurring debt only if immediately following such incurrence its
debt-to-total market capitalization would be 50% or less; however, there are no
limitations in CRFLT's or the
30
<PAGE>
Company's organizational documents that limit the amount of indebtedness either
may incur. Accordingly, the Board of Trustees could alter or eliminate this
policy. If this policy were changed, the Company could become more highly
leveraged, resulting in an increase in debt service payments that could
adversely affect the Company's cash flow, and consequently, the cash available
for distribution to holders of Units and Common Shares and could increase the
risk of default on the Company's indebtedness.
Majority Vote of Limited Partners of Hotel Partnerships Bind All
Limited Partners. Approval of the Consolidation by Limited Partners holding a
majority of the outstanding Partnership Units of a Hotel Partnership will cause
the Hotel Partnership to participate in the Consolidation, and such approval
will bind all Limited Partners in such Hotel Partnership, including Limited
Partners who voted against or abstained from voting with respect to the
Consolidation. Host and its subsidiaries have limited partner interests in FIBM
of 9.95% which they intend to vote for the Consolidation.
Potential Litigation Related to the Consolidation. Over the last
several years, business reorganizations involving the combination of several
partnerships into a single entity occasionally have given rise to investor
lawsuits. These lawsuits have involved claims against the general partners of
the participating partnerships, the partnerships themselves, and related persons
involved in the structuring of, or benefiting from, the conversion or
reorganization, as well as claims against the surviving entity and its trustees
and officers. If any lawsuits are filed in connection with the Consolidation,
such lawsuits could delay the closing of the Consolidation or result in
substantial damage claims against the Company, CRFLT or the Hotel Partnership
GPs. The Hotel Partnerships are obligated to indemnify the Hotel Partnership GPs
for claims against them arising from their role as general partners, other than
to the extent the Hotel Partnership GPs were guilty of negligence, fraud,
misconduct or breach of fiduciary duty. In this regard, CBM1 Limited Partners
and CBM2 Limited Partners currently have pending litigation against the CBM1 and
CBM2 Hotel Partnership GPs, respectively, Host and Marriott International, among
others, involving claims unrelated to the Consolidation. Because the Company
will be acquiring the Participating Hotel Partnerships themselves, CRFLT and the
Company indirectly will be subject to the indemnification obligations of the
Hotel Partnerships to the Hotel Partnership GPs and any obligations of the Hotel
Partnerships to pay damages to the extent not covered by any available
insurance. See "Business and Properties -- Legal Proceedings."
No Indemnification. The merger agreements pursuant to which
subsidiaries of the Company will merge with and into the Hotel Partnerships will
provide that the Company will not have any recourse against any contributing
entity or the Partners in the Hotel Partnerships in the event the Company
suffers a loss as the result of an inaccuracy in any representation or warranty
made in such merger agreements.
Dissenting Partners Have No Cash Appraisal Rights and May Elect to
Receive Only Notes. Dissenting Partners do not have a right to receive cash
based on an appraisal of their Hotel Partnership Interests or otherwise, but
instead, if they comply with specified procedures, will have the right to tender
the Units they receive in the Consolidation in exchange for Notes, subject to
certain limitations. See "--Risks of Ownership of the Notes," below and "The
Consolidation -- Rights of Dissenting Partners."
Maximum Note Limitation. If Dissenting Partners of one or more
Participating Hotel Partnerships elect to receive Notes in excess of the Maximum
Note Limitation, either the Consolidation will not be consummated or one or more
of such Hotel Partnerships would be excluded from the Consolidation (except that
the Company, in its sole discretion, may waive such condition if such waiver
does not result in violation of any other condition to the Consolidation).
Dilution. While currently there are no specific proposals for the
Company to issue Units beyond those to be issued in the Consolidation and the
Offering, the Company expects to pursue acquisitions of additional hotels. These
acquisitions may be financed through the issuance of Units
31
<PAGE>
or other limited partnership interests directly to property owners or to CRFLT
in exchange for cash. Any such Units or other limited partnership interests in
the Company may have certain preferences. Additional issuances of equity
securities of CRFLT or Units in connection with acquisitions of additional
hotels or offerings of securities for cash may occur in the discretion of
CRFLT's Board of Trustees, and would result in proportional reduction of the
percentage ownership interests of the limited partners (or other holders of
Units) in the Company. See "Description of Units."
Risks of Ownership of Units and Common Shares
Inability to Remove CRFLT as General Partner of the Company. The
Partnership Agreement provides that limited partners may not remove CRFLT as
general partner of the Company with or without cause (unless neither the general
partner nor its parent entity is a "public company," in which case the general
partner may be removed for cause). The inability to remove CRFLT as general
partner may not be in the best interests of the limited partners of the Company.
See "Description of Units -- Removal of the General Partner; Transfer of CRFLT's
Interests."
No Prior Public Market. Prior to the Consolidation, there will have
been no public market for Units or Common Shares. The Units will not be listed
on a national securities exchange or quoted on a market quotation system and,
consequently, no trading market is expected to develop for the Units. The Unit
Redemption Right may be exercised only after termination of the Initial Holding
Period so that a holder of Units will be required to hold his Units for at least
one year prior to being able to receive cash or Common Shares in exchange
therefor. Although the Common Shares are expected to be listed on the NYSE,
there can be no assurance that an active trading market will develop.
Restrictions on Transfer of Units. The Partnership Agreement contains
certain restrictions on the ability of partners to transfer their Units, except
in certain limited circumstances, without the prior written consent of CRFLT.
Limitations on Acquisition and Change in Control. CRFLT's Declaration
of Trust (the "Declaration of Trust") and the Partnership Agreement are expected
to contain a number of provisions that may limit the ability of outside parties
to acquire control of CRFLT, including the following:
Ownership Limit. The 9.9% ownership limit described under
"-- Possible Adverse Consequences of Limits on Ownership of Common
Shares" below may have the effect of precluding a change in control
of CRFLT by a third party without the consent of the Board of
Trustees, even if a change in control would be in the interest of the
limited partners in the Company or the shareholders of CRFLT (and
even if a change in control would not reasonably jeopardize the REIT
status of CRFLT).
Staggered Board. The Board of Trustees of CRFLT will have
three classes of trustees. The terms of the first, second and third
classes will expire in 1999, 2000 and 2001, respectively. Trustees
for each class will be chosen for a three-year term upon the
expiration of the then current class' term, beginning in 1999. The
staggered terms for trustees may affect the shareholders' ability to
effect a change in control of CRFLT even if a change in control would
be in the interest of the limited partners of the Company or
shareholders of CRFLT.
Shares of Beneficial Interest. The Declaration of Trust
will authorize the Board of Trustees to issue up to __________ shares
of beneficial interest and to establish the preferences and rights of
any beneficial interests issued. __________ of those shares will be
classified as Common Shares and the remaining __________ shares will
be classified as preferred shares. See "Description of Shares of
Beneficial Interest." The issuance of shares
32
<PAGE>
of beneficial interest having special preferences or rights could
have the effect of delaying or preventing a change in control of
CRFLT even if a change in control would be in the interest of the
shareholders of CRFLT or limited partners of the Company.
Consent Rights of the Limited Partners. Under the
Partnership Agreement, CRFLT generally will be able to merge or
consolidate with another entity with the consent of the holders of a
majority of the outstanding Units (including Units held by CRFLT) as
long as the holders of Units either will receive or will have the
right to receive the same consideration as the holders of Common
Shares. CRFLT, as a holder of a significant number of Units, would be
able to significantly influence (or, depending upon the number of
Units it holds, possibly control the outcome of) such a vote.
Transfer of CRFLT's Interests. The Partnership Agreement
provides that CRFLT may not transfer any of its interests as general
or limited partner in the Company, except in certain circumstances.
See "Description of Units -- Removal of the General Partner; Transfer
of CRFLT's Interests."
Maryland Business Combination Law. Under the Maryland
General Corporation Law (the "MGCL"), as applicable to real estate
investment trusts, certain "business combinations" (including certain
issuances of equity securities) between a Maryland real estate
investment trust and any person who owns 10% or more of the voting
power of the trust's then outstanding shares of beneficial interest
(an "Interested Shareholder") or an affiliate of the Interested
Shareholder are prohibited for five years after the most recent date
in which the Interested Shareholder becomes an Interested
Shareholder. Thereafter, any such business combination must be
approved by a supermajority (80%) of outstanding voting shares, and
by two-thirds of voting shares other than voting shares held by an
Interested Shareholder unless, among other conditions, the trust's
common shareholders receive a minimum price (as defined in the MGCL)
for their shares and the consideration is received in cash or in the
same form as previously paid by the Interested Shareholder.
Possible Adverse Consequences of Limits on Ownership of Common
Shares. To maintain its qualification as a REIT for federal income tax purposes,
not more than 50% in value of the outstanding shares of beneficial interest of
CRFLT may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code, to include certain entities). See "Federal Income Tax
Considerations -- Federal Income Taxation of CRFLT Following the Consolidation
- -- Requirements for Qualification." In addition, a person who owns, directly or
by attribution, 10% or more of a tenant of CRFLT cannot own, directly or by
attribution, 10% or more of the shares of CRFLT without jeopardizing CRFLT's
qualification as a REIT. To facilitate maintenance of its qualification as a
REIT for federal income tax purposes, CRFLT generally will prohibit ownership,
directly or by virtue of the attribution provisions of the Code, by any single
shareholder of more than 9.9% of the issued and outstanding Common Shares and
generally will prohibit ownership, directly or by virtue of the attribution
provisions of the Code, by any single shareholder of more than 9.9% of the
issued and outstanding shares of any class or series of CRFLT's preferred shares
(collectively, the "Ownership Limit"). The Board of Trustees, in its sole and
absolute discretion, may waive or modify the Ownership Limit with respect to one
or more persons who would not be treated as "individuals" for purposes of the
Code if it is satisfied, based upon information required to be provided by the
party seeking the waiver, that ownership in excess of this limit will not cause
a person who is an individual to be treated as owning Shares in excess of the
Ownership Limit, applying the applicable constructive ownership rules, and will
not otherwise jeopardize CRFLT's status as a REIT for federal income tax
purposes. Common Shares acquired or held in violation of the Ownership Limit
will be transferred automatically to a trust for the benefit of a designated
charitable beneficiary, with the person who acquired such Common Shares in
violation of the Ownership Limit not entitled to any distributions thereon, to
vote such Common Shares or to receive any proceeds from the subsequent sale
thereof in excess of the lesser of the price paid therefor or the amount
realized from such sale. A transfer of Common Shares to a person who, as a
result of the transfer, violates the Ownership Limit
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may be void under certain circumstances. See "Description of Shares of
Beneficial Interest --Restrictions on Transfer." The Ownership Limit may have
the effect of delaying, deferring or preventing a change in control and,
therefore, could adversely affect the shareholders' ability to realize a premium
over the then-prevailing market price for the Common Shares in connection with
such transaction.
Effect on Common Share Price of Shares Available for Future Sale.
Sales of a substantial number of Common Shares, or the perception that such
sales could occur, could adversely affect prevailing market prices for Common
Shares. Beginning at least one year after the closing of the Offering (or less
in certain circumstances), holders of Units may be able to sell Common Shares
received upon exercise of their Unit Redemption Right in the public market
pursuant to registration or exemptions from registration. In addition, a
substantial number of Common Shares would, pursuant to employee benefit plans,
be issued or reserved for issuance from time to time, including Common Shares
reserved for issuance pursuant to options issued concurrently with the
consummation of the Offering, and these Common Shares would be available for
sale in the public markets from time to time pursuant to exemptions from
registration or upon registration. No prediction can be made about the effect
that future sales of Common Shares would have on the market price of the Common
Shares.
Effect on Common Share Price of Market Conditions. As with other
publicly traded equity securities, the value of the Common Shares will depend
upon various market conditions, which may change from time to time. Among the
market conditions that may affect the value of the Common Shares would be the
following: (i) the extent to which a secondary market develops for the Common
Shares following the Offering, (ii) the extent of institutional investor
interest in CRFLT, (iii) the general reputation of REITs and the attractiveness
of their equity securities in comparison to other equity securities (including
securities issued by other real estate-based companies), (iv) CRFLT's financial
performance and (v) general stock and bond market conditions. Although the
Public Offering Price of the Common Shares will be determined by CRFLT in
consultation with the lead underwriters of the Offering, there can be no
assurance that the Common Shares would not trade at prices below the Public
Offering Price following the Offering.
Effect on Common Share Price of Earnings and Cash Distributions. It
is generally believed that the market value of the equity securities of a REIT
is primarily based upon the market's perception of the REIT's growth potential
for its core portfolio, the value of its real estate portfolio and its prospects
for accretive acquisitions and development. The combination of these factors
create a market perception of a REIT's current and potential future cash
distributions, whether from operations, sales, acquisitions, development or
refinancings, and is secondarily based upon the value of the underlying assets.
For that reason, Common Shares may trade at prices that are higher or lower than
the net asset value per Common Share or per Unit. To the extent CRFLT retains
operating cash flow for investment purposes, working capital reserves or other
purposes rather than distributing such cash flow to shareholders, these retained
funds, while increasing the value of CRFLT's underlying assets, may not
correspondingly increase the market price of the Common Shares. The failure of
CRFLT to meet the market's expectation with regard to future earnings and cash
distributions would likely adversely affect the market price of the Common
Shares.
Effect on Common Share Price of Market Interest Rates. One of the
factors that will influence the price of the Common Shares will be the dividend
yield on the Common Shares (as a percentage of the price of the Common Shares)
relative to market interest rates. Thus, an increase in market interest rates
may lead prospective purchasers of Common Shares to expect a higher dividend
yield, which would adversely affect the market price of the Common Shares.
Effect on Common Share Price of Unrelated Events. As with other
publicly traded equity securities, the value of the Common Shares will depend
upon various market conditions, including conditions unrelated to real estate
investments generally. Thus, events which depress
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equity market prices may not have any effect on real estate market values, with
the result that the Common Shares may trade at prices below CRFLT's net asset
value.
Dependence on External Sources of Capital. As with other REITs, but
unlike corporations generally, CRFLT's growth largely must be funded by external
sources of capital because CRFLT generally will have to distribute to its
shareholders 95% of its taxable income in order to qualify as a REIT. CRFLT's
access to external capital will depend upon a number of factors, including the
market's perception of CRFLT's growth potential, its current and potential
future earnings, cash distributions and the market price of the Common Shares.
Risks of Ownership of the Notes
No Public Market for the Notes. A public market for the Notes is not
expected to develop. If the Notes are sold, they may sell at prices
substantially below their issuance price. Noteholders are likely to receive the
full face amount of the Notes only if they hold the Notes to maturity, which is
approximately seven years after the closing of the Consolidation, or if the
Company repays or refinances the Notes at or prior to maturity or realizes net
sales or excess refinancing proceeds from Hotels owned by a Noteholder's former
Hotel Partnership. See "Description of the Notes -- Principal and Interest."
Priority of the Notes. The Notes, which are prepayable at any time,
are unsecured obligations of the Company. Thus, the Notes will be effectively
subordinated to any secured debt of the Company and to all obligations of the
Hotel Partnerships. On a pro forma basis assuming the Full Consolidation
Scenario, as of September 12, 1997, the aggregate consolidated liabilities of
the Company to which the Notes would be effectively subordinated would have been
approximately $939 million.
Limited Protection for Noteholders in the Event of a Restructuring or
Similar Transaction. Other than (i) certain restrictions on the incurrence of
indebtedness, (ii) a financial covenant requiring the Company to maintain
certain coverage ratios and (iii) the basic requirements that the surviving
entity assume the obligations under the Notes and the Indenture (as defined
herein) and be in full compliance with all of the provisions of the Indenture,
the Indenture does not contain any special provisions protecting Noteholders in
the event of a restructuring, reorganization or similar transaction involving
the Company, which could increase the risk that the Notes may not be paid in
full at maturity. See "Description of the Notes."
Risks of Operation
Competition. The profitability of the Hotels is subject to general
economic conditions, the management ability of the managers (including Marriott
International), competition, the desirability of particular locations and other
factors relating to the operation of the Hotels. The economy, moderately-priced
and extended-stay segments of the lodging industry in which the Hotels operate
are highly competitive, and the Hotels generally operate in markets that contain
numerous other competitors. The Hotels' success in their respective markets will
be dependent, in large part, upon their ability to compete in such areas as
access, location, quality of accommodations, room rate structure and, to a
lesser extent, the quality and scope of food and beverage facilities. The
lodging industry, including the Hotels (and thus the Company), may be adversely
affected in the future by (i) national and regional economic conditions, (ii)
changes in travel patterns, (iii) taxes and government regulations which
influence or determine wages, prices, interest rates, construction procedures
and costs and (iv) the availability of credit.
General Real Estate Investment Risks. Partners in the Company will
continue to bear risks associated with real estate investments. Real estate
investments are subject to varying degrees of risk. The yields available from
equity investments in real estate and the Company's ability to
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service debt depend, in large part, on the amount of rental revenues generated,
expenses incurred and capital expenditures required in the operation of its
business. The Company's income and ability to make distributions to limited
partners will be dependent upon the rent payable by the Lessees exceeding the
amounts required for debt service, property taxes and other expenses payable by
the Company (including required FF&E reserves and capital expenditures). The
rental payments payable by the Lessees will be affected in part by the sales
generated by the Managers from the operations of the Hotel. The Lessees' ability
to pay rent accrued under the Leases will depend in significant part upon the
ability of the Managers to generate gross sales in excess of its requirements to
meet operating expenses. The Company's rental income from hotels may, therefore,
be adversely affected by a number of factors, including the general economic
climate, local real estate conditions, such as an oversupply of, or a reduction
in demand for, hotel space, the attractiveness of the Company's Hotels to
consumers, the quality, philosophy and performance of management, the ability of
the Lessees to maximize rental payments to CRFLT, the ability of the Manager to
effectively operate the Hotels, competition from comparable hotels, changes in
room rates, the need to periodically repair and renovate the Hotels and to pay
the costs thereof and increases in operating costs due to inflation and other
factors (including increased real estate taxes), which increases may not
necessarily be passed through fully to guests. In addition, income from the
Hotels and real estate values also are affected by such factors as the cost of
compliance with government regulation, including zoning and tax laws, the
potential for liability under applicable laws, interest rate levels and the
availability of financing. Certain significant expenditures associated with each
equity investment in a hotel (such as mortgage payments, if any, real estate
taxes and maintenance costs) also may not decrease if circumstances cause a
reduction in income from the hotel. If any of the above occurs, the Company's
ability to make expected distributions to limited partners, including CRFLT,
could be adversely affected.
Risks of Leverage. The Company has substantial indebtedness. As of
September 12, 1997, on a pro forma basis assuming the Full Consolidation
Scenario, the Company had outstanding indebtedness totaling $780 million. The
Company's business is capital intensive and the Company will have significant
capital requirements in the future. The Company's leverage level could affect
its ability to (i) obtain financing in the future, (ii) undertake refinancings
on terms and subject to conditions deemed acceptable by the Company, (iii) make
distributions to Partners, (iv) pursue its acquisition strategy or (v) compete
effectively or operate successfully under adverse economic conditions.
If prevailing interest rates or other factors at the time of any
refinancing result in higher interest rates, the Company's interest expenses
would increase, which would adversely affect the Company's cash flow from
operations and the level of, or its ability to make, distributions to limited
partners. If the Company is unable to secure refinancing of such indebtedness on
acceptable terms, the Company could be forced to dispose of Hotels upon
disadvantageous terms, which could result in losses to the Company, adversely
affect the cash flow available for distribution and may have an adverse tax
impact on partners. In addition, if one or more Hotels are mortgaged to secure
payment of indebtedness and the Company is unable to generate funds to cover
debt service, the mortgage securing such Hotels could be foreclosed upon by, or
such Hotels could otherwise be transferred to, the mortgagee with a consequent
loss of income and asset value to the Company and adverse tax impact on the
partners.
Rental Revenues from Hotels Subject to Prior Rights of Lenders. In
accordance with the loan agreements with respect to outstanding indebtedness of
the Hotel Partnerships, the rental revenues received by the Company under the
Leases will first be used to satisfy the debt service on such outstanding
indebtedness and any cash flow remaining thereafter will be available to satisfy
all other obligations of the Company (including paying property taxes and
insurance and funding the required FF&E reserves for the Hotels and capital
improvements) and to make distributions to the partners (including CRFLT).
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Acquisition Risks. In the future, the Company expects to pursue
acquisitions of additional limited service and extended-stay hotels.
Acquisitions entail the risk that such investments will fail to perform in
accordance with expectations. The Company anticipates that, in certain
circumstances, it may use Units as consideration to acquire hotels from
tax-sensitive sellers and, in connection with such acquisitions, it may agree to
certain restrictions on the Company's ability to sell, or reduce the amount of
mortgage indebtedness on, such acquired hotels, which may increase the Company's
level of leverage and which may impair the Company's ability to take actions
that would otherwise be in the best interests of limited partners.
Seasonality. The hotel industry is seasonal in nature. The
seasonality of the industry may, from time to time, affect the ability of the
lessees to make timely rent payments under the leases. An inability of the
lessees to make timely rent payments to the Company could adversely affect the
ability of the Company to make distributions to partners (including CRFLT).
Illiquidity of Real Estate. Real estate investments are relatively
illiquid and, therefore, will tend to limit the ability of the Company to sell
and purchase hotels promptly in response to changes in economic or other
conditions. This could make it difficult for the Company to sell any of its
Hotels, even if a sale were in the interest of limited partners. See also
"Limitations on Sales or Refinancing of the Courtyard Hotels," above.
Hotels Subject to Ground Leases May Affect the Company's Revenues. Of
the Company's 221 Hotels, 116 are subject to ground leases with Marriott
International and its affiliates and 11 are subject to ground leases with third
parties. Such ground leases generally require increases in ground rent payments
every five years. To the extent that the increasing thresholds under the Leases
do not increase at the same rate as the increases under the ground leases, it
could affect the Company's cash available for distribution and its ability to
make distributions to partners (including CRFLT). In addition, any sale of a
Hotel encumbered by a ground lease would be made subject to such ground lease
and the value realized by the Company in such sale might not be as high if such
Hotel were not sold subject to such ground lease or were sold subject thereto.
Federal Income Tax Risks
Tax Consequences of the Consolidation. The Company has received an
opinion of Hogan & Hartson L.L.P., counsel to CRFLT and the Company, to the
effect that the receipt of Units in exchange for Hotel Partnership Interests as
part of the Consolidation will not result in the recognition of taxable income
or gain by a Limited Partner at the time of the Consolidation, except to the
extent that a Limited Partner (i) receives a cash distribution (or deemed cash
distribution) in excess of such Limited Partner's aggregate adjusted tax basis
in his Hotel Partnership Interest(s) as a result of relief from liabilities in
connection with the Consolidation (including from the use of the proceeds from
the Offering to prepay indebtedness of the Hotel Partnerships); (ii) exercises
Dissenters' Rights and elects to receive Notes in connection with the
Consolidation; (iii) exercises his Unit Redemption Right on a date sooner than
the date two years after the date of the consummation of the Consolidation; (iv)
is required to recognize gain by reason of the exercise by another Limited
Partner of Dissenters' Rights; or (v) has his "at risk" amount fall below zero
as a result of the Consolidation. CRFLT and the Company do not believe that the
Consolidation will result in a Limited Partner who acquired his Hotel
Partnership Interest in the original offering of such interest for cash and has
held that interest at all times since (a) receiving a distribution (or deemed
distribution) of cash in excess of such Limited Partner's adjusted basis in his
Hotel Partnership Interest or (b) having his "at risk" amount fall below zero.
The adjusted tax basis of a Limited Partner who did not acquire his Hotel
Partnership Interest in the original offering of such interest, however, could
vary materially from the adjusted tax basis of a Limited Partner who did.
Therefore, depending on the adjusted tax basis of such a Limited Partner in his
Hotel Partnership Interest, the Consolidation could result in the receipt by
such Limited Partner of a cash distribution (or deemed cash distribution) in
excess of such Limited Partner's adjusted basis in his Hotel Partnership
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Interest, and accordingly, could result in the recognition of taxable income or
gain by such Limited Partner.
With respect to the exercise of Dissenters' Rights, Hogan & Hartson
L.L.P. is of the opinion that although the matter is not free from doubt, a
Limited Partner who does not exercise Dissenters' Rights and elect to receive
Notes in connection with the Consolidation should not be required to recognize
gain by reason of another Limited Partner's exercise of such rights. With
respect to a Limited Partner's exercise of his Unit Redemption Right, Hogan &
Hartson L.L.P. is of the opinion that it is more likely than not that a Limited
Partner's exercise of his Unit Redemption Right more than one year after the
date of consummation of the Consolidation but less than two years after such
date will not cause the Consolidation itself to be a taxable transaction for the
Limited Partner or for the other Limited Partners. Opinions of counsel, however,
do not bind the IRS or the courts, and no assurance can be provided that such
opinions will not be challenged by the IRS or will be sustained by a court if so
challenged.
The particular tax consequences of the Consolidation for a Limited
Partner will depend upon a number of factors related to the tax situation of
that individual Limited Partner and the Hotel Partnerships in which he is a
Limited Partner, including such factors as the Limited Partner's aggregate
adjusted tax basis in his Hotel Partnership Interest(s), the extent to which the
Limited Partner has other investments that have generated passive losses that
could offset income arising from the Consolidation, the allocation of Company
liabilities to the Limited Partner following the Consolidation and the amount of
built-in gain with respect to the Hotels owned by the Hotel Partnership(s) in
which he is a Limited Partner. See "Federal Income Tax Considerations -- Tax
Consequences of Formation of the Company." The Company has consulted with its
advisors in connection with structuring the Consolidation, but it has not sought
a ruling from the IRS as to the tax consequences of the Consolidation. See
"Federal Income Tax Considerations -- Summary of Tax Opinions." Each Limited
Partner is urged to consult with his own tax advisor before determining whether
to approve of and participate in the Consolidation in order to determine the
anticipated tax consequences of the Consolidation for such Limited Partner.
Tax Status of the Company. The Company and CRFLT have received an
opinion of Hogan & Hartson L.L.P. to the effect that the Company will be treated
as a partnership for federal income tax purposes. An opinion of counsel,
however, does not bind the IRS or the courts, and no assurance can be provided
that such opinion will not be challenged by the IRS or will be sustained by a
court if so challenged. If the IRS were to successfully treat the Company as an
entity that is taxable as a corporation, CRFLT would cease to qualify as a REIT
because the value of CRFLT's ownership interest in the Company would exceed 5%
of CRFLT's assets and because CRFLT would be considered to hold more than 10% of
the voting securities of another corporation. See "Federal Income Tax
Considerations -- Federal Income Taxation of CRFLT Following the Consolidation--
Asset Tests Applicable to REITs." Moreover, the imposition of a corporate tax on
the Company would reduce significantly the amount of cash available for
distribution to the Limited Partners. See "Federal Income Tax Considerations --
Tax Status of the Company" and " -- Tax Aspects of CRFLT's Ownership of
Interests in the Company."
There is a significant risk that the Company will be considered to be
a "publicly traded partnership." The opinion of Hogan & Hartson L.L.P. regarding
the tax status of the Company will be based on the Company's expectation that it
will have sufficient "qualifying income" so that even if it were considered to
be a publicly traded partnership it would qualify as a partnership for federal
income tax purposes. See "Federal Income Tax Considerations -- Tax Status of the
Company." In this regard, the Partnership Agreement will prohibit Host, while
any of its subsidiaries are acting as a Lessee, and any direct or indirect owner
of 10% or more of Host or any of the Lessees from holding in excess of 4.9% by
value of the interests in the Company. If the Company were a publicly traded
partnership, however, a Limited Partner could be subject to certain special
rules applicable to publicly traded partnerships. In particular, a Limited
Partner would be unable to use passive losses from
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other passive activities to offset his allocable share of Company gain and
income, and any Company losses allocable to a Limited Partner could be used only
as an offset against such Limited Partner's allocable share of future Company
income and gains and not against income and gains from other passive activities.
Exercise of Dissenters' Rights. A Limited Partner who exercises his
Dissenters' Rights and elects to receive Notes in connection with the
Consolidation will be treated as having made a taxable disposition of his Hotel
Partnership Interest. The amount realized in connection with such disposition
will equal the sum of the "issue price" of the Notes (i.e., the face amount of
the Notes) plus the portion of the Hotel Partnership's liabilities allocable to
the Limited Partner for federal income tax purposes. To the extent the amount
realized exceeds the Limited Partner's adjusted basis in his Hotel Partnership
Interest, the Limited Partner will recognize gain. A Limited Partner may be
eligible to defer at least a portion of that gain under the "installment sale"
rules, see "Federal Income Tax Considerations -- Tax Treatment of Limited
Partners Who Exercise Dissenters' Rights in Connection with the Consolidation,"
but those rules may not permit a Limited Partner to defer all of the gain
recognized (and may require that a Limited Partner who defers gain pay to the
IRS interest on a portion of the resulting tax that has been deferred).
Effects of Subsequent Events upon Recognition of Gain. In addition to
any gain that might be recognized by the Limited Partners, at the time of the
Consolidation, there are a variety of subsequent events and transactions
(including (i) the sale or other taxable disposition of one or more of the
Hotels, (ii) the refinancing or repayment of nonrecourse liabilities secured by
one or more of the Hotels, (iii) the issuance of additional Units, including in
connection with the issuance of Common Shares or other equity interests by CRFLT
and the acquisition of additional properties in exchange for Units or other
equity interests in the Company; (iv) an increase to the basis of the Hotels
resulting from capital expenditures and (v) the elimination over time of the
disparity between the current tax basis of the Hotels and the "book basis" of
the Hotels based upon their fair market value at the time of the Consolidation)
that could cause a Limited Partner who holds Units to recognize part or all of
the taxable gain that otherwise has been deferred through the Consolidation.
The Partnership Agreement does not impose any restrictions on the
Company's ability to dispose of the Hotels or to refinance or repay debt secured
by the Hotels (or to direct that a Hotel Partnership or Subsidiary Partnership
engage in such a transaction) other than with respect to the Courtyard Hotels,
where such actions would require the consent of Host. In addition, the Company
specifically is not required to take into account the tax consequences to the
holders of Units in deciding whether to undertake specific transactions, and the
holders of Units generally have no right to approve or disapprove such
transactions. See "Federal Income Tax Considerations," "Description of Units
- -Sales of Assets and Lock-out Provisions" and "-- Borrowing by the Company."
Exercise of Unit Redemption Right. The receipt of either cash or
Common Shares, as determined by CRFLT, by a Limited Partner in connection with
the exercise of such Limited Partner's Unit Redemption Right will be a taxable
transaction and likely will result in the recognition of substantial gain for
federal income tax purposes. The amount realized in connection with a Limited
Partner's exercise of his Unit Redemption Right will equal the sum of either the
amount of cash or the value of the Common Shares received plus the portion of
the Company's liabilities allocable to the Units redeemed for federal income tax
purposes. To the extent the amount realized exceeds the Limited Partner's
adjusted basis in the redeemed Units, the Limited Partner will recognize gain.
See "Federal Income Tax Consequences -- Tax Treatment of Limited Partners Who
Hold Units Following the Consolidation -- Dissolution of the Company" and " -Tax
Treatment of Exercise of Unit Redemption Right." State and local income and
transfer taxes may apply to such a redemption as well.
Failure of CRFLT to Qualify as a REIT. CRFLT intends to operate so as
to qualify as a REIT under the Code commencing with CRFLT's taxable year ending
December 31, 1998. A REIT generally is not taxed at the corporate level on
income it currently distributes to its shareholders as
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long as it distributes currently at least 95% of its taxable income (excluding
net capital gain). No assurance can be provided, however, that CRFLT will so
qualify or be able to remain so qualified or that new legislation, Treasury
Regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to CRFLT's qualification as a
REIT or the federal income tax consequences of such qualification. In this
regard, CRFLT expects to receive an opinion of Hogan & Hartson L.L.P. to the
effect that CRFLT, commencing with its taxable year ending December 31, 1998,
will be organized in conformity with the requirements for qualification as a
REIT under the Code, and that CRFLT's proposed method of operation will enable
it to meet the requirements for qualification and taxation as a REIT. This
opinion will be conditioned upon certain representations made by CRFLT and the
Company as to factual matters relating to the organization and operation of
CRFLT, the Company, the Hotel Partnerships and the Subsidiary Partnerships. In
addition, this opinion will be based upon the factual representations of CRFLT
concerning its business and properties as set forth in this Consent Solicitation
and assumes that the actions described in this Consent Solicitation are
completed in a timely fashion. An opinion of counsel, however, does not bind the
IRS or the courts, and no assurance can be provided that such opinion will not
be challenged by the IRS or will be sustained by a court if so challenged.
Among the requirements for REIT qualification are that (i) at least
75% of CRFLT's gross income (excluding gross income from "prohibited
transactions") for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property") or from certain types of temporary investments; and
(ii) at least 95% of such income must be derived from such real property
investments plus dividends, interest, certain hedging instruments, and gain from
the sale or disposition of stock or securities, including certain hedging
instruments. See "Federal Income Tax Considerations -- Federal Income Taxation
of CRFLT Following the Consolidation -- Income Tests Applicable to REITs." Rent
paid pursuant to the Leases will constitute substantially all of the gross
income of CRFLT. In order for the rent paid pursuant to the Leases to constitute
"rents from real property," (a) the Leases must be respected as true leases for
federal income tax purposes and not treated as service contracts, joint ventures
or some other type of arrangement; and (b) the Lessees must not be regarded as
Related Party Tenants. If the Leases are not respected as true leases for
federal income tax purposes, part or all of the payments that the Company
receives from the Lessees will not constitute "rents from real property." The
Leases have been structured with the intent that they qualify as true leases for
federal income tax purposes. In this regard, Hogan & Hartson, L.L.P. expects to
provide to the Company at the Closing Date of the consolidation an opinion to
the effect that the Leases will be respected as leases for federal income tax
purposes. An opinion of counsel, however, does not bind the IRS or the courts.
Moreover, Limited Partners should be aware that there are no controlling
Treasury Regulations, published IRS rulings, or judicial decisions involving
leases with terms substantially the same as the Leases that discuss whether such
leases constitute true leases for federal income tax purposes. Therefore, there
can be no assurance that the IRS might not assert that the Leases should not be
respected as true leases for federal income tax purposes. If the Lessees are
regarded as Related Party Tenants, the payments that the Company receives from
the Lessees also would not qualify as "rents from real property." In order to
preclude the Lessees from being regarded as Related Party Tenants, the
Declaration of Trust will expressly prohibit Host and its subsidiaries (and/or
any 10% or greater shareholder of Host) from owning more than 9.9% of the value
of CRFLT, and will contain self-executing mechanisms intended to enforce this
prohibition. Assuming that this prohibition is enforced at all times, the
Lessees will not be regarded as Related Party Tenants. If the Leases were not
respected as true leases for federal income purposes or if the Lessees were
regarded as Related Party Tenants, CRFLT would not be able to satisfy either the
75% or 95% gross income tests and, as a result, would lose its REIT status. See
"Federal Income Tax Considerations -- Federal Income Taxation of CRFLT Following
the Consolidation-- Income Tests Applicable to REITs."
If CRFLT fails to qualify as a REIT, it will be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. In addition, unless entitled to relief under
certain statutory provisions, CRFLT will be disqualified from treatment as a
REIT for the four taxable years following the year during which REIT
qualification is
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lost. The additional tax would significantly reduce the cash available for
distributions by CRFLT to its shareholders. Failure of CRFLT to qualify as a
REIT would reduce materially the value of the Common Shares and Units. See
"Federal Income Tax Considerations -- Federal Income Taxation of CRFLT Following
the Consolidation -- Failure of CRFLT to Qualify as a REIT."
Other Tax Liabilities. Even if CRFLT qualifies as a REIT, it will be
subject, through the Company, the Hotel Partnerships and the Subsidiary
Partnerships, to certain federal, state and local taxes on its income and
property. See "Federal Income Tax Considerations --Other Tax Consequences for
CRFLT and Its Shareholders." In addition, holders of Units will be subject to
state and local taxation in the jurisdictions in which the Company directly or
indirectly holds real property and such holders will be required to file
periodic tax returns in at least some of those jurisdictions. The Company
initially will own Hotels located in 35 different states.
Conflicts of Interest -- The Consolidation
Affiliated General Partners. Subsidiaries of Host have varying
limited and general partner interests in each of the Hotel Partnerships and act
as Hotel Partnership GPs of all of the Hotel Partnerships. Each Hotel
Partnership GP has an independent obligation to assess whether the terms of the
Consolidation are fair and equitable to the Limited Partners in its Hotel
Partnership without regard to whether the Consolidation is fair and equitable to
any of the other participants (including the Limited Partners in other Hotel
Partnerships for which other subsidiaries of Host are the Hotel Partnership GPs,
and in the case of FIBM, have significant limited partner interests). While each
Hotel Partnership GP has sought faithfully to discharge its obligations as Hotel
Partnership GP to its Hotel Partnership, there is an inherent conflict of
interest in its serving, directly or indirectly, in a similar capacity with
respect to all of the other Hotel Partnerships.
No Arm's Length Negotiations; Absence of Independent Representation.
No independent representative was retained to negotiate on behalf of the Limited
Partners of the Hotel Partnerships. Consequently, the terms and conditions of
the Consolidation may have been more favorable to Limited Partners of the Hotel
Partnerships if such terms and conditions were the result of arm's length
negotiations or if an independent representative had been retained. The Hotel
Partnership GPs have obtained an opinion from AAA as to (i) the fairness, from a
financial point of view, to the Limited Partners of each Hotel Partnership, of
the methodologies used to determine the Exchange Value of each Hotel Partnership
and the allocation of Units among the Hotel Partnerships in the Consolidation,
(ii) the fairness and reasonableness, from the standpoint of each Hotel
Partnership, of the underlying assumptions used to determine the Exchange Value
of each Hotel Partnership and the purchase price of each Acquisition Hotel
(including, without limitation, the assumptions used to determine the various
adjustments to the Appraised Values of the Hotels), (iii) the fairness and
reasonableness to the Limited Partners of each Hotel Partnership of the
methodology used to allocate Units received by each Hotel Partnership among its
general and Limited Partners, (iv) the fairness and reasonableness, from the
standpoint of each Hotel Partnership, of the methodologies and underlying
assumptions used to determine the Continuation Value and the Liquidation Value
of each Hotel Partnership (including, without limitation, the assumptions used
to determine the various adjustments to the Appraised Values of the Hotels) and
(v) the fairness and reasonableness, from the Company's standpoint, of the
economic terms of the Leases. In this regard, the Fairness Opinion specifically
does not conclude that other methodologies for allocation of Units among the
Hotel Partnerships might not have been more favorable to the Limited Partners in
certain of the Hotel Partnerships. See "Fairness Analysis and Opinion."
Substantial Benefits to Related Parties. Host and its subsidiaries
will receive substantial benefits in connection with the Consolidation that
other participants in the Consolidation will not receive. Host and its
subsidiaries will receive Units with an estimated value of at least $____
million in exchange for their Hotel Partnership Interests (based upon the
estimated Exchange Values) and $____ million in cash from the sale of the
Acquisition Hotels. Subsidiaries of Host are
41
<PAGE>
Lessees of the Hotels and will receive substantial benefits in connection with
the Leases including the receipt of income to the extent sales from the Hotels
exceed operating costs and expenses payable by the Lessees, management fees and
rental payments paid to the Company. The Consolidation will also permit the
Hotel Partnership GPs of CBM1 and CBM2, which are subsidiaries of Host, to defer
significant tax liabilities (estimated at approximately $____ million) that
otherwise would be incurred with respect to any sale of the Courtyard Hotels
(other than in a tax-deferred transaction such as the Consolidation) or upon
substantial reductions in the amount of debt now secured by the Courtyard
Hotels. In the case of the Courtyard Hotels, the Partnership Agreement imposes
certain restrictions on the sale of those Hotels and the refinancing, prepayment
or reduction of the debt secured by those Hotels for __ years from the Closing
Date of the Consolidation without the consent of Host in order to defer the
recognition of gain, which gain would be disproportionately borne by the Hotel
Partnership GPs of CBM1 and CBM2 because of prior allocations to them of tax
losses. The Company will also repay, either in cash of Common Shares, at the
election of a subsidiary of Host, a loan of approximately $13 million owed to
such subsidiary of Host by CBM1.
Conflicts of Interests -- Operations
After the consummation of the Consolidation, it is anticipated that
affiliates of Host will continue to provide certain services to the Company that
such entities currently provide to the Hotel Partnerships. See "Conflicts of
Interest -- Future Dealings with Related Parties." These services include the
provision of, among others, payroll, benefits and other administrative services
and office space. For additional information regarding amounts historically paid
for such services and the basis of such payments, see the Notes to the Combined
Consolidated Financial Statements. The terms upon which these services will be
provided will be substantially the same as the current terms, which were not the
result of arm's length negotiations. As a result, the terms and conditions of
such arrangements may be less favorable to the Company than could have been
obtained from a third party. Alternately, in the event Host were to decide not
to provide such services in the future, the Company would incur incremental
costs to obtain such services from third parties or to establish an internal
capability to perform such services.
For a discussion of the Company's policies and agreements designed to
minimize any adverse effects from these conflicts of interest, see "Distribution
and Other Policies -- Conflicts of Interest Policies."
Miscellaneous Risks
Dependence on Key Personnel. The Company is dependent on the efforts
of the executive officers of CRFLT. While the Company believes that it could
find replacements for these key personnel, the loss of their services could have
a significant adverse effect on the operations of the Company. The Company does
not intend to obtain key-man life insurance with respect to any of the executive
officers of CRFLT.
Changes in Laws. Increases in real estate or business improvement
district taxes will not result in increased rental payments to the Company under
the Leases, with the result that they may adversely affect the Company's cash
flow from operations and its ability to make distributions to partners,
including CRFLT. Similarly, changes in laws increasing the potential liability
for environmental conditions existing on Hotels or increasing the restrictions
on discharges or other conditions, as well as changes in laws affecting
construction and safety requirements, may result in significant unanticipated
expenditures, which, to the extent such expenditures must be borne by the
Company as the Lessor of the Hotels, would adversely affect the Company's cash
flow from operations and its ability to make distributions to limited partners.
Uninsured Loss. The Company will carry comprehensive liability, fire,
flood, extended coverage and rental loss (for rental losses extending up to 12
months) with respect to its Hotels with
42
<PAGE>
policy specification and insured limits customarily carried for similar Hotels.
Certain types of losses (such as from wars and environmental hazards), however,
may be either uninsurable or not economically insurable. Should an uninsured
loss occur, the Company could lose both its capital invested in, and anticipated
profits from, one or more of its Hotels.
Americans with Disabilities Act. The Company's Hotels must comply
with Title III of the Americans with Disabilities Act (the "ADA") to the extent
that such Hotels are "public accommodations" or "commercial facilities" as
defined by the ADA. The ADA may require removal of structural barriers to access
by persons with disabilities in certain public areas of the Company's Hotels
where such removal is readily achievable. The Company believes that the Hotels
will not be required to make substantial non-budgeted capital expenditures to
address the requirements of the ADA. However, noncompliance with the ADA could
result in substantial capital expenditures to remove structural barriers, as
well as the imposition of fines or an award of damages to private litigants
which might adversely affect the Company's ability to make expected
distributions to limited partners and shareholders. Under the Leases, the
Company would be required to fund all such expenditures.
Other Regulatory Risks. The Company's Hotels are subject to various
forms of regulation in addition to the ADA, including building codes,
regulations pertaining to fire safety and handicapped access, and other
regulations which may from time to time be enacted. The Company may be required
to incur significant costs to comply with any future changes in such
regulations.
Possible Environmental Liabilities. Under various federal, state and
local laws, ordinances and regulations, owners or operators of real estate may
be required to investigate and clean up certain hazardous substances released at
a property, and may be held liable to a governmental entity or to third parties
for property damage or personal injuries and for investigation and clean-up
costs incurred by the parties in connection with any contamination. In addition,
some environmental laws create a lien on a 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 contamination may
adversely affect the owner's ability to sell or lease real estate or to borrow
using the real estate as collateral. No assurances can be given that (i) a prior
owner, operator or occupant, such as a tenant, did not create a material
environmental condition not known to the Company, (ii) a material environmental
condition with respect to any Hotel does not exist, or (iii) future uses or
conditions (including, without limitation, changes in applicable environmental
laws and regulations) will not result in the imposition of environmental
liability.
The Company has engaged an environmental consulting firm to perform
Phase I environmental assessments on all of the Hotels in order to assess
existing environmental conditions.
A Phase II Environmental Assessment was undertaken with respect to
the Deerfield, Illinois Courtyard Hotel (the "Deerfield Hotel"). A report of
such assessment, dated November 29, 1995, disclosed contamination of the shallow
groundwater at the site resulting from the prior use of the site as a landfill
and not from any use of such site by CBM2 or its subsidiary. The Company has
analyzed the results of this Phase II Environmental Assessment and its potential
liability, if any. Based on currently available information, the Company is
unable to determine the need for remediation, its potential responsibility, if
any, for remediation, the scope of any remediation that may be required, and the
extent of the Company's possible liability for any remediation costs. The
Company currently estimates that the costs to evaluate the situation further are
not likely to be significant. Based on the foregoing, including the limited
amount of information currently available concerning the Deerfield Hotel, and
while there can be no assurance that the Company will not have liability in
respect of remediation of contamination at that site, the Company does not
believe that any of the environmental matters described above are likely to have
a material adverse effect on the business and operations of the Company as a
whole.
43
<PAGE>
A Phase II Environmental Assessment was undertaken with respect to
the Shreveport-Bossier City, Louisiana Residence Inn (the "Bossier City
Residence Inn"). A report of such assessment dated February 5, 1996, disclosed
the presence of ACM in a 70 square foot wall covering in the pool/jacuzzi
mechanical room which would not require an Operations and Maintenance Plan for
asbestos management if such wall was removed. The Company has analyzed the
results of this Phase II Environmental Assessment and its potential liability,
if any. Based on currently available information, the Company is unable to
determine the need for remediation, its potential responsibility, if any, for
remediation, the scope of any remediation that may be required, and the extent
of the Company's possible liability for any remediation costs. The Company
currently estimates that the costs to evaluate the situation further are not
likely to be significant. Based on the foregoing, including the limited amount
of information currently available concerning the Bossier City Residence Inn,
and while there can be no assurance that the Company will not have liability in
respect of remediation of contamination at that site, the Company does not
believe that any of the environmental matters described above are likely to have
a material adverse effect on the business and operations of the Company as a
whole.
No assurances can be given, however, that all potential environmental
liabilities have been identified or properly quantified or that no prior owner,
operator, or past or current guest or occupant has created an environmental
condition not known to the Company. Moreover, no assurances can be given that
(i) future laws, ordinances, or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Hotels will not be affected by the condition of land or operations in the
vicinity of the Hotels (such as the presence of underground storage tanks), or
by third parties unrelated to the Company.
44
<PAGE>
CONFLICTS OF INTEREST
The Consolidation was initiated by Host and is being proposed by
Host, the Company and the Hotel Partnership GPs, which are subsidiaries of Host.
The terms and conditions of the Consolidation and the structure of the Company
also were formulated by Host, the Hotel Partnership GPs and the Company. See
"Background and Reasons for the Consolidation -- Background of the
Consolidation."
As discussed below, the establishment of the terms of the
Consolidation, the recommendation by the Hotel Partnership GPs with respect to
the Consolidation and the operation of the Company involve conflicts of
interest. In resolving any conflicts of interest, each of the Hotel Partnership
GPs must act in accordance with its fiduciary duties to the Limited Partners of
its Hotel Partnership. The trustees of CRFLT, which will be the sole general
partner of the Company, also must act in accordance with their fiduciary duties
to the shareholders of CRFLT and, to a certain extent, the limited partners of
the Company as limited by the Partnership Agreement. See "Comparison of
Ownership of Hotel Partnership Interests, Units and Common Shares -- Fiduciary
Duties" for a general description of these duties.
Affiliated General Partners
Subsidiaries of Host have varying limited and general partner
interests in each of the Hotel Partnerships and act as Hotel Partnership GPs of
all of the Hotel Partnerships. Each Hotel Partnership GP has an independent
obligation to assess whether the terms of the Consolidation are fair and
equitable to the Limited Partners in its Hotel Partnership without regard to
whether the Consolidation is fair and equitable to any of the other participants
(including the Limited Partners in other Hotel Partnerships for which
subsidiaries of Host are the Hotel Partnership GPs and, in the case of FIBM,
have significant limited partner interests). While each of the Hotel Partnership
GPs has sought faithfully to discharge its obligations as Hotel Partnership GP
to its Hotel Partnership, there is an inherent conflict of interest in its
serving, directly or indirectly, in a similar capacity with respect to all of
the other Hotel Partnerships.
No Arm's Length Negotiations; Absence of Independent Representation
No independent representative was retained to negotiate on behalf of
the Limited Partners of the Hotel Partnerships. Consequently, the terms and
conditions of the Consolidation may have been more favorable to Limited Partners
of the Hotel Partnerships if such terms and conditions were the result of arm's
length negotiations or if an independent representative had been retained. The
Hotel Partnership GPs have obtained an opinion from AAA as to (i) the fairness,
from a financial point of view, to the Limited Partners of each Hotel
Partnership, of the methodologies used to determine the Exchange Value of each
Hotel Partnership and the allocation of Units among the Hotel Partnerships in
the Consolidation, (ii) the fairness and reasonableness, from the standpoint of
each Hotel Partnership, of the underlying assumptions used to determine the
Exchange Value of each Hotel Partnership and the purchase price of each
Acquisition Hotel (including, without limitation, the assumptions used to
determine the various adjustments to the Appraised Values of the Hotels), (iii)
the fairness and reasonableness to the Limited Partners of each Hotel
Partnership of the methodology used to allocate Units received by each Hotel
Partnership among its general and Limited Partners, (iv) the fairness and
reasonableness, from the standpoint of each Hotel Partnership, of the
methodologies and underlying assumptions used to determine the Continuation
Value and the Liquidation Value of each Hotel Partnership (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) and (v) the fairness and reasonableness, from
the Company's standpoint, of the economic terms of the Leases. In this regard,
the Fairness Opinion specifically does not conclude that other methodologies for
allocation of Units among the Hotel Partnerships might not have been more
favorable to the Limited Partners in certain of the Hotel Partnerships. See
"Fairness Analysis and Opinion."
45
<PAGE>
Substantial Benefits to Related Parties
Host and its subsidiaries will receive substantial benefits in
connection with the Consolidation including (i) the receipt of Units with an
estimated value of at least $__ million in exchange for their Hotel Partnership
Interests (based upon the estimated Exchange Values), (ii) $___ million in cash
from the sale of the Acquisition Hotels and (iii) because subsidiaries of Host
are Lessees of the Hotels, Host will receive benefits under the Leases including
the receipt of income to the extent sales from the Hotels exceed operating costs
and expenses payable by the Lessees, management fees and rental payments paid to
the Company. The Consolidation will also permit the Hotel Partnership GPs of
CBM1 and CBM2, which are subsidiaries of Host, to defer significant tax
liabilities attributable to taxable gain in excess of sale proceeds (estimated
at approximately $____ million) that would otherwise be incurred with respect to
any sale of the Courtyard Hotels other than in a tax-deferred transaction such
as the Consolidation or upon any substantial reductions in the amount of debt
now secured by the Courtyard Hotels. In the case of the Courtyard Hotels, the
Partnership Agreement imposes certain restrictions on the sale of those Hotels
and the refinancing, prepayment or reduction of the debt secured by those Hotels
for __ years from the Closing Date of the Consolidation without the consent of
Host in order to defer the recognition of gain, which gain would be
disproportionately borne by the Hotel Partnership GPs of CBM1 and CBM2 because
of prior allocations to them of tax losses. The Company also will repay, either
in cash or Common Shares, at the election of a subsidiary of Host, a loan of
approximately $13 million owed to such subsidiary of Host by CBM1.
Future Dealings with Related Parties
After the consummation of the Consolidation, it is anticipated that
affiliates of Host will continue to provide certain services to the Company that
such entities currently provide to the Hotel Partnerships. These services
include the provision of, among others, payroll, benefits and other
administrative services and office space. For additional information regarding
amounts historically paid for such services and the basis of such payments, see
the Notes to the Combined Consolidated Financial Statements. The terms upon
which these services will be provided will be substantially the same as the
current terms, which were not the result of arm's length negotiations. As a
result, the terms and conditions of such arrangements may be less favorable to
the Company than could have been obtained from a third party. Alternatively, in
the event Host were to decide not to provide such services in the future, the
Company would incur incremental costs to obtain such services from third parties
or to establish an internal capability to perform such services.
For a discussion of the Company's policies and agreements designed to
minimize any adverse effects from these conflicts of interest, see "Distribution
and Other Policies -- Conflicts of Interest Policies."
Host's Continued Ownership of Certain Limited Service and Extended-Stay Hotels
Following the Consolidation, Host will continue to own interests in
two hotels which operate under the Courtyard by Marriott(R), Residence Inn by
Marriott(R) or Fairfield Inn by Marriott(R) brand names. Host will maintain its
50% interest in the Westport Residence Joint Venture, which was formed in 1983
to own and operate the 128 room St. Louis Westport Plaza Residence Inn (the
"Westport Residence Inn"). In addition, Host will maintain its ownership
interest in the limited service operations of the Miami Airport Marriott (the
"Miami Airport Marriott"). This 772 room hotel contains six separate buildings,
including two towers. Four of the buildings (totaling 409 rooms) were converted
to limited service concepts (Courtyard by Marriott and Fairfield Inn by
Marriott) to attract travelers from different segments, while the towers
remained a full service Marriott. As these operations are virtually inseparable,
Host will maintain all of its interests in the Miami Airport Marriott.
46
<PAGE>
Tax Consequences upon Sale or Refinancing of Hotels
Certain holders of Units may experience different and more adverse
tax consequences compared to those experienced by other holders of Units or by
holders of Common Shares upon the sale or reduction of indebtedness on any of
the Hotels (including, particularly, Host and its subsidiaries with respect to
the Courtyard Hotels). Therefore, such holders, including Host and its
subsidiaries, may have different objectives regarding the appropriate pricing
and timing of any sale or refinancing of an individual Hotel. For reasons
relating to the federal income tax considerations of subsidiaries of Host, the
Partnership Agreement prohibits the Company from selling or refinancing the
Courtyard Hotels without the consent of Host for a period of __ years following
the Closing Date of the Consolidation. See "Risk Factors -- Risks and Effects of
the Consolidation -- Limitations on Sales or Refinancings of the Courtyard
Hotels." If the Courtyard Hotels do not perform as well as other hotels in its
portfolio, the Company may be unable to dispose of them because it may not be in
Host's economic interest to consent to such disposition. The Company has no
current plans to sell any individual Hotels.
Policies with Respect to Conflicts of Interest
The Company has adopted certain policies and will enter into
agreements with Host and its affiliates designed to minimize the adverse effects
from these potential conflicts of interest. See "Distribution and Other Policies
- -- Conflicts of Interest Policies" and "Business and Properties -Noncompetition
Agreements." There can be no assurance, however, that the policies and
agreements always will be successful in eliminating the influence of such
conflicts, and if they are not successful, decisions could be made at the CRFLT
level that might fail to reflect fully the interests of the limited partners of
the Company.
47
<PAGE>
BACKGROUND AND REASONS FOR THE CONSOLIDATION
Background of the Hotel Partnerships
Formation of the Hotel Partnerships. During the latter half of the
1980s and early 1990s, Host sponsored six limited partnerships formed to
acquire, own and operate limited service and extended-stay hotels operating
under three Marriott brand names (Courtyard by Marriott(R), Residence Inn by
Marriott(R) and Fairfield Inn by Marriott(R)). The Hotel Partnerships raised
capital from over 10,000 investors in two Regulation D private placements to
accredited investors only (CBM1 and CBM2), three registered public offerings
(RIBM1, RIBM2 and FIBM) and one private placement to substantial foreign
companies (Res USA). Separate wholly owned subsidiaries of Host are the sole
general partners of each Hotel Partnership. The Hotels were purchased (or
leased) from Host and its subsidiaries and have been managed continuously since
then by the Managers, which were, prior to 1993, subsidiaries of Host.
The table below sets forth the capital raised, distributions made and
number of Hotels owned, by each of the Hotel Partnerships as of September 12,
1997:
Historical Information Concerning the Hotel Partnerships
<TABLE>
<CAPTION>
Distributions to Limited
Aggregate Partners Per $1,000
Distributions to Limited Partner Original Date of Last
Total Limited Partners Investment through Admission of No. of
Capital through September 12, September 12, Original Partners Hotels
Hotel Partnership Raised 1997 1997 (Mo./Yr.) Owned
- ----------------- ------ --------------------- ------------------------- ----------------- ------
(in thousands) (in thousands) (in dollars)
<S> <C> <C> <C> <C> <C>
CBM1 $121,100 $65,758 $572 8/86 50
CBM2 158,300 78,564 534 1/88 70
RIBM1 66,300 39,908 608 4/88 15
RIBM2 70,700 42,140 602 12/88 23
Res USA 64,000 36,990 578 12/91 11
FIBM 84,100 51,269 615 7/90 50
</TABLE>
The following paragraphs describe, on a partnership-by-partnership basis,
the original investment objectives of each Hotel Partnership and the extent to
which such objectives have been met.
CBM1. The offering was intended to provide investors with an
opportunity to participate in the growth of the Courtyard by Marriott hotel
system. The private placement memorandum and related documents projected that,
based upon the facts and circumstances at the time and subject to various risks
and other uncertainties, Limited Partners could benefit from potential increases
in cash flow from operation of the Hotels owned by CBM1, as well as potential
capital appreciation and tax benefits. Based upon a financial forecast (and
subject to the qualifications, limitations and uncertainties described therein
and in the related private placement memorandum), it was forecast that cash flow
to the Limited Partners would commence in 1987 at approximately 12% of Invested
Capital (as defined in the partnership
48
<PAGE>
agreement) and increase through 1995 to approximately 23.5% of Invested Capital.
It was also forecast that the Limited Partners could receive $100,000 per
Partnership Unit on a tax-sheltered basis from Refinancing Proceeds (as defined
in the partnership agreement) ($50,000 per Partnership Unit in 1991 and $50,000
per Partnership Unit in 1995). Tax savings through 1988 were forecast to be
$13,481 per Partnership Unit for a Limited Partner in the highest federal income
tax bracket for 1986 decreasing to a 28% tax bracket beginning on July 1, 1987.
Through September 12, 1997, Limited Partners in CBM1 have received $57,181 per
Partnership Unit.
CBM2. The objectives for this offering were similar to those for the
CBM1 offering. The offering was intended to provide investors with an
opportunity to participate in the growth of the Courtyard by Marriott hotel
system. The private placement memorandum and related documents projected that,
based upon the facts and circumstances at the time and subject to various risks
and other uncertainties, Limited Partners could benefit from potential increases
in cash flow from operations, as well as potential capital appreciation. Based
upon a financial forecast (and subject to the qualifications, limitations and
uncertainties described therein and in the related private placement
memorandum), it was forecast that cash distributions to the Limited Partners
would commence in 1988 at approximately 10% of Invested Capital (as defined in
the partnership agreement) and increase through 1996 to approximately 27% of
Invested Capital. It was also forecast that the Limited Partners could receive
$102,307 per Partnership Unit on a tax-sheltered basis from Refinancing Proceeds
(as defined in the partnership agreement) ($50,000 per Partnership Unit in 1992
and $52,307 per Partnership Unit in 1996). Through September 12, 1997, Limited
Partners in CBM2 have received $53,445 per Partnership Unit.
RIBM1. RIBM1's principal investment objectives were to (i) preserve
investor capital; (ii) provide quarterly cash distributions from operations,
none of which distributions through 1992 were anticipated to be subject to
current federal income taxation (assuming a Limited Partner's losses were not
used to offset passive income from other sources) and (iii) participate in
expected annual increases in cash distributions from operations and in potential
long-term appreciation in the value of its properties. Based upon a financial
forecast (and subject to the qualifications, limitations and uncertainties
described therein and in the related offering document), it was forecast that
cash flow to the Limited Partners would commence in 1988 at approximately 10.3%
of original capital contributions. Through September 12, 1997, Limited Partners
in RIBM1 have received $608 per Partnership Unit.
RIBM2. The principal investment objectives of RIBM2 were to (i)
preserve investor capital; (ii) provide quarterly cash distributions from
operations, sheltered from federal taxation through 1995 (assuming a Limited
Partner's losses were not used to offset passive income from other sources) and
(iii) participate in expected annual increases in cash distributions from
operations and potential long-term appreciation in the value of its properties.
Based upon a financial forecast (and subject to the qualifications, limitations
and uncertainties described therein and in the related offering document), it
was forecast that cash distributions to the Limited Partners would commence in
1989 at approximately a 9.0% annual return on original capital contributions,
increasing to 10.1% of original capital contributions in 1990. Through September
12, 1997, Limited Partners in RIBM2 have received $602 per Partnership Unit.
Res USA. The offering was intended to provide cash distributions to
its Limited Partners based upon expected increases in operating performance of
its properties. Based upon a financial forecast (and subject to the
qualifications, limitations and uncertainties described therein and in the
related private placement memorandum), it was forecast that cash distributions
to the Limited Partners would commence in 1992 at approximately 10% of original
capital contributions, increasing through 1996 to approximately 11% of original
capital contributions. Through September 12, 1997, Limited Partners in Res USA
have received $60,839 per Partnership Unit.
FIBM. FIBM's principal investment objectives were to (i) provide
quarterly cash distributions, which were anticipated to be free from significant
current federal taxation through 1998 (assuming that a Limited Partner did not
use tax losses from the partnership to offset passive activity income from other
sources); (ii) participate in expected annual increases in cash distributions
49
<PAGE>
and in potential long-term appreciation in value of its properties and (iii)
preserve investor capital. Based upon a financial forecast (and subject to the
qualifications, limitations and uncertainties described therein and in the
related offering document), it was forecast that cash flow to FIBM's Limited
Partners would commence in 1990 at approximately 9% of original capital
contributions, increasing through 1993 to approximately 12.4% of original
capital contributions. Through September 12, 1997, Limited Partners in FIBM have
received $615 per Partnership Unit.
Anticipated Holding Periods. The offering documents of each of RIBM1
and RIBM2 stated that the Hotel Partnership GP expected to sell all of Hotel
Partnership's Hotels before the end of 1998 but if all of the Hotels were not
sold by the end of 2001, then the Hotel Partnership GP would use its reasonable
best efforts to sell such Hotels thereafter. Similarly, the offering document of
FIBM stated that the Hotel Partnership GP expected to sell all of FIBM's Hotels
before the end of 2000, at which time the Hotel Partnership would be liquidated.
However, if all of FIBM's Hotels were not sold by the end of 2001, then the
Hotel Partnership GP would use its reasonable best efforts to sell such Hotels
at such time. The offering documents of Res USA stated that the Hotel
Partnership GP, subject to certain agreements and the majority consent of the
Limited Partners, would sell Res USA's Hotels by December 31, 1998 for the best
price it could reasonably obtain under the circumstances. The offering documents
of each of CBM1 and CBM2 did not contain any such provisions regarding
anticipated holding periods.
The following table sets forth, with respect to each Hotel Partnership, the
age of the Hotel Partnership relative to (i) the original term of the Hotel
Partnership as set forth in the applicable partnership agreement and (ii) the
anticipated holding period of the Hotel Partnership's investments as set forth
in the applicable offering materials.
Legal Life and Original Anticipated Holding Period
of the Hotel Partnerships
<TABLE>
<CAPTION>
Legal Life of Hotel Original Anticipated
Partnership Commenced Operations Holding Period Remaining Holding Period
Hotel Partnership (years) (Mo./Yr.) (years) (years)
- ----------------- ------------------- -------------------- -------------------- ------------------------
<S> <C> <C> <C> <C>
CBM1 100 8/86 no provision --
CBM2 100 1/88 no provision --
RIBM1 100 4/88 10-13 1
RIBM2 100 12/88 10-13 1
Res USA 100 12/91 7 1
FIBM 100 7/90 11-12 3
</TABLE>
Investment Liquidity. Since the Partnership Units of the Hotel Partnerships
are not listed on any national or regional stock exchange, nor quoted on any
automated quotations system, there has been limited liquidity available to
Partners. No formal market for such Partnership Units exists and because of
provisions in the Code which tax "publicly traded partnerships" as corporations,
the partnership agreement for each Hotel Partnership prohibits such a market
from developing. Sales activity in the Partnership Units has been limited and
sporadic.
The information in the following table shows the highest, lowest and
weighted average prices for sales of the Partnership Units in the Hotel
Partnerships as reported to the Hotel Partnership GPs
50
<PAGE>
for the twelve months ended November 30, 1997. The Hotel Partnership GPs do not
believe these prices generally reflect the current value of the Hotel
Partnership's net assets. These prices are not indicative of total return to
investors in the respective Hotel Partnerships because prior cash distributions
and tax benefits received by each Limited Partner are not reflected in the
price. There can be no assurance that transactions in Partnership Units of any
Hotel Partnership have not occurred at prices either above the high price or
below the low price set forth below.
Partnership Unit Prices
(All price information on a per unit basis)
<TABLE>
<CAPTION>
Transaction
Period Number of
Original 12 months Partnership Units Weighted Estimated
Hotel Partnership Cost ended Traded High Low Average Exchange Value/(1)/
- -------------------- ----------- ---------- ----------------- ---------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CBM1................ $ 100,000 11/30/97 45 $ 60,000 $ 30,000 $ 45,635 $
CBM2................ $ 100,000 11/30/97 54 $ 78,500 $ 34,800 $ 47,169 $
RIBM1............... $ 1,000 11/30/97 2,096 $ 583 $ 275 $ 414 $
RIBM2............... $ 1,000 11/30/97 2,731 $ 600 $ 143 $ 500 $
Res USA............. $ 100,000 11/30/97 0 N/A N/A N/A $
FIBM................ $ 1,000 11/30/97 3,462 $ 887 $ 450 $ 621 $
</TABLE>
- --------------------
/(1)/ Based upon the Appraised Values of each Hotel Partnership's Hotels and
certain estimates as of ________ __, 1998. The actual Exchange Values
will be determined as of the Final Valuation Date. Assumes that each
Hotel Partnership is allocated Units with a value equal only to its
estimated Exchange Value. The amounts in this column represent the
portion of the estimated Exchange Value of each Hotel Partnership that
would be allocable to Limited Partners per $1,000 limited partner
original investment.
Background of the Consolidation
To increase the Limited Partners' liquidity in their investment, Host and
the Hotel Partnership GPs began to seriously explore the concept of the
Consolidation in July 1997. By forming a separate public entity to own the
limited service and extended-stay hotels, the newly created public entity would
be able to focus solely on these segments of the lodging industry, thereby
affording Limited Partners with an opportunity to invest in a more diverse
lodging enterprise and also to have access to a public trading market. Following
the Consolidation, Host intends to concentrate its efforts on the full service
lodging industry. By structuring the transaction as proposed, however, Host
retains some economic interest in the limited service and extended-stay hotels
through the Lessees and its ownership of Units received in exchange for its
Hotel Partnership Interests. All of the discussions and negotiations with
respect to the Consolidation have taken place within Host and with its financial
and legal advisors.
Reasons for the Consolidation
The Consolidation is being proposed at this time for two principal reasons.
First, the Hotel Partnership GPs believe that the expected benefits of the
Consolidation, as set forth below, outweigh the risks connected with the
Consolidation, as set forth in "Risk Factors."
51
<PAGE>
Expected Benefits from the Consolidation
Enhanced Liquidity of Investment. Limited Partners' Hotel Partnership
Interests currently represent relatively illiquid investments. Although
currently there is a limited resale market for such Partnership Units (except
interests in Res USA, for which there is no market), the trading volume of such
Partnership Units is thin and the prices at which those Partnership Units trade
are generally below their Appraised Value (and applicable federal income tax
rules and the terms of the partnership agreements of the Hotel Partnerships
effectively prevent the development of a more active or substantial market for
these interests). See "Partnership Unit Prices" above. The Consolidation will
offer Limited Partners significantly enhanced liquidity with respect to their
investments in the Hotel Partnerships because, after the expiration of the
Initial Holding Period, Limited Partners would be able to exercise their Unit
Redemption Right (subject to certain limited exceptions). Limited Partners
thereby would be able to receive, at CRFLT's option, either freely tradeable
Common Shares of CRFLT or the cash equivalent thereof. In addition, CRFLT
expects that the Common Shares will be listed on the NYSE and that a public
market will develop for the Common Shares following the Consolidation. The
exercise of the Unit Redemption Right, however, generally would result in
recognition of taxable income or gain at that time.
Public Market Valuation of Assets. Typically, Limited Partners'
interests in the Hotel Partnerships currently trade at a discount to the
Appraised Values of the Hotel Partnership's real estate assets. In contrast, the
Hotel Partnership GPs believe that the public market valuations of securities of
many publicly traded real estate companies, including REITs that focus on the
lodging industry, are in part based on the growth potential of such companies
and currently exceed the private market values of their real estate assets.
Therefore, the Consolidation offers Limited Partners the opportunity to obtain
Units (and, upon the exercise of the Unit Redemption Right following the
expiration of the Initial Holding Period, Common Shares) whose public market
valuation may exceed the Appraised Value of the underlying assets of the Company
on a per Unit/Common Share basis. There can be no assurance, however, that the
Common Shares of CRFLT will trade at a premium to the private market values of
the Hotels or that the relative pricing differential will not change or be
eliminated in the future.
Regular Quarterly Cash Distributions. Over the last five full calendar
years, Limited Partners (except CBM2 Limited Partners) generally have
received biannual or annual cash distributions. In contrast, the Hotel
Partnership GPs expect that the Company will make regular quarterly cash
distributions to holders of Units (including CRFLT) in proportion to their
percentage interests in the Company (with such distributions to be an amount at
least sufficient to permit CRFLT to make distributions with respect to the
Common Shares in the amount required by the Code as it relates to REITs). The
ability to make these regular quarterly distributions would be attributable
primarily to (i) reduced interest expense resulting from a reduction in
indebtedness following the Consolidation and (ii) the Company's greater access
to capital both directly and through CRFLT (as compared to any of the Hotel
Partnerships individually). Upon exercise of the Unit Redemption Right, Limited
Partners who receive Common Shares would be entitled to receive cash
distributions with respect to such Common Shares in an amount per Common Share
equal to the amount distributed per Unit.
The following table sets forth the cash distributions per $1,000 limited
partner original investment for all of the Hotel Partnerships for 1996, actual
and expected distributions for 1997 and expected distributions for 1998,
assuming the Consolidation does not occur, and the distributions estimated to be
paid by the Company to the Limited Partners in each Hotel Partnership if the
Consolidation occurs and all of the Hotel Partnerships participate (computed
assuming the Consolidation were to occur on January 1, 1998).
52
<PAGE>
<TABLE>
<CAPTION>
1998 Distributions
-------------------------------------
Expected
Actual and With
Expected Expected Consolidation
1996 1997 Without (Distribution
Hotel Partnership Distributions Distributions/(1)/ Consolidation at ____ %)
----------------- ------------- ------------------ ------------- -----------
<S> <C> <C> <C> <C>
CBM1........... $20 $80/(2)/ $ $
CBM2........... 47 99
RIBM1.......... 75 25
RIBM2.......... 0 50
Res USA........ 116 85
FIBM........... 100 10
- ----------------------------
</TABLE>
/(1)/ Actual through September 12, 1997 and expected for September 13, 1997
through January 2, 1998.
/(2)/ Excludes a return of capital distribution of $250 per $1,000 limited
partner original investment.
Substantial Tax Deferral. The Hotel Partnership GPs expect that Limited
Partners who do not exercise Dissenters' Rights generally should be able to
obtain the benefits of the Consolidation while continuing to defer recognition
for federal income tax purposes of at least a substantial portion, if not all,
of the gain with respect to their Hotel Partnership Interests that otherwise
would be recognized in the event of a liquidation of the Hotel Partnership or a
sale or other disposition of its Hotels in a taxable transaction. Thereafter,
such Limited Partners generally should to be able to defer at least a
substantial portion of such built-in gain until they elect to exercise their
Unit Redemption Right, the Hotels currently owned by their Hotel Partnerships
are sold or otherwise disposed of in a taxable transaction by the Company or, in
the case of CBM1, the debt now secured by such Hotels is repaid, prepaid or
substantially reduced. In the case of the Courtyard Hotels, the Partnership
Agreement imposes certain restrictions on the sale of those Hotels and the
refinancing, repayment or reduction of the debt secured by those Hotels for __
years from the Closing Date of the Consolidation without the consent of Host in
order to defer the recognition of gain, which gain would be disproportionately
borne by the Hotel Partnership GPs of CBM1 and CBM2 because of prior allocations
to them of tax losses. The federal income tax consequences of the Consolidation
are highly complex, and with respect to each Limited Partner, are dependent upon
many variables, including the particular circumstances of such Limited Partner.
See "Federal Income Tax Considerations -- Tax Consequences of the Formation of
the Company." Each Limited Partner is urged to consult with his own tax advisors
as to the consequences of the Consolidation in light of his particular
circumstances.
Risk Diversification. Upon consummation of the Consolidation, each Limited
Partner's investment will be converted from an investment in a single Hotel
Partnership owning from 11 to 70 hotels of a single product type and market
segment into an investment in an entity that initially owns up to 221 hotels in
multiple product types, geographic locations and market segments. The
consolidation of the Hotels, as well as future hotel acquisitions by the
Company, will reduce the dependence upon the performance of, and the exposure to
the risks associated with, any particular group of Hotels currently owned by a
single Hotel Partnership and the single market segment, product type and
geographic locations in which each Hotel Partnership currently operates and
spread such risk over a broader portfolio, multiple market segments and
geographic locations.
Reduction in Leverage and Interest Costs. Upon consummation of the
Consolidation and the Offering, it is expected that the aggregate amount of
consolidated indebtedness will be reduced, by application of a portion of the
net proceeds of the Offering, by between approximately $390 million and $539
million (excluding prepayment and defeasance costs which also will be required
to be paid) depending upon which Hotel Partnerships participate in the
Consolidation and the proceeds of the Offering. This reduction in the level of
indebtedness will result in significant
53
<PAGE>
debt service savings (principal and interest) to the Company, as compared to the
current aggregate debt service expenses of the Hotel Partnerships. This
reduction also will reduce overall leverage for Limited Partners in the
Hotel Partnerships.
Growth Potential. The Hotel Partnership GPs believe that the conversion of
each Limited Partner's investment into an investment in the Company will allow
Limited Partners to participate in growth opportunities that would not otherwise
be available to them. The Hotel Partnership GPs believe that substantial
opportunities exist to acquire or develop limited service or extended-stay hotel
properties at attractive prices and that the Hotel Partnerships are not in a
position to take advantage of such opportunities because of (i) their lack of
access to additional sources of capital on favorable terms, (ii) restrictions on
additional acquisitions and development imposed by the partnership agreements of
the Hotel Partnerships and (iii) the fact that the Hotel Partnerships have
already committed their capital and generally are not authorized to raise
additional funds for (or reinvest net sale or refinancing proceeds in) new
investments, absent amendment of the partnership agreements of the Hotel
Partnerships.
The Company's structure and capitalization as part of an UPREIT should
provide it with substantial flexibility to structure acquisitions of additional
hotels utilizing debt, cash, Units or Common Shares (or any combination
thereof). In particular, the ability of the Company to issue Units in the future
for the purpose of acquiring additional properties may permit the Company to
structure acquisitions of hotel properties on an income tax-deferred basis to
the sellers (i.e., sellers of properties generally will be able to exchange
their ownership interests in those properties for Units without incurring an
immediate income tax liability).
Greater Access to Capital. With publicly traded equity securities, a larger
base of assets and a greater equity value than any of the Hotel Partnerships
individually, CRFLT should be able to obtain the capital necessary to fund the
Company's operations and to consummate acquisitions with greater ease and on
more attractive terms than would be available to any of the Hotel Partnerships
individually. CRFLT and the Company should have more sources of capital
available to it than the Hotel Partnerships through access to the public equity
and debt capital markets, as well as from more traditional sources of real
estate financing. In addition, the Hotel Partnership GPs expect that the
Company's proposed Credit Facility could be used to facilitate acquisitions of
additional hotel properties, for capital expenditures and for working capital
and other permitted purposes. This greater access to capital should provide
greater financial stability to the Company and should reduce the level of risk
associated with refinancing existing loans upon maturity, as compared to the
Hotel Partnerships individually.
Second, the Hotel Partnership GPs believe the Consolidation is better than
any of the alternatives which they considered, such as (i) reorganization of
each individual Hotel Partnership into a standalone UPREIT, (ii) continuation of
the Hotel Partnerships or (iii) liquidation of the Hotel Partnerships. See
"--Alternatives to the Consolidation."
Reimbursements and Distributions to the Hotel Partnership GPs
Under the partnership agreements of the Hotel Partnerships, the Hotel
Partnership GPs do not receive any fees or compensation for services rendered to
the Hotel Partnerships as general partner but the Hotel Partnership GPs and
their affiliates are reimbursed for certain costs and expenses incurred on
behalf of the Hotel Partnerships. Each Hotel Partnership GP is entitled to
distributions related to its respective interests in the Hotel Partnerships.
Following the Consolidation, the Hotel Partnership GPs will receive only
distributions with respect to the Units received for their Hotel Partnership
Interests and affiliates of the Hotel Partnership GPs will receive reimbursement
for certain services provided to the Company.
54
<PAGE>
The following table sets forth the reimbursements and distributions paid by
the Hotel Partnerships to the Hotel Partnership GPs on a combined basis
("Historical") for the last three fiscal years and the thirty-six weeks ended
September 12, 1997 ("First Three Quarters 1997") and the reimbursements and
distributions that would have been paid to the Hotel Partnership GPs over such
periods if the Consolidation had been in effect, assuming the Full Consolidation
Scenario ("Pro Forma").
Historical and Pro Forma
Reimbursements and Distributions to Hotel Partnership GPs
(in thousands)
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
-------------------- ------------------------------
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Historical
- ----------
Reimbursements $ 758 $ 923 $ 838 $ 757
Distributions 2,410 498 235 168
-------- ------ ------ ------
Total Historical $ 3,168 $ 1,421 $ 1,073 $ 925
======== ====== ====== ======
Pro Forma
- ---------
Reimbursements $ $ $ $
Distributions
-------- ------ ------ ------
Total Pro Forma $ $ $ $
======== ====== ====== ======
</TABLE>
Alternatives to the Consolidation
In determining whether to propose the Consolidation, the Hotel
Partnership GPs considered three principal alternatives to the Consolidation
that could have been pursued by each Hotel Partnership: (i) reorganization of
each Hotel Partnership into a standalone UPREIT; (ii) continuation of each Hotel
Partnership and (iii) liquidation of each Hotel Partnership.
Reorganization of each Hotel Partnership into a Standalone UPREIT. The
Hotel Partnership GPs considered the advisability of reorganizing each of the
Hotel Partnerships as a standalone UPREIT. If approved, such action would have
provided some of the benefits contemplated by the Consolidation, including
providing partners in the reorganized entities with enhanced liquidity and the
potential to form the UPREIT without recognition of significant taxable gain or
loss to the Limited Partners at the time of formation.
However, the Hotel Partnership GPs believe that single partnership
reorganizations have a number of significant disadvantages. First, it is
believed that the costs and expenses associated with six separate
reorganizations in the aggregate would substantially exceed the costs expected
for the Consolidation. Second, because of the relatively small size of the Hotel
Partnerships (as compared with existing publicly traded UPREITs), such
reorganizations would, in the opinion of the Hotel Partnership GPs, result in
significantly more limited markets for the equity securities of the newly formed
REITs than is expected to be the case for CRFLT as a result of the
Consolidation. Third, single partnership reorganizations would not achieve the
objective of placing a significant percentage of the Hotels under a single
ownership entity and, accordingly, would not be likely to realize certain
advantages expected to arise from the Consolidation, such as growth potential,
asset diversification and improved access to capital markets.
55
<PAGE>
Continuation of each Hotel Partnership.
Benefits of Continuation. An alternative to the Consolidation would be to
------------------------
continue each Hotel Partnership in accordance with its existing business plan
and pursuant to its current partnership agreement. Continuing each Hotel
Partnership without change would have the following effects, some of which
effects Limited Partners may perceive as benefits:
(i) no Hotel Partnership would be subject to the risks associated with
the Consolidation, and instead each Hotel Partnership would remain a separate
entity, with its own assets and liabilities, and would pursue its original
investment objectives consistent with the guidelines, restrictions and
safeguards contained in its partnership agreement;
(ii) no Hotel Partnership's performance would be affected by the
performance of the other Hotel Partnerships, including the investment
objectives, interests and intentions of the Limited Partners in the other Hotel
Partnerships;
(iii) there would be no change in the nature of the Limited Partners'
voting rights;
(iv) there would be no change in the cash distribution policy of the
Hotel Partnership; and
(v) none of the Hotel Partnerships would incur the Consolidation Expenses,
currently estimated to be approximately $_______ million in the aggregate.
Disadvantages of Continuation. However, maintaining the Hotel Partnerships
-----------------------------
as separate entities would have the following disadvantages, among others: (i)
continued illiquidity of a Limited Partner's investment due to the absence of an
established market for interests in the Hotel Partnerships that provides full
value for such interests and the restrictions in the federal income tax law and
the partnership agreements that prevent the development of such markets; (ii)
the inability from time to time of the Hotel Partnerships to make regular
distributions and (iii) the inability of the Hotel Partnerships to take
advantage of public market valuation of their assets, growth opportunities and
other potential benefits of the Consolidation.
Liquidation of each Hotel Partnership.
Benefits of Liquidation. In lieu of participating in the Consolidation,
-----------------------
each Hotel Partnership could sell its assets, pay off its existing liabilities
not assumed by the buyer and distribute the net sales proceeds to the Partners
(including the Hotel Partnership GPs) in accordance with the distribution
provisions of its partnership agreement. The primary advantage of this
alternative would be to provide immediate liquidity to Limited Partners based
upon the current market value of each Hotel Partnership's real estate assets.
See "Summary of Comparative Valuation Alternatives" for estimates of the net
liquidation proceeds that might be available to the Limited Partners upon the
liquidation of each Hotel Partnership.
Disadvantages of Liquidation. The Hotel Partnership GPs do not believe that
----------------------------
this alternative would be as beneficial to Limited Partners as the
Consolidation, for the following reasons, among others: (i) a Hotel
Partnership's sale of its Hotels would not be likely to benefit from the public
market valuation of real estate assets in the same manner as the sale of an
interest in an operating real estate company like the Company (through exercise
of the Unit Redemption Right and the sale of any Common Shares received as a
result thereof); (ii) certain existing Hotel Partnership debt cannot be defeased
or prepaid at the present time (such as the indebtedness of CBM1, RIBM2 and
FIBM) and when the existing debt can be defeased or prepaid, the costs of
defeasance or prepayment (with the exception of Res USA) would significantly
decrease the sales proceeds available to Limited Partners in an individual Hotel
Partnership and (iii) a sale and liquidation would be a taxable event for
Limited Partners, who would lose the ability to individually plan the
56
<PAGE>
timing of the recognition of their taxable gain. In addition, liquidation of the
Hotels at this time would be, in the Hotel Partnership GPs' opinion, premature,
and could result in various adverse consequences, including one or more of the
following:
(a) in the event of an aggressive bulk sale of individual Hotels,
significant discounts from appraised values, which assume a gradual and orderly
liquidation; and
(b) in the event of a gradual liquidation approach, ongoing Hotel
Partnership administration costs, which are largely independent of asset size,
over time could reach disproportionately high levels in relation to hotel
revenues and thus reduce the portion of net sales proceeds available for
distribution to Limited Partners.
Comparison of Alternative Consideration
To assist Limited Partners in evaluating the Consolidation, the Hotel
Partnership GPs have attempted to compare the estimated value of Units to be
received in the Consolidation with: (i) the face amount of Notes that will be
issued to Dissenting Partners who elect to exchange the Units they receive in
the Consolidation for Notes; (ii) estimates of the Continuation Value of the
Hotel Partnership Interests and (iii) estimates of the Liquidation Value of the
Hotel Partnership Interests. The Hotel Partnership GPs have not attempted to
estimate the value of Hotel Partnership Interests following standalone UPREIT
reorganizations because the Hotel Partnership GPs do not believe such
reorganizations are feasible and such valuation estimates would be subject to
substantial uncertainties. Since the value of the Units and the possible
consideration under alternatives to the Consolidation are dependent upon a
number of estimates, variables and assumptions, as well as varying market
conditions, no assurance can be given that the estimated values indicated could
be realized. However, the Hotel Partnership GPs believe that analyzing the
alternatives in terms of estimated values, based upon currently available market
data and reasonable estimates and assumptions, establishes a reasonable basis
for comparing the value of the Units to the alternatives. The results of this
comparative analysis (including the methodology and assumptions used to derive
estimated values) are summarized under "Fairness Analysis and Opinion --
Comparison of Alternatives."
The Hotel Partnership GPs believe that the comparison of the values that
might be realized by the Limited Partners from various alternatives, when
considered together with the anticipated effect of the Consolidation on
distributions and with all the other differences between continued ownership of
Hotel Partnership Interests as compared with the receipt of Units, supports the
Hotel Partnership GPs conclusion that the Consolidation is fair to Limited
Partners. Limited Partners should, however, bear in mind that the estimated
values assigned to the Units and alternative forms of consideration are based on
a variety of assumptions. These assumptions include the assumptions used by AAA
in preparing the Appraisals and the estimates of Continuation Value and
Liquidation Value. In addition, these estimates are based upon certain
information available at the time the estimates were prepared and no assurance
can be given that the same conditions will exist at the time of the
Consolidation. While AAA and the Hotel Partnership GPs believe AAA has a
reasonable basis for the assumptions selected, it is unlikely that the
assumptions will prove to be accurate in all respects, and some assumptions as
to future events have been selected to simplify the analysis and may not
approximate the actual experience of the Hotel Partnerships. The estimated
values of the Units and alternate forms of consideration would have been
different had different assumptions been made.
The following table summarizes the results of the comparative analysis
described above. There can be no assurance, however, that the actual value of
Units received in the Consolidation, the actual face amount of Notes offered to
Dissenting Partners, the actual value of continuing the Hotel Partnerships or
the actual net liquidation proceeds will not differ substantially from those
estimated for purposes of this analysis.
57
<PAGE>
Summary of Comparative Valuation Alternatives/(1)/
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Face Amount Estimated
of Liquidation
Estimated Notes Offered Value
Value of to Dissenting Estimated Continuation if Assets Sold at
Hotel Partnership Units/(2)/ Partners/(3)/ Value/(4)/ Appraised Value/(5)/
----------------- ------------ ------------- ---------- --------------------
<S> <C> <C> <C> <C>
CBM1........................... $ $ $ $
CBM2...........................
RIBM1..........................
RIBM2..........................
Res USA........................
FIBM...........................
- --------------------
</TABLE>
/(1)/ The information shown in this table assumes all Hotel Partnerships are
Participating Hotel Partnerships. A limited partner original investment of
$1,000 equates to one Partnership Unit in RIBM1, RIBM2 and FIBM and to
1/100th of a Partnership Unit in CBM1, CBM2 and Res USA.
/(2)/ The amounts in this column represent the portion of the estimated Exchange
Value of each Hotel Partnership that would be allocable to Limited
Partners per $1,000 limited partner original investment. Assumes the value
of Units is equal to the Public Offering Price of CRFLT's Common Shares in
the Offering and that the aggregate value of Units received by each Hotel
Partnership is just equal to (but does not exceed) the estimated Exchange
Value.
/(3)/ The amounts in this column are equivalent to the portion of the
Liquidation Value of each Hotel Partnership that would be reflected in the
Notes to be issued to Dissenting Partners per $1,000 limited partner
original investment. See footnote (5) below.
/(4)/ The amounts in this column represent the estimated amount that would be
distributed to Limited Partners per $1,000 limited partner original
investment if each Hotel Partnership were continued for ten years and then
sold for its estimated value, determined using a discounted cash flow
analysis applied to the anticipated cash flows from the operation and sale
of each Hotel and taking into account the terms of existing debt
obligations (the "Continuation Value").
/(5)/ The amounts in this column represent the amount that would be distributed
to Limited Partners per $1,000 limited partner original investment if each
Hotel Partnership sold its Hotels at their Appraised Values as of _____
__, 1998, and distributed the net proceeds (after payment of debts and
other obligations (including defeasance costs or prepayment penalties),
and an allowance for liquidation costs, expenses and contingencies equal
to 2% of the Appraised Value of the Hotels), in accordance with its
respective partnership agreement (the "Liquidation Value").
58
<PAGE>
RECOMMENDATION OF THE HOTEL PARTNERSHIP GPs
For the reasons stated herein, the Hotel Partnership GPs believe that
the terms of the Consolidation provide substantial benefits and are fair to the
Limited Partners in each of the Hotel Partnerships and recommend that all
Limited Partners vote FOR the Consolidation. See "Fairness Analysis and Opinion
- -- Fairness Analysis."
59
<PAGE>
THE CONSOLIDATION
General
Limited Partners of the Hotel Partnerships are being asked to approve
the Mergers of the Merger Partnerships into such Hotel Partnerships with the
Hotel Partnerships surviving and becoming subsidiaries of the Company and the
Partners (including the Hotel Partnership GPs) receiving Units of the Company in
exchange for their Hotel Partnership Interests. If the Consolidation is
consummated as contemplated, the Company will acquire and initially own 221
limited service and extended-stay hotels located in 35 states across the United
States, operating under three Marriott brand names (Courtyard by Marriott(R),
Residence Inn by Marriott(R) and Fairfield Inn by Marriott(R)). The Company will
be one of the largest owners of hotels in the United States.
The following table sets forth certain information as of September
12, 1997 (or, in the case of average daily rate, average occupancy and REVPAR,
for the thirty-six weeks then ended) regarding the Hotels that will comprise the
Company's initial lodging portfolio (including the Acquisition Hotels):
<TABLE>
<CAPTION>
Number of Number of Average Daily Average
Brand Name Hotels Rooms Rate Occupancy REVPAR/(1)/
---------- ----------- ----------- ---- --------- -----------
<S> <C> <C> <C> <C> <C>
Courtyard Hotels (moderate-priced)....... 120 17,558 $ 81.95 82.1% $67.31
Residence Inns (extended-stay)........... 49 5,910 $ 91.04 85.9% $78.14
Fairfield Inns (economy).................. 50 6,681 $ 50.89 78.4% $39.92
--- -----
Subtotal 219 30,149
Acquisition Hotels
Chicago Downtown Courtyard............ 1 334 $ 133.90 84.1% $112.56
Pentagon City Residence Inn........... 1 300 $ 120.52 81.1% $ 97.74
--- ------
Total 221 30,783
=== ======
- --------------
</TABLE>
/(1)/ REVPAR is a commonly used indicator of market performance of hotels.
REVPAR measures daily room revenues generated on a per room basis by
combining the average daily room rate charged and the average daily
occupancy achieved. REVPAR excludes food and beverage and other ancillary
revenues generated by the hotel.
If all requisite approvals are obtained and other conditions are
satisfied or waived, the following related transactions constituting the
Consolidation, are expected to occur:
. CRFLT will become the sole general partner of the Company.
. Each Hotel Partnership whose Limited Partners vote in favor
of participation in the Consolidation (a "Participating
Hotel Partnership") will merge (a "Merger") with a newly
formed direct or indirect wholly owned subsidiary of the
Company (a "Merger Partnership"). In each Merger, the
Partners will receive Units in exchange for their existing
Hotel Partnership Interests based upon the Exchange Value
of each Hotel Partnership. The Hotel Partnerships will be
the surviving entities of the Mergers and will continue in
existence as direct or indirect wholly owned subsidiaries
of the Company. Limited Partners who vote against the
Mergers and comply with certain specified procedures, can
elect to tender the Units they receive in the Consolidation
in
60
<PAGE>
exchange for Notes. See " -- Rights of Dissenting Partners"
and "Description of the Notes."
. The Hotel Partnerships will lease the Hotels to the
Lessees pursuant to the Leases.
. The Lessees will assume the Management Agreements with
the Managers relating to the operation of the Hotels.
See "Business and Properties -- The Management
Agreements."
. CRFLT will sell Common Shares in the Offering, which Common
Shares are expected to trade on the NYSE. The proceeds from
the Offering will be contributed by CRFLT to the Company in
exchange for Units.
. The Company will repay (i) $390.1 million of CBM2
Certificates (together with an estimated prepayment penalty
of $25.5 million), (ii) $93.3 million outstanding under the
RIBM1 Senior Mortgage (together with an estimated
prepayment penalty of $5.8 million) and (iii) $55.7 million
of mortgage debt owed by Res USA (together with an
estimated $1.4 million prepayment penalty).
. The Company will purchase the Acquisition Hotels from Host
for $___ million in cash, which represents their aggregate
Appraised Value, as adjusted.
. The Company will satisfy the $___ million obligation of the
Hotel Partnerships relating to certain deferred management
fees payable by the Hotel Partnerships to Marriott
International by the payment of $___ million in cash.
. The Company will repay, either in cash or Common Shares, at
the election of a subsidiary of Host, a loan of
approximately $13 million owed to such subsidiary of Host
by CBM1.
. The Company will pay the Consolidation Expenses and
Offering Costs.
. The Company will obtain the Credit Facility which will
provide for borrowings of up to $400 million for future
acquisitions and other purposes.
. The Company, through the Hotel Partnerships and assuming
the Full Consolidation Scenario, will continue to have
approximately $780 million of indebtedness outstanding as
of June 30, 1998, less scheduled amortization payments,
which will result in a debt-to-total market capitalization
ratio of approximately __% (assuming the value of the Units
is just equal to but does not exceed the estimated Exchange
Values).
61
<PAGE>
Following the Consolidation, assuming the Full Consolidation
Scenario, the organizational structure of CRFLT will be as follows:
[FLOW CHART APPEARS HERE]
The former general and Limited Partners in the Hotel Partnerships
will hold Units in the Company as limited partners and CRFLT will hold Units in
the Company as general partner and limited partner. CRFLT will be owned by the
public shareholders. The Company will own 100% of the equity interests in the
Hotel Partnerships and the Acquisition Hotels both directly and through other
direct or indirect wholly owned subsidiaries of the Company in CRFLT. The
Lessees of the Hotels, pursuant to the leases, are wholly owned subsidiaries of
Host Marriott Corporation. The Managers of the Hotels, pursuant to the
Management Agreements, are wholly owned subsidiaries of Marriott International,
Inc.
(1) Dissenting Partners may elect to tender the Units they receive in the
Consolidation for Notes, subject to the Maximum Note Limitation (as defined
herein). See "Rights of Dissenting Partners."
(2) The Company will own 100% of the equity interests in the Hotel Partnerships
and the Acquisition Hotels both directly and through other direct or
indirect wholly owned subsidiaries of the Company or CRFLT.
The Hotel Partnership Mergers
Issuance of Units. If the Consolidation is consummated and the
requisite percentage of Limited Partners of a Hotel Partnership votes to approve
the Consolidation, then each such Participating Hotel Partnership will merge
with a Merger Partnership, with the Participating Hotel Partnership being the
surviving entity. The Partners of each Participating Hotel Partnership will
receive Units in exchange for their respective Hotel Partnership Interests based
upon the Exchange Value of such Hotel Partnership Interests. The Units allocable
to each Participating Hotel Partnership will be allocated among the Partners in
such Participating Hotel Partnership (including the Hotel Partnership GP) in the
same manner in which net liquidation proceeds would be distributed under the
applicable partnership agreement if the Hotels were sold and the Hotel
Partnership received net liquidation proceeds in an amount equal to the Exchange
Value for that Hotel Partnership for distribution as sales proceeds. See
"Determination of Exchange Values and Allocation of Units." The Exchange Value
for each Hotel Partnership's assets has been established by the Company and the
Hotel Partnership GPs based upon the Appraised Value of such Hotel Partnership's
assets, with various adjustments as described in detail under "Determination of
Exchange Values and Allocation of Units." The Exchange Value of each Hotel
Partnership will be
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<PAGE>
subject to adjustment to reflect the actual Net Other Assets of the Hotel
Partnership as of the Final Valuation Date and certain other adjustments.
No fractional Units will be issued by the Company in the
Consolidation. In lieu thereof, fractional amounts less than or equal to 0.50 of
a Unit will be rounded down to the next whole number of Units and fractional
amounts greater than 0.50 will be rounded up to the next whole number of Units.
For a description of the Units, including restrictions on transfer
and the Unit Redemption Right, see "Description of Units."
Vote Required for Merger. The following table sets forth the required
vote for each of the Hotel Partnerships to approve the Merger of such Hotel
Partnership with the applicable Merger Partnership, with the Hotel Partnership
surviving and the Partners in the Hotel Partnership receiving Units. For
information regarding the number of outstanding Partnership Units in each Hotel
Partnership, see "Voting Procedures -- Required Vote and Other Conditions --
Record Date and Outstanding Partnership Units."
Hotel Partnership Required Vote
----------------- -------------
CBM1 Consent of Limited Partners holding
more than 50% of the outstanding
limited partner interests and the
approval of the Hotel Partnership
GP. The Hotel Partnership GP may not
vote any of its limited partner
interests.
CBM2 Consent of Limited Partners holding
more than 50% of the outstanding
limited partner interests and the
approval of the Hotel Partnership
GP. The Hotel Partnership GP may not
vote any of its limited partner
interests.
RIBM1 Consent of Limited Partners holding
more than 50% of the outstanding
limited partner interests and the
approval of the Hotel Partnership
GP.
RIBM2 Consent of Limited Partners holding
more than 50% of the outstanding
limited partner interests and the
approval of the Hotel Partnership GP.
Res USA Consent of Limited Partners holding
more than 50% of the outstanding
limited partner interests and the
approval of the Hotel Partnership GP.
FIBM Consent of Limited Partners holding
more than 50% of the outstanding
limited partner interests and the
approval of the Hotel Partnership GP.
The Hotel Partnership GP may vote its
limited partner interests.
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<PAGE>
Amendments to Partnership Agreements. In order to consummate the
Consolidation as currently proposed, there are a number of amendments required
to the partnership agreements of the Hotel Partnerships. A consent to such
amendments does not constitute consent to participation in the Consolidation. In
addition, the effectiveness of such amendments will be conditioned upon the
Hotel Partnership's participation in the Consolidation. The required amendments
include (i) allowing the transfer of interests of the Hotel Partnership GPs to
the Company prior to the Closing Date; (ii) permitting the Hotel Partnerships to
enter into the Leases with the Lessees prior to the Closing Date and (iii) any
and all other amendments required to delete obsolete references, reflect the
passage of time or allow the transactions constituting the Consolidation to be
consummated.
No Indemnification. The Hotel Partnerships will make certain
representations and warranties regarding each Hotel and each Hotel Partnership
in connection with the Company's acquisition of all of the interests in the
Hotel Partnerships. These representations and warranties, however, will not
survive the Closing of the Consolidation. In addition, neither the Hotel
Partnerships nor the Hotel Partnership GPs will be required to indemnify the
Company for inaccuracies in such representations and warranties.
Closing Adjustments. The estimated Exchange Values may increase or
decrease as a result of adjustments made as of the Final Valuation Date to
reflect (i) the amount of Net Other Assets, the actual principal balances of
mortgage and other debt (including an adjustment for prepayment and defeasance
costs) and the amount of deferred management fees, (ii) any amounts actually
expended by a Hotel Partnership after the Initial Valuation Date to perform
deferred maintenance or make up FF&E shortfalls previously subtracted in
determining the estimated Exchange Value of such Hotel Partnership and (iii) any
revised estimate and allocation of Consolidation Expenses. See "Determination of
Exchange Values and Allocation of Units."
Property Operations Prior to Closing. Pursuant to an agreement
entered into with the Company, each Hotel Partnership has covenanted that it
will use reasonable efforts to continue to operate its Hotels in the ordinary
course of business between now and the consummation of the Consolidation.
Effective Time of the Consolidation. The Effective Time of the
Consolidation will be at the time of the Certificates of Merger with respect to
the Mergers of the Merger Partnerships into the Participating Hotel Partnerships
are filed with the Secretary of State of the State of Delaware and the
consummation of the Offering. It is anticipated that such filings will be made
as promptly as practicable following the requisite approval of the Limited
Partners being obtained, the Offering being consummated and the other conditions
to the Consolidation being satisfied or waived, as the case may be.
Date by Which the Consolidation Must be Consummated. The
Consolidation must be consummated on or before December 31, 1999. This extended
deadline has been set so that, in the event market conditions are not favorable
at the end of the Solicitation Period, the Company will have significant
flexibility with respect to timing the Consolidation in order to help maximize
the value to be received by the Limited Partners.
Conditions to Consummation of the Consolidation
The consummation of the Consolidation and the participation of Hotel
Partnerships therein are subject to the satisfaction or waiver of a number of
conditions, including the conditions set forth below. If any of the conditions
set forth below are not satisfied or waived, the Consolidation will not be
consummated; provided, however, that CRFLT, as general partner of the Company,
may elect to complete the Consolidation notwithstanding that certain required
third-party consents are not obtained, if CRFLT determines that sufficient
consents have been obtained to permit consummation of the Consolidation
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<PAGE>
on substantially the same terms as described in this Consent Solicitation. In
addition, the Maximum Note Limitation and the Maximum Debt Limitation may be
waived by the Company, in its sole discretion, so long as such waiver does not
result in a violation of any other condition to the Consolidation. Subject to
the consummation of the Consolidation, the Managers (which are subsidiaries of
Marriott International) have waived their rights of first refusal under the
Management Agreements with respect to the Leases, of the Hotels to the Lessees
pursuant to the Consolidation. The conditions that must be satisfied or waived
in order for the Consolidation to be consummated include the following:
Minimum Hotel Partnership Participation. At least four Hotel
Partnerships, including CBM1, CBM2 and RIBM1, must participate in the
Consolidation (the "Minimum Participation Condition").
Requisite Level of Approval by Hotel Partnerships. With respect to
any particular Hotel Partnership engaged in the Consent Solicitation, the
Consolidation must be approved by Limited Partners holding a majority of the
Partnership Units in such Hotel Partnership. See "-- Vote Required for Merger."
If Limited Partners in any Hotel Partnership do not approve the Consolidation,
such Hotel Partnership will not participate in the Consolidation but the other
Hotel Partnerships for which the requisite consent is obtained will participate,
subject to the Minimum Participation Condition, the Minimum Value Condition and
satisfaction or waiver of other conditions.
Minimum Value Condition. The value of the Units received by each
Partner in the Consolidation (based on each Unit being considered to have a
value equal to the price per Common Share sold in the Offering) must be at least
equal to the Exchange Value attributable to such Partner's Hotel Partnership
Interest.
Maximum Debt Limitation. The Consolidation will not be consummated if
the Company's debt-to-total market capitalization ratio, including the Notes to
be issued to Dissenting Partners, exceeds 50% at the Closing Date. Such
condition may be waived by the Company, in its sole discretion, so long as such
waiver does not result in a violation of any other condition to the
Consolidation.
Maximum Note Limitation. The Consolidation will not be consummated if
Dissenting Partners who elect to tender the Units they receive in the
Consolidation in exchange for Notes request Notes with an aggregate principal
amount in excess of either 15% of the aggregate Exchange Values of all of the
Participating Hotel Partnerships or 20% of the Exchange Value of any individual
Participating Hotel Partnership. Such condition may be waived by the Company, in
its sole discretion, so long as such waiver does not result in a violation of
any other condition to the Consolidation.
Approval from Federal and State Authorities. The Consolidation will
not be consummated if any moratorium on transactions of its type are imposed by
federal, state or regulatory authorities or if any state blue sky or securities
authority imposes any restriction upon or prohibits any aspect of the
transactions contemplated by the Consolidation which, in the judgment of the
Company, renders the Consolidation undesirable or impractical.
Third-Party Consents. The Consolidation will not be consummated if
any required consent of any third party, including approvals of rating agencies
and certain lenders in connection with existing debt arrangements, is not
obtained or waived.
Expiration. The Consolidation will not be consummated if it is not
completed on or before December 31, 1999. This extended deadline has been set so
that, in the event market conditions are not favorable at the end of the
Solicitation Period, the Company will have significant flexibility with respect
to timing the Consolidation in order to help maximize the value to be received
by the Partners.
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<PAGE>
Right to Exclude Hotel Partnerships
The Company has reserved the right to exclude any Hotel Partnership
from participation in the Consolidation (even if the requisite number of Limited
Partners of a Hotel Partnership has voted to approve of the Consolidation and
each of the other conditions to the Consolidation has been satisfied or waived)
if the Company determines, in its sole discretion, that such exclusion is in the
best interests of the Company. A Nonparticipating Hotel Partnership will
continue to operate as a separate legal entity with its current Hotel
Partnership GP remaining as general partner.
Extension, Amendment and Termination of the Consolidation
The Company and the Hotel Partnership GPs reserve the right, subject
to limitations under applicable law, to (i) amend the terms of the Consolidation
by giving written notice of such amendment to the Limited Partners, (ii) extend
the Solicitation Period or delay consummation of the Consolidation, (iii)
terminate the solicitation of consents pursuant to this Consent Solicitation and
(iv) terminate the Consolidation whether or not all of the conditions to the
Consolidation have been satisfied or waived. If the terms of the Consolidation
are amended in a manner determined by the Company and the Hotel Partnership GPs
to constitute a material adverse change with respect to any Limited Partner,
they will promptly disclose such amendment in a manner reasonably calculated to
inform the Limited Partners of such amendment and will extend the Solicitation
Period for an appropriate time period if the Solicitation Period would otherwise
expire during such extension period.
If an event occurs or any matter is brought to the attention of the
Company that, in its judgment, materially affects, whether adversely or not, one
or more of the Hotel Partnerships or the Consolidation, the Company reserves the
right (but does not have the obligation) to terminate the solicitation of
consents with respect to the Consolidation or with respect to such Hotel
Partnership, decide not to consummate the Consolidation, modify the terms of the
Consolidation or take such other actions as may be in its best interests.
Restrictions on Transfer of Units
The Partnership Agreement provides that no holder of Units shall,
without the prior written consent of CRFLT, sell, assign, distribute or
otherwise transfer all or any portion of his interest in the Company, except
that a limited partner may transfer, with or without the consent of CRFLT, all
or a portion of its limited partnership interest (i) in the case of a limited
partner who is an individual, to a member of his immediate family, any trust
formed for the benefit of himself and/or members of his immediate family, or any
partnership, limited liability company, joint venture, corporation or other
business entity comprised only of himself and/or members of his immediate family
and entities the ownership interests in which are owned by or for the benefit of
himself and/or members of his immediate family, (ii) in the case of a limited
partner which is a trust, to the beneficiaries of such trust, (iii) in the case
of a limited partner which is a partnership, limited liability company, joint
venture, corporation or other business entity to which Units were transferred
pursuant to (i) above, to its partners, owners, or stockholders, as the case may
be, who are members of the immediate family of or are actually the person(s) who
transferred Units to it pursuant to (i) above, (iv) in the case of a limited
partner which acquired Units as of the closing of the Consolidation and which is
a partnership, limited liability company, joint venture, corporation or other
business entity, to its partners, owners, or stockholders, as the case may be,
or the Persons owning the beneficial interests in any of its partners, owners or
stockholders which are entities, (v) pursuant to a gift or other transfer
without consideration, (vi) pursuant to applicable laws of descent or
distribution, (vii) to another limited partner and (viii) pursuant to a grant of
security interest or other encumbrance effected in a bona fide transaction or
---- ----
as a result of the exercise of remedies related thereto. All of the foregoing
transfers are subject to the provisions of the Partnership
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<PAGE>
Agreement which require compliance with securities laws, prohibit transfers
affecting the tax status of the Company, prohibit transfers to holders of
nonrecourse liabilities of the Company, and are also subject to the rules on
substitution of limited partners. See "Description of Units -- Restrictions on
Transfers of Units by Limited Partners." In addition, holders of Units will be
permitted to dispose of their Units following the expiration of the Initial
Holding Period by exercising their Unit Redemption Right. See "Description of
Units -- Unit Redemption Right."
While the transfer of Units by any partner of the Company will not be
restricted as long as certain requirements set forth in the Partnership
Agreement are satisfied, the right of any permitted transferee of Units to
become a substitute limited partner is subject to the consent of CRFLT, as the
sole general partner of the Company, which consent CRFLT may withhold in its
sole and absolute discretion. If CRFLT does not consent to the admission of a
transferee of Units as a substitute limited partner, then the transferee would
succeed to all economic rights and benefits attributable to such Units, but
would not become a limited partner or possess any other rights of a limited
partner.
Transfers of Units may be effected only by means of entries in the
records of the Company, and CRFLT will require evidence satisfactory to it of
compliance with all transfer restrictions prior to recording any transfer.
Rights of Dissenting Partners
Upon consummation of the Consolidation, Dissenting Partners in
Participating Hotel Partnerships will have the right to tender the Units they
receive in the Consolidation in exchange for Notes by making the required
election on the Consent Form. If a Limited Partner votes against the
Consolidation but does not elect to receive Notes, the Limited Partner will
receive and retain Units. A Limited Partner in a Participating Hotel Partnership
that fails to vote will also receive and retain Units. For a summary of the
terms of the Notes, see "Description of the Notes."
Investor Lists. Under Rule 14a-7 of the Exchange Act, each Hotel
Partnership (other than Res USA) is required, upon the written request of a
Limited Partner, to provide to the requesting Limited Partner (i) a statement of
the approximate number of Limited Partners in such Limited Partner's Hotel
Partnership, and (ii) the estimated cost of mailing a proxy statement, form of
proxy or other similar communication to such Limited Partners. In addition, a
Limited Partner has the right, at his or her option, either (a) to have his
Hotel Partnership mail (at the Limited Partner's expense) copies of any proxy
statement, proxy form or other soliciting material furnished by the Hotel
Partnership to the Hotel Partnership's Limited Partners designated by the
Limited Partner, or (b) to have the Hotel Partnership deliver to the requesting
Limited Partner, within five business days of the receipt of the request, a
reasonably current list of the names, addresses and class of units held by the
Hotel Partnership's Limited Partners. The right to receive the list of Limited
Partners is subject to the requesting Limited Partner's payment of the cost of
mailing and duplication at a rate of $0.15 per page. See "Voting Procedures --
Investor Lists."
Effect of Consolidation on Nonparticipating Hotel Partnerships
Each Nonparticipating Hotel Partnership will continue to operate as
a separate legal entity with its own assets and liabilities. There will be no
change in its investment objectives, policies or restrictions, or fees or
distributions payable to the applicable Hotel Partnership GP or Manager. Each
Nonparticipating Hotel Partnership will remain subject to the terms of its
current partnership agreement and each Hotel Partnership GP will remain as
general partner.
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Consolidation Expenses
The Company and the Hotel Partnerships will incur substantial costs
and expenses in connection with structuring and consummating the Consolidation,
including legal fees, accounting fees and other costs and expenses associated
with all aspects of these transactions (the "Consolidation Expenses"). These
Consolidation Expenses do not include costs and expenses of the Offering or
those which have been incurred by the Hotel Partnerships in the ordinary course
of business and which are not related to these transactions.
Consolidation Expenses will be borne by the Company, the Hotel
Partnerships and the Hotel Partnership GPs as follows:
. In the event the Consolidation is consummated and all Hotel
Partnerships participate, the Company will pay all Consolidation
Expenses, with the result that Partners in each Hotel
Partnership (including the Hotel Partnership GPs) will bear the
Consolidation Expenses in proportion to the number of Units
allocated to such Partners in the Consolidation (including Host)
in proportion to the ratio that the Exchange Value (or the
purchase price for the Acquisition Hotels) represents to the
aggregate Exchange Values of all the Hotel Partnerships and the
purchase price of the Acquisition Hotels.
. In the event the Consolidation is not consummated, each Hotel
Partnership will bear the portion of the Consolidation Expenses
allocated to the Hotel Partnerships (based upon their relative
Exchange Values) based upon the percentage of "yes" votes and
the applicable Hotel Partnership GP will bear the portion of
such Consolidation Expenses based upon the percentage of "no"
votes and abstentions.
. In the event the Consolidation is consummated but any Hotel
Partnership fails to approve the Consolidation, then such
Nonparticipating Hotel Partnership will not bear any expenses of
the Consolidation. The Hotel Partnership GP of such Hotel
Partnership will be required to pay all of the expenses
attributable to such Hotel Partnership.
Certain Consolidation Expenses will be incurred and payable prior to
the completion of the solicitation and determination of which and how many Hotel
Partnerships have elected to participate in the Consolidation. For purposes of
determining the amount of pre-consummation Consolidation Expenses for which each
Hotel Partnership will be responsible, the Company and the Hotel Partnership GPs
have allocated such expenses in a manner they believe to be fair and reasonable.
Upon completion of the solicitation and the determination of the actual
Consolidation Expenses and which Hotel Partnerships will participate in the
Consolidation, the Consolidation Expenses will be allocated among the parties as
outlined above, and the Hotel Partnership GPs, the Company and the Hotel
Partnerships will each reimburse the others, to the extent necessary, for
overpayment, if any, of Consolidation Expenses.
If the Consolidation is not consummated, it is expected that each
Hotel Partnership's share of Consolidation Expenses will be funded from the
Hotel Partnership's available cash reserves and cash flow from operations. If
the Consolidation is consummated, the Company will pay the Consolidation
Expenses from the proceeds of the Offering.
Assuming all Hotel Partnerships participate, the Consolidation
Expenses and Offering Costs are estimated to be as follows:
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<PAGE>
<TABLE>
<S> <C>
Solicitation/Communication Costs
Information Agent .............................................................................. $
Printing, postage and brochure..................................................................
Travel, public relations, graphics, etc.........................................................
------------------
Subtotal............................................................................. $
------------------
Pre-closing Transaction Costs
Legal fees and expenses......................................................................... $
Appraisals (including fees and expenses)........................................................
Fairness Opinion (including fees and expenses)..................................................
Environmental and Engineering (including fees and expenses)
Registration, listing and filing fees...........................................................
Accounting fees and expenses....................................................................
Contingency.....................................................................................
------------------
Subtotal............................................................................. $
------------------
Closing Transaction Costs
Transfer fees, taxes and title.................................................................. $
Subtotal Consolidation Expenses...................................................... $
------------------
Offering Costs
Legal fees and expenses......................................................................... $
Registration and filing fees....................................................................
NYSE listing fee................................................................................
Printing and mailing costs......................................................................
Accounting fees and expenses....................................................................
Underwriting fees and expenses..................................................................
Miscellaneous...................................................................................
------------------
Subtotal Offering Costs.............................................................. $
------------------
Total Consolidation Expenses and Offering Costs............................ $
==================
</TABLE>
Accounting Treatment
The Partners are expected to have, upon completion of the
Consolidation, significant economic interests in the operations and activities
of the Company. Accordingly, the Consolidation will be accounted for as a
reorganization of affiliated entities under common control, similar to the
pooling of interests method. Under this method, the assets of the entities are
carried over at historical cost.
The Offering
The Consolidation contemplates and is conditioned upon, among other
things, the sale by CRFLT of Common Shares in the Offering resulting in the
value of the Units received by each Partner (including the Hotel Partnership GP)
in the Consolidation (based on each Unit being considered to have a value equal
to the price per Common Share sold in the Offering) being at least equal to the
Exchange Value attributable to such Partner's Hotel Partnership Interests. See
"The Consolidation -- Conditions to Consummation of the Consolidation -- Minimum
Value Condition." The actual number of Common Shares to be sold in the Offering
will be determined by CRFLT prior to the Offering in consultation with the lead
underwriters of the Offering. The Public Offering Price per share will be
determined by CRFLT through negotiations with the lead underwriters at the time
the Offering is consummated.
The proceeds from the Offering (net of underwriters' discounts and
other Offering Costs) will be contributed by CRFLT to the Company in exchange
for a number of Units equal to the number of
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Common Shares sold in the Offering. The net proceeds from the Offering, after
payment of all Offering Costs, are estimated to be approximately $748 million.
The actual proceeds of the Offering will be determined at the time of the
Offering and may vary from the estimate set forth above. The net proceeds from
the Offering are expected to be used to: (i) repay (a) $390.1 million of CBM2
Certificates (together with an estimated prepayment penalty of $25.5 million),
(b) $93.3 million outstanding under the RIBM1 Senior Mortgage (together with an
estimated prepayment penalty of $5.8 million) and (c) $55.7 million of mortgage
debt owed by Res USA (together with an estimated $1.4 million prepayment
penalty), (ii) purchase the Acquisition Hotels from Host for $____ million in
cash, which represents their aggregate Appraised Value, as adjusted, (iii)
satisfy the $___ million obligation of the Hotel Partnerships relating to
certain deferred management fees payable by the Hotel Partnerships to Marriott
International by the payment of $___ million in cash, (iv) repay, either in cash
or Common Shares, at the election of a subsidiary of Host, a loan of
approximately $13 million owed to such subsidiary of Host by CBM1 and (v) pay
the Consolidation Expenses and Offering Costs.
Following the Offering, CRFLT expects that the Common Shares will be
listed on the NYSE.
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DETERMINATION OF EXCHANGE VALUES AND ALLOCATION OF UNITS
Overview
Following the consummation of the Consolidation, Units will be owned
by two different groups: (i) Partners (including the Hotel Partnership GPs) in
the Participating Hotel Partnerships who receive such Units in exchange for the
contribution of the Hotels through the Mergers and (ii) CRFLT, which will be the
sole general partner of the Company and which receive such Units in exchange for
the net proceeds of the Offering. The equity interests in the Company to be
received in the Consolidation by each of these groups will be determined by the
following methods, each of which is described in greater detail below:
. The Partners in the Participating Hotel Partnerships will receive
Units based on the respective Exchange Value of the assets their
Hotel Partnerships are contributing to the Company in the
Consolidation. The Exchange Value for each Hotel Partnership's
assets has been established by the Company and the Hotel
Partnership GPs based upon the Appraised Value of each Hotel
Partnership's real property, which was then adjusted for other
assets and liabilities, mortgage and other debt, deferred
management fees, deferred maintenance costs and FF&E shortfalls
and certain other items. The Units issued in connection with the
Merger of each Participating Hotel Partnership will be allocated
among its Partners in accordance with the liquidation
distribution provisions of the partnership agreement for such
Participating Hotel Partnership.
. CRFLT will acquire Units in exchange for the net proceeds from
the Offering. The number of Units received by CRFLT will equal
the number of Common Shares sold by CRFLT in the Offering.
Methodology for Determining Exchange Values
Summary. The Company and the Hotel Partnership GPs established the
estimated Exchange Values for the equity interests in each Hotel Partnership by
(i) obtaining an independent appraisal of the value of each Hotel owned by such
Hotel Partnership, as of ________ __, 1998 (the "Appraised Value"), as described
below; (ii) adding the amount of other assets (such as cash, amounts due from
Marriott International and affiliates (i.e., working capital and rent
receivables) and cash reserves), net of liabilities (excluding mortgage and
other debt and deferred management fees) ("Net Other Assets") as of _________
__, 1998 (the "Initial Valuation Date"); (iii) subtracting the estimated balance
of the mortgage debt owed by such Hotel Partnership as of June 30, 1998, which
is the estimated closing date for the Consolidation; (iv) subtracting the
estimated balance of other debt of such Hotel Partnership as of June 30, 1998;
(v) adjusting for the estimated prepayment and defeasance costs; (vi)
subtracting the amount of deferred management fees payable to the applicable
Manager under the Management Agreement for such Hotels; (vii) subtracting an
amount equal to the estimated cost to complete any deferred maintenance items
identified in the engineer's report relating to the applicable Hotels; (viii)
subtracting an amount equal to the estimated cost (if any) of bringing the
condition of FF&E at the applicable Hotels to normal levels, (ix) subtracting
such Hotel Partnership's pro rata share (based upon relative Exchange Values) of
estimated Consolidation Expenses and (x) making certain other adjustments.
Prior to the distribution of the Last Preliminary Prospectus in the
Offering, final determination of the Exchange Values will be made, as of the
date that is the end of the most recent accounting period that has ended at
least ___ days prior to the date on which the Last Preliminary Prospectus is
distributed to investors (the "Final Valuation Date") to reflect (i) the amount
of Net Other Assets, the actual principal balances of mortgage and other debt
(including an adjustment for prepayment and defeasance costs) and the amount of
deferred management fees payable,
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(ii) any amounts actually expended by a Hotel Partnership after the Initial
Valuation Date to perform deferred maintenance or make up FF&E shortfalls
previously subtracted in determining the estimated Exchange Value of such Hotel
Partnership and (iii) any revised estimate and allocation of Consolidation
Expenses. The actual value of Units issued to Partners in each Participating
Hotel Partnership will be based on these final Exchange Values.
The following table sets forth the Appraised Values, adjustments
thereto and Exchange Values for each Hotel Partnership.
Calculation of Estimated Exchange Values
as of the Initial Valuation Date
(in thousands)
<TABLE>
<CAPTION>
CBM1 CBM2 RIBM1 RIBM2 Res USA FIBM
---- ---- ----- ----- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Appraised Value $ $ $ $ $ $
Net Other Assets
Mortgage debt
Other debt
Prepayment penalties and/or
defeasance costs
Deferred management fees
Deferred maintenance costs
FF&E shortfall
Consolidation expenses
Other adjustments/(1)/
----- ----- ----- ----- ----- -----
Exchange Value $ $ $ $ $ $
===== ===== ===== ===== ===== =====
</TABLE>
- -----------------------------
/(1)/ Includes environmental remediation and certain other costs.
Appraisals. The Hotels were appraised as of ________ __, 1998, by
AAA, an independent, nationally recognized hotel valuation and financial
advisory firm experienced in the appraisals of lodging properties such as the
Hotels. Each appraisal (an "Appraisal") was reviewed by an MAI appraiser and
certified by such MAI appraiser as having been prepared in accordance with the
requirements of the Standards of Professional Practice of the Appraisal
Institute and the Uniform Standards of Professional Appraisal Practice of the
Appraisal Foundation. The Appraisals are not guarantees of present or future
values and no assurance can be given as to the actual value of the Hotels. The
Appraisals should be read in conjunction with other information, such as, but
not limited to, the audited financial statements of the Hotel Partnerships.
The purpose of each Appraisal is to provide an estimate of the
"Market Value" of the related Hotel. "Market Value" means the most probable
price which a property should bring in a competitive and open market under all
conditions requisite to a fair sale, the buyer and seller each acting prudently
and knowledgeably and assuming the price is not affected by undue stimuli.
Implicit in this definition is the consummation of a sale as of a specific date
and the passing of title from seller to buyer under conditions whereby: (i) the
buyer and seller are typically motivated; (ii) both parties are well informed or
well advised, and each is acting in what he considers his own best interest;
(iii) a reasonable time frame is allowed for exposure in the open market; (iv)
payment is made in terms of cash in U.S. dollars and (v) the price represents
the normal consideration for the property sold unaffected by special or creative
financing or sales concessions granted by anyone associated with the sale.
With respect to the Hotels, 127 properties were encumbered by ground
leases as of the date of the Appraisal. Accordingly, the Appraised Values of
these Hotels have been decreased to reflect
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the encumbrance of the ground leases and the interest of the ground lessor in
the operating cash flows of such Hotels. The Appraised Values do not incorporate
any extraordinary deferred maintenance, FF&E shortfalls, or environmental
remediation costs with respect to the Hotels. The Exchange Values have been
separately adjusted in some instances for such items.
The Appraisals reflect a correlation of values based upon the "Sales
Comparable Approach," the "Cost Approach," and the "Income Approach" to the
extent that the approaches are applicable. The Appraisals are based, in part,
upon data, such as land comparables, to the extent available, and assumptions
such as general market conditions, which are subject to change. The Appraised
Values and the assumptions underlying these estimates are contingent upon a
series of future events, the outcomes of which are not necessarily within the
Company's control and cannot be determined at this time. There can be no
assurance that another appraiser would not have arrived at different, and
perhaps significantly different, results, particularly if such other appraiser
utilized different capitalization and/or discount rates, or a different
acceptable appraisal approach. Some of the assumptions inevitably will not
materialize, and unanticipated events and circumstances will occur subsequent to
the date of the Appraisals. Furthermore, the actual results achieved from the
Hotels will vary from the results assumed in the Appraisals and the variations
may be material.
Net Other Assets. The Net Other Assets of each Hotel Partnership
includes cash and liquid investments, escrows, FF&E and debt service reserves,
and net working capital (excluding mortgage and other debt and deferred
management fees). All intangible assets, such as deferred financing fees, are
treated as having no value. The amounts included in the estimated Exchange
Values shown above reflect the Net Other Assets as of the Initial Valuation
Date. Prior to the distribution of the Final Preliminary Prospectus in the
Offering, a determination of the Net Other Assets of each Hotel Partnership as
of the Final Valuation Date will be made. Any accounts receivable will be valued
based on estimates of credit quality and likelihood of collection, and any
liabilities will be valued based on the likely extent of the liability, in the
judgment of the Company. The final Exchange Values, and accordingly the number
and value of Units actually issued to Partners in each Participating Hotel
Partnership, will be based upon this determination.
Prepayment Penalties and/or Defeasance Costs. The Exchange Values
reflect an adjustment for the amount of prepayment penalties and/or defeasance
costs that would be payable in connection with the prepayment or defeasance of
indebtedness of the Hotel Partnerships. Such amounts will be recalculated as of
the Final Valuation Date.
Deferred Management Fees. The Exchange Values have been reduced by
the amount of deferred management fees payable under the Management Agreement of
each Hotel Partnership. These deferred fees will be paid in cash to the Managers
in connection with the Consolidation. Such amounts will be revised as of the
Final Valuation Date.
Deferred Maintenance Costs and FF&E Shortfall. The Exchange Values
have been reduced, as indicated, by an amount equal to the estimated cost to
complete any deferred maintenance items identified in the engineer's report
relating to the applicable Hotels and by an amount equal to the estimated cost
(if any) of bringing the condition of FF&E at the applicable Hotels to normal
levels, as determined by the Company and the Hotel Partnership GPs based on
information provided by the Managers. The adjustments for these items will be
reduced to reflect amounts expended after the Initial Valuation Date to perform
such deferred maintenance or make up any FF&E shortfall.
Consolidation Expenses. The Exchange Value of each Hotel Partnership
has been reduced by the Hotel Partnership's proportionate share of estimated
Consolidation Expenses (excluding the Offering Costs), which are currently
estimated to aggregate $_________ million, based on the proportionate share of
the aggregate Exchange Value for all Hotel Partnerships allocable to such
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Hotel Partnership. The estimate and allocation of Consolidation Expenses will be
revised as of the Final Valuation Date.
Allocation of Units in the Consolidation
Percentage Equity Interest in the Company Allocable to the Hotel
Partnerships as a Group. The total number of Units to be issued in connection
with the Consolidation and the Offering and the number of Units to be allocated
to CRFLT in exchange for the proceeds received from public investors in the
Offering will be based upon (i) the estimated total market value of the Company
at the time of the Offering, (ii) the percentage of the Company that must be
sold in order to raise the Offering proceeds and (iii) the price per Unit in the
Consolidation (which will be equal to the price per Common Share in the
Offering, which is assumed for purposes of the Consent Solicitation to be
$20.00). The estimated and actual total market value of the Company will be
determined based upon negotiations between CRFLT (as general partner of the
Company) and the lead underwriters of the Offering based upon then prevailing
equity and debt market conditions and other factors. All Units not required to
be issued to CRFLT in connection with the Offering will be allocated to the
Hotel Partnerships as a group.
Allocation of Units Among the Participating Hotel Partnerships. The
number of Units to be issued to each Participating Hotel Partnership will be
equal to the product of (i) the aggregate number of Units to be issued to all
Participating Hotel Partnerships times (ii) a fraction, the numerator of which
is the Exchange Value of such Participating Hotel Partnership and the
denominator of which is the aggregate of the Exchange Values of all
Participating Hotel Partnerships.
Allocation of Units Among Partners in the Participating Hotel
Partnerships. The number of Units issued to each Participating Hotel Partnership
will be allocated between the Limited Partners, on the one hand, and the
applicable Hotel Partnership GP, on the other hand, in accordance with the
provisions of the applicable partnership agreement relating to distribution of
net liquidation proceeds. The Limited Partners, as a group, will be allocated a
percentage of the Units equal to the percentage of liquidation proceeds that
they would receive if the partnership's assets were sold for their Exchange
Value, and the Hotel Partnership GP will receive the remaining Units. Each
Limited Partner will receive a number of Units based on the Limited Partner's
percentage interest in the aggregate limited partner interest in the Hotel
Partnership. No fractional Units will be issued. Fractional amounts less than or
equal to 0.50 of a Unit will be rounded down to the next whole number and
fractional amounts greater than 0.50 will be rounded up to the next whole number
of Units.
The following table sets forth the allocation of Units among the
Partners of each Hotel Partnership, assuming that the aggregate value of the
Units to be issued to the Hotel Partnerships is just equal to (but does not
exceed) the estimated Exchange Value for such Hotel Partnership. As stated
above, the estimated Exchange Values for the Hotel Partnerships (and thus the
number and value of Units the Partners in each Hotel Partnership will receive)
are subject to various adjustments. As a result of the Minimum Value Condition,
in no event will the value of the Units allocated to any Hotel Partnership be
less than its actual Exchange Value.
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<TABLE>
<CAPTION>
Limited Partners General Partners
---------------------------------------- --------------------------------
Estimated Value of
Estimated % of Units per $1,000 Estimated % of
Estimated Estimated % Units Received Limited Partner Units Received Estimated
Total Value of by Hotel Original by Hotel Value of
Hotel Partnership of Units/(1)/ Total/(2)/ Partnership Investment/(1)/ Partnership Units/(1)/
- ----------------- ------------- ----------- -------------- ------------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
CBM1 $ % % $ % $
CBM2
RIBM1
RIBM2
Res USA
FIBM
------------ ----------- ----------- ------------ ----------- ------------
Total $ 100% % $ % $
============ =========== =========== ============ =========== ============
</TABLE>
- ----------------
/(1)/ Assumes the value of the Units is equal to the Public Offering Price of
CRFLT's Common Shares in the Offering and that the aggregate value of the
Units received by each Hotel Partnership is just equal to (but does not
exceed) the estimated Exchange Value.
/(2)/ Represents the estimated percentage of the total value of Units allocated
to the Hotel Partnerships as a group and does not reflect the issuance of
Units to CRFLT in exchange for the proceeds of the Offering (which will
reduce the percentage of each Hotel Partnership in proportion to their
respective Exchange Values). Thus, for example, if CRFLT purchases 50% of
the Company using the proceeds received from public investors in the
Offering, then each of the percentages set forth above would be reduced by
50%. The estimated values of Units would not be affected.
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FAIRNESS ANALYSIS AND OPINION
Fairness Analysis
The Hotel Partnership GPs believe that the terms of the Consolidation
provide substantial benefits and are fair to the Limited Partners of each of the
Hotel Partnerships and recommend that all Limited Partners consent to the
Consolidation. The Hotel Partnership GPs base this recommendation primarily on
(i) their view that the expected benefits of the Consolidation for the Limited
Partners outweigh the risks and potential detriments to the Limited Partners
(see "Background and Reasons for the Consolidation -- Expected Benefits from the
Consolidation" and "Risk Factors"), (ii) their view that the estimated Exchange
Values established for each Hotel Partnership and the resulting value allocable
to the Limited Partners in the Hotel Partnerships represent fair consideration
for the interests held by the Limited Partners of such Hotel Partnership and are
fair to such Limited Partners from a financial point of view, and (iii) the
Fairness Opinion of AAA which concluded that (a) the methodologies used to
determine the Exchange Value of each Hotel Partnership and to allocate Units
among each of the Hotel Partnerships are fair, from a financial point of view,
to the Limited Partners of each Hotel Partnership, (b) the underlying
assumptions used to determine the Exchange Value of each Hotel Partnership and
the purchase price of each Acquisition Hotel (including, without limitation, the
assumptions used to determine the various adjustments to the Appraised Values of
the Hotels) are fair and reasonable from the standpoint of each Hotel
Partnership, (c) the methodology used to allocate Units received by each Hotel
Partnership among its general and Limited Partners is fair and reasonable to the
Limited Partners, (d) the methodologies and underlying assumptions used to
determine the Continuation Value and the Liquidation Value of each Hotel
Partnership (including, without limitation, the assumptions used to determine
the various adjustments to the Appraised Values of the Hotels) are fair and
reasonable from the standpoint of each Hotel Partnership and (e) the economic
terms of the Leases are fair and reasonable from the standpoint of the Company.
In this regard, the Fairness Opinion specifically does not conclude that other
methodologies for allocation of Units among the Hotel Partnerships might not
have been more favorable to the Limited Partners in certain of the Hotel
Partnerships.
The Consolidation may be consummated with the participation by less
than all of the Hotel Partnerships. It is a condition to consummation of the
Consolidation, however, that at least four of the Hotel Partnerships participate
in the Consolidation (including CBM1, CBM2 and RIBM1). The Hotel Partnership GPs
have considered these facts in evaluating the fairness of the Consolidation. The
Hotel Partnership GPs believe that the fairness of the Consolidation will not be
materially affected by the presence or absence of any individual Hotel
Partnership or by any particular combination of Hotel Partnerships (so long as
the Minimum Participation Condition is satisfied) and that the Consolidation
will be fair to the Limited Partners, individually and as a whole, if it is
consummated with any combination of Participating Hotel Partnerships. The Hotel
Partnership GPs base this belief primarily on the fact that the consideration to
be paid to the Limited Partners in each individual Hotel Partnership has been
established based upon such Hotel Partnership's Exchange Value, without regard
to any possible combination of Hotel Partnerships and the Minimum Participation
Condition has been established so that the Company would, in any event, have
sufficient Hotels to permit the Limited Partners in the Participating Hotel
Partnerships to achieve the intended benefits of the Consolidation.
In reaching the conclusions implicit in the above recommendation, the
Hotel Partnership GPs have taken into account the following considerations:
. The Hotel Partnership GPs have concluded that the Exchange
Value for each Hotel Partnership represents fair consideration
for the Hotel Partnership Interests of the Partners (including
the Hotel Partnership GPs) in the Consolidation in relation to
such Hotel Partnership. The Hotel Partnership GPs also have
concluded that the
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Exchange Value established for the Partners in each Hotel
Partnership fairly reflects the value of the assets held by
such Hotel Partnership. In addition, the Fairness Opinion
supports these conclusions.
. The Hotel Partnership GPs have concluded that the potential
benefits of the Consolidation to the Limited Partners, as
described under "Background and Reasons for Consolidation --
Expected Benefits from the Consolidation," outweigh the
potential risks and detriments of the Consolidation for the
Limited Partners, as described in "Risk Factors."
. The Fairness Opinion, in the view of the Hotel Partnership GPs,
supports the fairness of the Consolidation, even though it
includes qualifications, limitations and assumptions relating
to its scope and other factors that Limited Partners should
consider carefully.
. CRFLT will receive no compensation for its services to the
Company, although it will be reimbursed for certain expenses it
incurs relating to the management of the Company. Thus, CRFLT
will benefit from the management and operations of the Company,
in the same manner as the limited partners, each solely to the
extent of distributions made by the Company, as allocated to
its partners in accordance with their partnership interests.
Because CRFLT will share in the value of the Company solely
through distributions and not through any separate compensation
structure, the Hotel Partnership GPs believe that this is a
factor supporting the fairness of the Consolidation to the
Limited Partners.
. The Hotel Partnership GPs believe that the value of the
consideration to be received by the Limited Partners in each
Hotel Partnership in the Consolidation is fair in relation to
the value which would be derived by such Limited Partners under
any of the alternatives described under "Background and Reasons
for Consolidation -- Alternatives to the Consolidation." The
Hotel Partnership GPs do not believe that continuation of any
of the Hotel Partnerships will obtain for the Limited Partners
in such Hotel Partnership more than the value to be received by
such Limited Partners following the Consolidation. The Hotel
Partnership GPs do not believe that the sale of any Hotel and
liquidation of the associated Hotel Partnership will obtain for
Limited Partners in such Hotel Partnership as much value as the
value to be received by such Limited Partners following the
Consolidation.
. The Hotel Partnership GPs believe that the economic terms of
the Leases are fair and reasonable from the standpoint of the
Company and that the Fairness Opinion specifically addresses
such issue.
The Hotel Partnership GPs believe that the factors described above,
which support the fairness of the Consolidation to the Limited Partners in the
Hotel Partnerships, when weighed against the factors that may be
disadvantageous, taken as a whole indicate that the Consolidation is fair to the
Limited Partners.
Fairness Opinion
AAA, an independent, nationally recognized hotel valuation and
financial advisory firm with substantial real estate, hotel and partnership
transaction experience, was engaged by the Hotel Partnerships to render the
Fairness Opinion as to (i) the fairness, from a financial point of view, to the
Limited Partners of each Hotel Partnership of the methodologies used to
determine the Exchange Value of each Hotel Partnership and the allocation of
Units among the Hotel Partnerships in the Consolidation, (ii) the fairness and
reasonableness, from the standpoint of each Hotel Partnership, of the underlying
assumptions used to determine the Exchange Value of each Hotel Partnership and
the
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purchase price of each Acquisition Hotel (including, without limitation, the
assumptions used to determine the various adjustments to the Appraised Values of
the Hotels), (iii) the fairness and reasonableness to the Limited Partners of
each Hotel Partnership of the methodology used to allocate Units received by
each Hotel Partnership among its general and Limited Partners, (iv) the fairness
and reasonableness from the standpoint of each Hotel Partnership of the
methodologies and underlying assumptions used to determine the Continuation
Value and the Liquidation Value of each Hotel Partnership (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) and (v) the fairness and reasonableness, from
the Company's standpoint, of the economic terms of the Leases. In this regard,
the Fairness Opinion specifically does not conclude that other methodologies for
allocation of Units among the Hotel Partnerships might not have been more
favorable to the Limited Partners in certain of the Hotel Partnerships. The
Fairness Opinion is addressed to each of the Hotel Partnerships and it may be
relied upon by each of the Limited Partners in the Hotel Partnerships and the
Hotel Partnership GPs. The full text of the Fairness Opinion, which contains a
description of the assumptions and qualifications applicable to the review and
analysis by AAA, is set forth in Appendix B to this Consent Solicitation and
should be read in its entirety. The material assumptions and qualifications to
the Fairness Opinion are summarized below, although this summary does not
purport to be a complete description of the various inquiries and analyses
undertaken by AAA in rendering the Fairness Opinion. Arriving at a fairness
opinion is a complex analytical process not necessarily susceptible to partial
analysis or amenable to summary description. For a more complete description of
the assumptions and qualifications that limit the scope of the Fairness Opinion,
see "---Qualifications to Fairness Opinion" and "---Assumptions" below.
The Fairness Opinion assumes the participation of all of the Hotel
Partnerships in the Consolidation and does not attempt to address the fairness
of the allocations of Units that result under possible combinations of less than
all of the Hotel Partnerships.
Although the Hotel Partnership GPs advised AAA that certain
assumptions were appropriate in their view, the Hotel Partnership GPs imposed no
conditions or limitations on the scope of the investigation by AAA or the
methods and procedures to be followed by AAA in rendering the Fairness Opinion.
The fees and expenses of AAA will be treated as a Consolidation Expense and will
be paid by the Company if the Consolidation is consummated. For a description of
how Consolidation Expenses are handled if the Consolidation is not consummated,
see "The Consolidation -- Expenses of the Consolidation Expenses." In addition,
the Hotel Partnerships have agreed to indemnify AAA against certain liabilities.
See "-- Compensation and Material Relationships."
Qualifications to Fairness Opinion. In connection with preparing the
Fairness Opinion, AAA was not engaged to, and consequently did not, prepare any
written report or compendium of its analysis for internal or external use beyond
the analysis set forth in Appendix B. AAA will not deliver any additional
written opinion of the analysis, other than to update the written opinion.
Compensation and Material Relationships. AAA has been paid a fee of
$500,000 for its services as described herein and preparing to deliver the
Fairness Opinion. In addition, AAA will be reimbursed for all reasonable
out-of-pocket expenses up to $35,000, including legal fees, if any, and will be
indemnified against certain liabilities, including certain liabilities under the
securities laws. The fee was negotiated between the Hotel Partnership GPs and
AAA. Payment of the fee to AAA is not dependent upon completion of the
Consolidation.
Comparison of Alternatives. To assist Limited Partners in evaluating
the Consolidation, the Hotel Partnership GPs have attempted to compare the
estimated value of Units to be received in the Consolidation with: (i) the face
amount of Notes that will be issued to Dissenting Partners who elect to tender
the Units they receive in the Consolidation in exchange for Notes; (ii)
estimates of the Continuation Value of the Hotel Partnership Interests; and
(iii) estimates of the Liquidation Value of the Hotel Partnership Interests. The
Hotel Partnership GPs have not attempted to estimate the
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<PAGE>
value of Hotel Partnership Interests following standalone UPREIT reorganizations
because the Hotel Partnership GPs do not believe such reorganizations are
feasible and such valuation estimates would be subject to substantial
uncertainties. Since the estimated value of the Units and the estimated values
under the alternatives to the Consolidation are dependent upon a number of
estimates, variables and assumptions, as well as varying market conditions, no
assurance can be given that the estimated values indicated could be realized.
However, the Hotel Partnership GPs believe that analyzing the alternatives in
terms of estimated values, based upon currently available market data and
reasonable estimates and assumptions, establishes a reasonable basis for
comparing the Units to the alternatives. The results of this comparative
analysis (including the methodology and assumptions used to derive estimated
values) are set forth below.
The following table summarizes the results of the comparative
analysis described above. There can be no assurance, however, that the actual
value of Units received in the Consolidation, the actual face amount of Notes
offered to Dissenting Partners, the actual value of continuing the Hotel
Partnerships or the actual net liquidation proceeds will not differ
substantially from those estimated for purposes of this analysis.
Summary of Comparative Valuation Alternatives/(1)/
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Face Amount Estimated
of Liquidation
Estimated Notes Offered Value
Value of to Dissenting Estimated if Assets Sold at
Hotel Partnership Units/(2)/ Partners/(3)/ Continuation Value/(4)/ Appraised Value/(5)/
----------------- ----------- ------------- ----------------------- --------------------
<S> <C> <C> <C> <C>
CBM1........................... $ $ $ $
CBM2...........................
RIBM1..........................
RIBM2..........................
Res USA........................
FIBM...........................
</TABLE>
- --------------------
/(1)/ The information shown in this table assumes all Hotel Partnerships are
Participating Hotel Partnerships. A limited partner original investment of
$1,000 equates to one Partnership Unit in RIBM1, RIBM2 and FIBM and to
1/100th of a Partnership Unit in CBM1, CBM2 and Res USA.
/(2)/ The amounts in this column represent the portion of the estimated Exchange
Value of each Hotel Partnership that would be allocable to Limited
Partners per $1,000 limited partner original investment. Assumes the value
of Units is equal to the Public Offering Price of CRFLT's Common Shares in
the Offering and that the aggregate value of Units received by each Hotel
Partnership is just equal to (but does not exceed) the estimated Exchange
Value.
/(3)/ The amounts in this column are equivalent to the portion of the
Liquidation Value of each Hotel Partnership that would be reflected in the
Notes to be issued to Dissenting Partners per $1,000 limited partner
original investment. See footnote (5) below.
/(4)/ The amounts in this column represent the estimated amount that would be
distributed to Limited Partners per $1,000 limited partner original
investment if each Hotel Partnership were continued for ten years and then
sold for its estimated value, determined using a discounted cash flow
analysis applied to the anticipated cash flows from the operation and sale
of each Hotel and taking into account the terms of existing debt
obligations (the "Continuation Value").
/(5)/ The amounts in this column represent the amount that would be distributed
to Limited Partners per $1,000 limited partner original investment if each
Hotel Partnership sold its Hotels at their Appraised Values as of
______ __, 1998, and distributed the net proceeds (after payment of debts
and other obligations (including defeasance costs or prepayment
penalties), and an allowance for liquidation costs, expenses and
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contingencies equal to 2% of the Appraised Value of the Hotels), in
accordance with its respective partnership agreement (the "Liquidation
Value").
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BUSINESS AND PROPERTIES
Business of the Company
CRFLT and the Company have been formed to (i) own the Hotels, (ii)
expand the portfolio through the acquisition of new hotels and (iii) improve the
portfolio through selective capital improvements and renovations to existing
Hotels. CRFLT will operate as a self-managed and self-administered REIT and its
operations will be conducted solely through the Company and its subsidiaries.
The Hotels consist of 221 hotels (121 Courtyard Hotels, 50 Residence Inns and 50
Fairfield Inns), representing 30,783 rooms, and located in 35 states throughout
the United States. Assuming that all six of the Hotel Partnerships participate
in the Consolidation, CRFLT will be one of the four largest hotel REITs in the
United States (based on number of hotels owned). All of the Hotels are operated
under Marriott brand names and managed by subsidiaries of Marriott
International. Subsequent to the Consolidation, the Hotels will be leased to
subsidiaries of Host and will be managed on behalf of the Lessees by
subsidiaries of Marriott International. All three Marriott brands under which
the Hotels are operating are among the leading competitors within their
respective industry segments.
The Company intends to actively seek to acquire additional limited
service and extended-stay hotels, both in the form of existing hotels and newly
constructed properties. The Company's acquisition activities will focus on
identifying hotels in markets which have high barriers to entry and strong real
estate fundamentals, thereby limiting the likelihood of overdevelopment. In
addition, the Company expects its greater access to capital to allow it to
selectively renovate and upgrade certain Hotels where such renovations or
upgrades will provide attractive returns on its investment. Such selective
renovations and upgrades should enhance such Hotels' competitive position within
their respective markets.
CRFLT will be the sole general partner of the Company and will manage
all aspects of the business of the Company. This will include decisions with
respect to (i) sales and purchases of hotels, (ii) the financing of the hotels,
(iii) the leasing of the hotels and (iv) expenditures for the hotels. CRFLT will
be managed by its Board of Trustees.
Under current federal income tax law, REITs are not permitted to
derive revenues directly from the operation of hotels. Therefore, the Company
will lease the Hotels to the Lessees under the Leases. See "The Leases" below.
The Lessees will pay rent to the Company generally equal to the greater of Base
Rent or Percentage Rent. The Company is not obligated to use subsidiaries of
Host as lessees with respect to any hotels acquired after the Consolidation. The
Lessees will operate the Hotels pursuant to the Management Agreements with the
Managers, which are subsidiaries of Marriott International, one of the largest
hotel management companies in the country, with more than ___ hotels under
management. Each of the Management Agreements provides for certain base and
incentive management fees, plus reimbursement of system and/or chain services
fees, as further described below. See "-- Management Agreements." Such fees will
be the obligation of the Lessees and not the Company (although the obligation to
pay such fees could adversely affect the ability of the Lessees to pay the
required rent to the Company). In addition to the brands described below, other
Marriott brands include Marriott Hotels, Resorts and Suites, Ritz-Carlton,
TownePlace Suites, Executive Residences, Renaissance, New World and Ramada
International.
Courtyard by Marriott
Introduced by Marriott in 1981, Courtyard by Marriott was designed to
meet the needs of business and leisure travelers who desire high quality
accommodations at moderate prices, as opposed to a group meeting or convention
business. Approximately 60% of the guests at Courtyard by Marriott hotels are
individual business travelers, 30% are leisure travelers and 10% are guests
attending small group meetings. The typical Courtyard hotel has 150 rooms and is
located
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proximate to business parks or airports. Each hotel generally contains an
attractive but condensed lobby, a lounge with seating for approximately 80
guests, a pool, an exercise room and two meeting rooms. Reflecting Courtyard by
Marriott's focus on business travelers, the guest rooms are full sized, with
furnishings comparable to those found in traditional hotels -- including desks
or designated work areas.
To limit operating costs, the public spaces and related facilities
are generally smaller than those found in Marriott Hotels, Resorts and Suites
brand hotels, and the food and beverage service operations are generally focused
on providing breakfast, plus beverage options during the evening hours. The more
simplified scale of operations allows for more standardized operations and
facilitates more centralized management. These program modifications permit a
Courtyard by Marriott hotel to operate with substantially fewer employees per
hotel room, one employee per four rooms, as compared to a more traditional
hotel, which averages approximately three employees per four rooms. The lower
staffing levels and other operating cost savings result in higher operating
profit margins (profits as a percentage of room sales) as compared to more
traditional hotels.
Courtyard by Marriott hotels compete successfully against a variety
of traditional hotel brands, including Hilton Inn, Holiday Inn and Ramada Inn,
as well as newer brands such as Hampton Suites, Sheraton Four Points and Wyndham
Garden Hotels, which have sought to imitate the Courtyard by Marriott approach.
Since 1992, the average room rate for the Courtyard by Marriott brand has
increased by 35% and the average REVPAR has increased by 45%. During this same
period, the Company believes that the competitive brands have collectively
achieved a 24% increase in average room rate and a 32% increase in REVPAR.
Residence Inn by Marriott
The Company believes that Residence Inn by Marriott is the largest
lodging brand (based on number of hotels) that has been specifically designed
for extended-stay guests (i.e., guests who seek lodging for five or more
consecutive nights). Typical guests include relocated employees who have not yet
secured a permanent residence, trainees attending seminars or employer-sponsored
training programs, vacationers and other persons involved in extended project
assignments. Residence Inn by Marriott targets these guests by providing a
spacious suite (the average suite size of approximately 500 square feet is 50%
larger than the typical hotel room), which is furnished to create a homelike
atmosphere, plus a full kitchen. Amenities provided to guests include laundry
and shopping services as well as a free continental breakfast served each
morning in the "Gatehouse," the lounge and lobby facility serving each Residence
Inn. The typical Residence Inn, which ranges in size from 88 to 144 rooms, also
provides a pool and workout facility.
Several aspects of the extended-stay concept tend to increase
occupancy rates and reduce operating costs. Extended-stay guests check in and
check out with less frequency than shorter-stay guests and longer stays
contribute to higher than average weekend occupancy, which raises overall
occupancy rates. During 1996 and 1997, the average stay at all Residence Inns
was estimated to be 4.9 nights, as compared to an estimated average stay of 1.6
nights in a typical full service hotel. As a result, occupancy for this period
for the Residence Inn by Marriott brand averaged approximately 83%, versus an
estimated 64% for the lodging industry as a whole. Operating costs are generally
lower in Residence Inns than for full service hotels because extended-stay
guests require less frequent housekeeping services and because Residence Inns do
not contain as much public space or the facilities normally found in a full
service hotel, such as ballrooms, catering facilities, specialty restaurants or
gift shops. All of these differences result in fewer employees required per
hotel room, approximately one employee per four rooms, versus a full service
hotel, which averages three employees per four rooms.
Although several new brands have recently sought to focus on the
extended-stay guest, Residence Inn by Marriott generally competes against the
upper tier of this market, which includes Amerisuites, Hawthorne Suites,
Homewood Suites and Summerfield Suites. As compared to this
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competition, the Residence Inn by Marriott brand generates a higher average room
rate of $93 as compared to an estimated $91 average room rate for the
competition and occupancy of 84% as compared to an estimated 74% occupancy for
the competition, which leads to a significantly higher REVPAR of $78 as compared
to an estimated REVPAR of $67 for the competition.
Fairfield Inn by Marriott
Fairfield Inn by Marriott competes in the economy segment of the
hotel business. The Fairfield Inn by Marriott brand seeks to provide superior
service and clean, modern rooms with certain key amenities to price sensitive
business and pleasure travelers. Although a significant portion of the lodging
industry is focused on this market segment, Fairfield Inn by Marriott seeks to
generate superior performance by capitalizing on the Marriott brand name and on
the Marriott standard for quality. Fairfield Inn by Marriott has its own central
reservation system, which operates nationwide, thereby permitting cross selling
throughout the system. This system is accessible to both travel agents and the
Marriott central reservation system.
Fairfield Inns are typically comprised of a single three-story
building of approximately 135 rooms situated on a 2.5 acre site. Each Fairfield
Inn is designed to be aesthetically appealing as well as functional and easy to
maintain. In addition to the signature Fairfield tower, each Fairfield Inn
contains a swimming pool and a 10 to 12 seat meeting room. Individual rooms
provide either two double-sized beds or one king-size bed, plus a work desk.
Consistent with the focus on providing value for a careful price, food and
beverage service is limited to a complimentary continental breakfast.
Fairfield Inn by Marriott competes against a wide variety of local,
regional and, in certain cases, national brands. Its primary national
competitors include Best Western, Comfort Inn, Days Inn, Hampton Inn and Holiday
Inn Express. The success of the Fairfield Inn by Marriott concept is indicated
by the 44% increase in average room rate for the Fairfield Inn brand over the
last five years as compared to an estimated 13% increase in average room rate
for these competitors and the 49% increase in REVPAR for the Fairfield Inn by
Marriott brand during this same period as compared to an estimated 27% increase
in REVPAR for these competitors.
Business Strategy
The Company's primary business objective is to maximize its cash
available for distribution and enhance its value by:
. Acquiring additional existing hotels which satisfy the Company's
investment criteria.
. Acquiring or developing new hotels which satisfy the Company's
investment criteria, employing transaction structures which
mitigate risk.
. Participating in the growth in sales for each of the hotels,
through leases which provide for the payment of rent based upon
the lessees' gross hotel sales.
. Enhancing existing hotel operations by completing selective
capital improvements which are designed to increase gross sales.
. Pursuing other real estate investments, as appropriate.
External Growth -- Acquisition/Development Strategy
The Company will target (i) asset acquisitions located in markets
with high entry costs, which may allow for purchases at less than replacement
cost, (ii) newly developed or converted assets
83
<PAGE>
located in markets with strong real estate fundamentals and (iii)
underperforming assets where operating results can be improved by conversion to
a Marriott brand. As described above, the Company believes that within the
moderate price and economy segments of the lodging industry, the Courtyard by
Marriott and Fairfield Inn by Marriott brands have achieved higher REVPAR
increases than their competition over the last five years. While the level of
increases is likely to moderate, the benefits of association with the Marriott
brand are likely to continue. The Company will seek to capitalize on this
competitive advantage.
The extended-stay segment of the lodging industry offers significant
opportunity. Based on a market analysis prepared by D.K. Shifflet & Associates
Ltd., the demand for extended-stay units currently exceeds available supply by a
ratio of 7 to 1. This demand is driven by increased reliance by American
businesses on outside contractors and temporary workers, as well as the
continued increase in the general mobility of society. Accordingly, only a small
portion of the available demand is being satisfied by lodging facilities with
rooms designed to accommodate the extended-stay guest's needs. The dominant
participant in this segment has been Residence Inn by Marriott, which is
targeted toward the upper end of the extended-stay market. In response to strong
demand in the mid-priced segment of this market, Marriott International has also
developed a new product known as TownePlace Suites. Given the attractive
supply/demand fundamentals of this business, the Company expects to seek to
acquire additional Residence Inns and TownePlace Suites.
Emphasizing the benefit of the Company's geographically diverse
portfolio, the Company will seek to manage its expansion to provide exposure to
all major markets, while avoiding over-concentration in any single market or
region. This diversity will permit the Company to benefit from the varied
regional economic expansions, while cushioning the negative impact of any
regional downturn. This approach recognizes that the supply of new hotels has
not been evenly allocated across the nation, but rather has been focused in
certain markets where the economy has recovered from the slowdown of the early
1990's first, and where the barriers to entry were lower, such as the Southeast
and Southwest. Markets such as the West coast and the New England/Mid-Atlantic
regions have experienced significantly less new construction due to delayed
economic recovery and greater restrictions on development.
The Company's national presence results in a strong understanding of
the relative opportunities and real estate fundamentals of various markets
located throughout the nation. This will enable the Company to focus its
acquisition efforts in metropolitan areas offering the best opportunity for
sales and income growth. The Company's acquisition efforts will also focus on
the various submarkets within different metropolitan areas, especially downtown
or urban locations which have experienced significantly reduced levels of new
construction. These urban-focused projects may include the conversion of older
office buildings into hotels. The higher barriers to entry inherent in these
markets offer the potential for faster room rate and REVPAR growth.
The Company expects there will be numerous opportunities to improve
the performance of acquired hotels by replacing the existing hotel manager with
Marriott International and converting the hotels to a Marriott brand. As
outlined above, the Company believes that Marriott brand properties have
consistently outperformed the industry, especially in the limited service and
extended-stay markets, which are characterized by a large number of smaller
competitors that provide uneven levels of lodging service. Accordingly, the
Company anticipates that additional hotels acquired by the Company should
achieve higher occupancy and average room rates, resulting in higher lease
payments to the Company. However, the Company is not obligated to use the
Marriott brand name for hotels acquired after the Consolidation and it may elect
to use other brand names under appropriate circumstances.
The Company believes it is well qualified to pursue its acquisition
strategy. Management has extensive experience in acquiring and financing lodging
properties and believes its industry knowledge, relationships and access to
market information provide a competitive advantage over other hotel companies
with respect to identifying, evaluating and acquiring hotel assets. In addition,
84
<PAGE>
the Company is well positioned to convert acquired properties to high quality
Marriott brand names because of its relationship with Marriott International.
Internal Growth Strategy
The Leases are designed to allow the Company to participate in any
growth in room sales at the Hotels, which management expects can be achieved
through increases in room rates and occupancies. Although the economic trends
affecting the hotel industry will be the major factor in generating growth in
lease revenues, the abilities of the Company, Lessees and Managers will also
have a material impact on future sales growth. As summarized below, and
described in greater detail herein, (see "The Leases" and "Management
Agreements"), each of the parties is motivated to improve operating results.
In addition to external growth generated by new acquisitions, the
Company intends to carefully and periodically review its portfolio to identify
opportunities to selectively enhance existing assets to improve operating
performance. The Company's Leases provide the Company with control over major
capital improvements and the Company intends to work closely with the Lessees
and the Managers to assure that its lodging properties continue to benefit from
their established, often infill, locations to generate above-market room rates
and occupancies.
Competitive Advantages
Based on current information, the Company will be the largest owner
of limited service and extended-stay hotels in the nation and will have hotels
located in 35 states. The Company believes that the size and geographic
diversity of its portfolio provide the Company with superior market insight and
information, which are critical to accurately evaluating acquisition
opportunities. Although market information compiled by a number of sources is
available to other industry competitors, accurate data with respect to operating
costs and sub-market conditions is often harder to obtain. The scale and breadth
of the Company's portfolio should result in more accurate assessments of actual
operating costs and true demand generators, thereby enhancing the Company's
ability to identify appropriate acquisitions.
If all of the Hotel Partnerships participate in the Consolidation,
the Company will be the largest owner of Marriott International managed hotels,
resulting in a strong relationship with Marriott International, which is one of
the three largest hotel management companies in the United States. As the owner
of 221 hotels currently managed by Marriott International, the Company's Hotels
will represent more than ___% of Marriott International's management portfolio
(based upon the number of hotels managed). As the manager or franchiser of more
than ___ hotels, Marriott International is one of the largest hotel operators in
the nation and the world. A strong relationship with Marriott International and
its franchises offers both opportunities for acquiring existing Marriott brand
hotels, as well as the potential for reflagging other properties.
Senior management has extensive hotel and real estate experience and
extensive relationships with both Host and the Managers, as well as others
within the hotel and financial community. This experience should enable the
Company to identify market opportunities and successfully consummate its
strategy. See "Management."
The financial structure of the Company following the Consolidation
has been designed to provide the Company with substantial financial flexibility,
including the ability to issue Units as consideration for acquisitions, thereby
reducing its dependence on the public equity and debt markets for financing. In
addition, the scale of the Company's activities provides the Company with the
ability to finance its growth at competitive interest rates, plus the capability
to acquire a significant number of hotels prior to returning to the equity
capital markets. This will permit the
85
<PAGE>
Company to implement its strategic plan without the potential disruptions caused
by frequent equity raising requirements.
Hotel Lodging Properties
The Company's hotel lodging properties represent quality assets in
the limited service and extended-stay lodging segments. All of the Company's
properties are operated under Marriott brand names and are managed by Marriott
International.
The following table sets forth information regarding the hotel
properties that will comprise the initial lodging portfolio:
<TABLE>
<CAPTION>
Number Number
Brand Name of Hotels of Rooms
---------- --------- -----------
<S> <C> <C>
Courtyard Hotels (moderate-priced)............................. 120 17,558
Residence Inns (extended-stay)................................. 49 5,910
Fairfield Inns (economy)....................................... 50 6,681
----- -----------
Subtotal.................................................. 219 30,149
Acquisition Hotels............................................. 2 634
----- -----------
Total..................................................... 221 30,783
=== ===========
</TABLE>
To maintain the overall quality of the Company's Hotels, each Hotel
undergoes refurbishments and capital improvements on a regularly scheduled
basis. Typically, refurbishing has been provided at intervals of five years,
based on an annual review of the condition of each Hotel. In 1996, 1995 and
1994, the Hotel Partnerships spent approximately $40 million, $38 million and
$33 million, respectively, on capital improvements to existing Hotels. As a
result of these expenditures, the Hotel Partnerships have been able to maintain
high quality rooms at their Hotels.
The following table sets forth certain information with respect to
the operations of the Hotel Partnerships and the Company on a historical and pro
forma basis for the fifty-three weeks ended September 12, 1997:
<TABLE>
<CAPTION>
Fifty-three Weeks Ended September 12, 1997
------------------------------------------------------------------------------------
Pro Forma
Lease Net
Number Income Plus Pro Forma Average
Hotel of Number of Hotel Lease Lease Daily
Partnerships Hotels Rooms Revenues Payments Payments Occupancy Rate REVPAR/(1)/
- ------------ ------ ----------- -------- -------- --------- --------- --------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CBM1................. 50 7,223 $ 95,070 $ $ 79.9% $79.44 $63.51
CBM2................. 70 10,335 141,717 80.6% 80.34 64.74
RIBM1................ 15 2,129 32,484 82.6% 90.50 74.74
RIBM2................ 23 2,487 34,940 84.0% 87.58 73.59
Res USA.............. 11 1,294 21,857 86.8% 92.04 79.85
FIBM................. 50 6,681 46,010 76.1% 50.03 38.09
-- ----- --------- ---------- ----------
Totals 219 30,149 $ 372,078 $ $
=== ====== ========= ========== ==========
Weighted Average 80.1% $75.66 $60.63
</TABLE>
86
<PAGE>
- ------------------
/(1)/ REVPAR is a commonly used indicator of market performance of hotels.
REVPAR measures daily room revenues generated on a per room basis by
combining the average daily room rate charged and the average daily
occupancy achieved. REVPAR excludes food and beverage and other ancillary
revenues generated by the hotel.
Courtyard Hotels. The Company's Courtyard Hotels are moderate-priced,
limited service hotels aimed at individual business and pleasure travelers, as
well as families. Courtyard Hotels typically have approximately 150 rooms with
locations in suburban areas or near airports throughout the United States. The
Courtyard Hotels include well-landscaped grounds, a courtyard with a pool and
socializing areas. Each Hotel features meeting rooms and a lounge with
approximately 80 seats. The Company's Courtyard Hotels have substantially
matured and are operating at high occupancy rates. The Company believes this
competitive position will enable the Manager to continue to improve sales by
adjusting the mix of business to increase room rates. The table below sets forth
certain performance information for the Company's Courtyard Hotels (excluding
the Acquisition Hotels) for the indicated periods.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
---------------------- -------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of properties ................. 120 120 120 120 120
Number of rooms....................... 17,558 17,558 17,558 17,558 17,558
Average daily rate................... $ 81.95 $ 76.88 $ 76.44 $ 71.38 $ 66.69
Occupancy............................. 82.1% 81.6% 79.9% 81.2% 81.2%
REVPAR................................ $ 67.31 $ 62.70 $ 61.10 $57.97 $ 54.16
% REVPAR change....................... 7.4% -- 5.4% 7.0% --
</TABLE>
The Company's Courtyard Hotels benefited in the First Three Quarters
of 1997 from higher demand. REVPAR increased over 7% due to increases in room
rates of over 6% and a slight increase in occupancy as compared to the same
period in 1996. House profit margins also increased by 1%, reflecting the
operating leverage inherent in properties already running at close to capacity.
The Company's Courtyard Hotels were generally fully occupied during
the business week and enjoyed high occupancies during the weekends. The Company
believes this competitive position will enable the Manager to continue to
improve sales through yield management and selective room rate increases.
However, there can be no assurance that sales will continue to improve.
Residence Inns. The Company's Residence Inns are extended-stay,
limited service hotels which cater primarily to business and family travelers
who stay more than five consecutive nights. Residence Inns typically have 88 to
144 studio and two-story suites. Residence Inns generally are located in
suburban settings throughout the United States and feature a series of
residential-style buildings with landscaped walkways, courtyards and
recreational areas. Residence Inns do not have restaurants, but offer a
complimentary continental breakfast. In addition, most Residence Inns provide a
complimentary evening hospitality hour. Each suite contains a fully-equipped
kitchen and many suites have woodburning fireplaces. The table below sets forth
certain performance information for the Company's Residence Inns (excluding the
Acquisition Hotels) for the indicated periods.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
---------------------- -------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of properties ................. 49 49 49 49 49
Number of rooms....................... 5,910 5,910 5,910 5,910 5,910
Average daily rate.................... $ 91.00 $ 86.74 $ 86.67 $ 81.40 $ 76.03
Occupancy............................. 85.9% 86.6% 84.6% 86.8% 87.4%
REVPAR................................ $ 78.14 $ 75.12 $ 73.33 $ 70.62 $ 66.43
% REVPAR change....................... 4% -- 3.8% 6.3% --
</TABLE>
87
<PAGE>
The Company's Residence Inns performed well in the First Three
Quarters of 1997. REVPAR increased over 4% due to increases in room rates of
nearly 5%, while occupancy decreased by less than one percentage point as
compared to the same period in 1996. Continued popularity of this product with
customers combined with increasing business travel resulted in superior
performance for the period. At an average occupancy rate of 86% for the First
Three Quarters of 1997, these properties were near full occupancy during the
business week and enjoyed high occupancies during the weekends. Given this
strong demand, the Company's Residence Inns were able to improve room rates
through managing their mix of business.
Fairfield Inns. The Company's Fairfield Inns are economy-priced,
limited service hotels aimed at budget conscious individual business and
pleasure travelers, as well as families. Fairfield Inns typically have
approximately 135 rooms at locations in suburban areas or near airports
throughout the United States. Fairfield Inns have limited public space and do
not include restaurants; however, they do offer a complimentary continental
breakfast. The Company believes this competitive position will enable the
Manager to continue to improve sales by adjusting the mix of business to
increase room rates. The table below sets forth certain performance information
for the Company's Fairfield Inns for the indicated periods.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
---------------------- -------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of properties.................. 50 50 50 50 50
Number of rooms....................... 6,681 6,681 6,681 6,681 6,681
Average daily rate.................... $ 50.89 $ 50.23 $ 49.57 $ 45.26 $ 41.51
Occupancy............................. 78.4% 79.1% 76.6% 80.6% 81.5%
REVPAR................................ $ 39.92 $ 39.76 $ 37.98 $ 36.47 $ 33.83
% REVPAR change........................ 0.4% -- 4.1% 7.8% --
</TABLE>
The Company's Fairfield Inns benefited in the First Three Quarters of
1997 from continued high demand. REVPAR increased less than 1% with increases in
room rates of over 1% while occupancy decreased less than 1% as compared to the
same period in 1996. Operations in 1996 were favorably impacted by the six
Fairfield Inns located in the Atlanta area which had an especially strong third
quarter in 1996 due to the 1996 Summer Olympics.
The Acquisition Hotels
The Acquisition Hotels consist of a Residence Inn in Pentagon City,
Virginia and a Courtyard Hotel located in downtown Chicago, Illinois. The
Company is purchasing the Acquisition Hotels for cash due to restrictions in the
debt agreements of the Host subsidiary that owns such Hotels, which require that
assets sold by such Host subsidiary be sold for consideration consisting of at
least 75% cash.
Courtyard Hotel; Downtown Chicago, Illinois. The Chicago Courtyard
Hotel, which opened in April 1992, contains 334 rooms. The Chicago Courtyard
Hotel has several amenities, including 9,000 square feet of meeting space, a
multi-purpose restaurant and room service, which, along with its size
(approximately twice the size of a typical Courtyard Hotel), distinguishes it
from a typical Courtyard Hotel. The table below sets forth certain performance
information for the Chicago Courtyard Hotel for the indicated periods.
88
<PAGE>
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
-------------------------- -------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of rooms............. 334 334 334 334 334
Average daily rate.......... $133.90 $115.32 $119.17 $104.13 $98.88
Occupancy................... 84.1% 83.6% 83.4% 83.8% 82.3%
REVPAR...................... $112.56 $ 96.38 $ 99.39 $ 87.26 $81.36
% REVPAR change............. 16.8% -- 13.9% 7.3% --
</TABLE>
Residence Inn; Pentagon City, Virginia. The Pentagon City Residence
Inn, which opened in March 1996, contains 300 rooms. This Hotel has several
amenities, including 5,000 square feet of meeting space, an indoor pool and an
underground garage which, along with its size (approximately three times the
size of a typical Residence Inn), distinguishes it from a typical Residence Inn.
The table below sets forth certain performance information for the Pentagon City
Residence Inn for the indicated periods.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
--------------------------- --------------
1997 1996 1996
---- ---- --------------
<S> <C> <C> <C>
Number of rooms................... 300 300 300
Average daily rate................ $120.52 $113.33 $113.88
Occupancy......................... 81.1% 79.4% 75.0%
REVPAR............................ $ 97.74 $ 89.96 $ 85.41
% REVPAR change................... 8.6% -- --
</TABLE>
Marketing
All of the Company's Hotels are currently, and following the
Consolidation will remain, managed by Marriott International and its
subsidiaries as Marriott brand hotels. The Company believes that these Marriott
properties will continue to enjoy competitive advantages arising from their
participation in the Marriott International hotel system. Marriott
International's nationwide marketing programs and reservation systems as well as
the advantage of the strong customer preference for Marriott brands should also
help these properties to maintain or increase their premium over competitors in
both occupancy and room rates. Repeat guest business in the Marriott hotel
system is enhanced by the recently created Marriott Rewards program, which
expanded the previous Marriott Honored Guest Awards program. Marriott Rewards
membership includes more than nine million members.
The Marriott reservation system provides Marriott reservation agents
complete descriptions of the rooms available for sale and up-to-date rate
information from the properties. The reservation system also features
connectivity to airline reservation systems, providing travel agents with access
to available rooms inventory for all Marriott lodging properties. In addition,
software at Marriott's centralized reservations centers enables agents to
immediately identify the nearest Marriott brand property with available rooms
when a caller's first choice is fully occupied.
Properties
The following table sets forth certain information relating to each of the
Hotels owned by the Hotel Partnerships and the Acquisition Hotels. All Hotels
are operated by Marriott International and its subsidiaries and the land on
which the hotel is built is fee owned unless otherwise indicated.
89
<PAGE>
Courtyard Hotels
- ----------------
No. of Date
Location Rooms Opened
-------- ------ ------
Alabama
Birmingham-Homewood 140 1985
Birmingham-Hoover(1)...................... 153 1987
Huntsville(1)............................. 149 1987
Montgomery(1)............................. 146 1987
Arizona
Phoenix Airport(1)........................ 145 1987
Phoenix-Mesa(1)........................... 148 1988
Phoenix Metrocenter(1).................... 146 1987
Tucson Airport(1)......................... 149 1988
Arkansas
Little Rock(1)............................ 149 1988
California
Bakersfield(1)............................ 146 1988
Buena Park(1)............................. 145 1986
Cupertino(2).............................. 149 1988
Foster City(1)............................ 147 1987
Fremont(1)................................ 146 1987
Fresno(2)................................. 146 1986
Hacienda Heights(1)....................... 150 1990
Marin-Larkspur Landing(1)................. 146 1987
Palm Springs(1)........................... 149 1988
Pleasanton................................ 145 1986
Torrance(1)............................... 149 1988
Sacramento-Rancho Cordova................. 144 1987
San Francisco Airport(2).................. 147 1986
Santa Ana(1).............................. 145 1987
Colorado
Boulder(1)................................ 149 1988
Denver.................................... 146 1987
Denver-Southeast(1)....................... 155 1987
Connecticut
Norwalk(2)................................ 145 1988
Wallingford(1)............................ 149 1990
Windsor(1)................................ 149 1987
Florida
Ft. Myers(1).............................. 149 1988
Ft. Lauderdale-Plantation(1).............. 149 1988
Melbourne(1).............................. 146 1987
Miami Airport West(1)..................... 145 1987
St. Petersburg(1)......................... 149 1989
Tallahassee(1)............................ 154 1987
Tampa-Westshore(2)........................ 145 1986
West Palm Beach(1)........................ 149 1989
Georgia
Atlanta-Airport South..................... 144 1986
Atlanta-Delk Road(1)...................... 146 1986
Atlanta-Executive Park(1)................. 145 1987
Atlanta-Gwinnett Mall(1).................. 146 1987
Atanta-Northlake(2)....................... 128 1984
Atlanta-Peachtree Corners................. 131 1985
Atlanta-Peachtree Dunwoody................ 128 1983
Atlanta-Perimeter Center(1)............... 145 1987
Atlanta-Roswell(2)........................ 154 1988
Atlanta-Windy Hill........................ 127 1983
Augusta................................... 130 1985
Columbus.................................. 139 1985
Savannah.................................. 144 1986
Illinois
Arlington Heights South................... 146 1985
Chicago-Deerfield......................... 131 1986
Chicago-Glenview(1)....................... 149 1989
Chicago-Highland Park(1).................. 149 1988
Chicago-Lincolnshire...................... 146 1987
Chicago-Naperville(1)..................... 147 1986
Chicago-Oakbrook Terrace.................. 147 1986
Chicago-Waukegan(1)....................... 149 1988
Chicago-Wood Dale(1)...................... 149 1988
Rockford.................................. 147 1986
Indiana
Indianapolis-Castleton(1)................. 146 1987
Kansas
Kansas City-Overland Park(1).............. 149 1989
Kentucky
Lexington North(1)........................ 146 1988
Maryland
Annapolis(1).............................. 149 1989
Baltimore-Hunt Valley(1).................. 146 1986
Landover.................................. 152 1986
Rockville(1).............................. 147 1987
Silver Spring(1).......................... 146 1988
Massachusetts
Boston-Andover(1)......................... 146 1988
Michigan
Detroit Airport(1)........................ 146 1987
Detroit Dearborn(1)....................... 147 1987
Detroit-Livonia(1)........................ 149 1988
Detroit-Southfield........................ 147 1986
Detroit-Troy.............................. 147 1986
Detroit-Warren............................ 147 1986
Minnesota
Minneapolis Airport(1).................... 146 1987
Missouri
St. Louis-Creve Coeur(1).................. 154 1987
St. Louis-Westport(1)..................... 149 1988
New Jersey
Lincroft-Red Bank(1)...................... 146 1988
New York
Poughkeepsie(2)........................... 149 1988
Rye(1).................................... 145 1988
Tarrytown................................. 139 1987
North Carolina
Charlotte-Arrowood Road(1)................ 146 1987
Charlotte-Southpark(2).................... 149 1989
Raleigh-Cary(1)........................... 149 1988
Raleigh-Wake Forest Road.................. 153 1986
90
<PAGE>
Courtyard Hotels, continued
- ---------------------------
No. of Date
Location Rooms Opened
-------- ------ ------
Ohio
Cincinnati-Blue Ash(1).................... 149 1986
Columbus-Dublin(1)........................ 147 1986
Columbus-Worthington(1)................... 145 1987
Dayton Mall(1)............................ 146 1987
Toledo(1)................................. 149 1988
Oklahoma
Oklahoma City Airport(1).................. 149 1988
Oregon
Portland-Beaverton(1)..................... 149 1989
Pennsylvania
Philadelphia-Devon(2)..................... 149 1988
Valley Forge(1)........................... 150 1987
South Carolina
Columbia(1)............................... 149 1989
Greenville(1)............................. 146 1988
Tennessee
Brentwood(1).............................. 145 1986
Memphis Airport(1)........................ 145 1987
Memphis-Park Avenue East(1)............... 146 1986
Nashville Airport(1)...................... 145 1988
Texas
Arlington................................. 147 1986
Bedford(1)................................ 145 1987
Dallas-Addison(1)......................... 145 1987
Dallas-Las Colinas........................ 147 1986
Dallas-LBJ Northwest(1)................... 146 1987
Dallas-Northeast(1)....................... 149 1988
Dallas-Plano.............................. 149 1988
Dallas-Stemmons(1)........................ 146 1987
San Antonio Airport(1).................... 145 1987
San Antonio Downtown(1)................... 149 1990
San Antonio-Medical Center(1)............. 146 1987
Virginia
Charlottesville(1)........................ 150 1989
Fair Oaks................................. 144 1986
Herndon(1)................................ 146 1987
Hampton(1)................................ 146 1987
Manassas(1)............................... 149 1989
Richmond(1)............................... 145 1986
Virginia Beach(1)......................... 146 1987
Washington
Seattle Southcenter(1).................... 149 1989
------
17,558
Subtotal
Acquisition Hotel
Illinois
Chicago-Downtown......................... 334 1992
------
TOTAL 17,892
======
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<PAGE>
Residence Inns
- --------------
No. of Date
Location Rooms Opened
-------- ------ ------
Alabama
Birmingham................................... 128 1986
Montgomery................................... 94 1990
California
Arcadia...................................... 120 1989
Bakersfield.................................. 114 1990
Costa Mesa................................... 144 1986
Irvine....................................... 112 1989
La Jolla..................................... 287 1986
Long Beach................................... 216 1987
Placentia.................................... 112 1988
Pleasant Hill................................ 126 1990
San Ramon.................................... 106 1990
Colorado
Boulder...................................... 128 1986
Connecticut
Meriden(2)................................... 106 1990
Florida
Boca Raton................................... 120 1988
Jacksonville................................. 112 1986
Pensacola.................................... 64 1985
St. Petersburg............................... 88 1986
Georgia
Atlanta Airport.............................. 126 1990
Atlanta-Buckhead............................. 136 1987
Atlanta-Cumberland........................... 130 1987
Atlanta-Dunwoody............................. 144 1984
Illinois
Chicago-Deerfield............................ 128 1989
Chicago-Lombard.............................. 144 1987
Louisiana
Shreveport/Bossier City...................... 72 1983
Massachusetts
Boston-Danvers............................... 96 1989
Boston-Tewksbury............................. 130 1990
Michigan
Kalamazoo.................................... 83 1989
Southfield................................... 144 1986
Mississippi
Jackson...................................... 120 1986
Missouri
St. Louis-Chesterfield....................... 104 1986
St. Louis-Galleria........................... 152 1986
Nevada
Las Vegas.................................... 192 1989
New Mexico
Santa Fe..................................... 120 1986
North Carolina
Charlotte North.............................. 91 1988
Greensboro................................... 128 1987
Raleigh...................................... 144 1986
Ohio
Akron........................................ 112 1987
Cincinnati-Blue Ash.......................... 118 1990
Cincinnati North............................. 144 1985
Columbus North............................... 96 1985
Dayton North................................. 64 1987
Dayton South................................. 96 1985
Pennsylvania
Valley Forge................................. 88 1988
South Carolina
Columbia..................................... 128 1988
Spartanburg.................................. 88 1985
Tennessee
Memphis...................................... 105 1986
Texas
Dallas-Las Colinas........................... 120 1989
Houston-Clear Lake........................... 110 1990
Lubbock...................................... 80 1986
-----
Subtotal 5,910
Acquisition Hotel
Virginia
Pentagon City.............................. 300 1996
-----
TOTAL 6,210
=====
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<PAGE>
Fairfield Inns
- --------------
No. of Date
Location Rooms Opened
-------- ------ ------
Alabama
Birmingham-Homewood(1)....................... 132 1988
Montgomery................................... 133 1988
California
Los Angeles-Buena Park(1).................... 135 1990
Los Angeles-Placentia........................ 135 1990
Florida
Gainesville(1)............................... 135 1990
Miami-West(1)................................ 135 1989
Orlando-International Drive(1)............... 135 1989
Orlando-South(1)............................. 133 1988
Georgia
Atlanta Airport(1)........................... 132 1987
Atlanta-Gwinnett Mall........................ 135 1988
Atlanta-Northlake(1)......................... 133 1988
Atlanta-Northwest(1)......................... 130 1987
Atlanta-Peachtree Corners.................... 135 1989
Atlanta-Southlake............................ 134 1989
Savannah(1).................................. 135 1990
Iowa
Des Moines-West(1)........................... 135 1990
Illinois
Bloomington-Normal(1)........................ 132 1988
Chicago-Lansing(1)........................... 135 1989
Peoria....................................... 135 1989
Rockford..................................... 135 1989
Indiana
Indianapolis-Castleton(1).................... 132 1988
Indianapolis-College Park.................... 132 1988
Kansas
Kansas City-Merriam.......................... 135 1989
Kansas City-Overland Park................... 134 1989
Michigan
Detroit-Airport(1)........................... 133 1988
Detroit-Auburn Hills(1)...................... 134 1989
Detroit-Madison Heights(1)................... 134 1989
Detroit-Warren(1)............................ 131 1988
Detroit-West (Canton)(1)..................... 133 1988
Kalamazoo(1)................................. 133 1988
Missouri
St. Louis-Hazelwood.......................... 135 1989
North Carolina
Charlotte-Airport(1)......................... 135 1989
Charlotte-Northeast(1)....................... 133 1988
Durham(1).................................... 135 1990
Fayetteville(1).............................. 135 1989
Greensboro(1)................................ 135 1989
Raleigh-Northeast(1)......................... 132 1988
Wilmington................................... 134 1989
Ohio
Cleveland-Airport............................ 135 1989
Columbus-North(1)............................ 135 1989
Dayton-North(1).............................. 135 1989
Toledo-Holland............................... 135 1989
South Carolina
Florence..................................... 135 1989
Greenville................................... 132 1989
Hilton Head(1)............................... 120 1989
Tennessee
Johnson City(1).............................. 132 1988
Virginia
Hampton...................................... 134 1989
Virginia Beach(1)............................ 134 1990
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<PAGE>
Wisconsin
Madison(1)................................... 135 1988
Milwaukee-Brookfield......................... 135 1989
-----
TOTAL 6,681
=====
- -------------------
(1) The land on which the Hotel is built is leased by the Hotel Partnerships
from Marriott International or its affiliates under long term lease
agreements.
(2) The land on which the Hotel is built is leased by the Hotel Partnerships
from third parties unaffiliated with Marriott International under long term
lease agreements.
The Leases
In order for CRFLT to qualify as a REIT, neither CRFLT nor the Company may
operate the Hotels or related properties. The Company will lease the Hotels to
the Lessees for a term of __ years pursuant to separate Leases for both Hotel
Partnership and for both of the Acquisition Hotels. Each Lessee will be a wholly
owned subsidiary of Host. The Company is not obligated to use subsidiaries of
Host as a lessee with respect to any hotels acquired after the Consolidation.
The following summary of the principal terms of the Leases is qualified in its
entirety by reference to the Leases, a form of which has been filed as an
exhibit to the Registration Statement of which this Consent Solicitation is a
part.
Lease Terms. Each Lease will have a term of __ years, subject to
earlier termination upon the occurrence of certain contingencies described in
the Leases (including, particularly, the provisions described herein under
"Damage to the Hotels," "Condemnation of the Hotels" and "Termination of Leases
upon Disposition of the Hotels").
Base Rent; Percentage Rent; Additional Charges. Each Lease requires
the Lessee to pay the greater of (i) Base Rent in a fixed dollar amount or (ii)
Percentage Rent (Base Rent and Percentage Rent are collectively referred to
herein as "Rents"), based on specified percentages of aggregate sales (including
room sales, food and beverage sales and telephone and other sales) ("Total
Sales") from the Hotels that are subject to the Lease, plus in either case,
certain other amounts, including interest accrued on any late payments or
charges ("Additional Charges").
The following table sets forth, for each Hotel Partnership and the
Acquisition Hotels, the 1998 Annualized Base Rent, the Percentage Rent formula
and the 1998 Pro Forma Percentage Rent payments under the applicable Lease:
<TABLE>
<CAPTION>
1998 1998 Pro Forma
Annualized Percentage Rent Percentage
Hotel Partnership Base Rent Formula Rent Payments
----------------- --------- ----------------- -----------------
<S> <C> <C> <C>
CBM1.......................... $ __% of Total Sales up to $__; $
__% of Total Sales in excess
of $__.
CBM2.......................... __% of Total Sales up to $__;
__% of Total Sales in excess
of $__.
RIBM1......................... __% of Total Sales up to $__;
__% of Total Sales in excess
of $__.
RIBM2......................... __% of Total Sales up to $__;
__% of Total Sales in excess
of $__.
Res USA....................... __% of Total Sales up to $__;
__% of Total Sales in excess
of $__.
FIBM.......................... __% of Total Sales up to $__;
__% of Total Sales in excess
of $__.
Acquisition Hotels............ __% of Total Sales up to $__;
__% of Total Sales in excess
of $__.
---------------- --------------
Totals: $ $
================ ==============
</TABLE>
As of January 1, 1999 and each January 1 thereafter, the Base Rent
and each of the Percentage Rent thresholds under each of the Leases will be
increased to reflect a specified portion of any increase in the Consumer Price
Index ("CPI") as compared to January 1 of the preceding year. The effect of
those adjustments will be to increase the Base Rent payable under the Leases,
but to reduce the Percentage Rent payable under the Leases unless Total Sales
with respect to a particular Lease increase at least by the same percentage as
the CPI adjustment.
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<PAGE>
Base Rent is required to be paid monthly in arrears on the first day of
each calendar month. Percentage Rent is payable monthly in arrears on the tenth
day of each calendar month. Percentage Rent for such purposes will be calculated
based on the year-to-date Total Sales as of the end of the preceding month, and
a prorated amount of each of the applicable thresholds, determined based on the
portion of the fiscal year for which the calculation is being made, and
crediting against such amount the total Percentage Rent previously paid for such
fiscal year and the cumulative Base Rent paid for such fiscal year as of the end
of the preceding month. A final adjustment of the Percentage Rent for each
fiscal year will be made based on audited statements of sales for each Lease
within days after the end of the fiscal year.
Other than real estate and personal property taxes, casualty insurance
(including loss of income insurance), capital impositions and capital
replacements and refurbishments (determined in accordance with generally
accepted accounting principles), which are obligations of the Company, the
Leases require the Lessees to pay rent, insurance, all costs and expenses and
all utility and other charges incurred in the operation of the Hotels. The
Leases also provide for rent reductions and abatements in the event of damage or
destruction or a partial taking of any Hotel as described under "Damage to the
Hotels" and "Condemnation of the Hotels."
Lessee Capitalization. Each Lessee will be required to maintain
liquid assets in an amount equal to the Minimum Net Worth, which must be equal
to the greater of (i) a specified dollar amount ranging from $____ million to
$____ million or (ii) ____% of the initial projected annual lease payments for
all Hotels leased by the Company to each such Lessee. The Minimum Net Worth will
be available to make payments under the Lease and to fund operational shortfalls
in the event operating cash flow is inadequate. To the extent that a Lessee is
required to fund operational shortfalls because operating cash flow is
inadequate, the Minimum Net Worth for such Lessee will be reduced by an amount
equal to such operational shortfall payment. In the event that one or more of
the Hotels is terminated under the Lease (other than as a result of a default by
a Lessee), the specified dollar amount portion of the Minimum Net Worth
requirement will be reduced on a pro rata basis, provided that if the Lessee has
leased additional hotels, such pro rata reduction shall be decreased by the pro
rata amount of the Lessee's net worth requirement attributable to such
additional hotels. There can be no assurance that the Minimum Net Worth will be
sufficient to make all required payments under the Leases or to fund all
operating shortfalls.
Maintenance and Improvements. Each Lease obligates the Company to
maintain annually a reserve for capital improvements at the Hotels (including
the periodic replacement or refurbishment of FF&E).
The aggregate amount of such reserves will average __% of Total Sales for
the Hotels for the preceding twelve months (which, on a pro forma basis for the
fifty-three weeks ended September 12, 1997, represented approximately $____
million or ___% of Total Sales). Any unexpended amounts will remain the property
of the Company upon termination of the Leases. Otherwise, the Lessees will be
required, at their expense, to maintain the Hotels in good order and repair,
except for ordinary wear and tear, and to make non-structural, foreseen and
unforeseen, and ordinary and extraordinary, repairs (other than capital repairs)
which may be necessary and appropriate to keep the Hotels in good order and
repair.
The Lessees will not be obligated to bear the cost of any capital
improvements or capital repairs to the Hotels. With the consent of the Company,
however, the Lessees, at their expense, may make non-capital and capital
additions, modifications or improvements to the Hotels, provided that such
action does not significantly alter the character or purposes and maintains or
enhances the value of the Hotels and is permitted under the Company's debt
agreements. All such alterations, replacements and improvements shall be subject
to all the terms and provisions of the Leases and will become the property of
the Company upon termination of the Leases. The Company will own substantially
all personal property (other than inventory, linens and other nondepreciable
personal
95
<PAGE>
property) not affixed to, or deemed a part of, the real estate or improvements
on the Hotels, except to the extent that ownership of such personal property
would cause any portion of the rents under the Leases not to qualify as "rents
from real property" for REIT income test purposes. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Income Tests."
Insurance and Property Taxes. The Company is responsible for paying
for (i) real estate and personal property taxes on the Hotels (except to the
extent that personal property associated with the Hotels is owned by the
Lessees), (ii) casualty insurance on the Hotels and (iii) business interruption
insurance on the Hotels. The aggregate real estate and personal property tax
obligations for the Hotels during the year ended January 2, 1998 were
approximately $___ million. The aggregate insurance obligations for the Hotels
during the year ended January 2, 1998 were approximately $___ million. The
Lessees are required to pay or reimburse the Company for all liability insurance
on the Hotels, with extended coverage, including comprehensive general public
liability, workers' compensation and other insurance appropriate and customary
for properties similar to the Hotels and naming the Company as an additional
named insured.
Events of Default. Events of Default under each of the
Leases include, among others, the following:
(i) the failure by the Lessee to pay Base Rent or
Percentage Rent when due;
(ii) the failure of the Lessee to maintain required
liability insurance;
(iii) the failure of the Lessee to maintain the
Minimum Net Worth;
(iv) if the Lessee shall generally not be paying
its debts as they become due or file a petition for relief or reorganization or
arrangement or any other petition in bankruptcy, for liquidation or to take
advantage of any bankruptcy or insolvency law of any jurisdiction, make an
assignment for the benefit of its creditors, consent to the appointment of a
custodian, receiver, trustee or other similar officer with respect to it or any
substantial part of its assets, be adjudicated insolvent or take corporate
action for the purpose of any of the foregoing; or if a court or governmental
authority of competent jurisdiction shall enter an order appointing, without
consent by the Lessee, a custodian, receiver, trustee or other similar officer
with respect to the Lessee or any substantial part of its assets, or if an order
for relief shall be entered in any case or proceeding for liquidation or
reorganization or otherwise to take advantage of any bankruptcy or insolvency
law of any jurisdiction, or ordering the dissolution, winding-up or liquidation
of the Lessee or if any petition for any such relief shall be filed against the
Lessee and such petition shall not be dismissed within 120 days;
(v) if the Lessee is liquidated or dissolved or
commences proceedings to effect the same, or ceases to do business or sells all
or substantially all of its assets;
(vi) the failure by the Lessee to observe or perform
any other term of the Lease and the continuation of such failure for a period of
30 days after receipt by the Lessee of notice from the Company thereof, unless
the Lessee is diligently proceeding to cure, in which case the cure period will
be extended to _____ days; if such failure cannot be cured within the _____ day
period and the Lessee continues to act, with diligence, to correct such failure
within said _____ days, the Lessee will be afforded up to an additional ____
days to cure such failure;
(vii) if the Lessee voluntarily discontinues
operations of a Hotel for more than 30 days, except as a result of material
damage, destruction, condemnation or force majeure; or
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<PAGE>
(viii) any action or inaction on the part of the Lessee
which causes an event of default under any indebtedness of the Company or any
Hotel Partnership.
Assignment and Subleasing. The Lessees will not be
permitted to sublet all or any part of the Hotels or assign its interest under
any of the Leases, other than to an affiliate of the Lessee that satisfies
certain requirements specified in each Lease, without the prior written consent
of the Company. The Company has generally agreed to consent to any sublease of a
retail portion of the Hotels (provided such sublease will not cause any Rents to
fail to qualify as "rents from real property" for REIT purposes). No assignment
or subletting will release the Lessee from any of its obligations under the
Leases.
Damage to the Hotels. In the event of damage to or
destruction of any Hotel covered by insurance which then renders the Hotel
unsuitable for its intended use and occupancy as a hotel, the Lease shall
terminate as to such Hotel and the Company shall generally be entitled to retain
the proceeds of insurance. In the event that damage to or destruction of a Hotel
which is covered by insurance does not render the Hotel unsuitable for its
intended use and occupancy as a hotel, the Company or, at the Company's option,
the Lessee generally will be obligated to repair or restore the Hotel to
substantially the same condition as existed immediately prior to such damage. In
the event of damage to or destruction of any Hotel that is not covered by
insurance, the Company may either repair, rebuild or restore the Hotel (at the
Company's expense) to substantially the same condition as existed immediately
prior to such damage or terminate the Lease on the terms and conditions set
forth in such Lease.
Condemnation of the Hotels. In the event of a total
condemnation of a Hotel, the relevant Lease will terminate with respect to such
Hotel as of the date of taking, and the Company and the Lessee will be entitled
to their respective shares of any condemnation award in accordance with the
provisions of the Lease. In the event of a partial taking which does not render
the Hotel unsuitable for its intended use as a hotel, then the Company or, at
the Company's election, the Lessee shall restore the untaken portion of the
Hotel, and the Company shall contribute to the cost of such restoration that
part of the condemnation award specified for restoration.
Termination of Leases upon Disposition of the Hotels. In
the event the Company enters into an agreement to sell or otherwise transfer a
Hotel, the Company, at its option, must either (i) pay the Lessee the fair
market value of the Lessee's leasehold interest in the remaining term of the
relevant Lease with respect to such Hotel or (ii) lease to the Lessee a
substitute hotel or hotels on terms that would create a leasehold interest in
such substitute hotel or hotels with a fair market value equal to or exceeding
the fair market value of the Lessee's remaining leasehold interest under the
relevant Lease with respect to such Hotel that is sold or otherwise transferred.
For purposes of computing the fair market value of the leasehold interest, a __%
discount rate will be applied to the projected profit to be earned by the Lessee
with respect to such Hotel that is sold over the balance of the term of the
Lease with respect to such Hotel (taking into account any renewal options under
the relevant Lease).
Termination of Leases upon Changes in Tax Laws. In the
event that changes in federal income tax laws allow the Company, a subsidiary or
an affiliate to directly operate hotels, the Company will have the right (but
not the obligation) to terminate all, but not less than all, Leases with the
Lessees, in which event the Company will pay the Lessees the fair value of the
remaining term of the Leases (determined as set forth above in "Termination of
Leases upon Disposition of Hotels").
Other Lease Covenants. The Lessees have agreed that
during the term of the Leases, the Lessees will not engage in any business
activities other than acting as Lessees under their respective Leases. Host has
agreed that, for the term of the Leases, any transfer of its interest in a
97
<PAGE>
Lessee or of the Lessee's business is subject to the approval of the Company,
unless the assignment is to an entity which is 100% owned by Host.
Covenant Not to Compete. For a period of __ years from
the execution of the Leases, the Company will not acquire or develop any full
service hotels and Host will not acquire or develop any limited service or
extended-stay hotels. However, Host's ownership of the Westport Residence Inn
and Miami Airport Marriott are exempt from such prohibition. See "Conflicts of
Interest -- Host's Continued Ownership of Certain Limited Service and
Extended-Stay Hotels."
The Management Agreements
General
The Lessees will lease the Hotels from the Participating Hotel
Partnerships subject to the Management Agreements between the Hotel Partnerships
and Marriott International or its subsidiaries and will succeed to all of the
rights and obligations of the Participating Hotel Partnerships under the
Management Agreements. Following the Consolidation, the Lessees will have all of
the rights and obligations of the owners of the Hotels under the Management
Agreements for the period during which the Leases are in effect (including the
obligation to pay the management and other fees thereunder) and will hold the
Company harmless with respect thereto. In connection with the Consolidation,
Marriott International will receive a payment of $____ million to satisfy the
$____ million obligation of the Hotel Partnerships with respect to deferred
management fees payable to the Managers.
Relationship with Marriott International
Marriott International or its subsidiaries will serve as Managers for
all of the Hotel Partnerships' Hotels which will be leased to the Lessees, as
well as the Acquisition Hotels, pursuant to the Management Agreements. Marriott
International and its subsidiaries also provide various other services to Host
and its affiliates. With respect to these contractual arrangements, the
potential exists for disagreement as to contract compliance. Additionally, the
possible desire of CRFLT and the Company to finance, refinance or effect a sale
of any of the Hotels managed by subsidiaries of Marriott International may,
depending upon the structure of such transactions, result in a need to modify
the Management Agreements with respect to such Hotel. Any such modification
proposed by CRFLT or the Company may not be acceptable to Marriott International
and the lack of consent from either Marriott International or the applicable
Lessee that has assumed the Management Agreement could adversely affect the
Company's ability to consummate such financing or sale. In addition, certain
situations could arise where actions taken by Marriott International in its
capacity as manager of competing lodging properties would not necessarily be in
the best interests of the Company, CRFLT or the Lessees. Nevertheless, the
Company believes that there is sufficient mutuality of interest between the
Company, the Lessees and Marriott International to result in a mutually
productive relationship.
Management Services
Under each Management Agreement, the Manager will provide complete
management services to the applicable Lessees in connection with its management
of such Lessee's Hotels following the Consolidation. Except where specifically
noted, these relationships are identical to those that exist between the
applicable Manager and the applicable Hotel Partnership currently, and that
would exist between the Company and the Manager in the event the Leases expire
or otherwise terminate while the Management Agreements remain in effect. The
services provided by each Manager to each Lessee will include the following:
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<PAGE>
Operational Services. The Manager will have sole
responsibility and exclusive authority for all activities necessary for the
day-to-day operation of the Hotels, including establishment of all room rates,
the processing of reservations, procurement of inventories, supplies and
services, periodic inspection and consultation visits to the Hotels by the
Manager's technical and operational experts and promotion and publicity of the
Hotels.
Executive Supervision and Management Services. The
Manager will provide all managerial and other employees for the Hotels; review
the operation and maintenance of the Hotels; prepare reports, budgets and
projections; provide other administrative and accounting support services, such
as planning and policy services, financial planning, divisional financial
services, risk planning services, product planning and development, employee
planning, corporate executive management, legislative and governmental
representation and certain in-house legal services; and protect the "Marriott,"
"Courtyard by Marriott," "Residence Inn by Marriott" or "Fairfield Inn by
Marriott" trademark, as the case may be, and other tradenames and service marks.
The Manager also will provide a national reservations system for each Marriott
brand.
Chain Services. The Management Agreements will require
the Manager to furnish certain services (the "Chain Services") that are
furnished generally on a central or regional basis to hotels in the Courtyard by
Marriott, Residence Inn by Marriott or Fairfield Inn by Marriott systems, as the
case may be. Such services will include the following: (i) the development and
operation of computer systems and reservation services, (ii) regional management
and administrative services, regional marketing and sales services, regional
training services, manpower development and relocation costs of regional
personnel and (iii) such additional central or regional services as may from
time to time be more efficiently performed on a regional or group level. Costs
and expenses incurred in providing such services are allocated among all hotels
in the Courtyard by Marriott, Residence Inn by Marriott or Fairfield Inn by
Marriott system, as the case may be, managed by the Manager or its affiliates
and each applicable Lessee will be required to reimburse the Manager for its
allocable share of such costs and expenses.
Working Capital and Fixed Asset Supplies. The Lessee will
be required to maintain working capital for each Hotel and fund the cost of
fixed asset supplies, which principally consist of linen and similar items. The
applicable Lessee will also be responsible for providing funds to meet the cash
needs for the operations of the Hotels if at any time the funds available from
operations are insufficient to meet the financial requirements of the Hotels.
Use of Affiliates. The Manager employs the services
of its affiliates to provide certain services under the Management Agreements.
The terms of any such employment must be no less favorable to the applicable
Lessee, in the reasonable judgment of the Manager, than those that would be
available from the Manager.
FF&E Replacements. The Management Agreements will
provide that once each year the Manager will prepare a list of FF&E to be
acquired and certain routine repairs that are normally capitalized to be
performed in the next year ("FF&E Replacements") and an estimate of the funds
necessary therefor and provide such list to the Company for its approval. Under
each Lease, the Company will be responsible for the costs of FF&E Replacements
and for decisions with respect thereto. Therefore, the Lessee will be required
to obtain the consent of the Company prior to agreeing to make any FF&E
Replacements proposed by the Manager that are not contained on the annual list
which was approved by the Company. If the Manager and the Company agree, the
Company will acquire or otherwise provide the FF&E Replacements set forth on the
approved list. If the Company and the Manager are unable to agree on the list
within 60 days of its submission, the Company will be required to make only
those FF&E Replacements specified on such list that are no more extensive than
the system standards for FF&E Replacements that the Manager requires for
Courtyard by Marriott, Residence Inn by Marriott or Fairfield Inn by Marriott
hotels generally, as the case may be. For purposes of funding the FF&E
Replacements required to be paid for by the
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<PAGE>
Company, each Management Agreement and the Company's loan agreements require the
Company to deposit a designated amount into a segregated FF&E reserve account
(the "FF&E Reserve Account") periodically.
Building Alterations, Improvements and Renewals. The
Management Agreements require the Manager to prepare an annual estimate of the
expenditures necessary for major repairs, alterations, improvements, renewals
and replacements to the structural, mechanical, electrical, heating,
ventilating, air conditioning, plumbing and vertical transportation elements of
each Hotel. Such estimate will be submitted to the Company [and the Lessee] for
[their] approval. Under the terms of the Leases, the Company will be responsible
for the costs of such items and for decisions with respect thereto. If the
Company and the Manager are unable to agree on the estimate within 60 days of
its submission, the Company will be required to make only those expenditures
that are no more extensive than the Manager requires for Courtyard by Marriott,
Residence Inn by Marriott or Fairfield Inn by Marriott hotels generally, as the
case may be.
Service Marks. During the term of the Management
Agreements, the service marks "Courtyard by Marriott," "Residence Inn by
Marriott" and "Fairfield Inn by Marriott" and other symbols, logos and service
marks currently used by the Manager and its affiliates in the Courtyard by
Marriott system, Residence Inn by Marriott system or Fairfield Inn by Marriott
system may be used in the operation of the Hotels, as the case may be. Marriott
International (or its applicable affiliates) intends to retain its legal
ownership of these marks. Any right to use the service marks, logo and symbols
and related trademarks will terminate with respect to a Hotel upon termination
of the Management Agreement with respect to such Hotel.
Termination Fee. If the Management Agreement is terminated
prior to its full term due to casualty, condemnation or the sale of the Hotel,
the Manager will receive a termination fee as specified in the specific
Management Agreement. Under the Leases, the responsibility for the payment of
any such termination fee as between the Lessee and the Company will depend upon
the cause for such termination. The termination of a Management Agreement with
respect to a Hotel will result in the loss of any right to use the Courtyard,
Residence Inn, Fairfield Inn or Marriott names, trademarks, symbols, logos or
designs for the Hotel. The Management Agreements may also be terminated based
upon a failure to meet certain performance criteria.
Events of Default. Events of default under the Management
Agreements include, among others, the following: (i) the failure of either party
to make payments pursuant to the Management Agreement within ten days after
written notice of such nonpayment has been made, (ii) the failure of either
party to perform, keep or fulfill any of the covenants, undertakings,
obligations or conditions set forth in the Management Agreement and the
continuance of such default for a period of 30 days after notice of said failure
or, if such default is not susceptible of being cured within 30 days, the
failure to commence said cure within 30 days and thereafter to complete said
cure within a commercially reasonable time, (iii) a receiver or liquidator by
order of a court of competent jurisdiction with respect to the property of
either party is appointed and not dismissed within 60 days of such appointment,
(iv) if either party is liquidated or dissolved or if either party files a
voluntary bankruptcy petition seeking liquidation or dissolution under the
Bankruptcy Code or similar state or federal law or (v) if any creditor of either
party files a petition to liquidate or dissolve either party pursuant to the
Bankruptcy Code or similar state or federal law and such petition is not
discharged or denied within 60 days of its filing.
As described above, all fees payable under the Management Agreements
will become obligations of the Lessees, to be paid by the Lessees, as modified
prior to the consummation of the Consolidation, for so long as the Leases remain
in effect. The obligation to pay these fees, however, could adversely affect the
ability of one or more Lessees to pay Base Rent or Percentage Rent payable under
the Leases, even though such amounts otherwise are due and owing to the Company.
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The following summaries of the compensation and reimbursement terms
and other various conditions of the existing Management Agreements for each
Hotel Partnership do not purport to be complete and are qualified in their
entirety by reference to the Management Agreements. Capitalized terms not
otherwise defined below have the meanings ascribed to such terms in the
applicable Management Agreements, copies of which have been filed as exhibits to
the Registration Statement of which this Consent Solicitation is a part.
CBM1 Management Agreement. The initial term of the CBM1 Management
-------------------------
Agreement expires December 29, 2017. The Manager can extend the CBM1 Management
Agreement for up to four successive periods of ten years each. Under the CBM1
Management Agreement, the Manager is entitled to receive the following
compensation for its services:
Base Management Fee. The Manager is paid an annual Base
Management Fee equal to 3% of all income derived from the operation of the
Hotels except retail sales, use and excise taxes, gratuities, extraordinary
revenues or interest earned on bank accounts ("Gross Revenues"). For the fiscal
years 1996, 1995 and 1994, CBM1 paid $5,449,000, $5,124,000 and $4,855,000,
respectively, in Base Management Fees.
Courtyard Management Fee. The Manager earns an annual
"Courtyard Management Fee" equal to 3% of Gross Revenues in each fiscal year for
providing divisional executive management, divisional financial services,
product planning and development, employee planning, protection of the Courtyard
by Marriott tradename and trademark, food service product development and the
services of the Manager's technical and operational experts making periodic
inspection and consultation visits to the Hotels. The Manager has agreed to
subordinate a portion of the Courtyard Management Fee equal to 1% of Gross
Revenues to debt service on the CBM1 mortgage loan (the "Subordinated Courtyard
Management Fee"). For fiscal years 1996, 1995 and 1994, CBM1 paid $5,449,000,
$5,124,000 and $4,855,000, respectively, in Courtyard Management Fees.
Incentive Management Fee. The Manager earns an "Incentive
Management Fee" equal to 15% of Operating Profit attributable to the Hotels on a
combined basis. Operating Profit equals Gross Revenues minus operating costs and
expenses, including the Base Management Fee, the Courtyard Management Fee and
ground rent payments (but not other rental payments owed by the Lessee to the
Company). Deferred and current year Incentive Management Fees are payable from
50% of available cash after payment of (i) debt service, (ii) deferred Courtyard
Management Fees, if any, (iii) deferred ground rent payments to Marriott
International and (iv) a priority return to the owner, which will be the Lessee
following the Consolidation, of approximately $9.1 million plus 10% of various
capital expenditures by the owner and certain additional working capital
advances. Deferred management fees are not payable to the Manager from sale or
refinancing proceeds and future unpaid incentive management fees will not accrue
interest. For fiscal years 1996, 1995 and 1994, CBM1 accrued $9,365,000,
$8,615,000 and $7,616,000, respectively, in Incentive Management Fees. Deferred
Incentive Management Fees were $25,596,000 and $16,231,000 as of January 3, 1997
and December 29, 1995, respectively.
Chain Services. For fiscal years 1996, 1995 and 1994, CBM1
reimbursed the Manager $6,540,000, $6,412,000 and $6,265,000, respectively, for
Chain Services. Chain Services fees cannot exceed 5% of Gross Revenues for any
year. Following the Consolidation, the Lessees will be obligated to reimburse
the Manager for Chain Services.
FF&E Reserve Account. An amount equal to 5% of Gross
Revenues are contributed by the Hotel Partnership to the Manager to ensure that
the physical condition and product quality of the Hotels are maintained.
Beginning in 1999, contributions to the FF&E Reserve Account can be increased to
6% of Gross Revenues if certain operating profit levels are obtained. See "--
FF&E Replacements" and "-- Building Alterations,
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Improvements and Renewals" above. For fiscal years 1996, 1995 and 1994, CBM1
contributed $9,082,000, $8,540,000 and $8,092,000, respectively to the FF&E
Reserve Account.
Sale of Hotels. No more than 15 Hotels may be sold prior
to December 31, 2001 free and clear of the CBM1 Management Agreement. After such
time, any Hotels may be sold free and clear of the Management Agreement. Upon
the sale of a Hotel, the Manager is entitled to a termination fee and if a Hotel
is sold subject to the CBM1 Management Agreement, the Manager has the right to
terminate the CBM1 Management Agreement if, in its sole discretion, the Manager
reasonably believes: (i) the proposed purchaser is a competitor of the Manager
or any affiliate of the Manager, (ii) the business character and reputation of
the proposed purchaser have not been firmly established or (iii) the financial
condition and prospects of the proposed purchaser may not be adequate to
discharge the obligations of the owner pursuant to the CBM1 Management
Agreement.
Termination for Failure to Meet Performance Criteria.
The CBM1 Management Agreement is subject to termination if the average Operating
Profit during any three consecutive fiscal years fails to exceed approximately
$40.2 million plus 8% of the sum of the capital expenditures. The Manager will
have the right to avoid termination by paying the Lessee the amount of the
deficiency within 30 days of the notice to terminate. Following the
Consolidation, the Lessee and the Company will, individually or collectively,
have the right to provide the notice of termination to the Manager.
Termination Fee. The termination fee equals the net
present value of the reasonably anticipated Incentive Management Fees which
would be earned by the Manager over the lesser of the next 40 years or the
remaining term of the CBM1 Management Agreement. Such fee will be the obligation
of the Lessee under the Lease so long as the Lease remains in effect.
CBM2 Management Agreement. The initial terms of the CBM2 Management
-------------------------
Agreements expire February 28, 2013. The Manager may renew the CBM2 Management
Agreements, as to one or more of the Hotels, at its option, for up to three
successive terms of ten years each and one final term of five years. Under the
CBM2 Management Agreements, the Manager is entitled to receive the following
compensation:
Base Management Fee. The Manager receives a Base
Management Fee of 3.5% of Gross Revenues. For fiscal years 1996, 1995 and 1994,
CBM2 paid $9,230,000, $8,604,000 and $8,123,000, respectively, in Base
Management Fees.
Courtyard Management Fee. The Manager receives a
Courtyard Management Fee of 2.5% of Gross Revenues. For fiscal years 1996, 1995
and 1994, CBM2 paid $6,592,000, $6,145,000 and $5,802,000, respectively, in
Courtyard Management Fees.
Incentive Management Fee. The Manager is entitled to an
Incentive Management Fee of 15% of Operating Profit. The Incentive Management
Fee is payable only out of available cash flow after payment of debt service and
other obligations and after a priority return of up to approximately $15.5
million to the owner under the CBM2 Management Agreements which will be the
Lessee following the Consolidation. Any portion of Incentive Management Fees not
paid will accrue without interest. For fiscal years 1996, 1995 and 1994, CBM2
paid the Manager $11,407,000, $10,480,000 and $3,839,000, respectively, in
Incentive Management Fees. CBM2 accrued Incentive Management Fees of $633,000
and $5,564,000 in fiscal years 1996 and 1994, respectively. Deferred Incentive
Management Fees were $6,197,000 and $5,564,000 as of January 3, 1997 and
December 29, 1995, respectively.
Chain Services. Following the Consolidation, the
Lessees will be obligated to reimburse the Manager for Chain Services. For
fiscal years 1996, 1995 and 1994, CBM2 paid $9,474,000, $9,224,000 and
$8,981,000, respectively, for Chain Services reimbursements.
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FF&E Reserve Account. Contributions of 5% of Gross
Revenues are required under the CBM2 Management Agreement until the year 2000;
thereafter contributions of 6% of Gross Revenues may be required. See "-- FF&E
Replacements" and "-- Building Alterations, Improvements and Renewals" above.
For fiscal years 1996, 1995 and 1994, CBM2 contributed $13,185,000, $14,749,000
and $13,925,000, respectively, to the FF&E Reserve Account.
Sale of Hotels. No more than 20 Hotels may be sold prior
to December 31, 2007 free and clear of the CBM2 Management Agreement. After such
time, any Hotels may be sold free and clear of the Management Agreement. Upon
the sale of a Hotel, the Manager is entitled to a termination fee and if the
Hotel is sold subject to the CBM2 Management Agreement, the Manager has the
right to terminate the CBM2 Management Agreement if, in its sole discretion, the
Manager reasonably believes: (i) the proposed purchaser is a competitor of the
Manager or any affiliate of the Manager, (ii) the business character and
reputation of the proposed purchaser have not been firmly established or (iii)
the financial condition and prospects of the proposed purchaser may not be
adequate to discharge the obligations of the owner pursuant to the CBM2
Management Agreement.
Termination for Failure to Meet Performance Criteria.
The CBM2 Management Agreement is subject to termination if the average Operating
Profit during any three consecutive fiscal years fails to exceed 8% of the sum
of the aggregate original costs of approximately $644.5 million for the Hotels
subject to the CBM2 Management Agreement. The Manager will have the right to
avoid termination by paying the Lessee the amount of the deficiency within 30
days of the notice to terminate. Following the Consolidation, the Lessee and the
Company will, individually or collectively, have the right to provide the notice
of termination to the Manager.
Termination Fee. The termination fee equals the net
present value of the reasonably anticipated Incentive Management Fees which
would be earned by the Manager over the lesser of the next 20 years or the
remaining term of the CBM2 Management Agreement. Such fee will be the obligation
of the Lessee under the Lease so long as the Lease remains in effect.
RIBM1 Management Agreement. The initial term of the RIBM1 Management
--------------------------
Agreement expires on December 28, 2007. The Manager may renew the RIBM1
Management Agreement for up to five successive terms of ten years each. Under
the RIBM1 Management Agreement, the Manager is entitled to receive the following
compensation:
Base Management Fee. The Manager receives a Base
Management Fee of 2% of Gross Revenues. For fiscal years 1996, 1995 and 1994,
RIBM1 paid $1,216,000, $1,135,000 and $1,069,000, respectively, in Base
Management Fees. RIBM1 also paid deferred Base Management Fees of $515,000 and
$491,000 in fiscal years 1996 and 1995, respectively.
Residence Inn System Fee. The Manager receives a
Residence Inn System Fee of 4% of that portion of Gross Revenues attributable to
the rental of guest suites ("Suite Revenues") for providing system financial
planning and policy services, product planning and development, human resources
management and planning for the system, protection of the "Residence Inn" and
related tradenames, trademarks, logos and service marks and development and
implementation of the Manager's technical and operational programs designed for
periodic inspection and consultation visits to the Hotels. For fiscal years
1996, 1995 and 1994, RIBM1 paid $2,321,000, $2,158,000 and $2,032,000,
respectively, in Residence Inn System Fees.
Incentive Management Fee. The Manager is entitled to an
Incentive Management Fee of 15% of annual Operating Profit on a combined basis
increasing to 20% in any year Operating Profit is equal to or greater than $23.5
million. The Incentive Management Fee is payable out of cash flow from
operations remaining after payments of qualifying debt service, the Base
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Management Fee, any Contingent Base Management Fees and retention by RIBM1 (or
following the Consolidation, the Lessee) of approximately $6.6 million, subject
to reduction by the distribution of capital proceeds. For fiscal years 1996,
1995 and 1994, RIBM1 accrued $3,366,000, $3,130,000 and $2,838,000,
respectively, in Incentive Management Fees. Deferred Incentive Management Fees
were $19,326,000 and $15,960,000 as of January 3, 1997 and December 29, 1995,
respectively.
Chain Services. Following the Consolidation, the
Lessees will be obligated to reimburse the Manager for Chain Services for so
long as the Lease remains in effect. For fiscal years 1996, 1995 and 1994, RIBM1
paid $1,031,000, $988,000 and $982,000, respectively, for Chain Services
reimbursements.
Marketing Fund. The Manager maintains a marketing fund
for costs associated with developing, producing and administering advertising,
marketing, promotional and public relations materials and programs and operating
the reservation center used by hotels in the Residence Inn by Marriott system
(the "Marketing Fund"). The Marketing Fund is administered by the Manager but
the Manager has no ownership interest in the Marketing Fund. RIBM1 is required
to contribute 2.5% of each Hotel's Suite Revenues. RIBM1 contributed $1,450,000,
$1,349,000 and $1,270,000 to the Marketing Fund for fiscal years 1996, 1995 and
1994, respectively.
FF&E Reserve Account. Contributions to the FF&E Reserve
Account equal 5% of Gross Revenues. RIBM1 contributed $3,041,000, $2,836,000 and
$2,672,000 to the FF&E Reserve Account for fiscal years 1996, 1995 and 1994,
respectively. See "-- FF&E Replacements" and -- Building Alterations,
Improvements and Renewals" above.
Sale of the Hotels. The RIBM1 Management Agreement provides
for the sale or lease of one or more of the Hotels without the consent of the
Manager provided the sale does not result in more than four separate owners of
the Hotels. If the sale would result in more than four owners of the Hotels, the
sale is subject to the consent of the Manager. The Manager has a right of first
refusal to purchase or lease any Hotel subject to approval. If the Manager
decides not to purchase the Hotel, it must enter into a management agreement
with the proposed purchaser on substantially the same terms unless, in its sole
discretion, the Manager reasonably believes: (i) the proposed purchaser is a
competitor in the lodging business of the Manager or any affiliate of the
Manager, (ii) the business character and reputation of the proposed purchaser
have not been firmly established or (iii) the financial condition and prospects
of the proposed purchaser may not be adequate to discharge the obligations of
the owner pursuant to the RIBM1 Management Agreement. Upon the sale of any
Hotel, the net sales proceeds after payment of mortgage or other indebtedness,
transaction costs and a priority return will be applied to unpaid current
Incentive Management Fees and unpaid accrued Incentive Management Fees.
Termination for Failure to Meet Certain Performance
Criteria. The RIBM1 Management Agreement is subject to termination if the sum of
the Operating Profit during any three consecutive fiscal years does not equal or
exceed 8% of the sum total of the total original cost ($____) and any additional
hotel investments. The Manager will have the right to avoid termination by
paying the Lessee the amount of the deficiency within 60 days of the notice to
terminate. Following the Consolidation, the Lessee and the Company will,
individually or collectively, have the right to provide the notice of
termination to the Manager.
RIBM2 Management Agreement. The initial terms of the RIBM2 Management
--------------------------
Agreements expire on December 28, 2012. The Manager may renew the RIBM2
Management Agreements for one term of five years followed by up to four
successive terms of ten years each. Under the RIBM2 Management Agreements, the
Manager is entitled to receive the following compensation for its services:
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Base Management Fee. The Manager is entitled to a Base
Management Fee of 2% of Gross Revenues. For fiscal years 1996, 1995 and 1994,
RIBM2 paid Base Management Fees of $1,393,000, $1,337,000 and $1,261,000,
respectively. In fiscal years 1996 and 1995, RIBM2 also paid deferred Base
Management Fees of $743,000 and $2,296,000 respectively.
Residence Inn System Fee. The Manager is entitled to a
Residence Inn System Fee of 4% of Suite Revenues. For fiscal years 1996, 1995
and 1994, RIBM2 paid the Manager a Residence Inn System Fee of $2,639,000,
$2,535,000 and $2,384,000, respectively.
Incentive Management Fee. The Manager is entitled to an
Incentive Management Fee equal to 15% of annual Operating Profit on a combined
basis which increases to 23.5% when Operating Profit is equal to or greater than
$24.8 million. The Incentive Management Fee is payable out of available cash
flow from operations remaining after payments of qualifying debt service, a
provision for Hotel Partnership administrative expenses, the Base Management
Fee, any Contingent Base Management Fees and after a priority return of
approximately $7.0 million to the owner under the Management Agreement, which
will be the Lessee following the Consolidation. Incentive Management Fees of
$1,190,000 were paid in fiscal year 1996. For fiscal years 1996, 1995 and 1994,
RIBM2 accrued $2,352,000, $3,502,000 and $3,133,000, respectively, in Incentive
Management Fees. Deferred Incentive Management Fees were $14,610,000 and
$12,258,000 as of January 3, 1997 and December 29, 1995, respectively.
Chain Services. Following the Consolidation, the Lessees
will be obligated to reimburse the Manager for Chain Services. For fiscal years
1996, 1995 and 1994, RIBM2 reimbursed the Manager $1,558,000, $1,498,000 and
$1,486,000 for Chain Services, respectively.
Marketing Fund. RIBM2 is required to contribute 2.5% of
Suite Revenues to the Marketing Fund. Following the Consolidation, such
contribution will be the obligation of the Lessee so long as the Lease remains
in effect. The Marketing Fund is administered by the Manager but the Manager has
no ownership interest in such Marketing Fund. For fiscal years 1996, 1995 and
1994, RIBM2 contributed $1,649,000, $1,584,000 and $1,490,000 to the Marketing
Fund, respectively.
FF&E Reserve Account. RIBM2 is required to contribute 5% of
Gross Revenues to the FF&E Reserve Account through 2000; thereafter such
contributions of 6% of Gross Revenues may be required. See " -- FF&E
Replacements" and " -- Building Alterations, Improvements and Renewals" above.
Total contributions to the FF&E Reserve Account for fiscal years 1996, 1995 and
1994 were $3,482,000, $3,343,000 and $3,152,000, respectively.
Sale of the Hotels. The RIBM2 Management Agreement provides
for the sale or lease of one or more of the Hotels without the consent of the
Manager provided the sale does not result in more than five separate owners of
the Hotels and provided prompt written notice is given to the Manager. If the
sale would result in more than five owners of the Hotels, the sale is subject to
the consent of the Manager. The Manager has a right of first refusal within 30
days of the receipt of written notice of an offer to purchase. If the Manager
exercises its right to purchase the Hotel, the Manager must purchase such Hotel
on the same terms and conditions contained in the written notice. If the Manager
decides not to purchase the Hotel, it must enter into a management agreement
with the proposed purchaser on substantially the same terms unless, in its sole
discretion, the Manager reasonably believes: (i) the proposed purchaser is a
competitor in the lodging business of the Manager or any affiliate of the
Manager, (ii) the business character and reputation of the proposed purchaser
have not been firmly established or (iii) the financial condition and prospects
of the proposed purchaser may not be adequate to discharge the obligations of
the owner pursuant to the RIBM2 Management Agreement. Upon the sale of any
hotel, the net sales proceeds after
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payment of mortgage or other indebtedness, transaction costs and a priority
return will be applied to unpaid current Incentive Management Fees and unpaid
accrued Incentive Management Fees.
Termination for Failure to Meet Certain Performance
Criteria. The RIBM2 Management Agreement is subject to termination if the sum of
the Operating Profit during any three consecutive fiscal years does not equal or
exceed 8% of the sum total of the total original cost of approximately $186.9
million for the Hotels and any additional hotel investments. The Manager will
have the right to avoid termination by paying the Lessee the amount of the
deficiency within 60 days of the notice to terminate. Following the
Consolidation, the Lessee and the Company will, individually or collectively,
have the right to provide the notice of termination to the Manager.
Res USA Management Agreement. The initial term of the
----------------------------
Res USA Management Agreement expires on December 30, 2011. The Manager can renew
the Res USA Management Agreement for up to five successive terms of ten years
each. Under the Res USA Management Agreement, the Manager is entitled to receive
the following compensation for its services:
Base Management Fee. The Manager is paid a Base
Management Fee equal to 2% of Gross Revenues. For fiscal years 1996, and 1995,
Res USA paid $774,000, and $731,000, respectively, in Base Management Fees.
Residence Inn System Fee. The Manager is entitled to a
Residence Inn System Fee of 4% of Suite Revenues. For fiscal years 1996, 1995
and 1994, Res USA paid Residence Inn System Fees of $1,473,000, $1,383,000 and
$1,300,000, respectively.
Incentive Management Fee. Under the Res USA Management
Agreement, the Manager is entitled to Incentive Management Fees equal to 20% of
the excess of annual Operating Profit on a combined basis over $9.5 million. The
Incentive Management Fee is payable only out of available cash flow from
operations after debt service payments and other obligations and a priority
return of approximately $7.0 million to the owner under the Res USA Management
Agreement, which will be the Lessee following the Consolidation. Through fiscal
year 1996, Incentive Management Fees not paid currently were waived by the
Manager. Beginning in fiscal year 1997, any portion of fees not paid will accrue
without interest. For fiscal years 1996 and 1995, Res USA paid Incentive
Management Fees of $468,000 and $98,000, respectively.
Chain Services. Following the Consolidation, the Lessees
will be obligated to reimburse the Manager for Chain Services. For fiscal years
1996, 1995 and 1994, Res USA reimbursed the Manager for $748,000, $719,000 and
$713,000, respectively, of Chain Services.
Marketing Fund. Res USA is required to contribute
2.5% of Suite Revenues to the Marketing Fund. For fiscal years 1996, 1995 and
1994, Res USA contributed $920,000, $864,000 and $813,000, respectively, to the
Marketing Fund. The Marketing Fund is administered by the Manager but the
Manager has no ownership interest in such Marketing Fund. Following the
Consolidation, such contribution will be the obligation of the Lessee so long as
the Lease remains in effect.
FF&E Reserve Account. Res USA is required to contribute
5% of Suite Revenues to the FF&E Reserve Account. See -- FF&E Replacements" and
"-- Building Alterations, Improvements and Renewals" above. For fiscal years
1996, 1995 and 1994, Res USA contributed $1,936,000, $1,827,000 and $1,722,000,
respectively, to the FF&E Reserve Account.
Sale of the Hotels. The Res USA Management Agreement
provides for the sale or lease of one or more of the Hotels without the consent
of the Manager provided prompt written notice is given to the Manager. The
Manager has a right of first refusal with respect to an offer to purchase
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a Hotel. If the Manager exercises its right to purchase the Hotel, the Manager
must purchase such Hotel on the same terms and conditions contained in the
written notice. If the Manager decides not to purchase the Hotel, it must enter
into a management agreement with the proposed purchaser on substantially the
same terms unless, in its sole discretion, the Manager reasonably believes: (i)
the proposed purchaser is a competitor in the lodging business of the Manager or
any affiliate of the Manager (unless the proposed purchaser is a financial
institution that is solely a passive owner of competitive properties in the
lodging business), (ii) the proposed purchaser is known as being of bad moral
character or is in control of or controlled by persons known as being of bad
moral character or (iii) the financial condition and prospects of the proposed
purchaser may not be adequate to discharge the obligations of the owner pursuant
to the Res USA Management Agreement.
Termination for Failure to Meet Certain Performance
Criteria. The Management Agreement is subject to termination if the sum of the
Operating Profit during any two consecutive fiscal years does not equal or
exceed the sum total of $9.5 million for each of the two years plus 8% of the
weighted average outstanding balance of any additional hotel investments for
each of two years. The Manager will have the right to avoid termination by
paying the Lessee the amount of the deficiency within 60 days of the notice to
terminate. Following the Consolidation, the Lessee and the Company will,
individually or collectively, have the right to provide the notice of
termination to the Manager.
FIBM Management Agreement. The initial term of the FIBM
-------------------------
Management Agreement expires on December 31, 2019. The Manager can extend the
FIBM Management Agreement for up to four successive terms of ten years each and
one final period of five years. Under the FIBM Management Agreement, the Manager
is entitled to receive the following compensation for its services:
Base Management Fee. The Manager is entitled to a Base
Management Fee of 2% of Gross Revenues. For fiscal years 1996, 1995 and 1994,
FIBM paid $1,949,000, $1,834,000 and $851,000 respectively, in Base Management
Fees.
Fairfield Inn System Fee. The Manager is entitled to a
Fairfield Inn System Fee of 3% of Gross Revenues for providing system financial
planning and policy services, product planning and development, human resources
management and planning for the system, protection of the "Fairfield Inn" and
related tradenames, trademarks, logos and service marks and development and
implementation of the Manager's technical and operational programs designed for
periodic inspection and consultation visits to the Hotels. For fiscal years
1996, 1995 and 1994, FIBM paid $2,923,000, $2,751,000 and $2,555,000,
respectively, in Fairfield Inn System Fees.
Incentive Management Fee. The Manager is entitled to
Incentive Management Fees equal to 15% of annual Operating Profit on a combined
basis increasing to 20% in any year in which Operating Profit equals or exceeds
$33.9 million. The Incentive Management Fee is payable out of cash flow from
operations remaining after payment of ground rent, debt service, partnership
administrative expenses and a priority return of approximately $8.4 million plus
10% of additional investments from time to time to the owner under the
Management Agreement, which will be the Lessee following the Consolidation. Any
portion of Incentive Management Fees not paid will accrue without interest. For
fiscal years 1996, 1995 and 1994, FIBM accrued $2,470,000, $2,857,000 and
$3,429,000, respectively, in Incentive Management Fees. At January 3, 1997 and
December 29, 1995, deferred Incentive Management Fees were $12,786,000 and
$10,316,000, respectively. For fiscal years 1996, 1995 and 1994, FIBM paid
$2,428,000, $1,809,000 and $875,000, respectively, in Incentive Management Fees.
Chain Services. Following the Consolidation, the Lessees
will be obligated to reimburse the Manager for Chain Services. FIBM paid
$1,267,000, $1,192,000 and $1,004,000 for Chain Services for fiscal years 1996,
1995 and 1994, respectively.
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Marketing Fund. FIBM is required to contribute 2.5% of
Gross Revenues to the Marketing Fund. For fiscal years 1996, 1995 and 1994, FIBM
contributed $2,436,000, $2,292,000 and $2,129,000, respectively, to the
Marketing Fund. The Marketing Fund is administered by the Manager but the
Manager has no ownership interest in such Marketing Fund. Following the
Consolidation, such contribution will be the obligation of the Lessee so long as
the Lease remains in effect.
FF&E Reserve Account. For fiscal years 1996, 1995
and 1994, FIBM contributed $5,846,000, $5,502,000 and $5,109,000, respectively,
to the FF&E Reserve Account. Such contributions are equal to 6% of Gross
Revenues through 1996, increasing to 7% in 1997.
Sale of the Hotels. The FIBM Management Agreement
provides for the sale or lease of one or more of the Hotels without the consent
of the Manager provided prompt written notice is given to the Manager. The
Manager has a right of first refusal with respect to an offer to purchase a
Hotel. If the Manager exercises its right to purchase the Hotel, the Manager
must purchase such Hotel on the same terms and conditions contained in the
written notice. If the Manager decides not to purchase the Hotel, it must enter
into a management agreement with the proposed purchaser on substantially the
same terms unless, in its sole discretion, the Manager reasonably believes: (i)
the proposed purchaser is a competitor in the lodging business of the Manager or
any affiliate of the Manager (unless the proposed purchaser is a financial
institution that is solely a passive owner of competitive properties in the
lodging business), (ii) the proposed purchaser is known in the community as
being of bad moral character or (iii) the financial condition and prospects of
the proposed purchaser may not be adequate to discharge the obligations of the
owner pursuant to the FIBM Management Agreement. Upon the sale of any Hotel, the
net sales proceeds after payment of mortgage or other indebtedness, ground lease
obligations and a priority return will be applied to unpaid current Incentive
Management Fees and unpaid accrued Incentive Management Fees. Any fees not paid
are assumed by the purchaser.
Termination for Failure to Meet Certain Performance
Criteria. The FIBM Management Agreement is subject to termination if the sum of
the operating profit during any three consecutive fiscal years does not equal or
exceed 8% of the sum of the total of the same three years of the total original
cost of the Hotels of approximately $239.1 million plus the weighted average
outstanding balance of any additional investments to the Hotels multiplied by
three years. The Manager will have the right to avoid termination by paying the
Lessee the amount of the deficiency within 60 days of the notice to terminate.
Following the Consolidation, the Lessee and the Company will, individually or
collectively, have the right to provide the notice of termination to the
Manager.
Chicago Courtyard Hotel Management Agreement. The initial term of the
--------------------------------------------
Chicago Courtyard Hotel Management Agreement expires December 27, 2013. The
Manager can extend the Chicago Courtyard Management Agreement for up to three
successive periods of ten years each. Under the Chicago Courtyard Hotel
Management Agreement, the Manager is entitled to receive the following
compensation for its services:
Base Management Fee. The Manager is paid an annual Base Management
Fee equal to 2% of Gross Revenues.
Courtyard Management Fee. The Manager receives a Courtyard
Management Fee of 3% of Gross Revenues.
Incentive Management Fee. The Manager is entitled to an Incentive
Management Fee of 50% of the available cash flow in each fiscal year. However,
at no time may the cumulative Incentive Management Fee received by the Manager
exceed 20% of the cumulative Operating Profit and in no event may such
cumulative limitation require the Manager to refund to the Lessee any Incentive
Management Fees which were paid in a previous fiscal year and were within such
limitation as of the time when they were paid. As defined in the Chicago
Courtyard Hotel Management Agreement, "available cash flow" means an amount
equal to the excess, if any, of the Operating Profit over the sum of (i) a
priority return to the owner, (ii) the Base Management Fee and (iii) any
deferred Contingent Base Management Fees paid to the Manager in such fiscal
year.
Chain Services. Following the Consolidation, the Lessee will be
obligated to reimburse the Manger for Chain Services.
FF&E Reserve Account. Contributions of 5% of Gross Revenues to the
FF&E Reserve Account are required under the Chicago Courtyard Hotel Management
Agreement. See "--FF&E Replacements" and "--Building Alterations, Improvements
and Renewals" above.
Sale of the Hotel. The Chicago Courtyard Hotel Management
Agreement permits the sale or the lease of the Hotel without the consent of
the Manager. The Manager must enter into a management agreement with the
proposed purchaser unless such proposed purchaser is an individual or entity
which: (i) has insufficient financial resources and liquidity to fulfill the
Lessee's obligations under the Management Agreement; (ii) is in control of or
controlled by persons who have been convicted of felonies involving moral
turpitude in any state or federal court; or (iii) is engaged in the business of
operating (as distinguished from owning) a branded hotel chain having 1,500 or
more guest rooms in competition with the Manger. An individual or entity will
not be deemed to be in the business of operating hotels in competition with the
Manager solely by virtue of (x) the ownership of such hotels, either directly or
through subsidiaries, affiliates and partnerships, or (y) holding a mortgage or
mortgages secured by one or more hotels.
Termination for Failure to Meet Certain Performance Criteria. The
Chicago Courtyard Hotel Management Agreement is subject to termination if, (i)
with respect to any two consecutive fiscal years, Operating Profit, less the
amount of the ground lease rental, if applicable, for each of two consecutive
fiscal years is less than approximately $2.1 million plus 8% of various capital
expenditures by the owner, and (ii) the percentage derived by dividing the
average REVPAR for the Hotel by the REVPAR of the Hotel's competitors is less
than 95%. The Manager will have the right to avoid termination by paying the
Lessee 105% of the amount of deficiency within 60 days of the notice to
terminate. Following the Consolidation, the Lessee and the Company will,
individually or collectively, have the right to provide the notice of
termination to the Manager.
Pentagon City Residence Inn Management Agreement. The initial term of
------------------------------------------------
the Pentagon City Residence Inn Management Agreement expires March 31, 2016. The
Manager can extend the Pentagon City Residence Inn Management Agreement for up
to two successive periods of eight years each. Under the Pentagon City Residence
Inn Management Agreement, the Manager is entitled to receive the following
compensation for its services:
Base Management Fee. The Manager is paid an annual Base Management
Fee equal to 2% of Gross Revenues.
Residence Inn System Fee. The Manager receives a Residence Inn
System Fee of 4% of Suite Revenues through June 1998. Thereafter, the Manager
receives a Residence Inn System Fee of 5% of Suite Revenues.
Incentive Management Fee. The Manager is entitled to an Incentive
Management Fee of (i) 30% of the available cash flow until 12% of total Inn
investment is returned to the owner, which will be the Lessee following the
Consolidation, (ii) then 35% of available cash flow until the owner, which will
be the Lessee following the Consolidation, recovers 13% of its total investment
and (iii) then 40% of available cash flow, which will be the Lessee following
the Consolidation, thereafter. In the Pentagon City Residence Inn Management
Agreement "available cash flow" means an amount equal to excess Operating Profit
in each fiscal year over 10.5% of owner investment.
Chain Services. Following the Consolidation, the Lessee will be
obligated to reimburse the Manager for Chain Services.
Marketing Fund. Pentagon City Residence Inn is required to
contribute 2.5% of Suite Revenues to the Marketing Fund. Following the
Consolidation, such contribution will be the obligation of the Lessee. The
Marketing Fund is administered by the Manager but the Manager has no
ownership interest in such Marketing Fund.
FF&E Reserve Account. Pentagon City Residence Inn is required to
contribute 3% of Gross Revenues to the FF&E Reserve Account through June 1998.
Thereafter, a contribution of 5% of Gross Revenues to the FF&E Reserve Account
is required. See "--FF&E Replacements" and "-- Building Alterations,
Improvements and Renewals" above.
Sale of the Inn. The Pentagon City Residence Inn Management
Agreement provides for the sale or the lease of the Inn without the consent of
the Manager. The Manager must enter into a management agreement with the
proposed purchaser unless such proposed purchaser is an individual or entity
which: (i) has insufficient financial resources and liquidity to fulfill the
Lessee's obligations under the Management Agreement; (ii) is in control of or
controlled by persons who have been convicted of felonies involving moral
turpitude in any state or federal court; or (iii) is engaged in the business of
operating (as distinguished from owning) a branded hotel chain having five
thousand or more guest rooms in competition with the Manager. An individual or
entity will not be deemed to be in the business of operating hotels in
competition with the Manager solely by virtue of (x) the ownership of such
hotels, either directly or through subsidiaries, affiliates and partnerships, or
(y) holding a mortgage or mortgages secured by one or more hotels.
Termination for Failure to Meet Certain Performance Criteria. The
Pentagon City Residence Inn Management Agreement is subject to termination if,
with respect to any two consecutive fiscal years (not including any fiscal year
prior to fiscal year 1999), Operating Profit for each of the two fiscal years is
less than 8% of various capital expenditures by the owner which will be the
Lessee following the Consolidation. The Manager will have the right to avoid
termination by paying the Lessee the amount of the deficiency within 60 days of
the notice to terminate. Following the Consolidation, the Lessee and the Company
will, individually or collectively, have the right to provide the notice of
termination to the Manager.
Noncompetition Agreements
In connection with the Consolidation, the Company will agree with
Host that the Company will not acquire or develop any full service hotels for a
period of ____ years from the Closing Date of the Consolidation and Host will
not acquire or develop any limited service or extended-stay hotels for a period
of _____ years from the Closing Date of the Consolidation. Following the
Consolidation, Host will continue to own direct and indirect interests in two
hotels which operate under the Courtyard by Marriott, Residence Inn by Marriott
and Fairfield Inn by Marriott brand names. See "Conflicts of Interest -- Host's
Continued Ownership of Certain Limited Service and Extended-Stay Hotels."
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<PAGE>
Indebtedness
At September 12, 1997, the Hotel Partnerships had the following debt
outstanding (in thousands):
<TABLE>
<CAPTION>
Third Party Debt Related Party Payable
---------------------------------------------------------------------------------- ------------------------
Annual Debt
Principal Service Balance due
Balance Payment(1) Maturity Date Interest Rate at Maturity Balance Payment
------- ------------- ------------- ------------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CBM1
First Mortgage $ 322,158 $ 32,294 April 2012 7.865% $ 134,956
General Partner
Advance $13,406 $ 0
CBM2
Senior Notes 127,400 13,696 February 1, 2008 10.75% 127,400
First Mortgage 390,099 43,544 January 28, 2008 8.5% (2) 186,050
RIBM1
Senior Mortgage 93,341 10,490 September 30, 2002 8.60% 74,922
Second Mortgage 28,019 4,807 September 30, 2002 15.25% 24,008
RIBM2 139,455 13,926 March 10, 2006 8.85% 121,562
Res USA 55,662 6,152 December 31, 1998 9.66% 54,756
FIBM 163,250 17,099 January 11, 2017 8.40% 0
-------------- ----------- ------------- -------------- -----
$ 1,319,384 $ 142,008 $ 723,654 $ 13,406 $ 0
============== =========== ============= ============== =====
</TABLE>
- ------------------
/(1)/ Includes interest and principal amortization where applicable.
/(2)/ Weighted average rate for September 1997. The rate increases as the First
Mortgage is repaid.
At September 12, 1997, outstanding third party debt of CBM1 consisted
of a $322.2 million mortgage loan secured by first mortgages on its 50 Courtyard
Hotels, related personal property and the land on which they are located or an
assignment of the interest under the land leases. The mortgage debt is
non-recourse and requires monthly payments of interest at a fixed rate of 7.865%
and principal based on a 20-year amortization schedule. The loan has a scheduled
maturity in April of 2012; however, the loan maturity can by extended for an
additional five years. During the extended loan term, the loan will bear
interest at an adjusted rate, as defined, and all cash flow from operations will
be applied to amortize the principal balance of the loan.
At September 12, 1997, CBM1 had an outstanding related party payable
of $13.4 million to a subsidiary of Host resulting from debt service guarantee
advances made by the CBM1 Hotel Partnership GP to CBM1. The advances bear
interest at the prime rate. Principal and accrued interest are payable at
maturity, on April 11, 2023 (or earlier in certain events). Payment of this
indebtedness is subordinated to payment of CBM1's mortgage loan.
At September 12, 1997, the outstanding consolidated debt of CBM2
consisted of $127.4 million of senior notes (the "CBM2 Senior Notes") and $390.1
million of multi-class commercial pass-through certificates (the "CBM2
Certificates"), relating to a mortgage loan (the "CBM2 Mortgage Loan") under
which the borrower is a subsidiary of CBM2, Courtyard II Associates, L.P.
("Associates"). The CBM2 Mortgage Loan is divided into several components with
interest rates varying from 6.88% to 8.645% (weighted average rate of 8.5% at
September 12, 1997), and requires monthly payments of principal and interest
based on a 17-year amortization schedule. The CBM2 Mortgage Loan requires that
CBM2 make payments in amounts and at times sufficient to fund all
109
<PAGE>
required payments on the CBM2 Certificates. The CBM2 Mortgage Loan matures on
January 28, 2008. Prepayments of the Mortgage Loan are permitted with the
payment of a premium equal to the greater of one percent of the mortgage loan
being prepaid or yield maintenance amounts based on a spread of .25% or .55%
over the U.S. Treasury rate, as defined. The Company expects to prepay the CBM2
Mortgage Loan in connection with the Consolidation.
The CBM2 Senior Notes bear interest at 10.75% and mature on February
1, 2008. The CBM2 Senior Notes are secured by a first priority pledge by CBM2 of
its 99% partnership interest in Associates and its 100% equity interest in the
managing general partner of Associates. The terms of the CBM2 Senior Notes
include requirements that CBM2 maintain a debt service reserve of approximately
$7 million and maintain certain levels of excess cash flow. If the required
level of cash flow is not met, CBM2 will be required to (i) suspend
distributions to its Partners (ii) fund additional debt service reserves and
(iii) if such failure were to continue, offer to repurchase a portion of the
CBM2 Senior Notes at par. The CBM2 Senior Notes are not redeemable prior to
February 1, 2001. Afterward, they may be redeemed at premiums declining to par
in 2004. In connection with the Consolidation, the Company will be required to
make an offer to repurchase the CBM2 Senior Notes at 101% of their principal
amount.
At September 12, 1997, the outstanding debt of RIBM1 was comprised of
a $93.3 million first mortgage (the "Senior Mortgage"), which bears interest at
8.6%, and a $28 million second mortgage (the "Second Mortgage"), which bears
interest at 15.25%, for a blended interest rate of 10.13%, both of which
mortgages mature on September 30, 2002. The Senior Mortgage and Second Mortgage
are both secured by the 15 Residence Inns owned by RIBM1. The principal of the
Second Mortgage can be prepaid annually at RIBM1's option up to specified
amounts without premium.
At September 12, 1997, the outstanding debt of RIBM2 consisted of
$139.5 million in first mortgage debt. The mortgage debt bears interest at a
fixed rate of 8.85% per annum through March 10, 2006 and requires monthly
payments of interest and principal amortization based upon a 25-year
amortization schedule. The loan can be repaid without penalty on or after March
11, 2006. Subsequent to March 11, 2006, the mortgage loan will bear interest at
an adjustable rate per annum equal to the greater of 10.85% or the comparable
U.S. Treasury rate plus 4.47% and all excess cash flow will be applied to repay
the mortgage loan. The mortgage debt is secured by first mortgages on 22 of the
23 Residence Inns owned by RIBM2, the land on which they are located, a security
interest in all personal property associated with those Hotels, including
furniture and equipment, inventory, contracts and other intangibles and rights
under the RIBM2 Management Agreement.
At September 12, 1997, the outstanding debt of Res USA was comprised
of $29.7 million of fixed rate mortgage debt at 9.66% per annum and $26 million
of adjustable rate mortgage debt which bears interest at 1.85% over three month
LIBOR, both of which are secured by all of the Hotels owned by Res USA and
mature on December 31, 1998. At the time the adjustable rate loan was entered
into, Res USA entered into an interest rate swap agreement with a third party
which fixed the interest rate on the adjustable rate loan at 9.66%.
At September 12, 1997, the outstanding debt of FIBM consisted of a
$163.3 million mortgage loan secured by first mortgages on all Hotels owned by
FIBM, the land on which they are located, a security interest in all personal
property associated with these Hotels, including furniture and equipment,
inventory, contracts and other intangibles and rights under the FIBM Management
Agreement. The mortgage loan bears interest at 8.4% per annum and requires
monthly payments of interest and principal amortization based upon a 20-year
amortization schedule through January 11, 2007. Thereafter, until the final
maturity date of January 11, 2017, interest is payable at an adjusted rate and
all excess cash flow is applied toward principal amortization. The loan can be
repaid with penalty on or after January 11, 2007.
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<PAGE>
Assuming the Full Consolidation Scenario, a portion of the net
proceeds of the Offering would be utilized to prepay certain indebtedness of the
Company as follows:
<TABLE>
<CAPTION>
Net Proceeds of
Principal Balance Prepayment Offering
Prepaid Penalty Utilized
--------------- -------------- ---------------
(in thousands)
<S> <C> <C> <C>
CBM2 Certificates $ 390,099 $ 25,493 $ 415,592
RIBM1 Senior Mortgage 93,341 5,759 99,100
Res USA Mortgage Debt 55,662 1,400 57,062
--------------- -------------- ---------------
Total $ 539,102 $ 32,652 $ 571,754
=============== ============== ===============
</TABLE>
After completion of the Offering, and the anticipated prepayment of
certain indebtedness described above, the Company will have the following debt
outstanding on a pro forma basis as of September 12, 1997 (in thousands):
<TABLE>
<CAPTION>
Annual Debt
Principal Service Interest Balance due
Balance Payment Maturity Date Rate at Maturity
----------- -------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
CBM1
First Mortgage $ 322,158 $ 32,294 April 2012 7.865% $ 134,956
CBM2
Senior Notes 127,400 13,696 February 1, 2008 10.75% 127,400
RIBM1
Second Mortgage 28,019 4,807 September 30, 2002 15.25% 24,008
RIBM2 139,455 13,926 March 10, 2006 8.85% 121,562
FIBM 163,250 17,099 January 11, 2017 8.40% --
------------ ------------- ------------
$ 780,282 $ 81,822 $ 407,926
============ ============= ============
</TABLE>
Credit Facility
Host is currently negotiating on behalf of the Company with an
institutional lender to obtain the Credit Facility, which will provide for a
$400 million secured revolving line of credit at the time of the Closing of the
Consolidation. The currently contemplated terms of the Credit Facility are as
follows:
The proceeds of the Credit Facility will be used to fund future
acquisitions and working capital and for general corporate purposes. There can
be no assurances that the final terms of the Credit Facility will not differ
materially from the terms described above.
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<PAGE>
Ground Leases
CBM1
- ----
Leases with Marriott International and its Affiliates
The land on which 31 of the CBM1 50 Hotels are located is leased from
Marriott International and its affiliates. The ground leases on those hotel
sites expire on December 31, 2081. These leases provide for an annual rental
payment equal to the greater of a minimum rent or a percentage rent. The minimum
rent varies from Hotel to Hotel from $60,000 to $437,000. The percentage rent
also varies from Hotel to Hotel and ranges from 2% to 7.5% of gross revenues. As
of the beginning of the eleventh fiscal year after the opening of each Hotel,
and as of every fifth anniversary thereafter, the minimum rent per fiscal year
will be increased to equal the larger of (i) the then existing minimum rental
increased by percentage increases in the CPI, or (ii) the average rental per
fiscal year during the three preceding fiscal years. As of the beginning of the
seventy-first full fiscal year after the opening of each Hotel, there will be no
percentage rent payable, only minimum rent. Minimum rent for such seventy-first
fiscal year will be the average of total rent paid in the two preceding fiscal
years. Thereafter, such minimum rent will be increased at the beginning of every
fiscal year by the increase in the CPI, up to a maximum of 5%, for the previous
calendar year.
Upon the final termination of the ground leases with Marriott
International and its affiliates in 2081, the landlords will purchase the Hotels
at their then fair market value. The landlord will not purchase any improvements
that the tenant has made and may require the tenant to remove such improvements
from the land or the improvements will become the property of the landlord upon
termination.
Ground Leases with Third Parties
The land on which 2 of the 50 CBM1 Hotels are located is leased from
third parties not affiliated with Marriott International. The initial lease
terms vary from 30 to 45 years and the leases have renewal options for up to an
additional 30 to 45 years. One lease provides for an annual rent payment equal
to the greater of a minimum rent varying from $412,700 to $560,400 or percentage
rent of 9.75% of gross sales. The second lease provides for annual minimum
rental payments of $51,750 with the rent increased every five years by 115% of
the product of the Ground Rental (as defined in the lease) for the previous five
years. Such ground leases provide that during the lease term, the tenant shall
have all ownership rights in the improvements located thereon. Generally upon
termination of such ground leases, the hotel and any other improvements (other
than furniture, furnishings, trade equipment, inventories and other personal
property) become the property of the landlord. The tenant under the ground
leases has the right to assign its interest in the lease subject to certain
limitations, which may include the landlord's consent.
CBM2
- ----
Leases with Marriott International and its Affiliates
The land on which 53 of the 70 CBM2 Hotels are located is leased from
Marriott International and its affiliates. The ground leases expire on December
31, 2068. These leases provide for an annual rental payment by CBM2 equal to the
greater of a minimum rent or a percentage rent. The minimum rent varies from
Hotel to Hotel and ranges from $96,000 to $329,000. The percentage rent also
varies from Hotel to Hotel and ranges from 3% to 8% of gross revenues. As of the
beginning of the sixth fiscal year after the opening of each Hotel, and as of
every three years thereafter, the minimum rent per fiscal year will be increased
to equal the greater of (i) 75% of the average rent per year during the three
preceding years, (ii) the prior year's minimum rent or (iii) the
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<PAGE>
prior year's minimum rent increased by 80% of the percentage increase in the CPI
for the prior three years. As of the beginning of the sixty-first full fiscal
year after the opening of each Hotel, there will be no percentage rent payable,
only minimum rent. Minimum rent for such sixty-first fiscal year will be the
average of total rent paid in the two preceding years. Thereafter, such minimum
rent will be increased at the beginning of every fiscal year by the increase in
the CPI, up to a maximum of 5%, for the previous year.
The ground leases provide for the option to acquire the land and the
landlord's reversionary interest in the improvements made from the lessor at its
then fair market value after the earliest to occur of a sale of such hotel and
February 1, 2008. Upon the final termination of the ground leases with Marriott
International and its affiliates in 2068, the ground lessors will purchase the
Hotels at their then fair market value. The ground lessors will not purchase any
improvements that the tenant has made and may require the tenant to remove such
improvements from the land or the improvements will become the property of the
ground lessor upon termination.
Ground Leases with Third Parties
The land on which 8 of the 70 CBM2 Hotels are located is leased from
third parties not affiliated with Marriott International. The initial lease
terms vary from 33 to 99 years and certain leases have renewal options up to an
additional 15 to 40 years. The leases generally provide for an annual rental
payment equal to the greater of a minimum rent or percentage rent. The minimum
rent varies from Hotel to Hotel and ranges from $19,294 to $352,057. The minimum
rentals are adjusted generally based on changes in the CPI at various
anniversary dates throughout the lease terms. The percentage rent also varies
from Hotel to Hotel and ranges from 3.5% to 6% of gross sales.
Each third party ground lease provides that during the term thereof,
the tenant will have all ownership rights in the improvements located thereon.
Upon termination of each such ground lease, the Hotel and any other improvements
(other than furniture, furnishings, trade equipment, inventories and other
personal property) become the property of the landlord. The tenant under each
such ground lease will have a limited right to assign its interest thereunder
subject to restrictions set forth in such ground lease. In general, other than
rentals, terms and casualty provisions of such leases, the ground leases with
third parties contain provisions and conditions similar to those contained in
the ground leases with affiliates of Marriott International. The tenants under
the ground leases with third parties have no option to purchase the landlords'
fee interests.
Res USA
- -------
The land on which the Meriden Residence Inn is situated is subject to
a ground lease. The initial term expires on August 14, 2013. Thereafter, the
lease may be extended for up to ten additional terms of five years each. The
entire rent of $1.2 million for the initial term was prepaid by Host; therefore,
no further monetary liability to the landlord exists. The rent due under each
extension of the initial term has been fixed and must be prepaid (on a present
value basis) on or before the first day of each such extension. The ground lease
is assignable without the consent of the landlord only if the lease is assigned
to an affiliate of Host. The landlord's consent is required if the lease is
assigned to a third party.
FIBM
- ----
The land on which 32 of the 50 FIBM Fairfield Inns are situated is
leased from Marriott International pursuant to long-term ground leases (the
"Fairfield Ground Leases"). The Fairfield Ground Leases expire on November 30,
2088. Annual rents equal the greater of (i) the minimum rent for each such Hotel
or (ii) the percentage rent for each such Hotel in each fiscal year. The minimum
rent varies from Hotel to Hotel ranging from $48,000 to $134,000 per Hotel
through 1999.
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<PAGE>
Thereafter, beginning in 2000, the minimum rent will be adjusted upward or
downward every five years to equal the greater of (i) the average minimum rent
for the previous five years, plus an amount equal to such average rent
multiplied by 50% of the increase in the CPI over the previous five years or
(ii) 80% of the average annual rent actually paid for the previous five years.
The percentage rent varies from Hotel to Hotel through 2002, ranging from 2% of
gross revenues to 6% of gross revenues. Thereafter, beginning in 2003, the
percentage rent will vary from Hotel to Hotel, ranging from 2% of gross revenues
to 8% of gross revenues.
The Fairfield Ground Leases provide for options (the "Site Purchase
Options") to purchase any land subject to a ground lease in connection with a
sale of the Hotel operated thereon. The Site Purchase Options will be
exercisable only at the time of the sale of a Hotel and only on or after
September 30, 1999. In the event a Hotel is sold prior to that date, the
purchaser of such Hotel will automatically receive the Site Purchase Option with
respect to the land on which such Hotel is situated, exercisable by such
purchaser at any time during the period from September 30, 1999 to September 30,
2001. If the Site Purchase Option is not exercised on or after September 30,
2001, the Site Purchase Option for such land will expire. The purchase price for
the land under each Site Purchase Option will be equal to the greater of (i) the
cost of such land to Marriott International and its affiliates, increased
annually by one percent plus the actual percentage increase in the CPI or (ii) a
specified minimum purchase price for such land.
The tenant will be given the right of first refusal to purchase all
or a part of the land subject to a Fairfield Ground Lease in the event that
Marriott International or its affiliate which owns the land desires to sell all
or part of it to an unaffiliated third party. The Site Purchase Option will
survive any sale of the land as to which the tenant does not exercise its right
of first refusal.
Competition
The United States lodging industry generally is comprised of two
broad segments: full service hotels and limited service hotels. Full service
hotels generally offer restaurant and lounge facilities and meeting spaces, as
well as a wide range of services, typically including bell service and room
service. Limited service hotels generally offer accommodations with limited or
no services and amenities. As moderately-priced, extended-stay and economy
hotels, the Hotels compete effectively with both full service and limited
service hotels in their respective markets by providing streamlined services and
amenities exceeding those provided by typical limited service hotels at prices
that are significantly lower than those available at full service hotels.
The lodging industry in general, and the limited service segment in
particular, is highly competitive, but the degree of competition varies from
location to location and over time. The Hotels compete with several other major
lodging brands. Competition in the industry is based primarily on the level of
service, quality of accommodations, convenience of locations and room rates. The
following table presents key participants in the limited service segments of the
lodging industry in which the Hotels compete:
114
<PAGE>
<TABLE>
<CAPTION>
Segment Representative Participants
------- ---------------------------
<S> <C>
Moderate-priced.................................... Courtyard by Marriott, Hampton Inn and Suites, Hilton Inn,
Holiday Inn, Ramada Inn, Sheraton Four Points, Wyndham
Garden
Extended-stay...................................... AmeriSuites, Hawthorne Suites, Homewood Suites, Residence
Inn by Marriott, Summerfield Suites
Economy............................................ Best Western, Comfort Inn and Suites, Days Inn, Fairfield
Inn by Marriott, Hampton Inn and Suites, Holiday Inn Express
</TABLE>
Employees
The Company has no employees. All of its management services will be
provided by employees of CRFLT.
Environmental Matters
Under various federal, state and local laws, ordinances and
regulations, owners or operators of real estate may be required to investigate
and clean up certain hazardous substances released at a property, and may be
held liable to a governmental entity or to third parties for property damage or
personal injuries and for investigation and clean-up costs incurred by the
parties in connection with any contamination. In addition, some environmental
laws create a lien on a 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 contamination may adversely affect the
owner's ability to sell or lease real estate or to borrow using the real estate
as collateral. No assurances can be given that (i) a prior owner, operator or
occupant, such as a tenant, did not create a material environmental condition
not known to the Company, (ii) a material environmental condition with respect
to any Hotel does not exist, or (iii) future uses or conditions (including,
without limitation, changes in applicable environmental laws and regulations)
will not result in the imposition of environmental liability.
The Company has engaged an environmental consulting firm to perform
Phase I environmental assessments on all of the Hotels in order to assess
existing environmental conditions.
A Phase II Environmental Assessment was undertaken with respect to
the Deerfield Hotel. A report of such assessment, dated November 29, 1995,
disclosed contamination of the shallow groundwater at the site resulting from
the prior use of the site as a landfill and not from any use of such site by
CBM2 or its subsidiary. The Company has analyzed the results of this Phase II
Assessment and its potential liability, if any. Based on currently available
information, the Company is unable to determine the need for remediation, its
potential responsibility, if any, for remediation, the scope of any remediation
that may be required, and the extent of the Company's possible liability for any
remediation costs. The Company currently estimates that the costs to evaluate
the situation further are not likely to be significant. Based on the foregoing,
including the limited amount of information currently available concerning the
Deerfield Hotel, and while there can be no assurance that the Company will not
have liability in respect of remediation of contamination at that site, the
Company does not believe that any of the environmental matters described above
are likely to have a material adverse effect on the business and operations of
the Company as a whole.
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<PAGE>
A Phase II Environmental Assessment was undertaken with respect to
the Bossier City Residence Inn. A report of such assessment dated February 5,
1996, disclosed the presence of ACM in a 70 square foot wall covering in the
pool/jacuzzi mechanical room which would not require an Operations and
Maintenance Plan for asbestos management if such wall was removed. The Company
has analyzed the results of this Phase II Environmental Assessment and its
potential liability, if any. Based on currently available information, the
Company is unable to determine the need for remediation, its potential
responsibility, if any, for remediation, the scope of any remediation that may
be required, and the extent of the Company's possible liability for any
remediation costs. The Company currently estimates that the costs to evaluate
the situation further are not likely to be significant. Based on the foregoing,
including the limited amount of information currently available concerning the
Bossier City Residence Inn, and while there can be no assurance that the Company
will not have liability in respect of remediation of contamination at that site,
the Company does not believe that any of the environmental matters described
above are likely to have a material adverse effect on the business and
operations of the Company as a whole.
No assurances can be given, however, that all potential environmental
liabilities have been identified or properly quantified or that no prior owner,
operator, or past or current guest or occupant has created an environmental
condition not known to the Company. Moreover, no assurances can be given that
(i) future laws, ordinances, or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Hotels will not be affected by the condition of land or operations in the
vicinity of the Hotels (such as the presence of underground storage tanks), or
by third parties unrelated to the Company.
Legal Proceedings
Whitey Ford, et al. v. Host Marriott Corporation, et al. In the 285th
-------------------------------------------------------
Judicial District Court of Bexar County, Texas; Case No. 96-CI-08327. This
lawsuit was filed by a group of CBM2 Limited Partners in a state district court
in San Antonio, Texas, against Host, Marriott International and others, alleging
breach of fiduciary duty, breach of contract, fraud, negligent
misrepresentation, tortious interference, violation of the Texas Free Enterprise
and Antitrust Act and conspiracy in connection with the formation, operation and
management of CBM2 and the CBM2 Hotels. Initial discovery efforts are underway.
The defendants (which do not include CBM2) believe that the lawsuit is without
merit and intend to vigorously defend the suit.
Marvin Schick, et. al. v. Host Marriott Corporation, et al. In the
----------------------------------------------------------
Chancery Court for New Castle County, Delaware; C.A. No. 15991. The plaintiffs,
two members of an ad hoc committee of CBM1 Limited Partners, recently filed this
------
purported class action lawsuit against Host, Marriott International and others,
alleging breach of fiduciary duty, breach of contract, tortious interference and
aiding and abetting liability in connection with the refinancings of CBM1's
debt. Among other things, the plaintiffs contend that certain changes to CBM1's
Management Agreement could not be made without the consent of a majority vote of
the CBM1 Limited Partners. The defendants (which do not include CBM1) believe
that the lawsuit is without merit and, if current discussions fail to resolve
the dispute, intend to vigorously defend the suit.
While the Hotel Partnerships have not been named as defendants in the
lawsuits described above, the partnership agreements of CBM1 and CBM2 entitle
the Hotel Partnership GPs of CBM1 and CBM2 to indemnification of such claims,
including expenses.
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DISTRIBUTION AND OTHER POLICIES
The following is a discussion of the anticipated policies with
respect to distributions, investments, financing, lending, conflicts of interest
and certain other activities of the Company and CRFLT. Upon consummation of the
Consolidation, the Company's policies with respect to these activities will be
determined by the Board of Trustees of CRFLT and may be amended or revised from
time to time at the discretion of the Board of Trustees without notice to or a
vote of the shareholders of CRFLT or the limited partners of the Company, except
that changes in certain policies with respect to conflicts of interest must be
consistent with legal requirements.
Distribution Policy
CRFLT and the Company intend to pay regular quarterly distributions
to holders of Common Shares and Units. The distributions to shareholders per
Common Share will be in an amount equal to the amount distributed by the Company
per Unit. The Company will establish its initial distribution based upon its
estimate of the annualized cash flow that will be available for distribution
after the Offering. The actual distributions made by the Company will be
affected by a number of factors, including the rental payments received by the
Company from the Lessees with respect to the Leases on the Hotels, the operating
expenses of the Company, the interest expense incurred in borrowing and
unanticipated capital expenditures. No assurance can be given that the Company's
estimates will prove accurate or that any level of distributions will be made or
sustained. The Company anticipates that distributions will exceed net income
determined in accordance with generally accepted accounting principles due to
non-cash expenses, primarily depreciation and amortization.
For a discussion of the tax treatment of distributions to holders of
Units, see "Federal Income Tax Considerations -- Tax Treatment of Holders of
Units-- Treatment of Company Distributions." For a discussion of the annual
distribution requirements applicable to REITs, see "Federal Income Tax
Considerations -- Taxation of CRFLT Following the Consolidation -- Annual
Distribution Requirements Applicable to REITs." For a discussion of the tax
treatment of distributions to the holders of Common Shares, see "Federal Income
Tax Considerations -- Taxation of Taxable U.S. Shareholders of CRFLT Generally"
"-- Taxation of Tax-Exempt Shareholders of CRFLT" and "-- Taxation of Non-U.S.
Shareholders of CRFLT."
Investment Policies
Investments in Real Estate or Interests in Real Estate. CRFLT is
required to conduct all of its investment activities through the Company. The
Company's investment objectives are to (i) increase cash flow and the value of
the Hotels, (ii) acquire additional hotel properties with growth potential,
(iii) lease such additional hotels to lessees pursuant to leases and (iv) pursue
other real estate investments. The Company is not required to use subsidiaries
of Host as lessee with respect to any hotels acquired after the Consolidation.
Additionally, where prudent and possible, the Company will seek to upgrade the
existing Hotels and any newly acquired hotels. The Company's business will be
focused on limited service and extended-stay hotels. Where appropriate, and
subject to REIT qualification rules and limitations contained in the Partnership
Agreement, the Company may sell certain of its Hotels.
The Company also may participate with other entities in property
ownership through joint ventures or other types of co-ownership. Equity
investments may be subject to existing mortgage financing and other indebtedness
or such financing or indebtedness may be incurred in connection
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with acquiring investments. Any such financing or indebtedness will have
priority over the Company's equity interest in such property.
Investments in Real Estate Mortgages. While the Company will
emphasize equity real estate investments, it may, in its discretion, invest in
mortgages and other similar interests. The Company does not intend to invest to
a significant extent in mortgages or deeds of trust, but may acquire mortgages
as a strategy for acquiring ownership of a property or the economic equivalent
thereof, subject to the investment restrictions applicable to REITs. See
"Federal Income Tax Considerations -- Taxation of CRFLT Following the
Consolidation -- Income Tests Applicable to REITs" and "-- Asset Tests
Applicable to REITs." In addition, the Company may invest in mortgage-related
securities and/or may seek to issue securities representing interests in such
mortgage-related securities as a method of raising additional funds.
Securities of or Interests in Persons Primarily Engaged in Real
Estate Activities and Other Issuers. Subject to the percentage of ownership
limitations and gross and asset income tests necessary for REIT qualification,
the Company also may invest in securities of other entities engaged in real
estate activities or invest in securities of other issuers, including for the
purpose of exercising control over such entities. The Company may acquire all or
substantially all of the securities or assets of other REITs or similar entities
where such investments would be consistent with the Company's investment
policies. No such investments will be made, however, unless the Board of
Trustees determines that the proposed investment would not cause either CRFLT or
the Company to be an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
Financing Policies
The Company's and CRFLT's organizational documents currently contain
no restrictions on incurring debt. CRFLT and the Company, however, will have a
policy of incurring debt only if upon such incurrence the debt-to-total market
capitalization of CRFLT and the Company would be 50% or less. In addition, the
indenture pursuant to which the Notes will be issued (the "Indenture") limits
the amount of Debt (as defined in the Indenture) that the Company may incur if,
immediately after giving effect to the incurrence of such additional Debt, the
aggregate principal amount of all outstanding Debt of the Company and its
Subsidiaries (as defined in the Indenture) on a consolidated basis is greater
than 60% of the Total Market Capitalization (as defined herein) of the Company
on the date of such incurrence. The Company may, from time to time, reduce its
outstanding indebtedness by repurchasing a portion of such outstanding
indebtedness, subject to certain restrictions contained in the Partnership
Agreement and the terms of its outstanding indebtedness. The Company will from
time to time reevaluate its borrowing policies in light of then current economic
conditions, relative costs of debt and equity capital, market values of
properties, growth and acquisition opportunities and other factors.
Consequently, the Company's financing policy is subject to modification and
change. The Company may modify its borrowing policy without any vote of the
shareholders of CRFLT or the limited partners of the Company.
To the extent that the Board of Trustees determines to seek
additional capital, CRFLT or the Company may raise such capital through equity
offerings, debt financing or retention of cash flow or a combination of these
methods. As long as the Company is in existence, the net proceeds of all equity
capital raised by CRFLT will be contributed to the Company in exchange for Units
in the Company, which will dilute the ownership interest of limited partners of
the Company.
The Company is negotiating to obtain the Credit Facility providing
for borrowings of up to $400 million to be used for working capital and other
permitted purposes. In the future, the Company may seek to extend, expand,
reduce or renew the Credit Facility, or obtain new credit facilities or lines of
credit, subject to its general policy relating to the ratio of debt-to-total
market
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capitalization, for the purpose of making acquisitions or capital improvements
or providing working capital or meeting the taxable income distribution
requirements for REITs under the Code. In the future, CRFLT and the Company also
may determine to issue securities senior to the Common Shares or Units,
including preferred shares and debt securities (either of which may be
convertible into Common Shares or Units or may be accompanied by warrants to
purchase Common Shares or Units).
The Company has not established any limit on the number or amount of
mortgages that may be placed on any single hotel or on its portfolio as a whole.
Lending Policies
The Company may consider offering purchase money financing in
connection with the sale of a hotel where the provision of such financing will
increase the value received by the Company for the hotel sold.
Conflicts of Interest Policies
The Company and CRFLT will adopt certain policies and currently
intends to enter into agreements with Host with respect to certain potential
areas of conflicts of interest. In addition, CRFLT's Board of Trustees is
subject to provisions of Maryland law designed to address conflicts of interest.
There can be no assurance, however, that these policies and provisions or these
agreements always will be successful in eliminating the influence of such
conflicts. If they are not successful, decisions could be made that may fail to
reflect fully the interests of all limited partners of the Company.
Absence of Arm's Length Negotiations. Pursuant to Maryland law (where
CRFLT is organized), any contract or transaction between CRFLT and a trustee, or
any entity in which the trustee is a trustee or has a material financial
interest, generally must (i) be approved by the affirmative vote of a majority
of the trustees not having such an interest ("disinterested trustees") or by the
affirmative vote of a majority of the votes cast by disinterested shareholders
and, in each case, the fact of the common trusteeship or interests must be
disclosed or known to such disinterested trustees or disinterested shareholders
(as applicable), or (ii) be in fact fair and reasonable to CRFLT. In addition,
under Delaware law (where the Company is formed), CRFLT, as general partner, has
a fiduciary duty to the Company and, consequently, such transactions are subject
to the duties of care and loyalty that CRFLT, as general partner, owes to
limited partners of the Company (to the extent such duties have not been
eliminated pursuant to the terms of the Partnership Agreement).
Business Opportunities; Noncompetition Arrangements. Pursuant to
Maryland law, each trustee of CRFLT is obligated to offer to CRFLT any business
opportunity (with certain limited exceptions) that comes to such trustee and
that CRFLT reasonably could be expected to have an interest in pursuing. After
the Consolidation, Host and its subsidiaries will continue to own interests in a
number of full service hotels and two limited service and extended-stay hotels.
See "Business and Properties -- Noncompetition Agreements." The Company will not
have any interest in these hotels. CRFLT and Host will enter into agreements in
which Host will agree not to purchase any limited service or extended-stay hotel
for a period of ___ years from the Closing Date of the Consolidation and the
Company will agree not to acquire or develop any full service hotels for a
period of __ years from the Closing Date of the Consolidation. These agreements
are subject to any preexisting, contractual or fiduciary obligations Host may
owe to existing partnerships or other entities.
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Officers and Trustees of CRFLT. Without the approval of a majority of
the disinterested trustees, CRFLT and the Company will not (i) acquire from or
sell to any trustee or officer of CRFLT, or any entity in which a trustee or
officer of CRFLT owns more than a 1% interest, or acquire from or sell to any
affiliate of any of the foregoing, any assets or other property of CRFLT or the
Company, (ii) make any loan to or borrow from any of the foregoing persons or
(iii) engage in any other material transaction with any of the foregoing
persons. Each transaction of the type described above will be in all respects on
such terms as are, at the time of the transaction and under the circumstances
then prevailing, fair and reasonable to CRFLT and the Company. CRFLT will adopt
a policy which requires that all contracts and transactions between CRFLT, the
Company or any of its subsidiaries, on the one hand, and a trustee or executive
officer of CRFLT or any entity in which such trustee or executive officer is a
trustee or has a material financial interest, on the other hand, must be
approved by the affirmative vote of a majority of the disinterested trustees.
Where appropriate in the judgment of the disinterested trustees, the Board of
Trustees may obtain a fairness opinion or engage independent counsel to
represent the interests of nonaffiliated security holders, although the Board of
Trustees will have no obligation to do so.
Policies with Respect to Other Activities
The Company may, but does not presently intend to, make investments
other than as previously described. CRFLT will make investments only through the
Company. CRFLT and the Company will have authority to offer their securities and
to repurchase or otherwise reacquire their securities and may engage in such
activities in the future. CRFLT and the Company also may make loans to joint
ventures in which they may participate in the future to meet working capital
needs. Neither CRFLT nor the Company will engage in trading, underwriting,
agency distribution or sale of securities of other issuers. At all times CRFLT
intends to cause the Company to make investments in such a manner as to be
consistent with the requirements of the Code for CRFLT to qualify as a REIT
unless, because of changing circumstances or changes in the Code (or the
regulations promulgated thereunder), the Board of Trustees determines that (i)
it is no longer in the best interests of CRFLT to continue to qualify as a REIT
and (ii) that the Company will still qualify as a partnership for federal income
tax purposes, or, alternatively, it is no longer in the interests of the holders
of Units for the Company to continue to qualify as a partnership. CRFLT's
policies with respect to such activities may be reviewed and modified from time
to time by CRFLT's trustees without notice to or the vote of its shareholders.
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SELECTED FINANCIAL DATA
THE COMPANY
The following table presents selected historical combined consolidated
financial data derived from the Company's combined consolidated financial
statements for the First Three Quarters 1997 and First Three Quarters 1996 and
for the five most recent fiscal years ended January 3, 1997. The following data
should be read in conjunction with the Company's combined consolidated financial
statements and the notes thereto, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the other financial
information included elsewhere herein. Because the Company's Hotels will be
leased following the Consolidation, the Company does not believe that the
historical results of operations will be comparable to the results of operations
of the Company following the Consolidation. For pro forma financial information
giving effect to the Consolidation (including the Leases), see "Pro Forma
Financial Statements."
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
--------------------- ----------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (in millions, except per limited partner original investment amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ $ 269 $ 254 $ 358 $ 333 $ 305 $ 280 $ 258
Operating profit ................... 121 109 152 134 110 101 82
Income (loss) before extraordinary
item(1).......................... 42 30 38 24 (3) (12) (33)
Net income (loss)................... 54 30 38 24 49 (12) (33)
Distributions
General partners................. 2.4 .5 .5 .2 .2 .2 .7
Limited partners................. 56.3 18.2 29.6 23.6 31.8 31.0 40.8
------- ------- ------- -------- -------- -------- --------
58.7 18.7 30.1 23.8 32.0 31.2 41.5
Per $1,000 limited partner
original investment:
Net income (loss)................ 424 292 376 238 417 (119) (301)
Distributions.................... 522 231 352 308 381 370 476
Cash provided by
operating activities............. 98 79 123 127 100 88 82
Cash used in investing activities... 45 31 45 38 32 33 35
Cash used in financing activities... 59 66 97 59 63 57 38
Increase (decrease) in cash and
cash equivalents................. (6) (18) (19) 30 5 (2) 9
EBITDA(2) .......................... 178 167 234 218 194 184 168
Funds From Operations ("FFO")(3).... 95 84 115 102 78 68 50
Ratio of earnings to fixed
charges(4)....................... 1.47x 1.34x 1.30x 1.19x -- -- --
Deficiency of earnings to
fixed charges(4)............... -- -- -- -- 3 12 33
Total assets at book value.......... 1,467 1,477 1,470 1,507 1,501 1,546 1,589
Total assets at value assigned
for consolidation.............. -- -- -- -- -- -- --
Cash and cash equivalents........... 45 52 51 70 40 35 37
Total debt.......................... 1,319 1,322 1,305 1,343 1,369 1,398 1,415
Partner's capital (deficit):
Limited partners................. (21) (11) (17) (23) (22) (37) 6
General partners................. 10 10 11 9 8 6 6
Book value per $1,000 limited
partner original investment.... 179 260 188 165 234 195 688
Exchange value per $1,000 limited
partner original investment.... -- -- -- -- -- --
</TABLE>
- ----------------
/(1)/ In 1997, the Company recognized a $15 million extraordinary gain on the
forgiveness of deferred management fees which was partially offset by an
extraordinary loss on the early extinguishment of debt of approximately $3
million. In 1994, the Company recognized a $52 million extraordinary gain
on the forgiveness of deferred management fees.
/(2)/ EBITDA consists of the sum of consolidated net income, interest expense,
depreciation and amortization. EBITDA data is presented because such data
is used by certain investors to determine the Company's ability to meet
debt service requirements. The Company considers EBITDA to be an
indicative measure of the Company's operating performance due to the
significance of the Company's long-lived assets and because EBITDA can be
used to measure the Company's ability to service debt, fund capital
expenditures and expand its business; however, such information should not
be considered as an alternative to net income, operating profit, cash
flows from operations, or any other operating or liquidity performance
measure prescribed by generally accepted accounting principles ("GAAP").
Cash expenditures for various long-term assets and interest expense have
been, and will be, incurred which are not reflected in the EBITDA
presentations.
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/(3)/ Management considers FFO to be an appropriate measure of performance of an
equity REIT because it is predicated on cash flow analyses. FFO has been
calculated in accordance with the standards established by the National
Association of Real Estate Investment Trusts, Inc. ("NAREIT"), which may
differ from the methodology for calculating FFO utilized by other REITs
and, accordingly, may not be comparable to such other REITs. FFO is
defined by NAREIT as net income computed in accordance with GAAP,
excluding gains or losses from debt restructurings and sales of
properties, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. FFO should not be
considered as an alternative to net income, operating profit, cash flows
from operations, or any other operating or liquidity performance measure
prescribed by GAAP. FFO is also not an indicator of funds available to
fund the Company's cash needs, including its ability to make
distributions.
/(4)/ The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges is largely the result of
depreciation and amortization of $81 million, $80 million and $84 million
in 1994, 1993 and 1992, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Lack of Comparability Following the Consolidation
Because the Company's Hotels will be leased following the
Consolidation, the Company does not believe that the historical results of
operations will be comparable to the results of operations of the Company
following the Consolidation. For pro forma financial information giving effect
to the Consolidation (including the Leases), see "Pro Forma Financial
Statements."
Results of Operations
Revenues represent house profit from the Company's hotel properties.
House profit reflects the net revenues flowing to the Company as property owner
and represents hotel sales less property-level expenses excluding depreciation,
management fees, property taxes, ground and equipment rent, insurance and
certain other costs which are classified as operating costs and expenses. The
Company's hotel operating costs and expenses are, to a great extent, fixed.
Therefore, the Company derives substantial operating leverage from increases in
revenue. This operating leverage is somewhat diluted, however, by the impact of
base, system and management fees which are calculated as a percentage of sales,
variable lease payments and incentive management fees tied to operating
performance above certain established levels.
For the periods discussed herein, the Company's three lodging
concepts have experienced increases in room revenue per available room
("REVPAR"). REVPAR is a commonly used indicator of market performance for hotels
which represents the combination of the daily room rate charged and the average
daily occupancy achieved. REVPAR does not include food and beverage or other
ancillary revenues generated by the property. The REVPAR increases primarily
represent strong percentage increases in room rates, while occupancies have
generally decreased slightly. Increases in room rates have generally been
achieved by the managers through shifting occupancies away from discounted group
business to higher-rated group and transient business. This shift has been made
possible by the increased travel due to improved economic conditions and by the
favorable supply/demand characteristics existing in the hotel industry today.
The Company expects this supply/demand imbalance to continue, which management
believes should result in improved REVPAR and operating profit at its hotel
properties in the near term. However, there can be no assurance that REVPAR will
continue to increase in the future.
First Three Quarters 1997 Compared to First Three Quarters 1996
The following discussion and analysis of operations and financial
condition presents the combined results of the Company as if the combination
into a single operating partnership discussed in Note 1 to the combined
consolidated financial statements was effective for all periods presented but
the Leases to be put in place at the time of Consolidation is consummated were
not in effect.
Revenues. Revenues consist of house profit from the Company's Hotels.
The Company's First Three Quarters 1997 revenues of $269 million represented a
$15 million, or 6%, increase from the First Three Quarters 1996. Revenue and
operating profit were impacted primarily by improved lodging results. Hotel
sales increased $23 million, or 5%, to $524 million in the First Three Quarters
1997 also reflecting the improvements in REVPAR for the period. The Company's
three lodging products all reported growth in REVPAR.
The Company's moderate-priced Courtyard properties reported a 7%
increase in REVPAR for the First Three Quarters 1997 due primarily to an
increase in average room rates of 7%, while average occupancy increased one
percentage point. Due to the continued high occupancy of these properties,
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the Company expects future increases in REVPAR to be driven by room rate
increases, rather than occupancy increases. However, there can be no assurance
that REVPAR will continue to increase in the future.
The Company's extended-stay Residence Inn properties reported a 4%
increase in REVPAR for the First Three Quarters of 1997 due primarily to an
increase in average room rates of 5%, while average occupancy decreased less
than one percentage point. Due to the high occupancy of these properties, the
Company expects future increases in REVPAR also to be driven by room rate
increases, rather than occupancy increases. However, there can be no assurance
that REVPAR will continue to increase in the future.
The Company's economy-priced Fairfield Inn properties, reported a
slight increase in REVPAR for the First Three Quarters 1997 due primarily to an
increase in average room rates of 1%, while average occupancy decreased less
than one percentage point. Due to the high occupancy of these properties, the
Company expects future increases in REVPAR to be driven by room rate increases,
rather than occupancy increases. However, there can be no assurance that REVPAR
will continue to increase in the future.
Operating Costs and Expenses. Operating costs and expenses consist of
depreciation, amortization, base, system and incentive management fees, property
taxes, ground and equipment rent, insurance and certain other costs. Operating
costs and expenses increased $3 million to $148 million for the First Three
Quarters 1997 primarily as a result of increased management fees driven by the
increase in hotel sales. As a percentage of revenues, operating costs and
expenses represented 55% and 57% of revenues for the First Three Quarters 1997
and the First Three Quarters 1996, respectively.
Operating Profit. As a result of the changes in revenues and
operating costs and expenses discussed above, operating profit increased by $12
million to $121 million, or 45% of revenues, for the First Three Quarters 1997
from $109 million, or 43% of revenues, for the First Three Quarters 1996,
reflecting the operating leverage of the Hotels.
Interest Expense. Interest expense remained unchanged at $83 million
for the First Three Quarters 1997.
Income Before Extraordinary Item. Income before extraordinary item
increased $12 million, or 40%, to $42 million, or 16% of revenues, for the First
Three Quarters 1997 from $30 million, or 12% of revenues, for the First Three
Quarters 1996 due to strong operating results generated by the Company's Hotels.
Extraordinary Item. The Company recognized a net extraordinary gain
in the First Three Quarters 1997 of $12 million, primarily representing the
write-off of deferred management fees forgiven by Marriott International,
partially offset by a loss on the early extinguishment of debt in conjunction
with the refinancing of certain debt.
Net Income. Net income for the First Three Quarters 1997 increased
$24 million to $54 million, or 20% of revenues, compared to net income of $30
million, or 12% of revenues, for the First Three Quarters 1996 due to improved
operating results and the 1997 extraordinary gain.
1996 Compared to 1995
Revenues. Revenues increased $25 million, or 8%, to $358 million in
1996 from $333 million in 1995 as a result of strong growth in REVPAR. Hotel
sales increased $44 million, or 7%, to $712 million in 1996 also reflecting
improvements in REVPAR.
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Improved results were driven by strong increases in REVPAR for all
three of the Company's' lodging concepts. The Company's moderate-priced
Courtyard properties reported an overall REVPAR increase of over 5%. The
increase in REVPAR was primarily a result of a 7% increase in average room rates
with a slight decrease in average occupancy of one percentage point. The
Company's extended-stay Residence Inns reported a REVPAR increase of nearly 4%
resulting from an increase in average room rates of 6% with a decrease in
average occupancy of two percentage points. The Company's economy-priced
Fairfield Inns reported a REVPAR increase of 4%, due primarily to an increase in
average room rates of nearly 10% while average occupancy decreased four
percentage points. Management believes REVPAR will continue to grow in the near
future through steady increases in average room rates, combined with less
significant changes in occupancy. However, there can be no assurance that REVPAR
will continue to grow in the future.
Operating Costs and Expenses. Operating costs and expenses increased
$7 million, or 4%, to $206 million in 1996 from $199 million in 1995, primarily
reflecting an increase in base, system and incentive management fees associated
with the increase in revenue discussed above and the improved profitability of
the Hotels. As a percentage of revenues, operating costs and expenses
represented 58% of revenues for 1996 and 60% in 1995.
Operating Profit. As a result of the changes in revenues and
operating costs and expenses discussed above, operating profit increased $18
million to $152 million, or 42% of total revenues, in 1996 from $134 million, or
40% of revenues, in 1995.
Interest Expense. Interest expense increased approximately $4
million, or 3%, to $120 million, due to the impact of higher average interest
rates, as a result of refinancing debt at fixed rates which are higher than the
prior year's variable rates.
Net Income. Net income increased $14 million to $38 million, or 11%
of revenues, in 1996 from $24 million, or 7% of revenues, in 1995 due to
improved lodging results, partially offset by the change in interest expense
discussed above.
1995 Compared to 1994
Revenues. Revenues increased $28 million, or 9%, to $333 million in
1995 from $305 million in 1994 as a result of strong growth in REVPAR in all
three lodging concepts. The Company's Courtyard Hotels reported an overall
growth in REVPAR of 7% driven by an increase in average room rates of 7%, while
average occupancy remained unchanged. The Company's Residence Inns reported
REVPAR growth of over 6%, resulting from an increase in average room rates of
over 7%, which was partially offset by a decrease in average occupancy of less
than one percentage point. The Company's Fairfield Inns reported a strong growth
in REVPAR of nearly 8% due primarily to an increase in average room rates of 9%,
which was partially offset by a decrease in average occupancy of less than one
percentage point.
Operating Costs and Expenses. Operating costs and expenses increased
$4 million to $199 million, or 60% of hotel revenues, in 1995, from $195
million, or 64% of hotel revenues, in 1994.
Operating Profit. Operating profit increased $24 million, or 22%, to
$134 million, or 40% of revenues, in 1995 from $110 million, or 36% of revenues,
in 1994 due to the changes in revenues and operating costs discussed above.
Interest Expense. Interest expense remained at $116 million for 1995
and 1994.
Income (Loss) Before Extraordinary Item. Income (loss) before
extraordinary item increased $27 million to $24 million in 1995 from a net loss
of $3 million in 1994 primarily due to strong operating results generated by the
Company's Hotels.
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Extraordinary Item. The Company recognized an extraordinary gain in
1994 of $52 million representing the write-off of deferred management fees
forgiven by Marriott International in conjunction with the 1994 refinancing of
the CBM1 debt.
Net Income. Net income decreased to $24 million, or 7% of revenues,
in 1995, from $49 million, or 16% of revenues, in 1994 due to the 1994
extraordinary gain on the forgiveness of deferred management fees, which was
partially offset by improved operating results from the hotels.
Liquidity and Capital Resources
Cash flow provided by operations was $98 million and $79 million for
the First Three Quarters of 1997 and 1996, respectively, and $123 million in
1996, $127 million in 1995 and $100 million in 1994.
Cash used in investing activities was $45 million and $31 million for
the First Three Quarters of 1997 and 1996, respectively, and $45 million, $38
million and $32 million in fiscal years 1996, 1995 and 1994, respectively. The
Company's cash investing activities consists primarily of contributions to the
FF&E Reserves and capital expenditures for improvements to existing hotels.
The Company through the Manager, routinely makes disbursements to
cover the cost of certain non-routine repairs and maintenance to the Hotels
which are normally capitalized and the costs of replacements and renewals to the
Hotels' property and equipment. Such disbursements are generally equal to 5% of
gross hotel sales and were $28 million for the First Three Quarters 1997 and $27
million for the First Three Quarters 1996 and were $37 million, $34 million and
$32 million for 1996, 1995 and 1994, respectively.
Cash used in financing activities was $59 million and $66 million,
respectively, for the First Three Quarters 1997 and the First Three Quarters
1996. The Company's cash used in financing activities was $97 million in 1996,
$59 million in 1995 and $63 million in 1994. The Company's cash financing
activities primarily consisted of distributions to partners and principal
payments on debt, as well as the refinancing of certain debt of the Company. The
Company's refinanced mortgage debt and other debt of $446 million, $668 million
and $129 million in the First Three Quarters 1997 and fiscal years 1996 and
1995, respectively.
The proceeds of the Offering will be used to repay approximately $539
million of indebtedness, thereby reducing total indebtedness to approximately
$780 million. In addition, the proceeds of the Offering will be utilized to pay
$33 million of debt prepayment expenses and an estimated $___ million of
expenses related to the Consolidation. The Company expects to meet its long-term
liquidity requirements such as refinancing mortgages, financing acquisitions and
financing certain capital improvements through long-term borrowings, issuances
of debt securities and the offering of additional equity securities.
Funds From Operations
The Company considers Funds From Operations ("FFO") to be an
appropriate measure of performance for an equity REIT. While FFO is a relevant
and widely used measure of operating performance of REITs, it does not represent
net income or cash flow from operations as defined by GAAP principles and it
should not be considered as an alternative to these indicators in evaluating the
liquidity or operating performance of the Company.
The following table computes FFO under the NAREIT definition, which
may differ from the methodology for calculating FFO utilized by other REITs and,
accordingly, may not be comparable to other such REITs. FFO under the NAREIT
definition consists of net income computed in accordance with GAAP, excluding
gains or losses from debt restructurings and sales of property, plus real estate
126
<PAGE>
related depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
---------------------- ------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(unaudited) (in millions)
<S> <C> <C> <C> <C> <C>
Funds From Operations (FFO):
- ----------------------------
Net income.............................................. $ 54 $ 30 $ 38 $ 24 $ 49
Add back (deduct):
Extraordinary items/(1)/............................ (12) -- -- -- (52)
Depreciation........................................ 53 54 77 78 81
------- ------- ------- ------- -------
FFO/(2)/................................................ $ 95 $ 84 $ 115 $ 102 $ 78
======= ======= ======= ======= =======
- ------------------------
</TABLE>
/(1)/ In 1997, the Company recognized a $15 million extraordinary gain on the
forgiveness of deferred management fees, which was partially offset by an
extraordinary loss on the early extinguishment of debt of approximately $3
million. In 1994, the Company recognized a $52 million extraordinary gain
on the forgiveness of deferred management fees.
/(2)/ Management considers FFO to be an appropriate measure of performance of an
equity REIT because it is predicated on cash flow analyses. FFO has been
calculated in accordance with the standards established by NAREIT, which
may differ from the methodology for calculating FFO utilized by other
REITs and, accordingly, may not be comparable to such other REITs. FFO
should not be considered as an alternative to net income, operating
profit, cash flows from operations, or any other operating or liquidity
performance measure prescribed by GAAP. FFO is also not an indicator of
funds available to fund the Company's cash needs, including its ability to
make distributions.
EBITDA
The Company believes that consolidated Earnings Before Interest
Expense, Taxes, Depreciation and Amortization ("EBITDA") is a meaningful measure
of its operating performance due to the significance of the Company's long-lived
assets (and the related depreciation thereon), and because EBITDA can be used to
measure the Company's ability to service debt, fund capital expenditures and
expand its business. EBITDA is used by certain investors to determine the
Company's ability to meet debt service requirements and to determine the
Company's ability to incur additional debt. EBITDA information should not be
considered as an alternative to net income, operating profit, cash flows from
operations, or any other operating or liquidity performance measure prescribed
by GAAP. EBITDA increased $10.5 million, or 6%, to $178 million in the First
Three Quarters 1997 from $167.5 million in the First Three Quarters 1996 and
$15.6 million, or 7.1%, to $233.8 million in 1996 from $218.2 million in 1995.
The increase in EBITDA is primarily due to improved lodging results,
particularly from the Company's Courtyard properties. The Company's ratio of
EBITDA to cash interest expense (defined as GAAP interest expense less
amortization of deferred financing costs) was 2.2 to 1.0 for the First Three
Quarters 1997, 2.1 to 1.0 for the First Three Quarters 1996, 2.0 to 1.0 for 1996
and 1.9 to 1.0 for 1995. The ratio of earnings to fixed charges was 1.5 to 1.0
and 1.3 to 1.0 for the First Three Quarters 1997 and for the First Three
Quarters 1996, respectively, and 1.3 to 1.0 and 1.2 to 1.0 in 1996 and 1995,
respectively.
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<PAGE>
The following is a reconciliation of EBITDA to income before
extraordinary item:
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
------------------------- ---------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(unaudited) (in millions)
<S> <C> <C> <C> <C> <C>
EBITDA.................................................. $ 178 $ 167 $ 234 $ 218 $ 194
Interest expense........................................ (83) (83) (120) (116) (116)
Depreciation and amortization........................... (53) (54) (76) (78) (81)
------- ------- ------- ------- -------
Income (loss) before extraordinary item............. $ 42 $ 30 $ 38 $ 24 $ (3)
======= ======= ======= ======= =======
</TABLE>
Management's Discussion and Analysis of Pro Forma Results of Operations
Because the Company's Hotels will be leased following the
Consolidation, the Company does not believe that the historical results of
operations will be comparable to the results of operations of the Company
following the Consolidation. Accordingly, a comparison of the Company's pro
forma results of operations for the First Three Quarters 1997 and First Three
Quarters 1996 has been included below. The following discussion and analysis
should be read in conjunction with the Company's combined consolidated financial
statements and the Company's pro forma financial statements included elsewhere
in this Consent Solicitation. The following discussion and analysis has been
prepared assuming the following two scenarios:
. All six Hotel Partnerships participate and the Consolidation
includes an Offering at $20.00 per Common Share with gross proceeds
of $800 million and no Notes are issued ("100% Participation with
No Notes Issued").
. Four Hotel Partnerships participate - CBM1, CBM2, RIBM1 and the
remaining Hotel Partnership (Res USA) that produces the lowest
estimated net operating income. The Consolidation includes an
Offering at $20.00 per Common Share with gross proceeds of $540
million and no Notes are issued ("Minimum Condition with No Notes
Issued").
These presentations do not purport to represent what combination will
result from the Consolidation, but instead are designed to illustrate what the
composition of the Company would have been like under the above scenarios.
Furthermore, the pro forma financial statements do not purport to represent what
the Company's results of operations would actually have been if the
Consolidation had in fact occurred on such date or at the beginning of such
period or to project the Company's results of operations for any future date or
period. The following table presents the results of operations for the First
Three Quarters 1997 and First Three Quarters 1996 under the scenarios discussed
above:
128
<PAGE>
<TABLE>
<CAPTION>
100% Participation with Minimum Participation
No Notes Issued with No Notes Issued
----------------------------- -------------------------
First Three Quarters First Three Quarters
----------------------------- -------------------------
1997 1996 1997 1996
---------- ----------- ----------- ----------
(in millions)
<S> <C> <C> <C> <C>
Revenues.................................................. $ 211 $ 194 $ 167 $ 150
Operating costs and expenses.............................. 95 95 74 74
-------- --------- --------- ---------
Operating profit before interest and corporate expenses... 116 99 93 76
Corporate expenses/(1)/...................................
Interest expense.......................................... (51) (50) (42) (42)
Interest income........................................... 4 4 3 3
-------- --------- --------- ---------
Income before extraordinary items and consolidation expenses $ 69 $ 53 $ 54 $ 37
======== ========= ========= =========
- -----------------------------
</TABLE>
/(1)/ The amount of corporate expenses are not known at this time and will be
filed by amendment.
100% Participation with No Notes Issued - First Three Quarters 1997 Compared to
First Three Quarters 1996.
Revenues. Revenues consist of lease revenues from the Lessees.
Revenues increased $17 million, or 9%, to $211 million for the First Three
Quarters 1997. The increase in revenues was driven by strong lodging results.
The Company's moderate-priced Courtyard properties reported an 8%
increase in REVPAR for the First Three Quarters 1997 due primarily to an
increase in average room rates of 7%, while average occupancy increased almost
one percentage point. Due to the continued high occupancy of these properties,
the Company expects future increases in REVPAR to be driven by room rate
increases, rather than occupancy increases. However, there can be no assurance
that REVPAR will continue to increase in the future.
The Company's extended-stay Residence Inn properties reported a 5%
increase in REVPAR for the First Three Quarters of 1997 due primarily to an
increase in average room rates of 6%, while average occupancy decreased less
than one percentage point. Due to the high occupancy of these properties, the
Company expects future increases in REVPAR also to be driven by room rate
increases, rather than occupancy increases. However, there can be no assurance
that REVPAR will continue to increase in the future.
The Company's economy-priced Fairfield Inn properties, reported a
slight increase in REVPAR for the First Three Quarters 1997 due primarily to an
increase in average room rates of 1%, while average occupancy decreased less
than one percentage point. Due to the high occupancy of these properties, the
Company expects future increases in REVPAR to be driven by room rate increases,
rather than occupancy increases. However, there can be no assurance that REVPAR
will continue to increase in the future.
Operating Costs and Expenses. Operating costs and expenses consist of
depreciation, amortization, property taxes, ground and equipment rent, insurance
and other costs. Operating costs and expenses remained unchanged at $95 million
for the First Three Quarters 1997. As a percentage of revenues, operating costs
and expenses represented 45% and 49% of revenues for the First Three Quarters
1997 and the First Three Quarters 1996, respectively.
129
<PAGE>
Operating Profit. As a result of the changes in revenues and
operating costs and expenses discussed above, operating profit increased $17
million, or 17%, to $116 million for the First Three Quarters 1997 reflecting
the strong operating leverage of the Hotels. Operating profit as a percentage of
revenues represented 55% of revenues for the First Three Quarters 1997 and 51%
of revenues for the First Three Quarters 1996.
Corporate Expenses. Corporate expenses increased $__ million to $__
million. As a percentage of revenues, corporate expenses represented ___% of
revenues for the First Three Quarters 1997 and __% of revenues for the First
Three Quarters 1996.
Interest Expense. Interest expense increased $1 million to $50
million.
Income Before Extraordinary Items and Consolidation Expenses. Income
before extraordinary items and consolidation expenses increased $16 million to
$69 million reflecting the strong operating results of the Hotels.
Minimum Condition with No Notes Issued - First Three Quarters 1997 Compared to
First Three Quarters 1996
Revenues. Revenues consist of lease revenues from the Lessees.
Revenues increased $17 million, or 11%, to $167 million for the First Three
Quarters 1997. The increase in revenues was driven by strong lodging results.
The Company's moderate-priced Courtyard properties reported an 8%
increase in REVPAR for the First Three Quarters 1997 due primarily to an
increase in average room rates of 7%, while average occupancy increased almost
one percentage point. Due to the continued high occupancy of these properties,
the Company expects future increases in REVPAR to be driven by room rate
increases, rather than occupancy increases. However, there can be no assurance
that REVPAR will continue to increase in the future.
The Company's extended-stay Residence Inn properties reported an 5%
increase in REVPAR for the First Three Quarters of 1997 due primarily to an
increase in average room rates of 6%, while average occupancy decreased less
than one percentage point. Due to the high occupancy of these properties, the
Company expects future increases in REVPAR also to be driven by room rate
increases, rather than occupancy increases. However, there can be no assurance
that REVPAR will continue to increase in the future.
Operating Costs and Expenses. Operating costs and expenses consist of
depreciation, amortization, property taxes, ground and equipment rent, insurance
and other costs. Operating costs and expenses remained at $74 million for the
First Three Quarters 1997. As a percentage of revenues, operating costs and
expenses represented 44% and 49% of revenues for the First Three Quarters 1997
and the First Three Quarters 1996, respectively.
Operating Profit. As a result of the changes in revenues and
operating costs and expenses discussed above, operating profit increased $17
million, or 22%, to $93 million reflecting the strong operating leverage of the
Hotels. Operating profit as a percentage of revenues represented 56% of revenues
for the First Three Quarters 1997 and 51% of revenues for the First Three
Quarters 1996.
Corporate Expenses. Corporate expenses increased $__ million to $__
million. As a percentage of revenues, corporate expenses represented __% of
revenues for the First Three Quarters 1997 and ___% of revenues for the First
Three Quarters 1996.
Interest Expense. Interest expense remained unchanged at $42 million
for the First Three Quarters 1997.
130
<PAGE>
Income Before Extraordinary Items and Consolidation Expenses. Income
before extraordinary items and consolidation expenses increased $17 million to
$54 million reflecting the strong operating results of the Hotels.
Inflation
The Company's lodging properties are impacted by inflation through
its effect on increasing costs, which increasing costs may affect the Lessees'
ability to pay rent under the Leases and on the Managers' ability to increase
room rates. Unlike other real estate operations, hotels have the ability to
change room rates on a daily basis, so the impact of higher inflation generally
can be passed on to customers.
New Accounting Standards
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," during the first quarter of 1996. The
adoption of SFAS No. 121 did not have an effect on the Company's combined
consolidated financial statements.
131
<PAGE>
MANAGEMENT
Trustees, Executive Officers and Key Employees of CRFLT
The following table sets forth certain information with respect to
persons who are Trustees or will be elected Trustees ("Proposed Trustees")
immediately after the completion of the Consolidation, and the executive
officers and other key employees of CRFLT (or the Company):
Name Age Position with CRFLT (or the Company)
- --------------------------------------------------------------------------------
The following is a biographical summary of the experience of the
Proposed Trustees and officers of CRFLT:
Committees of the Board of Trustees
Promptly following the consummation of the Consolidation, the Board
of Trustees of CRFLT will establish the following committees:
Audit Committee. The Audit Committee will consist of at least three
independent Trustees. The Audit Committee will be established to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public accounts,
consider the range of audit and non-audit fees and review the adequacy of
CRFLT's internal accounting controls.
Executive Committee. The Executive Committee will consist of
____________, _______ and one independent trustee. The Executive Committee will
have such authority as is delegated to it by the Board of Trustees, including
authority to acquire, dispose of and finance investments for CRFLT and to
authorize the execution of contracts and agreements.
Compensation Committee. The Compensation Committee will consist of
three independent Trustees and will determine compensation for CRFLT's executive
officers and will administer CRFLT's Employee Share Option Plan, Restricted
Share Plan and Incentive Compensation Plan.
132
<PAGE>
CRFLT may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated by
the Board of Trustees.
Compensation of Trustees
CRFLT intends to pay its Trustees who are not officers of CRFLT fees
for their services as Trustees. These Trustees will receive annual compensation
of $_____ plus a fee of $_____ respectively, for attendance (in person or by
telephone) at each meeting of the Board of Trustees. Officers of CRFLT who are
Trustees will not be paid any trustee fees. In addition, CRFLT will reimburse
its Trustees for reasonable travel expenses and out of pocket expenses incurred
in connection with their activities on behalf of CRFLT.
CRFLT intends to adopt a Non-employee Trustee Share Option Plan under
which each director who is not an employee of CRFLT will receive, upon the
closing of the Consolidation, an option to purchase _____ Common Shares for a
price per share equal to $_____. The plan also will provide for automatic grants
of options, exercisable for _____ Common Shares, to newly appointed non-employee
Trustees. The exercise price per share of all options granted under the plan
will be equal to the fair market value of the Common Shares on the date of
grant. Each option will have a term of _____ years, and will become exercisable
_____ after the date of grant. The exercise price of options granted under the
plan may be paid in cash or by delivering Common Shares having a fair market
value equal to the purchase price.
Executive Compensation
The following table sets forth the annual base salary levels and
options expected to be paid in 1998 to CRFLT's Chief Executive Officer and
CRFLT's four other most highly paid executive officers (the "Named Executive
Officers").
<TABLE>
<CAPTION>
1998 Base Options
Name Title Salary/(1)/ Allocated/(2)/
--------------------- ------------------ ------------ -------------
<S> <C> <C> <C>
</TABLE>
- ----------------
/(1)/ Does not include bonuses that may be paid to the Named Executive
Officers. See "--Incentive Compensation" below.
/(2)/ Upon the effective date of the Consolidation, options to purchase Common
Shares will be granted to officers and other employees of CRFLT under
CRFLT's share option plan at a price equal to the initial public
offering price.
For a comparison of the reimbursements and distributions currently
payable to the Hotel Partnership GPs and their affiliates and the reimbursements
and distributions to be paid by CRFLT, on
133
<PAGE>
a pro forma basis, to the Hotel Partnership GPs following the Consolidation, see
"Background and Reasons for the Consolidation -- Reimbursements and
Distributions to Hotel Partnership GPs."
Employment Agreements
The Company will have employment agreements with certain of its
executive officers. The terms of such agreements currently are under
negotiation.
Option and Restricted Share Plans
Prior to the completion of the Consolidation, CRFLT intends to adopt
the 1998 Employee Share Option and Restricted Share Plan (the "Employee Plan")
for the purpose of attracting and retaining highly qualified executive officers,
trustees and employees.
The Employee Plan will be qualified under Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Employee
Plan will be administered by the Compensation Committee and provide for the
granting of share options, share appreciation rights or restricted shares with
respect to up to ___% of CRFLT's outstanding Common Shares (calculated on a
fully diluted basis) to executive or other key employees of CRFLT. Common Share
options are expected to be in the form of non-statutory stock options, and are
exercisable for up to 10 years following the date of the grant. The exercise
price of each option will be set by the Compensation Committee; provided,
however, that the price per share must be equal to or greater than the fair
market value of the Common Shares on the grant date.
The Employee Plan also provides for the issuance of share
appreciation rights which will generally entitle a holder to receive cash or
shares, as determined by the Compensation Committee at the time of exercise,
equal to the difference between the exercise price and the fair market value of
the Common Shares. In addition, the Employee Plan permits CRFLT to issue
restricted Common Shares to executive or other key employees upon such terms and
conditions as shall be determined by the Compensation Committee in its sole
discretion.
Incentive Compensation
CRFLT has established an incentive compensation plan for key officers
of CRFLT and its subsidiaries. This plan will provide for payment of cash
bonuses to participating officers after evaluating the officer's performance and
the overall performance of CRFLT. The primary performance target is based on
CRFLT's net cash flow from operations. The Chief Executive Officer will make
recommendations to the Compensation Committee of the Board of Trustees, which
will make the final determination for the award of bonuses. The Compensation
Committee will determine such bonuses, if any, for the Chief Executive Officer.
Limitation of Liability and Indemnification
The Maryland REIT Law permits a Maryland real estate investment trust
to include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of CRFLT contains such a provision which eliminates such
liability to the maximum extent permitted by Maryland law.
134
<PAGE>
The Declaration of Trust of CRFLT authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former trustee or officer or (b) any individual who, while a
trustee of CRFLT and at the request of CRFLT, serves or has served another real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise from and against any claim or
liability to which such person may become subject or which such person may incur
by reason of his or her status as a present or former Trustee or officer of
CRFLT. The Bylaws of CRFLT obligate it, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (a) any present or former
trustee or officer who is made party to the proceeding by reason of his service
in that capacity or (b) any individual who, while a trustee or officer of CRFLT
and at the request of CRFLT, serves or has served another real estate investment
trust, corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a trustee, director, officer or partner of such real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity, against any claim or
liability to which he may become subject by reason of such status. The
Declaration of Trust and Bylaws also permit CRFLT to indemnify and advance
expenses to any person who served as a predecessor of CRFLT in any of the
capacities described above and to any employee or agent of CRFLT or a
predecessor of CRFLT. The Bylaws require CRFLT to indemnify a trustee or officer
who has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity.
The Maryland REIT Law permits a Maryland real estate investment trust
to indemnify and advance expenses to its trustees, officers, employees and
agents to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, under the MGCL,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In accordance with the MGCL, the Bylaws of
CRFLT require it, as a condition to advancing expenses, to obtain (a) a written
affirmation by the trustee or officer of his good faith belief that he has met
the standard of conduct necessary for indemnification by CRFLT as authorized by
the Bylaws and (b) a written statement by or on his behalf to repay the amount
paid or reimbursed by CRFLT if it shall ultimately be determined that the
standard of conduct was not met.
The Partnership Agreement also provides for indemnification of CRFLT
and its officers and trustees to the same extent that indemnification is
provided to officers and trustees of CRFLT in its Declaration of Trust, and
limits the liability of CRFLT and its officers and trustees to the Company and
its respective partners to the same extent that the liability of the officers
and trustees of CRFLT to CRFLT and its shareholders is limited under CRFLT's
Declaration of Trust.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to trustees, officers or persons controlling the
registrant pursuant to the foregoing provisions, CRFLT has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
The Lessees
135
<PAGE>
Executive Officers and Key Employees of the Lessees
The following table sets forth certain information with respect to
persons who are executive officers and other key employees of the Lessees (or
one or more of its principal operating subsidiaries):
Name Age Position with the Lessees
- --------------------------------------------------------------------------------
The following is a biographical summary of the experience of the
executive officers and key employees of the Lessees:
The Managers
Executive Officers and Key Employees of the Managers
The following table sets forth certain information with respect to
persons who are executive officers and other key employees of the Managers (or
one or more of its principal operating subsidiaries):
Name Age Position with the Manager
- --------------------------------------------------------------------------------
136
<PAGE>
The following is a biographical summary of the experience of the
executive officers and key employees of the Manager:
137
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Subsidiaries of Host serve as the sole general partner for each of
the Hotel Partnerships to be consolidated into the Company. The Hotel
Partnership GP has a one percent ownership interest in RIBM1, RIBM2 and FIBM,
and a five percent ownership interest in CBM1, CBM2 and Res USA. Host and its
subsidiaries own limited partnership interests of 1.25%, 1.39% and 9.95% in
CBM1, CBM2 and FIBM, respectively.
Host, as parent of the Hotel Partnership GPs, has guaranteed mortgage
loans for several of the Hotel Partnerships. As of January 3, 1997 and December
29, 1995, $12,975,000 (including $5,634,000 of accrued interest) and $19,834,000
(including $6,004,000 of accrued interest), respectively, had been advanced by
Host to the Hotel Partnerships under two of the mortgage loan guarantees. The
advance outstanding at January 3, 1997 bore interest at 8.25%.
In July 1996, Host provided an unsecured nonrecourse loan to Res USA
in the amount of $5,393,000 to repay a maturing mortgage loan. The loan bore
interest at prime plus one percent (9.25% at January 3, 1997) and was repaid in
full in April 1997.
As parent of the Hotel Partnership GPs, Host provides certain
administrative services to them. The cost of these services is reimbursed by the
Hotel Partnerships. Total costs reimbursed was approximately $1 million for each
fiscal years 1996, 1995 and 1994, respectively.
138
<PAGE>
PRINCIPAL SECURITY HOLDERS
The following table sets forth the expected beneficial ownership of
Units of (i) each person who is expected to hold more than a 5% interest in the
Company, (ii) trustees of CRFLT, (iii) the Chief Executive Officer and the four
most highly compensated executive officers of CRFLT and (iv) the trustees and
executive officers of CRFLT as a group. Unless otherwise indicated in the
footnotes, all of such interests are owned directly, and the indicated person or
entity has sole voting and investment power.
The "Percent of All Units" represents the number of Units the person
is expected to hold immediately after the Consolidation, as a percentage of the
total number of Units expected to be outstanding immediately after the
Consolidation (including Units held by CRFLT). The information in this table
assumes that all transactions comprising the Consolidation are consummated as
currently expected.
Units
---------------------------------------
Number of Units Percent of
Name of Beneficial Owner Beneficially Owned All Units
- ------------------------ ------------------ ---------
139
<PAGE>
DESCRIPTION OF UNITS
Partners whose Hotel Partnership participates in the Consolidation
will receive Units in exchange for their Hotel Partnership Interests. Limited
Partners who exercise Dissenters' Rights and elect to receive Notes will tender
their Units to the Company in exchange for Notes. See "The Consolidation --
Rights of Dissenting Partners." After the Initial Holding Period, each limited
partner in the Company (other than CRFLT) will be entitled to have each of his
Units redeemed by the Company for cash equal to the fair market value, at the
time of redemption, of one Common Share (subject to adjustment to reflect any
stock split, stock dividend or other transaction affecting the number of Common
Shares outstanding but not affecting the number of Units outstanding), or, at
the option of CRFLT, Common Shares (subject to adjustment as described herein).
The material terms of the Common Shares, including a summary of certain
provisions of CRFLT's Declaration of Trust and Bylaws, are set forth in
"Description of Shares of Beneficial Interest." The material terms of the Units,
including a summary of certain provisions of the Partnership Agreement, are set
forth below. The following description of the terms and provisions of the Units
and certain other matters does not purport to be complete and is subject to, and
qualified in its entirety by, reference to applicable provisions of Delaware law
and the Partnership Agreement. A copy of the Partnership Agreement in
substantially the form in which it will be adopted (subject to such
modifications as do not materially and adversely affect the rights of the
holders of Units to be issued in the Consolidation) is attached as Appendix A to
this Consent Solicitation. Each Person acquiring Units in the Consolidation or
thereafter will be deemed bound by the terms and conditions of the Partnership
Agreement. For a comparison of the voting and certain other rights of Limited
Partners in the Hotel Partnerships, holders of Units in the Company and
shareholders of CRFLT, see "Comparison of Ownership of Hotel Partnership
Interests, Units and Common Shares -- Voting Rights."
General
Holders of Units (other than CRFLT in its capacity as general
partner) will hold a limited partnership interest in the Company, and all
holders of Units (including CRFLT in its capacity as general partner) will be
entitled to share in cash distributions from, and in the profits and losses of,
the Company. Because CRFLT will hold a number of Units equal to the number of
Common Shares outstanding, each Unit generally will receive distributions in the
same amount paid on each Common Share. See "Distribution and Other Policies --
Distribution Policy."
Holders of Units will have the rights to which limited partners are
entitled under the Partnership Agreement and the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act"). The Units to be issued in the
Consolidation will not be registered pursuant to any federal or state securities
laws, and they will not be listed on any exchange or quoted on any national
market system. The Partnership Agreement imposes certain restrictions on the
transfer of Units, as described below.
Formation
The Company was formed as a Delaware limited partnership under the
Delaware Act on December 4, 1997. Upon the consummation of the Consolidation,
CRFLT will be admitted to the Company as the sole general partner of the
Company. Following the Consolidation and the Offering, CRFLT is expected to hold
a substantial amount of the interests in the Company. Of the interests in the
Company allocated to CRFLT, a 1% interest in the Company will be held by CRFLT
as the general partner of the Company, and the remaining interests in the
Company allocated to CRFLT will be held by CRFLT as a limited partner in the
Company.
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Purposes, Business and Management
The purpose of the Company includes the conduct of any business that
may be lawfully conducted by a limited partnership formed under the Delaware
Act, except that the Partnership Agreement requires the business of the Company
to be conducted in such a manner that will permit CRFLT to qualify as a REIT
under Section 856 of the Code, unless CRFLT ceases to qualify as a REIT for
reasons other than the conduct of the business of the Company. Subject to the
foregoing limitation, the Company may enter into partnerships, joint ventures or
similar arrangements and may own interests directly or indirectly in any other
entity.
CRFLT, as general partner of the Company, has the exclusive power and
authority to conduct the business of the Company subject to the consent of the
limited partners in certain limited circumstances discussed below. No limited
partner may take part in the operation, management or control of the business of
the Company by virtue of being a holder of Units.
In particular, the limited partners expressly acknowledge in the
Partnership Agreement that CRFLT is acting on behalf of the Company's limited
partners and CRFLT's shareholders collectively, and is under no obligation to
consider the tax consequences to limited partners when making decisions for the
benefit of the Company. Subject to the Lock-out Provisions (which are intended
for the benefit of the Hotel Partnership GPs in CBM1 and CBM2 and can be waived
with the consent of Host), CRFLT intends to make decisions in its capacity as
general partner of the Company so as to maximize the profitability of CRFLT and
the Company as a whole, independent of the tax effects on the limited partners.
See "Federal Income Tax Considerations -- Tax Treatment of Limited Partners Who
Hold Units Following the Consolidation." CRFLT and the Company will have no
liability to a limited partner as a result of any liabilities or damages
incurred or suffered by, or benefits not derived by, a limited partner as a
result of an action or inaction of CRFLT as general partner of the Company as
long as CRFLT acted in good faith.
Ability of CRFLT to Engage in Other Businesses; Conflicts of Interest
CRFLT, as general partner, may not conduct any business other than
the business of the Company without the consent of the holders of a majority of
the limited partnership interests (not including the limited partnership
interests held by CRFLT in its capacity as a limited partner in the Company).
Other persons (including officers, trustees, employees, agents and other
affiliates of CRFLT) will not be prohibited under the Partnership Agreement from
engaging in other business activities. See "Distribution and Other Policies --
Conflicts of Interest Policies." However, CRFLT, on behalf of the Company, has
adopted certain policies and entered into certain agreements with affiliates of
CRFLT and the Company regarding noncompete provisions and avoidance of conflicts
of interest. In addition, the Partnership Agreement does not prevent another
person or entity that acquires control of CRFLT in the future from conducting
other businesses or owning other assets, even though such businesses or assets
may be ones that it would be in the best interests of the limited partners for
the Company to own.
Distributions; Allocations of Income and Loss
The Partnership Agreement provides for the quarterly distribution of
Available Cash (as defined below), to the extent required under the Code to
preserve CRFLT's qualification as a REIT, as determined in the manner provided
in the Partnership Agreement, to CRFLT and the limited partners in proportion to
their percentage interests in the Company. "Available Cash" is generally defined
as net income plus depreciation and amortization and any reduction in reserves
and minus interest and principal payments on debt, capital expenditures, any
additions to reserves and other adjustments. At the time of the Consolidation,
neither CRFLT nor the limited partners will be entitled to any preferential or
disproportionate distributions of Available Cash. The Partnership
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Agreement provides for the allocation to CRFLT, as general partner, and the
limited partners of items of Company income and loss as described in "Federal
Income Tax Considerations -- Tax Treatment of Limited Partners Who Hold Units
Following the Consolidation -- Allocations of Company Income, Gain, Loss and
Deductions."
Borrowing by the Company
CRFLT is authorized to cause the Company to borrow money and to issue
and guarantee debt as it deems necessary for the conduct of the activities of
the Company, including to finance and refinance the assets of the Company. Such
debt may be secured by mortgages, deeds of trust, liens or encumbrances on
properties of the Company. CRFLT also may cause the Company to borrow money to
enable the Company to make distributions, including distributions in an amount
sufficient to permit distributions to holders of Units, including CRFLT, in
amounts sufficient to permit CRFLT, as long as it qualifies as a REIT, to avoid
the payment of any federal income tax. See "Distribution and Other Policies --
Financing Policies." Pursuant to the Lock-out Provisions, the Company may not,
earlier than one year prior to its maturity, repay the existing indebtedness of
the Courtyard Hotels during the Lock-out Period (other than the CBM2
Certificates, which are to be prepaid at the closing of the Consolidation)
without the consent of the holders of the Units issued in the Consolidation to
the original Hotel Partnership GP of CBM1 or CBM2, as the case may be, unless
the repayment is in connection with either a refinancing of the outstanding debt
(on a basis that is nonrecourse to the Company and the Hotel Partnership GP and
with the least amount of principal amortization as is available on commercially
reasonable terms) or an involuntary sale pursuant to foreclosure of a mortgage
securing the debt (or other similar event). In addition, during the Lock-out
Period, the Company is obligated to use commercially reasonable efforts,
commencing one year prior to the stated maturity, to refinance at maturity (on a
basis that is nonrecourse to the Company and the Hotel Partnership GP and with
the least amount of principal amortization as is available on commercially
reasonable terms) the existing indebtedness of the Courtyard Hotels (other than
the CBM2 Certificates, which are to be prepaid at the closing of the
Consolidation) at not less than the principal amount outstanding on the maturity
date. Finally, during the Lock-out Period, the Company cannot incur debt secured
by any of the Courtyard Hotels if the amount of the new debt would exceed the
greater of 60% of the value of the property securing the debt or the amount of
existing debt being refinanced (plus the costs associated therewith).
Reimbursement of CRFLT; Transactions with CRFLT and its Affiliates
CRFLT will not receive any compensation for its services as general
partner of the Company. CRFLT, however, as a partner in the Company, has the
same right to allocations and distributions as other partners in the Company. In
addition, the Company will reimburse CRFLT for all expenses it incurs relating
to the Consolidation, the ongoing operation of CRFLT and any other offering of
additional Units or Common Shares (or rights, options, warrants or convertible
or exchangeable securities), including expenses in connection with the
registration of Common Shares for issuance in exchange for Units upon the
assumption by CRFLT of a Unit Redemption Right exercised by a limited partner of
the Company. See "-- Unit Redemption Right."
Except as expressly permitted by the Partnership Agreement, CRFLT and
its affiliates will not engage in any transactions with the Company except on
terms that are fair and reasonable and no less favorable to the Company than
would be obtained from an unaffiliated third party.
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Liability of CRFLT and Limited Partners
CRFLT, as general partner of the Company, will be liable for all
general recourse obligations of the Company to the extent not paid by the
Company. CRFLT will not be liable for the nonrecourse obligations of the
Company.
The limited partners of the Company will not be required to make
additional capital contributions to the Company. Assuming that a limited partner
does not take part in the control of the business of the Company and otherwise
acts in conformity with the provisions of the Partnership Agreement, the
liability of a limited partner for obligations of the Company under the
Partnership Agreement and the Delaware Act will be limited, subject to certain
exceptions, generally to the loss of such limited partner's investment in the
Company represented by his Units. Under the Delaware Act, a limited partner may
not receive a distribution from the Company if, at the time of the distribution
and after giving effect thereto, the liabilities of the Company, other than
liabilities to parties on account of their interests in the Company and
liabilities for which recourse is limited to specified property of the Company,
exceed the fair value of the Company's assets, other than the fair value of any
property subject to nonrecourse liabilities of the Company, but only to the
extent of such liabilities. The Delaware Act provides that a limited partner who
receives a distribution knowing at the time that it violates the foregoing
prohibition is liable to the Company for the amount of the distribution. Unless
otherwise agreed, such a limited partner will not be liable for the return of
such distribution after the expiration of three years from the date of such
distribution.
The Company expects to qualify to conduct business in various states
in which the conduct of its business requires such qualification. Maintenance of
limited liability may require compliance with certain legal requirements of
those jurisdictions and certain other jurisdictions. Limitations on the
liability of a limited partner for the obligations of a limited partnership have
not been clearly established in many jurisdictions. Accordingly, if it were
determined that the right, or exercise of the right by the limited partners, to
make certain amendments to the Partnership Agreement or to take other action
pursuant to the Partnership Agreement constituted "control" of the Company's
business for the purposes of the statutes of any relevant jurisdiction, the
limited partners might be held personally liable for the Company's obligations.
The Company will operate in a manner CRFLT deems reasonable, necessary and
appropriate to preserve the limited liability of the limited partners.
Exculpation and Indemnification of CRFLT
The Partnership Agreement generally provides that CRFLT, as general
partner of the Company, will incur no liability to the Company or any limited
partner for losses sustained, liabilities incurred or benefits not derived as a
result of errors in judgment or mistakes of fact or law or of any act or
omission, if CRFLT carried out its duties in good faith. In addition, CRFLT is
not responsible for any misconduct or negligence on the part of its agents,
provided CRFLT appointed such agents in good faith. CRFLT may consult with legal
counsel, accountants, appraisers, management consultants, investment bankers and
other consultants and advisors, and any action it takes or omits to take in
reliance upon the opinion of such persons, as to matters that CRFLT reasonably
believes to be within their professional or expert competence, shall be
conclusively presumed to have been done or omitted in good faith and in
accordance with such opinion.
The Partnership Agreement also provides for indemnification of CRFLT,
the trustees and officers of CRFLT and such other persons as CRFLT may from time
to time designate against any judgments, penalties, fines, settlements and
reasonable expenses actually incurred by such person in connection with the
proceeding unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit in money, property or services; or (iii) in the
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case of any criminal proceeding, the indemnified person had reasonable cause to
believe that the act or omission was unlawful.
Sales of Assets and Lock-out Provisions
Under the Partnership Agreement, CRFLT generally has the exclusive
authority to determine whether, when and on what terms the assets of the Company
(including the Hotels) will be sold, subject to the Lock-out Provisions. In
addition, CRFLT is not required to take into account the tax consequences of the
limited partners in deciding whether to cause the Company to undertake a
specific transaction. A sale of all or substantially all of the assets of the
Company (or a merger of the Company with another entity), however, requires an
affirmative vote of a majority of the outstanding Units (including Units held by
CRFLT) but also is subject to the Lock-out Provisions.
Under the Lock-out Provisions, during such time that Host or its
affiliates hold the Units issued in the Consolidation for its interests in CBM1
or CBM2 (the "Courtyard Units"), the Company may not sell or otherwise dispose
of any of the Courtyard Hotels for a period of __ years from the Closing Date of
the Consolidation (the "Lock-out Period") (except pursuant to a sale or other
disposition of all or substantially all of the Company's assets approved as
described below, an involuntary sale pursuant to foreclosure of a mortgage
secured by one of the Courtyard Hotels or a bankruptcy proceeding, and certain
transactions, including a "Section 1031 like-kind exchange," that would not
result in the recognition of any gain for tax purposes by the holders of the
Courtyard Units) without the consent of the holders of the Units issued in the
Consolidation to the original Hotel Partnership GP of CBM1 or CBM2, as the case
may be. If, at any time during the Lock-out Period, Host disposes of its
Courtyard Units, the Lock-out Provisions are no longer applicable to any sale of
any of the Courtyard Hotels. Under the Lock-out Provisions, a sale or other
disposition of all or substantially all of the assets of the Company during the
Lock-out Period generally would require the consent of the holders of the Units
issued in the Consolidation to the original Hotel Partnership GP of CBM1 or
CBM2, as the case may be. The consent requirement under the Lock-out Provisions,
however, would not apply in the event of a merger or consolidation involving the
Company and substantially all of its assets if (i) the transaction would not
result in the recognition of any gain with respect to the Courtyard Units, (ii)
the Lock-out Provisions would continue to apply with respect to each of the
Courtyard Hotels owned by CBM1 and CBM2 at the time of the Consolidation and
(iii) the surviving entity agrees to a number of restrictions and conditions for
the benefit of the Hotel Partnership GPs of CBM1 and CBM2 designed to preserve
the benefit of certain provisions and restrictions in the Partnership Agreement
for such Hotel Partnership GPs (and Host and its affiliates).
Removal of the General Partner; Transfer of CRFLT's Interests
The Partnership Agreement provides that the limited partners may not
remove CRFLT as general partner of the Company with or without cause (unless
neither CRFLT nor its parent entity is a "public company," in which case CRFLT
may be removed for cause). In addition, CRFLT may not transfer any of its
interests as general or limited partner of the Company, except in connection
with a merger or sale of all or substantially all of its assets, provided that
(i) the limited partners of the Company either will receive, or will have the
right to receive, substantially the same consideration as holders of Common
Shares, (ii) following such merger or other consolidation, substantially all of
the assets of the surviving entity consist of Units and (iii) such transaction
has been approved by the holders of a majority of the interests in the Company
(including interests held by CRFLT). CRFLT initially will hold a majority of the
Units and thus would control the outcome of this vote. The Lock-out Provisions
do not apply to a sale or other transfer by CRFLT of its interests as a partner
in the Company, but they would apply to transfers of assets of the Company
undertaken during the Lock-out Period in connection with or as part of any such
transaction by CRFLT. See "-- Sales of Assets and Lock-out Provisions."
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Although CRFLT cannot transfer its partnership interests except in a
transaction in which substantially all of the assets of the surviving entity
consist of Units, the Partnership Agreement does not prevent a transaction in
which another entity acquires control (or all of the shares of beneficial
interest) of CRFLT and that other entity owns assets and conducts businesses
outside of the Company.
Certain Voting Rights of Holders of Units During the Initial Holding Period
During the Initial Holding Period, if a vote of the shareholders of
CRFLT is required, then (i) a sale of all or substantially all of the assets of
the Company, (ii) a merger involving the Company and (iii) any issuance of Units
in connection with an issuance of Common Shares representing 20% or more of the
outstanding Common Shares which would require shareholder approval under the
rules of the NYSE, would require the approval of a majority of all outstanding
Units (or, in the case of clause (iii), a majority of the Units that are voted,
provided that at least a majority of the Units are voted), including Units held
by CRFLT, voting as a single class with voting its Units in the same proportion
as its shareholders vote. In addition, during the Initial Holding Period, any
taxable sale or sales of Hotels representing more than 10% of the aggregate
Appraised Value of the Hotels of any Hotel Partnership would require, in
addition to any other approval requirements, the approval of a majority of all
outstanding Units held by persons who formerly were Limited Partners of such
Hotel Partnership, voting as a separate class.
Restrictions on Transfers of Units by Limited Partners
The Partnership Agreement provides that no holder of Units shall,
without the prior written consent of CRFLT, sell, assign, distribute or
otherwise transfer all or any portion of his interest in the Company, except
that a limited partner may transfer, with or without the consent of CRFLT, all
or a portion of its limited partnership interest (i) in the case of a limited
partner who is an individual, to a member of his immediate family, any trust
formed for the benefit of himself and/or members of his immediate family, or any
partnership, limited liability company, joint venture, corporation or other
business entity comprised only of himself and/or members of his immediate family
and entities the ownership interests in which are owned by or for the benefit of
himself and/or members of his immediate family, (ii) in the case of a limited
partner which is a trust, to the beneficiaries of such trust, (iii) in the case
of a limited partner which is a partnership, limited liability company, joint
venture, corporation or other business entity to which Units were transferred
pursuant to (i) above, to its partners, owners, or stockholders, as the case may
be, who are members of the immediate family of or are actually the person(s) who
transferred Units to it pursuant to (i) above, (iv) in the case of a limited
partner which acquired Units as of the closing of the Consolidation and which is
a partnership, limited liability company, joint venture, corporation or other
business entity, to its partners, owners, or stockholders, as the case may be,
or the Persons owning the beneficial interests in any of its partners, owners or
stockholders which are entities, (v) pursuant to a gift or other transfer
without consideration, (vi) pursuant to applicable laws of descent or
distribution, (vii) to another limited partner and (viii) pursuant to a grant of
security interest or other encumbrance affected in a bona fide transaction or
as a result of the exercise of remedies related thereto. All of the foregoing
transfers are subject to the provisions of the Partnership Agreement which
require compliance with securities laws, prohibit transfers affecting the tax
status of the Company, prohibit transfers to holders of nonrecourse liabilities
of the Company, and are also subject to the rules on substitution of limited
partners. In addition, Limited Partners will be permitted to dispose of their
Units following the expiration of the Initial Holding Period by exercising their
Unit Redemption Right. See "-- Redemption of Units" below.
The right of any permitted transferee of Units to become a substitute
limited partner is subject to the consent of CRFLT, which consent CRFLT may
withhold in its sole and absolute discretion. If CRFLT does not consent to the
admission of a transferee of Units as a substitute limited partner, the
transferee will succeed to all economic rights and benefits attributable to such
Units (including the Unit Redemption Right), but will not become a limited
partner or possess any other rights of limited partners (including the right to
vote).
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Transfers of Units may be effected only by means of entries in the
record of the Company and CRFLT will require evidence satisfactory to it of
compliance with all transfer restrictions prior to recording any transfer.
Unit Redemption Right
Subject to certain limitations, holders of Units (other than CRFLT)
may exercise the Unit Redemption Right by providing notice to the Company at any
time after the Initial Holding Period. Unless CRFLT elects to assume and perform
the Company's obligation with respect to the Unit Redemption Right, as described
below, the redeeming holder of Units will receive cash from the Company in an
amount equal to the market value of the Units to be redeemed. The market value
of a Unit for this purpose will be equal to the average of the closing trading
price of a Common Share on the NYSE for the ten trading days before the day on
which the redemption notice was given. In lieu of the Company's acquiring the
Units for cash, CRFLT will have the right (except as described below, if the
Common Shares are not publicly traded) to elect to acquire the Units directly
from a holder of Units exercising the Unit Redemption Right, in exchange for
either cash or Common Shares, and, upon such acquisition, CRFLT will become the
owner of such Units. In either case, acquisition of such Units by CRFLT will be
treated as a sale of the Units to CRFLT for federal income tax purposes. See
"Federal Income Tax Considerations -- Tax Consequences of Formation of the
Company -- Unit Redemption Right." Upon exercise of the Unit Redemption Right,
the right of the holder of Units to receive distributions for the Units so
redeemed or exchanged will cease. At least 1,000 Units (or all remaining Units
owned by the holder of Units if less than 1,000 Units) must be redeemed each
time the Unit Redemption Right is exercised. The redemption generally will occur
on the tenth business day after notice of the exercise of the Unit Redemption
Right by a holder of Units is given to the Company, except that no redemption or
exchange can occur if delivery of Common Shares would be prohibited either under
the provisions of CRFLT's Declaration of Trust designed primarily to protect
CRFLT's qualification as a REIT or under applicable federal or state securities
laws as long as the Common Shares are publicly traded. In this regard, Host and
its subsidiaries are prohibited from exercising the Unit Redemption Right with
respect to Units they hold if the issuance by CRFLT to them of Common Shares in
satisfaction of the Unit Redemption Right would be prohibited under the special
restrictions contained in the Declaration of Trust that are applicable to their
acquisition and ownership of Common Shares. See "Description of Shares of
Beneficial Interest -- Restrictions on Ownership and Transfer."
In the event that the Common Shares are not publicly traded but
another entity whose stock is publicly traded owns more than 50% of the
beneficial interests of CRFLT (referred to as the "Parent Entity"), the Unit
Redemption Right will be determined by reference to the publicly traded shares
of the Parent Entity and the general partner will have the right to elect to
acquire the Units to be redeemed for publicly traded stock of the Parent Entity.
In the event that the Common Shares are not publicly traded and there is no
Parent Entity with publicly traded stock, the Unit Redemption Right would be
based upon the fair market value of the Company's assets at the time the Unit
Redemption Right is exercised (as determined in good faith by CRFLT), and CRFLT
and the Company would be obligated to satisfy the Unit Redemption Right in cash,
payable on the thirtieth business day after notice to the Company of exercise of
the Unit Redemption Right.
No Withdrawal by Limited Partners
No limited partner has the right to withdraw from or reduce his
capital contribution to the Company, except as a result of the redemption,
exchange or transfer of Units pursuant to the terms of the Partnership
Agreement.
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Issuance of Limited Partnership Interests
CRFLT is authorized, without the consent of the limited partners, to
cause the Company to issue additional Units to CRFLT, to the limited partners or
to other persons for such consideration and upon on such terms and conditions as
CRFLT deems appropriate. The Company also may issue partnership interests in
different series or classes, which may be senior to the Units, including with
respect to distributions and upon liquidation. If additional Units are issued to
CRFLT, then CRFLT must issue additional Common Shares and must contribute to the
Company the proceeds received by CRFLT from such issuance. In addition, CRFLT
may cause the Company to issue to CRFLT additional partnership interests in
different series or classes of equity securities, which may be senior to the
Units, including with respect to distributions and upon liquidation, in
connection with an offering of securities of CRFLT having substantially similar
rights upon the contribution of the proceeds therefrom to the Company.
Consideration for additional partnership interests may be cash or any property
or other assets permitted by the Delaware Act. No limited partner has
preemptive, preferential or similar rights with respect to capital contributions
to the Company or the issuance or sale of any partnership interests therein.
Meetings; Voting
Meetings of the limited partners may be called only by CRFLT, on its
own motion or upon written request of limited partners owning at least 25% of
the then outstanding Units (including CRFLT). Limited partners may vote either
in person or by proxy at meetings. Any action that is required or permitted to
be taken by the limited partners may be taken either at a meeting of the limited
partners or without a meeting if consents in writing setting forth the action so
taken are signed by limited partners owning not less than the minimum number of
Units that would be necessary to authorize or take such action at a meeting of
the limited partners at which all limited partners entitled to vote on such
action were present. On matters in which limited partners are entitled to vote,
each limited partner (including CRFLT to the extent it holds Units) will have a
vote equal to the number of Units he holds. A transferee of Units who has not
been admitted as a substituted limited partner with respect to such Units will
have no voting rights with respect to such Units, even if such transferee holds
other Units as to which it has been admitted as a limited partner. The
Partnership Agreement does not provide for annual meetings of the limited
partners and CRFLT does not anticipate calling such meetings.
Amendment of the Partnership Agreement
Amendments to the Partnership Agreement may be proposed by CRFLT or
by limited partners owning at least 25% of the then outstanding Units.
Generally, the Partnership Agreement may be amended with the approval of CRFLT,
as general partner, and limited partners (including CRFLT) holding a majority of
the Units. Certain provisions regarding, among other things, the rights and
duties of CRFLT as general partner (e.g., restrictions on CRFLT's power to
conduct businesses other than owning Units) or the dissolution of the Company,
may not be amended without the approval of a majority of the Units not held by
CRFLT. Notwithstanding the foregoing, CRFLT, as general partner, will have the
power, without the consent of the limited partners, to amend the Partnership
Agreement as may be required to (i) add to the obligations of CRFLT as general
partner or surrender any right or power granted to CRFLT as general partner,
(ii) reflect the admission, substitution, termination or withdrawal of partners
in accordance with the terms of the Partnership Agreement, (iii) establish the
rights, powers, duties and preferences of any additional partnership interests
issued in accordance with the terms of the Partnership Agreement, (iv) reflect a
change of an inconsequential nature that does not materially adversely affect
any limited partner, or cure any ambiguity, correct or supplement any provisions
of the Partnership Agreement not inconsistent with law or with other provisions
of the Partnership Agreement, or make other changes concerning
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matters under the Partnership Agreement that are not otherwise inconsistent with
the Partnership Agreement or applicable law, or (v) satisfy any requirements of
federal, state or local law.
Certain amendments that would, among other things, (i) convert a
limited partner's interest into a general partner's interest, (ii) modify the
limited liability of a limited partner, (iii) alter the interest of a partner in
profits or losses, or the rights to receive any distributions (except as
permitted under the Partnership Agreement with respect to the admission of new
partners or the issuance of additional Units, either of which actions will have
the effect of changing the percentage interests of the partners and thus
altering their interests in profits, losses and distributions) or (iv) alter the
Unit Redemption Right, must be approved by CRFLT and each limited partner that
would be adversely affected by such amendment. In addition, any amendment that
would affect the Lock-out Provisions with respect to the Courtyard Hotels
originally owned by CBM1 and CBM2 during the Lock-out Period would require the
consent of the holders of Units issued in the Consolidation to the original
Hotel Partnership GP of CBM1 or CBM2, as the case may be, affected by such
amendment. Such consent would be required only if Host and/or the applicable
Hotel Partnership GP has not already disposed of the Units received with respect
to the CBM1 and CBM2 Hotel Partnership GP interests in a taxable transaction.
Books and Reports
CRFLT is required to keep the Company's books and records at the
principal office of the Company. The books of the Company are required to be
maintained for financial and tax reporting purposes on an accrual basis. The
limited partners will have the right, subject to certain limitations, to receive
copies of the most recent Securities and Exchange Commission filings by CRFLT
and the Company, the Company's federal, state and local income tax returns, a
list of limited partners, the Partnership Agreement, the partnership certificate
and all amendments thereto and certain information about the capital
contributions of the partners. CRFLT may keep confidential from the limited
partners any information that CRFLT believes to be in the nature of trade
secrets or other information the disclosure of which CRFLT in good faith
believes is not in the best interests of the Company or which the Company is
required by law or by agreements with unaffiliated third parties to keep
confidential.
CRFLT will furnish to each limited partner, no later than the date on
which CRFLT mails its annual report to its shareholders, an annual report
containing financial statements of the Company (or CRFLT, if it prepares
consolidated financial statements including the Company) for each fiscal year,
including a balance sheet and statements of operations, cash flow, partners'
equity and changes in financial position. The financial statements will be
audited by a nationally recognized firm of independent public accountants
selected by CRFLT. In addition, if and to the extent that CRFLT mails quarterly
reports to its shareholders, CRFLT will furnish to each limited partner, no
later than the date on which CRFLT mails such reports to its shareholders, a
report containing unaudited financial statements of the Company (or CRFLT) as of
the last day of the calendar quarter and such other information as may be
required by applicable law or regulation or as CRFLT deems appropriate.
CRFLT will use reasonable efforts to furnish to each limited partner,
within 90 days after the close of each taxable year, the tax information
reasonably required by the limited partners for federal and state income tax
reporting purposes.
Power of Attorney
Pursuant to the terms of the Partnership Agreement, each limited
partner and each assignee appoints CRFLT, any liquidator and the authorized
officers and attorneys-in-fact of each, as such limited partner's or assignee's
attorney-in-fact to do the following: execute, swear to, acknowledge,
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deliver, file and record in the appropriate public offices various certificates,
documents and other instruments (including, among other things, the Partnership
Agreement and the certificate of limited partnership and all amendments or
restatements thereof) that CRFLT deems appropriate or necessary to effectuate
the terms or intent of the Partnership Agreement. The Partnership Agreement
provides that such power of attorney is irrevocable, will survive the subsequent
incapacity of any limited partner and the transfer of all or any portion of such
limited partner's or assignee's Units and will extend to such limited partner's
or assignee's heirs, successors, assigns and personal representatives.
Dissolution, Winding Up and Termination
The Company will continue until December 31, 2097, unless sooner
dissolved and terminated. The Company will be dissolved prior to the expiration
of its term and its affairs wound up upon the occurrence of the earliest of: (i)
the withdrawal of CRFLT as general partner without the permitted transfer of
CRFLT's interest to a successor general partner (except in certain limited
circumstances); (ii) the sale of all or substantially all of the Company's
assets and properties (subject to the Lock-out Provisions during the Lock-out
Period); (iii) the entry of a decree of judicial dissolution of the Company
pursuant to the provisions of the Delaware Act; (iv) the entry of a final
non-appealable order for relief in a bankruptcy proceeding of the general
partner, or the entry of a final non-appealable judgment ruling that the general
partner is bankrupt or insolvent (except that, in either such case, in certain
circumstances the limited partners (other than CRFLT) may vote to continue the
Company and substitute a new general partner in place of CRFLT); or (v) on or
after December 31, 2057, on election by CRFLT, in its sole and absolute
discretion. Upon dissolution, CRFLT, as general partner, or any liquidator will
proceed to liquidate the assets of the Company and apply the proceeds therefrom
in the order of priority set forth in the Partnership Agreement.
Ownership Limitation
In order to avoid the Company being treated as a corporation for
federal income tax purposes, the Partnership Agreement expressly provides that
during the period of time that a subsidiary of Host is acting as a Lessee,
neither Host, Marriott International nor any owner of 10% or more of Host may
own, actually or constructively, more than 4.9% by value of interests in the
Company. The Partnership Agreement contains self-executing mechanisms intended
to enforce this prohibition. For a description of the consequences of the
Company being treated as a corporation for federal income tax purposes, see
"Federal Income Tax Considerations -- Tax Status of the Company." As general
partner of the Company, the CRFLT, in its sole and absolute discretion, may
waive or modify this ownership limitation if it is satisfied that ownership in
excess of this limit will not cause the Company to be treated as a corporation
for federal income tax purposes.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The summary of the terms of the shares of beneficial interest of
CRFLT set forth below does not purport to be complete and is subject to and
qualified in its entirety by reference to the Declaration of Trust and Bylaws of
CRFLT, copies of which have been filed as Exhibits to the Registration Statement
of which this Consent Solicitation is a part.
General
The Declaration of Trust of CRFLT provides that CRFLT may issue up to
___ million shares of beneficial interest, consisting of ____ million Common
Shares and ___ million preferred shares. As of _________ __, 1998, _____ Common
Shares were issued and outstanding.
As permitted by the Maryland REIT Law, the Declaration of Trust
contains a provision permitting the Board of Trustees, without any action by the
shareholders of CRFLT, to amend the Declaration of Trust to increase or decrease
the aggregate number of shares of beneficial interest or the number of shares of
any class of shares of beneficial interest that CRFLT has authority to issue.
Both the MGCL and CRFLT's Declaration of Trust provide that no
shareholder of CRFLT will be liable for any debt or obligation of CRFLT solely
as a result of his status as a shareholder of CRFLT. CRFLT's Bylaws further
provide that CRFLT shall indemnify each present or former shareholder against
any claim or liability to which the shareholder may become subject by reason of
his being or having been a shareholder and that CRFLT shall reimburse each
shareholder for all reasonable expenses incurred by him in connection with any
such claim or liability. However, with respect to tort claims, contractual
claims where shareholder liability is not so negated, claims for taxes and
certain statutory liability, the shareholders may, in some jurisdictions, be
personally liable to the extent that such claims are not satisfied by CRFLT.
Inasmuch as CRFLT carries public liability insurance which it considers
adequate, any risk of personal liability to shareholders is limited to
situations in which CRFLT's assets plus its insurance coverage would be
insufficient to satisfy the claims against CRFLT and its shareholders.
Common Shares
Subject to the preferential rights of any other shares of beneficial
interest and to the provisions of the Declaration of Trust regarding
restrictions on transfers of shares of beneficial interest, holders of Common
Shares are entitled to receive distributions if, as and when authorized and
declared by the Board of Trustees, out of assets legally available therefor and
to share ratably in the assets of CRFLT legally available for distribution to
its shareholders in the event of its liquidation, dissolution or winding-up
after payment of, or adequate provision for, all known debts and liabilities of
CRFLT. CRFLT currently intends to pay regular quarterly distributions.
Subject to the provisions of CRFLT's Declaration of Trust regarding
restrictions on transfer of shares of beneficial interest, each outstanding
Common Share entitles the holder to one vote on all matters submitted to a vote
of shareholders, including the election of trustees, and, except as provided
with respect to any other class or series of shares of beneficial interest, the
holders of Common Shares will possess the exclusive voting power. There is no
cumulative voting in the election of trustees, which means that the holders of a
majority of the outstanding Common Shares can elect all of the trustees then
standing for election and the holders of the remaining shares of beneficial
interest, if any, will not be able to elect any trustees.
Holders of Common Shares have no preferences, conversion, sinking
fund, redemption rights or preemptive rights to subscribe for any securities of
CRFLT. Assuming, as expected, that the Common
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Shares are listed on the NYSE, holders of the Common Shares will generally have
no dissenters' appraisal rights. Subject to the exchange provisions of CRFLT's
Declaration of Trust regarding restrictions on transfer, Common Shares have
equal distribution, liquidation and other rights.
Pursuant to the Maryland REIT Law, a Maryland REIT generally cannot
dissolve, amend its declaration of trust or merge, unless approved by the
affirmative vote or written consent of shareholders holding at least two-thirds
of the shares entitled to vote on the matter unless a lesser percentage (but not
less than a majority of all of the votes entitled to be cast on the matter) is
set forth in CRFLT's Declaration of Trust. CRFLT's Declaration of Trust does not
provide for a lesser percentage in such situations. Under the Maryland REIT Law,
a declaration of trust may permit the trustees by a two-thirds vote to amend the
declaration of trust from time to time to qualify as a REIT under the Code or
the Maryland REIT Law without the affirmative vote or written consent of the
shareholders. CRFLT's Declaration of Trust permits such action by the Board of
Trustees.
Preferred Shares
The Declaration of Trust authorizes the Board of Trustees to issue
______ million preferred shares and to classify any unissued preferred shares or
to reclassify any previously classified but unissued preferred shares of any
series from time to time, in one or more series. Prior to issuance of shares of
each series, the Board of Trustees is required by the Maryland REIT Law and the
Declaration of Trust to set, subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of shares of beneficial interest,
the terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption for each such series. Thus, the Board of Trustees could
authorize the issuance of preferred shares with terms and conditions which could
have the effect of delaying, deferring or preventing a transaction or a change
in control of CRFLT that might involve a premium price for holders of Common
Shares or otherwise be in their best interest. As of the date hereof, no
preferred shares are outstanding and CRFLT has no present plans to issue any
preferred shares.
Power to Issue Additional Common Shares and Preferred Shares
CRFLT believes that the power of the Board of Trustees to issue
additional authorized but unissued Common Shares or preferred shares and to
classify or reclassify unissued Common Shares or preferred shares and thereafter
to cause CRFLT to issue such classified or reclassified shares of beneficial
interest in one or more series will provide CRFLT with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. The additional classes or series, as well as the Common
Shares, will be available for issuance without further action by CRFLT's
shareholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which CRFLT's securities may
be listed or traded. Although the Board of Trustees has no intention at the
present time of doing so, it could authorize CRFLT to issue a class or series
that could, depending upon the terms of such class or series, delay, defer or
prevent a transaction or a change in control of CRFLT that might involve a
premium price for holders of Common Shares or otherwise be in their best
interest.
Restrictions on Ownership and Transfer
For CRFLT to qualify as a REIT under the Code, no more than 50% in
value of its outstanding shares of beneficial interest may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which an election to be treated as a REIT has been made) or during a
proportionate part of a shorter taxable year. In addition, if CRFLT, or an owner
(actually or constructively) of 10% or more of CRFLT, actually or constructively
owns 10% or more of a tenant of CRFLT (or a tenant of any
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partnership in which CRFLT is a partner), the rent received by CRFLT (either
directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. A
REIT's shares also must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve months or during a proportionate part
of a shorter taxable year (other than the first year for which an election to be
treated as a REIT has been made).
Because the Board of Trustees believes it is desirable for CRFLT to
qualify as a REIT, the Declaration of Trust, subject to certain exceptions,
provides that no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than (i) 9.9% of the lesser of the
number or value of Common Shares outstanding or (ii) 9.9% of the lesser of the
number or value of the issued and outstanding preferred shares of any class or
series of CRFLT (the "Ownership Limit"). The Ownership Limit also prohibits, so
long as the Lessees are parties to the Leases and Host owns a 10% or greater
interest in the Lessees, Host, Marriott International, their subsidiaries and
their affiliates (including members of the Marriott family) from collectively
owning shares of beneficial interests in excess of the Ownership Limit. The
ownership attribution rules under the Code are complex and may cause Common
Shares owned actually or constructively by a group of related individuals and/or
entities to be owned constructively by one individual or entity. As a result,
the acquisition of less than 9.9% of the Common Shares (or the acquisition of an
interest in an entity that owns, actually or constructively, Common Shares) by
an individual or entity, could, nevertheless cause that individual or entity, or
another individual or entity, to own constructively in excess of 9.9% of the
outstanding Common Shares and thus subject such Common Shares to the Ownership
Limit. The Board of Trustees may grant an exemption from the Ownership Limit
with respect to one or more persons who would not be treated as "individuals"
for purposes of the Code if it is satisfied, based upon evidence satisfactory to
the Board of Trustees in its sole discretion, that such ownership will not cause
a person who is an individual to be treated as owning Common Shares in excess of
the Ownership Limit, applying the applicable constructive ownership rules, and
will not otherwise jeopardize CRFLT's status as a REIT (for example, by causing
any tenant of the Company or the Hotel Partnerships to be considered a "related
party tenant" for purposes of the REIT qualification rules). As a condition of
such waiver, the Board of Trustees may require undertakings or representations
from the applicant with respect to preserving the REIT status of CRFLT. Under
certain circumstances, the Board of Trustees may, in its sole and absolute
discretion, grant an exemption for individuals to acquire Preferred Shares in
excess of the Ownership Limit, provided that certain conditions are met and any
representations and undertakings that may be required by the Board of Trustees
are made.
The Board of Trustees of CRFLT will have the authority to increase
the Ownership Limit from time to time, but will not have the authority to do so
to the extent that after giving effect to such increase, five beneficial owners
of Common Shares could beneficially own in the aggregate more than 49.5% of the
outstanding Common Shares.
The Declaration of Trust further prohibits (a) any person from
actually or constructively owning shares of beneficial interest of CRFLT that
would result in CRFLT being "closely held" under Section 856(h) of the Code or
otherwise cause CRFLT to fail to qualify as a REIT and (b) any person from
transferring shares of beneficial interest of CRFLT if such transfer would
result in shares of beneficial interest of CRFLT being owned by fewer than 100
persons.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of beneficial interest of CRFLT that will or
may violate any of the foregoing restrictions on transferability and ownership
is required to give notice immediately to CRFLT and provide CRFLT with such
other information as CRFLT may request in order to determine the effect of such
transfer on CRFLT's status as a REIT.
If any purported transfer of shares of beneficial interest of CRFLT
or any other event would otherwise result in any person violating the Ownership
Limit or the other restrictions in the Declaration of the Trust, then any such
purported transfer will be void and of no force or effect with
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respect to the purported transferee (the "Prohibited Transferee") as to that
number of shares that exceeds the Ownership Limit (referred to as "excess
shares") and the Prohibited Transferee shall acquire no right or interest (or,
in the case of any event other than a purported transfer, the person or entity
holding record title to any such shares in excess of the Ownership Limit (the
"Prohibited Owner") shall cease to own any right or interest) in such excess
shares. Any such excess shares described above will be transferred
automatically, by operation of law, to a trust, the beneficiary of which will be
a qualified charitable organization selected by CRFLT (the "Beneficiary"). Such
automatic transfer shall be deemed to be effective as of the close of business
on the Business Day (as defined in the Declaration of Trust) prior to the date
of such violating transfer. Within 20 days of receiving notice from CRFLT of the
transfer of shares to the trust, the trustee of the trust (who shall be
designated by CRFLT and be unaffiliated with CRFLT and any Prohibited Transferee
or Prohibited Owner) will be required to sell such excess shares to a person or
entity who could own such shares without violating the Ownership Limit, and
distribute to the Prohibited Transferee an amount equal to the lesser of the
price paid by the Prohibited Transferee for such excess shares or the sales
proceeds received by the trust for such excess shares. In the case of any excess
shares resulting from any event other than a transfer, or from a transfer for no
consideration (such as a gift), the trustee will be required to sell such excess
shares to a qualified person or entity and distribute to the Prohibited Owner an
amount equal to the lesser of the fair market value of such excess shares as of
the date of such event or the sales proceeds received by the trust for such
excess shares. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee or Prohibited Owner, as applicable,
will be distributed to the Beneficiary. Prior to a sale of any such excess
shares by the trust, the trustee will be entitled to receive, in trust for the
Beneficiary, all dividends and other distributions paid by CRFLT with respect to
such excess shares, and also will be entitled to exercise all voting rights with
respect to such excess shares. Subject to Maryland law, effective as of the date
that such shares have been transferred to the trust, the trustee shall have the
authority (at the trustee's sole discretion and subject to applicable law) (i)
to rescind as void any vote cast by a Prohibited Transferee prior to the
discovery by CRFLT that such shares have been transferred to the trust and (ii)
to recast such vote in accordance with the desires of the trustee acting for the
benefit of the Beneficiary. However, if CRFLT has already taken irreversible
corporate action, then the trustee shall not have the authority to rescind and
recast such vote. Any dividend or other distribution paid to the Prohibited
Transferee or Prohibited Owner (prior to the discovery by CRFLT that such shares
had been automatically transferred to a trust as described above) will be
required to be repaid to the trustee upon demand for distribution to the
Beneficiary. If the transfer to the trust as described above is not
automatically effective (for any reason) to prevent violation of the Ownership
Limit, then the Declaration of Trust provides that the transfer of the excess
shares will be void.
In addition, shares of beneficial interest of CRFLT held in the trust
shall be deemed to have been offered for sale to CRFLT, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the trust (or, in the case of a
devise or gift, the market value at the time of such devise or gift) and (ii)
the market value of such shares on the date of CRFLT, or its designee, accepts
such offer. CRFLT will have the right to accept such offer until the trustee has
sold the shares of beneficial interest held in the Trust. Upon such a sale to
CRFLT, the interest of the Beneficiary in the shares sold will terminate and the
trustee will distribute the net proceeds of the sale to the Prohibited Owner.
The foregoing restrictions on transferability and ownership will not
apply if the Board of Trustees determines that it is no longer in the best
interests of CRFLT to attempt to qualify, or to continue to qualify, as a REIT.
All certificates representing shares of beneficial interest shall
bear a legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution
provisions of the Code, more than 5% (or such other percentage between 1/2 of 1%
and 5% as provided in the rules and regulations
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promulgated under the Code) of the lesser of the number or value of the
outstanding shares of beneficial interest of CRFLT must give a written notice to
the Company within 30 days after the end of each taxable year. In addition, each
shareholder will, upon demand, be required to disclose to CRFLT in writing such
information with respect to the direct, indirect and constructive ownership of
shares of beneficial interest as the Board of Trustees deems reasonably
necessary to comply with the provisions of the Code applicable to a REIT, to
comply with the requirements of any taxing authority or governmental agency or
to determine any such compliance.
These ownership limitations could have the effect of delaying,
deferring or preventing a takeover or other transaction in which holders of
some, or a majority, of Common Shares might receive a premium for their Common
Shares over the then prevailing market price or which such holders might believe
to be otherwise in their best interest.
Changes in Control Pursuant to Maryland Law
Possible Limitations on Changes in Control Pursuant to Maryland Law.
Under the MGCL, as applicable to REITs, certain "business combinations"
(including certain issuances of equity securities) between a Maryland REIT and
any Interested Shareholder or an affiliate of the Interested Shareholder, are
prohibited for five years after the most recent date on which the Interested
Shareholder becomes an Interested Shareholder. Thereafter, any such business
combination must be approved by two super-majority shareholder votes unless,
among other conditions, the trust's common shareholders receive a minimum price
(as defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Shareholder for
its common shares.
In addition, also under the MGCL, as applicable to real estate
investments, "control shares" acquired in a "control share acquisition" have no
voting rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares owned by the acquiror, by
officers or by trustees who are employees of the trust. "Control shares" are
voting shares which, if aggregated with all other such shares previously
acquired by the acquiror or in respect of which the acquiror is able to exercise
or direct the exercise of voting power (except solely by virtue of a revocable
proxy), would entitle the acquiror to exercise voting power in electing trustees
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority, or (iii) a
majority or more of all voting power. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including an undertaking
to pay expenses), may compel the board of trustees of the trust to call a
special meeting of shareholders to be held within 50 days of demand to consider
the voting rights of the shares. If no request for a meeting is made, the trust
may itself present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the trust may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other shareholders may exercise appraisal
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rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid by the
acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the trust is a party to
the transaction or (b) to acquisitions approved or exempted by the declaration
of trust or bylaws of the trust.
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DESCRIPTION OF THE NOTES
The Notes will be issued under an indenture (the "Indenture"),
between the Company and _____________________, as trustee (the "Indenture
Trustee"). A copy of the form of Indenture is filed as an exhibit to the
Registration Statement of which this Consent Solicitation is a part. The terms
of the Notes include those provisions contained in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and holders of Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to and qualified in its
entirety by reference to the Indenture. As used in this section, the term
"Company" means CRF Lodging Company, L.P. and not any of its Subsidiaries,
unless otherwise expressly stated or the context otherwise requires.
General
A separate series of Notes will be issued to Dissenting Partners in
each Hotel Partnership who elect to receive Notes in exchange for the Units
issued to them in the Consolidation. The terms of each series of Notes will be
substantially identical, except with respect to the provisions for mandatory
prepayment of principal, as described below (see "Principal and Interest"). The
Notes will be direct, senior unsecured and unsubordinated obligations of the
Company and will rank pari passu with each other and with all other unsecured
and unsubordinated indebtedness of the Company from time to time outstanding.
The Notes will be effectively subordinated to mortgages and other secured
indebtedness of the Company to the extent of the value of the property securing
such indebtedness. The Notes also will be effectively subordinated to all
existing and future third party indebtedness and other liabilities of the
Company's Subsidiaries (including the Hotel Partnerships). As of _____ __, 1997,
on a pro forma basis assuming the Full Consolidation Scenario, such secured
indebtedness would have aggregated approximately $_______ million, and the total
liabilities of the Company's Subsidiaries would have been approximately $___
million.
The Notes will mature on ______ , 2005 (the "Maturity Date"). The
Notes are not subject to any sinking fund provisions, although the Company is
required to make mandatory prepayments of principal in certain events. See
"___ Principal and Interest."
Except as described under "Certain Covenants -- Limitations on
Incurrence of Debt" and "-- Merger, Consolidation or Sale," the Indenture does
not contain any other provisions that would limit the ability of the Company or
any of its Subsidiaries to incur indebtedness or that would afford Holders of
the Notes protection in the event of (i) a highly leveraged or similar
transaction involving the Company, the management of the Company or CRFLT, or
any subsidiary of any of them, (ii) a change of control of the Company or CRFLT
or (iii) a reorganization, restructuring, merger or similar transaction
involving the Company that may adversely affect the holders of the Notes. In
addition, subject to the limitations set forth under "-- Merger, Consolidation
or Sale," the Company may, in the future, enter into certain transactions such
as the sale of all or substantially all of its assets or the merger or
consolidation of the Company that would increase the amount of the Company's
indebtedness or substantially reduce or eliminate the Company's assets, which
may have an adverse effect on the Company's ability to service its indebtedness,
including the Notes. The Company and its management have no present intention of
engaging in a highly leveraged or similar transaction involving the Company.
The Notes will be issued in fully-registered form.
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Principal and Interest
The Notes will bear interest at a fixed rate of interest equal to
120% of the applicable federal rate as of the closing of the Consolidation (as
defined in Section 1274 of the Code and published from time to time by the IRS),
from the closing of the Consolidation or from the immediately preceding Interest
Payment Date (as defined below) to which interest has been paid, payable
semi-annually in arrears on each ______ __ and ______ __, commencing ______ __,
1998 (each, an "Interest Payment Date"), and on the Maturity Date, to the
persons (the "Holders") in whose names the Notes are registered in the security
register for the Notes at the close of business on the date 15 calendar days
prior to such payment day regardless of whether such day is a Business Day, as
defined below (each, a "Regular Record Date"). Interest on the Notes will be
computed on the basis of a 360-day year of twelve 30-day months. As of ______,
1997, the interest rate on the Notes would have been ___% per annum.
The principal of each Note payable on the Maturity Date will be paid
against presentation and surrender of such Note at the corporate trust office of
the Trustee, located initially c/o _____________________________________________
______________, in such coin or currency of the United States of America as at
the time of payment is legal tender for payment of public and private debts.
If any Interest Payment Date or a Maturity Date falls on a day that
is not a Business Day, the required payment shall be made on the next Business
Day as if it were made on the date such payment was due and no interest shall
accrue on the amount so payable for the period from and after such Interest
Payment Date or such Maturity Date, as the case may be. "Business Day" means any
day, other than a Saturday or Sunday, on which banking institutions in The City
of New York are open for business.
In the event that, following the closing of the Consolidation, any
Hotel Partnership (i) sells or otherwise disposes of any Hotel and realizes net
cash proceeds in excess of (a) the amount required to repay mortgage
indebtedness (outstanding immediately prior to the Consolidation) secured by
such Hotel or otherwise required to be applied to the reduction of indebtedness
of such Hotel Partnership and (b) the costs incurred by the Hotel Partnership in
connection with such sale or other disposition or (ii) refinances (whether at
maturity or otherwise) any indebtedness secured by any Hotel and realizes net
cash proceeds in excess of (a) the amount of indebtedness secured by such Hotel
at the time of the Consolidation, calculated prior to any repayment or other
reduction in the amount of such indebtedness in the Consolidation (including
from the proceeds of the Offering) and (b) the costs incurred by the Company or
such Hotel Partnership in connection with such refinancing ("Net Cash
Proceeds"), the Company will be required to prepay an aggregate amount of
principal of the series of Notes related to such Hotel Partnership equal to 80%
of such Net Cash Proceeds, together with interest accrued on the principal being
prepaid to the date of prepayment. Notice of any mandatory principal prepayment
will be given to Holders of the applicable series at their addresses, as shown
in the security register for the Notes, not more than 60 nor less than 30 days
prior to the date fixed for prepayment, which date shall be not more than 60
days after the applicable sale or other disposition of such Hotel. The notice of
redemption will specify, among other items, the principal amount of the Notes
held by each Holder to be redeemed.
Optional Redemption
The Notes of any series may be redeemed at any time at the option of
the Company, in whole or from time to time in part, at a redemption price equal
to the sum of the principal amount of the Notes being redeemed plus accrued
interest thereon to the redemption date (collectively, the "Redemption Price").
If notice has been given as provided in the Indenture and funds for
the redemption of any Notes called for redemption shall have been made available
on the redemption date referred to in such notice, such Notes will cease to bear
interest on the date fixed for such redemption specified in such notice and the
only right of the Holders of the Notes will be to receive payment of the
Redemption Price.
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Notice of any optional redemption of any Notes will be given to
Holders at their addresses, as shown in the security register for the Notes, not
more than 60 nor less than 30 days prior to the date fixed for redemption. The
notice of redemption will specify, among other items, the Redemption Price and
the principal amount of the Notes held by such Holder to be redeemed.
If less than all the Notes of any series are to be redeemed at the
option of the Company, the Company will notify the Indenture Trustee at least 45
days prior to giving notice of redemption (or such shorter period as is
satisfactory to the Indenture Trustee) of the aggregate principal amount of
Notes to be redeemed and their redemption date. The Indenture Trustee shall
select, in such manner as it shall deem fair and appropriate, Notes to be
redeemed in whole or in part.
Limitations on Incurrence of Debt
The Company will not, and will not permit a Subsidiary to, incur any
Debt (as defined below), other than intercompany Partnership Debt (representing
Debt to which the only parties are CRFLT, the Company and any of their
Subsidiaries, but only so long as such Debt is held solely by any of CRFLT, the
Company and any Subsidiary) that is subordinate in right of payment to the
Notes, if, immediately after giving effect to the incurrence of such additional
Debt, the aggregate principal amount of all outstanding Debt of the Company and
its Subsidiaries on a consolidated basis, determined in accordance with GAAP, is
greater than 60% of the Total Market Capitalization (as defined below) of the
Company on the date of such incurrence.
As used in the Indenture and the description thereof herein:
"Debt" of the Company or any Subsidiary means, without
duplication, any indebtedness of the Company and its Subsidiaries,
whether or not contingent, in respect of (i) borrowed money evidenced
by bonds, notes, debentures or similar instruments, (ii) indebtedness
secured by any mortgage, pledge, lien, charge, encumbrance or any
security interest existing on property owned by the Company and its
Subsidiaries, (iii) the reimbursement obligations, contingent or
otherwise, in connection with any letters of credit actually issued
or amounts representing the balance deferred and unpaid of the
purchase price of any property except any such balance that
constitutes an accrued expense or trade payable or (iv) any lease of
property by the Company and its Subsidiaries as lessee which is
reflected in the Company's consolidated balance sheet as a
capitalized lease in accordance with GAAP, in the case of items of
indebtedness under (i) through (iii) above to the extent that any
such items (other than letters of credit) would appear as a liability
on the Company's consolidated balance sheet in accordance with GAAP,
and also includes, to the extent not otherwise included, any
obligation by the Company or any Subsidiary to be liable for, or to
pay, as obligor, guarantor or otherwise (other than for purposes of
collection in the ordinary course of business), indebtedness of
another person (other than the Company or any Subsidiary) (it being
understood that "Debt" shall be deemed to be incurred by the Company
and its Subsidiaries on a consolidated basis whenever the Company and
its Subsidiaries on a consolidated basis shall create, assume,
guarantee or otherwise become liable in respect thereof; Debt of a
Subsidiary of the Company existing prior to the time it became a
Subsidiary of the Company shall be deemed to be incurred upon such
Subsidiary's becoming a Subsidiary of the Company; and Debt of a
person existing prior to a merger or consolidation of such person
with the Company or any Subsidiary of the Company in which such
person is the successor to the Company or such Subsidiary shall be
deemed to be incurred upon the consummation of such merger or
consolidation); provided, however, that the term Debt shall not
include any such indebtedness that has been the subject of an "in
substance" defeasance in accordance with GAAP.
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<PAGE>
"Total Market Capitalization" means, as of any date, the sum of
(i) the product of (x) the closing price of a Common Share on the
NYSE on the immediately preceding trading day times (y) the total
number of Units then outstanding (including Units held by CRFLT),
plus (ii) the aggregate liquidation preference of all outstanding
preferred units of limited partnership interest in the Company, plus
(iii) the aggregate principal amount of all outstanding Debt of CRFLT
and its subsidiaries on a consolidated basis determined in accordance
with GAAP (determined on a pro forma basis after giving effect to the
incurrence of any Debt on such date and the application of the
proceeds thereof).
"Subsidiary" means (i) a corporation, partnership, limited
liability company, trust, real estate investment trust or other
entity a majority of the voting power of the voting equity securities
of which are owned, directly or indirectly, by the Company or by one
or more Subsidiaries of the Company, (ii) a partnership, limited
liability company, trust, real estate investment trust or other
entity not treated as a corporation for federal income tax purposes
the majority of the value of the equity interests of which are owned,
directly or indirectly, by the Company or by one or more other
Subsidiaries of the Company or (iii) one or more corporations which,
either individually or in the aggregate, would be Significant
Subsidiaries (as defined below, except that the investment, asset and
equity thresholds for purposes of this definition shall be 5%), the
majority of the value of the equity interests of which are owned,
directly or indirectly, by the Company or by one or more
Subsidiaries.
Merger, Consolidation or Sale
The Company may consolidate with, or sell, lease or convey all or
substantially all of its assets to, or merge with or into, any other
corporation, limited liability company, association, partnership, real estate
investment trust, company or business trust (any such entity, a "Corporation"),
provided that (i) the Company shall be the continuing Corporation, or the
successor Corporation or its transferees or assignees of such assets (if other
than the Company) formed by or resulting from any such consolidation or merger
or which shall have received the transfer of such assets by lease (subject to
the continuing obligations of the Company set forth in the Indenture) or
otherwise shall expressly assume payment of the principal of and interest on all
the Notes and the due and punctual performance and observance of all of the
covenants and conditions contained in the Indenture; (ii) the successor
Corporation formed by or resulting from any such consolidation or merger or
which shall have received the transfer of assets shall be a United States
Corporation; (iii) immediately after giving effect to such transaction and
treating any indebtedness which becomes an obligation of the Company or any
Subsidiary of the Company as a result thereof as having been incurred by the
Company or such Subsidiary at the time of such transaction, no Event of Default
under the Indenture, and no event which, after notice or the lapse of time, or
both, would become such an Event of Default, shall have occurred and be
continuing; and (iv) an officer's certificate and legal opinion covering such
conditions shall be delivered to the Indenture Trustee.
Events of Default, Notice and Waiver
The following events are "Events of Default" with respect to the
Notes of any series: (i) default for 30 days in the payment of any installment
of interest on any Note of such series; (ii) default in the payment of the
principal of any Note at its maturity; (iii) default in the payment of any
mandatory prepayment of principal on or before the date 90 days after the
applicable sale or other disposition of a Hotel giving rise to the obligation to
make such prepayment; (iv) default in the performance of any other covenant or
warranty of the Company contained in the Indenture, such default having
continued for 60 days after written notice as provided in the Indenture; (v)
certain events of bankruptcy, insolvency or reorganization, or court appointment
of a receiver, liquidator or trustee of the Company or any Significant
Subsidiary or any of their respective property; (vi) any other Event of Default
provided in the Indenture with respect to the Notes. The term "Significant
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<PAGE>
Subsidiary" means each significant subsidiary (as defined in Regulation S-X
promulgated under the Securities Act) of the Company.
If an Event of Default under the Indenture occurs and is continuing,
then in every such case the Indenture Trustee or the Holders of not less than
25% in principal amount of the Outstanding Notes (as defined below) may declare
the principal amount of all of the Notes to be due and payable immediately by
written notice thereof to the Company (and to the Indenture Trustee if given by
the Holders). However, at any time after such a declaration of acceleration with
respect to Notes has been made, but before a judgment or decree for payment of
the money due has been obtained by the Indenture Trustee, the Holders of not
less than a majority in principal amount of Outstanding Notes may rescind and
annul such declaration and its consequences if (i) the Company shall have paid
or deposited with the Indenture Trustee all required payments of the principal
of and interest on the Notes, plus certain fees, expenses, disbursements and
advances of the Indenture Trustee and (ii) all Events of Default, other than the
nonpayment of accelerated principal of (or specified portion thereof), or
premium (if any) or interest on the Notes have been cured or waived as provided
in the Indenture. The Indenture also provides that the Holders of not less than
a majority in principal amount of the Outstanding Notes may waive any past
default with respect to such series and its consequences, except a default (x)
in the payment of the principal of or interest payable on any Note or (y) in
respect of a covenant or provision contained in the Indenture that cannot be
modified or amended without the consent of the Holder of each Outstanding Note
affected thereby.
The Indenture Trustee will be required to give notice to the Holders
of Notes within 90 days of a default under the Indenture unless such default has
been cured or waived; provided, however, that the Indenture Trustee may withhold
notice to the Holders of any default (except a default in the payment of the
principal of or interest on any Note or in the payment of any mandatory
prepayment installment in respect of any Note) if specified Responsible Officers
(as defined in the Indenture) of the Indenture Trustee consider such withholding
to be in the interest of such Holders.
The Indenture provides that no Holders of Notes may institute any
proceedings, judicial or otherwise, with respect to the Indenture or for any
remedy thereunder, except in the case of failure of the Indenture Trustee, for
60 days, to act after it has received a written request to institute proceedings
in respect of an Event of Default from the Holders of not less than 25% in
principal amount of the Outstanding Notes, as well as an offer of indemnity
reasonably satisfactory to it. This provision will not prevent, however, any
Holder of Notes from instituting suit for the enforcement of payment of the
principal of (and premium, if any) interest on such Notes at the respective due
dates thereof.
Subject to provisions in the Indenture relating to its duties in case
of default, the Indenture Trustee is under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any Holders
of any Notes then Outstanding under the Indenture, unless such Holders shall
have offered to the Indenture Trustee thereunder reasonable security or
indemnity. The Holders of not less than a majority in principal amount of the
Outstanding Notes shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee, or
of exercising any trust or power conferred upon the Indenture Trustee. However,
the Indenture Trustee may refuse to follow any direction which is in conflict
with any law or the Indenture, which may involve the Indenture Trustee in
personal liability or which may be unduly prejudicial to the Holders of Notes of
such series not joining therein.
Within __ days after the close of each fiscal year, the Company must
deliver to the Indenture Trustee a certificate, signed by one of several
specified officers of CRFLT, stating whether or not such officer has knowledge
of any default under the Indenture and, if so, specifying each such default and
the nature and status thereof.
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<PAGE>
Modification of the Indenture
Modifications and amendments of the Indenture will be permitted to be
made only with the consent of the Holders of not less than a majority in
principal amount of all Outstanding Notes which are affected by such
modification or amendment; provided, however, that no such modification or
amendment may, without the consent of the Holders of each such Note affected
thereby, (i) change the Stated Maturity of the principal of or premium (if any)
or any installment of interest on, any such Note; (ii) reduce the principal
amount of, or the rate or amount of interest on, any such Note, (iii) change the
place of payment, or the coin or currency, for payment of principal of, premium,
if any, or interest on any such Note; (iv) impair the right to institute suit
for the enforcement of any payment on or with respect to any such Note; (v)
reduce the above stated percentage of outstanding Notes of any series necessary
to modify or amend the Indenture, to waive compliance with certain provisions
thereof or certain defaults and consequences thereunder or to reduce the quorum
or voting requirements set forth in the Indenture; or (vi) modify any of the
foregoing provisions or any of the provisions relating to the waiver of certain
past defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the Holders of each such Note affected
thereby. A Note shall be deemed outstanding ("Outstanding") if it has been
authenticated and delivered under the Indenture unless, among other things, such
Note has been canceled or redeemed.
The Indenture provides that the Holders of not less than a majority
in principal amount of Outstanding Notes have the right to waive compliance by
the Company with certain covenants in the Indenture.
Modifications and amendments of the Indenture will be permitted to be
made by the Company and the Indenture Trustee without the consent of any Holder
of Notes for any of the following purposes: (i) to evidence the succession or
addition of another Person to the Company as obligor under the Indenture; (ii)
to add to the covenants of the Company for the benefit of the Holders of the
Notes or to surrender any right or power conferred upon the Company in the
Indenture; (iii) to add Events of Default for the benefit of the Holders of the
Notes; (iv) to permit or facilitate the issuance of the Notes in uncertificated
form, provided, that such action shall not adversely affect the interests of the
Holders of Notes in any material respect; (v) to secure the Notes; (vi) to
establish the form or terms of additional notes of any series; (vii) to provide
for the acceptance of appointment by a successor Indenture Trustee or facilitate
the administration of the trusts under the Indenture by more than one Indenture
Trustee; (viii) to cure any ambiguity, defect or inconsistency in the Indenture,
provided that such action shall not adversely affect the interests of Holders of
Notes in any material respect; (ix) to supplement any of the provisions of the
Indenture to the extent necessary to permit or facilitate defeasance and
discharge of any series of Notes or additional notes under the Indenture,
provided that such action shall not adversely affect the interests of the
Holders of the Notes in any material respect.
The Indenture contains provisions for convening meetings of the
Holders of Notes. A meeting will be permitted to be called at any time by the
Trustee, and also, upon request, by the Company or the Holders of at least 10%
in principal amount of the Outstanding Notes, in any such case upon notice given
as provided in the Indenture. Except for any consent that must be given by the
Holder of each Note affected by certain modifications and amendments of the
Indenture, any resolution presented at a meeting or adjourned meeting duly
reconvened at which a quorum is present will be permitted to be adopted by the
affirmative vote of the Holders of a majority in principal amount of the
Outstanding Notes of that series; provided, however, that, except as referred to
above, any resolution with respect to any request, demand, authorization,
direction, notice, consent, waiver or other action that may be made, given or
taken by the Holders of a specified percentage, which is less than a majority,
in principal amount of the Outstanding Notes may be adopted at a meeting or
adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the Holders of such specified percentage in principal amount
of the Outstanding
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<PAGE>
Notes. Any resolution passed or decision taken at any meeting of Holders of
Notes duly held in accordance with the Indenture will be binding on all Holders
of Notes. The quorum at any meeting called to adopt a resolution, and at any
reconvened meeting, will be Persons holding or representing a majority in
principal amount of the Outstanding Notes; provided, however, that if any action
is to be taken at such meeting with respect to a consent or waiver which may be
given by the Holders of not less than a specified percentage in principal amount
of the Outstanding Notes, the Persons holding or representing such specified
percentage in principal amount of the Outstanding Notes will constitute a
quorum.
Notwithstanding the foregoing provisions, if any action is to be
taken at a meeting of Holders of Notes of any series with respect to any
request, demand, authorization, direction, notice, consent, waiver or other
action that the Indenture expressly provides may be made, given or taken by the
Holders of a specified percentage in principal amount of all Outstanding Notes
affected thereby, or of the Holders of such series and one or more additional
series: (i) there shall be no minimum quorum requirement for such meeting and
(ii) the principal amount of the Outstanding Notes that vote in favor of such
request, demand, authorization, direction, notice, consent, waiver or other
action shall be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under the Indenture.
Satisfaction and Discharge
The Company may discharge certain obligations to Holders of Notes
that have not already been delivered to the Indenture Trustee for cancellation
and that either have become due and payable or will become due and payable
within one year (or scheduled for redemption within one year) by irrevocably
depositing with the Indenture Trustee, in trust, funds in such currency or
currencies, currency unit or units or composite currency or currencies in which
such Notes are payable in an amount sufficient to pay the entire indebtedness on
such Notes in respect of principal and interest to the date of such deposit (if
such Notes have become due and payable) or to the Stated Maturity or Redemption
Date, as the case may be.
No Conversion Rights
The Notes will not be convertible into or exchangeable for any
capital stock of CRFLT or equity interest in the Company.
Governing Law
The Indenture will be governed by and shall be construed in
accordance with the laws of the State of New York.
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<PAGE>
COMPARISON OF OWNERSHIP OF HOTEL PARTNERSHIP
INTERESTS, UNITS AND COMMON SHARES
The information below highlights a number of the significant
differences between the Hotel Partnerships, the Company and CRFLT relating to,
among other things, form of organization, investment objectives, policies and
restrictions, asset diversification, capitalization, management structure,
compensation and fees and investor rights, and compares certain legal rights
associated with the ownership of Hotel Partnership Interests, Units and Common
Shares, respectively. These comparisons are intended to assist Limited Partners
in understanding how their investments will be changed if, as a result of the
Consolidation, their Hotel Partnership Interests are exchanged for Units, which
are redeemable at the option of the holder thereof beginning one year after the
Consolidation, at the option of CRFLT, for either Common Shares or the cash
equivalent thereof. This discussion is summary in nature and does not constitute
a complete discussion of these matters, and Limited Partners should carefully
review the balance of this Consent Solicitation for additional important
information.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Form of Organization and Purpose
--------------------------------
All of the Hotel Partnerships are The Company is a Delaware limited CRFLT is a Maryland REIT and will
Delaware limited partnerships. The partnership. Following the be the sole general partner of the
Hotel Partnership GP of each Hotel Consolidation, the Company will Company. CRFLT will make an
Partnership is a wholly owned succeed to the ownership of the election to be taxed as a REIT under
subsidiary of Host. The purpose of Participating Hotel Partnerships. the Code and intends to maintain its
each Hotel Partnership includes The sole general partner of the qualification as a REIT. CRFLT's
acquiring, operating, selling or Company, will be CRFLT. The only significant asset will be its
disposing of hotel properties and Participating Hotel Partnerships, as interest in the Company and
engaging in other activities related wholly owned subsidiaries of the consequently an indirect investment
or incidental thereto. Company, will own the Hotels and in the Hotels owned by subsidiaries
lease them to the Lessees. The of the Company. See "Distribution
Company will invest in a real estate and Other Policies."
portfolio primarily consisting of
limited service and extended-stay
hotels. The business of the Company
will be limited to and conducted in
such a manner as to permit CRFLT
at all times to be qualified as a REIT
under the Code. See "Distribution and
Other Policies."
</TABLE>
163
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Length and Type of Investment
-----------------------------
Each of the Hotel Partnerships is a The Company has a stated term of CRFLT has a perpetual term and
finite-life entity with a stated term approximately 100 years. The intends to continue its operations for
which expires between 2086 and 2090. Company has no specific plans for an indefinite time period. To the
Partners are entitled to receive cash disposition of the assets acquired extent CRFLT sells or refinances its
distributions out of the Hotel through the Consolidation or that assets, the net proceeds therefrom
Partnership's net operating income, may be subsequently acquired. To the will generally be retained by CRFLT
if any, and to receive cash distributions, extent the Company sells or refinances for working capital and other
if any, upon liquidation of the Hotel its assets, the net proceeds therefrom corporate purposes, except to the
Partnership's real estate investments. will generally be retained by the extent distributions thereof must be
See "Background and Reasons for the Company for working capital and new made to permit CRFLT to qualify as
Consolidation -- Background of the Hotel investments rather than being distributed a REIT for tax purposes. See
Partnerships." to its partners (including CRFLT), except "Distribution and Other Policies --
to the extent distributions thereof must Investment Policies."
be made to permit CRFLT to qualify as a
REIT for tax purposes. See "Background
and Reasons for the Consolidation --
Expected Benefits from the Consolidation"
and "Distribution and Other Policies --
Investment Policies."
</TABLE>
The Hotel Partnerships are structured to dissolve when the assets of the
Hotel Partnerships are liquidated (or after approximately 100 years, if no
liquidation occurs sooner). In contrast, the Company and CRFLT generally will
constitute an operating company and will reinvest the proceeds of asset
dispositions, if any, in new properties or other appropriate investments
consistent with the Company's and CRFLT's investment objectives.
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<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liquidity
---------
The Partnership Units in each of the Each limited partner will have the The Common Shares of CRFLT will
Hotel Partnerships represent right, beginning one year after the be freely transferable upon
relatively illiquid investments with a closing of the Consolidation, to registration under the Securities Act.
limited resale market for such exercise his Unit Redemption Right. The Common Shares are expected to
Partnership Units (except interests Upon redemption, such limited be listed on the NYSE and CRFLT
in Res USA, which has no resale partner will receive, at the election expects a public market for the
market). The trading volume of such of CRFLT, either Common Shares of Common Shares to develop. The
Partnership Units in the resale CRFLT or the cash equivalent breadth and strength of this market
market is thin and the prices at thereof in exchange for such Units. will depend, among other things,
which Partnership Units trade are A limited partner may in certain upon the number of Common Shares
generally not equal to their net asset circumstances, transfer his Units. outstanding, CRFLT's financial
value (and applicable federal income See "Description of Units -- results and prospects and the
tax rules and the partnership Restrictions on Transfers of Units by general interest in CRFLT's dividend
agreements of the Hotel Limited Partners." yield compared to that of other debt
Partnerships effectively prevent the and equity securities. See
development of a more active or "Background and Reasons for the
substantial market for these Consolidation -- Expected Benefits
interests). No Limited Partner can from the Consolidation."
require a Hotel Partnership to
dispose of the Hotel Partnership's
assets or redeem the Limited
Partner's interest in the Hotel
Partnership.
</TABLE>
Partnership Units in the Hotel Partnerships have a relatively limited
resale market and Partnership Units in Res USA have no resale market. Beginning
one year after the Consolidation, limited partners of the Company (other than
CRFLT) will be able to exercise their Unit Redemption Right and receive, at the
option of CRFLT, either cash or Common Shares on a one-for-one basis. The Common
Shares of CRFLT will be freely transferable upon registration under the
Securities Act. Shareholders of CRFLT are expected to achieve liquidity of their
investments by trading the Common Shares in the open market.
165
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nature of Investment
--------------------
The limited partnership interests of The Units constitute equity interests The Common Shares constitute
each Hotel Partnership constitute entitling each limited partner to his equity interests in CRFLT. CRFLT is
equity interests entitling each pro rata share of cash distributions entitled to receive its pro rata share
Partner to his pro rata share of cash made to the limited partners of the of distributions made by the
distributions made to the Partners of Company. The Company generally Company with respect to the Units it
the Hotel Partnership. The Hotel intends to retain and reinvest holds, and each shareholder will be
Partnerships generally maintain a proceeds of the sale of property or entitled to his pro rata share of any
policy of long-term ownership for excess refinancing proceeds in its dividends or distributions paid with
current cash flow and long-term business. See "Distribution and respect to the Common Shares. The
appreciation. The partnership Other Policies." dividends payable to the shareholders
agreement for each Hotel Partnership are not fixed in amount and are only
specifies how the cash available paid if, when and as declared by the
for distribution, whether arising from Board of Trustees. In order to qualify
operation or sales or refinancing, is as a REIT, CRFLT must distribute at
to be shared among the Hotel least 95% of its taxable income
Partnership GP and the Limited Partners. (excluding capital gains), and any
The distributions payable to the taxable income (including capital gains)
Partners are not fixed in amount and not distributed will be subject to
depend upon the operating results and corporate income tax. See
net sale or refinancing proceeds available "Distribution and Other Policies."
from the disposition of the Hotel
Partnership's assets. The Hotel
Partnerships are not authorized to raise
additional funds for (or reinvest net
sale or refinancing proceeds in) new
investments, absent amendments to the
partnership agreements of the Hotel
Partnerships.
</TABLE>
The limited partnership interests in the Hotel Partnerships and the
Company, and the Common Shares in CRFLT, constitute equity interests in each,
respectively. Each limited partner is entitled to his pro rata share of the cash
distributions of his respective Hotel Partnership, and each shareholder is
entitled to his pro rata share of any dividends or distributions of CRFLT which
are paid with respect to the Common Shares.
166
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Properties and Diversification
------------------------------
The investment portfolio of each of As a result of the Consolidation, the As a result of the Consolidation,
the Hotel Partnerships currently Company will own a portfolio of up CRFLT will be the sole general
consists of 11 to 70 hotels and to 221 hotels. The Company will partner and a substantial limited
certain related assets. Each Hotel own multiple brands of hotels in partner of the Company, which will
Partnership owns hotels of a single multiple market segments and own a portfolio of up to 221 hotels.
brand and in a single market geographic locations.
segment. See "Background and
Reasons for the Consolidation --
Background of the Hotel
Partnerships."
</TABLE>
The investment portfolio of each Hotel Partnership is currently
limited to between 11 and 70 hotels in one brand and market segment and certain
related assets. Through the Consolidation, and through additional investments
that may be made from time to time, CRFLT and the Company intend to create an
investment portfolio substantially larger and more diversified than the assets
of any of the Hotel Partnerships individually. In addition, the larger portfolio
will diversify the risks to the limited partners and shareholders over a broader
group of hotels with multiple brands and market segments and would reduce the
dependence of an investment upon the performance of, and the exposure to the
risks associated with, any particular group of hotels currently owned by an
individual Hotel Partnership.
167
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Additional Equity/Potential Dilution
------------------------------------
Each Hotel Partnership was The Company is authorized to issue CRFLT may issue additional equity
designed as a finite-life investment Units and other partnership securities, including shares of
vehicle. None of the Hotel interests (including partnership beneficial interest which may be
Partnerships are authorized to raise interests of different series or classes classified as one or more classes or
additional funds for (or reinvest net that may be senior to Units) as series of common or preferred shares
sale or refinancing proceeds in) new determined by CRFLT in its sole and contain certain preferences, in
investments, absent amendments to discretion including in connection the discretion of the Board of
their partnership agreements. Since with acquisitions of properties. The Trustees. Any proceeds from the
such Hotel Partnerships were not Company may issue Units and other issuance of equity securities by
structured to issue additional equity partnership interests to CRFLT, as CRFLT must be contributed to the
securities, there is little chance for long as such interests are issued in Company in exchange for Units. The
dilution of the Partners' share of connection with a comparable issuance of additional equity
cash available for distribution. issuance of Common Shares of securities by CRFLT may result in
CRFLT and proceeds raised in the dilution of the interests of the
connection with the issuance of such shareholders, as well as interests of
shares are contributed to the holders of Units in the Company.
Company. In addition, the Company See "Distribution and Other Policies --
may issue additional Units upon Investment Policies."
exercise of the options granted
pursuant to option plans or
restricted shares issued under
restricted share plans or other
employee benefit plans adopted by
CRFLT.
</TABLE>
168
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Borrowing Policies
------------------
The Hotel Partnership GP of each The Company may incur debt or CRFLT is not restricted under its
Hotel Partnership is authorized to enter into similar credit, guarantee, Declaration of Trust from incurring
borrow money from itself or others financing or refinancing debt. However, under the Partnership
and issue evidence of indebtedness arrangements for any purpose with Agreement, CRFLT, as general partner
necessary, convenient or incidental any Person that is not CRFLT upon of the Company, may not incur any
to the accomplishment of the such terms that CRFLT, as sole debts except those for which it may
purposes of the Hotel Partnership. general partner, determines be liable as general partner of the
appropriate; provided, that, the Company and certain other limited
-------- ---- circumstances. Therefore, all
Company shall not incur any debt indebtedness incurred by CRFLT will
that is recourse to CRFLT, except to be through the Company. CRFLT will
the extent otherwise agreed to by have a policy of incurring debt
CRFLT in its sole discretion. See only if immediately following such
"Distribution and Other Policies -- incurrence the debt-to-total market
Borrowing Policies." capitalization ratio would be 50% or
less. The Board of Trustees could
alter or eliminate this policy. See
"Distribution and Other Policies --
Borrowing Policies."
</TABLE>
In conducting their business, each of the Hotel Partnerships, CRFLT
and the Company may incur indebtedness to the extent deemed appropriate by their
general partner or Board of Trustees, as the case may be.
169
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Other Investment Restrictions
-----------------------------
The partnership agreements of RIBM2, Res USA There are no restrictions upon the Company's Neither CRFLT's Declaration of Trust
and FIBM contain provisions that prohibit authority to enter into certain transactions, nor its Bylaws impose any restric-
(i) the reinvestment in the Hotel Partner- including among others, making investments, tions upon the types of investments
ship of cash available for distribution, lending Company funds or reinvesting the that may be made by CRFLT, except
(ii) the purchase or lease of any real Company's cash flow and net sale or that under the Declaration of Trust,
property without the support of an appraisal refinancing proceeds except (i) restrictions the Board of Trustees is prohibited
report of an independent, nationally precluding investments by the Company that from taking any action that would
recognized appraiser of hotel properties, would adversely affect CRFLT's status as a terminate CRFLT's status as a REIT,
(iii) the acquisition of any property in REIT, (ii) general restrictions on trans- unless a majority of the shareholders
exchange for interests in the Hotel Part- actions with Affiliates, (iii) the Lock-out vote to terminate such status.
nership or (iv) the investment in limited Provisions and (iv) the Noncompetition CRFLT's Declaration of Trust and
partnership interests or general partnership Agreement. Bylaws do not impose any restrictions
interests in other entities or joint upon vote to terminate such status.
ventures. The partnership agreements of CRFLT's Declaration of Trust and
CBM1, CBM2 and RIBM1 are silent as to dealings between CRFLT and trustees,
investment restrictions. None of the Hotel officers and affiliates thereof.
Partnerships are authorized to raise Maryland's REIT Law, however,
additional funds for (or reinvest net sale requires that the material facts of
or refinancing proceeds in) new investments, the relationship, the interest and
absent amendments to their partnership the transaction must be (i) disclosed
agreements. to the Board of Trustees and approved
by the affirmative vote of a
majority of the disinterested
trustees, (ii) disclosed to the
shareholders and approved by the
affirmative vote of a majority of the
disinterested shareholders or (iii)
in fact fair and reasonable. In
addition, CRFLT has adopted a policy
which requires that all contracts and
transactions between CRFLT and
trustees, officers or affiliates
thereof must be approved by the
affirmative vote of a majority of the
disinterested trustees. Lastly, CRFLT
has adopted a policy that it must
conduct its investment activities
through the Company for so long as
the Company exists.
</TABLE>
Some of the Hotel Partnership's partnership agreements contain provisions
which prohibit or hinder further investment by the Hotel Partnership. The
Partnership Agreement permits the Company wide latitude in choosing the type of
investments to pursue. CRFLT has adopted a policy to conduct all investment
activities through the Company.
170
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<TABLE>
<CAPTION>
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HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Management Control
------------------
Under each of the partnership agreements of All management powers over the business The Board of Trustees will direct the
the Hotel Partnerships, the Hotel Partner- and affairs of the Company are vested in management of CRFLT's business and
ship GPs are, subject to certain CRFLT, as sole general partner, and no affairs subject to restrictions contained
limitations, vested with the exclusive limited partner of the Company will have in CRFLT's Declaration of Trust and
right and power to conduct the business and any right to participate in or exercise Bylaws, the Partnership Agreement and
affairs of the Hotel Partnership and may control or management power over the applicable law. The Board of Trustees
appoint, contract or otherwise deal with business and affairs of the Company will be classified into three classes of
any Person, including employees of its except (i) CRFLT, as sole general trustees, the majority of which will be
affiliates, to perform any acts or services partner, may not, without written con- independent trustees. At each annual
for the Hotel Partnership necessary or sent of all the limited partners or such meeting of the shareholders, the suc-
appropriate for the conduct of the business lower percentage of Units as may be cessors of the class of trustees whose
and affairs of the Hotel Partnership. A specifically provided for in the Part- terms expire at that meeting will be
Limited Partner has no right to participate nership Agreement or the Delaware Act, elected. The policies adopted by the
in the management and control of a Hotel take any action in contravention of the Board of Trustees may be altered or
Partnership and has no voice in its affairs Partnership Agreement; (ii) CRFLT, as eliminated without a vote of the
except on certain limited matters that may general partner, may not dispose of all shareholders. Accordingly, except for
be submitted to a vote of the Limited or substantially all of the Company's their vote in the elections of
Partners under the terms of the Hotel assets without the consent of the trustees and their vote in certain
Partnership agreements. Under each Hotel holders of a majority of the outstanding major transactions, shareholders will
Partnership agreement, other than CBM2 Units (including Units held by CRFLT); have no control over the ordinary
which requires a 662/3% vote, Limited and (iii) until December 31, 2057, CRFLT business policies of CRFLT. The Board
Partners have the right to remove their may not cause or permit the Company to of Trustees cannot change CRFLT's
general partner by a majority vote subject dissolve if more than 10% of the limited policy of maintaining its status as a
to certain conditions. The Hotel Partner- partners object to such dissolution. REIT, however, without the approval
ship partnership agreements for CBM1 and CRFLT may not be removed as general of a majority of the votes entitled
CBM2 permit removal of the general partner partner by the limited partners with or to be cast thereon.
only for fraud or unremedied acts of bad without cause unless CRFLT ceases to be
faith or gross negligence. The Hotel a "public company." See "Risk Factors
Partnership partnership agreements for -- Risks and Effect of the Consolidation
RIBM1, RIBM2, Res USA and FIBM permit -- Reduced Control Over Major Decisions."
removal of the general partner with or
without cause. In all cases of removal of
the general partner, however, the removal
can only occur if the Limited Partners
find a successor general partner.
</TABLE>
Under the partnership agreements for the Hotel Partnerships and the
Partnership Agreement of the Company, the general partners are vested with the
exclusive right and power to conduct the business and affairs of the
partnerships. In both cases, limited partners have no voice in the affairs of
the partnership except on certain limited matters. All of the Hotel Partnerships
permit removal of the general partner by the limited partners, some only with,
and some without, cause. The Partnership Agreement of the Company does not
permit removal of CRFLT as general partner by the limited partners with or
without cause. Under the Declaration of Trust and Bylaws, the Board of Trustees
directs management of CRFLT. Except for their vote in the elections of trustees
and their vote in certain major transactions, shareholders have no control over
the management of CRFLT.
171
<PAGE>
<TABLE>
<CAPTION>
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HOTEL PARTNERSHIPS COMPANY CRFLT
- -----------------------------------------------------------------------------------------------------------------------------
Fiduciary Duties
----------------
<S> <C> <C>
The Delaware Act provides that the Under the Delaware Act, CRFLT, as Under Maryland law, the trustees
Hotel Partnership GPs are general partner of the Company, is must perform their duties in good
accountable as fiduciaries to the accountable to the Company as a faith, in a manner that they
Hotel Partnerships and are required fiduciary and, consequently, is reasonably believe to be in the best
to exercise good faith, loyalty and required to exercise good faith and interests of CRFLT and with the care
integrity in their dealings in integrity in all of its dealings of an ordinary prudent person in a
conducting the affairs of the Hotel with respect to partnership affairs. like position. Trustees of CRFLT who
Partnership. The duty of good faith However, under the Partnership act in such a manner generally will
requires that the Hotel Partnership Agreement, CRFLT, as general not be liable to CRFLT for monetary
GPs deal fairly and with complete partner, is under no obligation to damages arising from their
candor toward the limited partners. consider the separate interests of activities.
The duty of loyalty requires that, the limited partners in deciding
without the limited partners' whether to cause the Company to take
consent, the Hotel Partnership GPs (or decline to take) any actions,
may not have business or other and CRFLT, as general partner, is
interests that are adverse to the not liable for monetary damages for
interests of the Hotel Partnerships. losses sustained, liabilities
The duty of fair dealing also incurred, or benefits not derived by
requires that all transactions limited partners in connection with
between the Hotel Partnership GPs such decision, provided that CRFLT,
and the Hotel Partnerships be fair as general partner, has acted in
in the manner in which the good faith and pursuant to its
transactions are effected and in the authority under the Partnership
amount of the consideration received Agreement.
by the Hotel Partnership GPs.
</TABLE>
The Hotel Partnerships GPs, CRFLT, as general partner of the Company,
and the Board of Trustees of CRFLT, respectively, owe fiduciary duties to their
constituent parties. Some courts have interpreted the fiduciary duties of the
Board of Trustees in the same way as the duties of a general partner in a
limited partnership. Therefore, although it is unclear whether, or to what
extent, there are differences in such fiduciary duties, it is possible that the
fiduciary duties of the trustees of CRFLT to the shareholders may be less than
those of the Hotel Partnership GPs to the Hotel Partnership limited partners and
CRFLT, as general partner of the Company, to the limited partners of the
Company.
The Partnership Agreement contains a specific provision to the effect
that CRFLT, as general partner of the Company, is under no obligation to
consider the separate interests of the limited partners of the Company in taking
partnership action. Since the partnership agreements of the Hotel Partnerships
do not contain such a provision, the fiduciary duties of CRFLT, as general
partner of the Company, to the limited partners of the Company may be less than
those of the Hotel Partnership GPs to their limited partners.
172
<PAGE>
<TABLE>
<CAPTION>
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HOTEL PARTNERSHIPS COMPANY CRFLT
- -----------------------------------------------------------------------------------------------------------------------------
Management Liability and Indemnification
----------------------------------------
<S> <C> <C>
Under the Delaware Act, each Hotel Under the Delaware Act, CRFLT, as CRFLT's Declaration of Trust
Partnership GP is liable for the general partner of the Company, is provides that the liability of
payment of partnership obligations liable for the payment of the CRFLT's trustees and officers to CRFLT
and debts, unless limitations upon obligations and debts of the and its shareholders for money damages
such liability are expressly stated in Company unless limitations upon is limited to the fullest extent permitted
the document or instrument evidencing such liability are stated in the under Maryland law. The Declaration of
the obligation (e.g., a loan structured document or instrument evidencing Trust and Maryland law provide broad
as a nonrecourse obligation). Each Hotel the obligation. Under the indemnification to trustees and officers,
Partnership agreement generally provides Partnership Agreement, the whether serving CRFLT or at its request any
that the Hotel Partnership GP will not be Company agrees to indemnify other entity, to the fullest extent permitted
held liable for any costs arising out of CRFLT or any trustee or officer of under Maryland law. CRFLT will indemnify
its action or inaction except that the CRFLT from and against all losses, its present and former trustees and officers,
Hotel Partnership GP will be liable for claims, damages, liabilities, joint among others, against judgments, penalties,
any costs which arise from the Hotel or several, expenses (including fines, settlements and reasonable expenses
Partnership GP's own fraud, negligence, legal fees), fines, settlements and actually incurred by them in connection with
misconduct or other breach of fiduciary other amounts incurred in connection any proceeding to which they may be made a
duty. In cases in which the Hotel with any actions relating to the party by reason of their service in those or
Partnership GP is indemnified, any operations of the Company as set forth other capacities unless it is established
indemnity is payable only from the in the Partnership Agreement in which that (a) the act or omission of the trustee
assets of the Hotel Partnership. CRFLT or any such trustee or officer or officer was material to the matter giving
is involved, unless (i) the act or rise to the proceeding and (i) was committed
omission of CRFLT was material to the in bad faith or (ii) was the result of
matter giving rise to the proceeding and active and deliberate dishonesty, (b) the
either was committed in bad faith or was trustee or officer actually
the result of active and deliberate received an improper personal benefit
dishonesty; (ii) CRFLT or the other in money, property or services
person to be indemnified actually or (c) in the case of any criminal proceeding,
received an improper personal the trustee or officer had reasonable
benefit in money, property or cause to believe that the act or omission was
services or (iii) in the case unlawful. However, under Maryland law, CRFLT
of any criminal proceeding, CRFLT or may not indemnify for an adverse judgment in
the other person to be indemnified had a suit by or in the right of the corporation.
reasonable cause to believe the act or The Bylaws of CRFLT require it, as
omission was unlawful. The reasonable a condition to advancing expenses, to obtain
expenses incurred by CRFLT may be (a) a written affirmation by the trustee
reimbursed by the Company in advance of or officer of his good faith belief that
the final disposition of the proceeding he has met the standard of conduct necessary
upon receipt by the Company of an for indemnification by CRFLT as authorized
affirmation by CRFLT or the other by the Bylaws and (b) a written statement
person to be indemnified of its good by or on his behalf to repay the amount paid
faith belief that the standard of or reimbursed by CRFLT if it shall ultimately
conduct necessary for indemnification be determined that the standard
has been met and an undertaking of conduct was not met.
by CRFLT to repay the amount if it is
determined that such standard was not met.
</TABLE>
In each of the Hotel Partnerships, the Hotel Partnership GPs will
only be held liable for costs which arise from the Hotel Partnership GPs' own
fraud, negligence, misconduct or other breach of fiduciary duty, and may be
indemnified in certain cases. While CRFLT, as general partner of the Company, is
generally liable for the payment of the obligations and debts of the Company,
the Company generally agrees to indemnify CRFLT, except regarding certain
unauthorized acts of CRFLT. The liability of CRFLT's trustees and officers is
limited to the fullest extent permitted under Maryland law and such trustees and
officers are indemnified by CRFLT to the fullest extent permitted by Maryland
law.
173
<PAGE>
<TABLE>
<CAPTION>
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HOTEL PARTNERSHIPS COMPANY CRFLT
- ----------------------------------------------------------------------------------------------------------------------------------
Liability of Investors
----------------------
<S> <C> <C>
Under each of the Hotel Partnership Under the Partnership Agreement Under Maryland law, shareholders
agreements and the Delaware Act, the and the Delaware Act, the are not personally liable for
partnership liability of Limited Partners liability of limited partners the debts or obligations of CRFLT.
for the Hotel Partnership's debts and for the Company's debts and
obligations is generally limited to obligations is generally limited
the amount of their investment in the to the amount of their
Hotel Partnership, together with an investment in the Company,
interest in undistributed income, together with an interest in
if any. undistributed income, if any.
</TABLE>
In the Hotel Partnerships and the Company, a limited partner's
liability is limited to the amount of his investment. Shareholders of CRFLT
generally have no liability for the debts and obligations of CRFLT.
174
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ----------------------------------------------------------------------------------------------------------------------------------
Antitakeover Provisions
-----------------------
<S> <C> <C>
For each of the Hotel Partnerships, Except in limited circumstances The Declaration of Trust and
a change in management may be effected (see "Voting Rights" below) CRFLT, Bylaws of CRFLT contain a
only by removal of the Hotel Partnership in its capacity as general partner number of provisions that
GP. See "Management Control" above for a of the Company, has exclusive may have the effect of
discussion of the ability to remove a management power over the business delaying or discouraging a
Hotel Partnership GP. In addition, the and affairs of the Company. CRFLT change in control of CRFLT
Hotel Partnership GP may restrict may not be removed as general that might be in the best
transfers of the Hotel Partnership partner of the Company by the interests of shareholders.
Interests. An assignee of a limited limited partners with or without These provisions include,
partner interest may not become a cause (unless CRFLT is no longer among others, (i) a Board of
substitute limited partner, entitling a "public company," in which case Trustees with three-year
him to vote on matters that may be the general partner may be removed staggered terms, (ii)
submitted to the Partners for approval, for cause). Under the Partnership authorized capital stock
unless the Hotel Partnership GP Agreement, CRFLT may, in its sole that may be classified and
consents to such substitution. discretion, prevent a limited issued as a variety of
partner from transferring his equity securities in the
interest or any rights as a limited discretion of the Board of
partner except in certain limited Trustees, including
circumstances. CRFLT may exercise securities having superior
this right of approval to deter, voting rights to the Common
delay or hamper attempts by Persons Shares, (iii) restrictions
to acquire a majority interest in on business combinations
the Company. In addition, CRFLT has with persons who acquire
the power to impose limits on more than a certain
transfers if, and to the extent, percentage of Common Shares,
necessary to cause the Company (iv) a requirement that
not to be a "publicly traded trustees be removed only
partnership" that would be taxed for cause and only by a
as a corporation. vote of shareholders
holding at least a majority
of all of the shares entitled
to be cast for the election
of trustees and (v) certain
ownership limitations which
are designed to protect
CRFLT's status as a REIT
under the Code. See
"Description of Shares of
Beneficial Interest."
</TABLE>
Certain provisions of the governing documents of the Hotel
Partnerships, the Company and CRFLT could be us ed to deter attempts to obtain
control of the Hotel Partnerships, the Company and CRFLT in transactions not
approved by the Hotel Partnership GPs, the general partner of the Company or the
Board of Trustees, respectively.
175
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
Voting Rights
-------------
<S> <C> <C>
Generally, with some exceptions, Under the Partnership Agreement, the CRFLT will be managed and controlled by
the Limited Partners of the Hotel limited partners have voting rights as to a Board of Trustees consisting of three
Partnerships have voting rights only the sale of substantially all of the assets classes having staggered terms of office.
as to major partnership transactions of the Company, certain consolidations and Each class is to be elected by the
to the extent provided in the Hotel mergers and amendments of the Partnership shareholders at annual meetings of CRFLT.
Partnership partnership agreements. Agreement. Otherwise, all decisions relating Maryland law requires that certain major
Such voting rights include: incurrence to the operation and management of the Company transactions, including most amendments
of debt, merger or consolidation with will be made by CRFLT, in its capacity as to CRFLT's Declaration of Trust, may not
another entity, sale of all or general partner of the Company. be consummated without the approval of
substantially all of the assets of a shareholders. Each Common Share will have
Hotel Partnership, certain amendments one vote and CRFLT's Declaration of Trust
to the partnership agreement or removal permits the Board of Trustees to classify
of the Hotel Partnership GP. and issue shares of capital stock in one
or more series having voting power which
may differ from that of the Common Shares
See "Description of Shares of Beneficial
Interest."
</TABLE>
The limited partners of the Hotel Partnerships and the
Company have only limited voting rights. The shareholders of CRFLT will have
voting rights that permit them to elect the Board of Trustees and to approve or
disapprove certain major transactions. See "Risk Factors -- Reduced Control over
Major Decisions."
176
<PAGE>
<TABLE>
<CAPTION>
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HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
Sale
- ----
<S> <C> <C>
The partnership agreements of Under the Partnership Agreement, CRFLT Under Maryland law, the Board of
RIBM2, Res USA and FIBM allow generally has the exclusive authority to Trustees is required to obtain approval
the sale of all or substantially determine whether, when and on what terms of the shareholders by the affirmative
all of the assets of the partnership the assets of the Company (including the vote of two-thirds of all the votes
with the consent of a majority of Hotels) will be sold, subject to the entitled to be cast on the matter in
the outstanding limited partnership Lock-out Provisions. See "Description of order to sell all or substantially
interests, including any limited Units -- Sales of Assets and Lock-out all of the assets of CRFLT. No
partnership interests held by the Provisions." However, CRFLT, as general approval of the shareholders is
Hotel Partnership GP unless the partner of the Company, generally may not required for the sale of less than
Hotel Partnership GP has an interest sell, exchange, transfer or otherwise dispose substantially all of CRFLT's assets.
in the vote. The partnership agreement of all or substantially all of the Company's
of RIBM1 allows the sale of all or assets in a single transaction or a series
substantially all of the assets of the of related transactions (including by way
partnership with the consent of a of merger, consolidation or other combination
majority of the outstanding limited with any other Persons), without the consent of
partnership interests excluding any more than 50% of the outstanding limited
limited partnership interests held by partnership interests, including any limited
the Hotel Partnership GP. The partnership partnership interests held by CRFLT and by the
agreements of CBM1 and CBM2 allow the Hotel Partnership GPs or their affiliates.
sale of up to 10 or 20 hotels, respectively, In addition, during the Initial Holding Period,
without the consent of the Limited Partners. the holders of Units of the Company have certain
CBM1's partnership agreement does not address voting rights if a vote of shareholders is
the sale of more than 10 hotels. CBM2's required. In connection with a sale of all or
partnership agreement implicitly allows the substantially all of the assets of the Company
sale of more than 20 hotels with the consent the approval of a majority of all outstanding Units,
of a majority of the outstanding limited including the Units held by CRFLT, voting as a
partnership interests excluding any limited single class with CRFLT voting its Units in the same
partnership interests held by the Hotel proportion as its shareholders vote would be required.
Partnership GP. In addition, during the Initial Holding Period, any
taxable sale or sales of Hotels representing more
than 10% of the aggregate Appraised Value of the
Hotels of any Hotel Partnership would require, in
addition to any other approval requirements, the
approval of a majority of all outstanding Units held
by persons who formerly were Limited Partners of such
Hotel Partnership, voting as a separate class.
</TABLE>
Under each of the Hotel Partnership partnership agreements,
the Partnership Agreement and CRFLT's Declaration of Trust, the sale of assets
may be effected with various levels of limited partner or shareholder consent.
Under most of the partnership agreements and the Declaration of Trust, the sale
of assets which do not amount to all or substantially all of the assets of the
Hotel Partnerships, the Company or CRFLT does not require any consent of the
limited partners or shareholders, respectively.
177
<PAGE>
<TABLE>
<CAPTION>
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HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sale to an Affiliate of the General Partner
- ------------------------------------------
The Hotel Partnership GPs of RIBM1, RIBM2, The Company shall not, directly or The Declaration of Trust has no
Res USA and FIBM may cause those Hotel indirectly, sell, transfer or convey any specified additional requirements
Partnerships to sell all or substantially property to any affiliate of CRFLT that for sales of assets to affiliates
all of their assets to its Hotel Partnership is not also a subsidiary of the Company, of CRFLT.
GP (or an affiliate of the Hotel Partnership except as expressly permitted in the
GP) (A) with the consent of the Limited Partnership Agreement or except on terms
Partners holding of a majority of the that are fair and reasonable and no less
outstanding limited partnership interests favorable to the Company than would be
in the Hotel Partnership excluding any obtained from an unaffiliated third party.
limited partnership interests held by the
Hotel Partnership GP and (B) by complying
with certain notice and independent
appraisal requirements as follows:
(i) the Hotel Partnership GP must provide
to its Limited Partners at least 30 days'
notice of the proposed sale, which notice
must set forth the price and other material
terms and conditions of the proposed
transaction, (ii) the Hotel Partnership
must obtain three appraisals of the fair
market sales value of the Hotels to be
sold, which appraisals must be prepared by
independent, nationally recognized
appraisers experienced in the valuation
of hotel properties selected by the
Hotel Partnership GP (the cost of all
such appraisals must be borne by the Hotel
Partnership GP or an affiliate), (iii) such
appraisers may not have, directly or
indirectly, any material interest in or
material business or professional
relationship with the Hotel Partnership
GP or any of its affiliates and the
compensation of each such appraiser must
be determined in accordance with a
written contract before such appraisal is
prepared, (iv) the price at which the
sale is effected must not be less than
the average of the three amounts
determined by the three appraisers,
disregarding entirely any appraisal that
differs by more than 20% from the amount
determined by the appraiser whose
determination is between the highest and
lowest of the amounts determined by the
three appraisers, (v) the purchase price
must be payable in cash, (vi) no real
estate commission may be paid by the
Hotel Partnership in connection with such
sale and (vii) the Hotel Partnership GP
must include copies of such appraisals
with the above-described notice to its
Limited Partners.
</TABLE>
178
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
The Hotel Partnership GPs of CBM1
and CBM2 may cause those Hotel
Partnerships to sell any hotels to
the Hotel Partnership GP or any
affiliate (A) with the consent of
Limited Partners holding of a majority
of the outstanding limited partnership
interests in the Hotel Partnership,
excluding any limited partnership
interests held by the Hotel Partnership
GP and (B) by complying with certain
notice and independent appraisal
requirements as follows: (i) the Hotel
Partnership GP must provide at least
30 days' notice of the proposed sale to its
Limited Partners, who thereafter must have
30 days to elect a nationally recognized
appraiser having the approval of the holders
of a majority of the Hotel Partnership
interests, (ii) such appraiser must have
30 days from the date of election to prepare
and submit to the Hotel Partnership GP an
appraisal of the fair market value of the
Hotel in question, (iii) the purchaser must
submit to the Hotel Partnership GP an
appraisal of the fair market value of the
Hotel, such appraisal to be submitted within
the time limit provided by clause (ii)
above in the case of the appraisal to be
submitted by the appraiser elected by
the Limited Partners, and (iv) the
Hotel Partnership GP must thereafter
seek the required consent and
include therewith copies of the
two appraisals.
</TABLE>
Under the Hotel Partnership partnership agreements and the
Partnership Agreement, in addition to the general restrictions on sale of
assets, there are provisions which must be met when partnership assets are sold
to an affiliate of the general partner. Under the Declaration of Trust of CRFLT,
however, there are no specified additional requirements.
179
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ----------------------------------------------------------------------------------------------
Merger
- ------
<S> <C> <C>
The partnership Under the Partnership Under Maryland law,
agreements of RIBM2, Agreement, CRFLT generally the Board of Trustees
Res USA and FIBM allow may not cause a merger or is required to obtain
a merger of each Hotel consolidation of the Company approval of the
Partnership with the without the consent of a shareholders by the
consent of a majority majority of the outstanding affirmative vote of
of the outstanding limited partnership two-thirds of all the
limited partnership interests (including the votes entitled to be
interests, including limited partnership interests cast on the matter in
the limited partnership held by CRFLT). order to merge or
interests held by the In addition, during the consolidate CRFLT.
Hotel Partnership GP. The Initial Holding Period, the
partnership agreement holders of Units of the Company
of RIBM1 allows for the have certain voting rights if
merger of RIBM1 with a vote of shareholders is
the consent of a majority required. In connection with
of the outstanding a merger of the Company the
limited partnership approval of a majority of all
interests, excluding the outstanding Units, including the
limited partnership Units held by CRFLT, voting as a
interests held by the single class with CRFLT voting its
Hotel Partnership GP. Units in the same proportion as its
Each of the CBM1 and CBM2 shareholders vote would be required.
partnership agreements
contain no merger
provision. Under the
Delaware Act, a merger of
each of CBM1 or CBM2 could
be effected upon approval
by its Hotel Partnership GP
and the holders of a
majority of the limited
partnership interests.
</TABLE>
Under applicable law, most of the Hotel Partnership partnership
agreements, the Partnership Agreement, and the Declaration of Trust of CRFLT,
the merger of the respective partnerships and CRFLT is permitted subject to a
certain level of limited partner or shareholder consent, respectively.
180
<PAGE>
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HOTEL PARTNERSHIPS COMPANY CRFLT
- --------------------------------------------------------------------------------
Dissolution
- -----------
<TABLE>
<S> <C> <C>
RIBM1, Res USA and The Company will Under Maryland law,
FIBM may be dissolved continue until the Board of Trustees
with the consent of a December 31, 2097, must obtain approval
majority of the unless sooner dissolved of holders of at least
outstanding limited and terminated. The two-thirds of the
partnership interests, Company will be outstanding Common
including any limited dissolved prior to the Shares in order to
partnership interests expiration of its term, dissolve CRFLT.
owned by the Hotel and its affairs wound
Partnership GP. RIBM2 up upon the occurrence
may be dissolved with of the earliest of: (i)
the consent of a the withdrawal of CRFLT
majority of the as general partner
outstanding limited without the permitted
partnership interests, transfer of CRFLT's
excluding any limited interest to a successor
partnership interests general partner (except
held by the Hotel in certain limited
Partnership GP. The circumstances), (ii)
partnership agreements the sale of all or
for CBM1 and CBM2 substantially all of the
require the consent of Company's assets and
a majority (66 2/3% vote properties (subject to
for CBM2) of the the Lock-out Provisions
outstanding limited during the Lock-out
partnership interests, Period), (iii) the entry
excluding the limited of a decree of judicial
partnership interests dissolution of the
owned by the Hotel Company pursuant to the
Partnership GP, and a provisions of the
commission of fraud, Delaware Act, (iv)
unremedied bad faith the entry of a final
or gross negligence non-appealable order for
on the part of the relief in a bankruptcy
Hotel Partnership GP. proceeding of the
general partner, or the
entry of a final non-
appealable judgment
ruling that the
general partner is
bankrupt or insolvent
(except that, in either
such case, in certain
circumstances the
limited partners (other
than CRFLT) may vote to
continue the Company
and substitute a new
general partner in place
of CRFLT), or (v) on or
after December 31, 2057,
on election by CRFLT, in
its sole and absolute
discretion. Upon
dissolution, CRFLT, as
general partner, or any
liquidator will proceed
to liquidate the assets
of the Company and apply
the proceeds therefrom
in the order of priority
set forth in the
Partnership Agreement.
</TABLE>
Under each of the Hotel Partnership partnership agreements, the
Partnership Agreement and CRFLT's Declaration of Trust, the respective entities
may be dissolved with the consent of a certain percentage of the outstanding
interests. Under some Hotel Partnership partnership agreements, the limited
partnership interests of the Hotel Partnership GP may be voted; in others, the
Hotel Partnership GP's limited partnership interest may not be voted.
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<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
Amendments
- ----------
<S> <C> <C>
Each of the partnership agreements Amendments to the Partnership Amendments to CRFLT's Declaration
for CBM1, CBM2 and RIBM1 allows Agreement may be proposed by of Trust must be approved by the
amendment of most of its provisions CRFLT, as general partner of the Board of Trustees and by the vote
with the consent of a majority of Company, or any limited partner of at least two-thirds of the
outstanding partnership interests, holding 25% or more of the limited votes entitled to be cast at a
excluding those held by the Hotel partnership interests. Subject to meeting of shareholders, except
Partnership GP. The partnership certain exceptions, such proposed that an amendment of the provisions
agreements for RIBM2, Res USA and amendment must be approved by the relating to the classified Board of
FIBM allow amendments with the vote of CRFLT, as general partner, Trustees and the power to remove
consent of a majority of the and the holders of at least a trustees must be approved by an 80%
outstanding partnership interests, majority of the outstanding limited vote. An amendment relating to
including those held by the Hotel partnership interests of the Company, termination of REIT status requires a
Partnership GP as long as the Hotel including limited partnership majority of the votes entitled to be
Partnership GP does not have an interests held by CRFLT. In addition, cast thereon.
interest in the vote. Amendments to with certain exceptions, CRFLT, as
the Hotel Partnership partnership general partner, has broad discretion
agreements that require the unanimous to amend the Partnership Agreement
consent (subject to the exclusion of without the consent of the limited
Hotel Partnership GP votes as partners.
described above) include: (i)
converting the interest of a Limited
Partner into a general partner's
interest; (ii) any act adversely
affecting the liability of a Limited
Partner; (iii) altering the interest
of a Partner in net profits, net
losses, gain, loss, or distributions
of cash available for distribution,
sale proceeds or refinancing
proceeds; (iv) reducing the
percentage of Partners which is
required to consent to any action
in the partnership agreement; (v)
limiting in any manner the liability
of the Hotel Partnership GP; or (vi)
causing the Hotel Partnership to be
taxed, for federal income tax
purposes, as an association taxable
as a corporation.
</TABLE>
Under both the Hotel Partnership partnership agreements and
the Partnership Agreement, amendment to the respective partnership agreement
may be made with the consent of the limited partners. Under the provisions of
the Partnership Agreement, CRFLT, as general partner of the Company, has broad
discretion to make amendments even without the consent of the limited partners.
Amendment of CRFLT's Declaration of Trust requires the consent of both the Board
of Trustees and a certain percentage of the votes entitled to be cast at a
meeting of shareholders.
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HOTEL PARTNERSHIPS COMPANY CRFLT
- ------------------------------------------------------------------------------------------------------------------------------------
Compensation, Fees and Distributions
------------------------------------
<S> <C> <C>
Under the partnership agreements of CRFLT will not receive any The trustees of CRFLT will receive
the Hotel Partnerships, the Hotel compensation for its services as compensation for their services as
Partnership GPs do not receive any general partner of the Company. described herein under "Management."
fees or other compensation from CRFLT, however, has the same right
their Hotel Partnerships in exchange to allocations and distributions
for their services as general partner. as other partners of the Company. In
The Hotel Partnership GP of each addition, the Company will reimburse
Hotel Partnership is entitled, CRFLT for expenses incurred relating
however, to reimbursement for the to the Consolidation, the ongoing
cost of providing any administrative operation of CRFLT and any other
or other services rendered to its offering of additional Units or Common
Hotel Partnership. The Hotel Shares, including all expenses,
Partnership GPs are entitled to damages and other payments resulting
distributions with respect to their from or arising in connection with
respective percentage interests in litigation related to any of the
the Hotel Partnerships, as well as foregoing.
certain additional back-end
participations in cash flow and
excess sale and refinancing proceeds
after the Limited Partners have
received certain investment returns.
See "Background and Reasons for the
Consolidation -- Reimbursements and
Distributions to Hotel Partnership
GPs."
</TABLE>
Neither the Hotel Partnership GPs nor CRFLT, as general
partner of the Company, receive compensation in exchange for their services as
general partner. The trustees of CRFLT, however, do receive compensation for
their services as trustees.
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ERISA CONSIDERATIONS
Status of CRFLT and the Company Under ERISA
This section discusses the extent to which the fiduciary requirements
of ERISA and the prohibited transaction provisions of ERISA and the Code would
apply to CRFLT or the Company because one or more investors in CRFLT or the
Company is an ERISA Plan or Other Plan.
If the underlying assets of CRFLT are deemed to be assets of an
investing ERISA Plan and Other Plan ("Plan Assets"), (i) the prudence standards
and other provisions of Part 4 of Title I of ERISA and the prohibited
transaction provisions of ERISA and the Code would be applicable to any
transactions involving CRFLT's assets, and (ii) persons who exercise any
authority or control over CRFLT's assets, or who provide investment advice to
CRFLT for a fee or other compensation, would be (for purposes of ERISA and the
Code) fiduciaries of ERISA Plans and Other Plans that acquire Common Shares of
CRFLT. Similarly, if the underlying assets of the Company are deemed to be Plan
Assets, (i) the prudence standards and other provisions of Part 4 of Title I of
ERISA and the prohibited transaction provisions of ERISA and the Code would be
applicable to any transactions involving the Company's assets, and (ii) persons
who exercise any authority or control over the Company's assets, or who provide
investment advice to the Company for a fee or other compensation, would be (for
purposes of ERISA and the Code) fiduciaries of ERISA Plans and Other Plans that
acquire Common Shares of CRFLT.
The United States Department of Labor ("DOL"), which has certain
administrative responsibility over ERISA Plans and certain Other Plans, has
issued a regulation defining plan assets for certain purposes ("DOL
Regulation"). The DOL Regulation generally provides that when an ERISA Plan or
Other Plan acquires a security that is an equity interest in an entity and that
security is neither a "publicly offered security" nor a security issued by an
investment company registered under the 1940 Act, the assets of the ERISA Plan
or Other Plan include both the equity interest and an undivided interest in each
of the underlying assets of the entity, unless it is established either that the
entity is an "operating company" (as defined in the DOL Regulation) or that
equity participation in the entity by "benefit plan investors" is not
"significant."
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 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, or such later
time as may be allowed by the Commission (the "Registration Period"), after the
end of the fiscal year of the issuer during which the offering occurred). CRFLT
anticipates that the Common Shares will be considered "publicly offered
securities," and therefore the underlying assets of CRFLT would not be deemed to
be Plan Assets of any ERISA Plan or Other Plan that invests in the Common
Shares.
The DOL Regulation defines "benefit plan investors" to consist of any
employee benefit plan as defined in section 3(3) of ERISA, any Other Plan, or
any entity whose underlying assets include Plan Assets by reason of an employee
benefit plan's investment in the entity. Equity participation in an entity by
"benefit plan investors" is deemed "significant" if, immediately after the most
recent acquisition of any equity interest in the entity, 25% or more of the
value of any class of equity interest is held by "benefit plan investors."
Furthermore, for purposes of determining the percentage interest in a class of
equity held by "benefit plan investors," the value of interests held by persons
who either have discretionary authority or control over the entity's assets, or
who provide investment advice for a fee, or are affiliates of such persons, is
disregarded.
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<PAGE>
Based upon the value of the interests in the Hotel Partnerships owned
by "benefit plan investors" relative to the value of the interests in the Hotel
Partnerships owned by other Hotel Partnership investors, and the expected
Exchange Value for each of the Hotel Partnerships, the Company believes that
immediately following the Consolidation "benefit plan investors" will not own a
"significant" percentage of Units, and, thus, the underlying assets of the
Company will not constitute Plan Assets of any ERISA Plan or Other Plan that
owns Units. Furthermore, the Partnership Agreement will restrict ownership of
Units by benefit plan investors to less than 25%.
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<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following discussion summarizes the federal income tax
considerations reasonably anticipated to be material to a Limited Partner in
connection with (i) the acquisition of the Hotel Partnerships by the Company
through the mergers of the Merger Partnerships into the Hotel Partnerships and
the resulting distribution of Units to the Partners; (ii) the ownership and
subsequent disposition by the Limited Partners of such Units; (iii) the
acquisition and ownership of Notes received by Limited Partners who exercise
Dissenters' Rights and tender the Units received in the Consolidation to the
Company; and (iv) the ownership and disposition of Common Shares that could be
issued to Limited Partners upon the exercise of their Unit Redemption Right. The
following discussion is intended to address only those federal income tax
considerations that are generally applicable for all Limited Partners in a Hotel
Partnership. Accordingly, it does not discuss all aspects of federal income
taxation that might be relevant to a specific Limited Partner in light of his
particular investment or tax circumstances. Therefore, it is imperative that a
Limited Partner review the following discussion and consult with his own tax
advisors to determine the interaction of his individual tax situation with the
anticipated tax consequences of the Consolidation and the subsequent ownership
and disposition of Units, Notes and/or Common Shares, as applicable.
The following description is for general information only, is not
exhaustive of all possible tax considerations, and is not intended to be (and
should not be construed as) tax advice. For example, this summary does not give
a detailed discussion of any state, local or foreign tax considerations. In
addition, the description does not purport to deal with all aspects of taxation
that may be relevant to Limited Partners subject to special treatment under the
federal income tax laws, including, without limitation, insurance companies,
financial institutions or broker-dealers, tax-exempt organizations (except to
the extent discussed under the heading "Taxation of Tax-Exempt Shareholders of
CRFLT") or foreign corporations and persons who are not citizens or residents of
the United States (except to the extent discussed under the heading "Taxation of
Non-U.S. Shareholders of CRFLT").
The information in this section is based on the Code, current,
temporary and proposed Treasury Regulations thereunder, the legislative history
of the Code, current administrative interpretations and practices of the IRS
(including its practices and policies as endorsed in private letter rulings,
which are not binding on the IRS), and court decisions, all as of the date
hereof. No assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and court decisions will not significantly change
the current law or adversely affect existing interpretations of current law. Any
such change could apply retroactively to transactions preceding the date of the
change. Neither CRFLT, the Company nor the Hotel Partnership GPs have requested
or plan to request any rulings from the IRS concerning the tax consequences of
the Consolidation or the treatment of either the Company or CRFLT subsequent to
the Consolidation. Thus, no assurance can be provided that the statements set
forth herein (which do not bind the IRS or the courts) will not be challenged by
the IRS or will be sustained by a court if so challenged.
CRFLT, the Company and the Hotel Partnership GPs have obtained an
opinion of counsel to the effect that the discussion contained in this section,
to the extent it describes applicable federal income tax law, is correct in all
material respects. Such opinion, however, does not purport to
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<PAGE>
address the tax consequences of the Consolidation to any particular Limited
Partner in a Hotel Partnership in light of his particular circumstances, nor
does it purport to predict whether, and the extent to which, future events and
transactions, some of which may be in the control of CRFLT and/or the Company
and some of which may not be in the control of CRFLT and/or the Company, will
have a material adverse impact on the income tax positions of Limited Partners,
either in particular Hotel Partnerships or as a whole.
The following description does not address the income tax
consequences of the Consolidation for Host or the Hotel Partnership GPs.
As used in this section, the term "CRFLT" refers solely to CRF
Lodging Trust, and the term "Company" refers solely to CRF Lodging Company, L.P.
The following discussion is not intended to be, and should not be
construed by a Limited Partner as, tax advice. THE SPECIFIC TAX ATTRIBUTES OF A
PARTICULAR LIMITED PARTNER COULD HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES
OF THE CONSOLIDATION, THE SUBSEQUENT OWNERSHIP AND DISPOSITION OF UNITS, AND/OR
THE SUBSEQUENT OWNERSHIP OF COMMON SHARES. THEREFORE, IT IS ESSENTIAL THAT
LIMITED PARTNERS CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH LIMITED PARTNERS' RESPECTIVE
PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS
OF ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTION. THE FOLLOWING DISCUSSION IS
NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING, AND LIMITED PARTNERS
SHOULD RELY ONLY ON THE ADVICE OF THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES OF THE CONSOLIDATION AND THE SUBSEQUENT OWNERSHIP AND DISPOSITION
OF UNITS AND COMMON SHARES.
Summary of Tax Opinions
Hogan & Hartson L.L.P., counsel to CRFLT and the Company, has
provided to CRFLT and the Company an opinion letter (substantially in the form
of Appendix E hereto) as to certain federal income tax consequences of the
Consolidation. The opinion letter is based upon certain assumptions and certain
representations provided by CRFLT, the Company and the Hotel Partnership GPs.
These representations generally involve factual matters relating to the
organization, ownership and operations (including the income, assets,
businesses, liabilities and properties) of the Hotel Partnerships prior to the
Consolidation and of CRFLT, the Company and the Hotel Partnerships following the
Consolidation.
The specific opinions that Hogan & Hartson L.L.P. has provided are:
1. The proposed method of operation of the Company is such
that it and each of the Hotel Partnerships will be treated
as a partnership for federal income tax purposes and will
not be subject to tax as a corporation or an association
taxable as a corporation.
2. The formation of the Company will not result in the
recognition of taxable gain or loss at the time of the
Consolidation to a Limited Partner (i) who does not
exercise his Unit Redemption Right on a date sooner than
the date two years after the date of the consummation of
the Consolidation; (ii) who does not receive a cash
distribution (or a
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<PAGE>
deemed cash distribution resulting from relief from
liabilities, including as a result of the prepayment of
debt with the proceeds from the Offering) in connection
with the Consolidation in excess of such Limited Partner's
aggregate adjusted basis in his Hotel Partnership Interest
at the time of the Consolidation; (iii) who does not
receive Notes upon exercise of any applicable Dissenters'
Rights under Delaware law; (iv) who is not required to
recognize gain by reason of the exercise by another
Limited Partner of Dissenters' Rights and the option to
receive Notes; and (v) whose "at risk" amount does not fall
below zero as a result of the Consolidation.
3. The Unit Redemption Right will not be considered "other
consideration" such that its receipt in the Consolidation
would result in a Limited Partner being treated under the
"disguised sale" rules as having sold all or a portion of
his Hotel Partnership Interest to the Company in the
Consolidation.
4. A Limited Partner's exercise of his Unit Redemption Right
more than two years after the date of consummation of the
Consolidation will not cause the Consolidation itself to be
a taxable transaction for the Limited Partner.
5. It is more likely than not that a Limited Partner's
exercise of his Unit Redemption Right more than one year
after the date of consummation of the Consolidation but
less than two years after such date will not cause the
Consolidation itself to be a taxable transaction for the
Limited Partner or for the other Limited Partners.
6. Although the matter is not free from doubt, a Limited
Partner who does not exercise Dissenters' Rights and
receive Notes in connection with the Consolidation should
not be required to recognize gain by reason of another
Limited Partner's exercise of such rights. In any event,
such Limited Partner should not recognize gain in excess of
the amount by which such Partner's allocable share of such
gain (determined pursuant to the Hotel Partnership's
partnership agreement) exceeds his basis in his Hotel
Partnership Interest.
7. A Limited Partner's relief from Hotel Partnership
liabilities allocable to such Limited Partner in connection
with the Consolidation and the concurrent pay down of
certain Hotel Partnership debts with proceeds from the
Offering will not cause such Limited Partner to recognize
taxable gain at the time of the Consolidation unless (and
only to the extent that) the amount thereof exceeds such
Limited Partner's adjusted basis in his Hotel Partnership
Interest at the time of the Consolidation.
8. The discussion herein under the heading "Federal Income Tax
Considerations," to the extent it describes applicable
federal income tax law, is correct in all material
respects.
In addition, on the Closing Date, Hogan & Hartson L.L.P. expects to
provide to CRFLT and the Company an opinion letter (substantially in the form of
Appendix E hereto) to the effect that (i) CRFLT, commencing with its taxable
year ending December 31, 1998, will be organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
will enable it to meet the requirements for qualification and taxation as a REIT
under the Code; and (ii) the Leases will be respected as leases for federal
income tax purposes. This opinion letter will be based upon certain assumptions
and certain representations provided by CRFLT, the Company and the Hotel
Partnership GPs. These representations generally will involve
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<PAGE>
factual matters relating to the organization, ownership and operations
(including the income, assets, businesses, liabilities and properties) of CRFLT,
the Company and the Hotel Partnerships following the Consolidation.
The opinions already rendered by Hogan & Hartson L.L.P. are based on
the Code and Treasury Regulations in effect on the date hereof, current
administrative interpretations and positions of the IRS and existing court
decisions, and the opinions to be rendered by Hogan & Hartson L.L.P. on the
Closing Date will be based on the same authorities as of the Closing Date. No
assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and court decisions will not significantly change
the law or the above conclusions reached by counsel. In addition, any such
change could apply retroactively to transactions preceding the date of change.
Moreover, opinions of counsel merely represent counsel's best judgment with
respect to the probable outcome on the merits and are not binding on the IRS or
the courts. Accordingly, even if there is no change in applicable law, no
assurance can be provided that such opinions (which do not bind the IRS or the
courts) will not be challenged by the IRS or will not be sustained by a court if
so challenged. Neither CRFLT, the Company nor the Hotel Partnership GPs have
requested or plan to request any rulings from the IRS concerning the tax
consequences of the Consolidation or the treatment of either the Company or
CRFLT subsequent to the Consolidation.
Tax Status of the Company
An entity classified as a partnership for federal income tax purposes
generally is not itself a taxable entity and incurs no federal income tax
liability. Therefore, partners are required to take into account in computing
their federal income tax liability their allocable shares of income, gains,
losses, deductions and credits of the partnership, regardless of whether cash
distributions are made by the partnership to the partners. A distribution of
money by a partnership to a partner generally is not taxable unless the amount
of the distribution is in excess of the partner's adjusted basis in his
partnership interest.
Under recently issued Treasury Regulations under Section 7701 of the
Code, a partnership will be treated as a partnership for federal income tax
purposes unless it elects to be treated as a corporation or would be treated as
a corporation because it is a "publicly traded partnership." Neither the
Company, any of the Hotel Partnerships, nor any of the partnerships or limited
liability companies in which the Hotel Partnerships have an interest (the
"Subsidiary Partnerships") will elect to be treated as a corporation, and
therefore, subject to the disclosure below, will be treated as partnerships for
federal income tax purposes.
Pursuant to Section 7704 of the Code, however, a partnership that
does not elect to be treated as a corporation nevertheless will be treated as a
corporation for federal income tax purposes if it is a "publicly traded
partnership," unless at least ninety percent (90%) of its income consists of
"qualifying income" under that section. A "publicly traded partnership" is any
partnership (i) interests in which are traded on an established securities
market, or (ii) interests in which are readily tradeable on a "secondary market
(or the substantial equivalent thereof)." Units will not be traded on an
established securities market. There is a significant risk, however, that after
the Unit Redemption Right becomes exercisable, the Units would be considered
readily tradeable on the substantial equivalent of a secondary market.
Hogan & Hartson L.L.P. is of the opinion, based upon representations
by CRFLT and the Company as to the expected ownership and operations of the
Company, that even if the Company
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were considered to be a publicly traded partnership because Units were
considered to be readily tradeable on the substantial equivalent of a secondary
market, the proposed method of operation of the Company is such that it will
qualify as a partnership for federal income tax purposes because it will have
sufficient "qualifying income." In this regard, the income requirements
generally applicable to REITs and the definition of "qualifying income" under
Section 7704 of the Code are similar in most key respects. There is one
significant difference, however, that is relevant to the Company. For a REIT,
rent from a tenant does not qualify as rent from real property if an actual or
constructive owner of 10% or more of the REIT actually or constructively owns
10% or more of the tenant; under Section 7704 of the Code, however, rent from a
tenant is not qualifying income if an actual or constructive owner of 5% or more
of the partnership actually or constructively owns 10% or more of the tenant. A
significant majority of the Company's income will come from rent payments by the
Lessees, which will be wholly owned subsidiaries of Host. Accordingly, if Host
(or an owner of 10% or more of Host) were to own 5% or more of the Company, none
of the rent from the Lessees would be qualifying income for purposes of
determining whether the Company should be taxed as a corporation. In order to
avoid this result, the Partnership Agreement expressly provides that neither
Host, Marriott International nor any owner of 10% or more of Host or any of the
Lessees may during the period of time that a subsidiary of Host is acting as a
Lessee own, actually or constructively, more than 4.9% by value of the interests
in the Company, and the Partnership Agreement contains self-executing mechanisms
intended to enforce this prohibition. Assuming that the prohibition is enforced
at all times, so long as the Company's income is such that CRFLT could meet the
gross income tests applicable to REITs (see "Federal Income Taxation of CRFLT
Following the Consolidation -- Income Tests Applicable to REITs" and "--
Ownership of Partnership Interests by a REIT"), the Company's qualifying income
should be sufficient for it to avoid being classified as a corporation even if
it were considered a publicly traded partnership. As general partner of the
Company, CRFLT may, in its sole and absolute discretion, waive or modify this
ownership limit if it is satisfied that ownership in excess of this limit will
not cause the Company to be treated as a corporation for federal income tax
purposes.
If the Company were considered a publicly traded partnership (because
the Units were considered readily tradeable on the substantial equivalent of a
secondary market) but not treated as a corporation for federal income tax
purposes (because it meets the "qualifying income" exception), a Limited Partner
still could be subject to certain special rules applicable to publicly traded
partnerships. In particular, if the Company were a publicly traded partnership,
a Limited Partner would be unable to use passive losses from other passive
activities to offset his allocable share of Company gain and income. Conversely,
any Company losses allocable to a Limited Partner could be used only as an
offset against such Limited Partner's allocable share of Company income and
gains and not against income and gains from other passive activities.
The entire discussion of the federal income tax consequences of the
Consolidation and the subsequent ownership of Units is based on the Company
being classified as a partnership for federal income tax purposes. If the
Company instead were taxable as a corporation, most, if not all, of the tax
consequences described below would be inapplicable. In particular, the Company
itself would be subject to federal and state income tax, thereby reducing the
cash available for distribution to holders of Units. Under such circumstances,
the Mergers should be treated for federal income tax purposes as contributions
of the Hotel Partnership Interests to a corporation under Section 351 of the
Code, and accordingly, a Limited Partner would recognize gain or loss on the
transaction only to the extent that the Hotel Partnership liabilities allocable
to the Limited Partner at the time of the Consolidation (see "Tax Consequences
of the Formation of the Company -- Relief from Liabilities/Deemed Cash
Distribution" below) exceeded the Limited Partner's adjusted basis in his Hotel
Partnership Interest (i.e., the Limited Partner had a "negative capital
account"). Finally, under such circumstances, CRFLT would not
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qualify as a REIT because the value of CRFLT's ownership interest in the Company
would exceed 5% of CRFLT's assets and CRFLT would be considered to hold more
than 10% of the voting securities of another corporation (see "Federal Income
Taxation of CRFLT Following the Consolidation -- Asset Tests Applicable to
REITs"), which would adversely affect the value of the Common Shares (and,
indirectly, the value of the Units) (see "Federal Income Taxation of CRFLT
Following the Consolidation -- Failure of CRFLT to Qualify as a REIT"). However,
as described above, Hogan & Hartson L.L.P., counsel to the Company, is of the
opinion that the proposed method of operation of the Company (as represented by
the Company) is such that it will be treated as a partnership for federal income
tax purposes and will not be subject to tax as a corporation or an association
taxable as a corporation. As noted previously, an opinion of counsel does not
bind the courts, and no assurance can be provided that such opinion will not be
challenged by the IRS or will be sustained by a court if so challenged.
Tax Consequences of the Formation of the Company
Overview. As described in greater detail above (see "The
Consolidation"), the Company will acquire the Hotel Partnerships through the
mergers of the Merger Partnerships into the Hotel Partnerships, resulting in the
receipt of Units by the Partners. The Company intends that the Mergers will be
treated for federal income tax purposes as the transfer by the Partners of their
interests in the Hotel Partnerships to the Company in exchange for Units, and
the discussion herein assumes that the Mergers will be so treated. There can be
no assurance, however, that the IRS will not seek to recharacterize each Merger
as either (i) the liquidation of a Hotel Partnership followed by the
distribution by the Hotel Partnership of its assets to its Partners and the
subsequent transfers by such Partners of such assets to the Company in exchange
for Units or (ii) the transfer by a Hotel Partnership of its assets to the
Company in exchange for Units and the subsequent distribution of such Units to
its Partners. For a discussion of the tax consequences that would occur if the
Mergers are recharacterized in either of these two alternative manners, see "--
Alternative Recharacterizations of the Mergers."
Section 721 of the Code provides that no gain or loss is recognized
in the case of a contribution of property to the partnership in exchange for an
interest in the partnership. The nonrecognition rule of Section 721 ordinarily
applies even when the property transferred is subject to liabilities (so long as
the assumption of such liabilities does not result in a deemed distribution of
cash in excess of a transferor's basis in the property transferred to a
partnership). Accordingly, Section 721 generally would apply to prevent the
recognition of gain by a Limited Partner in the Consolidation. However, there
are several potential exceptions to the availability of nonrecognition treatment
under Section 721, including the following:
1. Any decrease in a contributing partner's liabilities (including
its share of liabilities with respect to a partnership interest contributed to
another partnership), if not offset by a corresponding increase in the partner's
share of other partnership liabilities, could cause the partner to recognize
taxable gain as a result of the partner being deemed to have received a cash
distribution from the partnership. This recognition of gain could occur even if
the decrease arose in connection with a contribution that would otherwise
qualify for tax-free treatment under Section 721 of the Code. A decrease in a
partner's liabilities (and a resulting deemed cash distribution) also might
occur after a contribution upon a repayment of part or all of such liabilities.
For example, a Limited Partner will be deemed to receive a cash distribution
upon the expected use of proceeds from the Offering to prepay certain
indebtedness of the Hotel Partnerships.
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2. A contribution of property that is treated in whole or in part as
a "disguised sale" of the contributed property under the Code.
3. A contribution of property to a partnership that is classified as
an "investment company" under the Code.
4. Recapture under Section 465(e) of the Code.
CRFLT, the Company, and Hogan & Hartson L.L.P believe that the
foregoing exceptions, which are discussed in greater detail below, should not
result in the recognition of taxable gain or loss at the time of the
Consolidation to a Limited Partner (i) who does not receive a distribution (or a
deemed distribution resulting from relief from liabilities) that exceeds such
Limited Partner's aggregate adjusted basis in his Units after the Consolidation
(including as a result of the use of proceeds from the Offering to pay down
indebtedness of the Hotel Partnerships); and (ii) whose at risk amount does not
go below zero as a result of the Consolidation. CRFLT and the Company also
believe that a Limited Partner who acquired his Hotel Partnership Interests in
the original offering of such interests for cash and who has held such
interests at all times since (a) should not be considered to receive, as a
result of the Consolidation, a distribution (or a deemed distribution resulting
from relief from liabilities) that exceeds such Limited Partner's aggregate
adjusted basis in his Units at the time of the Consolidation, and (b) should not
have his "at risk" amount fall below zero as a result of the Consolidation. See
"-- Assumptions Used in Determining Tax Consequences of the Consolidation"
below. (The adjusted tax basis of a Limited Partner who did not acquire his
Hotel Partnership Interest in the original offering of such interests for cash,
however, could vary materially from that of a Limited Partner who did so, and
thus the Consolidation could result in the receipt by such Limited Partner of a
distribution (or deemed distribution) of cash in excess of such Limited
Partner's adjusted tax basis in his Hotel Partnership Interest and/or a
reduction in his "at risk" amount below zero, either of which could result in
the recognition of income or gain by such Limited Partner.)
Even if a Limited Partner does not recognize gain at the time of the
Consolidation as a result of the foregoing exceptions to nonrecognition
treatment, a variety of events and transactions subsequent to the Consolidation
could cause a Limited Partner to recognize all or part of the gain that has been
deferred through the Consolidation. See "-- Effect of Subsequent Events" below.
CRFLT, as general partner of the Company, specifically is not required to take
into account the tax consequences for the Limited Partners in deciding whether
to cause the Company (or to have the Company cause a Hotel Partnership or a
Subsidiary Partnership) to undertake specific transactions in the future and the
Limited Partners have no right to approve or disapprove such transactions
(except that without the consent of Host, CRFLT cannot cause the Company to sell
the Courtyard Hotels or refinance or pay off the debt secured by the Courtyard
Hotels during the __-year period immediately following the consummation of the
Consolidation). See "Description of Units -- Sales of Assets and Lock-out
Provisions."
Relief from Liabilities/Deemed Cash Distribution. A Limited Partner
will be deemed to receive a cash distribution in connection with the
Consolidation to the extent that his share of Company liabilities immediately
after the Consolidation is less than his share of Hotel Partnership liabilities
immediately prior to the Consolidation (for example, because of the use of
proceeds from the Offering to prepay the CBM2 Certificates, the RIBM1 Senior
Mortgage, and all of the outstanding indebtedness of Res USA). A Limited Partner
will recognize taxable gain as a result of this deemed cash distribution,
however, only to the extent that the deemed cash distribution exceeds such
Limited Partner's adjusted tax basis in his Hotel Partnership Interest
immediately prior to the
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Consolidation. Whether the deemed cash distribution results in taxable gain
depends upon a number of circumstances that can be determined only with full
knowledge of the circumstances of both the Company and the particular Limited
Partner.
Under the applicable provisions of the Code, partners in a
partnership include their share of the partnership's liabilities, determined in
accordance with the Treasury Regulations under Section 752 of the Code, in
determining the basis of their partnership interests. Partners also include in
the basis of their partnership interests the adjusted tax basis of any capital
contributions that they have actually made to the partnership and their
allocable share of all partnership income and gains; partners reduce the basis
in their partnership interests by the amount of all distributions that they
receive from the partnership and their allocable share of all partnership
losses. For purposes of these rules, if a partner's share of the partnership's
liabilities is reduced for any reason, the partner is deemed to have received a
cash distribution equal to the amount of such reduction.
In the case of the Consolidation, these rules generally will be
applied by reference to a Limited Partner's share of liabilities in a Hotel
Partnership immediately before the Consolidation and such Limited Partner's
share of liabilities in the Company immediately after the Consolidation. Any
deemed cash distribution resulting from a reduction in such Limited Partner's
share of liabilities will be considered to be a deemed cash distribution from
the Company (rather than from the Hotel Partnership with respect to which such
Limited Partner's share of liabilities would be reduced). A Limited Partner may
offset his share of the liabilities of the Company against the elimination of
the Limited Partner's share of liabilities of a Hotel Partnership in determining
the amount of the deemed cash distribution to the Limited Partner from the
Company; however, if a Limited Partner is deemed under these rules to receive a
cash distribution from the Company in an amount in excess of the basis of the
Hotel Partnership Interest owned by that Limited Partner immediately prior to
the Consolidation, the Limited Partner may recognize taxable gain. If a Limited
Partner owns interests in more than one Hotel Partnership, then such Limited
Partner should be able to aggregate his bases in such Hotel Partnership
Interests in determining whether such Limited Partner is deemed to receive a
taxable cash distribution from the Company so long as the intended
characterization of the Mergers is respected (i.e., the Mergers are treated as
contributions by the Partners of their Hotel Partnership Interests in exchange
for Units).
Section 752 of the Code and the Treasury Regulations thereunder
provide that a partner's share of partnership liabilities includes the partner's
share of partnership recourse liabilities plus the partner's share of
partnership nonrecourse liabilities. A partnership liability is a recourse
liability to the extent that any partner (or a person related to any partner)
bears the "economic risk of loss" for that liability within the meaning of the
Treasury Regulations; a partnership liability is nonrecourse to the extent that
no partner (or related person) bears the "economic risk of loss." No Limited
Partner (other than possibly Host or an affiliate of Host) will have any share
of any recourse liability of the Company, but each Limited Partner will have a
share of the nonrecourse liabilities of the Company. The following paragraphs
describe the manner in which a Limited Partner's share of the nonrecourse
liabilities of the Company will be determined.
Pursuant to Section 752 of the Code and the Treasury Regulations
thereunder, a partner's share of partnership nonrecourse liabilities is
determined under a three-tier approach. Under this approach, a partner's share
of partnership nonrecourse liabilities equals the sum of (i) the partner's share
of "partnership minimum gain," determined in accordance with the rules of
Section 704(b) of the Code and the Treasury Regulations thereunder; (ii) the
amount of any taxable gain that would be allocated to the partner under Section
704(c) of the Code (or in the same manner as Section 704(c) of the Code in
connection with a revaluation of partnership property) if the partnership
disposed of all
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<PAGE>
partnership property (in a taxable transaction) subject to one or more
nonrecourse liabilities of the partnership in full satisfaction of such
liabilities and for no other consideration ("Section 704(c) Minimum Gain"); and
(iii) the partner's share of "excess nonrecourse liabilities" (i.e., those not
allocated under (i) and (ii) above), which are allocated in accordance with the
partner's "share of partnership profits." A partner's "share of partnership
profits" is determined by taking into account all facts and circumstances of the
economic arrangement among the partners.
At the time of the Consolidation, the Company will not have any
"partnership minimum gain," determined in accordance with the rules of Section
704(b) of the Code and the Treasury Regulations thereunder. Therefore, each
nonrecourse liability of the Company secured by a Hotel will be allocated to
each Limited Partner in accordance with tiers two and three described in Section
752 of the Code and the Treasury Regulations thereunder. First, pursuant to tier
two, such liabilities will be allocated to each Limited Partner in the amount of
such Limited Partner's share of any Section 704(c) Minimum Gain with respect to
such Hotel, after taking into account any reduction in the liabilities occurring
in connection with the Consolidation (including pursuant to the use of proceeds
from the Offering to prepay the CBM2 Certificates, the RIBM1 Senior Mortgage and
all of the outstanding indebtedness of Res USA). Next, pursuant to tier three,
any remaining nonrecourse liabilities will be allocated to each Limited Partner
in accordance with such Limited Partner's share of Company profits, taking into
account for such purposes CRFLT's share of Company profits.
The nonrecourse liabilities, if any, allocable to a Limited Partner
by reason of Section 704(c) Minimum Gain will depend upon a number of factors,
including, for example, (i) the Limited Partner's share of existing Section
704(c) Minimum Gain of the Hotel Partnerships at the time of the Consolidation;
(ii) the extent to which the Company causes nonrecourse liabilities as to which
there exists Section 704(c) Minimum Gain immediately prior to the Consolidation
to be repaid or refinanced in connection with the Consolidation in a manner that
reduces or eliminates that Section 704(c) Minimum Gain; and (iii) the method
selected by the Company to allocate gain under Section 704(c) of the Code. The
Company will elect to allocate gain under Section 704(c) of the Code under the
"traditional method," which in the case of the Limited Partners of a
participating Hotel Partnership that owns a Hotel with Section 704(c) Minimum
Gain, will minimize such Limited Partners' share of Company nonrecourse
liabilities to be allocated by reason of Section 704(c) Minimum Gain. However,
the use of this method will decrease the taxable income that will be allocated
to such Limited Partners, as compared with the amount that would be allocated
had another method been selected. See "Tax Treatment of Limited Partners Who
Hold Units Following the Consolidation -- Tax Allocations With Respect to
Book-Tax Difference on Contributed Hotels."
The Company will allocate any "excess nonrecourse liabilities" in
accordance with a Limited Partner's share of Company profits as represented by
the Limited Partner's percentage ownership interest the Company.
CRFLT and the Company believe that immediately after the
Consolidation, and taking into account the election described above and the
assumptions set forth below (see "-- Assumptions Used in Determining Tax
Consequences of the Consolidation"), each Limited Partner who does not
exercise Dissenters' Rights will be allocated nonrecourse liabilities in an
amount such that no such Limited Partner will be deemed for federal income tax
purposes to have received a deemed cash distribution in excess of such Limited
Partner's basis in his Hotel Partnership Interest as a result of the
Consolidation. The chart below sets forth for each Hotel Partnership (based on
the assumptions set forth below) an estimate of (i) the amount of Hotel
Partnership debt currently allocated to a Limited Partner in such Hotel
Partnership per $1,000 limited partner original investment, (ii) the amount of
Company debt that would be allocated to a Limited Partner in each Hotel
Partnership per $1,000 limited partner original
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<PAGE>
investment immediately after the Consolidation, (iii) the amount, if any, of the
deemed cash distribution resulting from a relief from liabilities, and (iv) the
estimated basis of a Limited Partner in such Hotel Partnership per $1,000
limited partner original investment in the Company immediately after giving
effect to the Consolidation. THIS INFORMATION IS FOR ILLUSTRATIVE PURPOSES ONLY.
HENCE, IT IS ESSENTIAL IN ASSESSING THE POTENTIAL IMPACT RESULTING FROM THE
CONSOLIDATION THAT A LIMITED PARTNER CONSULT WITH HIS OWN TAX ADVISOR AS TO HIS
PARTICULAR CIRCUMSTANCES.
<TABLE>
<CAPTION>
Post Consolidation Deemed Cash
Current Allocation of Allocation of Operating Contribution/(Distribution)
Hotel Partnership Partnership Liabilities (per $1,000 Limited Estimated Basis in Units
Liabilities (per $1,000 (per $1,000 Limited Partner Original (per $1,000 Limited
Limited Partner Original Partner Original Investment) Resulting from Partner Original
Hotel Partnership Investment) Investment) the Consolidation Investment)
----------------- ------------------------ ----------------------- -------------------------- ------------------------
<S> <C> <C> <C> <C>
CBM1
CBM2
RIBM1
RIBM2
Res USA
FIBM
</TABLE>
Assumptions Used in Determining Tax Consequences of the
Consolidation. The estimated adjusted tax basis in the Units indicated per
$1,000 limited partner original investment in each Hotel Partnership has been
computed on the assumption that each of the Limited Partners acquired his Hotel
Partnership Interests in the original offering of such interests for cash. The
actual adjusted tax basis of a Limited Partner in a Hotel Partnership Interest
(and thus the resulting gain, if any) could vary materially from this estimated
amount, depending upon a number of factors, including when and the manner in
which such Limited Partner acquired his Hotel Partnership Interest. See "Tax
Treatment of Limited Partners Who Hold Units Following the Consolidation --
Initial Basis of Units."
Also, the determination of the amount of the Company's nonrecourse
liabilities that will be allocated to a Limited Partner following the
Consolidation assumes that the method to be used by CRFLT to allocate the
liabilities among the Hotels will be respected for federal income tax purposes.
Finally, the determination of the amount of the Company's nonrecourse
liabilities that will be allocated to a Limited Partner is based on the Full
Consolidation Scenario (i.e., that the Offering will yield gross proceeds of
$800 million, that $539 million of outstanding indebtedness will be repaid, that
all of the Hotel Partnerships will elect to participate in the Consolidation and
that no Notes will be issued.) If any of the Hotel Partnerships should elect not
to participate in the Consolidation, the tax consequences of the Consolidation
to the participating Limited Partners (including, without limitation, the
liabilities allocable to the Limited Partners in the Participating Hotel
Partnerships and any deemed distribution to the Limited Partners resulting
therefrom) could change significantly.
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<PAGE>
CRFLT, however, believes that even under such circumstances, Limited Partners
who acquired their Hotel Partnership Interests in the original offering of such
interests for cash and held such interests at all times since still would be
allocated nonrecourse liabilities in an amount such that no such Limited Partner
would be deemed for federal income tax purposes to have received a deemed cash
distribution in excess of such Limited Partner's basis in his Hotel Partnership
Interest as a result of the Consolidation. For a more detailed discussion of the
assumptions used in determining the tax consequences of the Consolidation, see
Appendix __.
Disguised Sale Regulations. The Consolidation also will not be tax
free to a Limited Partner to the extent that it is treated as a "disguised sale"
of all or a portion of such Limited Partner's Hotel Partnership Interest under
the Code or Treasury Regulations. Section 707 of the Code and the Treasury
Regulations thereunder (the "Disguised Sale Regulations") generally provide
that, unless one of certain prescribed exceptions is applicable, a partner's
contribution of property to a partnership and a simultaneous transfer of money
or other consideration (other than an interest in the partnership) from the
partnership to the partner will be treated as a sale, in whole or in part, of
such property by the partner to the partnership. Further, the Disguised Sale
Regulations provide generally that transfers of money or other consideration
between a partnership and a partner that are made within two years of each other
are presumed to be a sale unless the facts and circumstances clearly establish
that either the transfers do not constitute a sale or an exception to disguised
sale treatment applies.
For purposes of these rules, certain reductions in a partner's share
of partnership liabilities are treated as a transfer of money or other property
from the partnership to the partner which may give rise to a disguised sale,
even if that reduction would not otherwise result in a taxable deemed cash
distribution in excess of the partner's basis in his partnership interest. The
method of computing the existence and amount of any such reduction under the
Disguised Sale Regulations is different from, and generally more onerous than,
that applied under the rules discussed at "-- Relief From Liabilities/Deemed
Cash Distribution," above. However, if a transfer of property by a partner to a
partnership is not otherwise treated as part of a disguised sale, then any
reduction in the partner's share of "qualified liabilities" (discussed below)
also will not be treated as part of a disguised sale. Moreover, even if some
-----------
or all of the transfer does otherwise constitute a disguised sale, the amount of
the reduction in the partner's share of "qualified liabilities" may in some
cases be computed under a more favorable method than the amount of the reduction
in the partner's share of other liabilities.
1. Impact of Distributions of Cash Flow from the Company. Cash
-----------------------------------------------------
distributions from a partnership to a partner may be treated as a transfer of
property for purposes of the "disguised sale" rules. However, one exception to
"disguised sale" treatment in the Disguised Sale Regulations relates to
distributions of "operating cash flow," as such term is defined in the Disguised
Sale Regulations. Operating cash flow distributions are presumed not to be a
part of a sale of property to a partnership unless the facts and circumstances
clearly establish that the distribution of operating cash flow is part of a
sale. The Disguised Sale Regulations define operating cash flow distributions as
distributions which are not presumed to be guaranteed payments for capital under
the Disguised Sale Regulations, are not reasonable preferred returns under the
Disguised Sale Regulations, and are not characterized by the parties as
distributions to the partner acting in a capacity other than as a partner, to
the extent of the net cash flow of the partnership from operations multiplied by
the lesser of the percentage interest of the partner receiving the distribution
for that year or the partner's percentage interest in overall partnership
profits for the life of the partnership. The Disguised Sale Regulations contain
a safe harbor for calculating a partner's interest in such operating cash flow.
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<PAGE>
No distribution of cash will be made by the Company to the
participating Limited Partners at the time of the Consolidation. CRFLT and the
Company believe that the Company's periodic distributions of cash to holders of
Units will qualify as distributions of "operating cash flow" under the Disguised
Sale Regulations, and that there will be no facts or circumstances indicating
that such distributions should be considered part of a sale.
2. Impact of Assumption of Liabilities by the Company. As described
--------------------------------------------------
above, a second exception to the "disguised sale" presumption relates to the
assumption of "qualified liabilities" in connection with a contribution of
property to a partnership. For purposes of the Disguised Sale Regulations, a
"qualified liability" in connection with a transfer of property to a partnership
includes (i) any liability incurred more than two years prior to the earlier of
the transfer of the property or the date the partner agrees in writing to the
transfer, as long as the liability has encumbered the transferred property
throughout the two-year period; (ii) a liability that was not incurred in
anticipation of the transfer of the property to a partnership, but that was
incurred by the partner within the two-year period prior to the earlier of the
date the partner agrees in writing to transfer the property or the date the
partner transfers the property to a partnership and that has encumbered the
transferred property since it was incurred; (iii) a liability that is traceable
under the Treasury Regulations to capital expenditures with respect to the
property; and (iv) a liability that was incurred in the ordinary course of the
trade or business in which property transferred to the partnership was used or
held, but only if all the assets related to that trade or business are
transferred, other than assets that are not material to a continuation of the
trade or business. However, a recourse liability is not a "qualified liability"
unless the amount of the liability does not exceed the fair market value of the
transferred property (less any other liabilities that are senior in priority and
encumber such property or any allocable liabilities described in (iii) or (iv),
above) at the time of transfer. A liability incurred within two years of the
transfer is presumed to be incurred in anticipation of the transfer unless the
facts and circumstances clearly establish that the liability was not incurred in
anticipation of the transfer. However, to the extent that the proceeds of a
partner or partnership liability are allocable under the Treasury Regulations to
payments discharging all or part of any other liability of that partner or of
the partnership, as the case may be, the newer liability is considered the same
as the older liability for purposes of the Disguised Sale Regulations. Finally,
if a partner treats a liability described in (ii) above as a "qualified
liability" because the facts clearly establish that it was not incurred in
anticipation of the transfer, such treatment must be disclosed to the IRS in the
manner set forth in the Disguised Sale Regulations.
The Hotel Partnerships and the Hotel Partnership GPs believe that all
direct or indirect liabilities of the Hotel Partnerships fall into one of the
four categories of "qualified liabilities" described above. However,
approximately $31.75 million of CBM1 indebtedness may be "qualified liabilities"
solely by reason of exception (ii) in the preceding paragraph (i.e., a liability
incurred within two years of the Consolidation but not in anticipation of the
Consolidation), and thus CBM1 and its Limited Partners may be required to make
disclosure with respect to the indebtedness in their tax returns for the year in
which the Consolidation occurs. There can be no assurance, however, that the IRS
will not challenge the position of CBM1 that this indebtedness is a "qualified
liability."
3. Impact of Unit Redemption Right. For a discussion of the impact
-------------------------------
of the receipt and exercise of the Unit Redemption Right upon the potential
characterization of the Consolidation as a disguised sale, see "-- Unit
Redemption Right," below.
4. Impact of Limited Partners Who Exercise Dissenters' Rights. If
----------------------------------------------------------
the Consolidation is recharacterized as partnership level transfers of the Hotel
Partnership assets, as described below in
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<PAGE>
"-- Alternative Recharacterizations of the Mergers -- Transfer of Hotel
Partnership Assets," there can be no assurance that the IRS would not assert
that a Limited Partner who does not exercise his Dissenters' Rights in
connection with the Consolidation must nevertheless recognize gain under the
"disguised sale" rules if another Limited Partner in the Hotel Partnership does
exercise such rights and receives Notes in connection with the Consolidation. As
described in such section below, however, Hogan & Hartson L.L.P. is of the
opinion that although the matter is not free from doubt, a Limited Partner who
does not exercise Dissenters' Rights and receive Notes in connection with the
Consolidation should not be required to recognize gain by reason of another
Limited Partner's exercise of such rights. As noted previously, an opinion of
counsel does not bind the courts, and no assurance can be provided that such
opinion will not be challenged by the IRS or will be sustained by a court if so
challenged.
5. Effect of Disguised Sale Characterization. If a transfer of
-----------------------------------------
property to a partnership and one or more transfers of money or other
consideration (including the assumption or taking subject to a liability) by the
partnership to that partner are treated as a disguised sale, then the transfers
will be treated as a sale of property, in whole or in part, to the partnership
by the partner acting in a capacity other than as a member of a partnership,
rather than a contribution under Section 721 of the Code and a partnership
distribution. Accordingly, in any case in which a Limited Partner's transfer of
his Hotel Partnership Interest to the Company is found to be a "disguised sale,"
all or a substantial portion of the gain represented by the excess of the fair
market value of such Hotel Partnership Interest (plus all liabilities
attributable to such Hotel Partnership Interest) over the Limited Partner's tax
basis in the Hotel Partnership Interest could be recognized by the Limited
Partner.
A transfer that is treated as a sale is treated as a sale for all
purposes of the Code and the sale is considered to take place on the date that,
under general principles of federal income tax law, the partnership is
considered to become the owner of the property. If the transfer of money or
other consideration from the partnership to the partner occurs after the
transfer of property to the partnership, the partner and the partnership are
treated as if, on the date of the transfer of the property, the partnership
transferred to the partner an obligation to transfer to the partner money or
other consideration. Moreover, if a transfer of property to a partnership is
treated as part of a sale without regard to the partnership's assumption of or
taking subject to a "qualified liability," as defined above, then the
partnership's assumption of or taking subject to that liability is treated as a
transfer of additional consideration to the transferring partner. The amount of
such "qualified liability" treated as additional consideration is generally the
lesser of (x) the amount of the "qualified liability" and (y) an amount
determined by multiplying the "qualified liability" by the partner's "net equity
percentage." The "net equity percentage" is generally the amount of
consideration received by such partner (other than relief from "qualified
liabilities") divided by the partner's net equity in the property sold, as
calculated under the Disguised Sale Regulations.
Investment Company Regulations. If a transfer of property to a
partnership (such as the transfer of the Hotel Partnership Interests to the
Company which will be deemed to occur when the Merger Partnerships merge into
the Hotel Partnerships) were considered to be a transfer to an "investment
company," as defined in the Treasury Regulations, gain would be recognized on
such transfer under Section 721 of the Code. In the case of a transfer of
property to a partnership, the Treasury Regulations provide that such transfer
would be treated as having been made to an investment company if the transfer
results in a diversification of the interests of two or more transferors, and
the transferee is a partnership more than 80% of the value of whose assets
(excluding cash and nonconvertible debt) are held for investment and are readily
marketable stock or securities or interests in Regulated Investment Companies
("RICs") or REITs. The Treasury
198
<PAGE>
Regulations further provide that a transfer ordinarily will result in
diversification for this purpose if two or more persons contribute non-identical
assets. Although the transfers to the Company will result in the diversification
of the interests of the Partners, no significant portion of the Company's assets
will constitute readily marketable stocks or securities or interests in RICs or
REITs. Accordingly, the transfers to the Company will not constitute transfers
to an investment company.
The tax consequences of the Consolidation described above are based
in part on the conclusion that the deemed contributions of the Hotel Partnership
Interests to the Company will not be treated as transfers to an investment
company under Section 721 of the Code and the Treasury Regulations. The Company,
however, might not meet the IRS's guidelines for obtaining an advance ruling
with respect to this issue. Revenue Procedure 97-3 states that the question of
whether Section 721 of the Code applies to the contribution of widely held
developed or undeveloped real property to a partnership in exchange for an
interest in the partnership is an area under "extensive study" with respect to
which the IRS will not issue rulings or determination letters when (i) the
contribution is the result of solicitation by promoters, brokers, or investment
houses, or (ii) the interest in the transferee partnership is issued in a form
designed to render it readily tradable. The key terms used in this Revenue
Procedure have not been defined and the IRS has not issued Treasury Regulations,
proposed Treasury Regulations, rulings, or other pronouncements with respect to
such contributions. The IRS could take the position in the future that
contributions of the sort described in the Revenue Procedure do not qualify for
nonrecognition treatment under Section 721 of the Code, that such contributions
should include the contributions of Hotel Partnership Interests to the Company
as part of the Consolidation and that such conclusions should apply
retroactively. It is by no means clear, however, that even if the IRS were to
take such position, a court would sustain it.
If Section 721 of the Code were not to apply to the deemed
contributions of Hotel Partnership Interests to the Company, then such
contributions would be treated as taxable exchanges for federal income tax
purposes. Each Limited Partner would be treated as if he had sold, in a fully
taxable transaction, his Hotel Partnership Interest to the Company in exchange
for an amount equal to (x) the value of the Units received and (y) the
liabilities assumed by the Company. Any gain or loss on such a sale would
generally be treated as capital gain or loss under the Code. For a discussion of
the treatment of capital gain and loss under the Code, see "Tax Treatment of
Limited Partners Who Hold Units Following the Consolidation -- Disposition of
Units by Limited Partners," below.
Section 465(e) Recapture. In general, the "at risk" rules of Section
465 of the Code limit the use of losses, see "-- Tax Treatment of Limited
Partners Who Hold Units Following the Consolidation -- Limitations on
Deductibility of Losses," below. Under Section 465(e) of the Code, a taxpayer
may be required to include in gross income (i.e., to "recapture") losses
previously allowed to the taxpayer with respect to an "activity," if the amount
for which the taxpayer is "at risk" in the activity is less than zero at the
close of the taxable year.
The identification of a taxpayer's activities for purposes of the "at
risk" rules and the determination of a taxpayer's amount at risk in an activity
are complex and uncertain. However, as a general matter a taxpayer's amount at
risk in an activity is increased by the taxpayer's income, and reduced by the
taxpayer's losses, from the activity. Therefore, any income taken into account
by a Limited Partner as a result of a deemed cash distribution, disguised sale
treatment or investment company treatment is likely to reduce the extent to
which Section 465(e) of the Code would apply to that Limited Partner.
Nevertheless, it is possible that the consummation of the
Consolidation or the repayment of certain "qualified nonrecourse financing" (as
defined in Section 465(b)(6) of the Code) of the
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<PAGE>
Company at the time of or following the Consolidation could, singularly or in
combination, cause a Limited Partner's amount at risk in an activity to be
reduced below zero and could, therefore, cause an income inclusion to the
Partner under Section 465(e) of the Code. In this regard, the definition of
"qualified nonrecourse financing" is different from, and more restrictive than,
the definition of "nonrecourse liabilities" under Section 752 of the Code.
Hence, it is possible that a Limited Partner could incur a reduction in his
share of "qualified nonrecourse financing" that causes him to recognize income
under Section 465(e) of the Code even though he has a sufficient share of
"nonrecourse liabilities" under Section 752 of the Code so that he would not be
deemed to have received a taxable deemed cash distribution in connection with
the Consolidation. However, CRFLT expects that the majority of the current debt
with respect to the Hotel Partnerships that will be assumed by the Company in
the Consolidation should qualify as "qualified nonrecourse financing" and that,
subject to the assumptions described in Appendix ___, the use of proceeds from
the Offering to prepay the CBM2 Certificates, the RIBM1 Senior Mortgage and all
of the outstanding indebtedness of Res USA will not cause any Limited Partner's
amount at risk with respect to a Hotel Partnership to be reduced below zero.
However, there can be no assurance that debt incurred by the Company in the
future to refinance existing debt would qualify as "qualified nonrecourse
financing," or that the repayment of obligations assumed by the Company in
connection with a refinancing of such obligations would not cause income
inclusion to a Limited Partner under Section 465(e) of the Code.
The "at risk" provisions of the Code generally do not apply to losses
attributable to real property placed in service prior to January 1, 1987, by the
taxpayer or to losses attributable to a partnership in which the taxpayer
acquired its interests before that date. Except with respect to certain of the
Hotels held by CBM1, all of the Hotels were placed in service on or after
January 1, 1987. Moreover, if a Limited Partner in CBM1 acquired his interest on
or after January 1, 1987, then such Limited Partner will be subject to the "at
risk" provisions of the Code with respect to his entire interest in CBM1 (rather
than just the CBM1 Hotels placed in service after that date). To the extent that
a Limited Partner of CBM1 was not subject to the "at risk" provisions of the
Code with respect to CBM1's pre-1987 Hotels, he will become so as a result of
the Consolidation.
Unit Redemption Right. The Partnership Agreement provides that,
subject to certain limitations, a Limited Partner may, one year after the
consummation of the Offering, upon notice to the Company, require the Company to
redeem all or a portion of such Limited Partner's Units for an amount of cash
equal to the deemed fair market value of such Units at the time of redemption
(the "Redemption Amount"). See "Description of Units -- Unit Redemption Right."
The Redemption Amount shall equal the value on a defined valuation date of a
number of Common Shares per Unit determined pursuant to a defined "conversion
factor," which the Company expects will be one. Thus, it is intended that the
Redemption Amount will be determined by reference to a number of Common Shares
equal to the number of Units being redeemed. In addition, CRFLT may, in its sole
and absolute discretion, elect to assume and satisfy the Company's redemption
obligation by purchasing from a redeeming Limited Partner the Units that such
Limited Partner wishes to redeem for an amount equal to the Redemption Amount,
payable at the option of CRFLT in either Common Shares or cash. If CRFLT assumes
the redemption obligation in the manner just described, the Partnership
Agreement provides that the redemption will be treated by CRFLT, the Company,
and the redeeming Limited Partner as a sale of Units by such Limited Partner to
CRFLT at the time of such purchase. (A Limited Partner's rights described in
this paragraph are referred to as the "Unit Redemption Right.")
Based on certain representations of the Company and CRFLT, Hogan &
Hartson L.L.P., counsel to CRFLT, has opined as follows with respect to the Unit
Redemption Right: (1) the Unit Redemption Right will not be considered "other
consideration" such that its receipt would result in a
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Limited Partner being treated under the "disguised sale" rules as having sold
all or a portion of his Hotel Partnership Interest to the Company in the
Consolidation; (2) a Limited Partner's exercise of his Unit Redemption Right
more than two years after the date of consummation of the Consolidation will not
cause the Consolidation itself to be a taxable transaction for the Limited
Partner (or for the other Limited Partners); and (3) it is more likely than not
that a Limited Partner's exercise of his Unit Redemption Right more than one
year after the date of consummation of the Consolidation but less than two years
after such date will not cause the Consolidation itself to be a taxable
transaction for the Limited Partner (or for the other Limited Partners). As
noted previously, however, an opinion of counsel does not bind the courts, and
no assurance can be provided that such opinion will not be challenged by the IRS
or will be sustained by a court if so challenged.
In the event the Disguised Sale Regulations were determined to apply
to a Limited Partner who exercises his Unit Redemption Right, such Limited
Partner would be treated as though he sold in a fully taxable transaction
property to the Company on the date of the consummation of the Consolidation and
received on such date an obligation of the Company to transfer money or other
consideration to him. Such disguised sale treatment might result in taxable gain
being allocated only to the redeeming Limited Partner. If, however, the
Consolidation were recharacterized as partnership level transfers of the Hotel
Partnership assets as described below in "-- Alternative Recharacterizations of
the Mergers -- Transfer of Hotel Partnership Assets," there could be no
assurance that the IRS would not assert that any such gain is allocable to all
Partners who were partners in a Hotel Partnership with such redeeming Limited
Partner on the date of consummation of the Consolidation.
For a discussion of the expected federal income tax effects of a
Limited Partner's exercise of his Unit Redemption Right (other than the effects
of such exercise on the Consolidation described in this section), see "Tax
Treatment of Limited Partners Who Hold Units Following the Consolidation -- Tax
Treatment of Exercise of Unit Redemption Right" below.
Impact of Partnership Anti-Abuse Regulations. The United States
Treasury has issued a final regulation (the "Anti-Abuse Rule") under the
partnership provisions of the Code (the "Partnership Provisions") that
authorizes the IRS, in certain "abusive" transactions involving partnerships, to
disregard the form of the transaction and recast it for federal tax purposes as
the IRS deems appropriate. The Anti-Abuse Rule applies where a partnership is
formed or utilized in connection with a transaction (or series of related
transactions) with a principal purpose of substantially reducing the present
value of the partners' aggregate federal tax liability in a manner inconsistent
with the intent of the Partnership Provisions. The Anti-Abuse Rule states that
the Partnership Provisions are intended to permit taxpayers to conduct joint
business (including investment) activities through a flexible economic
arrangement that accurately reflects the partners' economic agreement and
clearly reflects the partners' income without incurring any entity-level tax.
The purposes for structuring a transaction involving a partnership are
determined based on all of the facts and circumstances, including a comparison
of the purported business purpose for a transaction and the claimed tax benefits
resulting from the transaction. A reduction in the present value of the
partner's aggregate federal tax liability through the use of a partnership does
not, by itself, establish inconsistency with the intent of the Partnership
Provisions.
The Anti-Abuse Rule contains an example in which a corporation that
elects to be treated as REIT contributes substantially all of the proceeds from
a public offering to a partnership in exchange for a general partnership
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, some of the limited partners have
the right, beginning two years after the
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formation of the partnership, to require the redemption of their limited
partnership interests in exchange for cash or REIT stock (at the REIT's option)
equal to the fair market value of their respective interests in the partnership
at the time of the redemption. The example concludes that the use of the
partnership is not inconsistent with the intent of the Partnership Provisions
and, thus, cannot be recast by the IRS.
Based on the foregoing, Hogan & Hartson L.L.P. and CRFLT believe that
the Anti-Abuse Rule will not have any adverse impact on either CRFLT's ability
to qualify as a REIT, or the federal income tax consequences of the
Consolidation with respect to the Limited Partners. However, the Unit Redemption
Right does not conform in all respects to the redemption rights contained in the
foregoing example. Moreover, the Anti-Abuse Rule is extraordinarily broad in
scope and is applied based on an analysis of all of the facts and circumstances.
As a result, there can be no assurance that the IRS will not attempt to apply
the Anti-Abuse Rule to the Company and CRFLT. If the conditions of the
Anti-Abuse Rule are met, the IRS is authorized to take appropriate enforcement
action, including disregarding the Company for federal income tax purposes or
treating one or more of its partners as nonpartners (including, perhaps as
shareholders of CRFLT). If the Company were ignored for federal income tax
purposes, the Hotel Partnerships could be treated as receiving (and then
distributing to the Partners) Common Shares in the mergers of the Merger
Partnerships into the Hotel Partnerships, instead of Units, which would be a
taxable exchange.
Withholding. If a Limited Partner is not considered a U.S. resident
for tax purposes, withholding (in an amount equal to 10% of the "amount
realized" by such Limited Partner, which would include both the value of the
Units received and such Limited Partner's share of the liabilities of his Hotel
Partnership, as determined for federal income tax purposes) under the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA") may be required. As a
condition to the receipt of Units in the Consolidation, each Limited Partner who
does not want to be subject to such withholding will have to provide to the
Company either a certification, made under penalties of perjury, that it is a
United States citizen or resident (or if an entity, an entity organized under
the laws of the United States) or, alternatively, a withholding certificate from
the IRS providing that no withholding is required with respect to such Limited
Partner in connection with the Consolidation. A Limited Partner who is not a
United States citizen or resident (or if an entity, not an entity organized
under the laws of the United States) should consult with his U.S. tax advisor
with respect to obtaining a withholding certificate from the IRS.
Alternative Recharacterizations of the Mergers. As described above,
the Company intends that the Mergers of the Merger Partnerships into the Hotel
Partnerships will be treated for federal income tax purposes as the transfer by
the Partners of their interests in the Hotel Partnerships to the Company in
exchange for Units, and the discussion herein assumes that the Mergers will be
so treated. The IRS, however, may seek to recharacterize each Merger as either
(i) the liquidation of a Hotel Partnership, followed by the distribution by the
Hotel Partnership of its assets to its Partners and the subsequent transfers by
such Partners of such assets to the Company in exchange for Units, or (ii) the
transfer by a Hotel Partnership of its assets to the Company in exchange for
Units and the subsequent distribution of such Units to its Partners.
1. Liquidation of Hotel Partnership. If each of the Mergers of the
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Merger Partnerships into the Hotel Partnerships were treated as the liquidation
of a Hotel Partnership followed by the distribution by the Hotel Partnership of
its assets to its Partners and the subsequent transfers by such Partners of such
assets to the Company in exchange for Units, the resulting tax consequences to a
Limited Partner would be the same in all material respects as those described in
"-- Overview," above. Section 731 of the Code provides that a distribution by a
partnership to a partner of property,
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other than "money" (which would include a distribution of "marketable
securities" in certain circumstances), does not result in taxable gain to the
partner. A partner will recognize gain on a partnership distribution of money
only to the extent that the money exceeds the partner's basis in his partnership
interest. If the Hotel Partnerships are treated as having distributed their
assets to their Partners, any money (or marketable securities, where applicable)
deemed distributed to a Limited Partner who acquired his Hotel Partnership
Interest in the original offering of such interests for cash would not exceed
such Limited Partner's basis in his Hotel Partnership Interest. Accordingly,
Section 731 would generally apply to prevent the recognition of gain by such a
Limited Partner upon the distribution to such Limited Partner of his share of
the assets of the Hotel Partnership.
Pursuant to Section 732 of the Code, upon receipt of the liquidating
distribution, the Limited Partner would take a basis in the assets received
equal to his basis in his Hotel Partnership Interest. The contribution of such
assets by such Limited Partner to the Company would be treated under Section 721
of the Code in the same manner as the contributions by Limited Partners of their
Hotel Partnership Interests to the Company described above in "-- Overview."
Accordingly, Section 721 of the Code would generally apply to prevent the
recognition of gain by a Limited Partner in the Consolidation, subject to the
exceptions discussed above in "-- Overview," (i) who does not receive a cash
distribution (or a deemed cash distribution resulting from relief from
liabilities) that exceeds such Limited Partner's aggregate adjusted basis in his
Units after the Consolidation; and (ii) whose "at risk" amount does not go below
zero as a result of the Consolidation.
2. Transfer of Hotel Partnership Assets. The IRS also may seek to
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recharacterize each of the Mergers of a Merger Partnership into a Hotel
Partnership as the transfer by the Hotel Partnership of its assets to the
Company in exchange for Units (and possibly Notes) and the subsequent
distribution of such Units (and possibly Notes) to its Partners. If the Mergers
are treated for federal income tax purposes as partnership level transfers of
Hotel Partnership assets to the Company, CRFLT and the Company intend to take
the position that in exchange for such assets, each Hotel Partnership would
receive solely Units from the Company, which the Hotel Partnership then would
distribute to its Partners. A Limited Partner who exercised his Dissenters'
Rights and elected to receive Notes would then redeem the Units for Notes. For a
discussion of the treatment of such Limited Partners, see "Tax Treatment of
Limited Partners Who Exercise Dissenters' Rights in Connection with the
Consolidation." If the partnership level transfer of assets were so treated, the
Hotel Partnerships would not recognize gain on such transfers under Section 721
of the Code, and accordingly, the Limited Partners, subject to the exception
discussed in "-- Overview" above would not recognize gain.
There can be no assurance, however, that the IRS would not assert
that in exchange for its assets, each Hotel Partnership should be deemed to have
received from the Company a mixture of Units and Notes. If so treated, a Hotel
Partnership would recognize gain equal to the difference between (x) the initial
issue price (i.e., the face amount) of the Notes that it would be deemed to have
received from the Company, and (y) the adjusted basis of the portion of the
assets considered transferred to the Company for the Notes. In that event, all
Limited Partners in the Hotel Partnership would recognize their share of such
gain, regardless of whether or not they exercised their Dissenters' Rights.
Hogan & Hartson L.L.P. is of the opinion, however, that although the matter is
not entirely free from doubt, the Hotel Partnerships should not be treated as
receiving from the Company the Notes that are ultimately issued to the Limited
Partners who exercise their Dissenters' Rights and elect to receive Notes in
exchange for Units. As noted previously, an opinion
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of counsel does not bind the courts, and no assurance can be provided that such
opinion will not be challenged by the IRS or will be sustained by a court if so
challenged.
Under Section 731 of the Code, the deemed subsequent distribution of
Units (and possibly Notes) by each Hotel Partnership to its Partners would not
result in the recognition of gain by Limited Partners, unless the distribution
of the Units is treated as a distribution of "marketable securities" under
Section 731(c) of the Code.
Section 731(c) of the Code, enacted in 1993, provides that "money"
includes marketable (actively traded) securities, which would include publicly
traded REIT shares, or equity interests in another entity that are readily
convertible into or exchangeable for money or marketable securities. The Common
Shares that can be issued to a Limited Partner upon exercise of the Unit
Redemption Right (and which in any event will determine the amount received by a
Limited Partner upon such exercise) will be marketable securities. Accordingly,
the Units may be considered "exchangeable for money or marketable securities"
and therefore treated as "money" under Section 731(c). Regulations under Section
731(c) provide, however, that a distribution of a marketable security will not
be treated as a distribution of "money" under Section 731(c) if (i) the security
was acquired by the partnership in a nonrecognition transaction; (ii) the value
of any marketable securities and money exchanged by the partnership (that is, by
a Hotel Partnership) in the nonrecognition transaction was less than 20 percent
of the value of all the assets exchanged in such transaction; and (iii) the
partnership distributes the security within 5 years of the date the security was
acquired by the partnership. The Company and Hotel Partnership GPs believe that,
if the Consolidation were characterized in this manner, the distributions of
Units by the Hotel Partnerships would not be treated as distributions of "money"
because the conditions described above will be satisfied. Hence, the Limited
Partners should not be required to recognize gain under Section 731(c) of the
Code on the deemed distributions by the Hotel Partnerships of the Units.
Effect of Subsequent Events. In addition to any gain that might be
recognized by the Limited Partners at the time of the Consolidation, a variety
of future events and transactions could cause some or all of the Limited
Partners holding Units to recognize part or all of the taxable gain that
otherwise has been deferred through the Consolidation including, but not limited
to, the following:
(i) the sale or other taxable disposition of one or more of the
individual Hotels (see "-- Tax Treatment of Limited
Partners Who Hold Units Following the Consolidation -- Sale
of Individual Hotels," below);
(ii) the reduction in the amount of existing nonrecourse
liabilities secured by one or more of the individual Hotels
as a result of a refinancing or repayment thereof
(including, without limitation, the use of proceeds from
the Offering to prepay debts in addition to the CBM2
Certificates, the RIBM1 Senior Mortgage, and all of the
outstanding indebtedness of Res USA, or any other
refinancing or repayment of nonrecourse liabilities with
the proceeds of public or private debt financing obtained
by the Company that is not secured by individual assets of
the Company or that is secured by assets of the Company
other than those that were owned by a Hotel Partnership
immediately prior to the Consolidation) (see "Financing
Transactions" above and "-- Tax Treatment of Limited
Partners Who Hold Units Following the Consolidation --
Refinancing of the Indebtedness Secured by Individual
Hotels," below);
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(iii) the issuance of additional Units, including in connection
with either the issuance of Common Shares or other equity
interests by CRFLT or the acquisition of additional
properties in exchange for Units or other equity interests
in the Company;
(iv) an increase to the tax basis of the Hotels resulting from
capital expenditures; and
(v) the elimination over time of the disparity between the
current tax basis of the Hotels and the "book basis" of the
Hotels based upon their fair market values at the time of
the Consolidation (see "-- Tax Treatment of Limited
Partners Who Hold Units Following the Consolidation -- Tax
Allocations with Respect to Book-Tax Difference on
Contributed Hotels," below), which could have the effect of
reducing the amount of indebtedness allocable to the
Limited Partners for basis purposes and therefore can
result in deemed cash distributions.
In addition, Limited Partners can expect that the aggregate adjusted
tax basis in their Units following the Consolidation will be substantially lower
following the Consolidation than such Limited Partners' aggregate adjusted basis
in their Hotel Partnership Interests immediately before the Consolidation.
See "-- Tax Treatment of Limited Partners Who Hold Units Following the
Consolidation --Initial Basis of Units" below. Therefore, the Limited Partners
can expect to receive taxable distributions of cash and taxable deemed cash
distributions resulting from the reduction of their share of Company nonrecourse
liabilities sooner than would have been the case if the Consolidation had not
occurred. See "-- Relief From Liabilities/Deemed Cash Distributions," above.
Except with respect to the Courtyard Hotels and the debt secured by
such Hotels, the Partnership Agreement does not impose any restrictions on the
Company's ability to dispose of the Hotels or to refinance debt secured by the
Hotels (or to direct that the Hotel Partnerships engage in such transactions),
and the restrictions relating to the Courtyard Hotels may be waived by Host. In
addition, CRFLT, as general partner of the Company, specifically is not required
to take into account the tax consequences to the holder of Units in deciding
whether to cause the Company to undertake specific transactions (although it is
expressly permitted to do so), and the holders of Units have no right to approve
or disapprove such transactions. See "Description of Units -- Sales of Assets
and Lock-out Provisions."
Tax Treatment of Limited Partners Who Exercise Dissenters' Rights in Connection
with the Consolidation
A Limited Partner who exercises his Dissenters' Rights and elects to
receive Notes in connection with the Consolidation will be treated as having
made a taxable disposition of his Hotel Partnership Interest. The amount
realized in connection with such disposition will equal the sum of the "issue
price" of the Notes (i.e., the face amount of the Notes) plus the portion of the
Hotel Partnership's liabilities allocable to the Limited Partner for federal
income tax purposes. To the extent the amount realized exceeds the Limited
Partner's adjusted basis in his Hotel Partnership Interest, the Limited Partner
will recognize gain. For a discussion of the federal income tax rates applicable
to the net capital gain from the sale of a capital asset, see "-- Tax Treatment
of Limited Partners Who Hold Units Following the Consolidation -- Disposition of
Units by Limited Partners."
A Limited Partner who exercises Dissenters' Rights and elects to
receive Notes may be eligible to defer at least a portion of that gain under the
"installment sale" rules. Those rules, however, may not permit the Limited
Partner to defer all of the gain, and to the extent that the face amount of the
Notes outstanding at the end of the taxable year (and any other installment
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obligations received by the Limited Partner during the year) exceeds $5,000,000,
will require that the Limited Partner who defers gain pay to the IRS interest on
the resulting tax that has been deferred. The Limited Partner, for instance,
will not be eligible to defer that gain to the extent that such gain would be
taxed as ordinary income under Section 1245 of the Code. In addition, to the
extent that the Limited Partner's share of Hotel Partnership liabilities exceeds
his adjusted tax basis in his Hotel Partnership Interest immediately prior to
the Consolidation, the Limited Partner will not be eligible to defer gain
recognized upon the receipt of Notes. Lastly, if a Limited Partner disposes of
Notes, any gain that had been deferred would be recognized in the year of
disposition.
The gain, if any, required to be recognized by a Limited Partner in
the Consolidation can be offset by unused passive activity losses from the Hotel
Partnerships and other investments.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR DISSENTING PARTNER COULD
HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE CONSOLIDATION, AND THE
SUBSEQUENT OWNERSHIP AND DISPOSITION OF NOTES. THEREFORE, IT IS ESSENTIAL THAT
SUCH LIMITED PARTNERS CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH PARTNERS' RESPECTIVE PERSONAL
TAX SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY
STATE, LOCAL, OR FOREIGN TAXING JURISDICTION.
Tax Treatment of Limited Partners Who Hold Units Following the Consolidation
Income and Deductions in General. Each Limited Partner that holds
Units following the Consolidation will be required to report on his income tax
return his allocable share of income, gains, losses, deductions and credits of
the Company. Such items must be included on the Limited Partner's federal income
tax return without regard to whether the Company makes a distribution of cash or
other assets to the Limited Partner. No federal income tax will be payable by
the Company.
Treatment of Company Distributions. Distributions of money (including
for such purposes decreases in a Limited Partner's share of Company liabilities)
by the Company to a Limited Partner generally will not be taxable to such
Limited Partner for federal income tax purposes to the extent of the Limited
Partner's aggregate basis in his Units immediately before the distribution.
Distributions of money in excess of such basis generally will be considered to
be gain in the amount of such excess, a portion of which may be ordinary income.
As discussed above, any reduction in a Limited Partner's share of the Company's
nonrecourse liabilities, either through repayment, refinancing with recourse
liabilities, refinancing with nonrecourse liabilities secured by the other
Hotels or otherwise, will be treated as a distribution of money to such Limited
Partner. An issuance of additional Units by the Company without a corresponding
increase in debt, so that the overall debt to capitalization ratio declines,
will decrease the existing Limited Partners' share of nonrecourse liabilities of
the Company and, thus, will result in a corresponding deemed distribution of
money.
A non-pro rata distribution of money or property may result in
ordinary income to a Limited Partner, regardless of his basis in his Units, if
such distribution reduces the Limited Partner's share of the Company's
"unrealized receivables" (including depreciation recapture) and/or
"substantially appreciated inventory items" (both as defined in Section 751 of
the Code) (collectively, "Section 751 Assets"). To that extent, the Limited
Partner will be treated as having received a distribution of his proportionate
share of the Section 751 Assets and having exchanged such assets with the
Company in return for a portion of the actual distribution made equal to the
fair market value of his proportionate share of the Section 751 Assets. This
latter deemed exchange will generally result in
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the Limited Partner's realization of ordinary income under Section 751(b) of the
Code. Such income will equal the excess of (1) the portion of such distribution
deemed received in exchange for his proportionate share of the Section 751
Assets over (2) the Limited Partner's basis of the share of such Section 751
Assets deemed relinquished in the exchange. Although the Company does not
currently expect to make an actual non-pro rata distribution of money or
property, a deemed distribution of money resulting either upon the Consolidation
or upon the Company's subsequent issuance of additional Units (as a result of a
reduction in nonrecourse liabilities or the shifting of nonrecourse liabilities
from existing to new partners or CRFLT) would constitute a non-pro rata
distribution for purposes of Section 751(b).
The IRS has ruled that the change in an existing partner's share of
Section 751 Assets that would normally occur upon such an issuance, when coupled
with such deemed distribution of money, will cause the application of Section
751(b) of the Code. The Partnership Agreement provides that recapture income
will be allocated, to the extent possible, to the Partners who were allocated
the deductions giving rise to the treatment of gain as recapture income. Such
allocations, if respected, along with allocations in accordance with Section
704(c) principles, should minimize the risk of recognition of ordinary income
under Section 751(b) of the Code upon an Company offering of additional
interests. The IRS may contend, however, that such a deemed exchange of Section
751 Assets has occurred and, therefore, that ordinary income must be realized
under Section 751(b) of the Code by Partners whose percentage interests in the
Company have decreased due to such offering of additional interests.
Initial Tax Basis of Units. In general, a Limited Partner will have
an initial tax basis in his Units received in the Consolidation ("Initial
Basis") equal to the aggregate basis in his Hotel Partnership Interests,
adjusted as set forth below to reflect the effects of the Consolidation (that
is, reduced to reflect any deemed cash distributions resulting from a reduction
in the Limited Partner's share of Hotel Partnership liabilities and increased to
reflect any gain required to be recognized in connection with the
Consolidation).
If a Limited Partner's share of nonrecourse liabilities decreases as
a result of the Consolidation (see "-- Tax Consequences of Formation of the
Company -- Relief from Liabilities/Deemed Cash Distributions"), such Limited
Partner may have an Initial Basis in his Units that is significantly lower than
the basis in his Hotel Partnership Interest immediately before the
Consolidation. A Limited Partner whose basis is so reduced can expect to receive
taxable distributions of cash and taxable deemed distributions of cash resulting
from a reduction of such Limited Partner's share of Company nonrecourse
liabilities sooner than he would have if such basis reduction had not occurred.
Such basis reduction also will affect the Limited Partner's ability to deduct
his share of any Company tax losses. For the effect on a Limited Partner of a
reduction in basis that may result from the Consolidation, see "-- Tax
Consequences of Formation of the Company -- Relief from Liabilities/Deemed Cash
Distribution" and "-- Treatment of Company Distributions," above and "--
Limitations on Deductibility of Losses," below.
A Limited Partner's Initial Basis in his Units generally will be
increased by the Limited Partner's share of (a) Company taxable income and (b)
subsequent increases in nonrecourse liabilities incurred by the Company, if any.
Generally, a Limited Partner's Initial Basis in his Units will be decreased (but
not below zero) by his share of (i) Company distributions, (ii) subsequent
decreases in liabilities of the Company, including any decrease in their
respective shares of nonrecourse liabilities of the Company (see "-- Tax
Consequences of Formation of the Company -- Relief from Liabilities/Deemed Cash
Distribution"), (iii) losses of the Company, and (iv) nondeductible expenditures
of the Company that are not chargeable to capital.
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Allocations of Company Income, Gain, Loss and Deduction. The
Partnership Agreement provides that if the Company operates at a net loss, net
losses shall be allocated to CRFLT and the limited partners in proportion to
their respective percentage ownership interests in the Company, provided that
net losses that would have the effect of creating a deficit balance in a limited
partner's capital account (as specially adjusted for such purpose) ("Excess
Losses") will be reallocated to CRFLT, as general partner of the Company. The
Partnership Agreement also provides that, if the Company operates at a net
profit, net income shall be allocated first to CRFLT to the extent of Excess
Losses with respect to which CRFLT has not previously been allocated net income
and any remaining net income shall be allocated in proportion to the respective
percentage ownership interests of CRFLT and the limited partners.
Under Section 704(b) of the Code, a partnership's allocation of any
item of income, gain, loss, or deduction to a partner will be given effect for
federal income tax purposes so long as it has "substantial economic effect," or
is otherwise in accordance with the "partner's interest in the partnership." If
an allocation of an item does not satisfy this standard, it will be reallocated
among the partners on the basis of their respective interests in the
partnership, taking into account all facts and circumstances. CRFLT believes
that the allocations of items of income, gain, loss and deduction under the
Partnership Agreement will be considered to have substantial economic effect
under the applicable Treasury Regulations.
Tax Allocations with Respect to Book-Tax Difference on Contributed
Hotels. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with, or benefits from, the unrealized gain or
unrealized loss associated with the property at the time of contribution. The
amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the time
of contribution and the adjusted tax basis of such property at the time of
contribution (referred to as "Book-Tax Difference"). It is anticipated that at
the time of the Consolidation, there will exist a substantial amount of Book-Tax
Difference with respect to each of the Hotels. Because of prior depreciation
deductions, this will be the case even if a particular Hotel has not appreciated
in value in economic terms.
The Partnership Agreement requires allocations of income, gain, loss
and deduction attributable to the Hotels with respect to which there is a
Book-Tax Difference be made in a manner that is consistent with Section 704(c)
of the Code. The Partnership Agreement provides CRFLT, as general partner, with
substantial latitude in determining how to apply the Section 704(c) requirements
to the Company. CRFLT intends to use the "traditional method" described in the
Treasury Regulations under Section 704(c). Under the traditional method, in the
case of a Hotel with respect to which there is a Book-Tax Difference, a Limited
Partner who was a Limited Partner in the Hotel Partnership that is deemed to
have contributed such Hotel will be allocated less depreciation (or perhaps no
depreciation) with respect to such Hotel (and thus more taxable income) than
would be the case if the Consolidation had not occurred and the Limited Partner
continued to hold his Hotel Partnership Interest. For such a Limited Partner,
these incremental allocations of income should be offset, at least in part by
depreciation deductions allocable to such Limited Partner with respect to Hotels
held by the Company through its ownership interest in Hotel Partnerships in
which the Limited Partner was not a limited partner prior to the Consolidation.
Nevertheless, it is possible that, as a result of these various allocations, the
income allocable to a Limited Partner from the Company (and possibly in the case
of Limited Partners from some Hotel Partnerships, the resulting tax liability
attributable to such income) could equal or exceed, perhaps by a substantial
amount, the actual cash distributions to be received by the Limited Partner from
the Company.
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To illustrate the consequences of these allocations for a Limited
Partner, the Company and the Hotel Partnership GPs have produced an estimate,
based upon and subject to the assumptions and other limitations described in
Appendix __, that if the Consolidation were consummated on January 1, 1998, of
the amount of income for 1998 that would be allocated to a Limited Partner who
acquired his Hotel Partnership Interests in the original offering of such
interests for cash and held such interests at all times since. The estimated
amount (per $1,000 limited partner original investment) for each of the Hotel
Partnerships is set forth in the chart below. With respect to the same period,
the chart also indicates, for the Limited Partners in each Hotel Partnership,
the total amount of taxable income estimated to be allocated to the Limited
Partners of each Hotel Partnership by the Company per $1,000 limited partner
original investment and the estimated amount of cash projected to be distributed
to such Limited Partners per $1,000 limited partner original investment.
<TABLE>
<CAPTION>
704(c)
Additional Total Estimated
Income Taxable Cash
Allocation Income Distributions
(per $1,000 (per $1,000 (per $1,000
Limited Partner Limited Partner Limited Partner
Original Original Original
Hotel Partnership Investment) Investment) Investment)
- ----------------- ----------- ----------- -----------
<S> <C> <C> <C>
CBM1
CBM2
RIBM1
RIBM2
Res USA
FIBM
</TABLE>
If a Hotel with a Book-Tax Difference is sold, any Book-Tax
Difference remaining at the time the Hotel is sold would be required to be
allocated exclusively to the Partners who were Partners in the Hotel Partnership
that owned that Hotel, even though the proceeds of such sale would be allocated
proportionately among all the partners in the Company. Under the "traditional
method" of allocation that will be used by the Company, however, the gain
required to be specially allocated under these rules would not exceed the gain
that is actually recognized by the Hotel Partnership on the sale and allocated
to the Company (unlike under certain alternative allocation methods available,
pursuant to which the gain allocated to the former partners of a Hotel
Partnership that sells a Hotel after the Consolidation could exceed the gain
actually recognized by the Hotel Partnership and allocated to the Company). For
a discussion of the impact to the Limited Partners of the Book-Tax Difference
from a sale of a Hotel, see "-- Sale of Individual Hotels" below.
The Partnership Agreement also requires that any gain allocated to
the Limited Partners (i) upon the sale or other taxable disposition of any
Company asset or (ii) due to the allocation of gain to the Company from its
interest in a Hotel Partnership, shall, to the extent possible, after taking
into account other required allocations of gain pursuant to the Partnership
Agreement, be characterized
209
<PAGE>
as recapture income in the same proportions and to the same extent as such
Limited Partners have been allocated any deductions directly or indirectly
giving rise to the treatment of such gains as recapture income (including by
reason of any deductions previously allocated to them as holders of Hotel
Partnership Interests).
Sale of Individual Hotels. The current value of each of the Hotels
exceeds its adjusted basis by a significant amount. Therefore, the Hotels owned
by the Hotel Partnerships have significant Book-Tax Differences. In the event
CRFLT were to cause a Hotel Partnership to sell a Hotel, the former Partners in
that Hotel Partnership who hold Units would be specially allocated by the
Company an amount of taxable gain equal to the Hotel's Book-Tax Difference at
the time of the sale, which will equal the Book-Tax Difference at the time of
the Consolidation, adjusted as described above in "Tax Allocations with Respect
to Book-Tax Difference on Contributed Hotels." This special allocation will be
made to the Limited Partners in that Hotel Partnership in accordance with the
manner in which gain would have been allocated under the applicable Hotel
Partnership partnership agreement if the Hotel Partnership had sold all of its
assets at the time of the Consolidation for an amount equal to aggregate
Appraised Value of its Hotels. Such Limited Partners would report the additional
gain on their individual federal income tax returns. In addition, such Limited
Partners would not be entitled to any special distributions from the Company in
connection with such a sale, and thus they would not necessarily receive cash
distributions from the Company sufficient to pay such additional taxes. The
Partnership Agreement does not impose any restriction upon the Company's ability
to cause a Hotel Partnership or a Subsidiary Partnership to sell an individual
Hotel, except with respect to the restriction on sales of the Courtyard Hotels
during the __-year period following consummation of the Consolidation (which
restriction (i) can be waived by Host and (ii) ceases to be applicable with
respect to the CBM1 Hotels if the Hotel Partnership GP of CBM1 disposes of the
Units it received in the Consolidation in a taxable transaction and ceases to be
applicable with respect to the CBM2 Hotels if the Hotel Partnership GP of CBM2
disposes of the Units it received in the Consolidation in a taxable
transaction). If a Limited Partner is required to recognize gain from the sale
of a Hotel, however, a Limited Partner with passive losses or passive loss
carryforwards may be able to use such losses to offset such gain, unless the
Company is treated as a publicly traded partnership for federal income tax
purposes. See "Tax Status of the Company" above.
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<PAGE>
The estimated Book-Tax Difference per $1,000 limited partner original
investment with respect to the Hotels owned by each of the Hotel Partnerships
(computed assuming that the value of the Units received in the Consolidation
equals, but does not exceed, the Exchange Value of each Hotel Partnership) is
set forth below. The amount of the Book-Tax Difference could be substantially
different for a Limited Partner in a Hotel Partnership who acquired his Hotel
Partnership Interest subsequent to the formation of such Hotel Partnership.
<TABLE>
<CAPTION>
704(c)
Book-Tax Difference
(per $1,000 Limited
Partner Original
Hotel Partnership Investment)
- ----------------- ----------------------
<S> <C>
CBM1
CBM2
RIBM1
RIBM2
Res USA
FIBM
</TABLE>
For a discussion of impact to the Limited Partners of the Book-Tax
Difference in the absence of a sale of the Hotel, see "--Tax Allocations with
Respect to Book-Tax Difference on Contributed Hotels" above.
Refinancing of the Indebtedness Secured by Individual Hotels. As
described above under "Tax Consequences of the Formation of the Company --
Relief from Liabilities/Deemed Cash Distributions," CRFLT does not expect that a
participating Limited Partner who acquired his Hotel Partnership Interest would
recognize taxable gain at the time of the Consolidation as a result of relief
from liabilities resulting in a taxable deemed distribution in connection with
the Consolidation (based on the assumptions set forth under the caption
"Assumptions Used in Determining Tax Consequences of the Consolidation" above).
However, there can be no assurance that any future refinancing of the
indebtedness securing the Hotels would not result in a reduction of the
liabilities allocated to the Limited Partners, thus resulting in a taxable
deemed distribution. The Partnership Agreement does not impose any restriction
upon on the Company's ability to cause a Hotel Partnership to refinance debt
secured by Hotels, other than with respect to the restriction on refinancing or
repaying debt secured by Courtyard Hotels during the __-year period following
the Consolidation (which restriction (i) can be waived with the consent of Host
and (ii) ceases to be applicable with respect to CBM1 if the Hotel Partnership
GP of CBM1 disposes of its Units received in the Consolidation in a taxable
transaction and ceases to be applicable with respect to CBM2 if the Hotel
Partnership GP of CBM2 disposes of its Units received in the Consolidation in a
taxable transaction). The Company has no present plan to refinance any of the
debt of the Hotel Partnerships secured by the Hotels. In this regard, however,
it is important to note that the Company's current long-term financing strategy
is to have as little debt as possible that is secured by individual Hotels and
to have as much of its debt as is possible in the form of unsecured debt, held
either by the public or by institutional investors, which debt may or may not be
recourse to CRFLT,
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<PAGE>
as general partner of the Company. Depending upon its terms, such debt may not
qualify either as "nonrecourse liabilities" for purposes of the rules under
Section 752 of the Code (see "Tax Consequences of the Formation of the Company
- -- Relief from Liabilities/Deemed Cash Distribution") or as "qualified
nonrecourse financing" for purposes of the "at risk" rules (see "Tax
Consequences of the Formation of the Company -- Section 465(e) Recapture").
Moreover, even if such debt qualifies as a nonrecourse liability, the amount of
Section 704(c) Minimum Gain with respect to properties that previously secured
traditional mortgage indebtedness would likely be reduced significantly (thereby
resulting in a reduction of the nonrecourse liabilities allocable to the Limited
Partners to whom such Section 704(c) Minimum Gain was allocable (and a resulting
deemed cash distribution to such Limited Partners)).
Generally, the maximum amount of gain that a Limited Partner could
recognize as a result of a reduction in nonrecourse liabilities is (i) the
amount by which his share of the liabilities of a Hotel Partnership
(determined as set forth in "Tax Consequences of the Formation of the Company --
Relief from Liabilities/Deemed Cash Distribution") immediately prior to the
Consolidation exceeds his adjusted basis in his Hotel Partnership Interest
immediately prior to the Consolidation (which amount generally should be
reflected as a "negative capital account" with respect to the Hotel Partnership
Interest held at the time of the Consolidation), plus (ii) actual cash
distributions received with respect to Units subsequent to the Consolidation to
the extent such cash distributions exceed the net taxable income allocated to
the Limited Partner with respect to the Units. The chart below sets forth the
estimated "negative capital accounts" for limited partners in each of the Hotel
Partnerships (per $1,000 limited partner original investment) as of the time of
the Consolidation (computed using the assumptions described under "Assumptions
Used in Determining Tax Consequences to the Consolidation" above).
<TABLE>
<CAPTION>
Estimated Negative
Capital Account
(per $1,000 Limited
Partner Original
Hotel Partnership Investment)
- ----------------- ----------------------
<S> <C>
CBM1
CBM2
RIBM1
RIBM2
FIBM
Res USA
</TABLE>
Dissolution of the Company. In the event of the dissolution of the
Company, see "Description Of Units - Dissolution, Winding Up and Termination,"
above, a distribution of Company property (other than money) will not result in
taxable gain to a holder of Units (except to the extent provided in Sections
737, 704(c)(1)(B) and 731(c) of the Code), and a Limited Partner that holds
Units at the time of the dissolution will hold such distributed property with a
basis equal to the adjusted basis of his Units, reduced by any money distributed
in liquidation. The liquidation of the Company, however, will be taxable to a
Limited Partner that
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<PAGE>
holds Units to the extent that any money distributed in liquidation (including
any money deemed distributed as a result of relief from liabilities) exceeds
such Limited Partner's tax basis in his Units. If CRFLT were to issue to Limited
Partners Common Shares of CRFLT upon dissolution of the Company, a Limited
Partner likely would be treated as if it had exchanged his Units for such Common
Shares and would recognize gain or loss as if such Units were sold in a fully
taxable exchange. See "-- Tax Treatment of Unit Redemption Right," below.
Limitations on Deductibility of Losses; Treatment of Passive
Activities and Portfolio Income. The passive loss limitations generally provide
that individuals, estates, trusts and certain closely held corporations and
personal service corporations can only deduct losses from passive activities
(generally activities in which the taxpayer does not materially participate,
which would include the Company for limited partners) to the extent that such
losses are not in excess of the taxpayer's income from passive activities or
investments. A Limited Partner will be able to offset losses from other passive
activities against income from the Company that is considered passive income
(but not portfolio income) so long as the Company is not treated as a publicly
traded partnership. There can be no assurance, however, that the Company will
not be classified as a publicly traded partnership. See "-- Tax Status of the
Company," above. In the event that the Company is classified as a publicly
traded partnership, any losses or deductions of the Company allocable to a
Limited Partner could not be used to offset passive income from other passive
activities. Similarly, losses from other passive activities (including losses
attributable to the Hotel Partnerships for periods prior to the Consolidation)
could not be applied to offset income of the Company allocated to a Limited
Partner.
In addition to the foregoing limitations, a Limited Partner that
holds Units may not deduct from taxable income his share of Company losses, if
any, to the extent that such losses exceed the lesser of (i) the adjusted tax
basis of his Units at the end of the Company's taxable year in which the loss
occurs and (ii) the amount for which such holder is considered "at risk" at the
end of that year. In general, a Limited Partner will initially be "at risk" to
the extent of the basis in his Unit (unless he has borrowed amounts on a
nonrecourse basis to acquire or carry his Hotel Partnership Interest), including
for such purpose only such Limited Partner's share of the Company's liabilities,
as determined under Section 752 of the Code, that are considered "qualified
nonrecourse financing" for purposes of the "at risk" rules. The Company believes
that, other than the CBM2 Certificates, the existing debt secured by the Hotels
(to the extent not guaranteed by Host or one of the Hotel Partnership GPs) will
constitute qualified nonrecourse financing for this purpose, but there can be no
assurance that the IRS might not contend otherwise. If the proceeds from the
Offering are used to prepay the CBM2 Certificates, the RIBM1 Senior Mortgage,
and the indebtedness of Res USA, after the Consolidation, all of the remaining
debt of the Hotel Partnerships, other than the CBM2 Senior Notes and the RIBM1
Second Mortgage, should constitute "qualified nonrecourse financing" for
purposes of the "at risk" rules. In addition, there can be no assurance that
debt incurred by the Company in the future to refinance existing debt will be
considered qualified nonrecourse financing. After consummation of the
Consolidation, in general, a Limited Partner's "at risk" amount will increase or
decrease as the adjusted basis in his Units increases or decreases. Losses
disallowed to a holder of Units as a result of these rules can be carried
forward and may be allowable to such holder to the extent that his adjusted
basis or at risk amount (whichever was the limiting factor) is increased in a
subsequent year. The "at risk" rules apply to an individual partner, an
individual shareholder of a corporate partner that is an S corporation and a
corporate partner if fifty percent (50%) or more of the value of stock of such
corporate partner is owned directly or indirectly by five or fewer individuals
at any time during the last half of the taxable year.
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<PAGE>
The "at risk" provisions of the Code generally do not apply to losses
attributable to real property placed in service prior to January 1, 1987, by the
taxpayer or by or to losses attributable to a partnership in which the taxpayer
acquired its interests before that date. Except with respect to certain of the
Hotels held by CBM1, all of the Hotels were placed in service on or after
January 1, 1987. Moreover, if a Limited Partner of CBM1 acquired his CBM1 Hotel
Partnership Interest on or after January 1, 1987, then such Limited Partner may
be subject to the "at risk" provisions of the Code with respect to his entire
interest in CBM1 (rather than just the CBM1 Hotels placed in service after that
date). To the extent that a Limited Partner of CBM1 was not subject to the "at
risk" provisions of the Code with respect to CBM1's pre-1987 Hotels, he will
become so as a result of the Consolidation.
Section 754 Election. The Company will make the election permitted by
Section 754 of the Code effective for the taxable year commencing January 1,
1998. It is irrevocable unless the consent of the IRS is obtained. The election
will generally permit a purchaser of Units in 1998 or thereafter, such as CRFLT
when it acquires Units from Limited Partners upon a redemption of Units, to
adjust its share of the basis in the Company's properties ("inside basis")
pursuant to Section 743(b) of the Code to fair market value (as reflected by the
value of consideration paid for the Units), as if such purchaser had acquired a
direct interest in the Company's assets. The Section 743(b) adjustment is
attributed solely to a purchaser of Units and is not added to the bases of the
Company's assets associated with all of the holders of Units in the Company. An
acquirer of Units (such as CRFLT when it acquires Units from Limited Partners
upon a redemption of Units) that obtains a Section 743(b) adjustment by reason
of such acquisition will be allowed depreciation with respect to such adjustment
beginning as of the date of the exchange as if the adjustment were new property
placed in service as of that date. A similar basis adjustment would be permitted
for the Company when there is a distribution or a deemed distribution to a
holder of Units that results in the recognition of gain to such holder of Units.
Effect of Consolidation on Depreciation. Under Section 708(b)(1)(B)
of the Code, a partnership will be considered to have been terminated if within
a twelve-month period there is a sale or exchange of 50% or more of the
interests in partnership capital and profits. As a result of the mergers of the
Merger Partnerships into the Hotel Partnerships, the Hotel Partnerships and the
Subsidiary Partnerships will terminate under Section 708(b)(1)(B) of the Code.
Section 168(i)(7) of the Code provides, in effect, that when a partnership
terminates under Section 708(b)(1)(B) of the Code the partnership must begin new
depreciation periods for its property. As a result, the remaining bases of the
Hotels acquired by the Company from the Hotel Partnerships in the Consolidation
will be depreciated over 39 years, rather than over the remaining current life
of the Hotels (which ranges from 8 years to 25 years). The Hotel Partnerships
are presently depreciating such remaining bases over shorter, in some cases
significantly shorter, periods of time. Thus, the Consolidation will adversely
affect the computation of depreciation deductions with respect to the Hotels
owned by the participating Hotel Partnerships, as compared to the computation of
depreciation deductions with respect to the Hotels by such Hotel Partnerships
prior to the Consolidation. The effect upon the depreciation deductions to be
taken with respect to the Hotels held by each Hotel Partnership will be
significant.
Disposition of Units by Limited Partners. If a Unit is sold or
otherwise disposed of, the determination of gain or loss from the sale or other
disposition will be based on the difference between the amount realized and the
tax basis for such Unit. See "-- Tax Basis of Units," above. Upon the sale of a
Unit, the "amount realized" will be measured by the sum of the cash and fair
market value of other property received for the Unit plus the portion of the
Company's liabilities considered allocable to the Unit sold. Similarly, upon a
gift of a Unit, a Limited Partner will be deemed to
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<PAGE>
have realized gain with respect to the portion of the Company's nonrecourse
liabilities considered allocable to such Unit. To the extent that the amount of
cash or property received plus the allocable share of the Company's nonrecourse
liabilities exceeds the Limited Partner's basis for the Unit disposed of, such
Limited Partner will recognize gain. The tax liability resulting from such gain
could exceed the amount of cash received upon such disposition.
Such gain will be capital gain if the Unit has been held by the
Limited Partner as a capital asset. For corporations, the maximum rate of tax on
the net capital gain from a sale or exchange of a capital asset held for more
than 12 months is currently 28%. The Taxpayer Relief Act of 1997 (the "1997
Act") altered the taxation of capital gain income for non-corporate taxpayers.
Pursuant to the 1997 Act, for individuals, trusts and estates, the maximum rate
of tax on the net capital gain from a sale or exchange of a capital asset held
for more than 18 months is currently 20%, and the maximum rate for capital
assets held for more than one year but not more than 18 months is currently 28%.
However, to the extent that the amount realized upon the sale of a Unit
attributable to a Partner's share of "unrealized receivables" of the Company (as
defined in Section 751 of the Code) exceeds the basis attributable to those
assets, such excess will be treated as ordinary income. Unrealized receivables
include, to the extent not previously includible in Company income, any rights
to payment for services rendered or to be rendered. Unrealized receivables also
include amounts that would be subject to recapture as ordinary income if the
Company had sold its assets at their fair market value at the time of the
transfer of a Unit, such as "depreciation recapture" under Sections 1245 and
1250 of the Code. In addition, the maximum rate for net capital gains
attributable to the sale of depreciable real property held for more than 18
months is currently 25% (rather than 20%) to the extent of the prior deductions
for "unrecaptured Section 1250 gain" (that is previously claimed depreciation
deductions that would not be recaptured as ordinary income). The 1997 Act also
provides special rules for "qualified 5-year gain," and other changes to prior
law.
The 1997 Act provides the IRS with authority to issue regulations
that could, among other things, apply these rates on a look-through basis in the
case of "pass-through" entities such as the Company. The IRS has not yet issued
such regulations, and if it does not issue such regulations in the future, the
rate of tax that would apply to the disposition of a Unit by an individual,
trust or estate likely would be determined based upon the period of time over
the which such individual, trust or estate held such Unit. No assurance,
however, can be provided that the IRS will not issue regulations that would
provide that the rate of tax that would apply to the disposition of a Unit by an
individual, trust or estate would be determined based upon the nature of the
assets of the Company and the periods of time over which the Company held such
assets. Moreover, no assurance can be provided that such regulations would not
be applied retroactively. If such regulations were to apply to the disposition
of a Unit, any gain on such sale possibly could be treated partly as gain from
the sale of a capital asset held for more than 18 months, partly as gain from
the sale of a capital asset held for more than one year but not more than 18
months, partly as gain from the sale of a capital asset held for one year or
less, and partly as gain that is considered "unrecognized Section 1250 gain."
Limited Partners are urged to consult with their own tax advisors with respect
to the new rules contained in the 1997 Act.
Tax Treatment of Exercise of Unit Redemption Right. In the event that
a Limited Partner exercises his Unit Redemption Right, see "Terms of the
Consolidation -- Acquisition of the Limited Partners' Interest and Related
Assets -- Issuances of Units" and "Description of Units -- Unit Redemption
Right," it is generally anticipated that CRFLT will elect to exercise its right
(under the Partnership Agreement) to acquire the redeeming Limited Partner's
Units in exchange for cash or Common Shares; however, CRFLT will be under no
obligation to exercise such right. In the event that CRFLT does so elect, such
transaction will be a fully taxable sale to the redeeming Limited
215
<PAGE>
Partner, and such redeeming Limited Partner will be treated as realizing in
connection with such sale an amount equal to the amount of the cash or the value
of the Common Shares received in the exchange plus the amount of Company
liabilities allocable to the redeemed Units at the time of the redemption.
If CRFLT does not elect to assume the obligation to redeem a Limited
Partner's Units, the Company generally will be required to redeem such Units for
cash. If the Company redeems Units for cash that CRFLT contributes to the
Company to effect such redemption, the redemption likely will be treated as a
sale of such Units to CRFLT in a fully taxable transaction, although the matter
is not free from doubt. In that event, the redeeming Limited Partner will
recognize taxable gain or loss to the extent that the amount he is treated as
realizing (the amount of the cash received in the exchange plus the amount of
Company liabilities allocable to the redeemed Units at the time of the
redemption) exceeds or is less than, respectively, his adjusted tax basis in his
Units redeemed. If, instead, the Company chooses to redeem a Limited Partner's
Units for cash that is not contributed by CRFLT to effect the redemption, the
tax consequences will be the same as described in the previous sentence, except
that if the Limited Partner redeems less than all of his Units, the Limited
Partner will not be permitted to recognize any taxable loss in connection with
the redemption and will recognize taxable gain on the redemption only to the
extent that the cash, plus the share of Company liabilities allocable to the
redeemed Units, exceed the Limited Partner's adjusted tax basis in all of his
Units held immediately before the redemption (rather than just the basis of the
Units redeemed).
For a discussion of the impact of the receipt and exercise of a
Limited Partner's Unit Redemption Right upon the tax consequences of the
formation of the Company, see "Tax Consequences of the Formation of the Company
- -- Unit Redemption Right," above.
Tax Shelter Registration. Under Section 6111 of the Code, the person
principally responsible for organizing certain "tax shelters" must register the
"tax shelter" with the IRS. CRFLT may be required to register the Company with
the IRS as a "tax shelter" pursuant to this provision. The following rules will
apply if such registration is required. CRFLT will be required to provide each
Limited Partner with the tax shelter registration number assigned to the Company
by the IRS. Each Limited Partner will then be required to include this tax
shelter registration number on any tax return on which the Limited Partner
claims any deduction, credit, loss, or other tax benefit, or reports any income,
from the Company. Each Limited Partner must report the tax shelter registration
number by preparing a Form 8271 ("Investor Reporting of Tax Shelter Registration
Number") with respect to the Company and attaching it to his return. The penalty
for failure to include the tax shelter registration number in a return is $250
per failure per return.
In addition, if a Limited Partner transfers any Units, he is required
to provide the transferee with the Company's tax shelter registration number
generally in the same manner and form in which such registration number is
originally provided to the Limited Partner by CRFLT. The penalty for failure to
provide the tax shelter registration number to a transferee of Units is $100 per
occurrence.
In connection with the registration of the Company as a tax shelter,
CRFLT would be required, under Section 6112 of the Code, to maintain a list of
all investors purchasing Units. Such list must include the name, address and
taxpayer identification number of each purchaser, the number of Units acquired
and the date of acquisition. Section 6112 requires that such list be maintained
and made available for inspection upon the request of the Service for a period
of seven years.
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<PAGE>
In addition, Section 6112 requires that any Limited Partner who
transfers any Units maintain and make available to the Service, for seven years,
a list specifying the name, address and taxpayer identification number of the
transferee of such Units, as well as the date of transfer. As an alternative to
maintaining such list for seven years, a Limited Partner may satisfy his
obligation under Section 6112 by sending the information required to be included
on such list to CRFLT at the time the Units are transferred. The penalty for
failure either to maintain such a list or to send the required information to
CRFLT is $50.
REGISTRATION OF THE COMPANY WITH THE INTERNAL REVENUE SERVICE AND THE
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR THE
CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED, OR APPROVED BY THE INTERNAL
REVENUE SERVICE.
Company Income Tax Information Returns and Company Audit Procedures.
The Company plans to furnish the holders of Units with the tax information
reasonably required by the holders of Units for federal and state income tax
reporting purposes within 90 days of the close of each of the Company's taxable
years.
The federal income tax information returns filed by the Company may
be audited by the IRS. The Code contains partnership audit procedures governing
the manner in which IRS audit adjustments of partnership items are resolved. The
Company will be able to elect (i) to participate in the simplified pass-through
system for audits that was enacted as part of the 1997 Act, which election is
available to partnerships that have 100 or more partners and meet certain other
requirements set forth in the 1997 Act; or (ii) to have its audits governed
under the audit rules which were enacted as part of the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA"). The Company has not yet made this
determination, but in making the determination, CRFLT, as general partner of the
Company, will not be required (but will be expressly permitted) to take into
account the tax consequences of the determination to any holder of Units, and
the holders of Units will have no right to approve or disapprove of such
determination.
Partnerships generally are treated as separate entities for purposes
of federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss, deduction and credit is determined at the partnership level
in a unified partnership proceeding, rather than in separate proceedings with
each partner. The Code provides for one person to be designated as the "Tax
Matters Partner" for these purposes. The Partnership Agreement appoints CRFLT as
the Tax Matters Partner for the Company.
Under TEFRA, the Tax Matters Partner is authorized, but not required,
to take certain actions on behalf of the Company and the Limited Partners and
can extend the statute of limitations for assessment of tax deficiencies against
Limited Partners with respect to Company items. The Tax Matters Partner will
make a reasonable effort to keep each Limited Partner informed of administrative
and judicial tax proceedings with respect to Company items in accordance with
Treasury Regulations issued under Section 6223 of the Code. In connection with
adjustments to Company tax returns proposed by the IRS, the Tax Matters Partner
may bind any Limited Partner with less than a one percent (1%) profits interest
in the Company to a settlement with the IRS unless the Limited Partner elects,
by filing a statement with the IRS, not to give such authority to the Tax
Matters Partner. The Tax Matters Partner may seek judicial review (to which all
the Limited Partners are bound) of a final Company administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any Limited Partner having at least a one
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<PAGE>
percent (1%) interest in the profits of the Company and by partners in the
Company having, in the aggregate, at least a five percent (5%) profits interest.
Only one judicial proceeding will go forward, however, and each Limited Partner
with an interest in the outcome may participate.
The Limited Partners will generally be required to treat Company
items on their federal income tax returns in a manner consistent with the
treatment of the items on the Company information return. In general, that
consistency requirement is waived if the Limited Partner files a statement with
the IRS identifying the inconsistency. Failure to satisfy the consistency
requirement, if not waived, will result in an adjustment to conform the
treatment of the item by the Limited Partner to the treatment on the Company
return. Even if the consistency requirement is waived, adjustments to the
Limited Partner's tax liability with respect to Company items may result from an
audit of the Company's or the Limited Partner's tax return. Intentional or
negligent disregard of the consistency requirement may subject a Limited Partner
to substantial penalties. In addition, an audit of the Company return may also
lead to an audit of an individual Limited Partner's tax return and such audit
could result in adjustment of nonpartnership items.
If a partnership makes an election to have the simplified audit
procedure for large partnerships enacted as part of the 1997 Act apply, there
would be differences in the rights of Limited Partners. For example, as under
the TEFRA rules, the IRS would challenge a reporting position taken by the
Company by conducting a single administrative proceeding, the outcome under
which would bind all partners. Unlike partners in a TEFRA partnership, partners
in an electing large partnership under the 1997 Act have no individual right to
notice of the adjustment proceedings, and no individual right to participate in
the proceedings. Like other partnerships, an electing partnership under the 1997
Act may request judicial review of a partnership adjustment. However, unlike
partnerships governed by TEFRA, the individual partners in an electing large
partnership have no right to file petitions for readjustment of the partnership
items. Finally, a partner in an electing partnership must report all partnership
items consistently with their treatment on the partnership return. Unlike the
comparable TEFRA audit rule, an inconsistency cannot be excused by notifying the
IRS of the differing treatment. Limited Partners who fail to report partnership
items consistently with their treatment on the partnership return are subject to
accuracy-related and fraud penalties.
Alternative Minimum Tax on Items of Tax Preference. The Code contains
different sets of minimum tax rules applicable to corporate and non-corporate
taxpayers. The discussion below relates only to the alternative minimum tax
applicable to non-corporate taxpayers. LIMITED PARTNERS THAT ARE CORPORATIONS
SHOULD CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE EFFECT OF THE
CORPORATE MINIMUM TAX PROVISIONS FOLLOWING CONSUMMATION OF THE CONSOLIDATION.
Non-corporate taxpayers are subject to an alternative minimum tax to
the extent the tentative minimum tax ("TMT") exceeds the regular income tax
otherwise payable. The rate of tax imposed on alternative minimum taxable income
("AMTI") in computing TMT is 26% for AMTI under $175,500 and 28% for AMTI over
$175,000. AMTI consists of the taxpayer's taxable income, as adjusted under
Section 56 and 58 of the Code, plus its items of tax preference; certain
taxpayers are entitled to an exemption amount equal to $45,000 for a joint
return or as surviving spouse, $33,750 for a single return, $22,500 for single
returns, married persons filing separate returns, estates and trusts.
In computing alternative minimum taxable income, for all depreciable
property placed in service after May 13, 1993, an alternative cost recovery
(depreciation) system is substituted for the
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regular tax cost recovery (depreciation) system. For example, cost recovery for
real property is computed on the straight-line basis over a 40-year life, rather
than the 27.5- or 39-year lives used under the regular tax system. The 1997 Act
eliminates this requirement for any property placed in service after December
31, 1998. The limitation on deduction of passive activity losses (as recomputed
for AMTI purposes) applies to the calculation of AMTI. The utilization of
itemized deductions is also limited.
The Company will not be subject to the alternative minimum tax, but
the Limited Partners are required to take into account on their own tax returns
their respective shares of the Company's tax preference items and adjustments
(and their shares of tax preference items and adjustments of the Hotel
Partnerships which are allocated to the Company) in order to compute alternative
minimum taxable income. Since the impact of this tax depends on each Limited
Partner's particular situation, the Limited Partners are urged to consult their
own tax advisors as to the applicability of the alternative minimum tax
following consummation of the Consolidation.
State and Local Taxes. In addition to the federal income tax aspects
described above, a Limited Partner should consider the potential state and local
tax consequences of owning Units. Tax returns may be required and tax liability
may be imposed both in the state or local jurisdictions where a Limited Partner
resides and in each state or local jurisdiction in which the Company has assets
or otherwise does business. Thus, Limited Partners holding Units in the Company
either directly or through one or more partnerships or limited liability
companies may be subject to state and local taxation in a number of
jurisdictions in which the Company directly or indirectly holds real property
and would be required to file periodic tax returns in those jurisdictions. In
this regard, immediately following the Consolidation, the Company will own
properties in 35 states across the United States. The Company anticipates
providing the Limited Partners with any information reasonably necessary to
permit them to satisfy state and local return filing requirements. To the extent
that a Limited Partner pays income tax with respect to the Company to a state
where it is not resident (or the Company is required to pay such tax on behalf
of the Limited Partner), the Limited Partner may be entitled, in whole or in
part, to a deduction or credit against income tax that otherwise would be owed
to his state of residence with respect to the same income. A Limited Partner
should consult with his personal tax advisor with respect to the state and local
income tax implications for such Limited Partner of owning Units.
Federal Income Taxation of CRFLT Following the Consolidation
General. CRFLT plans to make an election to be taxed as a
REIT under Sections 856 through 860 of the Code, commencing with its taxable
year ending December 31, 1998. CRFLT believes that, commencing with its taxable
year ending December 31, 1998, it will be organized and will operate in such a
manner as to qualify for taxation as a REIT under the Code, and CRFLT intends to
continue to operate in such a manner, but no assurance can be given that it in
fact will continue to operate in such a manner so as to qualify or remain
qualified.
These sections of the Code and the corresponding Treasury
Regulations are highly technical and complex. The following sets forth the
material aspects of the rules that govern the federal income tax treatment of a
REIT and its shareholders. This summary, however, is qualified in its entirety
by the applicable Code provisions, rules and regulations promulgated thereunder,
and administrative and judicial interpretations thereof.
Hogan & Hartson L.L.P. has acted as counsel to CRFLT in
connection with the Consolidation and CRFLT's election to be taxed as a REIT.
CRFLT expects that Hogan & Hartson
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L.L.P. will provide to CRFLT at the Closing an opinion to the effect that,
commencing with CRFLT's taxable year ending December 31, 1998, CRFLT will be
organized in conformity with the requirements for qualification as a REIT, and
its proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion will be conditioned upon certain representations made by CRFLT and
the Company as to factual matters relating to the organization and operation of
CRFLT, the Company, the Hotel Partnerships, and the Subsidiary Partnerships,
including the structure of each Lease. In addition, this opinion will be based
upon the factual representations of CRFLT concerning its business and properties
as set forth in this Consent Solicitation and will assume that the actions
described in this Consent Solicitation are completed in a timely fashion.
Moreover, such qualification and taxation as a REIT depends upon CRFLT's ability
to meet (through actual annual operating results, distribution levels and
diversity of share ownership) the various qualification tests imposed under the
Code discussed below, the results of which will not be reviewed by Hogan &
Hartson L.L.P. Accordingly, no assurance can be given that the actual results of
CRFLT's operations for any particular taxable year will satisfy such
requirements. Further, the anticipated income tax treatment described in this
Consent Solicitation may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time. See "-- Failure of CRFLT to
Qualify as a REIT," below.
If CRFLT qualifies for taxation as a REIT, it generally
will not be subject to federal corporate income taxes on its net income that is
currently distributed to shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from investment in a regular corporation. However, CRFLT will be subject
to federal income tax as follows:
1. CRFLT will be taxed at regular corporate rates on
any undistributed "REIT taxable income,"
including undistributed net capital gains;
provided, however, that properly designated
undistributed capital gains will effectively
avoid taxation at the shareholder level. A REIT's
"REIT taxable income" is the otherwise taxable
income of the REIT subject to certain
adjustments, including a deduction for dividends
paid.
2. Under certain circumstances, CRFLT may be subject
to the "alternative minimum tax" on its items of
tax preference.
3. If CRFLT has (i) net income from the sale or
other disposition of "foreclosure property" which
is held primarily for sale to customers in the
ordinary course of business or (ii) other
nonqualifying income from foreclosure property,
it will be subject to tax at the highest
corporate rate on such income.
4. If CRFLT has net income from "prohibited
transactions" (which are, in general, certain
sales or other dispositions of property held
primarily for sale to customers in the ordinary
course of business other than foreclosure
property), such income will be subject to a 100%
tax.
5. If CRFLT 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 an amount equal to (a) the gross
income attributable to the greater of the amount
by which CRFLT fails the 75% or 95% test
multiplied by (b) a fraction intended to reflect
CRFLT's profitability.
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6. If CRFLT should fail to distribute during each
calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year,
and (iii) any undistributed taxable income from
prior periods, CRFLT would be subject to a 4%
excise tax on the excess of such required
distribution over the sum of amounts actually
distributed and amounts retained but with respect
to which federal income tax was paid.
7. If CRFLT acquires any asset from a C corporation
(i.e., generally a corporation subject to full
corporate-level tax) in a transaction in which
the basis of the asset in the hands of CRFLT is
determined by reference to the basis of the asset
in the hands of the C corporation (a "Built-In
Gain Asset"), and CRFLT recognizes gain on the
disposition of such asset during the ten-year
period beginning on the date on which such asset
was acquired by CRFLT (the "Recognition Period"),
then, to the extent of the asset's "Built-In
Gain" (i.e., the excess of (a) the fair market
value of such asset over (b) CRFLT's adjusted
basis in the asset, determined when CRFLT
acquired the asset), such gain will be subject to
tax at the highest regular corporate rate
applicable.
Requirements for Qualification. 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 would be taxable as a domestic corporation, but for Sections 856
through 859 of the Code; (iv) which is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half of
each taxable year not more than 50% in value of the outstanding stock of which
is owned, actually or constructively, by five or fewer individuals (as defined
in the Code to include certain entities); and (vii) which meets certain other
tests, described below, regarding the nature of its income and assets.
The Code provides that conditions (i) to (iv), inclusive,
must be met during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of twelve months, or during a
proportionate part of a taxable year of less than twelve months. Conditions (v)
and (vi) will not apply until after the first taxable year for which an election
is made to be taxed as a REIT. For purposes of conditions (v) and (vi), pension
funds and certain other tax-exempt entities are treated as individuals, subject
to a "look-through" exception in the case of condition (vi). In connection with
condition (vi), a REIT is required to send annual letters to its shareholders
requesting information regarding the actual ownership of its shares. If the REIT
complies with this requirement, and it does not know, or exercising reasonable
diligence would not have known, whether it failed to meet condition (vi), then
it will be treated as having met condition (vi). If the REIT fails to properly
send such annual letters, it is required to pay either a $25,000 penalty or, if
the failure is intentional, a $50,000 penalty. The IRS may require such a REIT
to take further action to ascertain actual ownership of its shares, and failure
to comply with such an additional requirement would result in an additional
$25,000 (or $50,000) penalty. No penalty is assessed in the first instance,
however, if the failure to properly send the letters is due to reasonable cause
and not to willful neglect.
CRFLT believes that it will meet conditions (i) through
(iv). In addition, CRFLT believes that it will have issued sufficient Common
Shares with sufficient diversity of ownership in
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the Offering to allow it to satisfy conditions (v) and (vi). With respect to
condition (vi) CRFLT intends to comply with the requirement that it send annual
letters to its shareholders requesting information regarding the actual
ownership of its shares. In addition, CRFLT's Declaration of Trust provides for
restrictions regarding the transfer and ownership of Common Shares, which
restrictions are intended to assist CRFLT in continuing to satisfy the share
ownership requirements described in (v) and (vi) above. Such ownership and
transfer restrictions are described in "Description of Common Shares of
Beneficial Interest -- Restrictions on Ownership and Transfer." These
restrictions together with compliance with the annual shareholder letter
requirement described above, however, may not ensure that CRFLT will, in all
cases, be able to satisfy the share ownership requirements described above. If
CRFLT fails to satisfy such share ownership requirements, CRFLT's status as a
REIT will terminate. See " -- Failure of CRFLT to Qualify as a REIT."
A corporation may not elect to become a REIT unless its
taxable year is the calendar year. CRFLT will have a calendar year taxable year.
In order to qualify as a REIT, CRFLT cannot have at the end
of any taxable year any undistributed "earnings and profits" that are
attributable to a "C corporation" taxable year. CRFLT itself will be a newly
formed entity and will make a REIT election for its first taxable year. Hence,
CRFLT will not have any undistributed "C corporation earnings and profits."
Qualified REIT Subsidiary. If CRFLT owns a corporate
subsidiary that is a "qualified REIT subsidiary," that subsidiary will be
disregarded for federal income tax purposes, and all assets, liabilities and
items of income, deduction and credit of the subsidiary will be treated as
assets, liabilities and items of CRFLT itself. Generally, a qualified REIT
subsidiary is a corporation all of the capital stock of which is owned by the
REIT. CRFLT anticipates owning one or more qualified REIT subsidiaries for
purposes of holding a de minimis indirect interest in the Hotel Partnerships.
Ownership of Partnership Interests by a REIT. 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 character of the assets and gross
income of the partnership shall retain the same character in the hands of the
REIT for purposes of Section 856 of the Code, including satisfying the gross
income tests and the asset tests. Thus, CRFLT's proportionate share of the
assets and items of income of the Company (including the Company's share of such
items of the Hotel Partnerships and any other subsidiaries that are partnerships
or LLCs) will be treated as assets and items of income of CRFLT for purposes of
applying the requirements described herein. A summary of the rules governing the
federal income taxation of partnerships and their partners is provided below in
"-- Tax Aspects of CRFLT's Ownership of an Interest in the Company." As the sole
general partner of the Company, CRFLT will have direct control of the Company
(and indirect control over the Hotel Partnerships and the partnerships in which
the Hotel Partnerships have a controlling interest) and intends to operate these
entities consistent with the requirements for qualification of CRFLT as a REIT.
Income Tests Applicable to REITs. In order to maintain
qualification as a REIT, CRFLT annually must satisfy two gross income
requirements. First, at least 75% of CRFLT's gross income (excluding gross
income from "prohibited transactions") for each taxable year must be derived
directly or indirectly from investments relating to real property or mortgages
on real property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments. Second,
at least 95% of CRFLT's gross income (excluding gross income from
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"prohibited transactions") for each taxable year must be derived from such real
property investments, dividends, interest, certain hedging instruments, and gain
from the sale or disposition of stock or securities, including certain hedging
instruments (or from any combination of the foregoing).
Rents received by CRFLT will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent must not be based
in whole or in part 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, rents received from a tenant will not
qualify as "rents from real property" in satisfying the gross income tests if
CRFLT, or an actual or constructive owner of 10% or more of CRFLT, actually or
constructively owns 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," (the "15% Personal Property Test").
Finally, if (i) CRFLT operates or manages a property or
furnishes or renders services to the tenants at the property other than through
an independent contractor from whom CRFLT derives no revenue and not including
services "usually or customarily rendered" in connection with the rental of real
property and not otherwise considered "rendered to the occupant," and (ii) the
greater of (a) the income derived from such services or (b) 150% of the cost of
providing such services (the "Impermissible Tenant Service Income") exceeds one
percent of the total amount received by CRFLT with respect to the property (or,
if such services are not available to all tenants at a property, possibly with
respect to each tenant to whom the services are made available), then no amount
received by CRFLT with respect to the property (or, where possibly applicable,
such tenant) will qualify as "rents from real property." If the Impermissible
Tenant Service Income is one percent or less of the total amount received by the
REIT with respect to the property (or, where possibly applicable, such tenant),
then only the Impermissible Tenant Service Income will not qualify as "rents
from real property." To the extent that services (other than those customarily
furnished or rendered in connection with the rental of real property) are
rendered to the tenants of the property by an independent contractor, the cost
of the services must be borne by the independent contractor.
Each Hotel Partnership will enter into a Lease with a
Lessee, pursuant to which the Hotel Partnership will lease the Hotels owned by
the Hotel Partnership to the Lessee for a term of ___ years from the date of the
consummation of the Consolidation. In addition, the Company will execute two
Leases, pursuant to each of which it will lease an Acquisition Hotel to a Lessee
for the same term. Each Lease will provide for thirteen payments per annum of
the greater of the specified Base Rent or Percentage Rent, which Percentage Rent
will be calculated based upon the gross sales of the Hotels subject to the
particular Lease plus certain other amounts. See "Business and Properties -- The
Leases."
CRFLT will not (i) provide any services to the Lessees with
respect to the operation of the Hotels; (ii) charge rent for any Hotel 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 of receipts or sales, as described above),
(iii) rent any Hotel to a Related Party Tenant (unless the Board of Trustees
determines in its discretion that the rent received from such Related Party
Tenant is not material and will not jeopardize CRFLT's status as a REIT), or
(iv) derive rental income attributable to personal property (other than personal
property leased in connection with the lease of real property, the amount of
which is less than 15% of the total rent received under the lease).
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In order for the rent paid pursuant to the Leases to
constitute "rents from real property," (i) the Lessees must not be regarded as
Related Party Tenants; and (ii) the Leases must be respected as true leases for
federal income tax purposes and not treated as service contracts, joint ventures
or some other type of arrangement. A Lessee will be regarded as a Related Party
Tenant only if CRFLT, or an actual or constructive owner of 10% or more of
CRFLT, actually or constructively owns 10% or more of such Lessee. Host will
own, directly or indirectly, 100% of each Lessee. Accordingly, each Lessee would
be regarded as a Related Party Tenant if Host were to own, actually or
constructively, 10% or more of CRFLT. In order to preclude the Lessees from
being regarded as Related Party Tenants, the Declaration of Trust will expressly
prohibit Host and its subsidiaries (and/or any 10% or greater shareholder of
Host, which would include for this purpose Marriott International) from owning
more than 9.9% of CRFLT, and will contain self-executing mechanisms intended to
enforce this prohibition. Assuming that this prohibition is enforced at all
times, the Lessees will not be regarded as Related Party Tenants.
The determination of whether the Leases are true leases
depends on an analysis of all the surrounding facts and circumstances. In making
such a determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties; (ii) the form of the agreement; (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement); and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property) or the potential for economic gain (e.g.,
appreciation) with respect to the property.
In addition, Code section 7701(e) provides that a contract
that purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (i) the
service recipient is in physical possession of the property; (ii) the service
recipient controls the property; (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of the
useful life of the property, the recipient shares the risk that the property
will decline in value, the recipient shares in any appreciation in the value of
the property, the recipient shares in savings in the property's operating costs,
or the recipient bears the risk of damage to or loss of the property); (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract; (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient; and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination of whether a
service contract should be treated as a lease is inherently factual, the
presence or absence or any single factor may not be dispositive in every case.
The Leases have been structured with the intent to qualify
as true leases for federal income tax purposes. [For example, with respect to
each Lease (i) the Company (or, where appropriate, the applicable Hotel
Partnership or Subsidiary Partnership) and the Lessee intend for their
relationship to be that of a lessor and lessee and such relationship is
documented by a lease agreement, (ii) the Lessee has the right to exclusive
possession and use and quiet enjoyment of the Hotels covered by the Lease during
the term of the Lease, (iii) the Lessee bears the cost of, and will be
responsible for, day-to-day maintenance and repair of the Hotels, other than the
cost of certain capital expenditures, and dictate how the Hotels are operated,
maintained, and improved, (iv) the Lessee bears all of the costs and expenses of
operating the Hotels (including the cost of any inventory
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used in their operation) during the term of the Lease (other than the cost of
certain furniture, fixtures and equipment, and certain capital expenditures),
(v) the Lessee benefits from any savings (and bears the burdens of any
increases) in the costs of operating the Hotels during the term of the Lease,
(vi) in the event of damage or destruction to a Hotel, the Lessee is at economic
risk because it will be obligated either (A) to restore the property to its
prior condition, in which event it will bear all costs of such restoration in
excess of any insurance proceeds or (B) in certain circumstances, terminate the
Lease, (vii) the Lessee has indemnified the Company (or, where appropriate, the
applicable Hotel Partnership or Subsidiary Partnership) against all liabilities
imposed on the Company (or, where appropriate, the applicable Hotel Partnership
or Subsidiary Partnership) during the term of the Lease by reason of (A) injury
to persons or damage to property occurring at the Hotels or (B) the Lessee's
use, management, maintenance or repair of the Hotels, (viii) the Lessee is
obligated to pay, at a minimum, substantial Base Rent for the period of use of
the Hotels under the Lease, and (ix) the Lessee stands to incur substantial
losses (or reap substantial gains) depending on how successfully it operates the
Hotels.] Moreover, upon termination of a Lease, each Hotel is expected to have a
remaining useful life equal to at least 20% of its expected useful life on the
date of the consummation of the Consolidation, and a fair market value equal to
at least 20% of its fair market value on the date of the consummation of the
Consolidation.
Based upon representations made by CRFLT and the Company
(including but not limited to a representation as to the matters described in
the previous paragraph, Hogan & Hartson L.L.P., counsel to CRFLT, expects to
provide to CRFLT an opinion letter to the effect that the Leases will be
respected as leases for federal income tax purposes. As noted previously,
however, an opinion of counsel does not bind the IRS or the courts. Moreover,
Limited Partners should be aware that there are no controlling Treasury
Regulations, published IRS rulings, or judicial decisions involving leases with
terms substantially the same as the Leases that discuss whether such leases
constitute true leases for federal income tax purposes. Therefore, there can be
no assurance that the IRS will not assert a contrary position or that such
position will be sustained by a court if so challenged If the Leases are
recharacterized as service contracts or partnership agreements, rather than true
leases, part or all of the payments that the Company receives from the Lessees
would not be considered rent or would not otherwise satisfy the various
requirements for qualification as "rents from real property." In that case,
CRFLT very likely would not be able to satisfy either the 75% or 95% gross
income tests and, as a result, would lose its REIT status.
As indicated above, "rents from real property" must not be
based in whole or in part on the income or profits of any person. Payments made
pursuant to the Leases should qualify as "rents from real property" since they
will be based on specified percentages of gross sales which percentages will be
fixed at the time the Leases are entered into, assuming that the Leases (i) are
not renegotiated during their term in a manner that has the effect of basing
Percentage Rent or Base Rent on income or profits and (ii) are not in reality
used as a means of basing rent on income or profits. More generally, the rent
payable under the Leases would not qualify as "rents from real property" if,
considering the Leases and all the surrounding circumstances, the arrangement
does not conform with normal business practice, but is in reality used as a
means of basing rent on income or profits. Because each of the Percentage Rent
and the Base Rent will be based on fixed percentages of the gross sales of each
Hotel that are established in the Leases, and CRFLT has represented that (i) the
percentages will not be renegotiated during the terms of the Leases in a manner
that has the effect of basing rent on income or profits and (ii) the Leases
conform with normal business practice, the rent payable under the Leases should
not be considered based in whole or in part on the income or profits of any
person. Furthermore, CRFLT has represented that, with respect to other
properties that it acquires in the future, it will not charge rent for any
property that
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is based in whole or in part on the income or profits of any person (except by
reason of being based on a fixed percentage of gross revenues, as described
above).
CRFLT may lease certain items of personal property to the
Lessees in connection with the Leases. The 15% Personal Property Test provides
that if a lease provides for the rental of both real and personal property and
the portion of the rent attributable to personal property is 15% or less of the
total rent due under the lease, then all rent paid pursuant to such lease
qualifies as "rent from real property." If, however, a lease provides for the
rental of both real and personal property, and the portion of the rent
attributable to personal property exceeds 15% of the total rent due under the
lease, then the portion of the rent that is attributable to personal property
does not qualify as "rent from real property." The amount of rent attributable
to personal property is that amount which bears the same ratio to total rent for
the taxable year as the average of the adjusted tax bases of the personal
property at the beginning and end of the year bears to the average of the
aggregate adjusted tax bases of both the real and personal property at the
beginning and end of such year. CRFLT has represented that with respect to each
Lease that includes a lease of items of personal property, the amount of rent
attributable to personal property with respect to such Lease, determined as set
forth above, will not exceed 15% of the total rent due under the Lease.
If any of the Hotels were to be operated directly by the
Company, a Hotel Partnership or a Subsidiary Partnership as a result of a
default by a Lessee under the applicable Lease, such Hotel would constitute
foreclosure property until the close of the third tax year following the tax
year in which it was acquired (or for up to an additional three years if an
extension is granted by the IRS), provided that (i) the operating entity
conducts operations through an independent contractor (which would not include
Host and its affiliates) within 90 days after the date the Hotel is acquired,
(ii) the operating entity does not undertake any construction on the foreclosed
property other than completion of improvements that were more than 10% complete
before default became imminent, and (iii) foreclosure was not regarded as
foreseeable at the time the applicable Hotel Partnership entered into such
Leases. For as long as any of these Hotels constitute foreclosure property, the
income from the Hotels would be subject to tax at the maximum corporate rates,
but it would qualify under the 75% and 95% gross income tests. However, if any
of these Hotels does not constitute foreclosure property at any time in the
future, income earned from the disposition or operation of such property will
not qualify under the 75% and 95% gross income tests.
"Interest" generally will not qualify under the 75% or 95%
gross income tests if it depends in whole or in part on the income or profits of
any person. However, interest will not fail to so qualify solely by reason of
being based on a fixed percentage or percentages of receipts or sales. CRFLT
does not expect to derive significant amounts of interest that will not qualify
under the 75% and 95% gross income tests.
If CRFLT fails to satisfy one or both of the 75% or 95%
gross income tests for any taxable year, it may nevertheless qualify as a REIT
for such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will be generally available if CRFLT's failure to meet
such tests was due to reasonable cause and not due to willful neglect, CRFLT
attaches a schedule of the sources of its income to its federal income tax
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances CRFLT would be entitled to the benefit of these relief provisions.
For example, if CRFLT fails to satisfy the gross income tests because
nonqualifying income that CRFLT intentionally incurs exceeds the limits on such
income, the IRS could conclude that CRFLT's failure to satisfy the tests was not
due to reasonable cause. If these relief provisions are inapplicable to a
particular set of circumstances involving CRFLT, CRFLT will not qualify as a
REIT. As discussed
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above in "Federal Income Taxation of CRFLT Following the Consolidation --
General," even if these relief provisions apply, a tax would be imposed with
respect to the excess net income.
Any gain realized by CRFLT on the sale of any property held
as inventory or other property held primarily for sale to customers in the
ordinary course of business (including CRFLT's share of any such gain realized
by the Company) will be treated as income from a "prohibited transaction" that
is subject to a 100% penalty tax. Such prohibited transaction income may also
have an adverse effect upon CRFLT's ability to satisfy the income tests for
qualification as a REIT. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of a trade
or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. The Company intends
that both it and the Hotel Partnerships will hold the Hotels for investment with
a view to long-term appreciation, to engage in the business of acquiring and
owning the Hotels (and other hotels) and to make such occasional sales of the
Hotels as are consistent with the Company's investment objectives. There can be
no assurance, however, that the IRS might not contend that one or more of such
sales is subject to the 100% penalty tax.
Asset Tests Applicable to REITs. CRFLT, at the close of
each quarter of its taxable year, must also satisfy three tests relating to the
nature of its assets. First, at least 75% of the value of CRFLT's total assets
must be represented by real estate assets including for this purpose (i) its
allocable share of real estate assets held by partnerships in which CRFLT owns
an interest (including its allocable share of the assets held through the
Company) and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of CRFLT, cash, cash items and government securities.
Second, not more than 25% of CRFLT's total assets may be represented by
securities other than those in the 75% asset class. Third, of the investments
included in the 25% asset class, the value of any one issuer's securities owned
by CRFLT may not exceed 5% of the value of CRFLT's total assets, and CRFLT may
not own more than 10% of any one issuer's outstanding voting securities.
CRFLT will represent that neither CRFLT, the Company nor
any of the Hotel Partnerships will own more than 10% of the voting securities of
any entity that would be treated as a corporation for federal income tax
purposes. In addition, CRFLT and its senior management believe, and will
represent, that the securities of any one issuer owned by CRFLT, the Company,
and the Hotel Partnerships will not exceed 5% of the total value of CRFLT's
assets. There can be no assurance, however, that the IRS might not contend that
the value of such securities exceeds the 5% value limitation.
After initially meeting the asset tests at the close of any
quarter, CRFLT will not lose its status as a REIT for failure to satisfy the
asset tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including, for example, as a
result of CRFLT increasing its interest in the Company as a result of the
exercise of a Unit Redemption Right or an additional capital contribution of
proceeds of an offering of Common Shares by CRFLT), the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. CRFLT intends to maintain adequate records of the value of its
assets to ensure compliance with the asset tests and to take such other actions
within 30 days after the close of any quarter as may be
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required to cure any noncompliance. If CRFLT fails to cure noncompliance with
the asset tests within such time period, CRFLT would cease to qualify as a REIT.
Annual Distribution Requirements Applicable to REITs.
CRFLT, in order to qualify as a REIT, is required to distribute dividends (other
than capital gain dividends) to its shareholders in an amount at least equal to
(i) the sum of (a) 95% of CRFLT's REIT taxable income (computed without regard
to the dividends paid deduction and CRFLT's net capital gain) and (b) 95% of the
net income (after tax), if any, from foreclosure property, minus (ii) the sum of
certain items of noncash income. In addition, if CRFLT disposes of any Built-In
Gain Asset during its Recognition Period, CRFLT will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at least
95% of the Built-In Gain (after tax), if any, recognized on the disposition of
such asset. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before CRFLT timely files
its tax return for such year and if paid on or before the first regular dividend
payment date after such declaration. CRFLT intends to make timely distributions
sufficient to satisfy these annual distribution requirements. In this regard,
the Partnership Agreement authorizes CRFLT, as managing general partner, to take
such steps as may be necessary to cause the Company to distribute to its
partners an amount sufficient to permit CRFLT to meet these distribution
requirements.
To the extent that CRFLT does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its REIT
taxable income, as adjusted, it will be subject to tax thereon at regular
ordinary and capital gain corporate tax rates. CRFLT, however, may designate
some or all of its retained net capital gain, so that, although the designated
amount will not be treated as distributed for purposes of this tax, a
shareholder would include its proportionate share of such amount in income, as
capital gain, and would be treated as having paid its proportionate share of the
tax paid by CRFLT with respect to such amount. The shareholder's basis in its
Common Shares would be increased by the amount the shareholder included in
income and decreased by the amount of the tax the shareholder is treated as
having paid. CRFLT would make an appropriate adjustment to its earnings and
profits. For a more detailed description of the tax consequences to a
shareholder of such a designation, see "Taxation of Taxable U.S. Shareholders of
a REIT Generally."
It is expected that CRFLT's REIT taxable income will be
less than its cash flow due to the allowance of depreciation and other non-cash
charges in computing REIT taxable income. Accordingly, CRFLT anticipates that it
will generally have sufficient cash or liquid assets to enable it to satisfy the
distribution requirements described above. It is possible, however, that CRFLT,
from time to time, may not have sufficient cash or other liquid assets to meet
these distribution requirements due to timing differences between (i) the actual
receipt of income and actual payment of deductible expenses and (ii) the
inclusion of such income and deduction of such expenses in arriving at taxable
income of CRFLT. If such timing differences occur, in order to meet the
distribution requirements, CRFLT may find it necessary to arrange for short-
term, or possibly long-term, borrowings or to pay dividends in the form of
taxable stock dividends.
CRFLT intends to calculate its REIT taxable income based
upon the conclusion that the Hotel Partnerships, the Subsidiary Partnerships or
the Company, as applicable, are the owners of the Hotels for federal income tax
purposes. As a result, CRFLT expects that the depreciation deductions with
respect to the Hotels will reduce its REIT taxable income. This conclusion is
consistent with the conclusion above that the Leases will be treated as true
leases for federal income tax purposes. If the IRS were to successfully
challenge this position, in addition to likely failing the 75% and 95% gross
income tests described above, CRFLT also might be deemed retroactively to have
failed to meet the REIT
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distribution requirements and would have to rely on the payment of a "deficiency
dividend" in order to retain its REIT status.
Under certain circumstances, CRFLT may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in CRFLT's
deduction for dividends paid for the earlier year. Thus, CRFLT may be able to
avoid being taxed on amounts distributed as deficiency dividends; however, CRFLT
will be required to pay interest based upon the amount of any deduction taken
for deficiency dividends.
Furthermore, if CRFLT should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, CRFLT would be subject to a 4%
excise tax on the excess of such required distribution over the sum of amounts
actually distributed and amounts retained with respect to which the REIT pay
federal income tax.
Failure of CRFLT to Qualify as a REIT. If CRFLT fails to
qualify for taxation as a REIT in any taxable year, and if the relief provisions
do not apply, CRFLT will be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. Distributions to
shareholders in any year in which CRFLT fails to qualify will not be deductible
by CRFLT nor will they be required to be made. As a result, CRFLT's failure to
qualify as a REIT would significantly reduce the cash available for distribution
by CRFLT to its shareholders. In addition, if CRFLT fails to qualify as a REIT,
all distributions to shareholders will be taxable as ordinary income, to the
extent of CRFLT's current and accumulated earnings and profits, and, subject to
certain limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, CRFLT also will be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether in all circumstances CRFLT would be entitled to such
statutory relief.
Taxation of Taxable U.S. Shareholders of CRFLT Generally
As used herein, the term "U.S. Shareholder" means a holder
of Common Shares who (for United States federal income tax purposes) is (i) a
citizen or resident of the United States, (ii) a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source, or (iv) a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
persons who have the authority to control all substantial decisions of the
trust.
As long as CRFLT qualifies as a REIT, distributions made by
CRFLT out of its current or accumulated earnings and profits (and not designated
as capital gain dividends) will constitute dividends taxable to its taxable U.S.
Shareholders as ordinary income Such distributions will not be eligible for the
dividends received deduction in the case of U.S. Shareholders that are
corporations. To the extent that CRFLT makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Shareholder, reducing the adjusted basis which such U.S.
Shareholder has in its Common Shares for tax purposes by the amount of such
distribution (but not below zero), with distributions in excess of a U.S.
Shareholder's adjusted basis in its Common Shares taxable as capital gains
(provided that the Common Shares have been held as
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a capital asset). Dividends declared by CRFLT in October, November, or December
of any year and payable to a shareholder of record on a specified date in any
such month shall be treated as both paid by CRFLT and received by the
shareholder on December 31 of such year, provided that the dividend is actually
paid by CRFLT on or before January 31 of the following calendar year.
Shareholders may not include in their own income tax returns any net operating
losses or capital losses of CRFLT.
Distributions made by CRFLT that are properly designated by
CRFLT as capital gain dividends will be taxable to taxable non-corporate
(individuals, estates or trusts) U.S. Shareholders as gain from the sale or
exchange of a capital asset held for more than one year (to the extent that they
do not exceed CRFLT's actual net capital gain for the taxable year) without
regard to the period for which such non-corporate U.S. Shareholder has held his
Common Shares. On November 10, 1997, the IRS issued Notice 97-64, which provides
generally that CRFLT may classify portions of its designated capital gain
dividend as (i) a 20% gain distribution (which would be taxable to non-corporate
U.S. Shareholders at a maximum rate of 20%), (ii) an unrecaptured Section 1250
gain distribution (which would be taxable to non-corporate U.S. Shareholders at
a maximum rate of 25%), or (iii) a 28% rate gain distribution (which would be
taxable to non-corporate U.S. Shareholders at a maximum rate of 28%). (If no
designation is made, the entire designated capital gain dividend will be treated
as a 28% rate gain distribution.) Notice 97-64 provides that a REIT must
determine the maximum amounts that it may designate as 20% and 25% rate capital
gain dividends by performing the computation required by the Code as if the REIT
were an individual whose ordinary income were subject to a marginal tax rate of
at least 28%. Notice 97-64 further provides that designations made by the REIT
only will be effective to the extent that they comply with Revenue Ruling 89-81,
which requires that distributions made to different classes of shares be
composed proportionately of dividends of a particular type.
Distributions made by CRFLT that are properly designated by
CRFLT as capital gain dividends will be taxable to taxable corporate U.S.
Shareholders as long-term gain (to the extent that they do not exceed CRFLT's
actual net capital gain for the taxable year) without regard to the period for
which such corporate U.S. Shareholder has held his Common Shares. Such U.S.
Shareholders may, however, be required to treat up to 20% of certain capital
gain dividends as ordinary income.
Distributions made by CRFLT and gain arising from the sale
or exchange by a U.S. Shareholder of Common Shares will not be treated as
passive activity income, and, as a result, U.S. Shareholders generally will not
be able to apply any "passive losses" against such income or gain.
Upon any sale or other disposition of Common Shares, a U.S.
Shareholder will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and (ii)
the holder's adjusted basis in such Common Shares for tax purposes. Such gain or
loss will be capital gain or loss if the Common Shares have been held by the
U.S. Shareholder as a capital asset. In the case of a U.S. Shareholder that is a
corporation, such gain or loss will be long-term capital gain or loss if such
Common Shares have been held for more than one year. In the case of a U.S.
Shareholder who is an individual or an estate or trust, the characterization of
such gain or loss may turn on whether the IRS issues certain regulations. The
1997 Act altered the taxation of capital gain income of non-corporate taxpayers.
Under the 1997 Act, such taxpayers that hold certain investments for more than
18 months may be axed at a maximum long-term capital gain rate of 20% on the
sale or exchange of those investments. Non-corporate taxpayers that hold certain
assets for more than one year but not more than 18 months may be taxed at a
maximum mid-term capital gain rate of 28% on the sale or exchange of those
investments. The 1997 Act also provides a
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maximum rate of 25% for "unrecaptured section 1250 gain" for non-corporate
shareholders, special rules for "qualified 5-year gain," and other changes to
prior law. The 1997 Act allows the IRS to prescribe regulations on how the 1997
Act's new capital gain rates will apply to sales of capital assets by "pass-
through entities," which include REITs such as CRFLT, and to sales of interests
in "pass-through entities." To date, such regulations have not been prescribed.
Shareholders are urged to consult with their own tax advisors with respect to
the new rules contained in the 1997 Act. In general, any loss recognized by a
U.S. Shareholder upon the sale or other disposition of Common Shares that have
been held for six months or less (after applying certain holding period rules)
will be treated as a long-term capital loss, more likely than not in a manner
similar to the distributions received by such U.S. Shareholder from CRFLT which
were required to be treated as long-term capital gains.
CRFLT may designate its net capital gain so that with
respect to retained net capital gains, a U.S. Shareholder would include its
proportionate share of such gain in income, as long-term capital gain, and would
be treated as having paid its proportionate share of the tax paid by CRFLT with
respect to the gain. The U.S. Shareholder's basis in its Common Shares would be
increased by its share of such gain and decreased by its share of such tax. With
respect to such long-term capital gain of a U.S. Shareholder that is an
individual or an estate or trust, the IRS, as described above in this section,
has authority to issue regulations that could apply the special tax rate
applicable generally to the portion of the long-term capital gains of an
individual or an estate or trust attributable to deductions for depreciation
taken with respect to depreciable real property. IRS Notice 97-64, described
above in this section, did not address the taxation of non-corporate REIT
shareholders with respect to retained net capital gains.
Backup Withholding for Limited Service REIT Distributions
CRFLT will report to its U.S. Shareholders and the IRS the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder 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 U.S. shareholder that does not provide CRFLT with his
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, CRFLT may be required to
withhold a portion of capital gain distributions to any shareholders who fail to
certify their non-foreign status to CRFLT. See "-- Taxation of Non-U.S.
Shareholders of CRFLT."
Taxation of Tax-Exempt Shareholders of CRFLT
The IRS has ruled that amounts distributed as dividends by
a qualified REIT do not constitute unrelated business taxable income ("UBTI")
when received by a tax-exempt entity. Based on that ruling, provided that a tax-
exempt shareholder (except certain tax-exempt shareholders described below) has
not held its Common Shares as "debt financed property" within the meaning of the
Code and such Common Shares are not otherwise used in a trade or business, the
dividend income from CRFLT will not be UBTI to a tax-exempt shareholder.
Similarly, income from the sale of Common Shares will not constitute UBTI unless
such tax-exempt shareholder has held such
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Common Shares as "debt financed property" within the meaning of the Code or has
used the Common Shares in a trade or business.
For tax-exempt shareholders that are social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal services plans exempt from federal income
taxation under Code Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20),
respectively, income from an investment in CRFLT will constitute UBTI unless the
organization is able to properly deduct amounts set aside or placed in reserve
for certain purposes so as to offset the income generated by its investment in
CRFLT. Such prospective shareholders should consult their own tax advisors
concerning these "set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget
Reconciliation Act of 1993 (the "1993 Act") provides that, effective for taxable
years beginning in 1994, a portion of the dividends paid by a "pension held
REIT" shall be treated as UBTI as to any trust which (i) is described in Section
401(a) of the Code, (ii) is tax-exempt under Section 501(a) of the Code, and
(iii) holds more than 10% (by value) of the interests in the REIT. Tax-exempt
pension funds that are described in Section 401(a) of the Code are referred to
below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have
qualified as a REIT but for the fact that Section 856(h)(3) of the Code (added
by the 1993 Act) provides that stock owned by qualified trusts shall be treated,
for purposes of the "not closely held" requirement, as owned by the
beneficiaries of the trust (rather than by the trust itself), and (ii) either
(a) at least one such qualified trust holds more than 25% (by value) of the
interests in the REIT, or (b) one or more such qualified trusts, each of which
owns more than 10% (by value) of the interests in the REIT, hold in the
aggregate more than 50% (by value) of the interests in the REIT. The percentage
of any REIT dividend treated as UBTI is equal to the ratio of (i) the UBTI
earned by the REIT (treating the REIT as if it were a qualified trust and
therefore subject to tax on UBTI) to (ii) the total gross income of the REIT. A
de minimis exception applies where the percentage is less than 5% for any year.
The provisions requiring qualified trusts to treat a portion of REIT
distributions as UBTI will not apply if the REIT is able to satisfy the "not
closely held" requirement without relying upon the "look-through" exception with
respect to qualified trusts.
Based on the anticipated ownership of Common Shares
immediately following the Consolidation, and as a result of certain limitations
on transfer and ownership of Common Shares contained in the Declaration of
Trust, CRFLT does not expect to be classified as a "pension held REIT."
Taxation of Non-U.S. Shareholders of CRFLT
The rules governing federal income taxation of the
ownership and disposition of Common Shares by persons that are, for purposes of
such taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts (collectively, "Non-U.S.
Shareholders") are complex, and no attempt is made herein to provide more than a
brief summary of such rules. Accordingly, the discussion does not address all
aspects of federal income tax and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Shareholder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that CRFLT qualifies for taxation as a
REIT. Prospective Non-U.S. Shareholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income tax
laws with regard to an investment in Common Shares, including any reporting
requirements.
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Distributions by CRFLT. Distributions by CRFLT to a Non-
U.S. Shareholder that are neither attributable to gain from sales or exchanges
by CRFLT of United States real property interests nor designated by CRFLT as
capital gains dividends will be treated as dividends of ordinary income to the
extent that they are made out of current or accumulated earnings and profits of
CRFLT. Such distributions ordinarily will be subject to withholding of United
States federal income tax on a gross basis (that is, without allowance of
deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Shareholder of a United States trade
or business. Under certain treaties, lower withholding rates generally
applicable to dividends do not apply to dividends from a REIT, such as CRFLT.
Certain certification and disclosure requirements must be satisfied to be exempt
from withholding under the effectively connected income exemption. Dividends
that are effectively connected with such a trade or business will be subject to
tax on a net basis (that is, after allowance of deductions) at graduated rates,
in the same manner as domestic shareholders are taxed with respect to such
dividends, and are generally not subject to withholding. Any such dividends
received by a Non-U.S. Shareholder that is a corporation may also be subject to
an additional branch profits tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. CRFLT expects to withhold United
Sates income tax at the rate of 30% on any distribution made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies and any required form or
certification evidencing eligibility for that lower rate is filed with CRFLT or
(ii) a Non-U.S. Shareholder files an IRS Form 4224 with CRFLT claiming that the
distribution is effectively connected income.
Distributions in excess of current or accumulated earnings
and profits of CRFLT will not be taxable to a Non-U.S. Shareholder to the extent
that they do not exceed the adjusted basis of the shareholder's Common Shares,
but rather will reduce the adjusted basis of such Common Shares. To the extent
that such distributions exceed the adjusted basis of a Non-U.S. Shareholder's
Common Shares, they will give rise to gain from the sale or exchange of its
Common Shares, the tax treatment of which is described below. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that CRFLT will be required to withhold 10% of any distribution in
excess of CRFLT's current and accumulated earnings and profits. Consequently,
although CRFLT intends to withhold at a rate of 30% on the entire amount of any
distribution (or a lower applicable treaty rate), to the extent that CRFLT does
not do so any portion of a distribution not subject to withholding at a rate of
30% (or a lower applicable treaty rate) will be subject to withholding at a rate
of 10%. However, the Non-U.S. Shareholder may seek a refund of such amounts from
the IRS if it subsequently determined that such distribution was, in fact, in
excess of current or accumulated earnings and profits of CRFLT, and the amount
withheld exceeded the Non-U.S. Shareholder's United States tax liability, if
any, with respect to the distribution.
Distributions to a Non-U.S. Shareholder that are designated
by CRFLT at the time of distribution as capital gains dividends (other than
those arising from the disposition of a United States real property interest)
generally will not be subject to United States federal income taxation, unless
(i) the investment in the Common Shares is effectively connected with the Non-
U.S. Shareholder's United States trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as domestic shareholders with
respect to such gain (except that a shareholder that is a foreign corporation
may also be subject to the 30% branch profits tax, as discussed above), or (ii)
the Non-U.S. Shareholder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains.
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Distributions to a Non-U.S. Shareholder that are
attributable to gain from sales or exchanges by CRFLT of United States real
property interests (whether or not designated as capital gain dividends) will
cause the Non-U.S. Shareholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Shareholders would thus generally be taxed at the same rates applicable to
domestic shareholders (subject to a special alternative minimum tax in the case
of nonresident alien individuals). Also, such gain may be subject to a 30%
branch profits tax in the hands of a Non-U.S. Shareholder that is a corporation,
as discussed above. CRFLT is required to withhold 35% of any such distribution.
That amount is creditable against the Non-U.S. Shareholder's federal income tax
liability.
Although the law is not entirely clear on the matter, it
appears that amounts designated by CRFLT pursuant to the 1997 Act as
undistributed capital gains in respect of the Common Shares held by U.S.
Shareholders (see "-- Annual Distribution Requirements Applicable to REITs"
above) would be treated with respect to Non-U.S. Shareholders in the manner
outlined in the preceding two paragraphs for actual distributions by CRFLT of
capital gain dividends. Under that approach, the Non-U.S. Shareholders would be
able to offset as a credit against their United States federal income tax
liability resulting therefrom their proportionate share of the tax paid by CRFLT
on such undistributed capital gains (and to receive from the IRS a refund to the
extent their proportionate share of such tax paid by CRFLT were to exceed their
actual United States federal income tax liability).
Sale of Common Shares. Gain recognized by a Non-U.S.
Shareholder upon the sale or exchange of Common Shares generally will not be
subject to United States taxation unless such shares constitute a "United States
real property interest" within the meaning of FIRPTA. The Common Shares will not
constitute a "United States real property interest" so long as CRFLT is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period less than 50% in value of
its stock is held directly or indirectly by Non-U.S. Shareholders. CRFLT is
unable at this time to predict whether it will be a "domestically controlled
REIT," and therefore whether the sale of Common Shares will be subject to
taxation under FIRPTA. Moreover, even if CRFLT initially qualifies as a
"domestically controlled REIT," because the Common Shares are expected to be
publicly traded, no assurance can be given that CRFLT would continue to be a
"domestically controlled REIT." Notwithstanding the foregoing, gain from the
sale or exchange of Common Shares not otherwise subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if the Non-U.S. Shareholder is a nonresident
alien individual who is present in the United States for 183 days or more during
the taxable year and has a "tax home" in the United States. In such case, the
nonresident alien individual will be subject to a 30% United States withholding
tax on the amount of such individual's gain.
Even if CRFLT does not qualify as or ceases to be a
domestically-controlled REIT, gain arising from the sale or exchange by a Non-
U.S. Shareholder of Common Shares would not be subject to United States taxation
under FIRPTA as a sale of a United States real property interest if (i) the
Common Shares are "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (e.g., the NYSE), and (ii) such
Non-U.S. Shareholder owned 5% or less of the Common Shares throughout the five-
year period ending on the date of the sale or exchange. If gain on the sale or
exchange of Common Shares were subject to taxation under FIRPTA, the Non-U.S.
Shareholder would be subject to regular United States income tax with respect to
such gain in the same manner as a U.S. Shareholder (subject to any applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals and the possible application of the 30% branch
profits tax in the case of foreign
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corporations), and the purchaser of the Common Shares would be required to
withhold and remit to the IRS 10% of the purchase price.
Backup Withholding Tax and Information Reporting. Backup
withholding tax (which generally is a withholding tax imposed at the rate of 31%
on certain payments to persons that fail to furnish certain information under
the United States information reporting requirements) and information reporting
will generally not apply to distributions paid to Non-U.S. Shareholders outside
the United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by CRFLT of
United States real property interests. As a general matter, backup withholding
and information reporting will not apply to a payment of the proceeds of a sale
of Common Shares by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply, however, to a payment of the
proceeds of a sale of Common Shares by a foreign office of a broker that (a) is
a United States person, (b) derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States or (c) is a
"controlled foreign corporation" (generally, a foreign corporation controlled by
United States shareholders) for United States tax purposes, unless the broker
has documentary evidence in its records that the holder is a Non-U.S.
Shareholder and certain other conditions are met, or the shareholder otherwise
establishes an exemption. Payment to or through a United States office of a
broker of the proceeds of a sale of Common Shares is subject to both backup
withholding and information reporting unless the shareholder certifies under
penalty of perjury that the shareholder is a Non-U.S. Shareholder, or otherwise
establishes an exemption. A Non-U.S. Shareholder may obtain a refund of any
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS.
The IRS has recently finalized regulations regarding the
withholding and information reporting rules discussed above. In general, these
regulations do not alter the substantive withholding and information reporting
requirements but unify certifications procedures and forms and clarify and
modify reliance standards. These regulations generally are effective for
payments made after December 31, 1998, subject to certain transition rules.
Valid withholding certificates that are hold on December 31, 1998, will remain
valid until the earlier of December 31, 1999 or the date of expiration of the
certificate under rules currently in effect (unless otherwise invalidated due to
changes in the circumstances of the person whose name is on such certificate). A
Non-U.S. Shareholder should consult its own advisor regarding the effect of the
new Treasury Regulations.
Tax Aspects of CRFLT's Ownership of Interests in the Company
General. Substantially all of CRFLT's investments will be
held through the Company, and the Company holds most of the Hotels through the
Hotel Partnerships, some of which in turn hold Hotels through certain Subsidiary
Partnerships. In general, partnerships are "pass-through" entities which are not
subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. CRFLT will
include in its income its proportionate share of the foregoing partnership items
for purposes of the various REIT income tests and in the computation of its REIT
taxable income. Moreover, for purposes of the REIT asset tests, CRFLT will
include its proportionate share of assets held through the Company, the Hotel
Partnerships and any Subsidiary Partnerships.
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See "-- Federal Income Taxation of CRFLT Following the Consolidation --
Ownership of Partnership Interests by a REIT."
Entity Classification. If the Company, any of the Hotel
Partnerships, any of the Subsidiary Partnerships, or any other partnership in
which the Company has a direct or indirect interest were treated as an
association, the entity would be taxable as a corporation and therefore would be
subject to an entity level tax on its income. In such a situation, the character
of CRFLT's assets and items of gross income would change and could preclude
CRFLT from qualifying as a REIT (see "Federal Income Taxation of CRFLT Following
the Consolidation -- Asset Tests Applicable to REITs" and "-- Income Tests
Applicable to REITs").
At the time of the closing of the Consolidation, Hogan &
Hartson L.L.P. will deliver an opinion to CRFLT stating that, based on certain
factual assumptions and representations described in the opinion, the Company,
each of the Hotel Partnerships, and each of the Subsidiary Partnerships will be
treated as a partnership (or disregarded) for federal income tax purposes (and
not treated as an association taxable as a corporation).
Partnership Allocations. Although a partnership agreement
will generally determine the allocation of income and loss among partners, such
allocations will be disregarded for tax purposes if they do not comply with the
provisions of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder. Generally, Section 704(b) and the Treasury Regulations
promulgated thereunder require that partnership allocations respect the economic
arrangement of the partners.
If an allocation is not recognized for federal income tax
purposes, the item subject to the allocation will be reallocated in accordance
with the partners' interests in the partnership, which will be determined by
taking into account all of the facts and circumstances relating to the economic
arrangement of the partners with respect to such item. The allocations of
taxable income and loss provided for in the Partnership Agreement and the
partnership agreements for the Hotel Partnerships are intended to comply with
the requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations with Respect to the Hotels. As described
above, pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property (such as the Hotels) that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the Book-Tax Difference associated with the
property at the time of the contribution. The Partnership Agreement requires
that such allocations be made in a manner consistent with Section 704(c) of the
Code.
In general, the partners of the Company who contributed
depreciated assets having an adjusted tax basis less than their fair market
value at the time of contribution (which includes all of the Limited Partners
owning interests in the Hotel Partnerships) will be allocated depreciation
deductions for tax purposes which are lower than such deductions would be if
determined on a pro rata basis. In addition, in the event of the disposition of
any of the contributed assets which have such a Book-Tax Difference, all income
attributable to such Book-Tax Difference generally will be allocated to such
partners. These allocations will tend to eliminate the Book-Tax Difference over
the life of the Company. However, the special allocation rules of Section 704(c)
do not always entirely eliminate the Book-Tax Difference on an annual basis or
with respect to a specific taxable transaction such as a sale. Thus, the
carryover basis of the contributed assets in the hands of the
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Company may cause CRFLT to be allocated lower depreciation and other deductions,
and possibly an amount of taxable income in the event of a sale of such
contributed assets in excess of the economic or book income allocated to it as a
result of such sale. Such an allocation might cause CRFLT to recognize taxable
income in excess of cash proceeds, which might adversely affect CRFLT's ability
to comply with the REIT distribution requirements. See "Federal Income Taxation
of CRFLT Following the Consolidation -- Annual Distribution Requirements
Applicable to REITs."
As described above, the Company and CRFLT have determined
to use the "traditional method" for accounting for Book-Tax Differences with
respect to the Hotels contributed to the Company in connection with the
Consolidation. This method is generally the most favorable method for accounting
for Book-Tax Differences from the perspective of those Limited Partners
(including the Hotel Partnership GPs) receiving Units in exchange for property
at the time of the Consolidation and is the least favorable from the perspective
of CRFLT to the extent it contributes cash (such as the proceeds from the
Offering) to the Company.
With respect to any property purchased by the Company
subsequent to the Consolidation, such property will initially have a tax basis
equal to its fair market value, and Section 704(c) of the Code will not apply.
Other Tax Consequences for CRFLT and Its Shareholders
CRFLT and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of CRFLT and
its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in CRFLT.
237
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VOTING PROCEDURES
Distribution of Solicitation Materials
This Consent Solicitation, together with the accompanying transmittal
letter, the power of attorney and the Limited Partner consent (the power of
attorney and Limited Partner consent are referred to collectively as the
"Consent Form"), constitute the Solicitation Materials being distributed to the
Limited Partners to obtain their votes for or against their Hotel Partnership's
participation in the Consolidation.
In order to participate in the Consolidation, each Hotel Partnership
must approve participation by a majority vote of all interests of Limited
Partners in the Hotel Partnership, as set forth in the table below under
"Required Vote and Other Conditions." Each Hotel Partnership will participate in
the Consolidation by a Merger as set forth below and in the Supplement relating
to the individual Hotel Partnership. Each Limited Partner, therefore, should
complete and return the Consent Form before the expiration of the Solicitation
Period. The Solicitation Period is the time period during which Limited Partners
may vote for or against the Consolidation. The Solicitation Period will commence
upon delivery of the Solicitation Materials to the Limited Partners (on or about
________ __, 1998 and will continue until the later of (a) _______ __, 1998 (a
date not less than 60 calendar days from the initial delivery of the
Solicitation Materials) or (b) such later date as may be selected by the Hotel
Partnership GPs and the Company and as to which notice is given to the Limited
Partners. At their discretion, the Hotel Partnership GPs and the Company may
elect to extend the Solicitation Period. Under no circumstances will the
Solicitation Period be extended beyond ______ __, 1998. Any Consent Form
received by the information agent (the "Information Agent") prior to 5:00 p.m.,
Eastern time, on the last day of the Solicitation Period will be effective
provided that such Consent Form has been properly completed and signed. If you
fail to return a signed Consent Form by the end of the Solicitation Period, your
Hotel Partnership Interests will be counted as voting AGAINST the Consolidation,
which may jeopardize completion of the Consolidation.
The Consent Form consists of two parts. Part A seeks the Limited
Partners' consent to the Consolidation and certain related matters. The exact
matters which a vote in favor of the Consolidation will be deemed to approve
differ for each Hotel Partnership and are explained in detail in the individual
Supplement for each Hotel Partnership. If a Limited Partner has interests in
more than one Hotel Partnership, all of such interests will be set forth on the
Consent Form and the Consent Form will provide for separate votes by the Limited
Partner for each Hotel Partnership listed. Limited Partners who return a signed
Consent Form but fail to indicate their approval or disapproval as to any matter
(including the Consolidation) will be deemed to have voted to APPROVE such
matter.
Part B of the Consent Form is a power of attorney, which must be
signed separately. The power of attorney appoints ________________,
_______________ and _______________ as your attorneys-in-fact for the purpose of
executing, among other things, the Partnership Agreement (if necessary) and all
other documents and instruments advisable or necessary to complete the
Consolidation. The power of attorney is intended solely to ease the
administrative burden of completing the Consolidation without needing to obtain
signatures of Partners on multiple documents.
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No Special Meetings
None of the Hotel Partnerships has scheduled a special meeting of its
Limited Partners to discuss the Solicitation Materials or the terms of the
Consolidation. The Hotel Partnership GPs, members of CRFLT's management and the
Information Agent intend to solicit actively the support of the Limited Partners
for the Consolidation and, subject to applicable federal and state securities
laws, hold informal meetings with Limited Partners, answer questions about the
Consolidation and the Solicitation Materials and explain the reasons for the
recommendation that Limited Partners vote to approve the Consolidation. Costs of
solicitation will be allocated as set forth in "The Consolidation --
Consolidation Expenses." No person will receive compensation contingent upon
solicitation of a favorable vote.
Required Vote and Other Conditions
The Hotel Partnership GPs and the Company have conditioned
participation in the Consolidation by each Hotel Partnership upon obtaining the
required votes set forth in the table below. See "The Consolidation."
<TABLE>
<CAPTION>
Hotel Partnership Required Vote
----------------- -------------
<S> <C>
CBM1 Consent of Limited Partners holding more than 50% of
the outstanding limited partner interests and the
approval of the Hotel Partnership GP. The Hotel
Partnership GP may not vote any of its limited partner
interests.
CBM2 Consent of Limited Partners holding more than 50% of
the outstanding limited partner interests and the
approval of the Hotel Partnership GP. The Hotel
Partnership GP may not vote any of its limited partner
interests.
RIBM1 Consent of Limited Partners holding more than 50% of
the outstanding limited partner interests and the
approval of the Hotel Partnership GP.
RIBM2 Consent of Limited Partners holding more than 50% of
the outstanding limited partner interests and the
approval of the Hotel Partnership GP.
Res USA Consent of Limited Partners holding more than 50% of
the outstanding limited partner interests and the
approval of the Hotel Partnership GP.
</TABLE>
239
<PAGE>
<TABLE>
<S> <C>
FIBM Consent of Limited Partners holding more than 50% of
the outstanding limited partner interests and the
approval of the Hotel Partnership GP. The Hotel
Partnership GP may vote its limited partner interest.
</TABLE>
Record Date and Outstanding Partnership Units. The Record Date is
________ __, 1998 for all Hotel Partnerships. As of the Record Date, the
following number of units were held of record by the number of Limited Partners
indicated below:
<TABLE>
<CAPTION>
Number of Number of Units Number of Units Required for
Hotel Partnership Partners Held of Record Approval of Consolidation
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CBM1 1,267 1,150 576
CBM2 1,681 1,470 736
RIBM1 4,225 65,600 32,801
RIBM2 3,915 70,000 35,001
Res USA 3 608 305
FIBM 3,148 83,337 41,669
</TABLE>
Each Limited Partner is entitled to one vote for each Partnership
Unit held. Accordingly, the number of Partnership Units entitled to vote with
respect to the Consolidation is equivalent to the number of Partnership Units
held of record at the Record Date.
Investor Lists. Under Rule 14a-7 of the Exchange Act, each Hotel
Partnership is required, upon the written request of a Limited Partner, to
provide to the requesting Limited Partner (i) a statement of the approximate
number of Limited Partners in such Limited Partner's partnership, and (ii) the
estimated cost of mailing a proxy statement, form of proxy or other similar
communication to such Limited Partners. In addition, a Limited Partner has the
right, at his or her option, either (a) to have his Hotel Partnership mail (at
the Limited Partner's expense) copies of any proxy statement, proxy form or
other soliciting materials furnished by the Hotel Partnership to the Hotel
Partnership's Limited Partners designated by the Limited Partner, or (b) to have
the Hotel Partnership deliver to the requesting Limited Partner, within five
business days of the receipt of the request, a reasonably current list of the
names, addresses and class of Partnership Units held by the Hotel Partnership's
Limited Partners. The right to receive the list of Limited Partners is subject
to the requesting Limited Partner's payment of the cost of mailing and
duplication at a rate of $0.15 per page.
Tabulation of Votes. An automated system administered by
________________ will tabulate the votes. Abstentions will be tabulated with
respect to the Consolidation and related matters. Abstentions will have the
effect of a vote against the Consolidation, as will the failure to return a
Consent Form and broker nonvotes (where a broker submits a consent but does not
have authority to vote a Limited Partner's Partnership Units on one or more
matters). The number of Partnership Units that must be voted in favor of the
Consolidation for it to be approved by the respective Hotel Partnerships is
shown in the table above.
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EXPERTS
The financial statements and schedules of CRF Group as of January 3,
1997 and December 29, 1995 and for each of the three fiscal years in the period
ended January 3, 1997 and the financial statements of CBM1, CBM2, RIBM1, RIBM2,
Res USA and FIBM as of January 3, 1997 and December 29, 1995 and for each of the
three fiscal years in the period ended January 3, 1997 included in this Consent
Solicitation and in the Supplements hereto have been audited by Arthur Andersen
LLP, independent public accountants, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
LEGAL MATTERS
Certain legal matters, including certain tax matters, will be passed
upon for the Company and CRFLT by Hogan & Hartson L.L.P., Washington, D.C.
AVAILABLE INFORMATION
The Hotel Partnerships (except Res USA) are subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and is required to file reports and other information with the Securities
and Exchange Commission (the "Commission"), 450 Fifth Street N.W., Washington,
D.C. 20549. In addition, the Company has filed a Registration Statement on Form
S-4 under the Securities Act of 1933, as amended (the "Securities Act") and the
rules and regulations thereunder, with respect to the securities offered
pursuant to this Prospectus/Consent Solicitation Statement. This
Prospectus/Consent Solicitation Statement, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and financial schedules thereto. For further
information concerning the Consolidation, please refer to the reports of the
Hotel Partnerships (except Res USA) filed under the Exchange Act and the
Company's Registration Statement and such exhibits and schedules, copies of
which may be examined without charge at, or obtained upon payment of prescribed
fees from, the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and which will also be available
for inspection and copying at the regional offices of the Commission located at
Room 1400, 75 Park Place, New York, New York 10007 and at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. The Commission maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at "http:\\www.sec.gov".
A separate supplement to this Prospectus/Consent Solicitation
Statement has been prepared for each Hotel Partnership and will be delivered to
each Partner of the Hotel Partnership covered thereby. Upon receipt of a written
request by a Partner or representative so designated in writing, the Hotel
Partnership GPs will send a copy of any supplement without charge. All requests
should be directed to: ____________________________.
Statements contained in this Prospectus/Consent Solicitation
Statement or any supplements hereto as to the contents of any contract or other
document which is filed as an exhibit to the Registration Statement are not
necessarily complete, and each such statement is qualified in its entirety by
reference to the full text of such contract or document.
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<PAGE>
Upon consummation of the Consolidation, CRFLT and the Company will be
required to file reports and other information with the Commission pursuant to
the Exchange Act. In addition to applicable legal or NYSE requirements, if any,
holders of the Common Shares will receive annual reports containing audited
financial statements with a report thereon by CRFLT's independent public
accountants, and quarterly reports containing unaudited financial information
for each of the first three quarters of each fiscal year. CRFLT will include in
its Exchange Act filings all reports for the Lessees which they would be
required to file if they were subject to the filing requirements of the Exchange
Act. If a Hotel Partnership does not participate in the Consolidation, such
Hotel Partnership will continue to file reports and other information with the
Commission as required by law.
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<PAGE>
GLOSSARY
"15% Personal Property Test" means rent paid to the REIT will not be
considered "rent from real property" if personal property accounts for more than
15% of the total rent received under the lease of real property.
"1993 Act" means the Omnibus Budget Reconciliation Act of 1993.
"1997 Act" means the Taxpayer Relief Act of 1997.
"AAA" means American Appraisal Associates, an independent, nationally
recognized hotel valuation and financial advisory firm that appraised the Hotels
and rendered the Fairness Opinion.
"Acquisition Hotels" means the Pentagon City Residence Inn and the
Chicago Downtown Courtyard Hotel, both of which will be purchased by the Company
from Host for cash in connection with the Consolidation.
"ADA" means the Americans with Disabilities Act.
"Additional Charges" means certain other amounts, including interest
accrued on any late payments or charges, payable under the leases.
"AMTI" means alternative minimum taxable income.
"Anti-Abuse Rule" means a regulation under the partnership provisions
of the Code that authorizes the IRS, in certain "abusive" transactions involving
partnerships, to disregard the form of the transaction and recast it for federal
tax purposes as the IRS deems appropriate.
"Appraisal" means an appraisal of a Hotel performed by AAA.
"Appraised Value" means the value of the Hotels owned by the Hotel
Partnerships, as determined by AAA as of ___________ __, 1998.
"Available Cash" means net income plus depreciation and amortization
and any reduction in reserves and minus interest and principal payments on debt,
capital expenditures, any additions to reserves and other adjustments.
"Bankruptcy Code" means Title 11 of the U.S. Code.
"Base Rent" means a fixed dollar amount of rent payable monthly by
the Lessee to the Company unless the amount payable under the Percentage Rent
provision is higher, in which case only Percentage Rent will be payable.
"Beneficiary" means a qualified charitable organization selected by
CRFLT.
"Book-Tax Difference" means the difference between the fair market
value of the contributed property at the time of contribution and the adjusted
tax basis of such property at the time of such contribution.
<PAGE>
"Built-In Gain Asset" means an asset which has been acquired from a C
corporation in a transaction in which the basis of the asset in the hands of the
Company is determined by reference to the basis of the asset in the hands of the
C corporation.
"Business Day" means any day, other than a Saturday or Sunday, on
which the banking institutions in the City of New York are open for business.
"CBM1" means Courtyard by Marriott Limited Partnership, a Delaware
limited partnership.
"CBM2" means Courtyard by Marriott II Limited Partnership, a Delaware
limited partnership.
"CBM2 Certificates" means the indebtedness of CBM2 consisting of
$390.1 million of multi-class commercial pass-through certificates, relating to
a mortgage loan under which the borrower is a subsidiary of CBM2. The mortgage
loan is divided into several components with interest rates varying from 6.88%
to 8.645% (weighted average rate of 8.5% at September 12, 1997) and require
monthly payments of principal and interest based on a 17-year amortization
schedule.
"CBM2 Senior Notes" means the debt of CBM2 consisting of $127.4
million of senior secured notes. The CBM2 Senior Notes bear interest at 10.75%
and mature on February 1, 2008.
"Chain Services" means services generally furnished on a central or
regional basis to the Hotels. Such services include the following: (i) the
development and operation of computer systems and reservation services, (ii)
regional management and administrative services, regional marketing and sales
services, regional training services, manpower development and relocation costs
of regional personnel and (iii) such additional central or regional services as
may from time to time be more efficiently performed on a regional or group
level.
"Closing" means the consummation of the Consolidation.
"Closing Date" means the date of the Closing of the Consolidation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Share" means a common share of beneficial interest, $.01 par
value per share, of CRFLT.
"Company" means CRF Lodging Company, L.P., a Delaware limited
partnership.
"Consent Form" means the consent form and power of attorney,
collectively.
"Consent Solicitation" means the Prospectus/Consent Solicitation
Statement of the Company dated __________ __, 1998.
"Consolidation" means the merger of the Merger Partnerships into the
Hotel Partnerships, the purchase of the Acquisition Hotels by the Company from
Host, the Offering and the related transactions described in this Consent
Solicitation.
2
<PAGE>
"Consolidation Expenses" means the expenses incurred in connection
with the Consolidation, including, without limitation, solicitation and
communication costs, legal fees, appraisal fees, environmental and engineering
fees, fairness opinion fees, registration, listing and filing fees, accounting
fees and other fees and expenses.
"Continuation Value" means the amount that would be distributed to
Limited Partners if each Hotel Partnership were continued for ten years and then
sold for its estimated value, determined using a discounted cash flow analysis
applied to the anticipated cash flows from the operation and sale of each Hotel
and taking into account the terms of existing debt obligations.
"Control Share Acquisition" means the acquisition of Control Shares,
subject to certain exemptions.
"Control Shares" means voting shares which, if the acquiror is able
to exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise voting power in
electing trustees within one of the following ranges of voting power: (i)
one-fifth or more but less than one-third, (ii) one third or more but less than
a majority or (iii) a majority or more of all voting power.
"Courtyard Hotels" means all of the Hotels currently owned by CBM1
and CBM2.
"Courtyard Units" means the Units received in the Consolidation by
Host and its subsidiaries in exchange for its Hotel Partnership Interests in
CBM1 and CBM2.
"CPI" means the Consumer Price Index.
"Credit Facility" means a revolving credit facility of the Company
from institutional lenders that will provide for borrowings up to $400
million.
"CRFLT" means CRF Lodging Trust, a Maryland real estate investment
trust, which will be the sole general partner of the Company.
"Declaration of Trust" means the Declaration of Trust of CRFLT, dated
December __, 1997.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership
Act.
"Disguised Sale Regulations" means Section 707 of the Code and the
Treasury Regulations thereunder.
"Dissenters' Rights" means a Dissenting Partner's right to tender the
Units received in the Consolidation in exchange for Notes.
"Dissenting Partner" means a Limited Partner who votes against the
Consolidation and who complies with certain specified procedures.
"EBITDA" means Earnings Before Interest Expense, Taxes, Depreciation
and Amortization and certain other noncash items. EBITDA consists of the sum of
consolidated net income, interest expense, depreciation and amortization. EBITDA
data is presented because such data is used by certain investors to determine
the Company's ability to meet debt service requirements. The Company considers
EBITDA to be an indicative measure of the Company's operating performance due to
the significance of the Company's long-lived assets and because EBITDA can be
used to measure the Company's ability to service debt, fund capital expenditures
and expand its business; however, such information should not be considered as
an alternative to net income, operating profit, cash flows from operations, or
any other operating or liquidity performance measure prescribed by GAAP.
3
<PAGE>
Cash expenditures for various long-term assets and interest expense have been,
and will be, incurred which are not reflected in the EBITDA presentations.
"Effective Time" means the time at which the Certificates of Merger
with respect to the Merger of the Merger Partnerships with and into the
Participating Hotel Partnerships are filed with the Secretary of State of the
State of Delaware.
"Employee Plan" means the 1998 Employee Share Option and Restricted
Share Plan.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means any employee benefit plan as defined in section
3(3) of ERISA that is regulated by Title I of ERISA.
"Excess Losses" means losses that would have the effect of creating a
deficit balance in a Limited Partner's capital account.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Value" means the amount calculated by (i) obtaining an
independent appraisal of the value of each Hotel owned by such Hotel
Partnership, as of ________ __, 1998 (the "Appraised Value"), as described; (ii)
adding the amount of other assets (such as cash, amounts due from Marriott
International and affiliates (i.e., working capital and rent receivables) and
cash reserves), net of liabilities (excluding mortgage and other debt and
deferred management fees) ("Net Other Assets") as of _________ __, 1998 (the
"Initial Valuation Date"); (iii) subtracting the estimated balance of the
mortgage debt owed by such Hotel Partnership as of June 30, 1998, which is the
estimated closing date for the Consolidation; (iv) subtracting the estimated
balance of other debt of such Hotel Partnership as of June 30, 1998; (v)
adjusting for the estimated prepayment and defeasance costs; (vi) subtracting
the amount of deferred management fees payable to the applicable Manager under
the Management Agreement for such Hotels; (vii) subtracting an amount equal to
the estimated cost to complete any deferred maintenance items identified in the
engineer's report relating to the applicable Hotels; (viii) subtracting an
amount equal to the estimated cost (if any) of bringing the condition of FF&E at
the applicable Hotels to normal levels, (ix) subtracting such Hotel
Partnership's pro rata share (based upon relative Exchange Values) of estimated
Consolidation Expenses and (x) making certain other adjustments.
"FF&E" means furniture, fixtures and equipment.
"FF&E Replacements" means FF&E to be acquired and certain routine
repairs that are normally capitalized to be performed in the next year.
"FF&E Reserve Account" means the account where funds for FF&E
Replacements is deposited.
"FIBM" means Fairfield Inn by Marriott Limited Partnership, a
Delaware limited partnership.
4
<PAGE>
"Final Valuation Date" means the date that is the end of the most
recent accounting period that has ended at least __ days prior to the date on
which the Last Preliminary Prospectus is distributed to potential investors.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of
1980.
"First Three Quarters 1996" means the thirty-six weeks ended
September 6, 1996.
"First Three Quarters 1997" means the thirty-six weeks ended
September 12, 1997.
"Full Consolidation Scenario" means that the Consolidation occurs
with an Offering yielding gross proceeds of $800 million, all Hotel
Partnerships participate, no Notes are issued and $539 million of outstanding
indebtedness is repaid.
"Funds From Operations" or "FFO" means net income (loss) computed in
accordance with GAAP, excluding gains (or losses) from debt restructuring and
sales of properties, plus real estate depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures, in accordance
with the NAREIT White Paper.
"GAAP" means generally accepted accounting principles.
"Gross Revenues" means all income derived from the operation of the
Hotels except sales, use and excise taxes, gratuities, extraordinary revenues or
interest earned on bank accounts.
"Holders" means persons in whose names the Notes are registered in
the security register for the Notes.
"Host" means Host Marriott Corporation, a Delaware corporation.
"Hotel" means a hotel currently owned by CBM1, CBM2, RIBM1, RIBM2,
Res USA or FIBM.
"Hotel Partnership GP" means the general partner of a Hotel
Partnership, each of which is a wholly owned direct or indirect subsidiary of
Host.
"Hotel Partnership Interest" means an interest in a Hotel Partnership
owned by a Partner.
"Hotel Partnerships" means, collectively, CBM1, CBM2, RIBM1, RIBM2,
Res USA and FIBM, each a "Hotel Partnership."
"Impermissible Tenant Service Income" means any amount charged to a
tenant for services rendered by the Company or its affiliates which is greater
than 150% of the cost of providing such services.
"Incentive Management Fee" means an amount paid to the Manager equal
to a percentage of the Operating Profit attributable to the Hotels on a combined
basis.
5
<PAGE>
"Indenture" means the indenture entered into between the Company and
________ (the "Indenture Trustee") pursuant to which the Notes will be issued.
" Indenture Trustee" means ___________________________, the trustee
under the Indenture.
"Information Agent" means ___________________.
"Initial Basis" means a Limited Partner's initial tax basis in his
Units.
"Initial Holding Period" means the one-year period beginning after
the Closing Date during which Limited Partners will be prohibited from redeeming
Units acquired in the Consolidation.
"Initial Valuation Date" means _________ __, 1998.
"Interest Payment Date" means each ___________ __ and ____________ __
commencing __________ __, 1998.
"Interested Shareholder" means a person who owns 10% or more of the
voting power of a trust's then outstanding shares of beneficial interests or his
affiliate.
"Investment Income" means the interest, dividend, Unit distribution
income and capital gains of the Lessees.
"IRS" means the Internal Revenue Service.
"Last Preliminary Prospectus" means the last preliminary prospectus
distributed to potential investors in the Offering.
"Leases" means the lease agreements under which the Lessees will
lease the Hotels from the Hotel Partnerships.
"Lessees" means the wholly owned direct or indirect subsidiaries of
Host which will lease the Hotels from the Hotel Partnerships.
"LIBOR" means the London Interbank Offered Rate.
"Limited Partner" means a holder of limited partnership interests in
a Hotel Partnership.
"Liquidation Value" means the net proceeds from a sale of a Hotel
Partnership's Hotels at their Appraised Values as of _____ __, 1998 together
with its net other assets (after payment of debts and other obligations,
including defeasance costs or prepayment penalties and deferred management
fees) and an allowance for liquidation costs, expenses and contingencies equal
to 2% of the Appraised Value of the Hotels.
"Lock-out Period" means a period of __ years beginning from the
Closing Date of the Consolidation during which time the Lock-out Provisions are
applicable.
"Lock-out Provisions" means prohibitions against the sale or
other disposal of any of the Courtyard Hotels, during the Lock-Out Period,
during such time that Host or its affiliates hold the Courtyard Units (except
(i) pursuant to a sale or other disposition of all or substantially all of the
Company's assets, (ii) an involuntary sale pursuant to foreclosure of a mortgage
secured by one of the Courtyard Hotels or a bankruptcy proceeding or (iii)
certain other transactions, including a "Section 1031 like-kind exchange," that
would not result in
6
<PAGE>
the recognition of any gain for tax purposes by the holders of Courtyard Units)
without the consent of the holders of the Courtyard Units issued in the
Consolidation, unless such holders of Courtyard Units are compensated for
certain adverse tax consequences which would result to them and Host from such
sale or other disposition during the Lock-out Period.
"Management Agreements" mean the management agreements between the
Lessees and subsidiaries of Marriott International pursuant to which Marriott
International manages the Hotels leased by the Lessees.
"Managers" mean the subsidiaries of Marriott International that
currently manage the Hotels.
"Market Value" means the most probable price that a property should
bring in a competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently and knowledgeably and assuming
the price is not affected by undue stimuli. Implicit in this definition is the
consummation of a sale as of a specific date and the passing of title from
seller to buyer under conditions whereby: (i) the buyer and seller are typically
motivated; (ii) both parties are well informed or well advised, and each is
acting in what he considers his own best interest; (iii) a reasonable time
frame is allowed for exposure in the open market; (iv) payment is made in terms
of cash in U.S. dollars and (v) the price represents the normal consideration
for the property sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale.
"Marriott International" means Marriott International, Inc., a
Delaware corporation.
"Maryland REIT Law" means Title 8 of the Maryland General Corporation
Law.
"Maturity Date" means _______ __, 2005, the maturity date of the
Notes.
"Maximum Debt Limitation" means the debt-to-total market
capitalization ratio of the Company, including the Notes to be issued to the
Dissenting Partners does not exceed 50% at the Closing Date.
"Maximum Note Limitation" means Limited Partners who elect to tender
their Units in exchange for Notes not requesting Notes with an aggregate
principal amount in excess of 15% of the aggregate Exchange Values of the
Participating Hotel Partnerships or more than 20% of the Exchange Value of any
individual Hotel Partnership.
"Merger" means the merger of a Merger Partnership into a Hotel
Partnership with the Hotel Partnership being the surviving entity.
"Merger Partnership" means a newly formed direct or indirect wholly
owned subsidiary of the Company which will merge with and into a Hotel
Partnership.
"MGCL" means the Maryland General Corporation Law.
"Minimum Net Worth" means the requirement that each Lessee maintain a
net worth equal to the greater of (i) a specified dollar amount ranging from
$______ million to $______ million or (ii) _____% of the initial projected
annual lease payments for all Hotels leased by the Company to such Lessee.
"Minimum Participation Condition" means that at least four Hotel
Partnerships, including CBM1, CBM2 and RIBM1, must participate in the
Consolidation.
"Minimum Value Condition" means the requirement that the value of the
Units received by each Partner in the Consolidation (based on each Unit being
considered to have a value equal to the price per Common Share sold in the
Offering) must be at least equal to the Exchange Value attributable to the
Partner's Hotel Partnership Interest.
7
<PAGE>
"NAREIT" means the National Association of Real Estate Investment
Trusts, Inc.
"Net Cash Proceeds" means net cash proceeds from the (i) sale or
other disposition of a Hotel for an amount in excess of (a) the amount required
to repay mortgage indebtedness secured by such Hotel or otherwise required to be
applied to the reduction of indebtedness of such Hotel Partnership and (b) the
costs incurred by the Hotel Partnership in connection with such sale or other
disposition or (ii) refinancing (whether at maturity or otherwise) of any
indebtedness secured by any Hotel in an amount in excess of (a) the amount of
indebtedness secured by such Hotel at the time of the Consolidation, calculated
prior to any repayment or other reduction in the amount of such indebtedness in
the Consolidation (including from the proceeds of the Offering) and (b) the
costs incurred by the Company or such Hotel Partnership in connection with such
refinancing.
"Net Other Assets" means amount of other assets (such as cash, due
from Marriott International and affiliates (i.e., working capital and rent
receivables) and cash reserves) net of liabilities (excluding mortgage and other
debt (including an adjustment for prepayment and defeasance costs) and deferred
management fees).
"Non-U.S. Shareholders" means nonresident alien individuals, foreign
corporations, foreign partnerships or foreign estates or trusts.
"Nonparticipating Hotel Partnership" means a Hotel Partnership that
does not participate in the Consolidation.
"Nonrecourse liabilities" means liabilities of the Company for which
no Partner bears the economic risk of loss.
"Notes" means the unsecured seven-year notes due ____ __, 2005 with
an interest rate of 120% of the applicable federal rate as of the Closing,
payable semi-annually, which will be received by Dissenting Partners.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the initial public offering by CRFLT of its Common
Shares.
"Other Plans" means the term "plan" as defined in section 4975(e)(1)
of the Code.
"Ownership Limit" means the prohibition against ownership, directly
or by virtue of the attribution provisions of the Code, by any single
shareholder of more than 9.9% of the issued and outstanding Common Shares and
generally the prohibition against ownership, directly or by virtue of the
attribution provisions of the Code, by any single shareholder of more than 9.9%
of the issued and outstanding shares of any class or series of CRFLT's Common
Shares.
"Participating Hotel Partnership" means a Hotel Partnership whose
Limited Partners vote in favor of the Consolidation and which participates in
the Consolidation.
"Percentage Rent" means an amount of rent based on specified
percentages of aggregate sales (including room sales, food and beverage sales
and telephone and other sales) at each Hotel which is subject to a Lease.
"Partners" means partners in the Hotel Partnerships, including the
Hotel Partnership GPs.
8
<PAGE>
"Partnership Agreement" means the partnership agreement of CRF
Lodging Company, L.P., dated as of ___________ __, 1998, and attached hereto as
Appendix A.
"Partnership Unit" means a unit of limited partnership interest in a
Hotel Partnership.
"Person" means an individual, corporation, partnership, limited
liability company, trust or other entity.
"Plan Assets" means the underlying assets of the Company which are
deemed to be assets of an investing ERISA Plan.
"Preferred Share" means a preferred share of beneficial interest of
CRFLT.
"Prohibited Owner" means a Person holding record title to any shares
in excess of the Ownership Limit.
"Prohibited Transferee" means a Person who would violate the
Ownership Limit or any other restriction in the Declaration of Trust because of
a transfer of shares of beneficial interest of CRFLT to such Person or any other
event.
"Public Offering Price" means the offering price to the public per
Common Share in the Offering.
"Recognition Period" means the ten-year period beginning on the date
on which a Built-In Gain Asset is acquired.
"Redemption Amount" means an amount of cash equal to the deemed fair
market value of Units at the time of redemption.
"Redemption Price" means an amount of cash equal to the sum of the
principal amount of the Notes being redeemed plus accrued interest thereon to
the redemption date.
"Regular Record Date" means a date 15 days prior to an Interest
Payment Date, on which the Holders of the Notes are determined, regardless of
whether such day is a Business Day.
"REIT" means a real estate investment trust.
"Related Party Tenant" means a tenant in which the Company, or an
actual or constructive owner of 10% or more of the Company, actually or
constructively owns 10% or more.
"Rent" means Base or Percentage Rent, as the context may require.
"Rents" means Base Rent and Percentage Rent.
"Res USA" means Marriott Residence Inn USA Limited Partnership, a
Delaware limited partnership.
"REVPAR" means revenue per available room. REVPAR measures daily room
revenues generated on a per room basis by combining the average daily room rate
charged and the average
9
<PAGE>
daily occupancy achieved. REVPAR excludes food and beverage and other ancillary
revenues generated by the hotel.
"RIBM1" means Marriott Residence Inn Limited Partnership, a Delaware
limited partnership.
"RIBM2" means Marriott Residence Inn II Limited Partnership, a
Delaware limited partnership.
"RIC" means a "Regulated Investment Company."
"Second Mortgage" means the $28 million second mortgage secured by 15
of RIBM1's Hotels which bears interest at 15.25% and which matures on September
30, 2002.
"Section 704(c) Minimum Gain" means the amount of any taxable gain
that would be allocated to the Partner under Section 704(c) of the Code (or in
the same manner as Section 704(c) of the Code in connection with a revaluation
of partnership property) if the partnership disposed of all partnership property
(in a taxable transaction) subject to one or more nonrecourse liabilities of the
partnership in full satisfaction of such liabilities and for no other
consideration.
"Section 751 Assets" means "unitized receivables" (including
depreciation recapture) and/or "substantially appreciated inventory items" as
defined in Section 751 of the Code.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Mortgage" means the $93.4 million first mortgage secured by
15 of RIBM1's Hotels which bears interest at 8.6% and which matures on September
30, 2002.
"SFAS" means Statement of Financial Accounting Standards.
"Significant Subsidiary" means each significant subsidiary (as
defined in Rule 1-02(w) of Regulation S-X promulgated under the Securities Act)
of CRFLT.
"Solicitation Materials" means the Consent Solicitation and the
Consent Form.
"Solicitation Period" means the period of time commencing at the time
the Consent Solicitation and other Solicitation Materials are first distributed
to the Partners and ending at the later of (i) ________ __, 199_, or (ii) such
later date as CRFLT may elect, in its sole and absolute discretion.
"Tax Matters Partner" means the Person designated at the partnership
level to represent the partnership in a unified partnership proceeding to
determine income, gain, loss, deduction and credit for each Partner.
"TEFRA" means the Tax Equity and Fiscal Responsibility Act of 1982.
"TMT" means tentative minimum tax.
"Total Sales" means room sales, food and beverage sales and telephone
and other sales derived from the operation of the Hotels.
10
<PAGE>
"Treasury Regulations" means the regulations promulgated by the IRS
under the Code.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended.
"U.S. Shareholder" means a holder of Common Shares who for United
States federal income tax purposes is (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized in
or under the laws of the United States or any political subdivision thereof,
(iii) an estate or trust the income of which is subject to United States federal
income taxation regardless of its source, or (iv) a trust whose administration
is subject to the primary supervision of a United States court and which has one
or more United States persons who have authority to control all substantial
decisions of the trust.
"UBTI" means unrelated business taxable income.
"Unit" means a unit of limited partnership interest in the Company.
"Unit Redemption Right" means the right of Limited Partners to
redeem, after the Initial Holding Period, their Units and receive, at CRFLT's
election, either Common Shares on a one-for-one basis (subject to adjustment)
or cash in an amount equal to the market value of such shares.
"UPREIT" means an umbrella partnership real estate investment trust.
11
<PAGE>
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1993 Act.........................................................................232
Acquisition Hotels.................................................................6
ADA...............................................................................43
Additional Charges................................................................92
Anti-Abuse Rule..................................................................201
Appraisal.........................................................................71
Appraised Value...................................................................70
Associates.......................................................................107
Base Rent..........................................................................2
Beneficiary......................................................................151
Built-In Gain Asset..............................................................221
Business Day.....................................................................155
CBM1...............................................................................6
CBM2...............................................................................6
CBM2 Certificates................................................................107
CBM2 Senior Notes................................................................107
Chain Services....................................................................97
Code............................................................................2, 7
Commission.......................................................................240
Common Shares.................................................................2, 148
Company.........................................................................2, 6
Consent Form.................................................................22, 237
Consent Solicitation............................................................2, 6
Consolidation......................................................................6
Consolidation Expenses........................................................15, 67
Corporation......................................................................157
Courtyard Hotels.................................................................142
Credit Facility...................................................................15
CRFLT..............................................................................2
Debt.............................................................................156
Declaration of Trust..............................................................32
Delaware Act.....................................................................138
Disguised Sale Regulations.......................................................196
Dissenting Partners.........................................................3, 8, 12
Employee Plan....................................................................132
Exchange Act................................................................132, 240
Fairfield Ground Leases..........................................................111
FF&E Replacements.................................................................97
FIBM...............................................................................6
FIRPTA...........................................................................202
First Three Quarters 1997.........................................................55
Glossary...........................................................................6
Gross Revenues....................................................................99
Historical........................................................................55
Holders..........................................................................155
Host............................................................................2, 6
Hotel Partnership..................................................................6
Hotel Partnership GP...............................................................6
Hotel Partnership Interests........................................................2
Hotel Partnerships..............................................................2, 6
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Hotels.............................................................................2
Indenture........................................................................154
Information Agent................................................................237
Initial Holding Period..........................................................2, 7
Initial Valuation Date............................................................70
Interest Payment Date............................................................155
Leases..........................................................................2, 7
Lessees.........................................................................2, 7
Limited Service REIT...............................................................6
Lock-out Period..................................................................142
Management Agreements..............................................................7
Managers........................................................................2, 7
Market Value......................................................................71
Maturity Date....................................................................154
Maximum Debt Limitation...........................................................16
Maximum Note Limitation........................................................3, 16
Merger........................................................................15, 60
Merger Partnership............................................................15, 60
Minimum Participation Condition............................................3, 15, 65
Minimum Value Condition........................................................3, 16
Named Executive Officers.........................................................131
Net Cash Proceeds................................................................155
Net Other Assets..................................................................70
Nonparticipating Hotel Partnership................................................67
Non-U.S. Shareholders............................................................232
Notes..........................................................................3, 12
NYSE............................................................................2, 7
Offering...........................................................................6
Outstanding......................................................................159
Ownership Limit...................................................................33
Participating Hotel Partnership...............................................15, 60
Partners........................................................................2, 6
Partnership Provisions...........................................................201
Percentage Rent....................................................................2
Pro Forma.........................................................................55
Prohibited Owner.................................................................151
Prohibited Transferee............................................................151
Proposed Trustees................................................................130
Public............................................................................69
Redemption Amount................................................................200
Redemption Price.................................................................155
Regular Record Date..............................................................155
REIT...............................................................................2
Res USA............................................................................6
REVPAR.........................................................................6, 60
RIBM1..............................................................................6
RIBM2..............................................................................6
Second Mortgage..................................................................108
Securities Act...................................................................240
Section 704(c) Minimum Gain......................................................194
Senior Mortgage..................................................................108
Significant Subsidiary...........................................................158
Site Purchase Options............................................................112
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Solicitation Materials............................................................22
Subordinated Courtyard Management Fee.............................................99
Subsidiary.......................................................................157
Subsidiary Partnerships..........................................................189
Total Market Capitalization......................................................157
Trustee..........................................................................154
UBTI.............................................................................231
Unit Redemption Right...........................................................2, 7
Units...........................................................................2, 6
UPREIT..........................................................................2, 7
</TABLE>
iii
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
The following financial information is included on the pages indicated: ----
<S> <C>
Pro Forma Financial Statements of the CRF Group (unaudited)
- -----------------------------------------------
Introduction to Pro Forma Financial Statements............................................................................ F-2
Pro Forma Balance Sheet as of September 12, 1997 - 100% Participation With
No Notes Issued....................................................................................................... F-4
Pro Forma Statement of Operations for the Thirty-six Weeks
Ended September 12, 1997 - 100% Participation With No Notes Issued.................................................... F-6
Pro Forma Statement of Operations for the Fiscal Year Ended January 3, 1997 -
100% Participation With No Notes Issued .............................................................................. F-7
Pro Forma Statement of Cash Flows for the Thirty-six Weeks Ended September 12, 1997 -
100% Participation With No Notes Issued............................................................................... F-9
Pro Forma Statement of Cash Flows for the Fiscal Year Ended January 3, 1997 -
100% Participation With No Notes Issued............................................................................... F-10
Pro Forma Balance Sheet as of September 12, 1997 -
Minimum Consolidation Scenario With No Notes Issued .................................................................. F-12
Pro Forma Statement of Operations for the Thirty-six Weeks
Ended September 12, 1997 - Minimum Consolidation Scenario with No Notes Issued........................................ F-14
Pro Forma Statement of Operations for the Fiscal Year Ended January 3, 1997 -
Minimum Consolidation Scenario With No Notes Issued .................................................................. F-15
Pro Forma Statement of Cash Flows for the Thirty-six Weeks Ended September 12, 1997 -
100% Participation with No Notes Issued............................................................................... F-17
Pro Forma Statement of Cash Flows for the Fiscal Year Ended January 3, 1997 -
100% Participation With No Notes Issued............................................................................... F-18
Historical Financial Statements of the CRF Group
- ------------------------------------------------
Report of Independent Public Accountants.................................................................................. F-20
Combined Consolidated Balance Sheets as of January 3, 1997 and December 29, 1995.......................................... F-21
Combined Consolidated Statements of Operations for the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994............................................................................... F-22
Combined Consolidated Statements of Changes in Partner's Capital (Deficit) for the
Fiscal Years Ended January 3, 1997, December 29, 1995 and December 30, 1994........................................... F-23
Combined Consolidated Statements of Cash Flows for the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994............................................................................... F-24
Notes to Combined Consolidated Financial Statements....................................................................... F-25
Condensed Combined Consolidated Balance Sheet as of September 12, 1997 (unaudited)........................................ F-35
Condensed Combined Consolidated Statements of Operations for the Thirty-six Weeks Ended
September 12, 1997 and September 6, 1996 (unaudited).................................................................. F-36
Condensed Combined Consolidated Statements of Cash Flows for the Thirty-six Weeks Ended
September 12, 1997 and September 6, 1996 (unaudited).................................................................. F-37
Notes to Condensed Combined Consolidated Financial Statements (unaudited)................................................. F-38
Historical Financial Statements of CRF Lodging I, Inc.
- -----------------------------------------------------
Report of Independent Public Accountants.................................................................................. F-40
Balance Sheet as of December 5, 1997...................................................................................... F-41
Notes to Balance Sheet.................................................................................................... F-42
</TABLE>
F-1
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
Given the structure of the Company's consent solicitation, the Consolidation may
take a variety of different forms. The variations are dependent on the number
and identity of the Hotel Partnerships that elect to participate in the
Consolidation and whether participating Limited Partners elect to tender their
Partnership Units for Units or Notes in connection with the Consolidation.
In light of the possible variations, the Hotel Partnership GPs are not able to
describe all possible combinations of Hotel Partnerships that could compose the
Company. However, to assist Partners in analyzing the Consolidation, the General
Partners have prepared four separate sets of pro forma financial statements to
show the impact of the Consolidation assuming the following four scenarios:
. 100% of the Hotel Partnerships participate with no Notes issued;
. 100% of the Hotel Partnerships participate with Notes issued with
respect to 15% of the Units allocable to each Hotel Partnership;/(1)/
. Minimum condition participation with no Notes issued; and
. Minimum condition participation with Notes issued with respect to 15%
of the Units allocable to each Participating Hotel Partnership./(1)/
The first two scenarios assume that all six Hotel Partnerships participate and
that the Consolidation includes an Offering at $20.00 per Common Share with
gross proceeds of $800 million. The third and fourth scenarios assume that only
four Hotel Partnerships participate - CBM1, CBM2, RIBM1 and the remaining Hotel
Partnership (Res USA) that produces the lowest estimated net operating income
(the "Minimum Consolidation Scenarios"). These Minimum Consolidation Scenarios
also assume that the Offering at $20.00 per Common Share yields gross proceeds
of $540 million. This presentation does not purport to represent which Hotel
Partnerships may or may not participate, but is designed to illustrate to the
Limited Partners what the pro forma financial statements may reflect if the
Minimum Consolidation Scenario were to occur.
The pro forma combined consolidated balance sheets at September 12, 1997 have
been prepared assuming the Consolidation was consummated on such date. The pro
forma condensed combined consolidated statements of operations for the fiscal
year ended January 3, 1997 and the First Three Quarters 1997 have been prepared
assuming the Consolidation was consummated immediately prior to the beginning of
such period.
The pro forma financial statements do not purport to represent what combination
will result from the Consolidation, but instead are designed to illustrate what
the composition of the Company would have been like under the above scenarios.
Furthermore, the pro forma financial statements do not purport to represent what
the Company's financial position, results of operations or cash flows would
actually have been if the Consolidation had in fact occurred on such date or at
the beginning of such period or to project the Company's financial position,
results of operations or cash flows for any future date or period.
The pro forma financial statements are based upon available information and upon
certain assumptions, as set forth in the notes to the pro forma financial
statements, that the Company believes are reasonable under the circumstances.
Limited Partners should bear in mind, however, that the assumptions regarding
the number and identity of participating Hotel Partnerships, the number of
shares to be issued, price per share and proceeds from the Offering are not
necessarily CRFLT's expectation regarding the outcomes of the Consolidation but
instead have been made for illustrative purposes. The pro forma financial
statements and accompanying notes should be read in conjunction with the
historical combined consolidated financial statements of the Company, which is
comprised of the Hotel Partnerships (assuming participation by all of the Hotel
Partnerships), including the notes thereto and other
F-2
<PAGE>
financial information pertaining thereto included elsewhere in this Prospectus.
See "Index to Financial Information."
- ---------
/(1)/ As the Exchange Values for the Hotel Partnerships are not known at this
time, pro forma financial statements reflecting this scenario have not
been included in this Registration Statement.
Accounting Treatment
The Partners are expected to have, upon completion of the Consolidation,
significant economic interests in the operation and activities of CRFLT.
Accordingly, the Consolidation will be accounted for as a reorganization of
affiliated entities under common control, similar to the pooling of interests
method. Under this method, the assets of the entities are carried over at
historical cost.
F-3
<PAGE>
PRO FORMA BALANCE SHEET
September 12, 1997
(Unaudited, in millions)
Assuming 100% Participation With No Notes Issued
<TABLE>
<CAPTION>
Stock Acquisition Debt
Historical Offering(A) Hotels(B) Paydown(C) Pro Forma
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Assets
- ------
Property & Equipment .................. $ 1,284 $ -- $ -- $ -- $ 1,284
Property Improvement Fund.............. 46 -- -- -- 46
Due From Affiliates of Marriott
International, Inc.............. 26 -- -- -- 26
Deferred Financing Costs, Net.......... 34 -- -- (14) 20
Other Assets........................... 32 -- -- -- 32
Cash and Cash Equivalents.............. 45 748 -- (572) 221
----------- ----------- ---------- ----------- -----------
$ 1,467 $ 748 $ -- $ (586) $ 1,629
=========== =========== ========== =========== ===========
Liabilities and Equity
- ----------------------
Debt................................... $ 1,319 $ -- $ -- $ (539) $ 780
Management Fees Due to Affiliates
of Marriott International, Inc.. 93 -- -- -- 93
Deferred Ground rent .................. 30 -- -- -- 30
Due to Host Marriott Corporation....... 13 -- -- -- 13
Other Liabilities...................... 23 -- -- -- 23
----------- ----------- ----------- ----------- -----------
Total Liabilities............... 1,478 -- -- (539) 939
Equity................................. (11) 748 -- (47) 690
----------- ----------- ---------- ----------- -----------
$ 1,467 $ 748 $ -- $ (586) $ 1,629
=========== =========== ========== =========== ===========
</TABLE>
See Notes to the Pro Forma Balance Sheet.
F-4
<PAGE>
Notes to Pro Forma Balance Sheet
September 12, 1997
Assuming 100% Participation With No Notes Issued
A. Represents adjustments to record the consummation of the Offering as
follows:
- Record the issuance of 40 million shares at an assumed market
value of $20.00 per share;
- Record the net cash proceeds of $748 million, net of the issuance
costs of $52 million; and
- Record consolidation expenses of $__ million related to the
Consolidation./(2)/
B. Reflects the adjustments to record the consummation of the acquisition of
the Acquisition Hotels from proceeds of the Offering as follows/(1)/:
- Record property and equipment of $__ million;
- Record other assets of $ __ million; and
- Record the use of cash from the proceeds of the Offering of $___
million.
C. Represents the adjustment to record repayment of certain outstanding debt
as follows:
- Record the repayment of CBM2 Certificates of $390 million;
- Record the repayment of RIBM1 Senior Mortgage of $93 million;
- Record the repayment of Res USA mortgage of $56 million;
- Record the payment of prepayment penalties of $33 million;
- Record the write-off of the related deferred financing fees of $14
million; and
- Record the use of cash of $572 million.
- -------------------
/(1)/ The purchase price of the Acquisition Hotels is subject to negotiation
and therefore is not included.
/(2)/ The amount of consolidation expenses to be incurred is not known at this
time and will be filed by amendment.
F-5
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997
(Unaudited, in millions)
Assuming 100% Participation With No Notes Issued
<TABLE>
<CAPTION>
Acquisition Debt
Historical Hotels (A) Lease (B) Refinanced (C)
---------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Hotel revenues................................. $ 269 $ 11 $ (280) $ --
Rental revenues................................ -- -- 211 --
------------ ---------- ----------- -------------
Total revenues............................. 269 11 (69) --
------------ ---------- ----------- -------------
Operating costs and expenses
Depreciation and amortization.............. 53 2 -- --
Base, system and incentive
management fees......................... 56 2 (58) --
Property taxes............................. 17 1 -- --
Ground rent................................ 16 -- -- --
Insurance and other........................ 6 -- -- --
------------ ---------- ----------- -------------
Total operating costs and expenses....... 148 5 (58) --
------------ ---------- ----------- -------------
Operating profit .............................. 121 6 (11) --
Corporate expenses............................. -- -- -- --
Interest expense............................... (83) -- -- (1)
Interest income................................ 4 -- -- --
------------ ---------- ----------- -------------
Income before extraordinary item...............
and consolidation expenses................. $ 42 $ 6 $ (11) $ (1)
============ ========== =========== =============
Income before extraordinary item............... $ $ $ $
=========== ========= ========== ============
Ratio of earnings to fixed charges............. 1.47x
<CAPTION>
Debt Corporate
Paydown (D) Expenses (E) Pro Forma
----------- ------------ --------------
<S> <C> <C> <C>
Hotel revenues................................. $ -- $ -- $ --
Rental revenues................................ -- -- 211
------------ ------------- --------------
Total revenues............................. -- -- 211
------------ ------------- --------------
Operating costs and expenses
Depreciation and amortization.............. -- -- 55
Base, system and incentive
management fees......................... -- -- --
Property taxes............................. -- -- 18
Ground rent................................ -- -- 16
Insurance and other........................ -- -- 6
------------ ------------- --------------
Total operating costs and expenses....... -- -- 95
------------ ------------- --------------
Operating profit .............................. -- -- 116
Corporate expenses............................. --
Interest expense............................... 33 -- (51)
Interest income................................ -- -- 4
------------ ------------- --------------
Income before extraordinary item...............
and consolidation expenses................. $ 33 $ $ 69
============ ============= ==============
Income before extraordinary item............... $ $ $
=========== ============ =============
Ratio of earnings to fixed charges............. 2.21x
</TABLE>
See Notes to the Pro Forma Statement of Operations.
F-6
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1996
(Unaudited, in millions)
Assuming 100% Participation With No Notes Issued
<TABLE>
<CAPTION>
Acquisition Debt
Historical Hotels (A) Lease (B) Refinanced (C)
---------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Hotel revenues................................. $ 358 $ 11 $ (369) $ --
Rental revenues................................ -- -- 285 --
------------ ---------- ----------- -------------
Total revenues............................. 358 11 (84) --
------------ ---------- ----------- -------------
Operating costs and expenses
Depreciation and amortization.............. 77 2 -- --
Base, system and incentive
management fees......................... 75 2 (77) --
Property taxes............................. 25 2 -- --
Ground rent................................ 22 -- -- --
Insurance and other........................ 7 -- -- --
------------ ---------- ----------- -------------
Total operating costs and expenses....... 206 6 (77) --
------------ ---------- ----------- -------------
Operating profit .............................. 152 5 (7) --
Corporate expenses............................. -- -- -- --
Interest expense............................... (120) -- -- (1)
Interest income................................ 6 -- -- --
------------ ---------- ----------- -------------
Income before extraordinary item
and consolidated expenses.................. $ 38 $ 5 $ (7) $ (1)
============ ========== =========== =============
Net income..................................... $ $ $ $
============ ========== =========== =============
Ratio of earnings to fixed charges............. 1.30x
<CAPTION>
Debt Corporate
Paydown (D) Expenses (E) Pro Forma
----------- ------------ --------------
<S> <C> <C> <C>
Hotel revenues................................. $ -- $ -- $ --
Rental revenues................................ -- -- 285
------------ ------------- --------------
Total revenues............................. -- -- 285
------------ ------------- --------------
Operating costs and expenses
Depreciation and amortization.............. -- -- 79
Base, system and incentive
management fees......................... -- -- --
Property taxes............................. -- -- 27
Ground rent................................ -- -- 22
Insurance and other........................ -- -- 7
------------ ------------- --------------
Total operating costs and expenses....... -- -- 135
------------ ------------- --------------
Operating profit .............................. -- -- 150
Corporate expenses............................. -- -- --
Interest expense............................... 48 -- (73)
Interest income................................ -- -- 6
------------ ------------- --------------
Income before extraordinary item
and consolidated expenses.................. $ 48 $ -- $ 83
============ ============= ==============
Net income..................................... $ $ $
=========== ============ =============
Ratio of earnings to fixed charges............. 2.02x
</TABLE>
See Notes to the Pro Forma Statement of Operations.
F-7
<PAGE>
Notes to Pro Forma Statement of Operations
Assuming 100% Participation With No Notes Issued
A. Represents the adjustment to record the revenue and operating costs for the
Acquisition Hotels.
B. Represents the adjustment to eliminate hotel revenues and operating costs
and to record rental revenue associated with the leasing of hotel
properties to subsidiaries of Host Marriott Corporation./(1)/
C. Represents the adjustment to interest expense and related amortization of
deferred financing fees as a result of the refinancing of certain debt.
D. Represents the adjustment to eliminate interest expense and related
amortization of deferred financing fees as a result from the paydown of
certain debt using the proceeds from the Offering. The extraordinary loss
of $47 million related to the early extinguishment of debt has been
excluded because it is a non-recurring item.
E. Represents the adjustment to record the incremental general and
administrative costs as a result of the formation of the Company and CRFLT.
/(2)/
- -----------------
/(1)/ Lease amounts reflect estimates as the leases are currently subject to
negotiation. The lease amounts included may not reflect the final terms of
the leases.
/(2)/ The amount of general and administrative costs and consolidation expenses
to be incurred is not known at this time and will be filed by amendment.
F-8
<PAGE>
PRO FORMA STATEMENT OF CASH FLOWS
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997
(Unaudited, in millions)
Assuming 100% Participation With No Notes Issued
<TABLE>
<CAPTION>
Stock Acquisition Debt
Historical Offering (A) Hotels (B) Paydown (C)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary items and
consolidation expenses................................... $ 42 $ - $ 6 $ -
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization............................... 53 - 2 -
Deferred management fees.................................... 1 - - -
Amortization of deferred financing fees..................... 5 - - -
Other....................................................... 1 - - -
Changes in operating accounts:
Due from affiliates of Marriott International Inc. ......... 4 - - -
Other liabilities........................................... (8) - 1 -
----------- ----------- ----------- -----------
Cash provided by operations................................. 98 - 9 -
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Acquisitions................................................... - - - -
Additions to property and equipment............................ (50) - - -
Changes in property improvement fund........................... 10 - - -
Change in restricted cash...................................... (5) - - -
Other ......................................................... - - - -
----------- ----------- ----------- -----------
Cash used in investing activities........................... (45) - - -
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Capital distributions.......................................... (59) - - -
Proceeds from issuance of stock, net........................... - 748 - -
Proceeds from borrowings, net.................................. 494 - - -
Repayments of debt............................................. (451) - - (572)
Scheduled principal payments................................... (25) - - -
Payment of financing costs..................................... (11) - - -
Other ......................................................... (7) - - -
----------- ----------- ----------- -----------
Cash provided by (used in) financing activities............. (59) 748 - (572)
----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................. (6) 748 9 (572)
CASH AND CASH EQUIVALENTS, beginning of year.................. 51 - (9) -
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year......................... $ 45 $ 748 $ - $ (572)
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Income
Lease (D) Adjustments (E) Pro Forma
----------- -------------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary items and
consolidation expenses................................... $ (11) $ 32 $ 69
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization............................... - - 55
Deferred management fees.................................... (1) - -
Amortization of deferred financing fees..................... - (1) 4
Other....................................................... - - 1
Changes in operating accounts:
Due from affiliates of Marriott International Inc........... (4) - -
Other liabilities........................................... (1) - (8)
----------- -------------- -----------
Cash provided by operations................................. (17) 31 121
----------- -------------- -----------
INVESTING ACTIVITIES
Acquisitions................................................... - - -
Additions to property and equipment............................ - - (50)
Changes in property improvement fund........................... - - 10
Change in restricted cash...................................... - - (5)
Other ......................................................... - - -
----------- -------------- -----------
Cash used in investing activities........................... - - (45)
----------- -------------- -----------
FINANCING ACTIVITIES
Capital distributions.......................................... - - (59)
Proceeds from issuance of stock, net........................... - - 748
Proceeds from borrowings, net.................................. - - 494
Repayments of debt............................................. - - (1,023)
Scheduled principal payments................................... - - (25)
Payment of financing costs..................................... - - (11)
Other ......................................................... - - (7)
----------- -------------- -----------
Cash provided by (used in) financing activities............. - - 117
----------- -------------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................. (17) 31 193
CASH AND CASH EQUIVALENTS, beginning of year.................. 17 (31) 28
----------- -------------- -----------
CASH AND CASH EQUIVALENTS, end of year......................... $ - $ - $ 221
=========== ============== ===========
</TABLE>
F-9
<PAGE>
PRO FORMA STATEMENT OF CASH FLOWS
FISCAL YEAR 1996
(Unaudited, in millions)
Assuming 100% Participation With No Notes Issued
<TABLE>
<CAPTION>
Stock Acquisition Debt
Historical Offering (A) Hotels (B) Paydown (C)
---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary items and
consolidation expenses..................................... $ 38 $ - $ 5 $ -
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization................................. 77 - 2 -
Deferred management fees...................................... 18 - - -
Amortization of deferred financing fees....................... 4 - - -
Other......................................................... 1 - - -
Changes in operating accounts:
Due from affiliates of Marriott International Inc............. (7) - - -
Other liabilities............................................. (8) - 2 -
---------- ------------ ----------- -----------
Cash provided by operators.................................... 123 - 9 -
---------- ------------ ----------- -----------
INVESTING ACTIVITIES
Acquisitions..................................................... - - - -
Additions to property and equipment.............................. (45) - - -
Changes in property improvement fund............................. 5 - - -
Change in restricted cash........................................ - - - -
Other ........................................................... (5) - - -
---------- ------------ ----------- -----------
Cash used in investing activities............................. (45) - - -
---------- ------------ ----------- -----------
FINANCING ACTIVITIES:
Capital distributions............................................ (30) - - -
Proceeds from issuance of stock, net............................. - 748 - -
Proceeds from borrowings, net.................................... 683 - - -
Repayments of debt............................................... (674) - - (572)
Scheduled principal payments..................................... (47) - - -
Payment of financing costs....................................... (20) - - -
Deposit into debt service funds.................................. (9) - - -
Repayment of advances to Host Marriott Corporation............... (7) - - -
Other ........................................................... 7 - - -
---------- ------------ ----------- -----------
Cash provided by (used in) financing activities............... (97) 748 - (572)
---------- ------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. (19) 748 9 (572)
CASH AND CASH EQUIVALENTS, beginning of year..................... 70 - (9) -
---------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of year........................... $ 51 $ 748 $ -- $ (572)
========== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Income
Lease (D) Adjustments (E) Pro Forma
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary items and
consolidation expenses..................................... $ (7) $ 47 $ 83
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization................................. - - 79
Deferred management fees...................................... (18) - -
Amortization of deferred financing fees....................... - (2) 2
Other......................................................... - - 1
Changes in operating accounts:
Due from affiliates of Marriott International Inc............. 1 - (6)
Other liabilities............................................. (1) - (7)
----------- ----------- -----------
Cash provided by operators.................................... (25) 45 152
----------- ----------- -----------
INVESTING ACTIVITIES
Acquisitions..................................................... - - -
Additions to property and equipment.............................. - - (45)
Changes in property improvement fund............................. - - 5
Change in restricted cash........................................ - - -
Other ........................................................... - - (5)
----------- ----------- -----------
Cash used in investing activities............................. - - (45)
----------- ----------- -----------
FINANCING ACTIVITIES:
Capital distributions............................................ - - (30)
Proceeds from issuance of stock, net............................. - - 748
Proceeds from borrowings, net.................................... - - 683
Repayments of debt............................................... - - (1,246)
Scheduled principal payments..................................... - - (47)
Payment of financing costs....................................... - - (20)
Deposit into debt service funds.................................. - - (9)
Repayment of advances to Host Marriott Corporation............... - - (7)
Other ........................................................... - - 7
----------- ----------- -----------
Cash provided by (used in) financing activities............... - - 79
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. (25) 45 186
CASH AND CASH EQUIVALENTS, beginning of year..................... 25 (45) 41
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year........................... $ -- $ -- $ 227
=========== =========== ===========
</TABLE>
F-10
<PAGE>
Notes to Pro Forma Statement of Cash Flows
(Unaudited, in millions)
Assuming 100% Participation With No Notes Issued
A. Represents the adjustment to record the net cash proceeds of $748
million from the consummation of the Offering.
B. Represents the adjustments to record the consummation of the acquisition
of the Acquisition Hotels from the proceeds of the Offering./(1)/
C. Represents the adjustment to record the repayment of certain debt as
follows:
- Record the repayment of CBM2 Certificates of $390 million;
- Record the repayment of RIBM1 Senior Mortgage of $93 million;
- Record the repayment of Res USA mortgage of $56 million; and
- Record the payment of prepayment penalties for said debt of $33
million.
D. Reflects the adjustments to record rental revenue associated with the
leasing of hotel properties to subsidiaries of Host Marriott
Corporation.
E. Reflects the adjustment to interest expense as a result of the paydown
and refinancing of certain debt.
- ---------------
/(1)/ The purchase price of the Acquisition Hotels is subject to negotiation
and is therefore not included.
F-11
<PAGE>
PRO FORMA BALANCE SHEET
September 12, 1997
(Unaudited, in millions)
Assuming Minimum Participation With No Notes Issued
<TABLE>
<CAPTION>
Stock Acquisition Debt
Historical Offering(A) Hotels(B) Paydown(C) Pro Forma
---------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Assets
- ------
Property & Equipment................................ $ 980 $ - $ - $ - $ 980
Property Improvement Fund........................... 39 - - - 39
Due From Affiliates of Marriott International, Inc.. 26 - - - 26
Deferred Financing Costs, Net....................... 25 - - (11) 14
Other Assets........................................ 12 - - - 12
Cash and Cash Equivalents........................... 29 505 - (416) 118
----------- ---------- ---------- ---------- ----------
$ 1,111 $ 505 $ - $ (427) $ 1,189
=========== ========== ========== ========== ==========
Liabilities and Equity
- ----------------------
Debt................................................ $ 1,017 $ - $ - $ (390) $ 627
Management Fees Due to Affiliates of Marriott
International, Inc.................................. 61 - - - 61
Deferred Ground Rent................................ 30 - - - 30
Due to Host Marriott Corporation.................... 13 - - - 13
Other Liabilities................................... 13 - - - 13
----------- ---------- ---------- ---------- ----------
Total Liabilities................................ 1,134 (390) 744
Equity.............................................. (23) 505 - (37) 445
----------- ---------- ---------- ---------- ----------
$ 1,111 $ 505 $ - $ (427) $ 1,189
=========== ========== ========== ========== ==========
</TABLE>
See Notes to Pro Forma Balance Sheet.
F-12
<PAGE>
Notes to Pro Forma Balance Sheet
September 12, 1997
Assuming Minimum Participation With No Notes Issued
A. Represents adjustments to record the consummation of the Offering as
follows:
- Record the issuance of 27 million shares at an assumed market
value of $20.00 per share;
- Record the net cash proceeds of $505 million;
- Record the issuance costs of $35 million; and
- Record consolidation expenses of $___ million to the
Consolidation./(2)/
B. Reflects the adjustments to record the consummation of the acquisition
of the Acquisition Hotels from proceeds of the Offering as follows:/(1)/
- Record property and equipment of $__ million;
- Record other assets of $_ million; and
- Record the use of cash from the proceeds of the Offering of $__
million.
C. Represents the adjustment to record repayment of certain outstanding
mortgage loans and notes payable as follows:
- Record the repayment of CBM2 Certificates of $390 million;
- Record the payment of prepayment penalties of $26 million;
- Record the write-off of the related deferred financing fees of
$11 million; and
- Record the use of cash of $416 million.
- -----------------
/(1)/ The purchase price of the Acquisition Hotels is subject to negotiation
and therefore is not included.
/(2)/ The amount of consolidation expenses to be incurred is not known at this
time and will be filed by amendment.
F-13
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997
(Unaudited, in millions)
Assuming Minimum Participation With No Notes Issued
<TABLE>
<CAPTION>
Acquisition Debt
Historical Hotels (A) Lease (B) Refinanced (C)
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Hotel revenues................................................... $ 211 $ 11 $ (222) $ -
Rental revenues.................................................. - - 167 -
----------- ----------- ----------- -------------
Total revenues............................................. 211 11 (55) -
----------- ----------- ----------- -------------
Operating costs and expenses
Depreciation and amortization................................. 39 2 - -
Base, system and incentive management fees.................... 43 2 (45) -
Property taxes................................................ 14 1 - -
Ground rent................................................... 14 - - -
Insurance and other........................................... 4 - - -
----------- ----------- ----------- -------------
Total operating costs and expenses......................... 114 5 (45) -
----------- ----------- ----------- -------------
Operating profit................................................. 97 6 (10) -
Corporate expenses............................................... - - - -
Interest expense................................................. (64) - - (1)
Interest income.................................................. 3 - - -
----------- ----------- ----------- -------------
Income before extraordinary item and consolidation
expenses...................................................... $ 36 $ 6 $ (10) $ (1)
=========== =========== =========== =============
Income before extraordinary item................................. $ $ $ $
=========== =========== =========== =============
Ratio of earnings to fixed charges............................... 1.53x
</TABLE>
<TABLE>
<CAPTION>
Debt Corporate
Paydown (D) Expenses (E) Pro Forma
----------- ----------- -----------
<S> <C> <C> <C>
Hotel revenues................................................... $ - $ - $ -
Rental revenues.................................................. - - 167
----------- ----------- -----------
Total revenues............................................. - - 167
----------- ----------- -----------
Operating costs and expenses
Depreciation and amortization................................. - - 41
Base, system and incentive management fees.................... - - -
Property taxes................................................ - - 15
Ground rent................................................... - - 14
Insurance and other........................................... - - 4
----------- ----------- -----------
Total operating costs and expenses......................... - - 74
----------- ----------- -----------
Operating profit................................................. - - 93
Corporate expenses............................................... -
Interest expense................................................. 23 - (42)
Interest income.................................................. - - 3
----------- ----------- -----------
Income before extraordinary item and consolidation
expenses...................................................... $ 23 $ - $ 54
=========== =========== ===========
Income before extraordinary item................................. $ $ $
========== =========== ===========
Ratio of earnings to fixed charges............................... 2.15x
</TABLE>
See Notes to the Pro Forma Statement of Operations.
F-14
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1996
(Unaudited, in millions)
Assuming Minimum Participation With No Notes Issued
<TABLE>
<CAPTION>
Acquisition Debt
Historical Hotels (A) Lease (B) Refinanced (C)
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Hotel revenues.................................................... $ 277 $ 11 $ (288) $ -
Rental revenues................................................... - - 223 -
----------- ----------- ----------- -------------
Total revenues.............................................. 277 11 (65) -
----------- ----------- ----------- -------------
Operating costs and expenses
Depreciation and amortization.................................. 56 2 - -
Base, system and incentive management fees..................... 58 2 (60) -
Property taxes................................................. 19 2 - -
Ground rent.................................................... 19 - - -
Insurance and other............................................ 6 - - -
----------- ----------- ----------- -------------
Total operating costs and expenses.......................... 158 6 (60) -
----------- ----------- ----------- -------------
Operating profit ................................................. 119 5 (5) -
Corporate expenses................................................ - - - -
Interest expense.................................................. (90) - - (4)
Interest income................................................... 5 - - -
----------- ----------- ----------- -------------
Income before extraordinary item and consolidation expenses....... $ 34 $ 5 $ (5) $ (4)
=========== =========== =========== =============
Net income........................................................ $ $ $ $
=========== =========== =========== =============
Ratio of earnings to fixed charges................................ 1.35x
<CAPTION>
Debt Corporate
Paydown (D) Expenses (E) Pro Forma
----------- ------------ -----------
<S> <C> <C> <C>
Hotel revenues.................................................... $ - $ - $ -
Rental revenues................................................... - - 223
----------- ------------ -----------
Total revenues.............................................. - - 223
----------- ------------ -----------
Operating costs and expenses
Depreciation and amortization.................................. - - 58
Base, system and incentive management fees..................... - - -
Property taxes................................................. - - 21
Ground rent.................................................... - - 19
Insurance and other............................................ - - 6
----------- ------------ -----------
Total operating costs and expenses.......................... - - 104
----------- ------------ -----------
Operating profit ................................................. - - 119
Corporate expenses................................................ -
Interest expense.................................................. 33 - (61)
Interest income................................................... - - 5
----------- ------------ -----------
Income before extraordinary item and consolidation expenses....... $ 33 $ - $ 63
=========== ============ ===========
Net income........................................................ $ $ $
=========== ============ ===========
Ratio of earnings to fixed charges................................ 1.92x
</TABLE>
See Notes to the Pro Forma Statement of Operations.
F-15
<PAGE>
Notes to Pro Forma Statement of Operations
Assuming Minimum Participation With No Notes Issued
A. Represents the adjustment to record the revenue and operating costs for
the Acquisition Hotels.
B. Represents the adjustment to eliminate hotel revenues and operating
costs and to record rental revenue associated with the leasing of the
hotels to subsidiaries of Host Marriott Corporation./(1)/
C. Represents the adjustment to interest expense and related amortization
of deferred financing fees as a result of the refinancing of certain
debt.
D. Represents the adjustment to eliminate interest expense and related
amortization of deferred financing fees as a result from the paydown of
certain debt using the proceeds from the Offering. The extraordinary
loss of $37 million related to the early extinguishment of debt has been
excluded because it is a non-recurring item.
E. Represents the adjustment to record the incremental general and
administrative costs as a result of the formation of the Company and
CRFLT./(2)/
- -------------
/(1)/ Lease amounts reflect estimates as the leases are currently subject to
negotiation. The lease amounts included may not reflect the final terms
of the leases.
/(2)/ The amount of general and administrative cost and consolidation expenses
to be incurred is not known at this time and will be filed by amendment.
F-16
<PAGE>
PRO FORMA STATEMENT OF CASH FLOWS
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997
(Unaudited, in millions)
Assuming Minimum Participation With No Notes Issued
<TABLE>
<CAPTION>
Stock Acquisition Debt
Historical Offering (A) Hotels (B) Paydown (C)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary items............................... $ 36 $ - $ 6 $ -
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization................................ 39 - 2 -
Deferred management fees..................................... (4) - - -
Amortization of deferred financing fees...................... 5 - - -
Other........................................................ 1 - - -
Changes in operating accounts:
Due from affiliates of Marriott International Inc............ 2 - - -
Other liabilities............................................ (6) - 1 -
----------- ----------- ----------- -----------
Cash provided by operations.................................. 73 - 9 -
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Acquisitions.................................................... - - - -
Additions to property and equipment............................. (41) - - -
Changes in property improvement fund............................ 12 - - -
Change in restricted cash....................................... 3 - - -
Other .......................................................... - - - -
----------- ----------- ----------- -----------
Cash used in investing activities............................ (26) - - -
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Capital distributions........................................... (54) - - -
Proceeds from issuance of stock, net............................ - 505 - -
Proceeds from borrowings, net................................... 325 - - -
Repayments of debt.............................................. (286) - - (416)
Scheduled principal payments.................................... (23) - - -
Payment of financing costs...................................... (6) - - -
Other .......................................................... (7) - - -
----------- ----------- ----------- -----------
Cash provided by (used in) financing activities.............. (51) 505 - (416)
----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................................. (4) 505 9 (416)
CASH AND CASH EQUIVALENTS, beginning of year.................... 33 - (9) -
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year.......................... $ 29 $ 505 $ - $ (416)
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Income
Lease (D) Adjustments (E) Pro Forma
----------- -------------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary items............................... $ (10) $ 22 $ 54
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization................................ - - 41
Deferred management fees..................................... 4 - -
Amortization of deferred financing fees...................... - (1) 4
Other........................................................ - - 1
Changes in operating accounts:
Due from affiliates of Marriott International Inc............ (2) - --
Other liabilities............................................ (1) - (6)
----------- -------------- -----------
Cash provided by operations.................................. (9) 21 94
----------- -------------- -----------
INVESTING ACTIVITIES
Acquisitions.................................................... - - -
Additions to property and equipment............................. - - (41)
Changes in property improvement fund............................ - - 12
Change in restricted cash....................................... - - 3
Other .......................................................... - - -
----------- -------------- -----------
Cash used in investing activities............................ - - (26)
----------- -------------- -----------
FINANCING ACTIVITIES
Capital distributions........................................... - - (54)
Proceeds from issuance of stock, net............................ - - 505
Proceeds from borrowings, net................................... - - 325
Repayments of debt.............................................. - - (702)
Scheduled principal payments.................................... - - (23)
Payment of financing costs...................................... - - (6)
Other .......................................................... - - (7)
----------- -------------- -----------
Cash provided by (used in) financing activities.............. - - 38
----------- -------------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................................. (9) 21 106
CASH AND CASH EQUIVALENTS, beginning of year.................... 9 (21) 12
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year.......................... $ -- $ -- $ 118
=========== =========== ===========
</TABLE>
F-17
<PAGE>
PRO FORMA STATEMENT OF CASH FLOWS
FISCAL YEAR 1996
(Unaudited, in millions)
Assuming Minimum Participation With No Notes Issued
<TABLE>
<CAPTION>
Stock Acquisition Debt
Historical Offering (A) Hotels (B) Paydown (C)
---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary items................................ $ 34 $ - $ 5 $ -
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization................................. 56 - 2 -
Deferred management fees...................................... 13 - - -
Amortization of deferred financing fees....................... 4 - - -
Other......................................................... 1 - - -
Changes in operating accounts:
Due from affiliates of Marriott International Inc............. (6) - - -
Other liabilities............................................. - - 2 -
----------- ----------- ----------- -----------
Cash provided by operators.................................... 102 - 9 -
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Acquisitions..................................................... - - - -
Additions to property and equipment.............................. (36) - - -
Changes in property improvement fund............................. 6 - - -
Change in restricted cash........................................ - - - -
Other............................................................ (2) - - -
----------- ----------- ----------- -----------
Cash used in investing activities............................. (32) - - -
----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Capital distributions............................................ (22) - - -
Proceeds from issuance of stock, net............................. - 505 - -
Proceeds from borrowings, net.................................... 543 - - -
Repayments of debt............................................... (537) - - (416)
Scheduled principal payments..................................... (47) - - -
Payment of financing costs....................................... (16) - - -
Deposit into debt service funds.................................. (7) - - -
Repayment of advances to Host Marriott Corporation............... (7) - - -
Other............................................................ 7 - - -
----------- ----------- ----------- -----------
Cash provided by (used in) financing activities............... (86) 505 - (416)
----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. (16) 505 9 (416)
CASH AND CASH EQUIVALENTS, beginning of year..................... 49 - (9) -
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year........................... $ 33 $ 505 $ - $ (416)
=========== =========== =========== ===========
<CAPTION>
Income
Lease (D) Adjustments (E) Pro Forma
--------- --------------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary items................................ $ (5) $ 29 $ 63
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization................................. - - 58
Deferred management fees...................................... (13) - -
Amortization of deferred financing fees....................... - (2) 2
Other......................................................... - - 1
Changes in operating accounts:
Due from affiliates of Marriott International Inc............. 6 - -
Other liabilities............................................. 1 - 3
----------- ----------- -----------
Cash provided by operators.................................... (11) 27 127
----------- ----------- -----------
INVESTING ACTIVITIES
Acquisitions..................................................... - - -
Additions to property and equipment.............................. - - (36)
Changes in property improvement fund............................. - - 6
Change in restricted cash........................................ - - -
Other............................................................ - - (2)
----------- ----------- -----------
Cash used in investing activities............................. - - (32)
----------- ----------- -----------
FINANCING ACTIVITIES:
Capital distributions............................................ - - (22)
Proceeds from issuance of stock, net............................. - - 505
Proceeds from borrowings, net.................................... - - 543
Repayments of debt............................................... - - (953)
Scheduled principal payments..................................... - - (47)
Payment of financing costs....................................... - - (16)
Deposit into debt service funds.................................. - - (7)
Repayment of advances to Host Marriott Corporation............... - - (7)
Other............................................................ - - 7
----------- ----------- -----------
Cash provided by (used in) financing activities............... - - 3
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. (11) 27 98
CASH AND CASH EQUIVALENTS, beginning of year..................... 11 (27) 24
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year........................... $ - $ - $ 122
=========== =========== ===========
</TABLE>
F-18
<PAGE>
Notes to Pro Forma Statement of Cash Flows
(Unaudited, in millions)
Assuming Minimum Participation With No Notes Issued
A. Represents the adjustment to record the net cash proceeds of $505
million from the consummation of the Offering.
B. Represents the adjustments to record the consummation of the acquisition
of the Acquisition Hotels from the proceeds of the Offering./(1)/
C. Represents the adjustment to record the repayment of certain debt as
follows:
- Record the repayment of CBM2 Certificates of $390 million; and
- Record the payment of prepayment penalties for said debt of $26
million.
D. Reflects the adjustments to record rental revenue associated with the
leasing of hotel properties to subsidiaries of Host Marriott
Corporation.
E. Reflects the adjustment to interest expense as a result of the paydown
and refinancing of certain debt.
- ------------
/(1)/ The purchase price of the Acquisition Hotels is currently subject to
negotiation and therefore is not included.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of CRF Group:
We have audited the accompanying combined consolidated balance sheets of
CRF Group (the "Company") as of January 3, 1997 and December 29, 1995, and the
related combined consolidated statements of operations, changes in partners'
capital (deficit) and cash flows for the three fiscal years in the period ended
January 3, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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 includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined consolidated financial statements referred to
above present fairly, in all material respects, the financial position of the
Company as of January 3, 1997 and December 29, 1995 and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended January 3, 1997 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
December 16, 1997
F-20
<PAGE>
<TABLE>
<CAPTION>
CRF GROUP
COMBINED CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1997 and DECEMBER 29, 1995
(in millions)
ASSETS
1996 1995
---- ----
<S> <C> <C>
Property and equipment, net........................... $ 1,287 $ 1,318
Property improvement fund............................. 56 61
Due from affiliates of Marriott
International, Inc................................... 28 18
Deferred financing costs, net......................... 32 28
Other assets.......................................... 16 12
Cash and cash equivalents............................. 51 70
-------- --------
$ 1,470 $ 1,507
======== ========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<S> <C> <C>
Debt.................................................. $ 1,305 $ 1,343
Management fees payable to affiliates of
Marriott International, Inc.......................... 110 93
Deferred ground rent.................................. 30 30
Due to Host Marriott Corporation...................... 13 20
Other liabilities..................................... 18 35
-------- --------
Total liabilities................................. 1,476 1,521
-------- --------
Partners' capital (deficit)
General partners.................................... 11 9
Limited partners.................................... (17) (23)
-------- --------
Partners' deficit................................. (6) (14)
-------- --------
$ 1,470 $ 1,507
======== ========
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-21
<PAGE>
CRF GROUP
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JANUARY 3, 1997,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
(in millions)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES..................................................... $ 358 $ 333 $ 305
-------- ------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization............................. 77 78 81
Base, system and incentive management fees paid to
affiliates of Marriott International, Inc.............. 75 69 62
Property taxes............................................ 25 24 25
Ground rent............................................... 22 21 20
Insurance and other....................................... 7 7 7
-------- ------- --------
Total operating costs and expenses..................... 206 199 195
-------- ------- --------
OPERATING PROFIT............................................. 152 134 110
Interest expense............................................. (120) (116) (116)
Interest income.............................................. 6 6 3
-------- ------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM...................... 38 24 (3)
Extraordinary item - gain on forgiveness of deferred
management fees........................................... - - 52
-------- ------- --------
NET INCOME................................................... $ 38 $ 24 $ 49
======== ======= ========
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-22
<PAGE>
CRF GROUP
COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(DEFICIT)
FOR THE FISCAL YEARS ENDED JANUARY 3, 1997,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
(in millions)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
----------- ---------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993.............................. $ 6 $ (37) $ (31)
Net income.............................................. 2 47 49
Capital distributions................................... - (32) (32)
----------- ---------- -----------
Balance, December 30, 1994........................... 8 (22) (14)
Net income.............................................. 1 23 24
Capital distributions................................... - (24) (24)
----------- ---------- -----------
Balance, December 29, 1995........................... 9 (23) (14)
Net income.............................................. 2 36 38
Capital distributions................................... - (30) (30)
----------- ---------- -----------
Balance, January 3, 1997............................. $ 11 $ (17) $ (6)
=========== ========== ===========
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-23
<PAGE>
CRF GROUP
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 3, 1997,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
(in millions)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 38 $ 24 $ 49
Extraordinary gain on forgiveness of deferred management fees....... - - (52)
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization.................................... 77 78 81
Deferred management fees......................................... 18 18 23
Amortization of deferred financing fees.......................... 4 3 3
Other............................................................ 1 3 3
Changes in operating accounts:
Due from affiliates of Marriott International, Inc............... (7) 3 (4)
Other liabilities................................................ (8) (2) (3)
----------- ---------- -----------
Cash provided by operations...................................... 123 127 100
----------- ---------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net............................ (45) (29) (28)
Changes in property improvement fund................................ 5 (9) (5)
Other .............................................................. (5) - 1
----------- ---------- -----------
Cash used in investing activities................................ (45) (38) (32)
----------- ---------- -----------
FINANCING ACTIVITIES
Capital distributions............................................... (30) (24) (32)
Proceeds from borrowings............................................ 683 130 -
Repayments of debt.................................................. (674) (129) -
Scheduled principal payments........................................ (47) (26) (28)
Payment of financing costs.......................................... (20) (7) (4)
Deposits into debt service fund..................................... (9) - -
Repayment of advances from Host Marriott Corporation................ (7) (1) (4)
Other .............................................................. 7 (2) 5
----------- ---------- -----------
Cash used in financing activities................................ (97) (59) (63)
----------- ---------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................................... (19) 30 5
CASH AND CASH EQUIVALENTS, beginning of year........................ 70 40 35
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of year.............................. $ 51 $ 70 $ 40
=========== ========== ===========
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-24
<PAGE>
CRF GROUP
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined consolidated financial statements include the
accounts of the following limited partnerships:
. Courtyard by Marriott Limited Partnership ("CBM1")
. Courtyard by Marriott II Limited Partnership ("CBM2")
. Marriott Residence Inn Limited Partnership ("RIBM1")
. Marriott Residence Inn II Limited Partnership ("RIBM2")
. Marriott Residence Inn USA Limited Partnership ("Res USA")
. Fairfield Inn by Marriott Limited Partnership ("FIBM")
The limited partnerships listed above (referred to collectively as the
"Hotel Partnerships"), own 219 hotel properties (120 Courtyard by Marriott
hotels, 49 Residence Inn by Marriott hotels and 50 Fairfield Inn by Marriott
hotels) containing 30,149 rooms throughout the United States.
The Hotel Partnerships were formed between 1986 and 1991 to acquire, own
and operate limited service and extended-stay hotels operated under the
Courtyard by Marriott, Residence Inn by Marriott and Fairfield Inn by Marriott
brand names. The sole general partner of each of the Hotel Partnerships is a
direct or indirect wholly owned subsidiary of Host Marriott Corporation ("Host
Marriott"). Each Hotel Partnership is managed by a direct or indirect wholly
owned subsidiary of Marriott International, Inc. ("Marriott International" or
the "Manager"). In October 1993, Marriott Corporation's operations were divided
into two separate companies: Host Marriott and Marriott International.
The accompanying combined consolidated financial statements of CRF Group
(the "Company") have been presented on a combined basis because the Hotel
Partnerships have common general partners and because the Hotel Partnerships are
expected to be the subject of a consolidation (the "Consolidation") with and
into a partnership, CRF Lodging Company, L.P. Following the Consolidation, the
partners of the Hotel Partnerships will become limited partners of the Company.
CRF Lodging Trust ("CRFLT"), a newly formed real estate investment trust,
expects to qualify as a real estate investment trust (a "REIT") and will be the
sole general partner of the Company. Concurrently with the Consolidation, CRFLT
will make an initial public offering of its common shares and contribute the net
proceeds to the Company in exchange for the sole general partner interest in the
Company. The Consolidation will be treated as a combination of interests at
historical book value for financial reporting purposes. In management's opinion,
these combined consolidated financial statements include the assets,
liabilities, revenues and expenses associated with the operations, which are
intended to be contributed to the Company. All significant intercompany balances
and transactions have been eliminated in the combined consolidated financial
statements.
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31.
Fiscal year results for 1996 include 53 weeks versus 52 weeks for fiscal years
1995 and 1994.
Revenues and Expenses
Revenues represent house profit from the Company's hotels because the
Hotel Partnerships have delegated substantially all of the operating decisions
related to the generation of house profit from the hotels to Marriott
International. House profit reflects the net revenues flowing to the Hotel
Partnerships as property owner and represents hotel operating results less
property-level expenses,
F-25
<PAGE>
CRF GROUP
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
excluding depreciation and amortization, base, system and incentive management
fees, property taxes, ground rent and equipment rent, insurance and certain
other costs, which are classified as operating costs and expenses in the
accompanying combined consolidated statements of operations.
Interest Rate Swap Agreements
Res USA has entered into an interest rate swap agreement to fix certain of
its debt from a variable rate to a fixed rate basis. The interest rate
differential to be paid or received on the interest rate swap agreement is
accrued as interest rates change and is recognized as an adjustment to interest
expense.
Allocation of Income (Losses)
For each Hotel Partnership, income or loss is allocated between partners
based on the partners' stated interest in cash available for distribution.
Working Capital and Supplies
Pursuant to the terms of the Hotel Partnership's management agreements
discussed in Note 5, the Hotel Partnerships are required to provide the Manager
with working capital and supplies to meet the operating needs of the hotels. The
Manager converts cash advanced by the Hotel Partnerships into other forms of
working capital consisting primarily of operating cash, inventories, and trade
receivables and payables which are maintained and controlled by the Manager.
Upon the termination of the management agreements with an affiliate of Marriott
International, the Manager is required to convert working capital and supplies
into cash and return it to the Hotel Partnerships. As a result of these
conditions, the individual components of working capital and supplies controlled
by the Manager are not reflected in the accompanying combined consolidated
balance sheet. As of January 3, 1997 and December 29, 1995, $14 million and $11
million, respectively, were included in Due from affiliates of Marriott
International.
Property and Equipment
Property and equipment is recorded at cost. Replacements and improvements
are capitalized. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, generally 30 to 40 years for buildings
and 4 to 10 years for furniture and equipment. Leasehold improvements are
amortized over the shorter of the lease term or the useful lives of the related
improvements.
In cases where the Hotel Partnerships are holding for sale particular
lodging properties, the Hotel Partnerships assess impairment based on whether
the net realizable value (estimated sales price less costs of disposal) of each
individual property to be sold is less than its net book value. A lodging
property is considered to be held for sale when the Hotel Partnerships have made
the decision to dispose of the property. Otherwise, the Hotel Partnerships
assess impairment of their real estate properties based on whether it is
probable that undiscounted future cash flows from each individual property will
be less than its net book value. If a property is impaired, its basis is
adjusted to its fair market value.
Deferred Financing Costs
Deferred financing costs related to mortgage and other debt are deferred
and amortized over the term of the loan.
F-26
<PAGE>
CRF GROUP
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Hotel Partnerships consider all highly-liquid investments with a
maturity of three months or less at the date of purchase to be cash equivalents.
Ground Rent
The ground leases with affiliates of Marriott International (see Note 4)
include scheduled increases in minimum rents per property. These scheduled rent
increases, which are included in minimum lease payments, are being recognized by
the Hotel Partnerships on a straight line basis over the term of the respective
leases.
Income Taxes
Provision for Federal taxes has not been made in the accompanying combined
consolidated financial statements since the Hotel Partnerships do not pay income
taxes, but rather, allocate profits and losses to the individual partners.
Significant differences exist between the net income/loss for financial
reporting purposes and the net income/loss reported in each Hotel Partnership's
tax return. These differences are due primarily to the use for income tax
purposes of accelerated depreciation methods, shorter depreciable lives for the
assets, timing of recognition of certain fees and straight-line rent
adjustments. As a result of these differences, the excess of net assets of the
Hotel Partnerships reported in the accompanying combined consolidated financial
statements over the tax basis in the net assets was $59 million and $73 million
as of January 3, 1997 and December 29, 1995, respectively.
Consolidation
Certain of the Hotel Partnerships have consolidated subsidiaries which
were formed to facilitate financing transactions. All intercompany transactions
have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
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.
Statement of Financial Accounting Standards
The Hotel Partnerships adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" during the first quarter of 1996. The
adoption of SFAS No. 121 did not have an effect on the Company's combined
consolidated financial statements.
F-27
<PAGE>
CRF GROUP
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at January 3, 1997 and
December 29, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in millions)
<S> <C> <C>
Land................................................................................... $ 207 $ 207
Leasehold improvements................................................................. 728 720
Building and improvements.............................................................. 555 544
Furniture and equipment................................................................ 454 427
-------------- --------------
1,944 1,898
Less accumulated depreciation and amortization......................................... (657) (580)
-------------- --------------
$ 1,287 $ 1,318
============== ==============
</TABLE>
Note 3. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in millions)
<S> <C> <C>
Mortgage debt secured by $828 million of real estate, with an average rate
of 8.63% at January 3, 1997, maturing
through 2017........................................................................ $ 774 $ 1,312
Commercial mortgage pass-through certificates secured by
$452 million of real estate, with an average rate of 7.6% at
January 3, 1997, maturing through January 2008.......................................... 399 -
CBM2 Senior Notes, with a rate of 10.75% due February 2008.............................. 127 -
Note payable to Host Marriott Corporation, with a rate of 9.25%,
due April 1997...................................................................... 5 -
Industrial Development Revenue Bonds.................................................... - 26
Other................................................................................... - 5
-------------- --------------
$ 1,305 $ 1,343
============== ==============
</TABLE>
A summary of each of the Hotel Partnerships' debt follows:
CBM1
At January 3, 1997, CBM1 had outstanding debt of $289 million, including a
$283 million mortgage loan. This loan bore interest at the London Interbank
Offered Rate ("LIBOR") plus 1.5% through June 15, 1996 and LIBOR plus 1.75%
through the refinancing on March 21, 1997 discussed below. The weighted average
interest rate for 1996, 1995 and 1994 was 7.1%, 7.6% and 5.9%, respectively. In
addition, CBM1 had $6 million of non-recourse debt, which was also refinanced on
March 21, 1997. While the loan balance exceeded $300 million, the loan required
100% of available cash flow of the partnership to pay additional principal on
the loan and 80% of available cash flow while the loan exceeded $250 million.
Prior to the refinancing of this mortgage, Host Marriott provided a debt service
guarantee of up to $40 million of principal and interest. Host Marriott's
performance was backed up by a guarantee by Marriott International. Host
Marriott also provided a guarantee on the Hotel Partnership's original mortgage
loan of up to $37 million under which it made advances of approximately $7
million. Advances bore interest at a weighted average rate of 8.3%, 8.8% and
7.15% for 1996, 1995 and 1994, respectively. The balance of the advances and
accrued interest at January 3, 1997 was $13 million. In addition to its backup
guarantee, Marriott International also provided an additional debt service
guarantee of up to $15 million in the event of non-performance. No amounts
F-28
<PAGE>
CRF GROUP
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
were ever advanced under this guarantee. These guarantees were extinguished when
the debt was refinanced on March 21, 1997.
On March 21, 1997, CBM1's debt was refinanced with the total amount of the
debt increasing to $325 million. The new loan bears interest at 7.865% through
April 9, 2012. Subsequent to April 9, 2012 and through the loan's maturity on
April 10, 2017, the loan bears interest at a fixed rate equal to the greater of
9.865% or the comparable U.S. Treasury rate plus 2%. The loan can be repaid
without penalty on or after April 10, 2012. In connection with the CBM1
refinancing in 1997, Marriott International agreed to forgive approximately $15
million of deferred management fees, which has been reflected as an
extraordinary gain in the Company's financial statements for the thirty-six
weeks ended September 12, 1997.
In 1994, in connection with CBM1's refinancing of its then existing
mortgage debt, the Manager forgave $52 million of deferred management fees. The
forgiveness of these fees has been recorded as an extraordinary item in the
combined consolidated statements of operations.
CBM2
At January 3, 1997, CBM2 had $526 million of mortgage debt outstanding. On
January 24, 1996, CBM2 refinanced its debt with $127 million of non-recourse
senior secured notes (the "CBM2 Senior Notes") and $410 million of commercial
mortgage pass-through certificates (the "Certificates"). The net proceeds were
used to repay approximately $505 million of mortgage debt, Industrial
Development Revenue Bonds of approximately $26 million and approximately $7
million of advances from Host Marriott. In connection with the refinancing, the
limited partners approved certain amendments to the CBM2 partnership agreement,
which allowed the formation of certain subsidiaries of CBM2, including Courtyard
II Associates, L.P. ("Associates"), CBM Funding Corporation ("Funding") and
Courtyard II Finance Company ("Finance"), who along with CBM2 is the co-issuer
of the CBM2 Senior Notes. The CBM2 Certificates were issued in several classes
with interest rates varying from 6.88% to 8.645% (weighted average rate of 7.6%
at January 3, 1997) and require monthly payments of principal and interest based
on a 17-year amortization schedule.
The CBM2 Senior Notes bear interest at 10.75% and mature on February 1,
2008. The Senior Notes are secured by a first priority pledge by CBM2 of its 99%
partnership interest in Associates and its 100% equity interest in the managing
general partner. Finance has nominal assets, does not conduct any operations and
does not provide any additional security for the CBM2 Senior Notes. The terms of
the CBM2 Senior Notes include requirements of CBM2 to maintain a debt service
reserve of approximately $7 million and to maintain certain levels of excess
cash flow. If the required level of cash flow is not met, CBM2 will be required
to (i) suspend distributions to its partners (ii) fund additional debt service
reserves and (iii) if such failure were to continue, offer to repurchase a
portion of the CBM2 Senior Notes at par. The CBM2 Senior Notes are not
redeemable prior to February 1, 2001. Afterward, they may be redeemed at a
premium declining to par in 2004.
As part of the refinancing, 69 hotels and their related assets owned by
CBM2 were contributed to Associates in return for a direct and indirect 2%
general partner interest and a 98% limited partner interest. Funding was formed
to make a mortgage loan to Associates from the proceeds of the sale of the CBM2
Certificates. As a result of these transactions, CBM2's primary asset is its
interest in Associates.
Substantially all of Associates net equity is restricted to making
dividends, loans or advances to CBM2. Operating profit from the hotels in excess
of debt service is available to be distributed to CBM2 and used (i) to pay debt
service on the CBM2 Senior Notes, (ii) to fund additional debt service reserves
if required, (iii) to offer to repurchase the portion of the CBM2 Senior Notes,
(iv) for additional working
F-29
<PAGE>
CRF GROUP
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
capital, or (v) for distributions to the partners. At January 3, 1997, the
restricted net assets of Associates were approximately $81 million.
The mortgage loan from Funding matures on January 28, 2008. However, the
maturity date of the CBM2 Certificates may be extended until January 28, 2013
with the consent of 66.7% of the holders of the outstanding CBM2 Certificates
affected thereby. Prepayments of the mortgage loan are permitted with the
payment of a premium equal to the greater of one percent of the mortgage loan
being prepaid or yield maintenance amounts based on a spread of .25% or .55%
over the U.S. Treasury rate, as defined.
Prior to January 24, 1996, CBM2 had non-recourse mortgage debt of $505
million which bore interest at LIBOR or an adjusted CD rate plus .75 points. The
mortgage debt required no principal amortization and had an average interest
rate during 1995 and 1994 of 7% and 8.1%, respectively. Host Marriott had a $60
million debt service guarantee on the $505 million of mortgage debt from which
Host Marriott was released upon refinancing of the mortgage in 1996.
RIBM1
At January 3, 1997, RIBM1 had outstanding mortgage debt of approximately
$124 million which matures on September 30, 2002. RIBM1's mortgage debt is
comprised of a $95 million first mortgage which bears interest at 8.6% and a $28
million second mortgage which bears interest at 15.25% for a blended interest
rate of 10.13%. In addition to monthly principal amortization, from 1996 through
1997, RIBM1 is required to use available cash to repay $2 million of the first
mortgage annually. Additional amounts can be paid at RIBM1's option.
RIBM2
At January 3, 1997, RIBM2 had outstanding non-recourse mortgage debt of
approximately $140 million which bears interest at a fixed rate of 8.85% through
March 10, 2006. Subsequent to March 11, 2006, the loan bears interest at an
adjustable rate per annum equal to the greater of 10.85% or the comparable U.S.
Treasury rate plus 4.47%. Principal amortization is based on a 25-year schedule
and the loan can be repaid without penalty on or after March 11, 2006. The
mortgage debt required the Hotel Partnership to establish certain cash reserves
totaling $7 million for three months of debt service, capital expenditures,
working capital and environmental liabilities. In March 1996, RIBM2 used the
proceeds from the $140 million of mortgage debt to repay the $137 million
balance due on the Hotel Partnership's 10.17% fixed rate mortgage loan and
variable rate revolving loan which had matured on December 30, 1995.
Res USA
At January 3, 1997, Res USA had outstanding mortgage debt of approximately
$56 million which matures on December 31, 1998. Res USA's mortgage is comprised
of $30 million of fixed rate debt at 9.66% and $26 million of adjustable rate
debt which bears interest at 1.85% over three-month LIBOR. Host Marriott
provided a $12 million debt service guarantee on the mortgage until December
1995 at which time Host Marriott was released from the guarantee as a result of
the Hotel Partnership meeting certain performance criteria. At the time the
adjustable rate loan was entered into, Res USA entered into an interest rate
swap agreement with a third party which fixed the interest rate on the
adjustable rate loan at 9.66%. The third party's obligations under the swap
agreement are guaranteed by the parent company of the third party, a national
investment banking institution. Res USA does not anticipate non-performance by
the third party. At January 3, 1997, Res USA also had $5.4 million of unsecured
non-recourse notes payable to Host Marriott which matured on April 30, 1997 and
bore
F-30
<PAGE>
CRF GROUP
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
interest at prime plus one percent. The loan was repaid on April 30, 1997.
During 1996, $209,000 of interest was paid to Host Marriott.
FIBM
At January 3, 1997, FIBM had outstanding non-recourse mortgage debt of
approximately $165 million, which bore interest at 9.67% and required no
principal amortization. On January 13, 1997, FIBM refinanced its debt with a
$165 million mortgage bearing interest at 8.4% through January 11, 2007.
Subsequent to January 11, 2007 and through the loan's maturity on January 11,
2017, the loan bears interest at a fixed rate equal to the greater of 10.4% or
the comparable U.S. Treasury rate plus 2%. The loan requires monthly principal
amortization based on a 20-year schedule and can be repaid without penalty on or
after January 11, 2007. As part of the refinancing, FIBM was required to
establish cash reserves for capital expenditures, additional working capital,
debt service and insurance needs totaling approximately $9 million.
At January 3, 1997, debt maturities of the Company are as follows (in
millions):
<TABLE>
<CAPTION>
Historical Pro Forma/(1)/
---------- --------------
<S> <C> <C>
1997.......................................................................... $ 203 $ 33
1998.......................................................................... 84 88
1999.......................................................................... 30 35
2000.......................................................................... 31 37
2001.......................................................................... 33 40
Thereafter.................................................................... 924 1,109
-------- ---------
Total..................................................................... $ 1,305 $ 1,342
======== =========
</TABLE>
- -----------------------
/(1)/Reflects debt maturities of the Company on a pro forma basis, after taking
into consideration the 1997 refinancing of the CBM1 and FIBM debt.
In connection with certain debt of the Company, lenders have required that
certain reserves be established for debt service, capital expenditures and
working capital. As of January 3, 1997 and December 29, 1995, these restricted
cash escrows totaled $15 million and $10 million, respectively, and have been
included in other assets.
Cash paid for interest was $119 million, $112 million and $117 million in
1996, 1995 and 1994, respectively. Accumulated amortization of the deferred
financing costs was $11 million and $10 million at January 3, 1997 and December
29, 1995, respectively.
Note 4. LEASES
The land on which 116 of the hotels are located is leased from Marriott
International or affiliates of Marriott International. In addition, eleven of
the hotels are located on land leased from third parties. The land leases have
remaining terms (including all renewal options) expiring between the years 2024
and 2088. The Marriott International land leases and the third party land leases
provide for rent based on specific percentages (from 2% to 15%) of certain sales
categories subject to minimum amounts. The minimum rentals are adjusted
generally based on changes in the Consumer Price Index at various anniversary
dates throughout the lease terms, as defined in the agreements.
F-31
<PAGE>
CRF GROUP
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The Hotel Partnerships also rent certain equipment for use in the hotels.
Future minimum annual rental commitments for all non-cancelable operating leases
at January 3, 1997 are as follows (in millions):
<TABLE>
<S> <C>
1997................................................................................................. $ 19
1998................................................................................................. 19
1999................................................................................................. 19
2000................................................................................................. 19
2001................................................................................................. 19
Thereafter........................................................................................... 1,320
--------
Total minimum lease payments..................................................................... $ 1,415
========
</TABLE>
Rental expense consists of the following (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Minimum rentals on operating leases............................................... $ 19 $ 19 $ 18
Additional rentals based on sales................................................. 3 3 3
----- ----- -----
$ 22 $ 22 $ 21
===== ===== =====
</TABLE>
F-32
<PAGE>
CRF GROUP
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Note 5. MANAGEMENT AGREEMENTS
The Hotel Partnerships are party to management agreements (the "Management
Agreements") which provide for Marriott International to manage the hotels,
generally for a term of 20 years with renewal terms of up to an additional 50
years. The Management Agreements generally provide for payment of base
management fees equal to two to three percent of gross revenues and incentive
management fees generally equal to 15% of hotel operating profits (as defined in
the Management Agreements). Incentive management fees and certain other base and
system fees are only paid after certain priorities have been met and as cash is
then available. Accordingly, other liabilities include $110 million of deferred
fees payable to Marriott International at January 3, 1997. The Hotel
Partnerships may terminate the Management Agreements if specified performance
thresholds are not met, subject to the right of Marriott International to cure.
In the event of early termination of the Management Agreements, Marriott
International will receive additional fees based on the unexpired term and
expected future base and incentive management fees. The Management Agreements
also provide for a system fee equal to 2.5% to 4% of revenues.
Pursuant to the terms of the Management Agreements, the Manager is
required to furnish the hotels with certain services ("Chain Services") which
are generally provided on a central or regional basis to all managed, owned or
leased hotels in the Courtyard by Marriott, Residence Inn by Marriott and
Fairfield Inn by Marriott systems. As franchisor of the Residence Inn and
Fairfield systems Marriott International maintains a marketing fund to pay the
costs associated with certain system-wide advertising, promotional and public
relations materials and programs and the operation of a toll-free reservation
system. Each Residence Inn and Fairfield property contributes 2.5% of revenues
to the marketing fund.
Pursuant to the terms of the Management Agreements, the Hotel Partnerships
are required to provide the Manager with working capital to meet the operating
needs of the hotels. Upon termination of the Management Agreements, the working
capital will be returned to the Hotel Partnerships. Working capital advances to
the Manager as of January 3, 1997 and December 29, 1995 totaled $28 million and
$18 million, respectively.
The management agreements also provide for the establishment of a property
improvement fund for the hotels to cover the cost of certain non-routine repairs
and maintenance to the hotels which are normally capitalized, and the cost of
replacements and renewals to the hotels' property and improvements.
Contributions to the property improvement fund were generally equal to 5% of
gross hotel sales. Aggregate contributions to the property improvement fund for
all the hotels were $37 million, $34 million and $32 million for 1996, 1995 and
1994, respectively.
F-33
<PAGE>
CRF GROUP
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Note 6. REVENUES
As discussed in Note 1, revenues reflect house profit from the Company's
hotels. House profit reflects the net revenues flowing to the Hotel Partnerships
as property owner and represents all gross hotel operating revenues, less all
gross property-level expenses, excluding depreciation and amortization, base,
system and incentive management fees, property taxes, ground and equipment rent,
insurance and certain other costs, which are classified as operating costs and
expenses. The following table presents the details of the Company's house profit
(in millions):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales
Rooms ................................................................. $ 656 $ 614 $ 574
Food and beverage...................................................... 31 30 32
Other ................................................................. 25 24 24
---------- ---------- ----------
Total Hotel Sales................................................... 712 668 630
---------- ---------- ----------
Department Costs
Rooms ................................................................. 169 158 150
Food and beverage...................................................... 27 26 26
Other ................................................................. 3 3 3
---------- ---------- ----------
Total Department Costs.............................................. 199 187 179
---------- ---------- ----------
Department profit...................................................... 513 481 451
Other hotel operating expenses......................................... (155) (148) (146)
---------- ----------- ----------
House Profit.............................................................. $ 358 $ 333 $ 305
========== =========== ==========
</TABLE>
Note 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The
fair values of financial instruments not included in this table are estimated to
be equal to their carrying amounts.
<TABLE>
<CAPTION>
As of January 3, 1997 As of December 29, 1995
--------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ---------- -------- ---------
(in millions)
<S> <C> <C> <C> <C>
Financial Liabilities
Debt.......................................................... $ 1,305 $ 1,320 $ 1,343 $ 1,346
Management fees payable to Marriott
International.............................................. 110 34 93 29
Due to Host Marriott Corporation.............................. 13 15 20 7
</TABLE>
The estimated fair value of debt obligations for 1996 and 1995 were based
on expected future cash flows discounted at risk-adjusted rates. The 1996
amounts due to Host Marriott Corporation and management fees due to Marriott
International are valued based on the expected future payments from operating
cash flow discounted at risk-adjusted rates.
F-34
<PAGE>
CRF GROUP
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Note 8. RELATED PARTY
Subsidiaries of Host Marriott serve as the sole general partner for each of
the Hotel Partnerships in the Company. The general partner has a one percent
ownership in RIBM1, RIBM2 and FIBM, and a five percent ownership in CBM1, CBM2
and Res USA. Host Marriott owns an additional limited partnership interest of
1.25%, 1.39% and 9.95% in CBM1, CBM2 and FIBM, respectively.
Host Marriott, as parent of the general partner of the Hotel Partnerships,
has guaranteed mortgage loans for several of the Hotel Partnerships. As of
January 3, 1997 and December 29, 1995, $12,975,000 (including $5,634,000 of
accrued interest) and $19,834,000 (including $6,004,000 of accrued interest),
respectively, had been advanced by Host Marriott to the Hotel Partnerships under
two of the mortgage loan guarantees. The advance outstanding at January 3, 1997
bore interest at 8.25%. Host Marriott is no longer committed to advance amounts
to the Hotel Partnerships to cover any future debt service requirements of the
Hotel Partnerships.
In July 1996, Host Marriott provided an unsecured nonrecourse loan to
Residence USA in the amount of $5,393,000 to repay a maturing mortgage loan. The
loan bore interest at prime plus one percent (9.25% at January 3, 1997) and was
repaid in full in April 1997.
As parent of the general partner of the Hotel Partnerships, Host Marriott
provides certain administrative services to the Hotel Partnerships. The cost of
these services are reimbursed by the Hotel Partnerships. Total costs reimbursed
were approximately $1 million for 1996, 1995 and 1994, respectively.
Note 9. LITIGATION
The Hotel Partnerships are from time to time the subject of, or involved
in, judicial proceedings. Management believes that any liability or loss
resulting from such matters would not have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Hotel Partnerships.
F-35
<PAGE>
CRF GROUP
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
SEPTEMBER 12, 1997
(unaudited, in millions)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Property and equipment, net............................................................. $ 1,284
Property improvement fund............................................................... 46
Due from affiliates of Marriott International, Inc...................................... 26
Deferred financing costs, net........................................................... 34
Other assets............................................................................ 32
Cash and cash equivalents............................................................... 45
---------
$ 1,467
=========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Debt.................................................................................... $ 1,319
Management fees payable to affiliates of Marriott International, Inc.................... 93
Deferred ground rent.................................................................... 30
Due to Host Marriott Corporation........................................................ 13
Other liabilities....................................................................... 23
---------
Total liabilities.................................................................. 1,478
Partners' capital (deficit)
General partners..................................................................... 10
Limited partners..................................................................... (21)
---------
Partners' deficit.................................................................. (11)
---------
$ 1,467
=========
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-36
<PAGE>
CRF GROUP
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997 AND SEPTEMBER 6, 1996
(unaudited, in millions)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES.................................................................................... $ 269 $ 254
---------- -----------
OPERATING COSTS AND EXPENSES
Depreciation and amortization............................................................ 53 54
Base, system and incentive management fees paid to affiliates of
Marriott International, Inc........................................................... 56 52
Property taxes........................................................................... 17 18
Ground rent.............................................................................. 16 16
Insurance and other...................................................................... 6 5
---------- -----------
Total operating costs and expenses.................................................... 148 145
---------- -----------
OPERATING PROFIT............................................................................ 121 109
Interest expense............................................................................ (83) (83)
Interest income............................................................................. 4 4
---------- -----------
INCOME BEFORE EXTRAORDINARY ITEMS........................................................... 42 30
Extraordinary item - gain on forgiveness of deferred management fees........................ 15 -
Extraordinary item - loss on early extinguishment of debt................................... (3) -
---------- -----------
NET INCOME.................................................................................. $ 54 $ 30
========== ===========
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-37
<PAGE>
CRF GROUP
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997 AND SEPTEMBER 6, 1996
(unaudited, in millions)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................................................... $ 54 $ 30
Extraordinary items................................................................ (12) -
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization................................................... 53 54
Deferred management fees........................................................ 1 11
Amortization of deferred financing fees......................................... 5 3
Other........................................................................... 1 1
Changes in operating accounts:
Due from affiliates of Marriott International, Inc.............................. 4 (12)
Other liabilities............................................................... (8) (8)
---------- -----------
Cash provided by operations..................................................... 98 79
---------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net........................................... (50) (28)
Changes in property improvement fund............................................... 10 1
Change in restricted cash.......................................................... (5) -
Other ............................................................................. - (4)
---------- -----------
Cash used in investing activities............................................... (45) (31)
---------- -----------
FINANCING ACTIVITIES
Capital distributions.............................................................. (59) (19)
Proceeds from borrowings........................................................... 494 683
Scheduled principal payments....................................................... (25) (36)
Repayments of debt................................................................. (451) (668)
Payment of financing costs......................................................... (11) (19)
Other ............................................................................. (7) (7)
---------- -----------
Cash used in financing activities............................................... (59) (66)
---------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS.............................................. $ (6) $ (18)
========== ===========
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-38
<PAGE>
CRF GROUP
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying condensed combined consolidated financial statements
include the accounts of the following limited partnerships:
. Courtyard by Marriott Limited Partnership ("CBM1")
. Courtyard by Marriott II Limited Partnership ("CBM2")
. Marriott Residence Inn Limited Partnership ("RIBM1")
. Marriott Residence Inn II Limited Partnership ("RIBM2")
. Marriott Residence Inn USA Limited Partnership ("Res USA")
. Fairfield Inn by Marriott Limited Partnership ("FIBM")
The limited partnerships listed above (referred to collectively as
the "Hotel Partnerships") own 219 hotel properties containing 30,149 rooms
throughout the United States.
The accompanying combined consolidated financial statements of the
CRF Group (the "Company") have been presented on a combined basis because the
Hotel Partnerships have common general partners and because the Hotel
Partnerships are expected to be the subject of a consolidation (the
"Consolidation") with and into a partnership, CRF Lodging Company, L.P.
Following the Consolidation, the partners of the Hotel Partnerships will become
limited partners of the Company. CRF Lodging Trust ("CRFLT"), a newly formed
Maryland real estate investment trust, expects to qualify as a real estate
investment trust (a "REIT") and will be the sole general partner of the Company.
Concurrently with the Consolidation, CRFLT will make an initial public offering
of its common shares and contribute the net proceeds to the Company in exchange
for the sole general partner interest in the Company. The Consolidation will be
treated as a combination of interests at book value for financial reporting
purposes. In management's opinion, these combined consolidated financial
statements include the assets, liabilities, revenues and expenses associated
with the operations, which are intended to be contributed to the Company. All
significant intercompany balances and transactions have been eliminated in the
combined consolidated financial statements.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The management of the Hotel
Partnerships believe the disclosures made are adequate to make the information
presented not misleading. However, the condensed combined consolidated financial
statements should be read in conjunction with the audited combined consolidated
financial statements included in this Registration Statement.
In the opinion of the management of the Hotel Partnerships, the
accompanying unaudited condensed combined consolidated financial statements
reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position of the Company as of
September 12, 1997 and the results of operations and cash flows for the
thirty-six weeks ended September 12, 1997 and September 6, 1996. Interim results
are not necessarily indicative of fiscal year performance because of the impact
of seasonal and short-term variations.
2. Revenues represent house profit from the Company's hotel properties.
House profit reflects the net revenues flowing to the Hotel Partnerships as
property owner and represents hotel operating results less property-level
expenses excluding depreciation and amortization, base, system and incentive
management fees, property taxes, ground rent, insurance, and certain other costs
which are classified as operating costs and expenses.
F-39
<PAGE>
CRF GROUP
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
House profit generated by the Company's hotels consists of:
<TABLE>
<CAPTION>
Thirty-six Weeks Ended
---------------------------------------------
September 12, September 6,
1997 1996
------------- ------------
(in millions)
<S> <C> <C>
Sales
Rooms........................................ $ 485 $ 461
Food and beverage......................... 21 22
Other..................................... 18 18
--------- ----------
Total Hotel Sales..................... 524 501
--------- ----------
Department Costs
Rooms..................................... 123 117
Food and beverage......................... 18 19
Other..................................... 2 2
--------- ----------
Total Department Costs................ 143 138
--------- ----------
Department profit......................... 381 363
Other hotel operating expenses............ 112 109
--------- ----------
House Profit.......................... $ 269 $ 254
========= ==========
</TABLE>
3. During the thirty-six weeks ended September 12, 1997, the Hotel
Partnerships distributed approximately $56 million in cash to its limited
partners.
4. On January 13, 1997, FIBM refinanced mortgage debt with a third party
lender. The principal amount of FIBM's refinanced debt was $165 million. The
refinanced debt is non-recourse, bears interest at a fixed rate of 8.4% per year
and requires monthly payments of principal and interest based on a 20 year
amortization schedule.
5. On March 21, 1997, CBM1 successfully refinanced two outstanding
mortgage loans. The total amount financed was $325 million and bears interest at
a fixed rate of 7.865% per year. In connection with this refinancing, CBM1
recognized an extraordinary gain of approximately $12 million related to the
forgiveness of $15 million in deferred fees from the Manager, partially offset
by the write-off of approximately $3 million of financing costs related to the
original debt.
6. During the thirty-six weeks ended September 12, 1997, Res USA repaid
the $5.4 million note payable due to Host Marriott Corporation.
F-40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of CRF Lodging I, Inc.:
We have audited the accompanying balance sheet of CRF Lodging I, Inc.
("CRF"), a Delaware corporation, as of December 5, 1997. This balance sheet is
the responsibility of CRF's management. Our responsibility is to express an
opinion on the balance sheet 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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly,
in all material respects, the financial position of CRF, as of December 5, 1997,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
December 16, 1997
F-41
<PAGE>
CRF Lodging I, Inc.
Balance Sheet
December 5, 1997
(in dollars)
<TABLE>
<S> <C>
ASSETS
Cash................................................................... $ 1,000
========
STOCKHOLDER'S EQUITY
Common Stock, no par value, 100 shares authorized, issued and
outstanding......................................................... $ --
Additional paid-in capital............................................. 1,000
--------
$ 1,000
========
</TABLE>
The accompanying notes are an integral part of this balance sheet
F-42
<PAGE>
CRF Lodging I, Inc.
Notes to Balance Sheet
December 5, 1997
Note 1. Organization
CRF Lodging I, Inc. ("CRF") was incorporated in Delaware on December 4,
1997 as a wholly owned indirect subsidiary of Host Marriott Corporation ("Host
Marriott"). On December 4, 1997, CRF issued 100 shares of no par common stock to
its parent and sole shareholder, a wholly owned subsidiary of Host Marriott.
Note 2. Formation and Operations
CRF was formed for the purpose of serving as the general partner of CRF
Lodging Company, L.P. (the "Company"), a newly formed Delaware limited
partnership, prior to the consolidation (the "Consolidation") of the following
six limited partnerships into an umbrella partnership real estate investment
trust:
. Courtyard by Marriott Limited Partnership
. Courtyard by Marriott II Limited Partnership
. Marriott Residence Inn Limited Partnership
. Marriott Residence Inn II Limited Partnership
. Marriott Residence Inn USA Limited Partnership
. Fairfield Inn by Marriott Limited Partnership
In conjunction with the Consolidation, CRF will be merged into CRFLT.
F-43
<PAGE>
CRF LODGING COMPANY, L.P.
Supplement Dated __________ __, 1998 for
Prospectus/Consent Solicitation Statement Dated _________ __, 1998 for
Courtyard by Marriott Limited Partnership
On the terms described in the Prospectus/Consent Solicitation Statement
(the "Consent Solicitation") dated ________ __, 1998, of which this Supplement
(the "Supplement") is a part, CRF Lodging Company, L.P. (the "Company"), a newly
formed Delaware limited partnership, whose sole general partner will be CRF
Lodging Trust ("CRFLT"), a Maryland real estate investment trust, is proposing
the consolidation (the "Consolidation") of Courtyard by Marriott Limited
Partnership ("CBM1"), a Delaware limited partnership, and up to five other
limited partnerships (the "Hotel Partnerships") into an umbrella partnership
real estate investment trust (an "UPREIT") in order to consolidate and expand
the limited service and extended-stay hotel businesses currently conducted
separately by the Hotel Partnerships and Host Marriott Corporation ("Host").
Limited Partners of CBM1 are being asked to approve the Consolidation as
described in the Consent Solicitation. Upon approval of the Consolidation, a
newly formed direct or indirect wholly owned subsidiary of the Company (the
"Merger Partnership") will be merged with and into CBM1 with CBM1 being the
surviving entity. In the merger, partners of CBM1 will receive units of limited
partnership interest in the Company ("Units") in exchange for their interests in
CBM1.
Following the Consolidation, the Company will own a portfolio of up to
221 limited service and extended-stay hotels operating under three Marriott
brand names (Courtyard by Marriott(R), Residence Inn by Marriott(R) and
Fairfield Inn by Marriott(R)) (the "Hotels"). Concurrently with the
Consolidation, CRFLT will consummate an initial public offering (the "Offering")
of its common shares of beneficial interest (the "Common Shares") and contribute
the proceeds thereof to the Company in exchange for Units. Following the
Offering, CRFLT anticipates that the Common Shares will be listed on the New
York Stock Exchange ("NYSE"). Beginning one year after the Consolidation (the
"Initial Holding Period"), Limited Partners will have the right to redeem their
Units and receive, at the election of CRFLT, either Common Shares on a
one-for-one basis (subject to adjustment) or cash in an amount equal to the
market value of such shares (the "Unit Redemption Right"). CRFLT expects to
qualify as a real estate investment trust (a "REIT") under the Internal Revenue
Code of 1986, as amended (the "Code").
CBM One Corporation (the "Hotel Partnership GP"), the general partner
of CBM1, believes that the terms of the Consolidation provide substantial
benefits and are fair to the Limited Partners of CBM1 and recommend that all
Limited Partners of CBM1 vote FOR the Consolidation.
Limited Partners of CBM1 should consider the risks and other
considerations described more fully in the Consent Solicitation under "Risk
Factors," including the following:
. There is uncertainty at the time of voting as to the Hotel
Partnerships that will participate in the Consolidation and thus,
uncertainty as to the size and leverage of the Company until after the
end of the Solicitation Period.
. The Consolidation involves a fundamental change in the nature of a
Limited Partner's investment from an investment in a fixed portfolio,
limited life partnership where a Limited Partner could receive a
distribution upon liquidation of the partnership into an investment in
a public real estate company which expects to acquire additional
hotels and where a Limited Partner likely may realize value from his
investment only through a sale of Common Shares received pursuant to
the Unit Redemption Right.
. As a result of the Consolidation, a Limited Partner of CBM1, which
owns 50 Courtyard Hotels, will own an interest in a much larger
portfolio of Hotels, including up to an additional 71 Courtyard Hotels,
50 Residence Inns and 50 Fairfield Inns, and a material adverse change
affecting any of the
CBM1 Supp-1
<PAGE>
Company's assets will affect all Limited Partners
regardless of whether a particular Limited Partner previously held an
interest in such asset.
. No independent representative was retained to negotiate on behalf of
the Limited Partners of CBM1 or the other Hotel Partnerships. If one
had been, the terms of the Consolidation may have been more favorable
to the Limited Partners of CBM1 or the other Hotel Partnerships.
. Conflicts of interest exist in connection with the structuring of the
Consolidation, including the fact that subsidiaries of Host serve as
the general partners of all of the Hotel Partnerships and other
subsidiaries of Host will serve as the Lessees of the Hotels. Such
conflicts of interest may result in decisions that do not fully reflect
the interests of all Partners in the Hotel Partnerships.
. Host and its subsidiaries will realize substantial benefits from the
Consolidation, including receipt of Units having an estimated value of
at least $____ million in exchange for their Hotel Partnership
Interests in CBM1 (representing a 5% general partner interest and a
1.25% limited partner interest) ($____ million in the aggregate for
their Hotel Partnership Interests in all of the Hotel
Partnerships)(based upon the estimated Exchange Values), $____ million
in cash from the sale of two limited service and extended-stay hotels
owned by Host (the "Acquisition Hotels") based upon their aggregate
Appraised Value, as adjusted, economic benefits under the Leases and,
because the Consolidation has been structured to permit all Partners
(including the Limited Partners) to defer recognition of gain, the
ability to defer significant potential tax liabilities attributable to
taxable gain in excess of sale proceeds of approximately $____ million.
. The allocation of Units among the Hotel Partnerships is based upon
their respective Exchange Values, the calculation of which involves
numerous assumptions and estimates. There is no assurance that the
value of the Units to be received in the Consolidation equals the fair
market value of the Hotels and other assets contributed by CBM1 and the
other Hotel Partnerships.
. Current federal income tax law prohibits the Company from operating
the Hotels directly. Therefore, the Company will be substantially
dependent upon the Lessees and Managers for its revenue and the Company
will have limited control over the operations of the Hotels.
. Approval of the Consolidation by Limited Partners holding a majority
of the outstanding Partnership Units of CBM1 will bind all
Limited Partners of CBM1.
. Limited Partners of Hotel Partnerships who vote against the
Consolidation and comply with certain specified procedures ("Dissenting
Partners") will not have a right to receive cash based on an appraisal
of their Hotel Partnership Interests but instead can elect to tender
the Units they receive in the Consolidation in exchange for unsecured
notes (the "Notes"), for which there will be no public market, in an
amount equal to the Liquidation Value (as defined herein) of their
Hotel Partnership Interests. As of September 12, 1997, on a pro forma
basis assuming the Full Consolidation Scenario (as defined herein), the
Company would have had aggregate consolidated liabilities to which the
Notes were effectively subordinated of approximately $939 million.
. There are limitations on actual or constructive ownership of more than
9.9% of the number or value of CRFLT's outstanding Common Shares.
. Taxation of CRFLT as a regular corporation if it fails to qualify as a
REIT, and taxation of the Company as a corporation if it fails to
qualify as a partnership for federal income tax purposes, either of
which would, among other things, result in a decrease in cash available
for distribution and a material reduction in the value of the Common
Shares and Units.
The effects of the Consolidation may be different for Limited Partners
of the various Hotel Partnerships. This Supplement has been prepared to
highlight for the Limited Partners of CBM1 (the "CBM1 Limited Partners") the
risks, benefits, effects and fairness of the Consolidation and to provide
additional information specific to CBM1. Supplements have also been prepared for
each of the other Hotel Partnerships. This Supplement, together with the
supplements of the other Hotel Partnerships (collectively, the "Supplements"),
are a part of the Consent Solicitation Statement. Upon receipt of a written
request by a Limited Partner or his or her representative so designated in
writing, the Hotel Partnership GP will send a copy of any Supplement without
charge. All requests for a copy of a Supplement should be directed to:
- ----------------------------------------------.
The Consolidation is subject to various conditions, one of which is
that at least four Hotel Partnerships, including CBM1, CBM2 and RIBM1, must
approve the Consolidation (the "Minimum Participation Condition"). See "The
Consolidation -- Conditions to the Consolidation" in the Consent Solicitation.
CBM1 SUPP-2
<PAGE>
All cross-references refer to the Consent Solicitation unless stated
otherwise. Capitalized terms not defined herein shall have the meaning set forth
in the Consent Solicitation. The information contained herein, unless otherwise
indicated, assumes the Consolidation occurs with an Offering yielding gross
proceeds of $800 million, all Hotel Partnerships participate, no Notes are
issued and $539 million of outstanding indebtedness is repaid (the "Full
Consolidation Scenario").
Risk Factors
In deciding whether to approve the Consolidation, CBM1 Limited Partners
should consider certain risks and other factors. The Hotel Partnership GP
believes that CBM1 Limited Partners should particularly consider the following,
which should be read in conjunction with the information in the Consent
Solicitation under "Risk Factors" and "Federal Income Tax Considerations:"
Uncertainties at the Time of Voting. There are several uncertainties at
the time the Limited Partners must vote on the Consolidation, including (i) the
identity of the Hotel Partnerships that will participate in the Consolidation
and, thus, the Hotels that will be acquired by the Company (which will affect
such matters as the size, scope and leverage of the Company), (ii) the Exchange
Value for each Hotel Partnership (which will be adjusted for changes in working
capital, indebtedness and various other items prior to the Closing Date) and
(iii) the costs of prepaying certain indebtedness of the Hotel Partnerships
(which costs will be determined based upon the interest rates on applicable U.S.
Treasuries at the time of the prepayment). See "Determination of Exchange Values
and Allocation of Units."
Fundamental Change in Nature of Investment; Potential Underperformance.
The Consolidation involves a fundamental change in the nature of a Limited
Partner's investment from an investment in which a Limited Partner participates
in the profits from the operation of the Hotels and is entitled to receive
distributions from any net proceeds of a sale or refinancing of CBM1's assets,
to an investment in an entity which will receive rents from the lessees who will
bear the risks and receive the benefits from the hotels' operation and Limited
Partners likely may realize the value from their investment only through the
exercise of the Unit Redemption Right and sale of the Common Shares received as
a result thereof and not from liquidation proceeds. Continuing CBM1 would allow
CBM1 Limited Partners an opportunity to eventually receive liquidation proceeds
from the sale of CBM1's Hotel's, and a CBM1 Limited Partner's share of these
sale proceeds could be higher than the amount a limited partner might realize
from the sale of Units or exercise of the Unit Redemption Right (or payments on
Notes received by any Dissenting Partner). In addition, the Company has the
ability to acquire additional hotels, can reinvest proceeds from sales or
refinancings of existing hotels in additional hotels and has a general partner
that is a publicly traded entity. An investment in the Company may not
outperform an investment in CBM1. See "Comparison of Hotel Partnership
Interests, Units and Common Shares."
Exposure to Risks from Other Hotels and Brands. As a result of the
Consolidation, Limited Partners in CBM1, which owns 50 Courtyard Hotels, will
own interests in a much larger partnership with a broader range of assets,
including up to an additional 71 Courtyard Hotels, 50 Residence Inns and 50
Fairfield Inns. A material adverse change affecting one of the Company's assets
will affect all Limited Partners regardless of whether a particular Limited
Partner previously was an investor in such affected asset. In addition, each of
the three Marriott brands which initially will comprise the Company operates in
a different market segment and targets different consumers and, as a result, may
be affected differently by different economic and market conditions.
CBM1 Supp-3
<PAGE>
Limitations on Sales or Refinancings of the Courtyard Hotels. Because
of substantial taxable gains that would be recognized by the Hotel Partnership
GPs of CBM1 and CBM2, which are subsidiaries of Host, none of the assets of CBM1
and CBM2 (the "Courtyard Hotels") can be sold for a period of __ years from the
Closing Date of the Consolidation (other than pursuant to a tax-deferred
exchange) without the consent of Host (the "Lock-out Provisions"). Such Lock-out
Provisions are only applicable so long as Host holds the Units received in the
Consolidation relating to its Hotel Partnership Interests in CBM1 and CBM2 and
has not transferred, sold or otherwise disposed of such Units in a taxable
transaction. In addition, the Partnership Agreement contains certain
restrictions regarding the ability of the Company to repay or refinance
indebtedness secured by the Courtyard Hotels. These restrictions will limit the
ability of the Company to change its portfolio in response to market conditions
and, to the extent the Courtyard Hotels do not perform as well as the Residence
Inns or Fairfield Inns in its portfolio, the Company will have limited
flexibility to dispose of any such underperforming assets even if such disposal
would be in the best interests of the Company.
Conflicts of Interest in the Consolidation. Conflicts of interest exist
in connection with the Consolidation which include conflicts arising from the
fact that subsidiaries of Host serve as the Hotel Partnership GP of CBM1 (which
holds a 5% general partner interest and a 1.25% limited partner interest in
CBM1) and as Hotel Partnership GPs of the other Hotel Partnerships (with varying
interests) and other subsidiaries of Host will serve as Lessees of the Hotels
at the same time as the Hotel Partnership GP is recommending the Consolidation
and is involved in establishing the terms and structure of the Consolidation,
including the structuring of the Leases. In addition, Host and its subsidiaries
will receive substantial benefits from the Consolidation. These conflicts of
interest may result in decisions that do not fully reflect the interests of all
Limited Partners of CBM1 or the other Hotel Partnerships.
Substantial Benefits to Related Parties. The Consolidation will permit
Host to continue to be involved in the ownership and operation of the Hotels and
realize substantial benefits therefrom. Host and its subsidiaries will receive
Units with an estimated value of at least $____ million in exchange for their
CBM1 Supp-4
<PAGE>
Hotel Partnership Interests in CBM1 ($____ million in the aggregate for their
Hotel Partnership Interests in all of the Hotel Partnerships) (based upon the
estimated Exchange Values) and $___ million in cash from the sale of the
Acquisition Hotels to the Company (based upon their aggregate Appraised Value,
as adjusted). Subsidiaries of Host will be the Lessees of the Hotels and may
receive significant economic benefits in connection with the Leases, including
the receipt of income to the extent sales from the Hotels exceed operating costs
and expenses payable by the Lessees, management fees and rental payments to the
Company. Because the Consolidation has been structured to permit all Partners
(including the Limited Partners) to defer recognition of gain, the Consolidation
will also permit the Hotel Partnership GPs of CBM1 and CBM2, which are
subsidiaries of Host, to defer significant tax liabilities attributable to
taxable gain in excess of sale proceeds (estimated at approximately $____
million, of which $_____ million is attributable to CBM1) that otherwise would
be incurred upon any sale of the Courtyard Hotels (other than in a tax-deferred
exchange such as the Consolidation) or upon substantial reductions in the amount
of debt now secured by the Courtyard Hotels. In the case of the Courtyard
Hotels, the Partnership Agreement imposes certain restrictions on the sale of
such Hotels and the refinancing, prepayment or reduction of the debt secured by
those Hotels for __ years from the Closing Date of the Consolidation without the
consent of Host, in order to defer the recognition of gain, which gain would be
disproportionately borne by the Hotel Partnership GPs of CBM1 and CBM2 because
of prior allocations to them of tax losses. The Company also will repay, either
in cash or Common Shares, at the election of a subsidiary of Host, a loan of
approximately $13 million owed to such subsidiary of Host by CBM1.
Method of Allocation of Units. The allocation of Units among the Hotel
Partnerships will be based upon their respective Exchange Values, which in turn
are based upon the Appraised Value of each Hotel Partnership's Hotels as
adjusted for such things, among others, as net non-real estate assets (including
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables) and cash reserves)("Net Other Assets") existing
indebtedness (including an adjustment for prepayment and defeasance costs),
deferred maintenance and FF&E shortfalls, deferred management fees and
Consolidation Expenses. There is, however, no assurance that the value of the
Units to be received by participants in the Consolidation will equal the fair
market value of the Hotels and other assets contributed by such participants.
Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the Limited Partners of CBM1 or any of the
other Hotel Partnerships. The Hotel Partnership GP has obtained an opinion from
American Appraisal Associates, an independent, nationally recognized hotel
valuation and financial advisory firm ("AAA"), as to (i) the fairness, from a
financial point of view, to the Limited Partners of each Hotel Partnership, of
the methodologies used to determine the Exchange Value of CBM1 and each other
Hotel Partnership and the allocation of Units among each of the Hotel
Partnerships in the Consolidation, (ii) the fairness and reasonableness, from
the standpoint of each Hotel Partnership, of the underlying assumptions used to
determine the Exchange Value of each Hotel Partnership and the purchase price of
each Acquisition Hotel (including, without limitation, the assumptions used to
determine the various adjustments to the Appraised Values of the Hotels), (iii)
the fairness and reasonableness to the Limited Partners of each Hotel
Partnership of the methodology used to allocate Units received by each Hotel
Partnership among its general and Limited Partners, (iv) the fairness and
reasonableness, from the standpoint of each Hotel Partnership, of the
methodologies and underlying assumptions used to determine the Continuation
Value and the Liquidation Value of each Hotel Partnership (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) and (v) the fairness and reasonableness, from
the Company's standpoint, of the economic terms of the Leases. However, AAA has
not negotiated with the Hotel Partnership GP and has not participated in
establishing the terms of the Consolidation. Consequently, the terms and
conditions of the Consolidation may have been more favorable to CBM1 Limited
Partners or the Limited Partners of the other Hotel Partnerships if such terms
and conditions were the result of arm's length negotiations.
Lack of Control over Hotel Operations. Due to current federal income
tax law prohibitions on a REIT's ability to derive revenues directly from the
operation of a hotel, the Company will lease its Hotels to the Lessees, which
will operate the Hotels by continuing to retain the Managers pursuant to the
Management Agreements. Neither CRFLT nor the Company will operate the Hotels or
participate in the decisions affecting the daily operations of the Hotels.
Although the Company will have certain rights as lessor under the Leases
(including control over certain owner-funded capital expenditures), neither
CRFLT nor the Company will have the authority to require the Lessees or the
Managers to operate the Hotels in any particular manner or to govern any
particular aspect of their operation.
Expiration of Leases. The Leases expire at the end of __ years and
there can be no assurance that such Leases will be renewed. If such Leases are
terminated at the end of their terms, the Company will be required to find other
lessees (which lessees must be satisfactory to the Managers). There can be no
assurance as to whether satisfactory lessees could be found or as to the terms
or conditions on which the Company would be able to enter into new leases with
such lessees.
The Company's Dependence on the Lessees and Managers for Revenue. The
Company will be dependent upon the Lessees for its revenue, and the Lessees'
ability to pay rent to the Company will be substantially dependent upon the
Managers' ability to operate the Hotels profitably.
No Limitation on Debt. There are no limitations in CRFLT's or the
Company's organizational documents which limit the amount of indebtedness either
may incur.
Risks of Leverage. The Company has substantial indebtedness. As of
September 12, 1997, on a pro forma basis assuming the Full Consolidation
Scenario, the Company had outstanding indebtedness totaling $780 million. The
Company's business is capital intensive and the Company will have significant
capital requirements in the future. The Company's leverage level could affect
its ability to (i) obtain financing in the future, (ii) undertake refinancings
on terms and subject to conditions deemed acceptable by the Company, (iii) make
distributions to partners, (iv) pursue its acquisition strategy or (v) compete
effectively or operate successfully under adverse economic conditions.
Relinquishment of Potential Refinancing Proceeds. A CBM1 Limited
Partner's share of potential refinancing proceeds, if any should occur during
the term of CBM1, could be higher than what a limited partner might realize,
following the Initial Holding Period, from a sale of Common Shares received
pursuant to the Unit Redemption Right.
Rental Revenues from Hotels Subject to Rights of Lenders. In accordance
with the loan agreements with respect to outstanding indebtedness of CBM1 and
the other Hotel Partnerships, the rental
CBM1 Supp-5
<PAGE>
revenues received by the Company under the Leases will first be used to satisfy
the debt service on such outstanding indebtedness and any cash flow remaining
thereafter will be available to satisfy all other obligations of the Company
(including paying property taxes and insurance, funding the required FF&E
reserves for the Hotels and capital improvements) and to make distributions to
partners (including CRFLT).
Ownership Limitations. No person may own in excess of 9.9% of the
number or value of outstanding Common Shares of CRFLT, without the consent of
the Board of Trustees of CRFLT, in its sole and absolute discretion. During the
period of time subsidiaries of Host are acting as Lessees, Host and its
affiliates are prohibited from owning in excess of 4.9% (by value) of the
Company.
Majority Vote of CBM1 Limited Partners Binds All CBM1 Limited Partners.
Approval of the Consolidation by CBM1 Limited Partners holding a majority of the
outstanding Partnership Units of CBM1 will cause CBM1 to participate in the
Consolidation, and such approval will bind all CBM1 Limited Partners, including
CBM1 Limited Partners who voted against or abstained from voting with respect to
the Consolidation.
Assumptions Used in Determining Tax Consequences of the Consolidation.
In preparing the estimates set forth below in the section entitled "Federal
Income Tax Considerations," the Company and the Hotel Partnership GP made
several key assumptions described in such section. If any of these assumptions
are not accurate with respect to a particular CBM1 Limited Partner, the tax
consequences of the Consolidation with respect to such CBM1 Limited Partner
could be materially affected (e.g., the Consolidation could result in the
recognition of income or gain with respect to such CBM1 Limited Partner). See
"Federal Income Tax Considerations -- Assumptions Used in Determining the Tax
Consequences of the Consolidation."
Disguised Sale Considerations. The Company has assumed that liabilities
of CBM1 will not result in disguised sale treatment for federal income tax
purposes so long as the liabilities are "qualified liabilities." The Hotel
Partnership GP believes that all of the liabilities of CBM1 will qualify as
"qualified liabilities," but that approximately $31,750,000 (the amount of the
existing first mortgage loan that was incurred to finance the distribution made
to CBM1 Limited Partners on March 21, 1997) qualifies only because the facts
clearly establish that it was not incurred in anticipation of the Consolidation.
There can be no assurance that the IRS will not disagree with this position. For
a discussion of the consequences of disguised sale treatment, see "Federal
Income Tax Considerations -- Tax Consequences of the Formation of the Company --
Disguised Sale Regulations -- Effect of Disguised Sale Characterization," in the
Consent Solicitation.
Application of the "At Risk" Rules. CBM1 Limited Partners who acquired
their CBM1 Partnership Units prior to January 1, 1987 currently are not subject
to the "at risk" provisions of the Code with respect to the Hotels owned by CBM1
that were acquired before January 1, 1987. As a result of the Consolidation, all
CBM1 Limited Partners will be subject to the "at risk" rules with respect to
their entire investment in the Company. See "Federal Income Tax Considerations
- -- Tax Treatment of Limited Partners Who Hold Units Following the Consolidation
- -- Application of the "At Risk" Rules."
Effect of Subsequent Events upon Recognition of Gain. Even though the
CBM1 Limited Partners who do not receive Notes as a result of exercising
Dissenters' Rights generally are not expected to recognize significant taxable
gain at the time of the Consolidation, there are a variety of events and
transactions (including the sale of one or more of the Hotels or the reduction
of indebtedness securing one or more of the Hotels) that could cause a CBM1
Limited Partner to recognize all or a part of the gain that otherwise has been
deferred through the Consolidation. See "Federal Income Tax Considerations --
Tax Consequences of the Formation of the Company -- Effect of Subsequent
Events." The Partnership Agreement does not impose any restrictions on the
Company's ability to dispose of the Hotels or to refinance debt secured by the
Hotels, other than with respect to the Courtyard Hotels (which restriction can
be waived with the consent of Host). In addition, the Partnership Agreement
expressly provides that CRFLT, as general partner of the Company, is not
required to take into account the tax consequences of the limited partners in
deciding whether to cause the Company to undertake specific transactions and the
limited partners have no right to approve or disapprove such transactions. See
"Description of Units -- Sales of Assets and Lock-out Provisions."
Failure of the Company to Qualify as a Partnership for Tax Purposes.
Taxation of the Company as a corporation if it fails to qualify as a
partnership, and the Company's subsequent liability for federal, state and local
taxes on its income and property, would, among other things, have the effect of
reducing cash available for distribution to holders of Units, would cause CRFLT
to fail to qualify as a REIT for tax purposes, and could cause the holders of
Units to recognize taxable gain at the time the Company ceases to qualify as a
partnership.
CBM1 Supp-6
<PAGE>
Failure of CRFLT to Qualify as a REIT for Tax Purposes. Taxation of
CRFLT as a corporation if it fails to qualify as a REIT, and CRFLT's subsequent
liability for federal, state and local taxes on its income and property, would,
among other things, have the effect of reducing cash available for distribution
to CRFLT's shareholders and reducing materially the value of the Common Shares
and Units.
State and Local Taxes. CBM1 Limited Partners holding Units may be
subject to state and local taxation in a number of jurisdictions in which the
Company directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this regard, immediately
following the Consolidation, the Company will own properties in 35 states across
the United States. Currently, CBM1 owns properties in 16 states.
Dissenting Partners Have No Cash Appraisal Rights and May Elect to
Receive Only Notes. CBM1 Limited Partners who vote against the Consolidation
and comply with certain specified procedures ("Dissenting Partners") will not
have a right to receive cash based on an appraisal of their interests in CBM1 or
otherwise, but instead can elect to tender the Units they receive in the
Consolidation in exchange for unsecured seven-year notes (the "Notes"), for
which there will be no public market, in an amount equal to the Liquidation
Value of their Hotel Partnership Interests. If the Notes are sold, they may sell
at prices substantially below their issuance price. Noteholders are likely to
receive the full face amount of the Notes only if they hold the Notes to
maturity, which is approximately seven years after the Consolidation, or if the
Company repays or refinances the Notes at or prior to maturity or realizes net
sales or excess refinancing proceeds from Hotels owned by a Noteholder's former
Hotel Partnership. Because the Notes are unsecured obligations of the Company,
they will be effectively subordinate to all secured debt of the Company and all
obligations of the Hotel Partnerships which will be the owners of the Hotels. As
of September 12, 1997, on a pro forma basis assuming the Full Consideration
Scenario, the Company would have had aggregate consolidated liabilities to which
the Notes were effectively subordinated of approximately $939 million. See
"Rights of Dissenting Partners" and "Description of the Notes."
Expected Benefits of the Consolidation
The Hotel Partnership GP believes that participating in the
Consolidation would likely be beneficial to the CBM1 Limited Partners for the
reasons set forth below. This information is qualified by and should be read in
conjunction with the information in the Consent Solicitation under "Background
and Reasons for the Consolidation -- Expected Benefits of the Consolidation."
These benefits, which should be viewed as alternatives to continuing the
business and operations of CBM1, are expected to include:
. Enhanced Liquidity of Investment. The Consolidation will offer
CBM1 Limited Partners significantly enhanced liquidity with
respect to their investments in CBM1 because, after expiration of
the Initial Holding Period, CBM1 Limited Partners would be able
to exercise their Unit Redemption Right (subject to certain
limited exceptions) and receive, at CRFLT's election, either
freely tradeable Common Shares of CRFLT or the cash equivalent
thereof. The exercise of the Unit Redemption Right, however,
would result in recognition of taxable income or gain at that
time.
. Public Market Valuation of Assets. The Hotel Partnership GP
believes that the public market valuations of the equity
securities of many publicly traded real estate companies,
including REITs that focus on the lodging industry, are in part
based upon the growth potential of such companies and currently
exceed the private market values of their real estate assets.
There can be no assurance, however, that the Common Shares of
CRFLT will
CBM1 Supp-7
<PAGE>
trade at a premium to the private market values of the Hotels or
that the relative pricing differential will not change or be
eliminated in the future.
. Regular Quarterly Cash Distributions. The Hotel Partnership GP
expects that the Company will make regular quarterly cash
distributions to holders of Units in proportion to their
percentage interests in the Company. While these distributions
may not be higher than CBM1's current distributions, the ability
to receive distributions quarterly and in regular amounts would
be enhanced.
. Substantial Tax Deferral. The Hotel Partnership GP expects that
CBM1 Limited Partners who do not exercise Dissenters' Rights
generally should be able to obtain the benefits of the
Consolidation while continuing to defer recognition for federal
income tax purposes of at least a substantial portion, if not
all, of the gain with respect to their interests in CBM1 that
otherwise would be recognized in the event of a liquidation of
CBM1 or a sale or other disposition of its Hotels in a taxable
transaction. Thereafter, such CBM1 Limited Partners generally
should be able to defer at least a substantial portion of such
built-in gain until (i) they elect to exercise their Unit
Redemption Right, (ii) the Hotels currently owned by CBM1 are
sold or otherwise disposed of in a taxable transaction by the
Company or (iii) the debt now secured by the Hotels owned by CBM1
is repaid, prepaid or substantially reduced. In the case of the
Hotels owned by CBM1, the Partnership Agreement imposes certain
restrictions on the sale or refinancing of those Hotels and the
prepayment or reduction of the debt secured by those Hotels for
the ____ year period beginning with the consummation of the
Consolidation without the consent of Host in order to defer the
recognition of gain, which gain would be disproportionately borne
by the Hotel Partnership GP because of prior allocations to it of
tax losses. The federal income tax consequences of the
Consolidation are highly complex and, with respect to each CBM1
Limited Partner, are dependent upon many variables, including the
particular circumstances of such CBM1 Limited Partner. See
"Federal Income Tax Considerations -Tax Consequences of the
Formation of the Company." Each CBM1 Limited Partner is urged to
consult with his own tax advisors as to the consequences of the
Consolidation in light of his particular circumstances.
. Risk Diversification. The consolidation of the Hotels, as well as
future hotel acquisitions by the Company, will diversify the
investment risks to CBM1 Limited Partners over a broader group of
hotels, geographic locations, range of product types and market
segments and will reduce the dependence of an investment upon the
performance of, and the exposure to the risks associated with,
the 50 Courtyard Hotels currently owned by CBM1 and the single
market segment (moderate-priced limited service) in which CBM1
currently operates.
. Reduction in Leverage and Interest Costs. Upon consummation of
the Consolidation and the Offering, it is expected that the
aggregate amount of consolidated indebtedness of the Company will
be reduced, by application of a portion of the net proceeds from
the Offering, by between approximately $390 million and $539
million (excluding prepayment and defeasance costs which also
will be required to be paid), depending upon the Hotel
Partnerships which participate in the Consolidation and the
proceeds raised in the Offering, resulting in significant
interest and debt service savings and reduced overall leverage
levels for Limited Partners of the Hotel Partnerships. The
current outstanding indebtedness of CBM1 will remain outstanding
following the Consolidation. The Company will be less leveraged
than CBM1 is currently.
. Growth Potential. The Hotel Partnership GP believes that
substantial opportunities exist to acquire or develop limited
service and extended-stay hotel properties at attractive prices
and that CBM1 is not in a position to take advantage of such
opportunities because of its lack of access to additional sources
of capital on favorable terms and restrictions on additional
acquisitions and development imposed by its partnership
agreement. In addition, the
CBM1 Supp-8
<PAGE>
Company's structure and capitalization as part of an UPREIT
should provide it with substantial flexibility to structure
acquisitions of additional hotels utilizing debt, cash, Units or
Common Shares (or any combination thereof), which may permit the
Company to structure acquisitions of hotel properties on an
income tax-deferred basis to sellers.
. Greater Access to Capital. With publicly traded securities, a
larger base of assets and a greater equity value than CBM1
individually, CRFLT expects to have greater access to the capital
necessary for funding the operations of the Company and
consummating acquisitions on more attractive terms than would be
available to CBM1 individually. This greater access to capital
should provide greater financial stability to the Company and
reduce the level of risk associated with refinancing existing
loans upon maturity, as compared to CBM1 individually.
Determination of Exchange Values and Allocation of Units
The Company and the Hotel Partnership GP established the Exchange Value
for the equity interests in CBM1 by (i) obtaining an independent appraisal of
the value of the Hotels owned by CBM1, as of ________ __, 1998 (the "Appraised
Value"), as disclosed below; (ii) adding the amount of other assets (such as
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables) and cash reserves), net of liabilities (excluding
mortgage and other debt and deferred management fees) ("Net Other Assets") as of
__________ __, 1998 (the "Initial Valuation Date"); (iii) subtracting the
estimated balance of the mortgage debt owed by CBM1 as of June 30, 1998, which
is the estimated closing date for the Consolidation; (iv) subtracting the
estimated balance of other debt of CBM1 as of June 30, 1998; (v) adjusting for
the estimated prepayment and defeasance costs; (vi) subtracting the amount of
deferred management fees payable to the Manager under the CBM1 Management
Agreement for CBM1's Hotels; (vii) subtracting an amount equal to the estimated
cost to complete any deferred maintenance items identified in the engineer's
report relating to CBM1's Hotels; (viii) subtracting an amount equal to the
estimated cost (if any) of bringing the condition of FF&E at CBM1's Hotels to
normal levels; (ix) subtracting CBM1's pro rata share (based upon relative
Exchange Values) of estimated Consolidation Expenses and (x) making certain
other adjustments.
Prior to the distribution of the Last Preliminary Prospectus in the
Offering, a final determination of the Exchange Values will be made, as of the
date that is the end of the most recent accounting period that has ended at
least ___ days prior to the date on which the Last Preliminary Prospectus is
distributed to investors (the "Final Valuation Date") to reflect (i) the amount
of Net Other Assets, the actual principal balances of mortgage and other debt
(including an adjustment for prepayment and defeasance costs) and the amount of
deferred management fees payable, (ii) any amounts actually expended by CBM1
after the Initial Valuation Date to perform deferred maintenance or make up FF&E
shortfalls previously subtracted in determining the estimated Exchange Value of
CBM1 and (iii) any revised estimate and allocation of Consolidation Expenses.
The actual value of Units issued to Partners in each Participating Hotel
Partnership will be based on these Exchange Values.
The Hotels were appraised as of ______ __, 1998, by AAA, an
independent, nationally recognized hotel valuation and financial advisory firm
experienced in the appraisals of lodging properties such as the Hotels. Each
appraisal (an "Appraisal") was reviewed by an MAI appraiser and certified by
such MAI appraiser as having been prepared in accordance with the requirements
of the Standards of Professional Practice of the Appraisal Institute and the
Uniform Standards of Professional Appraisal Practice of the Appraisal
Foundation. The Appraisals are not guarantees of present or future values, and
no assurance can be given as to the actual value of the Hotels. The Appraisals
should be read in conjunction with other information, such as, but not limited
to, the audited financial statements of CBM1.
CBM1 Supp-9
<PAGE>
Appraised Value of Hotels Owned by CBM1
(Dollars in thousands)
Appraised Value ................................................. $__________
Calculation of Estimated Exchange Value
as of Initial Valuation Date
(Dollars in thousands)
Appraised Value $
Net Other Assets
Mortgage debt
Other debt
Prepayment penalties
and/or defeasance costs
Deferred management fees
Deferred maintenance costs
FF&E shortfall
Consolidation Expenses
Other adjustments/(1)/
Exchange Value $________
- ---------------------
(1) Includes environmental remediation and certain other costs.
Distribution of Units Among General and Limited Partners
Based on Estimated Exchange Values
(Dollars in thousands)
<TABLE>
<CAPTION>
Limited Partners General Partner
------------------------------- ---------------------------------
Estimated
Value of
Units per
$1,000
Limited
Estimated Estimated % Estimated % of Partner Estimated % of Estimated
Total Value of Units Received Original Units Received Value of
Hotel Partnership of Units/(1)/ Total/(2)/ by CBM1 Investment/(2)/ by CBM1 Units/(1)/
- ---------------- ------------- ------------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CBM1 $ % % $ % $
========== ============= =============== ============== =============== ===============
</TABLE>
- ----------------
/(1)/ Assumes the value of the Units is equal to the initial public offering
price of the Company's Common Shares in the Offering and that the
aggregate value of the Units received by CBM1 is just equal to (but does
not exceed) the estimated Exchange Value.
/(2)/ Represents the estimated percentage of the total value of Units allocated
to the Hotel Partnerships as a group and does not reflect the issuance of
Units to CRFLT in exchange for the proceeds of the Offering (which will
reduce the percentage of each Hotel Partnership in proportion to their
respective Exchange Values). Thus, for example, if CRFLT purchases 50% of
the Company using the proceeds received from public investors in the
Offering, then each of the percentages set forth above would be reduced by
50%. The estimated values of Units would be not affected.
CBM1 Supp-10
<PAGE>
Exchange Value of CBM1
for Allocation of Units to CBM1
as of Initial Valuation Date
<TABLE>
<CAPTION>
Per $1,000 Limited
Partner Original
Investment
----------------------------
Percent of Percent of
Estimated Aggregate Estimated Aggregate
Exchange Exchange Exchange Exchange
Description Value Value Value Value
----------- -------------- ---------- --------- -----------
(in thousands) (in dollars)
<S> <C> <C> <C> <C>
100% Participation,
No Notes Issued...................... $ % $ %
100% Participation,
Maximum Notes Issued.................
Minimum Participation,
No Notes Issued......................
Minimum Participation,
Maximum Notes Issued.................
</TABLE>
Cash Distributions
Historical Cash Distributions Paid by CBM1. The following table sets
forth the distributions paid to CBM1 Limited Partners (per $1,000 limited
partner original investment) for the periods indicated below. The information
below should be read in conjunction with the information in this Supplement
under the caption "Selected Financial Data."
Historical Cash Distributions Paid by CBM1
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended -------------------------------------------------
September 12, 1997 1996 1995 1994 1993 1992
------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
From net income.............................. $ 60 $ 20 $ -- $ -- $ -- $ 58
Representing return of capital/(1)/.......... 250 -- -- -- -- --
-------- ------- ------- ------- ------- -------
Total............................... $ 310 $ 20 $ -- $ -- $ -- $ 58
======= ======= ====== ====== ====== ======
</TABLE>
- -----------
/(1)/ Computed as all distributions in excess of distributions from operating
cash flow.
Compensation and Distributions to the Hotel Partnership GP. Under the
partnership agreement of CBM1, the Hotel Partnership GP does not receive fees or
compensation in connection with managing the affairs of the Hotel Partnership
but the Hotel Partnership GP and its affiliates are reimbursed for certain costs
and expenses incurred on behalf of CBM1. The following information has been
prepared to compare the amount of reimbursements paid and cash distributions
made by CBM1 to the Hotel Partnership GP and its affiliates to the amounts that
would have been paid if the reimbursement and distribution structure which will
be in effect after the Consolidation had been in effect for the years presented.
Following the Consolidation, CRFLT will be operated as a self-
administered REIT and as a result no reimbursements or other compensation will
be received by the Hotel Partnership GP other than
CBM1 Supp-11
<PAGE>
distributions on Units received in exchange for its Hotel Partnership Interests
received in the Consolidation.
During the thirty-six weeks ended September 12, 1997 and the fiscal
years 1996, 1995 and 1994, amounts actually paid by CBM1 to the Hotel
Partnership GP are shown below under "Historical" and the estimated amounts that
would have been paid had the Consolidation been in effect for the years
presented (assuming the Full Consolidation Scenario) are shown under "Pro
Forma."
Historical and Pro Forma Reimbursements and Distributions
(in thousands)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended ---------------------------------
September 12, 1997 1996 1995 1994
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Historical
Reimbursements $ 161 $ 154 $ 129 $ 163
Distributions 1,997 -- -- --
--------- ------- --------- ---------
Total Historical $ 2,158 $ 154 $ 129 $ 163
========= ======= ========= =========
Pro Forma
Reimbursements $ $ $ $
Distributions attributable to Units
--------- ------- --------- ---------
Total Pro Forma $ $ $ $
========= ======= ========= =========
</TABLE>
Certain Information Regarding Hotels Owned by CBM1
Courtyard Hotels are moderate-priced, limited service hotels aimed at
individual business and pleasure travelers, as well as families. Courtyard
Hotels typically have approximately 150 rooms with locations in suburban areas
or near airports throughout the United States. The Courtyard Hotels include
well-landscaped grounds, a courtyard with a pool and socializing areas. Each
Courtyard Hotel features meeting rooms and a restaurant and lounge with
approximately 80 seats. CBM1's Courtyard Hotels have substantially matured and
are operating at high occupancy rates.
<TABLE>
<CAPTION>
Location of Hotel Number of Rooms Date Opened
------------------ --------------- -----------
<S> <C> <C>
Montgomery, AL 146 1987
Phoenix Airport, AZ 145 1987
Buena Park, CA 145 1986
Fremont, CA 146 1987
Pleasanton, CA 145 1986
Sacramento-Rancho Cordova, CA 144 1987
San Francisco Airport, CA 147 1986
Santa Ana, CA 145 1987
Windsor, CT 149 1987
Melbourne, FL 146 1987
Miami Airport-West, FL 145 1987
Tallahassee, FL 154 1987
Atlanta-Delk Road, GA 146 1986
Atlanta-Executive Park, GA 145 1987
Atlanta-Northlake, GA 128 1984
Atlanta-Peachtree Corners, GA 131 1985
Atlanta-Peachtree Dunwoody, GA 128 1983
Atlanta-Windy Hill, GA 127 1983
</TABLE>
CBM1 Supp-12
<PAGE>
<TABLE>
<CAPTION>
Location of Hotel Number of Rooms Date Opened
------------------ --------------- -----------
<S> <C> <C>
Augusta, GA 130 1985
Columbus, GA 139 1985
Savannah, GA 144 1986
Naperville, IL 147 1986
Hunt Valley, MD 146 1986
Landover, MD 152 1986
Rockville, MD 147 1987
Dearborn, MI 147 1987
Southfield, MI 147 1986
Troy, MI 147 1986
Warren, MI 147 1986
Tarrytown, NY 139 1987
Charlotte-Arrowood Road, NC 146 1987
Raleigh-Wake Forest Road, NC 153 1986
Cincinnati-Blue Ash, OH 149 1986
Columbus-Dublin, OH 147 1986
Columbus-Worthington, OH 145 1987
Valley Forge, PA 150 1987
Brentwood, TN 145 1986
Memphis-Park Avenue East, TN 146 1986
Arlington, TX 147 1986
Bedford, TX 145 1987
Dallas-Addison, TX 145 1987
Dallas-Las Colinas, TX 147 1986
Dallas-LBJ Northwest, TX 146 1987
San Antonio Airport, TX 145 1987
San Antonio-Medical Center, TX 146 1987
Fair Oaks, VA 144 1986
Herndon, VA 146 1987
Hampton, VA 146 1987
Richmond, VA 145 1986
Virginia Beach, VA 146 1987
-----
TOTAL 7,223
=====
</TABLE>
The chart below sets forth certain performance information for
CBM1's Courtyard Hotels for the indicated periods.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
-------------------- ------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of properties........... 50 50 50 50 50
Number of rooms................ 7,223 7,223 7,223 7,223 7,223
Average daily rate............. $81.25 $76.89 $76.39 $71.23 $66.32
Occupancy...................... 82.2% 81.2% 79.2% 81.0% 81.4%
REVPAR......................... $66.81 $62.41 $60.52 $57.67 $53.98
% REVPAR change................ 7.1% -- 4.9% 6.8% --
</TABLE>
CBM1 Supp-13
<PAGE>
Amendments to the Partnership Agreement of CBM1
Transfer of Interests in the Hotel Partnerships to the Company
--------------------------------------------------------------
Immediately Prior to the Consummation of the Consolidation. For federal income
- ----------------------------------------------------------
tax purposes, immediately prior to the consummation of the Consolidation, each
Hotel Partnership GP will contribute a one percent partnership interest in the
Hotel Partnership to the Company in exchange for Units reflecting the estimated
Exchange Value attributable to such one percent interest. The Hotel Partnership
GP of CBM1 owns both limited partner and general partner interests. In order to
contribute a one percent partnership interest in CBM1 to the Company, an
amendment to change the requirements for assignments of limited partner
interests is required. Section 7.01 of the partnership agreement for CBM1 will
be amended to delete paragraph A restricting assignment of limited partnership
interests to the first day of an Accounting Period (as defined in the
partnership agreement of CBM1).
The consent of a majority of the outstanding limited partner interests
in CBM1 is required to amend Section 7.01 of the respective partnership
agreements. The Hotel Partnership GP is prohibited from voting its 1.25% limited
partner interests.
Permit CBM1 to Enter into the Lease with the Lessee. The Lease for
---------------------------------------------------
CBM1's Hotels must be entered into not later than the close of business on the
business day immediately preceding the Closing Date. Therefore, the partnership
agreement of CBM1 must be amended to allow CBM1 to enter into the Lease with the
Lessee. Currently, there is no provision in the partnership agreement for CBM1
to allow CBM1 to enter into a lease of its Hotels. In order to allow CBM1 to
enter into the Lease, the partnership agreement of CBM1 must be amended to allow
for such a transaction. Therefore, Section 5.02B of the partnership agreement of
CBM1 must be amended to add a new paragraph (ix) to read as follows:
(ix) sell, lease or otherwise dispose (or consent to the sale,
lease or other disposition), directly or indirectly, in one
transaction or a series of related transactions of any or all
of the Hotels.
The vote required for such amendment is the consent of a majority of
the outstanding limited partnership interests of CBM1. The Hotel Partnership GP
is prohibited from voting any of its 1.25% limited partner interests for such
amendment.
Other Amendments. Amendments to certain terms and sections of the
----------------
partnership agreement of CBM1 would be made in order to (a) delete certain
obsolete references to entities and agreements that are no longer in existence,
(b) update the partnership agreement to reflect the passage of time since the
formation of CBM1 and (c) make any other amendments to the partnership agreement
necessary or advisable to consummate the Consolidation. The Hotel Partnership GP
does not believe that these amendments would affect the rights of the Limited
Partners in any material respect nor the duties and obligations of the Hotel
Partnership GP. These changes are included, along with the other proposed
amendments, in the copy of the partnership agreement, as proposed to be amended,
which is attached hereto. The amended partnership agreement is marked to
indicate the revisions made to the existing partnership agreement and should be
read in its entirety. Deleted provisions are contained in brackets and struck
through and added provisions are in bold type and underlined.
The Hotel Partnership GP recommends that the CBM1 Limited Partners vote
to approve the requested amendments to the partnership agreement of CBM1.
Fairness
General. There are no material differences with respect to the fairness
of the Consolidation to the Hotel Partnerships, individually or in the
aggregate. Therefore, the discussion of the fairness of the Consolidation set
forth below is intended to summarize the Hotel Partnership GP's belief as to
fairness and
CBM1 Supp-14
<PAGE>
the material factors on which such belief is based. For a more detailed
discussion of the fairness of the Consolidation, see the section entitled
"Fairness Analysis and Opinion" in the Consent Solicitation.
Hotel Partnership GP's Belief as to Fairness. The Hotel Partnership GP
believes that the terms of the Consolidation provide substantial benefits and
are fair to the CBM1 Limited Partners and recommends that all CBM1 Limited
Partners vote FOR the Consolidation. In arriving at this conclusion, the Hotel
Partnership GP has relied primarily on the following factors, as well as others
described under "Fairness Analysis and Opinion -- Fairness Analysis" in the
Consent Solicitation: (i) its view that the expected benefits of the
Consolidation for the CBM1 Limited Partners outweigh the risks and potential
detriments to the CBM1 Limited Partners (see "Background and Reasons for the
Consolidation -- Reasons for the Consolidation" in the Consent Solicitation),
(ii) its view that the estimated Exchange Value established for CBM1 and the
resulting value allocable to the CBM1 Limited Partners represent fair
consideration for the interests held by the CBM1 Limited Partners and is fair to
such CBM1 Limited Partners from a financial point of view and (iii) the Fairness
Opinion of AAA as described below.
Basis for Hotel Partnership GP's Belief as to Fairness.
Comparison of Alternatives. To assist CBM1 Limited Partners in
evaluating the Consolidation, the Hotel Partnership GP has attempted to compare
the estimated value of Units to be received in the Consolidation with: (i) the
face amount of Notes that will be issued to Dissenting Partners who elect to
exchange the Units they receive in the Consolidation for Notes; (ii) estimates
of the value of the CBM1 Interests assuming that CBM1 continues as an operating
business and its assets are sold in ten years (the "Continuation Value"); and
(iii) estimates of the value of the Hotel Partnership Interests in CBM1 on a
liquidation basis, assuming that CBM1's Hotels are sold at their Appraised
Values and the net proceeds (together with its net other assets), after payment
of debts and other obligations (including defeasance costs or prepayment
penalties and deferred management fees) and an allowance for liquidation costs,
expenses and contingencies equal to 2% of the Appraised Values of the Hotels
(the "Liquidation Value"), are distributed to the CBM1 Partners in accordance
with the CBM1 partnership agreements. The Hotel Partnership GP has not attempted
to estimate the value of Hotel Partnership Interests in CBM1 following a
standalone UPREIT reorganization because the Hotel Partnership GP does not
believe such a reorganization is feasible and such valuation estimates would be
subject to substantial uncertainties. Since the estimated value of the Units and
the estimated values under the alternatives to the Consolidation are dependent
upon a number of estimates, variables and assumptions, as well as varying market
conditions, no assurance can be given that the estimated values indicated could
be realized. However, the Hotel Partnership GP believes that analyzing the
alternatives in terms of estimated values, based upon currently available market
data and reasonable estimates and assumptions, establishes a reasonable basis
for comparing the Units to the alternatives. The results of this comparative
analysis (including the methodology and assumptions used to derive estimated
values) are summarized under "Background and Reasons for the Consolidation --
Comparison of Alternative Consideration" and "Fairness Analysis and Opinion --
Comparison of Alternatives" in the Consent Solicitation.
The original offering document of CBM1 stated that while the Hotel
Partnership GP is obligated to investigate the possibility of increasing the
transferability of Partnership Units (including listing such Units on a national
or regional securities exchange or quoting the Units on an automated quotations
system), it was not under any obligation to effect a method of increasing
transferability or submitting such method to a vote. Changes in the Code
subsequent to the original offering and the inability of the CBM1 Partnership
Units to qualify under the listing requirements of the NYSE or American Stock
Exchange made such a listing impracticable.
The following table summarizes the results of the comparative analysis
described above. There can be no assurance, however, that the actual value of
Units received in the Consolidation, the actual face amount of Notes offered to
Dissenting Partners, the actual value of continuing CBM1 or the actual net
liquidation proceeds would not differ substantially from those estimated for
purposes of this analysis.
CBM1 Supp-15
<PAGE>
Summary of Comparative Valuation Alternatives/(1)/
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Face Amount of
Notes
Estimated Offered to Estimated Estimated Liquidation
Value Dissenting Continuation Value if Assets Sold
Hotel Partnership of Units/(2)/ Partners/(3)/ Value/(4)/ at Appraised Value/(5)/
- ----------------- ------------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C>
CBM1............... $ $ $ $
</TABLE>
- -----------------
/(1)/ A limited partner original investment of $1,000 equates to 1/100th of a
Partnership Unit in CBM1.
/(2)/ Assumes that CBM1 is allocated Units with a value equal only to its
estimated Exchange Value. The amounts in this column represent the
portion of the estimated Exchange Value of CBM1 that would be allocable
to Limited Partners per $1,000 limited partner original investment.
/(3)/ The amounts in this column are equivalent to the portion of the
Liquidation Value of CBM1 that would be reflected in the Notes to be
issued to CBM1 Dissenting Partners per $1,000 limited partner original
investment. See footnote (5) below.
/(4)/ The amounts in this column represent the estimated amount that would be
distributed to CBM1 Limited Partners per $1,000 limited partner original
investment if CBM1 was continued for ten years and then sold for its
estimated value, determined using a discounted cash flow analysis applied
to the anticipated cash flows from the operation and sale of each Hotel
and taking into account the terms of existing debt obligations (the
"Continuation Value").
/(5)/ The amounts in this column represent the amount that would be distributed
to CBM1 Limited Partners per $1,000 limited partner original investment
if CBM1 sold its Hotels at their Appraised Values as of _____ __, 1998,
and distributed the net proceeds (after payment of debts and other
obligations (including defeasance costs or prepayment penalties and
deferred management fees) and an allowance for liquidation costs,
expenses and contingencies equal to 2% of the Appraised Value of the
Hotels) (the "Liquidation Value"), in accordance with its partnership
agreement.
Fairness Opinion. AAA, an independent, nationally recognized hotel
valuation and financial advisory firm, has rendered the Fairness Opinion,
attached as Appendix B to the Consent Solicitation, which concluded that: (i)
the methodologies used to determine the Exchange Value of each Hotel Partnership
and to allocate the Units among each of the Hotel Partnerships are fair, from a
financial point of view, to the Limited Partners of each Hotel Partnership; (ii)
the underlying assumptions used to determine the Exchange Value of each Hotel
Partnership and the purchase price of each Acquisition Hotel (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) are fair and reasonable from the standpoint of
each Hotel Partnership; (iii) the methodology used to allocate Units received
by each Hotel Partnership among its general and Limited Partners is fair and
reasonable to the Limited Partners; (iv) the methodology and the underlying
assumptions used to determine the Continuation Value and the Liquidation Value
of each Hotel Partnership (including, without limitation, the assumptions used
to determine the various adjustments to the Appraised Values of the Hotels) are
fair and reasonable from the standpoint of each Hotel Partnership and (v) the
economic terms of the Leases are fair and reasonable from the standpoint of the
Company. See "Fairness Analysis and Opinion -- Fairness Opinion" in the Consent
Solicitation.
Federal Income Tax Considerations
In addition to the federal income tax considerations discussed in the
sections of the Consent Solicitation entitled "Federal Income Tax
Considerations" and "Risk Factors -- Federal Income Tax Risks," CBM1 Limited
Partners should read carefully the following discussion of federal income tax
considerations applicable specifically to the CBM1 Limited Partners. The
numerical data and estimates included in this
CBM1 Supp-16
<PAGE>
discussion are based on various factual assumptions and information which are
believed by the Company and the Hotel Partnership GP to be reliable. However,
some of these assumptions inevitably will not materialize, and unanticipated
events and circumstances will occur. Therefore, there likely will be differences
between the numerical data and estimates included herein and actual results, and
the variations may be material and adverse.
Applicability of Tax Opinions
Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to CRFLT and the
Company, has provided to CRFLT and the Company an opinion letter (substantially
in the form of Appendix E to the Consent Solicitation) as to certain federal
income tax consequences of the Consolidation. The opinion letter is based upon
certain assumptions and certain representations provided by the CRFLT, the
Company and the Hotel Partnership GPs. These representations generally involve
factual matters relating to the organization, ownership and operations
(including the income, assets, businesses, liabilities and properties) of the
Hotel Partnerships prior to the Consolidation and of CRFLT, the Company and the
Hotel Partnerships following the Consolidation. In addition, on the Closing Date
Hogan & Hartson expects to provide to CRFLT and the Company an opinion letter
(substantially in the form of Exhibit __ to the Prospectus) as to certain
federal income tax consequences relating to the Offering. See "Federal Income
Tax Considerations -- Summary of Tax Opinions" in the Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is
substantially in the form of Appendix E to the Consent Solicitation is
applicable to the CBM1 Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code
and Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson on the Closing Date will be based on
the same authorities as of the date of the Closing. No assurance can be given
that future legislation, Treasury Regulations, administrative interpretations
and court decisions will not significantly change the law or the above
conclusions reached by counsel. In addition, any such change could apply
retroactively to transactions preceding the date of change. Moreover, opinions
of counsel merely represent counsel's best judgment with respect to the probable
outcome on the merits and are not binding on the IRS or the courts. Accordingly,
even if there is no change in applicable law, no assurance can be provided that
such opinions (which do not bind the IRS or the courts) will not be challenged
by the IRS or will not be sustained by a court if so challenged. Neither CRFLT ,
the Company nor the Hotel Partnership GPs have requested or plan to request any
rulings from the IRS concerning the tax consequences of the Consolidation or the
treatment of either the Company or CRFLT subsequent to the Consolidation.
Tax Consequences of Formation of the Company
Overview. Hogan & Hartson has provided an opinion to the effect that
--------
the formation of the Company will not result in the recognition of taxable gain
or loss at the time of the Consolidation to a CBM1 Limited Partner (i) who does
not exercise his Unit Redemption Right on a date sooner than the date two years
after the date of the consummation of the Consolidation; (ii) who does not
receive a cash distribution (or a deemed cash distribution resulting from relief
from liabilities, including as a result of the prepayment of certain Hotel
Partnership liabilities with proceeds from the Offering) in connection with the
Consolidation in excess of his aggregate adjusted basis in his CBM1 Partnership
Unit at the time of the Consolidation; (iii) who does not receive Notes upon
exercise of Dissenters' Rights; (iv) who is not required to recognize gain by
reason of the exercise by another CBM1 Limited Partner of Dissenters' Rights and
the option to receive Notes; and (v) who does not have his "at risk" amount fall
below zero as a result of the Consolidation. See "Federal Income Tax
Considerations -- Summary of Tax Opinions" in the Consent Solicitation. With
respect to the foregoing exceptions to nonrecognition treatment, the Company and
the Hotel Partnership GP believe that a CBM1 Limited Partner who acquired his
CBM1 Partnership Units in
CBM1 Supp-17
<PAGE>
the original offering of such Units for cash and who has held such Units at all
times since (i) should not be considered to receive, as a result of the
Consolidation, a distribution (or a deemed cash distribution resulting from
relief from liabilities, including as a result of the prepayment of certain
Hotel Partnership liabilities with proceeds from the Offering) that exceeds his
aggregate adjusted basis in his CBM1 Partnership Unit at the time of the
Consolidation, and (ii) should not have his "at risk" amount fall below zero as
a result of the Consolidation. See "Federal Income Tax Considerations -- Tax
Consequences of the Formation of the Company -- Overview" in the Consent
Solicitation.
With respect to the exercise of Dissenters' Rights, Hogan & Hartson is
of the opinion that although the matter is not free from doubt, a CBM1 Limited
Partner who does not exercise Dissenters' Rights and elects to receive Notes in
connection with the Consolidation should not be required to recognize gain by
reason of another CBM1 Limited Partner's exercise of such rights. With respect
to the exercise of a Unit Redemption Right, Hogan & Hartson is of the opinion
that it is more likely than not that a CBM1 Limited Partner's exercise of his
Unit Redemption Right more than one year after the date of consummation of the
Consolidation but less than two years after such date will not cause the
Consolidation itself to be a taxable transaction for the CBM1 Limited Partner
(or the other CBM1 Limited Partners). See "Federal Income Tax Considerations --
Summary of Tax Opinions" in the Consent Solicitation. Opinions of counsel,
however, do not bind the IRS or the courts, and no assurances can be provided
that such opinions will not be challenged by the IRS or will be sustained by a
court if so challenged.
Amount of Deemed Cash Distribution. With respect to his CBM1
----------------------------------
Partnership Units, a CBM1 Limited Partner will receive no actual cash
distribution in connection with the Consolidation but will be deemed to receive
a cash distribution in connection with the Consolidation to the extent that his
share of Company liabilities immediately after the Consolidation is less than
his share of CBM1 liabilities immediately prior to the Consolidation (for
example, because of the use of proceeds from the Offering to prepay the CBM1
Certificates). See "Federal Income Tax Considerations -- Tax Consequences of the
Formation of the Company -- Relief from Liabilities/Deemed Cash Distribution" in
the Consent Solicitation. As a consequence of the Consolidation (including the
use of proceeds from the Offering to prepay certain debt of other Hotel
Partnerships), the Company and the Hotel Partnership GP believe, based upon and
subject to the assumptions and other limitations described below, that (i) the
CBM1 Limited Partners' aggregate share of indebtedness should decrease by
$______ (from $________ (on December 31, 1997) to $_________); and (ii) the
share of indebtedness of an individual CBM1 Limited Partner who acquired his
CBM1 Partnership Unit in the original offering of such Units for cash and has
held such Units at all times since should decrease by $_____ per CBM1
Partnership Unit (from $_____ (on December 31, 1997) to $_______). For a CBM1
Limited Partner who did not acquire his CBM1 Partnership Units in the original
offering of such Units for cash or who has not held his CBM1 Partnership Units
at all times since such offering, the above information could vary materially.
Estimated Amount of Taxable Gain. A CBM1 Limited Partner will recognize
--------------------------------
taxable gain as a result of the deemed cash distribution discussed in the
previous paragraph, however, only to the extent that the deemed cash
distribution exceeds his adjusted tax basis in his CBM1 Partnership Units
immediately prior to the Consolidation. As described below, the Company and the
CBM1 General Partner estimate that as of December 31, 1997, the adjusted tax
basis of a CBM1 Limited Partner who acquired his CBM1 Partnership Units in the
original offering of such Units for cash and has held such Units at all times
since was ______ per CBM1 Partnership Unit (which is greater than the deemed
cash distribution of _____ per CBM1 Partnership Unit discussed in the previous
paragraph). Accordingly, the Company and the CBM1 General Partner believe, based
upon and subject to the assumptions and other limitations described below, that
a CBM1 Limited Partner who acquired his CBM1 Partnership Units in the original
offering of such Units for cash and has held the Units at all times since should
not recognize gain due to the deemed cash distribution resulting from the relief
from liabilities in connection with the Consolidation.
The adjusted tax basis of a CBM1 Limited Partner who did not acquire
his CBM1 Partnership Units in the original offering of such Units for cash or
who has not held his CBM1 Partnership Units at all times since such offering
could vary materially from that of a Limited Partner who did so. If a CBM1
Limited
CBM1 Supp-18
<PAGE>
Partner has an adjusted tax basis in his CBM1 Partnership Units (per CBM1
Partnership Unit) that is less than the adjusted tax basis of a CBM1 Limited
Partner who acquired his CBM1 Partnership Units in the original offering of such
Units for cash and has held such Units at all times since, he could recognize
gain due to the deemed cash distribution resulting from the relief from
liabilities in connection with the Consolidation.
Disguised Sale Considerations. As described in the Consent Solicitation
-----------------------------
(see "Federal Income Tax Considerations -- Tax Consequences of Formation of the
Company -- Disguised Sale Regulations -- Impact of Assumption of Liabilities by
the Company"), an assumption of liabilities in connection with a contribution of
property to a partnership will not result in disguised sale treatment so long as
the liabilities are "qualified liabilities." The CBM1 General Partner believes
that all of the liabilities of CBM1 will qualify as "qualified liabilities," but
approximately $31,750,000 (the amount of the existing first mortgage loan that
was incurred to finance the distribution made to CBM1 Limited Partners on March
21, 1997) qualifies only because the facts clearly establish it was not incurred
in anticipation of the Consolidation. As described in "Federal Income Tax
Considerations -- Tax Consequences of Formation of the Company -- Disguised Sale
Regulations -- Impact of Assumption of Liabilities by the Company," CBM1 and
each CBM1 Limited Partner will be required to make disclosure in its tax return
for the year in which the Consolidation occurs as to that portion of CBM1's
liabilities. There can be no assurance that the IRS will not disagree with the
CBM1 General Partner's position that the facts clearly establish that the
approximately $31,750,000 portion of the mortgage debt was not incurred in
anticipation of the Consolidation. For a discussion of the consequences of
disguised sale treatment, see "Federal Income Tax Considerations -- Tax
Consequences of Formation of the Company -- Disguised Sale Regulations -- Effect
of Disguised Sale Characterization" in the Consent Solicitation.
Tax Treatment of CBM1 Limited Partners Who Hold Units Following the
Consolidation
Initial Basis in Units. In general, a CBM1 Limited Partner will have an
----------------------
initial tax basis in his Units ("Initial Basis") received in the Consolidation
with respect to his CBM1 Partnership Units equal to the basis in his CBM1
Partnership Units at the time of the Consolidation, reduced to reflect any
deemed cash distributions resulting from a reduction in his share of CBM1
liabilities and increased to reflect any gain required to be recognized in
connection with the Consolidation. As of December 31, 1997, a CBM1 Limited
Partner who acquired his CBM1 Partnership Units in the original offering of such
Units for cash and has held such Units at all times since, had an adjusted tax
basis in his CBM1 Partnership Units of $____ per CBM1 Partnership Unit (after
giving effect to the Consolidation, including the prepayment of indebtedness
contemplated in connection therewith). Based upon and subject to the assumptions
and other limitations described below, the Company and the CBM1 General Partner
believe that the tax basis of such a CBM1 Limited Partner in his Units received
in the Consolidation with respect to his CBM1 Partnership Units would be $____
per CBM1 Partnership Unit. For a CBM1 Limited Partner who did not acquire his
CBM1 Partnership Units in the original offering of such Units for cash or who
has not held his CBM1 Partnership Units at all times since such offering, the
above information could vary materially. For a discussion of the federal income
tax considerations for a Limited Partner from a reduction in basis that may
result from the Consolidation, see "Federal Income Tax Considerations -- Tax
Consequences of Formation of the Company -- Initial Tax Basis of Units" in the
Consent Solicitation.
Tax Allocations with Respect to Contributed Hotels upon a Sale of CBM1
----------------------------------------------------------------------
Hotels. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
- ------
attributable to appreciated or depreciated property that is contributed to a
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with, or benefits from, the unrealized gain or
unrealized loss associated with the property at the time of contribution. The
amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the time
of contribution and the adjusted tax basis of such property at the time of
contribution (referred to as "Book-Tax Difference"). The Company and the Hotel
Partnership GP, based upon and subject to the assumptions and other limitations
described below, estimate that the Book-Tax Difference of the CBM1 Hotels will
be $________ upon the consummation of the Consolidation.
CBM1 Supp-19
<PAGE>
In the event that the Company were to sell all of the CBM1 Hotels, the
Partners of CBM1 would be specially allocated by the Company an amount of
taxable gain equal to the Book-Tax Difference with respect to the CBM1 Hotels ($
____ in the aggregate if the CBM1 Hotels were sold immediately after the
consummation of the Consolidation, according to the estimate in the previous
paragraph). The share of such gain allocable to a CBM1 Limited Partner who
acquired his CBM1 Partnership Units in the original offering of such Units for
cash and held such Units at all times since would be $___ per CBM1 Partnership
Unit. The share of such gain of a CBM1 Limited Partner who did not acquire his
CBM1 Partnership Units in the original offering of such Units for cash or who
has not held his CBM1 Partnership Units at all times since such offering could
vary materially from this amount. If the Company were to sell one or more, but
not all, of the CBM1 Hotels, the former Partners of CBM1 would be specially
allocated by the Company an amount of taxable gain equal to that portion of the
Book-Tax Difference for the CBM1 Hotels that is attributable to the CBM1 Hotel
or Hotels sold. It should be noted that the Partnership Agreement precludes the
Company from selling any of the CBM1 Hotels during the __-year period commencing
immediately after the Consolidation (other than pursuant to a tax-free
exchange), unless either (i) the CBM1 General Partner disposes of the Units
received in the Consolidation in a taxable transaction or (ii) the Company
receives the consent of Host to sell CBM1 Hotels. Host may provide such consent
in its sole discretion. See "Federal Income Tax Considerations -- Tax Treatment
of Limited Partners Who Hold Units Following the Consolidation -- Sale of
Individual Hotels" in the Consent Solicitation.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
------------------------------------------------------------
allocations of depreciation to the CBM1 Limited Partners will change
significantly as a result of the Consolidation for two reasons. First, as
described above, pursuant to Section 704(c) of the Code, depreciation and
deductions attributable to the CBM1 Hotels will be required to be allocated for
federal income tax purposes in a manner such that the CBM1 Partners are charged
with the Book-Tax Difference associated with the CBM1 Hotels at the time of the
consummation of the Consolidation. Consequently, a CBM1 Limited Partner will be
allocated less depreciation with respect to the CBM1 Hotels than would be the
case if the Consolidation had not occurred and the CBM1 Limited Partner had
continued to hold his CBM1 Partnership Units. Second, the Consolidation will
cause the technical termination of CBM1 and each of the other Hotel Partnerships
under Section 708(b)(1)(B) of the Code. Section 168(i)(7) of the Code provides,
in effect, that when a partnership terminates under Section 708(b)(1)(B) of the
Code, the partnership must begin new depreciation periods for its property. As a
result, the remaining bases of the CBM1 Hotels and the Hotels held by the other
Hotel Partnerships will be depreciated over 39 years, rather than over the
remaining current life of such Hotels (which ranges from 8 years to 25 years).
See "Federal Income Tax Considerations -- Tax Treatment of Limited Partners Who
Hold Units Following the Consolidation -- Effect of Consolidation on
Depreciation" in the Consent Solicitation.
To illustrate the consequences of these changes for a CBM1 Limited
Partner, the Company and the Hotel Partnership GP estimate, based upon and
subject to the assumptions and other limitations described below, that if the
Consolidation were consummated on January 1, 1998, the amount of income for 1998
that would be allocated to a CBM1 Limited Partner who acquired his CBM1
Partnership Units in the original offering of such Units for cash and held such
Units at all times since would increase by $____ per CBM1 Partnership Unit (from
$_____ to $_____) over the estimated amount of income that would have been
allocated to such CBM1 Limited Partner for 1998 if CBM1 did not participate in
the Consolidation. No attempt is made here to estimate the effect of the
Consolidation on tax allocations in years subsequent to the 1998 taxable year,
but the Consolidation is expected to effect such allocations as well. The amount
of income allocable to a CBM1 Limited Partner who did not acquire his CBM1
Partnership Units in the original offering of such Units for cash or who has not
held his CBM1 Partnership Units at all times since such offering could vary
materially from this amount. See "Federal Income Tax Considerations -- Tax
Treatment of Limited Partners Who Hold Units Following the Consolidation -- Tax
Allocations with Respect to Book-Tax Difference on Contributed Hotels" in the
Consent Solicitation.
Application of the "At Risk" Rules. The "at risk" provisions of the
----------------------------------
Code generally do not apply to losses attributable to real property placed in
service prior to January 1, 1987, by the taxpayer or by or to
CBM1 Supp-20
<PAGE>
losses attributable to a partnership in which the taxpayer acquired its
interests before that date. (For a discussion of the "at risk" rules, see
"Federal Income Tax Considerations -- Tax Treatment of Limited Partners Who Hold
Units Following the Consolidation -- Limitations on Deductibility of Losses;
Treatment of Passive Activities and Portfolio Income.") Certain of the Hotels
held by CBM1 were placed in service before January 1, 1987; CBM1 Limited
Partners who acquired their CBM1 Partnership Units prior to January 1, 1987 are
not subject to the "at risk" rules with respect to these Hotels. The
Consolidation will cause the CBM1 Limited Partners to become subject to the "at
risk" rules with respect to their entire investment.
State and Local Taxes. CBM1 Limited Partners holding Units may be
---------------------
subject to state and local taxation in a number of jurisdictions in which the
Company directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this regard, immediately
following the Consolidation, the Company will own properties in 35 states across
the United States. Currently, CBM1 owns properties in 16 states. See "Federal
Income Tax Considerations -- Tax Treatment of Limited Partners Who Hold Units
Following the Consolidation -- State and Local Taxes" in the Consent
Solicitation.
Assumptions Used in Determining Tax Consequences of the Consolidation
In preparing the estimates set forth above, the Company and the Hotel
Partnership GP made several key assumptions, which are described below. If any
such assumption is not accurate with respect to a particular CBM1 Limited
Partner, the tax consequences of the Consolidation to such Limited Partner could
be substantially different from those reflected above. ACCORDINGLY, EACH CBM1
LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO
DETERMINE THE IMPACT OF SUCH CBM1 LIMITED PARTNER'S PARTICULAR TAX SITUATION ON
THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION.
First, with respect to a CBM1 Limited Partner's basis in his CBM1
Partnership Units prior to the Consolidation, the Company and the Hotel
Partnership GP assumed that a CBM1 Limited Partner acquired his CBM1 Partnership
Units in the original offering of such Units for cash and has held such Units at
all times since. The adjusted tax basis of a CBM1 Limited Partner who did not
acquire his CBM1 Partnership Units in the original offering of such Units for
cash could vary materially from that of a CBM1 Limited Partner who did so. In
this regard, it should be noted that the adjusted tax basis of a CBM1 Limited
Partner who acquired his CBM1 Partnership Units in the original offering of such
interests for cash still could vary substantially from the estimates set forth
above for several reasons, including but not limited to (i) if the CBM1 Limited
Partner has received special allocations of items of CBM1 income, gain,
deduction, loss, or credit, or non-pro rata distributions, or made non-pro rata
contributions; or (ii) if a CBM1 Limited Partner's share of CBM1 nonrecourse
liabilities differs from his pro rata percentage of such liabilities immediately
prior to consummation of the Consolidation. If a CBM1 Limited Partner has an
adjusted tax basis in his CBM1 Partnership Units that is less than the tax basis
of a CBM1 Limited Partner who acquired his CBM1 Partnership Units in the
original offering of such Units for cash and has held such Units at all times
since, the Consolidation might result in the receipt by the CBM1 Limited Partner
of a deemed distribution of cash in excess of his adjusted tax basis in his CBM1
Partnership Units, which could result in the recognition of income or gain.
Second, the Company and the Hotel Partnership GP assumed that the
method expected to be used by the Company to allocate liabilities among the
Partners will be respected for federal income tax purposes. The Company will
allocate liabilities among the Partners as described in "Federal Income Tax
Considerations -- Tax Consequences of the Formation of the Company -- Relief
from Liabilities/Deemed Cash Distribution" in the Consent Solicitation. If the
method used by the Company were not respected for federal income tax purposes
and the nonrecourse liabilities actually allocable to a CBM1 Limited Partner are
less than the amount assumed above, the Consolidation might result in the
receipt by such CBM1 Limited Partner of a deemed distribution of cash that is
greater than the deemed distribution of cash expected to be received by such
CBM1 Limited Partner as described above in "Tax Consequences of Formation of the
CBM1 Supp-21
<PAGE>
Company -- Amount of Deemed Cash Distribution." For a CBM1 Limited Partner, this
deemed distribution of cash could exceed his adjusted tax basis in his CBM1
Partnership Units, which could result in the recognition of income or gain.
Third, the Company and the Hotel Partnership GP assumed that all of the
Hotel Partnerships will elect to participate in the Consolidation and that no
Notes will be issued. If less than all of the Hotel Partnerships elect to
participate in the Consolidation, however, the Consolidation still may be
consummated so long as the Minimum Participation Condition and all other
conditions to consummation of the Consolidation are satisfied or waived. See
"The Consolidation -- Conditions to Consummation of the Consolidation."
Moreover, the Company has reserved the right to exclude any Hotel Partnership
from participation in the Consolidation (even if the requisite number of Limited
Partners in a Hotel Partnership have voted to approve of and participate in the
Consolidation and each of the other conditions to the Consolidation has been
satisfied or waived) if the Company determines that such exclusion is in its
best interests. See "The Consolidation -- Right to Exclude Hotel Partnerships."
If less than all of the Hotel Partnerships participate in the Consolidation, the
Consolidation might result in the receipt by CBM1 Limited Partners of a deemed
distribution of cash that is greater than the deemed distribution of cash
expected to be received by CBM1 Limited Partners as described above in "Tax
Consequences of Formation of the Company -- Amount of Deemed Cash Distribution."
For a CBM1 Limited Partner, this deemed distribution of cash could exceed his
adjusted tax basis in his CBM1 Partnership Units, which could result in the
recognition of income or gain.
Fourth, the Company and the Hotel Partnership GP assumed that Partners
in each Hotel Partnership would receive Units in the Consolidation with a value
exactly equal to the Exchange Value, that CRFLT would raise gross proceeds in
the Offering of $700 million, and that CRFLT would own a ____% interest in the
Company as a result of the contribution of the proceeds of the Offering to the
Company. With respect to the proceeds of the Offering, the Company and the Hotel
Partnership GP assumed that approximately $539 million would be used to prepay
certain indebtedness of the Hotel Partnerships (specifically the CBM2
Certificates, the RIBM1 Senior Mortgage, and all of the outstanding indebtedness
of Res USA) and that approximately $36 million would be used to pay prepayment
penalties associated with these prepayments. To the extent that the value of the
Units received by the Partners of CBM1 in the Consolidation exceeds the Exchange
Value, the aggregate Book-Tax Difference of the CBM1 Hotels discussed above
would increase accordingly. However, in the event the nonrecourse liabilities
actually allocable to a CBM1 Limited Partner are less than the amount assumed
above (including, for example, if the proceeds of the Offering exceed $800
million), the Consolidation might result in the receipt by such CBM1 Limited
Partner of a deemed distribution of cash that is greater than the deemed
distribution of cash expected to be received by such CBM1 Limited Partner as
described above in "Tax Consequences of Formation of the Company -- Amount of
Deemed Cash Distribution." For a CBM1 Limited Partner, this deemed distribution
of cash could exceed his adjusted tax basis in his CBM1 Partnership Units, which
could result in the recognition of income or gain.
Finally, the Company and the Hotel Partnership GP assumed that the
Mergers will be treated for federal income tax purposes as the transfer by the
Partners of their interests in the Hotel Partnerships to the Company in exchange
for Units. There can be no assurance, however, that the IRS will not seek to
recharacterize each Merger as either (i) the liquidation of a Hotel Partnership
followed by the distribution by the Hotel Partnership of its assets to its
Partners and the subsequent transfers by such Partners of such assets to the
Company in exchange for Units, or (ii) the transfer by a Hotel Partnership of
its assets to the Company in exchange for Units and the subsequent distribution
of such Units to its Partners. If the Mergers are recharacterized in such a
manner, the tax consequences of the Consolidation to the CBM1 Limited Partners
likely would be materially affected.
CBM1 Supp-22
<PAGE>
EACH CBM1 LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX
ADVISOR TO DETERMINE THE IMPACT OF SUCH LIMITED PARTNER'S PARTICULAR TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE
CONSOLIDATION. THE TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION TO A
PARTICULAR LIMITED PARTNER COULD VARY SUBSTANTIALLY FROM THE ESTIMATES DESCRIBED
ABOVE.
Tax Treatment of CBM1 Limited Partners Who Exercise Dissenters' Rights
and Elect to Receive Notes
A CBM1 Limited Partner who exercises his Dissenters' Rights and elects
to receive Notes in connection with the Consolidation will be treated as having
made a taxable disposition of his CBM1 Partnership Units. The amount realized in
connection with such disposition will equal the sum of the "issue price" of the
Notes (i.e., the face amount of the Notes) (currently estimated as $_____ per
CBM1 Partnership Unit) plus the portion of the CBM1 liabilities allocable to the
CBM1 Limited Partner for federal income tax purposes (estimated as $_______ per
CBM1 Partnership Unit as of December 31, 1997). To the extent the amount
realized exceeds the CBM1 Limited Partner's adjusted basis in his CBM1
Partnership Units, the CBM1 Limited Partner will recognize gain. For a
discussion of the federal income tax rates applicable to the net capital gain
from the sale of a capital asset, see "Federal Income Tax Considerations -- Tax
Treatment of Limited Partners Who Hold Units Following the Consolidation --
Disposition of Units by Limited Partners" in the Consent Solicitation. In this
regard, the Hotel Partnership GP estimates that, as of December 31, 1997, if
CBM1 sold all of its Hotels in a fully taxable transaction for a net amount,
after payment of liabilities, equal to the Liquidation Value of CBM1, the
"unrecognized Section 1250 gain" per CBM1 Partnership Unit would be $______ and
the gain subject to tax as ordinary income under Section 1245 per CBM1
Partnership Unit would be $______.
A CBM1 Limited Partner who exercises Dissenters' Rights and elects to
receive Notes may be eligible to defer at least a portion of that gain under the
"installment sale" rules. Those rules, however, may not permit the CBM1 Limited
Partner to defer all of the gain (and, to the extent that the face amount of the
Notes (and any other installment obligations received by the taxpayer during the
year) outstanding at the end of the taxable year in which the Consolidation
occurs exceeds $5,000,000, will require that the CBM1 Limited Partner who defers
gain pay to the IRS interest on the resulting tax that has been deferred). The
CBM1 Limited Partner, for instance, will not be eligible to defer gain to the
extent that such gain would be taxed as ordinary income under Section 1245 of
the Code. In addition, to the extent that the CBM1 Limited Partner's share of
CBM1 liabilities exceeds his adjusted tax basis in his CBM1 Units immediately
prior to the Consolidation, the CBM1 Limited Partner will not be eligible to
defer gain recognized upon the receipt of Notes. Lastly, if a CBM1 Limited
Partner disposes of Notes, any gain that had been deferred would be recognized
in the year of disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR DISSENTING CBM1 LIMITED
PARTNER COULD HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE
CONSOLIDATION, AND THE SUBSEQUENT OWNERSHIP AND DISPOSITION OF NOTES. THEREFORE,
IT IS ESSENTIAL THAT SUCH CBM1 LIMITED PARTNERS CONSULT WITH THEIR OWN TAX
ADVISORS WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH
CBM1 LIMITED PARTNERS' RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING
JURISDICTION.
Tax Consequences if CBM1 Does Not Participate in the Consolidation
If CBM1 does not participate in the Consolidation, the CBM1 Limited
Partners would not have any tax consequences resulting from the Consolidation.
The consequences of continued ownership of CBM1 Partnership Units will be the
same as would have resulted if the Consolidation had not been proposed.
* * *
CBM1 Supp-23
<PAGE>
The above description is not exhaustive of all possible tax
considerations associated with the Consolidation. This summary does not discuss
foreign tax considerations, nor does it discuss all of the aspects of federal
income taxation or state and local taxation that may be relevant to CBM1 Limited
Partners in light of their particular circumstances. EACH CBM1 LIMITED PARTNER
IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE IMPACT OF
SUCH CBM1 LIMITED PARTNER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX
CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION.
CBM1 Supp-24
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived
from the CBM1 financial statements for the First Three Quarters 1997 and First
Three Quarters 1996 and for the five most recent fiscal years in the period
ended January 3, 1997. The following data should be read in conjunction with
CBM1's financial statements and the notes thereto, Management's Discussion and
Analysis of Financial Condition and Results of Operations and the other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
-------------------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (amounts in thousands, except per limited partner original investment amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $68,961 $64,190 $90,300 $83,043 $76,087 $68,780 $61,738
Operating profit ............. 30,762 26,036 35,985 30,752 23,578 19,161 13,021
Income (loss) before
extraordinary item(1)....... 13,419 10,521 13,454 4,988 1,916 1,863 (6,925)
Net income (loss)............. 25,893 10,521 13,454 4,988 53,409 1,863 (6,925)
Distributions:
General Partner............. 1,997 -- -- -- -- -- 349
Limited Partner............. 35,650 -- 2,300 -- -- -- 6,624
-------- -------- -------- -------- -------- -------- ---------
37,647 -- 2,300 -- -- -- 6,973
Per $1,000 limited partner
original investment:
Net income (loss)........... 113 59 111 41 441 15 (57)
Distributions............... 310 -- 20 -- -- -- 58
EBITDA(2)..................... 44,566 40,410 56,241 51,742 45,452 40,720 33,750
Cash provided by
operating activities........ 20,430 27,457 42,688 34,701 33,125 25,998 25,361
Cash used in investing activities 13,818 6,601 9,589 9,409 6,903 8,637 8,947
Cash used in financing activities 10,443 21,564 31,403 25,135 22,264 21,394 10,947
Increase (decrease) in cash
and cash equivalents........ (3,831) (708) 1,696 157 3,958 (4,033) 5,467
Ratio of earnings to fixed
charges(3).................. 1.68x 1.59x 1.51x 1.17x 1.08x 1.09x --
Deficiency of earnings to
fixed charges (3)........... -- -- -- -- -- -- 6,925
Total assets at book value..... 332,283 332,828 330,509 338,740 349,641 365,337 370,154
Total assets at value assigned
for consolidation............ -- -- -- -- -- --
Cash and cash equivalents...... 8,878 10,305 12,709 11,013 10,856 6,898 10,931
Total debt..................... 322,158 296,205 288,975 317,763 342,844 370,740 381,092
Partner's capital(deficit):
Limited partners............. (30,855) (20,290) (19,804) (30,285) (35,023) (85,761) (87,531)
General partner.............. (229) 327 474 (199) (449) (3,120) (3,213)
Book value per $1,000 limited
partner original investment.. (271) (178) (174) (266) (308) (754) (769)
Exchange Value per $1,000 limited
partner original investment.. -- -- -- -- -- --
</TABLE>
(1) In 1997, CBM1 recognized an extraordinary gain of nearly $15 million on the
forgiveness of deferred management fees which was partially offset by an
extraordinary loss on the early extinguishment of debt of approximately $3
million. In 1994, CBM1 recognized a $51.5 million extraordinary gain on the
forgiveness of deferred management fees.
CBM1 Supp-25
<PAGE>
(2) EBITDA consists of the sum of consolidated net income, interest expense,
depreciation and amortization. EBITDA data is presented because such data
is used by certain investors to determine the partnership's ability to meet
debt service requirements. The partnership considers EBITDA to be an
indicative measure of the partnerships' operating performance due to the
significance of the partnership's long-lived assets and because EBITDA can
be used to measure the partnership's ability to service debt, fund capital
expenditures and expand its business; however, such information should not
be considered as an alternative to net income, operating profit, cash flows
from operations, or any other operating or liquidity performance measure
prescribed by generally accepted accounting principles. Cash expenditures
for various long-term assets and interest expense have been, and will be,
incurred which are not reflected in the EBITDA presentations.
(3) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges for 1992 is largely the result of
depreciation and amortization of $20,729,000.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
First Three Quarters 1997 Compared to First Three Quarters 1996
Revenues. Revenues for the First Three Quarters 1997 increased $4.8
million, or 7%, to $69 million. CBM1's revenues and operating profit were
impacted primarily by improved lodging results. The increase was driven
primarily by growth in revenue per available room ("REVPAR"). REVPAR is a
commonly used indicator of market performance for hotels which represents the
combination of daily room rate charged and the average daily occupancy achieved.
REVPAR does not include food and beverage or other ancillary revenues generated
by the property. Hotel sales increased $7.7 million, or 6%, to $135.1 million in
the First Three Quarters 1997 reflecting the improvements in REVPAR for the
period.
REVPAR increased 7% for the First Three Quarters 1997 due primarily to an
increase in average room rates of 6%, while average occupancy increased one
percentage point over the same period in 1996. Results were further enhanced by
a one percentage point increase in the house profit margin. Due to the continued
high occupancy of these properties, CBM1 expects future increases in REVPAR to
be driven by room rate increases, rather than changes in occupancy. However,
there can be no assurance that REVPAR will continue to increase in the future.
Operating Costs and Expenses. CBM1's operating costs and expenses remained
unchanged at $38.2 million for the First Three Quarters 1997 and the First Three
Quarters 1996. As a percentage of revenues, hotel operating costs and expenses
were 55% and 60% of revenues for the First Three Quarters 1997 and the First
Three Quarters 1996, respectively.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased by $4.8 million
to $30.8 million, or 45% of revenues, for the First Three Quarters 1997 from $26
million, or 40% of revenues, for the First Three Quarters 1996.
Interest Expense. Interest expense increased $1.6 million to $17.8 million
for the First Three Quarters 1997 over the First Three Quarters 1996 due to the
refinancing of mortgage debt from a short term loan at variable rates to a long
term loan at a higher fixed rate and an increase in the balance of the loan to
$325 million.
Income Before Extraordinary Items. Income before extraordinary item
increased $2.9 million to $13.4 million, or 19% of revenues, for the First Three
Quarters 1997 compared to $10.5 million, or 16% of revenues, for the First Three
Quarters 1996.
Extraordinary Items. CBM1 recognized an extraordinary gain in 1997 of $12.5
million representing the forgiveness of deferred management fees by Marriott
International partially offset by an extraordinary loss on the early
extinguishment of debt.
Net Income. Net income for the First Three Quarters 1997 increased $15.4
million to $25.9 million, or 38% of revenues, compared to net income of $10.5
million, or 16% of revenues, for the First Three Quarters 1996 as a result of
the items discussed above.
CBM1 Supp-26
<PAGE>
1996 Compared to 1995
Revenues. Revenues increased $7.3 million, or 9%, to $90.3 million in 1996
from $83 million in 1995 as a result of strong growth in REVPAR of 5%. Hotel
sales increased $10.8 million, or 6%, to $181.6 million in 1996 also reflecting
improvements in REVPAR for the year. The increase in REVPAR was primarily a
result of a 7% increase in average room rates partially offset by a two
percentage point decrease in average occupancy. Results were further enhanced by
a one percentage point increase in the house profit margin.
Operating Costs and Expenses. Operating costs and expenses increased $2
million, or 4%, to $54.3 million in 1996 from $52.3 million in 1995, primarily
reflecting an increase in management fees associated with rising revenues and
operating profit. As a percentage of hotel revenues, operating costs and
expenses represented 60% of revenues for 1996 and 63% in 1995.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased $5.2 million to
$36 million, or 40% of total revenues, in 1996 from $30.8 million, or 37% of
revenues, in 1995.
Interest Expense. Interest expense decreased $3.5 million to $23.5 million
due to the impact of lower average interest rates and a decreased level of debt
as a result of principal amortization.
Net Income. Net income increased $8.5 million to $13.5 million, or 15% of
total revenues, in 1996 from $5 million, or 6% of total revenues, in 1995 due to
improved lodging results and the impact of the decrease in interest expense
discussed above.
1995 Compared to 1994
Revenues. Revenues increased $6.9 million, or 9%, to $83 million in 1995
from $76.1 million in 1994 as a result of strong growth in REVPAR of nearly 7%.
The increase in REVPAR was primarily a result of a 7% increase in average room
rates and a decrease in average occupancy of less than one percentage point.
Operating Costs and Expenses. Operating costs and expenses decreased $.3
million to $52.3 million, or 63% of revenues, in 1995 from $52.6 million, or 69%
of hotel revenues, in 1994.
Operating Profit. Operating profit increased $7.3 million, or 31%, to $30.8
million, or 37% of revenues, in 1995 from $23.5 million, or 31% of revenues, in
1994 due to the changes in revenues and operating costs discussed above.
Interest Expense. Interest expense increased $4.5 million to $27 million
for 1995 primarily due to a higher variable interest rate of 7.62% on the
mortgage debt during 1995 as compared to a rate of 5.92% in 1994, which was
partially offset by the declining loan balance resulting from required principal
authorization.
Income Before Extraordinary Item. Income before extraordinary item
increased $3.1 million to $5 million, or 6% of revenues, in 1995, from $1.9
million, or 2% of revenues, in 1994.
Extraordinary Item. The partnership recognized an extraordinary gain in
1994 of $51.5 million representing the forgiveness of deferred management fees
by Marriott International.
Net Income. Net income decreased to $5 million, or 6% of revenues, in 1995,
from $53.4 million in 1994 primarily due to the $51.5 million extraordinary gain
in 1994, partially offset by improved operating results.
Liquidity and Capital Resources
Cash provided by operations was $20.4 million and $27.5 million for the
First Three Quarters 1997 and the First Three Quarters 1996, respectively, and
$42.7 million in 1996, $34.7 million in 1995 and $33.1 million in 1994.
Cash used in investing activities was $13.8 million and $6.6 million for
the First Three Quarters 1997 and the First Three Quarters 1996, respectively,
and $9.6 million, $9.4 million and $6.9 million in fiscal years 1996, 1995 and
1994, respectively. CBM1's cash investing activities consists primarily of
contributions to the property improvement fund and capital expenditures
CBM1 Supp-27
<PAGE>
for improvements to existing hotels. As part of the debt refinancing,
contributions to the property improvement fund will remain at 5% of gross hotel
sales through 1998 and may be increased to 6% in 1999 and 7% in 2000 and
thereafter, at the option of the Manager.
Cash used in financing activities was $10.4 million and $21.6 million for
the First Three Quarters 1997 and the First Three Quarters 1996, respectively,
and $31.4 million, $25.1 million and $22.3 million in fiscal years 1996, 1995
and 1994, respectively. CBM1's cash financing activities primarily consisted of
capital distributions to partners, repayments of debt and payment of financing
costs, as well as the refinancing of certain debts of the partnership.
In March 1997, CBM1 refinanced all of its outstanding mortgage debt. The
total amount of debt increased from $280.8 million to $325 million. The $44.2
million of excess refinancing proceeds were used to make a $7 million
contribution to the property improvement fund, a $30.2 million partial return of
capital distribution to the partners and to pay $7 million of refinancing costs.
The new non-recourse loan matures in April 2012, requires principal amortization
on a 20-year term and carries a fixed interest rate of 7.865%.
CBM1 Supp-28
<PAGE>
FINANCIAL STATEMENTS
CBM1 Supp-29
<PAGE>
Report of Independent Public Accountants
TO THE LIMITED PARTNERS OF COURTYARD BY MARRIOTT LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Courtyard by Marriott Limited
Partnership (a Delaware limited partnership) as of January 3, 1997 and December
29, 1995, and the related statements of operations, changes in partners' capital
(deficit) and cash flows for each of the three fiscal years in the period ended
January 3, 1997. These financial statements are the responsibility of the
General Partner's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide 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 Courtyard by Marriott Limited
Partnership as of January 3, 1997 and December 29, 1995, and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended January 3, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
April 11, 1997
CBM1 Supp-30
<PAGE>
Courtyard by Marriott Limited Partnership
Balance Sheets
January 3, 1997 and December 29, 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Property and equipment, net...................................................................$ 300,939 $ 301,117
Property improvement fund..................................................................... 8,449 17,940
Due from Courtyard Management Corporation..................................................... 5,325 4,772
Deferred financing costs, net of accumulated amortization..................................... 3,087 3,898
Cash and cash equivalents..................................................................... 12,709 11,013
----------- -----------
$ 330,509 $ 338,740
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt.................................................................................$ 288,975 $ 317,763
Management fees due to Courtyard Management Corporation....................................... 25,596 16,231
Straight-line and deferred ground rent due to affiliates of Marriott International, Inc....... 19,848 20,116
Debt service guaranty and accrued interest payable to Host Marriott Corporation............... 12,975 12,366
Accounts payable and accrued liabilities...................................................... 2,445 2,748
----------- -----------
Total Liabilities.......................................................................... 349,839 369,224
----------- -----------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contributions...................................................................... 28,218 28,218
Capital distributions...................................................................... (1,464) (1,464)
Cumulative net losses...................................................................... (26,280) (26,953)
----------- -----------
474 (199)
----------- -----------
Limited Partners
Capital contributions, net of offering costs of $12,912.................................... 100,845 100,845
Investor notes receivable.................................................................. (98) (98)
Capital distributions...................................................................... (30,108) (27,808)
Cumulative net losses...................................................................... (90,443) (103,224)
----------- -----------
(19,804) (30,285)
----------- -----------
Total Partners' Deficit.................................................................... (19,330) (30,484)
----------- -----------
$ 330,509 $ 338,740
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
CBM1 Supp-31
<PAGE>
Courtyard by Marriott Limited Partnership
Statements of Operations
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
REVENUES
Hotel (Note 3)...............................................................$ 90,300 $ 83,043 $ 76,087
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Depreciation ................................................................ 19,258 19,753 21,075
Base and Courtyard management fees........................................... 10,898 10,248 9,710
Incentive management fee..................................................... 9,365 8,615 7,616
Ground rent.................................................................. 7,246 7,066 6,948
Property taxes............................................................... 5,977 5,381 5,868
Insurance and other.......................................................... 1,571 1,228 1,292
----------- ----------- -----------
54,315 52,291 52,509
----------- ----------- -----------
OPERATING PROFIT.................................................................. 35,985 30,752 23,578
Interest expense.................................................................. (23,529) (27,001) (22,461)
Interest income................................................................... 998 1,237 799
----------- ----------- -----------
NET INCOME BEFORE EXTRAORDINARY ITEM.............................................. 13,454 4,988 1,916
EXTRAORDINARY ITEM
Gain on forgiveness of deferred management fees.............................. -- -- 51,493
----------- ----------- -----------
NET INCOME........................................................................$ 13,454 $ 4,988 $ 53,409
=========== =========== ===========
ALLOCATION OF NET INCOME
General Partner..............................................................$ 673 $ 250 $ 2,671
Limited Partners............................................................. 12,781 4,738 50,738
----------- ----------- -----------
$ 13,454 $ 4,988 $ 53,409
=========== =========== ===========
NET INCOME PER LIMITED PARTNER UNIT (1,150 Units).................................$ 11,114 $ 4,120 $ 44,120
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
CBM1 Supp-32
<PAGE>
Courtyard by Marriott Limited Partnership
Statements of Changes in Partners' Capital (Deficit)
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1993......................................................$ (3,120) $ (85,761) $ (88,881)
Net income................................................................. 2,671 50,738 53,409
----------- ----------- -----------
Balance, December 30, 1994...................................................... (449) (35,023) (35,472)
Net income................................................................. 250 4,738 4,988
----------- ----------- -----------
Balance, December 29, 1995...................................................... (199) (30,285) (30,484)
Capital distributions...................................................... -- (2,300) (2,300)
Net income................................................................. 673 12,781 13,454
----------- ----------- -----------
Balance, January 3, 1997........................................................$ 474 $ (19,804) $ (19,330)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
CBM1 Supp-33
<PAGE>
Courtyard by Marriott Limited Partnership
Statements of Cash Flows
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................................$ 13,454 $ 4,988 $ 53,409
Extraordinary item........................................................... -- -- 51,493
----------- ----------- -----------
Income before extraordinary item............................................. 13,454 4,988 1,916
Noncash items:
Depreciation.............................................................. 19,258 19,753 21,075
Deferred incentive management fees........................................ 9,365 8,615 7,616
Amortization of deferred financing costs as interest expense.............. 1,126 1,123 773
Deferred interest on guaranty advances.................................... 609 648 533
Straight-line and deferred ground rent.................................... -- 192 765
Changes in operating accounts:
Due from Courtyard Management Corporation................................. (553) (355) (923)
Straight-line and deferred ground rent due to affiliates of
Marriott International, Inc............................................. (268) -- --
Accounts payable and accrued liabilities.................................. (303) (263) 1,370
----------- ----------- -----------
Cash provided by operations............................................. 42,688 34,701 33,125
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net..................................... (19,080) (7,942) (4,186)
Change in property improvement fund.......................................... 9,491 (1,467) (4,360)
Change in contingency reserve fund........................................... -- -- 1,643
----------- ----------- -----------
Cash used in investing activities....................................... (9,589) (9,409) (6,903)
----------- ----------- -----------
FINANCING ACTIVITIES
Payment of mortgage debt..................................................... (28,788) (25,081) (27,896)
Capital distributions........................................................ (2,300) -- --
Payment of financing costs................................................... (315) (54) (4,381)
Change in refinancing escrow account......................................... -- -- 10,013
----------- ----------- -----------
Cash used in financing activities....................................... (31,403) (25,135) (22,264)
----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS............................................. 1,696 157 3,958
CASH AND CASH EQUIVALENTS at beginning of year.................................... 11,013 10,856 6,898
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year..........................................$ 12,709 $ 11,013 $ 10,856
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest..............................................$ 22,122 $ 25,493 $ 19,735
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
CBM1 Supp-34
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Financial Statements
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Courtyard by Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire and own 50 Courtyard by Marriott
hotels (the "Hotels") and the land on which certain of the Hotels are located.
The Partnership's 50 Hotels are located in 16 states in the United States: nine
in Georgia; seven in Texas; six in California; five in Virginia; four in
Michigan and three or less in each of the other 11 states. On December 29, 1995,
Host Marriott Corporation's operations were divided into two separate companies:
Host Marriott Corporation ("Host Marriott") and Host Marriott Services
Corporation. The sole general partner of the Partnership, with a 5% interest, is
CBM One Corporation (the "General Partner"), a wholly owned subsidiary of Host
Marriott. The Hotels are operated as part of the Courtyard by Marriott hotel
system by Courtyard Management Corporation (the "Operator" or "Manager"), a
wholly-owned subsidiary of Marriott International, Inc. ("MII").
On August 20, 1986 (the "Closing Date"), 1,150 limited partnership interests
(the "Units"), representing a 95% interest in the Partnership, had been sold
pursuant to a private placement offering at $100,000 per Unit. The General
Partner made capital contributions consisting of $1,211,000 in cash and land on
which certain of the Hotels are located valued at $4,842,000 for its 5% general
partner interest.
On the Closing Date, the Partnership executed a purchase agreement (the
"Purchase Agreement") with Host Marriott to acquire the Hotels and the land on
which certain of the Hotels are located for a total fixed price of $448,184,000.
Of the total purchase price, $374,656,000 was paid in cash from the proceeds of
the mortgage financing and the initial installment on the sale of the Units with
the remaining $73,528,000 evidenced by a note payable to Host Marriott.
Twenty-eight of the Hotels were conveyed to the Partnership in 1986, twenty-one
Hotels in 1987 and the final Hotel in January 1988.
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
a. Cash available for distribution will be distributed (i) first, 5% to the
General Partner and 95% to the limited partners until the General Partner
and limited partners (collectively, the "Partners") have received
cumulative distributions of sale or refinancing proceeds ("Capital
Receipts") equal to $60,526,500; (ii) next, 15% to the General Partner and
85% to the limited partners until the Partners have received cumulative
distributions of Capital Receipts equal to $121,053,000; and (iii)
thereafter, 30% to the General Partner and 70% to the limited partners.
b. Capital Receipts, other than from the sale or other disposition of
substantially all of the assets of the Partnership, not retained by the
Partnership will be distributed (i) first, 5% to the General Partner and
95% to the limited partners until the Partners have received cumulative
distributions of Capital Receipts equal to $121,053,000 and (ii)
thereafter, 30% to the General Partner and 70% to the limited partners.
c. Proceeds from the sale of substantially all of the assets of the
Partnership or from a related series of Hotel sales leading to the sale of
substantially all of the assets of the Partnership will be distributed to
the Partners pro-rata in accordance with their capital account balances.
d. Net profits are generally allocated in the same ratio in which cash
available for distribution is distributed. Net losses are generally
allocated to the General Partner. To the extent the General Partner makes
debt service advances to the Partnership and other loans as outlined in
the partnership agreement, the General Partner will be allocated net
losses equal to the amounts advanced.
e. In general, gain recognized by the Partnership will be allocated, with
respect to any year, in the following order of priority: (i) to all
Partners whose capital accounts have negative balances until such negative
balances are brought to zero; (ii) to all Partners up to the amount
necessary to bring their respective capital account balances to an amount
equal to their invested capital, as defined; and (iii) thereafter, 30% to
the General Partner and 70% to the limited partners.
CBM1 Supp-35
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Financial Statements
Gain arising from the sale or other disposition (or from a related series
of sales or dispositions) of substantially all of the assets of the
Partnership will be allocated (i) to the limited partners in an amount
equal to the excess, if any, of (1) the sum of 15% times the weighted
average of the limited partners' invested capital each year, over (2) the
sum of distributions to the limited partners of Capital Receipts and cash
available for distribution each year; and (ii) next, to the General
Partner until it has been allocated an amount equal to 30/70 times the
amount allocated to the limited partners under clause (i); and (iii)
thereafter, 30% to the General Partner and 70% to the limited partners.
f. For financial reporting purposes, profits and losses are allocated among
the Partners based on their stated interests in cash available for
distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting.
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.
Fiscal Year
The Partnership's fiscal year ends on the Friday nearest to December 31. Fiscal
year 1996 included 53 weeks compared to 52 weeks for fiscal years 1995 and 1994.
Revenues and Expenses
Hotel revenues represent house profit of the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotels to the Operator. House profit
reflects Hotel operating results which flow to the Partnership as property owner
and represents Hotel sales less property-level expenses, excluding depreciation,
Courtyard, base and incentive management fees, property taxes, ground and
equipment rent, insurance and certain other costs, which are disclosed
separately in the statement of operations.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Building and improvements 40 years
Leasehold improvements 40 years
Furniture and equipment 4-10 years
</TABLE>
All property and equipment is pledged to secure the mortgage debt described in
Note 6 and Note 9.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties will be
less than their net book value. If a property is impaired, its basis is adjusted
to fair market value.
CBM1 Supp-36
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Financial Statements
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt (see Note 6 and Note 9) and are amortized, using the
straight-line method, over the term of the loan including available extensions.
During 1996, the Partnership paid $315,000 in financing costs related to
refinancing the Partnership's mortgage debt as discussed in Note 9. Refinancing
costs for 1996 and 1995 were $6,107,000 and $5,792,000, respectively.
Accumulated amortization of financing costs as of January 3, 1997 and December
29, 1995 totaled $3,019,000 and $1,893,000, respectively.
Ground Rent
The land leases with affiliates of MII (see Note 7) include scheduled increases
in minimum rents per property. These scheduled rent increases, which are
included in minimum lease payments, are being recognized by the Partnership on a
straight-line basis over the 95 year term of the leases. The adjustment included
in ground rent expense to reflect minimum lease payments on a straight-line
basis was ($232,000) for 1996, $166,000 for 1995 and $765,000 for 1994.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual Partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives for the assets,
differences in the timing of recognition of certain fees and straight-line rent
adjustments. As a result of these differences, the excess of the tax basis in
net Partnership liabilities over the net Partnership liabilities reported in the
accompanying financial statements is $20,483,000 and $29,190,000 as of January
3, 1997 and December 29, 1995, respectively.
New Statement of Financial Accounting Standards
In the first quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on its financial statements.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Reclassifications
Certain reclassifications were made to prior year financial statements to
conform to the 1996 presentation.
CBM1 Supp-37
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Financial Statements
NOTE 3. REVENUES
Hotel revenues consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
HOTEL SALES
Rooms.........................................................................$ 162,126 $ 151,571 $ 141,894
Food and beverage............................................................. 12,975 12,787 13,313
Other......................................................................... 6,538 6,441 6,633
----------- ----------- -----------
181,639 170,799 161,840
----------- ----------- -----------
HOTEL EXPENSES
Departmental direct costs
Rooms..................................................................... 36,059 34,244 31,975
Food and beverage......................................................... 11,165 10,726 10,785
Other hotel operating expenses................................................ 44,115 42,786 42,993
----------- ----------- -----------
91,339 87,756 85,753
----------- ----------- -----------
HOTEL REVENUES ................................................................. $ 90,300 $ 83,043 $ 76,087
========== ========== ==========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
January 3, December 29,
1997 1995
----------- -----------
<S> <C> <C>
Land and improvements...........................................................................$ 30,797 $ 30,797
Leasehold improvements.......................................................................... 199,595 195,320
Building and improvements....................................................................... 133,728 130,481
Furniture and equipment......................................................................... 144,869 133,311
----------- -----------
508,989 489,909
Less accumulated depreciation................................................................... (208,050) (188,792)
----------- -----------
$ 300,939 $ 301,117
=========== ===========
</TABLE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts:
<TABLE>
<CAPTION>
As of January 3, 1997 As of December 29, 1995
---------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ -------------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Mortgage debt..............................................$ 288,975 $ 288,975 $ 317,763 $ 317,763
Management fees due to Courtyard
Management Corporation.................................$ 25,596 $ 7,777 $ 16,231 $ 7,497
Debt service guaranty and accrued interest payable
to Host Marriott Corporation...........................$ 12,975 $ 9,918 $ 12,366 $ --
</TABLE>
The estimated fair value of mortgage debt obligations is based on the expected
future debt service payments discounted at estimated market rates, adjusted for
the presence of the debt service guaranties. Management fees due to Courtyard
Management
CBM1 Supp-38
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Financial Statements
Corporation and debt service guaranty payable to Host Marriott Corporation
including accrued interest are valued based on the expected future payments from
operating cash flow discounted at risk adjusted rates.
NOTE 6. DEBT
The 49 Hotels Loan and the Windsor Loan as discussed below were refinanced on
March 21, 1997 and the lenders were repaid in full (see Note 9).
49 Hotels Loan
On June 15, 1988, the Partnership restructured the 49 hotels loan (the "Original
49 Hotels Loan") of $373,149,000 with a group of banks (the "Lenders"). The
Original 49 Hotels Loan matured on June 15, 1993 with the entire $373,149,000
balance due. The Partnership did not have sufficient cash to repay the Original
49 Hotels Loan at maturity and defaulted on the loan. On December 15, 1993, the
Partnership entered into a forbearance agreement whereby the Lenders agreed not
to exercise their rights and remedies for nonpayment of the Original 49 Hotels
Loan. In exchange, the Partnership and the Lenders agreed that the Original 49
Hotels Loan would bear interest at LIBOR plus 1.5 percentage points from June
15, 1993 through April 17, 1994. In connection with the restructuring of the
loan, the Partnership repaid $20 million of principal leaving a balance of
$353,149,000.
On April 18, 1994, the Partnership entered into a restated loan agreement (the
"49 Hotels Loan") with the Lenders for the 49 Hotels. The 49 Hotels Loan bore
interest at floating rates at the Partnership's option equal to the following:
<TABLE>
<CAPTION>
Time Period Interest Rate
------------------------------------- ------------------------------------------------------------------
<S> <C>
Closing through June 15, 1996 (1) LIBOR plus 1.5 percentage points or the higher of (2) .5
percentage points plus (a) prime, or (b) .5 percentage points
plus (i) the three week average 3-month CD rate or (ii) the
federal funds rate
June 15, 1996 through June 15, 1997 (1) LIBOR plus 1.75 percentage points or the higher of (2) .75
percentage points plus (a) prime, or (b) .5 percentage points
plus (i) the three week average 3-month CD rate or (ii) the
federal funds rate
</TABLE>
The 49 Hotels Loan required minimum annual principal payments of $7,000,000.
Additionally, while the loan balance was above $300,000,000, 100% of Available
Cash Flow (equal to operating profit, as defined, less the sum of (1) interest
expense, (2) the $7,000,000 annual principal payment, (3) partnership
administrative expenses of up to $250,000, as adjusted annually for the consumer
price index, and (4) ground rent payments to MII) was used to pay additional
principal on the 49 Hotels Loan. While the loan balance was between $250,000,000
and $299,999,999, 80% of Available Cash Flow was used to pay additional
principal on the 49 Hotels Loan and once the loan balance was less than
$250,000,000, 75% of Available Cash Flow would have been used to pay additional
principal on the loan.
For 1996 and 1995, the Partnership paid $28,416,000 and $24,584,000,
respectively, in principal payments on the 49 Hotels Loan leaving a balance of
$282,686,000 at December 31, 1996. The weighted average interest rate on the 49
Hotels Loan was 7.08% in 1996, 7.62% in 1995 and 5.92% in 1994. The interest
rate on the 49 Hotels Loan was 7.25% at December 31, 1996. The 49 Hotels Loan
would have matured on June 15, 1997; however, the term could have been extended
for two one-year periods if certain operating profit levels, as defined, were
met.
As security for the 49 Hotels Loan, the Lenders had a mortgage on the
Partnership's fee or leasehold interest in each of the Hotels, except the
Windsor, Connecticut Hotel. In addition, all of the Lenders had a security
interest in certain personal property associated with each Hotel and granted a
security interest in the Partnership's rights under the operating agreement (see
Note 8) and Purchase Agreement. Thirty of the 49 hotels covered by the 49 Hotels
Loan lease land (see Note 7) from affiliates of MII. These affiliates agreed to
subject their ownership interests as well as subordinate their receipt of ground
rent to the payment of debt service on the 49 Hotels Loan. Deferred ground rent
payable to affiliates of MII bore interest at two percentage points under the
base rate announced by Citibank, N.A. Deferred ground rent and related accrued
interest could not be repaid until the 49 Hotels Loan balance was less than
$300,000,000. There was no deferred ground rent related to the 49 Hotels Loan
during 1996 and 1995.
CBM1 Supp-39
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Financial Statements
Windsor Hotel Loan
On February 9, 1988, the Partnership entered into a loan agreement to provide
non-recourse mortgage debt of $8,274,000 (the "Windsor Loan") to pay
approximately 80% of the purchase price of the Windsor, Connecticut Hotel (the
"Windsor Hotel"). The Windsor Loan bore interest at a floating rate equal to the
adjusted CD rate or LIBOR plus 2.0 percentage points. The Windsor Loan matured
on August 15, 1996 with the remaining principal balance of $6,289,000 plus
accrued interest due at that time. In exchange for Host Marriott providing a
guaranty of repayment of the loan at maturity, the lender agreed to extend the
Windsor Loan maturity to March 31, 1997. The Partnership agreed to continue to
pay interest on the Windsor Loan at LIBOR plus 200 basis points until the
earlier of repayment or March 31, 1997. No principal amortization on the Windsor
Loan was required until maturity. The weighted average interest rate on the
Windsor Loan was 7.46%, 8.23% and 6.44% for 1996, 1995 and 1994, respectively.
The interest rate on the Windsor Loan was 7.50% on January 3, 1997 and 7.94% on
December 29, 1995.
As security for the Windsor Loan, the bank had a mortgage on the Partnership's
leasehold interest in the Windsor Hotel. Additionally, the bank had a security
interest in the Partnership's interest in the personal property associated with
the Windsor Hotel and a security interest in the Partnership's rights under the
operating agreement and Purchase Agreement.
The Windsor Hotel land is also leased from an affiliate of MII, which agreed to
subject their ownership interest as well as their receipt of ground rent to the
payment of debt service on the Windsor Loan. Deferred ground rent payable to the
affiliate of MII bore interest at two percentage points under the base rate
announced by Citibank, N.A. Deferred ground rent and accrued interest related to
the Windsor Loan was repaid with available funds from the Windsor Hotel after
payment of debt service. The deferred ground rent as of December 29, 1995 in the
amount of $36,000 was paid in 1996. As of January 3, 1997, there was no deferred
ground rent related to the Windsor Hotel.
49 Hotels Loan Guaranties
Host Marriott provided additional security to the Lenders in the form of a debt
guaranty (the "Debt Service Guaranty") of aggregate interest and principal of up
to $40 million. Host Marriott's performance under the Debt Service Guaranty was
backed by a $40 million guaranty of aggregate principal and interest from MII
(the "Backup Guaranty"). Payments by Host Marriott under the Debt Service
Guaranty or MII under the Backup Guaranty would have been treated as advances to
the Partnership and bore interest at the base rate announced by The First
National Bank of Chicago. The Debt Service Guaranty replaced the original
guarantee of $37.3 million under the Original 49 Hotels Loan. No amounts have
been advanced under the Debt Service Guaranty or the Backup Guaranty covering
the 49 Hotels Loan. As of December 31, 1996 and 1995, $7,341,000 had been
advanced by the General Partner under the Original 49 Hotels Loan guaranty. The
weighted average interest rate on the Original 49 Hotel Loan guaranty advances
was 8.3%, 8.8% and 7.15% for 1996, 1995 and 1994, respectively. The interest
rate at January 3, 1997 was 8.25% and 8.5% at December 29, 1995. Accrued
interest on the guaranty advance as of January 3, 1997 and December 29, 1995,
was $5,634,000 and $5,025,000, respectively.
MII provided two additional guaranties to the Lenders: the debt and tenant
change guaranty (the "Debt and Tenant Change Guaranty") and the Marriott
International Guaranty (the "MII Guaranty").
The Debt and Tenant Change Guaranty provided that in the event of nonpayment of
principal and interest when due or upon loan maturity, MII would have advanced
amounts, in addition to amounts advanced under the Backup Guaranty for principal
and interest not to exceed the following:
<TABLE>
<CAPTION>
<S> <C>
From closing through June 15, 1997 $10.0 million
From June 16, 1997 through June 15, 1998 $12.5 million
Thereafter $15.0 million
</TABLE>
Additionally, the Debt and Tenant Change Guaranty provided that if the Operator
ceases to be a wholly-owned subsidiary of MII, then MII would have advanced $15
million (the "Tenant Change Payment") for principal and interest on the 49
Hotels Loan. However, if MII would have paid $15 million to the Lenders prior to
the occurrence of a tenant change, then MII would have no further obligation to
fund the Tenant Change Payment.
CBM1 Supp-40
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Financial Statements
The MII Guaranty provided that in the event of nonpayment of principal and
interest when due or upon loan maturity, MII had the option of (1) remaining the
Operator of the 49 Hotels by advancing amounts to the Lenders for principal and
interest equal to the lesser of (i) $40 million minus amounts advanced under the
Debt and Tenant Change Guaranty or (ii) the amount necessary to reduce the
outstanding principal balance on the 49 Hotels Loan to $180 million or (2)
conveying its rights, title and interest in the 49 Hotels operating agreement to
the Lenders.
In the event of nonpayment of principal and interest when due or upon maturity,
for Courtyard Management Corporation to remain as the Operator of the 49 Hotels,
MII could have been required to advance as much as $80 million ($40 million
pursuant to the Backup Guaranty if Host Marriott failed to perform under the
Debt Service Guaranty and, at its option, $40 million, collectively, under the
MII Guaranty and the Debt and Tenant Change Guaranty). However, in the event
that MII conveyed its rights, title and interest in the 49 Hotels operating
agreement to the Lenders, the maximum amount that MII would have been required
to advance to the Lenders would have been $55 million ($40 million under the
Backup Guaranty if Host Marriott failed to perform under the Debt Service
Guaranty and $15 million under the Debt and Tenant Change Guaranty). Payments by
MII under the Debt and Tenant Change Guaranty and the MII Guaranty,
respectively, would have been treated as advances to the Partnership and bore
interest at the base rate announced by The First National Bank of Chicago. No
amounts were advanced pursuant to the Debt and Tenant Change Guaranty and the
MII Guaranty.
Windsor Loan Guaranty
Host Marriott directly or through the General Partner provided additional
security to the Windsor Loan lenders in the form of a debt service guaranty of
aggregate interest and principal on the Windsor Loan of up to $706,000. Payments
by Host Marriott or the General Partner under the debt service guaranty were
treated as advances to the Partnership and bore interest at the base rate
announced by The First National Bank of Chicago. No amounts were advanced under
the Windsor Loan guaranty. However, in exchange for Host Marriott providing a
guaranty of repayment of the loan at maturity, the lender agreed to extend the
Windsor Loan maturity to March 31, 1997.
Upon the refinancing of the Partnership's debt, Host Marriott and MII were
released from these guaranties as discussed in Note 9.
NOTE 7. LAND LEASES
The land on which 31 of the Hotels are located is leased from affiliates of MII.
In addition, two of the Hotels are located on land leased from third parties.
The ground leases have remaining terms (including all renewal options) expiring
between the years 2058 and 2081. The MII ground leases and one of the third
party ground leases provide for rent based on specific percentages (from 2% to
9.75%) of certain sales categories, subject to minimum amounts. The minimum
rentals are adjusted at various anniversary dates throughout the lease terms, as
defined in the agreements.
Minimum future rental payments during the term of the ground leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Lease Ground
Year Leases
---------- -----------
<S> <C>
1997 $ 7,068
1998 7,068
1999 7,068
2000 7,140
2001 7,140
Thereafter 546,703
-----------
$ 582,187
===========
</TABLE>
Total ground rent expense was $7,478,000 in 1996, $7,569,000 in 1995, and
$7,675,000 in 1994.
CBM1 Supp-41
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Financial Statements
NOTE 8. MANAGEMENT AGREEMENT/OPERATING AGREEMENT
In connection with the debt refinancing, the Operating Agreements, as defined
below, were terminated as of January 3, 1997. A new management agreement (the
"Management Agreement") was executed as of January 4, 1997 for the management of
the 50 Partnership Hotels.
On the Closing Date, the Partnership entered into a long-term management
agreement (the "Original Management Agreement") with Courtyard Management
Corporation to operate the Hotels as part of the Courtyard by Marriott hotel
system. Effective January 1, 1994, in connection with the 49 Hotels Loan
agreement, the Original Management Agreement was converted into two long-term
operating agreements (the "Operating Agreement(s)") with the Operator, one for
the 49 Hotels and one for the Windsor Hotel. The Operating Agreements had
initial terms expiring on December 31, 2007 for a majority of the Hotels. The
Operator could renew the term, for one or more of the Hotels, at its option, for
up to five successive terms of 10 years each.
Effective July 1, 1989, the Original Management Agreement was amended to defer
the Courtyard management fee and base management fee to the extent that cash
flow provided to the Partnership was less than $2,945,000 for 1989 and
$6,973,000 per year in 1990 through 1993 (the "Partnership Objective"). The
Partnership Objective provided a 3% per annum return on Partners' invested
capital, as defined, for 1989 and 6% per annum from 1990 through 1993. In order
to meet the Partnership Objective, the Courtyard management fee was first
subject to deferral followed by the base management fee. As of December 31,
1993, the balance of deferred incentive, Courtyard and base management fees
totaled $51.5 million. During 1994, these fees were extinguished pursuant to the
49 Hotels Loan and the forgiveness of these fees is recorded as an extraordinary
item in the statement of operations.
The 49 Hotels Operating Agreement provided for annual payments to the
Partnership equal to 85% of operating profit, as defined (75% of operating
profit after the Partners have received cumulative distributions of loan
proceeds equal to $60,526,500). However, until the 49 Hotels Loan balance was
below $300 million, 100% of Available Cash Flow from the 49 Hotels would have
been paid by the Operator to the Partnership. The additional payment to the
Partnership of 15% or 25% of operating profit accrued as deferred incentive
management fees. As of December 31, 1996 and 1995, $25,076,000 and $15,899,000,
respectively, of incentive management fees related to the 49 Hotels were
deferred. Once the 49 Hotels Loan balance was between $250,000,000 and
$299,999,999, the incentive management fee was payable out of 20% of Available
Cash Flow after the payment of the following: (i) deferred MII ground rent; (ii)
interest and principal on advances under the Backup Guaranty; (iii) interest and
principal on advances under the Debt Service Guaranty; (iv) interest and
principal under the Debt and Tenant Change Guaranty and the MII Guaranty; and
(v) a priority return to the Partnership equal to 10% of cumulative capital less
sales proceeds and loan proceeds, as defined. Additionally, once the 49 Hotels
Loan balance was below $250,000,000, the incentive management fee was payable
out of 25% of Available Cash Flow after the payment of items (i) through (v)
above.
The Windsor Hotel Operating Agreement also provided for annual payments to the
Partnership equal to 85% of operating profit, as defined, for the Windsor Hotel
(75% of operating profit after the Partners have received cumulative
distributions of loan proceeds equal to $60,526,500). However, if 85% or 75% of
operating profit from the Windsor Hotel was insufficient to cover debt service
on the Windsor Hotel, then the 15% or 25% of operating profit, as defined, was
paid to the Partnership. This additional payment to the Partnership of 15% or
25% of operating profit, as defined, accrued as deferred incentive management
fees. As of January 3, 1997 and December 29, 1995, $520,000 and $332,000,
respectively, of incentive management fees related to the Windsor Hotel were
deferred.
The Operating Agreements provided for annual payments to the Operator of (i) the
base management fee equal to 3% of gross sales from the Hotels, (ii) the
Courtyard management fee equal to 3% of gross sales from the Hotels, and (iii)
the incentive management fee equal to 15% of operating profit, as defined, (25%
of operating profit after the Partners have received distributions of aggregate
refinancing proceeds equal to $60,526,500).
The Operator was required to furnish certain services ("Chain Services") which
are furnished generally on a central or regional basis to all managed, owned or
leased hotels in the Courtyard by Marriott hotel system. Effective January 1,
1994, the Operating Agreements provided that charges for certain Chain Services
cannot exceed 5% of gross Hotel sales. The Operator will be responsible for any
Chain Services in excess of the 5% of gross Hotel sales limit from its own
funds. Chain Services charges for 1996, 1995 and 1994 did not exceed the
limitation. The total amount of Chain Services was $6,540,000 in 1996,
$6,412,000 in 1995 and $6,265,000 in 1994.
CBM1 Sup-42
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Financial Statements
The Partnership is required to provide the Operator with working capital and
fixed asset supplies to meet the operating needs of the Hotels. Upon termination
of the Operating Agreements, the working capital and supplies will be returned
to the Partnership. Of the $3,213,000 originally advanced to the Operator for
working capital, $2,000,000 of excess working capital was returned to the
Partnership in 1988, leaving a balance of $1,213,000 as of January 3, 1997 and
December 29, 1995.
The Operating Agreements provided for a property improvement fund to be
maintained to ensure that the physical condition and product quality of the
Hotels are maintained. Contributions to the property improvement fund were 5% of
gross Hotel sales through 1996. Beginning in 1997 contributions to the property
improvement fund could have been increased to 6% of gross Hotel sales if certain
operating profit levels were met. For 1996, 1995 and 1994, the Partnership
contributed $9,082,000, $8,540,000 and $8,092,000, respectively, to the property
improvement fund.
NOTE 9. SUBSEQUENT EVENT
Mortgage Debt
On March 21, 1997 (the "Refinancing Date") both the 49 Hotels Loan and the
Windsor Loan were refinanced. The total amount of the debt was increased from
$280.8 million to $325.0 million. The $44.2 million of excess refinancing
proceeds were used to: (i) make a $7 million contribution to the property
improvement fund to cover anticipated shortfalls; (ii) pay approximately $7
million of refinancing costs; and (iii) make a $30.2 million partial return of
capital distribution to the Partners. The new loan continues to be non-recourse
and requires monthly payments of interest at a fixed rate of 7.865% and
principal based on a 20 year amortization schedule. The loan has a scheduled
maturity in April 2012; however, the loan maturity can be extended for an
additional five years. During the extended loan term, the loan bears interest at
an adjusted rate, as defined, and all cash flow from Partnership operations is
used to amortize the principal balance of the loan.
Debt maturities under the refinanced loan are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 4,593
1998 7,356
1999 7,955
2000 8,604
2001 9,306
Thereafter 287,186
--------
$325,000
========
</TABLE>
The refinanced mortgage loan is secured by first mortgages on all of the Hotels,
related personal property, and the land on which they are located or an
assignment of the Partnership's interest under the land leases. All obligations
under the debt guaranties (see Note 6) expired with the repayment of the 49
Hotels Loan and the Windsor Loan. No new guaranties have been provided by Host
Marriott or MII.
The lender is currently working on the securitization of the mortgage debt
through the issuance and sale of commercial mortgage-backed securities.
Management Agreement
As part of the refinancing, the two Operating Agreements (see Note 8) were
converted into a single management agreement (the "Management Agreement")
effective January 4, 1997. The initial term of the Management Agreement expires
at the end of 2017. The Manager can extend the Management Agreement for up to
four successive periods of ten years. Under the Management Agreement, the
Manager has agreed to subordinate a portion of the Courtyard system fee equal to
1% of gross Hotel sales to debt service on the mortgage loan. In addition, in
exchange for payment of $4.2 million of deferred incentive management fees at
closing, the Manager agreed to forgive approximately $15 million of deferred
fees leaving a $6.5 million balance of accrued incentive management fees. The
$15 million of forgiven fees will be recognized as extraordinary income in the
first quarter of 1997. Incentive management fees are equal to 15% of operating
profit. Deferred and current year incentive management fees will be payable from
50% of available cash after the payment of: (i) debt service; (ii) deferred
Courtyard
CBM1 Supp-43
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Financial Statements
system fees, if any; (iii) deferred MII ground rent, if any; and (iv)
a priority return to the Partnership equal to 10% of cumulative capital less
sale and refinancing proceeds. In addition, incentive management fees paid are
capped at 15% of operating profit and no longer increase to 25% of operating
profit once cumulative distributions of refinancing proceeds equal $60.5
million. Deferred management fees are not payable to the Manager from sale or
refinancing proceeds. Future unpaid incentive management fees will not accrue.
In addition, contributions to the property improvement fund will remain at 5% of
gross Hotel sales through 1998. However, contributions can be increased to 6% of
gross Hotel sales for 1999 and 2000 and 7% thereafter.
Land Leases
Additionally, affiliates of MII, as the land lessors, agreed to continue to
subordinate their ownership interest as well as receipt of ground rent to debt
service on the mortgage loan.
CBM1 Supp-44
<PAGE>
Courtyard by Marriott Limited Partnership
Condensed Balance Sheet
September 12, 1997
(Unaudited, in thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Property and equipment, net....................................................................... $ 302,585
Due from Courtyard Management Corporation......................................................... 5,512
Other assets...................................................................................... 13,432
Restricted cash................................................................................... 1,876
Cash and cash equivalents......................................................................... 8,878
-----------
$ 332,283
===========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt..................................................................................... $ 322,158
Due to Marriott International, Inc. and affiliates................................................ 19,687
Due to Host Marriott Corporation.................................................................. 13,406
Incentive management fees due to Courtyard Management Corporation................................. 5,367
Accounts payable and accrued liabilities.......................................................... 2,749
-----------
Total Liabilities........................................................................... 363,367
-----------
PARTNERS' DEFICIT
General Partner................................................................................... (229)
Limited Partners.................................................................................. (30,855)
Total Partners' Deficit..................................................................... (31,084)
------------
$ 332,283
===========
</TABLE>
The accompanying notes are on integral part of these condensed financial
statements.
CBM1 Supp-45
<PAGE>
Courtyard by Marriott Limited Partnership
Condensed Statements of Operations
For the Thirty-six Weeks Ended September 12, 1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
REVENUES.................................................................. $ 68,961 $ 64,190
-------- ---------
OPERATING COSTS AND EXPENSES
Depreciation.......................................................... 13,332 13,675
Base and Courtyard management fees.................................... 8,105 7,644
Incentive management fees............................................. 6,595 6,730
Ground rent, taxes and other.......................................... 10,167 10,105
-------- ---------
38,199 38,154
-------- ---------
OPERATING PROFIT.......................................................... 30,762 26,036
Interest expense.......................................................... (17,814) (16,213)
Interest income........................................................... 472 698
-------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS......................................... 13,420 10,521
EXTRAORDINARY ITEMS
Gain on forgiveness of deferred fees.................................. 14,896 --
Loss on extinguishment of debt........................................ (2,423) --
--------- ---------
12,473 --
--------- ---------
NET INCOME................................................................ $ 25,893 $ 10,521
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
CBM1 Supp-46
<PAGE>
Courtyard by Marriott Limited Partnership
Condensed Statements of Cash Flows
For the Thirty-six Weeks Ended September 12, 1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................... $ 25,893 $ 10,521
Extraordinary items........................................................... (12,474) --
--------- ---------
Net income before extraordinary items......................................... 13,419 10,521
Noncash items................................................................. 14,264 21,619
Changes in operating accounts................................................. (7,253) (4,683)
--------- ---------
Cash provided by operations............................................... 20,430 27,457
--------- ---------
INVESTING ACTIVITIES
Additions to property and equipment, net...................................... (14,978) (11,016)
Change in property improvement fund........................................... 1,160 4,415
--------- ---------
Cash used in investing activities......................................... (13,818) (6,601)
--------- ---------
FINANCING ACTIVITIES
Proceeds from mortgage debt................................................... 325,000 --
Repayment of mortgage debt.................................................... (280,769) --
Scheduled principal payments on mortgage debt................................. (11,047) (21,558)
Capital distributions......................................................... (37,647) --
Payment of financing costs.................................................... (5,980) (6)
--------- ---------
Cash used in financing activities......................................... (10,443) (21,564)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS............................................. (3,831) (708)
CASH AND CASH EQUIVALENTS at beginning of period.................................. 12,709 11,013
--------- ---------
CASH AND CASH EQUIVALENTS at end of period........................................ $ 8,878 $ 10,305
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest............................................... $ 18,450 $ 16,818
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
CBM1 Supp-47
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Condensed Financial Statements
1. The accompanying condensed financial statements have been prepared by the
Courtyard By Marriott Limited Partnership (the "Partnership") without audit.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted from the accompanying statements.
The Partnership believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto included in the Partnership's audited financial
statements for the fiscal year ended January 3, 1997 included in this
Prospectus Supplement. Interim results are not necessarily indicative of
fiscal year performance because of seasonal and short-term variations.
For financial reporting purposes, the net income of the Partnership is
allocated 95% to the Limited Partners and 5% to the General Partner.
Significant differences exist between the net income for financial reporting
purposes and the net income reported for Federal income tax purposes. These
differences are due primarily to the use for income tax purposes of
accelerated depreciation methods, shorter depreciable lives for the assets,
difference in the timing of recognition of certain fees and straight-line
rent adjustments.
2. Revenues represent house profit of the Partnership Hotels since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Hotels to the Courtyard
Management Corporation (the "Manager"), a wholly owned subsidiary of
Marriott International, Inc. ("MII"). House profit reflects the net revenues
flowing to the Partnership as property owner and represents Hotel operating
results less property-level expenses, excluding depreciation and
amortization, base, Courtyard and incentive management fees, property taxes,
ground rent insurance and certain other costs, which are classified as
operating costs and expenses. Revenues consist of the following (in
thousands):
<TABLE>
<CAPTION>
Thirty-six Weeks Ended
--------------------------------------
September 12, September 6,
1997 1996
------------- ------------
<S> <S> <C>
HOTEL SALES
Rooms......................................................... $ 121,572 $ 113,561
Food and beverage............................................. 8,886 9,053
Other......................................................... 4,624 4,790
----------- -----------
135,082 127,404
----------- -----------
HOTEL EXPENSES
Departmental Direct Costs
Rooms..................................................... 25,833 24,782
Food and beverage......................................... 7,656 7,693
Other hotel operating expenses................................ 32,632 30,739
----------- -----------
66,121 63,214
----------- -----------
REVENUES ......................................................... $ 68,961 $ 64,190
=========== ===========
</TABLE>
3. On March 21, 1997, the Partnership completed a refinancing of both the 49
Hotels and Hartford Hotel mortgage loan. The total amount of the debt was
increased from $280.8 million to $325 million. In connection with this
refinancing, the Partnership recognized a net extraordinary gain of $12.5
million related to the forgiveness of $14.9 million in deferred fees from
the Manager and the write-off of $2.4 million of the financing costs related
to the original debt.
CBM1 Supp-48
<PAGE>
Courtyard by Marriott Limited Partnership
Notes to Condensed Financial Statements
4. Pursuant to the terms of the refinanced loan, the Partnership is required to
establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes for each mortgaged property if the
credit rating of MII is downgraded by Standard and Poor's Rating Services.
On April 1, 1997, MII's credit rating was downgraded and on July 21, 1997
the Partnership subsequently transferred $1.9 million into the escrow
reserve from the Manager's existing tax and insurance reserve account.
During the third quarter of 1997, an additional $543,000 was transferred
into and $591,000 in real estate taxes were paid out of the reserve account
resulting in an ending escrow balance of $1.9 million. The escrow reserve is
included in restricted cash and the resulting tax and insurance liability is
included in accounts payable and accrued liabilities in the accompanying
balance sheet.
CBM1 Supp-49
<PAGE>
CRF LODGING COMPANY, L.P.
Supplement Dated __________ __, 1998 for
Prospectus/Consent Solicitation Statement Dated _________ __, 1998 for
Courtyard by Marriott II Limited Partnership
On the terms described in the Prospectus/Consent Solicitation Statement
(the "Consent Solicitation") dated ________ __, 1998, of which this Supplement
(the "Supplement") is a part, CRF Lodging Company, L.P. (the "Company"), a newly
formed Delaware limited partnership, whose sole general partner will be CRF
Lodging Trust ("CRFLT"), a Maryland real estate investment trust, is proposing
the consolidation (the "Consolidation") of Courtyard by Marriott II Limited
Partnership ("CBM2"), a Delaware limited partnership, and up to five other
limited partnerships (the "Hotel Partnerships") into an umbrella partnership
real estate investment trust (an "UPREIT") in order to consolidate and expand
the limited service and extended-stay hotel businesses currently conducted
separately by the Hotel Partnerships and Host Marriott Corporation ("Host").
Limited Partners of CBM2 are being asked to approve the Consolidation as
described in the Consent Solicitation. Upon approval of the Consolidation, a
newly formed direct or indirect wholly owned subsidiary of the Company (the
"Merger Partnership") will be merged with and into CBM2 with CBM2 being the
surviving entity. In the merger, partners of CBM2 will receive units of limited
partnership interest in the Company ("Units") in exchange for their interests in
CBM2.
Following the Consolidation, the Company will own a portfolio of up to
221 limited service and extended-stay hotels operating under three Marriott
brand names (Courtyard by Marriott(R), Residence Inn by Marriott(R) and
Fairfield Inn by Marriott(R)) (the "Hotels"). Concurrently with the
Consolidation, CRFLT will consummate an initial public offering (the "Offering")
of its common shares of beneficial interest (the "Common Shares") and contribute
the proceeds thereof to the Company in exchange for Units. Following the
Offering, CRFLT anticipates that the Common Shares will be listed on the New
York Stock Exchange ("NYSE"). Beginning one year after the Consolidation (the
"Initial Holding Period"), Limited Partners will have the right to redeem their
Units and receive, at the election of CRFLT, either Common Shares on a
one-for-one basis (subject to adjustment) or cash in an amount equal to the
market value of such shares (the "Unit Redemption Right"). CRFLT expects to
qualify as a real estate investment trust (a "REIT") under the Internal Revenue
Code of 1986, as amended (the "Code").
CBM Two Corporation (the "Hotel Partnership GP"), the general partner
of CBM2, believes that the terms of the Consolidation provide substantial
benefits and are fair to the Limited Partners of CBM2 and recommend that all
Limited Partners of CBM2 vote FOR the Consolidation.
Limited Partners of CBM2 should consider the risks and other
considerations described more fully in the Consent Solicitation under "Risk
Factors," including the following:
. There is uncertainty at the time of voting as to the Hotel
Partnerships that will participate in the Consolidation and thus,
uncertainty as to the size and leverage of the Company until after
the end of the Solicitation Period.
. The Consolidation involves a fundamental change in the nature of a
Limited Partner's investment from an investment in a fixed portfolio,
limited life partnership where a Limited Partner could receive a
distribution upon liquidation of the partnership into an investment
in a public real estate company which expects to acquire additional
hotels, where a Limited Partner likely may
CBM2 Supp-1
<PAGE>
realize value from his investment only through a sale of Common
Shares received pursuant to the Unit Redemption Right.
. As a result of the Consolidation, a Limited Partner of CBM2, which
owns 70 Courtyard Hotels, will own an interest in a much larger
portfolio of Hotels, including up to an additional 51 Courtyard
Hotels, 50 Residence Inns and 50 Fairfield Inns, and a material
adverse change affecting any of the Company's assets will affect all
Limited Partners regardless of whether a particular Limited Partner
previously held an interest in such asset.
. No independent representative was retained to negotiate on behalf of
the Limited Partners of CBM2 or the other Hotel Partnerships. If one
had been, the terms of the Consolidation may have been more favorable
to the Limited Partners of CBM2 or the other Hotel Partnerships.
. Conflicts of interest exist in connection with the structuring of the
Consolidation, including the fact that subsidiaries of Host serve as
the general partners of all of the Hotel Partnerships and other
subsidiaries of Host will serve as the Lessees of the Hotels. Such
conflicts of interest may result in decisions that do not fully
reflect the interests of all Partners in the Hotel Partnerships.
. Host and its subsidiaries will realize substantial benefits from the
Consolidation, including receipt of Units having an estimated value
of at least $_______ million in exchange for their Hotel Partnership
Interests in CBM2 (representing a 5% general partner interest and a
1.39% limited partner interest) ($___ million in the aggregate for
their Hotel Partnership Interests in all of the Hotel Partnerships)
(based upon the estimated Exchange Values), $______ million in cash
from the sale of two limited service and extended-stay hotels owned
by Host (the "Acquisition Hotels") based upon their aggregate
Appraised Value, as adjusted, economic benefits under the Leases and,
because the Consolidation has been structured to permit all Partners
(including the Limited Partners) to defer recognition of gain, the
ability to defer significant potential tax liabilities attributable
to taxable gain in excess of sale proceeds of approximately $______
million.
. The allocation of Units among the Hotel Partnerships is based upon
their respective Exchange Values, the calculation of which involves
numerous assumptions and estimates. There is no assurance that the
value of the Units to be received in the Consolidation equals the
fair market value of the Hotels and other assets contributed by CBM2
and the other Hotel Partnerships.
. Current federal income tax law prohibits the Company from operating
the Hotels directly. Therefore, the Company will be substantially
dependent upon the Lessees and Managers for its revenue and the
Company will have limited control over the operations of the Hotels.
. Approval of the Consolidation by Limited Partners holding a majority
of the outstanding Partnership Units of CBM2 will bind all
Limited Partners of CBM2.
. Limited Partners of Hotel Partnerships who vote against the
Consolidation and comply with certain specified procedures
("Dissenting Partners") will not have a right to receive cash based
on an appraisal of their Hotel Partnership Interests but instead can
elect to tender the Units they receive in the Consolidation in
exchange for unsecured notes (the "Notes"), for which there will be
no public market, in an amount equal to the Liquidation Value (as
defined herein) of their Hotel Partnership Interests. As of September
12, 1997, on a pro forma basis assuming the Full Consolidation
Scenario (as defined herein), the Company would have had aggregate
consolidated liabilities to which the Notes were effectively
subordinated of approximately $939 million.
. There are limitations on actual or constructive ownership of more
than 9.9% of the number or value of CRFLT's outstanding Common
Shares
. Taxation of CRFLT as a regular corporation if it fails to qualify as
a REIT, and taxation of the Company as a corporation if it fails to
qualify as a partnership for federal income tax purposes, either of
which would, among other things, result in a decrease in cash
available for distribution and a material reduction in the value of
the Common Shares and Units.
The effects of the Consolidation may be different for Limited Partners
of the various Hotel Partnerships. This Supplement has been prepared to
highlight for the Limited Partners of CBM2 (the "CBM2 Limited Partners") the
risks, benefits, effects and fairness of the Consolidation and to provide
additional information specific to CBM2. Supplements have also been prepared for
each of the other Hotel Partnerships. This Supplement, together with the
supplements of the other Hotel Partnerships (collectively, the "Supplements"),
are a part of the Consent Solicitation Statement. Upon receipt of a written
request by a Limited Partner or his representative so designated in writing, the
Hotel Partnership GP will send a copy of any Supplement without charge. All
requests for a copy of a Supplement should be directed to:
______________________________________________.
CBM2 Supp-2
<PAGE>
The Consolidation is subject to various conditions, one of which is
that at least four Hotel Partnerships, including CBM1, CBM2 and RIBM1, must
approve the Consolidation (the "Minimum Participation Condition"). See "The
Consolidation -- Conditions to the Consolidation" in the Consent Solicitation.
All cross-references refer to the Consent Solicitation unless stated
otherwise. Capitalized terms not defined herein shall have the meaning set forth
in the Consent Solicitation. The information contained herein, unless otherwise
indicated, assumes the Consolidation occurs with an Offering yielding gross
proceeds of $800 million, all Hotel Partnerships participate, no Notes are
issued and $539 million of outstanding indebtedness is repaid (the "Full
Consolidation Scenario").
Risk Factors
In deciding whether to approve the Consolidation, CBM2 Limited Partners
should consider certain risks and other factors. The Hotel Partnership GP
believes that CBM2 Limited Partners should particularly consider the following,
which should be read in conjunction with the information in the Consent
Solicitation under "Risk Factors" and "Federal Income Tax Considerations:"
Uncertainties at the Time of Voting. There are several uncertainties at
the time the Partners must vote on the Consolidation, including (i) the identity
of the Hotel Partnerships that will participate in the Consolidation and, thus,
the Hotels that will be acquired by the Company (which will affect such matters
as the size, scope and leverage of the Company), (ii) the Exchange Value for
each Hotel Partnership (which will be adjusted for changes in working capital,
indebtedness and various other items prior to the Closing Date) and (iii) the
costs of prepaying certain indebtedness of the Hotel Partnerships (which costs
will be determined based upon the interest rates on applicable U.S. Treasuries
at the time of the prepayment). See "Determination of Exchange Values and
Allocation of Units."
Fundamental Change in Nature of Investment; Potential Underperformance.
The Consolidation involves a fundamental change in the nature of a Limited
Partner's investment from an investment in which a Limited Partner participates
in the profits from the operation of the Hotels and is entitled to receive
distributions from any net proceeds of a sale or refinancing of CBM2's assets,
to an investment in an entity who will receive rents from the lessees which will
bear the risks and receive the benefits from the hotels' operation and Limited
Partners likely may realize the value from their investment only through the
exercise of the Unit Redemption Right and sale of the Common Shares received as
a result thereof and not from liquidation proceeds. Continuing CBM2 would allow
CBM2 Limited Partners an opportunity to eventually receive liquidation proceeds
from the sale of CBM2's Hotels, and a CBM2 Limited Partner's share of these sale
proceeds could be higher than the amount a limited partner might realize from
the sale of Units or exercise of the Unit Redemption Right (or payments on Notes
received by any Dissenting Partner). In addition, the Company has the ability to
acquire additional hotels, can reinvest proceeds from sales or refinancings of
existing hotels in additional hotels and has a general partner that is a
publicly traded entity. An investment in the Company may not outperform an
investment in CBM2. See "Comparison of Hotel Partnership Interests, Units and
Common Shares."
Exposure to Risks from Other Hotels and Brands. As a result of the
Consolidation, Limited Partners of CBM2, which owns 70 Courtyard hotels, will
own interests in a much larger partnership with a broader range of assets,
including up to an additional 51 Courtyard hotels, 50 Residence Inns and 50
Fairfield Inns. A material adverse change affecting one of the Company's assets
will affect all Limited Partners regardless of whether a particular Limited
Partner previously was an investor in such affected asset. In addition, each of
the three Marriott brands which initially will comprise the Company operates in
a different market segment and targets different consumers and, as a result, may
be affected differently by different economic and market conditions.
CBM2 Supp-3
<PAGE>
Limitations on Sales or Refinancings of the Courtyard Hotels. Because
of substantial taxable gains that would be recognized by the Hotel Partnership
GPs of CBM1 and CBM2, which are subsidiaries of Host, none of the assets of CBM1
and CBM2 (the "Courtyard Hotels") can be sold for a period of __ years from the
Closing Date of the Consolidation (other than pursuant to a tax-deferred
exchange) without the consent of Host (the "Lock-out Provisions"). Such Lock-out
Provisions are only applicable so long as Host holds the Units received in the
Consolidation relating to its Hotel Partnership Interests in CBM1 and CBM2 and
has not transferred, sold or otherwise disposed of such Units in a taxable
transaction. In addition, the Partnership Agreement contains certain
restrictions regarding the ability of the Company to repay or refinance
indebtedness secured by the Courtyard Hotels. These restrictions will limit the
ability of the Company to change its portfolio in response to market conditions
and, to the extent the Courtyard Hotels do not perform as well as the Residence
Inns or Fairfield Inns in its portfolio, the Company will have limited
flexibility to dispose of any such underperforming assets even if such disposal
would be in the best interests of the Company.
Conflicts of Interest in the Consolidation. Conflicts of interest exist
in connection with the Consolidation which include conflicts arising from the
fact that subsidiaries of Host serve as the Hotel Partnership GP of CBM2 (which
holds a 5% general partner interest and a 1.39% limited partner interest in
CBM2) and as Hotel Partnership GPs of the other Hotel Partnerships (with
varying interests) and other subsidiaries of Host will serve as Lessees of the
Hotels at the same time as the Hotel Partnership GP is recommending the
Consolidation and is involved in establishing the terms and structure of the
Consolidation, including the structuring of the Leases. In addition, Host and
its subsidiaries will receive substantial benefits from the
CBM2 Supp-4
<PAGE>
Consolidation. These conflicts of interest may result in decisions that do not
fully reflect the interests of all Limited Partners in CBM2 or the other Hotel
Partnerships.
Substantial Benefits to Related Parties. The Consolidation will permit
Host to continue to be involved in the ownership and operation of the Hotels and
realize substantial benefits therefrom. Host and its subsidiaries will receive
Units with an estimated value of at least $____ million in exchange for their
Hotel Partnership Interests in CBM2 ($____ million in the aggregate for their
Hotel Partnership Interests in all of the Hotel Partnerships) (based upon the
estimated Exchange Values) and $___ million in cash from the sale of the
Acquisition Hotels to the Company (based upon their aggregate Appraised Value,
as adjusted). Subsidiaries of Host will be the Lessees of the Hotels and may
receive significant economic benefits in connection with the Leases, including
the receipt of income to the extent sales from the Hotels exceed operating costs
and expenses payable by the Lessees, management fees and rental payments to the
Company. Because the Consolidation has been structured to permit all Partners
(including the Limited Partners) to defer recognition of gain, the Consolidation
will also permit the Hotel Partnership GPs of CBM1 and CBM2, which are
subsidiaries of Host, to defer significant tax liabilities attributable to
taxable gain in excess of sale proceeds (estimated at approximately $____
million, of which $_____ million is attributable to CBM2) that otherwise would
be incurred upon any sale of the Courtyard Hotels (other than in a tax-deferred
exchange such as the Consolidation) or upon substantial reductions in the amount
of debt now secured by the Courtyard Hotels. In the case of the Courtyard
Hotels, the Partnership Agreement imposes certain restrictions on the sale of
such Hotels and the refinancing, prepayment or reduction of the debt secured by
those Hotels for __ years from the Closing Date of the Consolidation without the
consent of Host, in order to defer the recognition of gain, which gain would be
disproportionately borne by the Hotel Partnership GPs of CBM1 and CBM2 because
of prior allocations to them of tax losses. The Company also will repay, either
in cash or Common Shares, at the election of a subsidiary of Host, a loan of
approximately $13 million owed to such subsidiary of Host by CBM1.
Method of Allocation of Units. The allocation of Units among the Hotel
Partnerships will be based upon their respective Exchange Values, which in turn
are based upon the Appraised Value of each Hotel Partnership's Hotels as
adjusted for such things, among others, as net non-real estate assets (including
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables) and cash reserves) ("Net Other Assets"), existing
indebtedness (including an adjustment for prepayment and defeasance costs),
deferred maintenance and FF&E shortfalls, deferred management fees and
Consolidation Expenses. There is, however, no assurance that the value of the
Units to be received by participants in the Consolidation will equal the fair
market value of the Hotels and other assets contributed by such participants.
Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the Limited Partners of CBM2 or any of the
other Hotel Partnerships. The Hotel Partnership GP has obtained an opinion from
American Appraisal Associates, an independent, nationally recognized hotel
valuation and financial advisory firm ("AAA"), as to (i) the fairness, from a
financial point of view, to the Limited Partners of each Hotel Partnership of
the methodologies used to determine the Exchange Value of CBM2 and each other
Hotel Partnership and the allocation of Units among each of the Hotel
Partnerships in the Consolidation, (ii) the fairness and reasonableness, from
the standpoint of each Hotel Partnership, of the underlying assumptions used to
determine the Exchange Value of each Hotel Partnership and the purchase price of
each Acquisition Hotel (including, without limitation, the assumptions used to
determine the various adjustments to the Appraised Values of the Hotels), (iii)
the fairness and reasonableness of the Limited Partners of each Hotel
Partnership of the methodology used to allocate Units received by each Hotel
Partnership among its general and Limited Partners, (iv) the fairness and
reasonableness, from the standpoint of each Hotel Partnership, of the
methodologies and underlying assumptions used to determine the Continuation
Value and the Liquidation Value of each Hotel Partnership (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) and (v) the fairness and reasonableness, from
the Company's standpoint, of the economic terms of the Leases. However, AAA has
not negotiated with the Hotel Partnership GP and has not participated in
establishing the terms of the Consolidation. Consequently, the terms and
conditions of the Consolidation may have been more favorable to CBM2 Limited
Partners or the Limited Partners of the other Hotel Partnerships if such terms
and conditions were the result of arm's length negotiations.
Lack of Control over Hotel Operations. Due to current federal income
tax law prohibitions on a REIT's ability to derive revenues directly from the
operation of a hotel, the Company will lease its Hotels to the Lessees, which
will operate the Hotels by continuing to retain the Managers pursuant to the
Management Agreements. Neither CRFLT nor the Company will operate the Hotels or
participate in the decisions affecting the daily operations of the Hotels.
Although the Company will have certain rights as lessor under the Leases
(including control over certain owner-funded capital expenditures), neither
CRFLT nor the Company will have the authority to require the Lessees or the
Managers to operate the Hotels in any particular manner or to govern any
particular aspect of their operation.
Expiration of Leases. The Leases expire at the end of __ years and
there can be no assurance that such Leases will be renewed. If such Leases are
terminated at the end of their terms, the Company will be required to find other
lessees (which lessees must be satisfactory to the Managers). There can be no
assurance as to whether satisfactory lessees could be found or as to the terms
or conditions on which the Company would be able to enter into new leases with
such lessees.
The Company's Dependence on the Lessees and Managers for Revenue. The
Company will be dependent upon the Lessees for its revenue, and the Lessees'
ability to pay rent to the Company will be substantially dependent upon the
Managers' ability to operate the Hotels profitably.
No Limitation on Debt. There are no limitations in CRFLT's or the
Company's organizational documents which limit the amount of indebtedness either
may incur.
Risks of Leverage. The Company has substantial indebtedness. As of
September 12, 1997, on a pro forma basis assuming the Full Consolidation
Scenario, the Company had outstanding indebtedness totaling $780 million. The
Company's business is capital intensive and the Company will have significant
capital requirements in the future. The Company's leverage level could affect
its ability to (i) obtain financing in the future, (ii) undertake refinancings
on terms and subject to conditions deemed acceptable by the Company, (iii) make
distributions to partners, (iv) pursue its acquisition strategy or (v) compete
effectively or operate successfully under adverse economic conditions.
CBM2 Supp-5
<PAGE>
Relinquishment of Potential Refinancing Proceeds. A CBM2 Limited
Partner's share of potential refinancing proceeds, if any should occur during
the term of CBM2, could be higher than what a limited partner might realize,
following the Initial Holding Period, from a sale of Common Shares received
pursuant to the Unit Redemption Right.
Rental Revenues from Hotels Subject to Rights of Lenders. In accordance
with the loan agreements with respect to outstanding indebtedness of CBM2 and
the other Hotel Partnerships, the rental revenues received by the Company under
the Leases will first be used to satisfy the debt service on such outstanding
indebtedness and any cash flow remaining thereafter will be available to satisfy
all other obligations of the Company (including paying property taxes and
insurance, funding the required FF&E reserves for the Hotels and capital
improvements) and to make distributions to partners (including CRFLT).
Ownership Limitations. No person may own in excess of 9.9% of the
number or value of outstanding Common Shares of CRFLT, without the consent of
the Board of Trustees of CRFLT, in its sole and absolute discretion. During the
period of time subsidiaries of Host are acting as Lessees, Host and its
affiliates are prohibited from owning in excess of 4.9% (by value) of the
Company.
Majority Vote of CBM2 Limited Partners Binds All CBM2 Limited Partners.
Approval of the Consolidation by CBM2 Limited Partners holding a majority of the
outstanding Partnership Units of CBM2 will cause CBM2 to participate in the
Consolidation, and such approval will bind all CBM2 Limited Partners, including
CBM2 Limited Partners who voted against or abstained from voting with respect to
the Consolidation.
Effect of Subsequent Events upon Recognition of Gain. Even though the
CBM2 Limited Partners who do not receive Notes as a result of exercising
Dissenters' Rights generally are not expected to recognize significant taxable
gain at the time of the Consolidation, there are a variety of events and
transactions (including the sale of one or more of the Hotels or the reduction
of indebtedness securing one or more of the Hotels) that could cause a CBM2
Limited Partner to recognize all or a part of the gain that otherwise has been
deferred through the Consolidation. See "Federal Income Tax Considerations --
Tax Consequences of the Formation of the Company -- Effect of Subsequent
Events." The Partnership Agreement does not impose any restrictions on the
Company's ability to dispose of the Hotels or to refinance debt secured by the
Hotels, other than with respect to the Courtyard Hotels which restriction can be
waived with the consent of Host). In addition, the Partnership Agreement
expressly provides that CRFLT, as the general partner of the Company, is not
required to take into account the tax consequences of the limited partners in
deciding whether to cause the Company to undertake specific transactions, and
the limited partners have no right to approve or disapprove such transactions.
See "Description of Units -- Sales of Assets and Lock-out Provisions."
Failure of the Company to Qualify as a Partnership for Tax Purposes.
Taxation of the Company as a corporation if it fails to qualify as a
partnership, and the Company's subsequent liability for federal, state and local
taxes on its income and property, would, among other things, have the effect of
reducing cash available for distribution to holders of Units, would cause CRFLT
to fail to qualify as a REIT for tax purposes, and could cause the holders of
Units to recognize taxable gain at the time the Company ceases to qualify as a
partnership.
Failure of CRFLT to Qualify as a REIT for Tax Purposes. Taxation of
CRFLT as a corporation if it fails to qualify as a REIT, and CRFLT's subsequent
liability for federal, state and local taxes on its income and property, would,
among other things, have the effect of reducing cash available for distribution
to CRFLT's shareholders and reducing materially the value of the Common Shares
and Units.
State and Local Taxes. CBM2 Limited Partners holding Units may be
subject to state and local taxation in a number of jurisdictions in which the
Company directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this regard, immediately
following the Consolidation, the Company will own properties in 35 states across
the United States. Currently, CBM2 owns properties in 29 states.
Dissenting Partners Have No Cash Appraisal Rights and May Elect to
Receive Only Notes. CBM2 Limited Partners who vote against the Consolidation
and comply with certain specified procedures ("Dissenting Partners") will not
have a right to receive cash based on an appraisal of their
CBM2 Supp-6
<PAGE>
interests in CBM2 or otherwise, but instead can elect to tender the Units they
receive in the Consolidation in exchange for unsecured seven-year notes (the
"Notes"), for which there will be no public market, in an amount equal to the
Liquidation Value of their Hotel Partnership Interests. If the Notes are sold,
they may sell at prices substantially below their issuance price. Noteholders
are likely to receive the full face amount of the Notes only if they hold the
Notes to maturity, which is approximately seven years after the Consolidation,
or if the Company repays or refinances the Notes at or prior to maturity or
realizes net sales or excess refinancing proceeds from Hotels owned by a
Noteholder's former Hotel Partnership. Because the Notes are unsecured
obligations of the Company, they will be effectively subordinate to all secured
debt of the Company and all obligations of the Hotel Partnerships which will be
the owners of the Hotels. As of September 12, 1997, on a pro forma basis
assuming the Full Consolidation Scenario, the Company had aggregate consolidated
liabilities to which the Notes were effectively subordinated of approximately
$939 million. See "Rights of Dissenting Partners" and "Description of the
Notes."
Expected Benefits of the Consolidation
The Hotel Partnership GP believes that participating in the Consolidation
would likely be beneficial to the CBM2 Limited Partners for the reasons set
forth below. This information is qualified by and should be read in conjunction
with the information in the Consent Solicitation under "Background and Reasons
for the Consolidation -- Expected Benefits of the Consolidation." These
benefits, which should be viewed as alternatives to continuing the business and
operations of CBM2, are expected to include:
. Enhanced Liquidity of Investment. The Consolidation will offer CBM2
Limited Partners significantly enhanced liquidity with respect to
their investments in CBM2 because, after expiration of the Initial
Holding Period, CBM2 Limited Partners would be able to exercise their
Unit Redemption Right (subject to certain limited exceptions) and
receive, at CRFLT's election, either freely tradable Common Shares of
CRFLT or the cash equivalent thereof. The exercise of the Unit
Redemption Right, however, would result in recognition of taxable
income or gain at that time.
. Public Market Valuation of Assets. The Hotel Partnership GP believes
that the public market valuations of the equity securities of many
publicly traded real estate companies, including REITs that focus on
the lodging industry, are in part based upon the growth potential of
such companies and currently exceed the private market values of their
real estate assets. There can be no assurance, however, that the
Common Shares of CRFLT will trade at a premium to the private market
values of the Hotels or that the relative pricing differential will
not change or be eliminated in the future.
. Regular Quarterly Cash Distributions. The Hotel Partnership GP expects
that the Company will make regular quarterly cash distributions to
holders of Units in proportion to their percentage interests in the
Company. While these distributions may not be higher than CBM2's
current distributions, the ability to receive distributions quarterly
and in regular amounts would be enhanced.
. Substantial Tax Deferral. The Hotel Partnership GP expects that CBM2
Limited Partners who do not exercise Dissenters' Rights generally
should be able to obtain the benefits of the Consolidation while
continuing to defer recognition for federal income tax purposes of at
least a substantial portion, if not all, of the gain with respect to
their interests in CBM2 that otherwise would be recognized in the
event of a liquidation of CBM2 or a sale or other disposition of its
Hotels in a taxable transaction. Thereafter, such CBM2 Limited
Partners generally should be able to defer at least a substantial
portion of such built-in gain until they elect to exercise their Unit
Redemption Right or the Hotels currently owned by CBM2 are sold or
otherwise disposed of in a taxable transaction by the
CBM2 Supp-7
<PAGE>
Company. In the case of the Hotels owned by CBM2, the
Partnership Agreement imposes certain restrictions on the sale
or refinancing of those Hotels and the prepayment or reduction
of the debt secured by those Hotels for the ___ year period
beginning with the consummation of the Consolidation without
the consent of Host in order to defer the recognition of gain,
which gain would be disproportionately borne by the Hotel
Partnership GP because of prior allocations to it of tax
losses. The federal income tax consequences of the
Consolidation are highly complex and, with respect to each
CBM2 Limited Partner, are dependent upon many variables,
including the particular circumstances of such CBM2 Limited
Partner. See "Federal Income Tax Considerations-- Tax
Consequences of the Formation of the Company" in the Consent
Solicitation. Each CBM2 Limited Partner is urged to consult
with his own tax advisors as to the consequences of the
Consolidation in light of his particular circumstances.
. Risk Diversification. The consolidation of the Hotels, as
well as future hotel acquisitions by the Company, will
diversify the investment risks to CBM2 Limited Partners over a
broader group of hotels, geographic locations, range of
product types and market segments and will reduce the
dependence of an investment upon the performance of, and the
exposure to the risks associated with, the 70 Courtyard Hotels
currently owned by CBM2 and the single market segment
(moderate-priced limited service) in which CBM2 currently
operates.
. Reduction in Leverage and Interest Costs. Upon consummation of
the Consolidation and the Offering, it is expected that the
aggregate amount of consolidated indebtedness of the Company
will be reduced, by application of a portion of the net
proceeds from the Offering, by between approximately $390
million and $539 million (excluding prepayment and defeasance
costs which also will be required to be paid), depending upon
the Hotel Partnerships which participate in the Consolidation
and the proceeds raised in the Offering, resulting in
significant interest and debt service savings and reduced
overall leverage levels for Limited Partners in the Hotel
Partnerships. The CBM2 Senior Notes will remain outstanding
following the Consolidation. The Company will be less
leveraged than CBM2 is currently.
. Growth Potential. The Hotel Partnership GP believes that
substantial opportunities exist to acquire or develop limited
service and extended-stay hotel properties at attractive
prices and that CBM2 is not in a position to take advantage of
such opportunities because of its lack of access to additional
sources of capital on favorable terms and restrictions on
additional acquisitions and development imposed by its
partnership agreement. In addition, the Company's structure
and capitalization as part of an UPREIT should provide it with
substantial flexibility to structure acquisitions of
additional hotels utilizing debt, cash, Units or Common Shares
(or any combination thereof), which may permit the Company to
structure acquisitions of hotel properties on an income
tax-deferred basis to sellers.
. Greater Access to Capital. With publicly traded securities, a
larger base of assets and a greater equity value than CBM2
individually, CRFLT expects to have greater access to the
capital necessary for funding the operations of the Company
and consummating acquisitions on more attractive terms than
would be available to CBM2 individually. This greater access
to capital should provide greater financial stability to the
Company and reduce the level of risk associated with
refinancing existing loans upon maturity, as compared to CBM2
individually.
CBM2 Supp-8
<PAGE>
Determination of Exchange Values and Allocation of Units
The Company and the Hotel Partnership GP established the Exchange Value
for the equity interests in CBM2 by (i) obtaining an independent appraisal of
the value of the Hotels owned by CBM2, as of ______ __, 1998 (the "Appraised
Value"), as disclosed below; (ii) adding the amount of other assets (such as
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables) and cash reserves), net of liabilities (excluding
mortgage and other debt and deferred management fees) ("Net Other Assets") as of
________ ___, 1998 (the "Initial Valuation Date"); (iii) subtracting the
estimated balance of the mortgage debt owed by CBM2 as of June 30, 1998, which
is the estimated closing date for the Consolidation; (iv) subtracting the
estimated balance of other debt of CBM2 as of June 30, 1998; (v) adjusting for
the estimated prepayment and defeasance costs; (vi) subtracting the amount of
deferred management fees payable to the Manager under the CBM2 Management
Agreement for CBM2's Hotels; (vii) subtracting an amount equal to the estimated
cost to complete any deferred maintenance items identified in the engineer's
report relating to CBM2's Hotels; (viii) subtracting an amount equal to the
estimated cost (if any) of bringing the condition of FF&E at CBM2's Hotels to
normal levels; (ix) subtracting CBM2's pro rata share (based upon relative
Exchange Values) of estimated Consolidation Expenses and (x) making certain
other adjustments.
Prior to the distribution of the Last Preliminary Prospectus in the
Offering, a final determination of the Exchange Values will be made, as of the
date that is the end of the most recent accounting period that has ended at
least ___ days prior to the date on which the Last Preliminary Prospectus is
distributed to investors (the "Final Valuation Date") to reflect (i) the amount
of Net Other Assets, the actual principal balances of mortgage and other debt
(including an adjustment for prepayment and defeasance costs) and the amount of
deferred management fees payable, (ii) any amounts actually expended by CBM2
after the Initial Valuation Date to perform deferred maintenance or make up FF&E
shortfalls previously subtracted in determining the estimated Exchange Value of
CBM2 and (iii) any revised estimate and allocation of Consolidation Expenses.
The actual value of Units issued to Partners in each Participating Hotel
Partnership will be based on these Exchange Values.
The Hotels were appraised as of ________ __, 1998, by AAA, an
independent, nationally recognized hotel valuation and financial advisory firm
experienced in the appraisals of lodging properties such as the Hotels. Each
appraisal (an "Appraisal") was reviewed by an MAI appraiser and certified by
such MAI appraiser as having been prepared in accordance with the requirements
of the Standards of Professional Practice of the Appraisal Institute and the
Uniform Standards of Professional Appraisal Practice of the Appraisal
Foundation. The Appraisals are not guarantees of present or future values, and
no assurance can be given as to the actual value of the Hotels. The Appraisals
should be read in conjunction with other information, such as, but not limited
to, the audited financial statements of CBM2.
Appraised Value of Hotels Owned by CBM2
(Dollars in thousands)
<TABLE>
<S> <C>
Appraised Value .............................................. $___________
</TABLE>
CBM2 Supp-9
<PAGE>
Calculation of Estimated Exchange Value
as of Initial Valuation Date
(Dollars in thousands)
<TABLE>
<S> <C>
Appraised Value $
Net Other Assets
Mortgage debt
Other debt
Prepayment penalties and/or
defeasance costs
Deferred management fees
Deferred maintenance costs
FF&E shortfall
Consolidation Expenses
Other adjustments/(1)/
-----
Exchange Value $
=====
</TABLE>
- ----------------
/(1)/ Includes environmental remediation and certain other costs.
Distribution of Units Among General and Limited Partners
Based on Estimated Exchange Values
(Dollars in thousands)
<TABLE>
<CAPTION>
Limited Partners General Partner
------------------------------------ ---------------------------------
Estimated
Value of Units
Estimated % per $1,000
Estimated Estimated % of Units Limited Partner Estimated % of Estimated
Total Value of Received Original Units Received Value of
Hotel Partnership of Units/(1)/ Total/(2)/ by CBM2 Investment/(2)/ by CBM2 Units/(1)/
- ----------------- ------------- ------------ --------------- ------------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CBM2 $ % % $ % $
============= ============ =============== ================== ============== ===============
</TABLE>
- ----------------
(1) Assumes the value of the Units is equal to the initial public offering
price of CRFLT's Common Shares in the Offering and that the aggregate
value of the Units received by CBM2 is just equal to (but does not exceed)
the estimated Exchange Value.
(2) Represents the estimated percentage of the total value of Units allocated
to the Hotel Partnerships as a group and does not reflect the issuance of
Units to CRFLT in exchange for the proceeds of the Offering (which will
reduce the percentage of each Hotel Partnership in proportion to their
respective Exchange Values). Thus, for example, if CRFLT purchases 50% of
the Company using the proceeds received from public investors in the
Offering, then each of the percentages set forth above would be reduced by
50%. The estimated values of Units would be not affected.
CBM2 Supp-10
<PAGE>
Exchange Value of CBM2
for Allocation of Units to CBM2
as of Initial Valuation Date
<TABLE>
<CAPTION>
Per $1,000 Limited
Partner Original
Investment
----------------------------
Percent of Percent of
Estimated Aggregate Estimated Aggregate
Exchange Exchange Exchange Exchange
Description Value Value Value Value
----------- -------------- ---------- ------------ ----------
(in thousands) (in dollars)
<S> <C> <C> <C> <C>
100% Participation,
No Notes Issued...................... $ % $ %
100% Participation,
Maximum Notes Issued.................
Minimum Participation,
No Notes Issued......................
Minimum Participation,
Maximum Notes Issued.................
</TABLE>
Cash Distributions
Historical Cash Distributions Paid by CBM2. The following table sets
forth the distributions paid to CBM2 Limited Partners (per $1,000 limited
partner original investment) for the periods indicated below. The information
below should be read in conjunction with the information in this Supplement
under the caption "Selected Financial Data."
Historical Cash Distributions Paid by CBM2
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended ----------------------------------------------------
September 12, 1997 1996 1995 1994 1993 1992
------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
From net income....................... $ 78 $ 47 $ 18 $ 60 $ 60 $ 60
Representing return of capital/(1)/... -- -- -- -- -- --
----------- ------- -------- ------- ------- -------
Total........................ $ 78 $ 47 $ 18 $ 60 $ 60 $ 60
========== ====== ======= ====== ====== ======
</TABLE>
- -----------
/(1)/ Computed as all distributions in excess of distributions from operating
cash flow.
Compensation and Distributions to the Hotel Partnership GP. Under the
partnership agreement of CBM2, the Hotel Partnership GP does not receive fees or
compensation in connection with managing the affairs of the Hotel Partnership
but the Hotel Partnership GP and its affiliates are reimbursed for certain costs
and expenses incurred on behalf of CBM2. The following information has been
prepared to compare the amount of reimbursements paid and cash distributions
made by CBM2 to the Hotel Partnership GP and its affiliates to the amounts that
would have been paid if the reimbursement and distribution structure which will
be in effect after the Consolidation had been in effect for the years presented.
CBM2 Supp-11
<PAGE>
Following the Consolidation, CRFLT will be operated as a
self-administered REIT and as a result no reimbursements or other compensation
will be received by the Hotel Partnership GP other than distributions on Units
received in the Consolidation in exchange for its Hotel Partnership Interests.
During the thirty-six weeks ended September 12, 1997 and the fiscal
years 1996, 1995 and 1994, amounts actually paid by CBM2 to the Hotel
Partnership GP are shown below under "Historical," and the amounts that would
have been paid had the Consolidation been in effect for the years presented
(assuming the Full Consolidation Scenario) are shown under "Pro Forma."
Historical and Pro Forma Reimbursements and Distributions
(Dollars in thousands)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended -----------------------------------
September 12, 1997 1996 1995 1994
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Historical
Reimbursements $ 196 $ 221 $ 306 $ 219
Distributions -- -- -- --
----------- ------- ------- -------
Total Historical $ 196 $ 221 $ 306 $ 219
=========== ======= ======= =======
Pro Forma
Reimbursements $ $ $ $
Distributions attributable to Units
----------- ------- ------- -------
Total Pro Forma $ $ $ $
=========== ======= ======= =======
</TABLE>
Certain Information Regarding Hotels Owned by CBM2
Courtyard Hotels are moderate-priced, limited service hotels aimed at
individual business and pleasure travelers, as well as families. Courtyard
Hotels typically have approximately 150 rooms with locations in suburban areas
or near airports throughout the United States. The Courtyard Hotels include
well-landscaped grounds, a courtyard with a pool and socializing areas. Each
Courtyard Hotel features meeting rooms and a restaurant and lounge with
approximately 80 seats. CBM2's Courtyard Hotels have substantially matured and
are operating at high occupancy rates.
<TABLE>
<CAPTION>
Location of Hotel Number of Rooms Date Opened
- ----------------- --------------- -----------
<S> <C> <C>
Birmingham-Homewood, AL 140 1985
Birmingham-Hoover, AL 153 1987
Huntsville, AL 149 1987
Phoenix-Mesa, AZ 148 1988
Phoenix Metrocenter, AZ 146 1987
Tucson Airport, AZ 149 1988
Little Rock, AR 149 1988
Bakersfield, CA 146 1988
Cupertino, CA 149 1988
Foster City, CA 147 1987
Fresno, CA 146 1986
Hacienda Heights, CA 150 1990
Marin-Larkspur Landing, CA 146 1987
Palm Springs, CA 149 1988
Torrance, CA 149 1988
Boulder, CO 149 1988
Denver, CO 146 1987
Denver-Southwest, CO 155 1987
Norwalk, CT 145 1988
</TABLE>
CBM2 Supp-12
<PAGE>
<TABLE>
<CAPTION>
Location of Hotel Number of Rooms Date Opened
- ----------------- --------------- -----------
<S> <C> <C>
Wallingford, CT 149 1990
Ft. Myers, FL 149 1988
Ft. Lauderdale-Plantation, FL 149 1988
St. Petersburg, FL 149 1989
Tampa-Westshore, FL 145 1986
West Palm Beach, FL 149 1989
Atlanta-Airport South, GA 144 1986
Atlanta-Gwinnett Mall, GA 146 1987
Atlanta-Perimeter Center, GA 145 1987
Atlanta-Roswell, GA 154 1988
Arlington Heights South, IL 146 1985
Chicago-Deerfield, IL 131 1986
Chicago-Glenview, IL 149 1989
Chicago-Highland Park, IL 149 1988
Chicago-Lincolnshire, IL 146 1987
Chicago-Oakbrook Terrace, IL 147 1986
Chicago-Waukegan, IL 149 1988
Chicago-Wood Dale, IL 149 1988
Rockford, IL 147 1986
Indianapolis-Castleton, IN 146 1987
Kansas City-Overland Park, KS 149 1989
Lexington North, KY 146 1988
Annapolis, MD 149 1989
Silver Spring, MD 146 1988
Boston-Andover, MA 146 1988
Detroit Airport, MI 146 1987
Detroit-Livonia, MI 149 1988
Minneapolis Airport, MN 146 1987
St. Louis-Creve Coeur, MO 154 1987
St. Louis-Westport, MO 149 1988
Lincroft-Red Bank, NJ 146 1988
Poughkeepsie, NY 149 1988
Rye, NY 145 1988
Charlotte-SouthPark, NC 149 1989
Raleigh-Cary, NC 149 1988
Dayton Mall, OH 146 1987
Toledo, OH 149 1988
Oklahoma City Airport, OK 149 1988
Portland-Beaverton, OR 149 1989
Philadelphia-Devon, PA 149 1988
Columbia, SC 149 1989
Greenville, SC 146 1988
Memphis Airport, TN 145 1987
Nashville Airport, TN 145 1988
Dallas-Northeast, TX 149 1988
Dallas-Plano, TX 149 1988
Dallas-Stemmons, TX 146 1987
San Antonio-Downtown, TX 149 1990
Charlottesville, VA 150 1989
Manassas, VA 149 1989
Seattle-Southcenter, WA 149 1989
------
TOTAL 10,335
======
</TABLE>
CBM2 Supp-13
<PAGE>
The chart below sets forth certain performance information for CBM2's
Courtyard Hotels for the indicated periods.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
-------------------- -------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of properties........... 70 70 70 70 70
Number of rooms................ 10,335 10,335 10,335 10,335 10,335
Average daily rate............. $ 82.44 $ 76.87 $ 76.48 $ 71.49 $ 66.95
Occupancy...................... 82.1% 81.8% 80.4% 81.4% 81.1%
REVPAR......................... $ 67.66 $ 62.91 $ 61.51 $ 58.18 $ 54.28
% REVPAR change................ 7.6% -- 5.7% 7.2% --
</TABLE>
Amendments to the Partnership Agreement of CBM2
Transfer of Interests in the Hotel Partnerships to the Company
--------------------------------------------------------------
Immediately Prior to the Consummation of the Consolidation. For federal income
- ----------------------------------------------------------
tax purposes, immediately prior to the consummation of the Consolidation, each
Hotel Partnership GP will contribute a one percent partnership interest in the
Hotel Partnership to the Company in exchange for Units reflecting the estimated
Exchange Value attributable to such one percent partnership interest.
The Hotel Partnership GP owns both a 1.39% limited partner and a 5%
general partner interest. In order to contribute a one percent interest in CBM2
to the Company, an amendment to change the requirements for assignments of
limited partner interests is required. Section 7.01 of the partnership agreement
of CBM2 will be amended to delete paragraph A restricting assignment of limited
partnership interests to the first day of an Accounting Period (as defined in
the partnership agreement of CBM2).
The consent of a majority of the outstanding limited partner interests
in CBM2 is required to amend Section 7.01 of the partnership agreement of CBM2.
The Hotel Partnership GP is prohibited from voting its 1.39% limited partner
interests.
Permit CBM2 to Enter into the Lease with the Lessee. The Lease for
---------------------------------------------------
CBM2's Hotels must be entered into not later than the close of business on the
business day immediately preceding the Closing Date. There is no provision in
the partnership agreement of CBM2 to allow CBM2 to enter into a lease of its
Hotels. Therefore, in order to allow CBM2 to enter into the Lease, the
partnership agreement of CBM2 must be amended. Section 5.02B of the partnership
agreement of CBM2 will be amended to add a new paragraph (x) to read as follows:
(x) sell, lease or otherwise dispose (or consent to the sale,
lease or other disposition), directly or indirectly, in one
transaction or a series of related transactions of any or all
of the Hotels.
The consent of a majority of the outstanding limited partnership
interests of CBM2 is required for such amendments. The Hotel Partnership GP is
prohibited from voting any of its 1.39% limited partner interests.
Other Amendments. Amendments to certain terms and sections of the
----------------
partnership agreement of CBM2 would be made in order to (a) delete certain
obsolete references to entities and agreements that are no longer in existence,
(b) update the partnership agreement to reflect the passage of time since the
formation of CBM2 and (c) make any other amendments to the partnership agreement
necessary or advisable to consummate the Consolidation. The Hotel Partnership GP
does not believe that these amendments would affect the rights of the CBM2
Limited Partners in any material respect nor the duties and obligations of the
Hotel Partnership GP. These changes are included, along with the other proposed
CBM2 Supp-14
<PAGE>
amendments, in the copy of the partnership agreement, as proposed to be amended,
which is attached hereto. The amended partnership agreement is marked to
indicate the revisions made to the existing partnership agreement and should be
read in its entirety. Deleted provisions are contained in brackets and struck
through and added provisions are in bold type and underlined.
The Hotel Partnership GP recommends that the CBM2 Limited Partners vote
to approve the requested amendments to the partnership agreement of CBM2.
Fairness
General. There are no material differences with respect to the fairness
of the Consolidation to the Hotel Partnerships, individually or in the
aggregate. Therefore, the discussion of the fairness of the Consolidation set
forth below is intended to summarize the Hotel Partnership GP's belief as to
fairness and the material factors on which such belief is based. For a more
detailed discussion of the fairness of the Consolidation, see the section
entitled "Fairness Analysis and Opinion" in the Consent Solicitation.
Hotel Partnership GP's Belief as to Fairness. The Hotel Partnership GP
believes that the terms of the Consolidation provide substantial benefits and
are fair to the CBM2 Limited Partners and recommends that all CBM2 Limited
Partners vote FOR the Consolidation. In arriving at this conclusion, the Hotel
Partnership GP has relied primarily on the following factors, as well as others
described under "Fairness Analysis and Opinion -- Fairness Analysis" in the
Consent Solicitation: (i) its view that the expected benefits of the
Consolidation for the CBM2 Limited Partners outweigh the risks and potential
detriments to the CBM2 Limited Partners (see "Background and Reasons for the
Consolidation -- Reasons for the Consolidation" in the Consent Solicitation),
(ii) its view that the Exchange Value established for CBM2 and the resulting
value allocable to the CBM2 Limited Partners represents fair consideration for
the interests held by the CBM2 Limited Partners and is fair to such CBM2 Limited
Partners from a financial point of view and (iii) the Fairness Opinion of AAA as
described below.
Basis for Hotel Partnership GP's Belief as to Fairness.
Comparison of Alternatives. To assist CBM2 Limited Partners in
evaluating the Consolidation, the Hotel Partnership GP has attempted to compare
the estimated value of Units to be received in the Consolidation with: (i) the
face amount of Notes that will be issued to Dissenting Partners who elect to
exchange the Units they receive in the Consolidation for Notes; (ii) estimates
of the value of the Hotel Partnership Interests in CBM2 assuming that CBM2
continues as an operating business and its assets are sold in ten years (the
"Continuation Value"); and (iii) estimates of the value of the Hotel Partnership
Interests in CBM2 on a liquidation basis, assuming that CBM2's Hotels are sold
at their Appraised Values and the net proceeds (together with its Net Other
Assets), after payment of debts and other obligations (including defeasance
costs or prepayment penalties and deferred management fees) and an allowance for
liquidation costs, expenses and contingencies equal to 2% of the Appraised Value
of the Hotels (the "Liquidation Value"), are distributed to the Partners of CBM2
in accordance with the partnership agreement of CBM2. The Hotel Partnership GP
has not attempted to estimate the value of Hotel Partnership Interests in CBM2
following a standalone UPREIT reorganization because the Hotel Partnership GP
does not believe such a reorganization is feasible and such valuation estimates
would be subject to substantial uncertainties. Since the estimated value of the
Units and the estimated values under the alternatives to the Consolidation are
dependent upon a number of estimates, variables and assumptions, as well as
varying market conditions, no assurance can be given that the estimated values
indicated could be realized. However, the Hotel Partnership GP believes that
analyzing the alternatives in terms of estimated values, based upon currently
available market data and reasonable estimates and assumptions, establishes a
reasonable basis for comparing the Units to the alternatives. The results of
this comparative analysis (including the methodology and assumptions used to
derive estimated values) are summarized under "Background and Reasons for the
Consolidation -- Comparison of Alternative Consideration" and "Fairness Analysis
and Opinion --Comparison of Alternatives" in the Consent Solicitation.
CBM2 Supp-15
<PAGE>
The following table summarizes the results of the comparative analysis
described above. There can be no assurance, however, that the actual value of
Units received in the Consolidation, the actual face amount of Notes offered to
Dissenting Partners, the actual value of continuing CBM2 or the actual net
liquidation proceeds would not differ substantially from those estimated for
purposes of this analysis.
Summary of Comparative Valuation Alternatives/(1)/
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Face Amount of
Estimated Notes Offered Estimated Estimated Liquidation
Value to Dissenting Continuation Value if Assets Sold
Hotel Partnership of Units/(2)/ Partners/(3)/ Value/(4)/ at Appraised Value/(5)/
- ----------------- ------------- -------------- ------------ -----------------------
<S> <C> <C> <C> <C>
CBM2.................. $ $ $ $ $
</TABLE>
- --------------------
(1) A limited partner original investment of $1,000 equates to 1/100th of a
Partnership Unit in CBM2.
(2) Assumes that CBM2 is allocated Units with a value equal only to its
estimated Exchange Value. The amounts in this column represent the portion
of the estimated Exchange Value of CBM2 that would be allocable to CBM2
Limited Partners per $1,000 limited partner original investment.
(3) The amounts in this column are equivalent to the portion of the Liquidation
Value of CBM2 that would be reflected in the Notes to be issued to CBM2
Dissenting Partners per $1,000 limited partner original investment. See
footnote (5) below.
(4) The amounts in this column represent the estimated amount that would be
distributed to CBM2 Limited Partners per $1,000 limited partner original
investment if CBM2 was continued for ten years and then sold for its
estimated value, determined using a discounted cash flow analysis applied
to the anticipated cash flows from the operation and sale of each Hotel and
taking into account the terms of existing debt obligations (the
"Continuation Value").
(5) The amounts in this column represent the amount that would be distributed
to CBM2 Limited Partners per $1,000 limited partner original investment if
CBM2 sold its Hotels at their Appraised Values as of _____ __, 1998, and
distributed the net proceeds (after payment of debts and other obligations
(including defeasance costs or prepayment penalties and deferred management
fees) and an allowance for liquidation costs, expenses and contingencies
equal to 2% of the Appraised Value of the Hotels) (the "Liquidation
Value"), in accordance with its partnership agreement.
Fairness Opinion. AAA, an independent, nationally recognized hotel
valuation and financial advisory firm, has rendered the Fairness Opinion,
attached as Appendix B to the Consent Solicitation, which concluded that: (i)
the methodologies used to determine the Exchange Value of each Hotel Partnership
and to allocate the Units among each of the Hotel Partnerships are fair, from a
financial point of view, to the Limited Partners of each Hotel Partnership, (ii)
the underlying assumptions used to determine the Exchange Value of each Hotel
Partnership and the purchase price of each Acquisition Hotel (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) are fair and reasonable from the standpoint of
each Hotel Partnership; (iii) the methodology used to allocate Units received by
each Hotel Partnership among its general and Limited Partners is fair and
reasonable to the Limited Partners; (iv) the methodologies and the underlying
assumptions used to determine the Continuation Value and the Liquidation Value
of each Hotel Partnership (including, without limitation, the assumptions used
to determine the various adjustments to the Appraised Values of the Hotels) are
fair and reasonable from the standpoint of each Hotel Partnership and (v) the
economic terms of the Leases are fair and reasonable from the standpoint of the
Company. See "Fairness Analysis and Opinion -- Fairness Opinion" in the Consent
Solicitation.
CBM2 Supp-16
<PAGE>
Federal Income Tax Considerations
In addition to the federal income tax considerations discussed in the
sections of the Prospectus entitled "Federal Income Tax Considerations" and
"Risk Factors -- Federal Income Tax Risks," CBM2 Limited Partners should read
carefully the following discussion of federal income tax considerations
applicable specifically to the CBM2 Limited Partners. The numerical data and
estimates included in this discussion are based on various factual assumptions
and information which are believed by the Company and the Hotel Partnership GP
to be reliable. However, some of these assumptions inevitably will not
materialize, and unanticipated events and circumstances will occur. Therefore,
there likely will be differences between the numerical data and estimates
included herein and actual results, and the variations may be material and
adverse.
Applicability of Tax Opinions
Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to CRFLT and the
Company, has provided to CRFLT and the Company an opinion letter (substantially
in the form of Appendix E to the Consent Solicitation) as to certain federal
income tax consequences of the Consolidation. The opinion letter is based upon
certain assumptions and certain representations provided by CRFLT, the Company
and the Hotel Partnership GPs. These representations generally involve factual
matters relating to the organization, ownership and operations (including the
income, assets, businesses, liabilities and properties) of the Hotel
Partnerships prior to the Consolidation and of CRFLT, the Company and the Hotel
Partnerships following the Consolidation. In addition, on the Closing Date,
Hogan & Hartson expects to provide to CRFLT and the Company an opinion letter
(substantially in the form of Exhibit __ to the Prospectus) as to certain
federal income tax consequences relating to the Offering. See "Federal Income
Tax Considerations -- Summary of Tax Opinions" in the Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is
substantially in the form of Appendix E to the Consent Solicitation is
applicable to the CBM2 Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code
and Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson on the date of the Closing will be
based on the same authorities as of the Closing Date. No assurance can be
given that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change the law or the
above conclusions reached by counsel. In addition, any such change could apply
retroactively to transactions preceding the date of change. Moreover, opinions
of counsel merely represent counsel's best judgment with respect to the probable
outcome on the merits and are not binding on the IRS or the courts. Accordingly,
even if there is no change in applicable law, no assurance can be provided that
such opinions (which do not bind the IRS or the courts) will not be challenged
by the IRS or will not be sustained by a court if so challenged. Neither CRFLT,
the Company nor the Hotel Partnership GPs have requested or plan to request any
rulings from the IRS concerning the tax consequences of the Consolidation or the
treatment of either the Company or CRFLT subsequent to the Consolidation.
CBM2 Supp-17
<PAGE>
Tax Consequences of Formation of the Company
Overview. Hogan & Hartson has provided an opinion to the effect that
--------
the formation of the Company will not result in the recognition of taxable gain
or loss at the time of the Consolidation to a CBM2 Limited Partner (i) who does
not exercise his Unit Redemption Right on a date sooner than the date two years
after the date of the consummation of the Consolidation; (ii) who does not
receive a cash distribution (or a deemed cash distribution resulting from relief
from liabilities, including as a result of the prepayment of the CBM2
Certificates with proceeds from the Offering) in connection with the
Consolidation in excess of his aggregate adjusted basis in his CBM2 Partnership
Unit at the time of the Consolidation; (iii) who does not receive Notes upon
exercise of Dissenters' Rights; (iv) who is not required to recognize gain by
reason of the exercise by another CBM2 Limited Partner of Dissenters' Rights and
the option to receive Notes; and (v) who does not have his "at risk" amount fall
below zero as a result of the Consolidation. See "Federal Income Tax
Considerations -- Summary of Tax Opinions" in the Consent Solicitation. With
respect to the foregoing exceptions to nonrecognition treatment, the Company and
the Hotel Partnership GP believe that a CBM2 Limited Partner who acquired his
CBM2 Partnership Units in the original offering of such Units for cash and who
has held such Units at all times since (i) should not be considered to receive,
as a result of the Consolidation, a distribution (or a deemed cash distribution
resulting from relief from liabilities, including as a result of the prepayment
of the CBM2 Certificates with proceeds from the Offering) that exceeds his
aggregate adjusted basis in his CBM2 Partnership Unit at the time of the
Consolidation, and (ii) should not have his "at risk" amount fall below zero as
a result of the Consolidation. See "Federal Income Tax Considerations -- Tax
Consequences of the Formation of the Company -- Overview" in the Consent
Solicitation.
With respect to the exercise of Dissenters' Rights, Hogan & Hartson is
of the opinion that although the matter is not free from doubt, a CBM2 Limited
Partner who does not exercise Dissenters' Rights and elects to receive Notes in
connection with the Consolidation should not be required to recognize gain by
reason of another CBM2 Limited Partner's exercise of such rights. With respect
to the exercise of a Unit Redemption Right, Hogan & Hartson is of the opinion
that it is more likely than not that a CBM2 Limited Partner's exercise of his
Unit Redemption Right more than one year after the date of consummation of the
Consolidation but less than two years after such date will not cause the
Consolidation itself to be a taxable transaction for the CBM2 Limited Partner
(or the other CBM2 Limited Partners). See "Federal Income Tax Considerations --
Summary of Tax Opinions" in the Consent Solicitation. Opinions of counsel,
however, do not bind the IRS or the courts, and no assurances can be provided
that such opinions will not be challenged by the IRS or will be sustained by a
court if so challenged.
Amount of Deemed Cash Distribution. With respect to his CBM2
----------------------------------
Partnership Units, a CBM2 Limited Partner will receive no actual cash
distribution in connection with the Consolidation but will be deemed to receive
a cash distribution in connection with the Consolidation to the extent that his
share of Company liabilities immediately after the Consolidation is less than
his share of CBM2 liabilities immediately prior to the Consolidation (for
example, because of the use of proceeds from the Offering to prepay the CBM2
Certificates). See "Federal Income Tax Considerations -- Tax Consequences of the
Formation of the Company -- Relief from Liabilities/Deemed Cash Distribution" in
the Consent Solicitation. As a consequence of the Consolidation (including the
use of proceeds from the Offering to prepay the CBM2 Certificates), the Company
and the Hotel Partnership GP believe, based upon and subject to the assumptions
and other limitations described below, that (i) the CBM2 Limited Partners'
aggregate share of indebtedness should decrease by $______ (from $________ (on
December 31, 1997) to $_________); and (ii) the share of indebtedness of an
individual CBM2 Limited Partner who acquired his CBM2 Partnership Unit in the
original offering of such Units for cash and has held such Units at all times
since should decrease by $_____ per CBM2 Partnership Unit (from $_____ (on
December 31, 1997) to $_______). For a CBM2 Limited Partner who did not acquire
his CBM2 Partnership Units in the original offering of such Units for cash or
who has not held his CBM2 Partnership Units at all times since such offering,
the above information could vary materially.
CBM2 Supp-18
<PAGE>
Estimated Amount of Taxable Gain. A CBM2 Limited Partner will recognize
--------------------------------
taxable gain as a result of the deemed cash distribution discussed in the
previous paragraph, however, only to the extent that the deemed cash
distribution exceeds his adjusted tax basis in his CBM2 Partnership Units
immediately prior to the Consolidation. As described below, the Company and the
Hotel Partnership GP estimate that as of December 31, 1997, the adjusted tax
basis of a CBM2 Limited Partner who acquired his CBM2 Partnership Units in the
original offering of such Units for cash and has held such Units at all times
since was ______ per CBM2 Partnership Unit (which is greater than the deemed
cash distribution of _____ per CBM2 Partnership Unit discussed in the previous
paragraph). Accordingly, the Company and the Hotel Partnership GP believe, based
upon and subject to the assumptions and other limitations described below, that
a CBM2 Limited Partner who acquired his CBM2 Partnership Units in the original
offering of such Units for cash and has held the Units at all times since should
not recognize gain due to the deemed cash distribution resulting from the relief
from liabilities in connection with the Consolidation.
The adjusted tax basis of a CBM2 Limited Partner who did not acquire
his CBM2 Partnership Units in the original offering of such Units for cash or
who has not held his CBM2 Partnership Units at all times since such offering
could vary materially from that of a Partner who did so. If a CBM2 Limited
Partner has an adjusted tax basis in his CBM2 Partnership Units (per CBM2
Partnership Unit) that is less than the adjusted tax basis of a CBM2 Limited
Partner who acquired his CBM2 Partnership Units in the original offering of such
Units for cash and has held such Units at all times since, he could recognize
gain due to the deemed cash distribution resulting from the relief from
liabilities in connection with the Consolidation.
Tax Treatment of CBM2 Limited Partners Who Hold Units Following the
Consolidation
Initial Basis in Units. In general, a CBM2 Limited Partner will have an
----------------------
initial tax basis in his Units ("Initial Basis") received in the Consolidation
with respect to his CBM2 Partnership Units equal to the basis in his CBM2
Partnership Units at the time of the Consolidation, reduced to reflect any
deemed cash distributions resulting from a reduction in his share of CBM2
liabilities and increased to reflect any gain required to be recognized in
connection with the Consolidation. As of December 31, 1997, a CBM2 Limited
Partner who acquired his CBM2 Partnership Units in the original offering of such
Units for cash and has held such Units at all times since, had an adjusted tax
basis in his CBM2 Partnership Units of $____ per CBM2 Partnership Unit (after
giving effect to the Consolidation, including the prepayment of indebtedness
contemplated in connection therewith). Based upon and subject to the assumptions
and other limitations described below, the Company and the Hotel Partnership GP
believe that the tax basis of such a CBM2 Limited Partner in his Units received
in the Consolidation with respect to his CBM2 Partnership Units would be $____
per CBM2 Partnership Unit. For a CBM2 Limited Partner who did not acquire his
CBM2 Partnership Units in the original offering of such Units for cash or who
has not held his CBM2 Partnership Units at all times since such offering, the
above information could vary materially. For a discussion of the federal income
tax considerations for a Limited Partner from a reduction in basis that may
result from the Consolidation, see "Federal Income Tax Considerations -- Tax
Consequences of Formation of the Company -- Initial Tax Basis of Units" in the
Consent Solicitation.
Tax Allocations with Respect to Contributed Hotels upon a Sale of CBM2
----------------------------------------------------------------------
Hotels. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
- ------
attributable to appreciated or depreciated property that is contributed to a
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with, or benefits from, the unrealized gain or
unrealized loss associated with the property at the time of contribution. The
amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the time
of contribution and the adjusted tax basis of such property at the time of
contribution (referred to as "Book-Tax Difference"). The Company and the Hotel
Partnership GP, based upon and subject to the assumptions and other limitations
described below, estimate that the Book-Tax Difference of the CBM2 Hotels will
be $________ upon the consummation of the Consolidation.
CBM2 Supp-19
<PAGE>
In the event that the Company were to sell all of the CBM2 Hotels, the
Partners of CBM2 would be specially allocated by the Company an amount of
taxable gain equal to the Book-Tax Difference with respect to the CBM2 Hotels
($ ____ in the aggregate if the CBM2 Hotels were sold immediately after the
consummation of the Consolidation, according to the estimate in the previous
paragraph). The share of such gain allocable to a CBM2 Limited Partner who
acquired his CBM2 Partnership Units in the original offering of such Units for
cash and held such Units at all times since would be $___ per CBM2 Partnership
Unit. The share of such gain of a CBM2 Limited Partner who did not acquire his
CBM2 Partnership Units in the original offering of such Units for cash or who
has not held his CBM2 Partnership Units at all times since such offering could
vary materially from this amount. If the Company were to sell one or more, but
not all, of the CBM2 Hotels, the former Partners of CBM2 would be specially
allocated by the Company an amount of taxable gain equal to that portion of the
Book-Tax Difference for the CBM2 Hotels that is attributable to the CBM2 Hotel
or Hotels sold. It should be noted that the Partnership Agreement precludes the
Company from selling any of the CBM2 Hotels during the __-year period commencing
immediately after the Consolidation (other than pursuant to a tax-free
exchange), unless either (i) the Hotel Partnership GP disposes of the Units
received in the Consolidation in a taxable transaction or (ii) the Company
receives the consent of Host to sell CBM2 Hotels. Host may provide such consent
in its sole discretion. See "Federal Income Tax Considerations -- Tax Treatment
of Limited Partners Who Hold Units Following the Consolidation -- Sale of
Individual Hotels" in the Consent Solicitation.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
------------------------------------------------------------
allocations of depreciation to the CBM2 Limited Partners will change
significantly as a result of the Consolidation for two reasons. First, as
described above, pursuant to Section 704(c) of the Code, depreciation and
deductions attributable to the CBM2 Hotels will be required to be allocated for
federal income tax purposes in a manner such that the CBM2 Partners are charged
with the Book-Tax Difference associated with the CBM2 Hotels at the time of the
consummation of the Consolidation. Consequently, a CBM2 Limited Partner will be
allocated less depreciation with respect to the CBM2 Hotels than would be the
case if the Consolidation had not occurred and the CBM2 Limited Partner had
continued to hold his CBM2 Partnership Units. Second, the Consolidation will
cause the technical termination of CBM2 and each of the other Hotel Partnerships
under Section 708(b)(1)(B) of the Code. Section 168(i)(7) of the Code provides,
in effect, that when a partnership terminates under Section 708(b)(1)(B) of the
Code, the partnership must begin new depreciation periods for its property. As a
result, the remaining bases of the CBM2 Hotels and the Hotels held by the other
Hotel Partnerships will be depreciated over 39 years, rather than over the
remaining current life of such Hotels (which ranges from 8 years to 25 years).
See "Federal Income Tax Considerations -- Tax Treatment of Limited Partners Who
Hold Units Following the Consolidation -- Effect of Consolidation on
Depreciation" in the Consent Solicitation.
To illustrate the consequences of these changes for a CBM2 Limited
Partner, the Company and the Hotel Partnership GP estimate, based upon and
subject to the assumptions and other limitations described below, that if the
Consolidation were consummated on January 1, 1998, the amount of income for 1998
that would be allocated to a CBM2 Limited Partner who acquired his CBM2
Partnership Units in the original offering of such Units for cash and held such
Units at all times since would increase by $____ per CBM2 Partnership Unit (from
$_____ to $_____) over the estimated amount of income that would have been
allocated to such CBM2 Limited Partner for 1998 if CBM2 did not participate in
the Consolidation. No attempt is made here to estimate the effect of the
Consolidation on tax allocations in years subsequent to the 1998 taxable year,
but the Consolidation is expected to effect such allocations as well. The amount
of income allocable to a CBM2 Limited Partner who did not acquire his CBM2
Partnership Units in the original offering of such Units for cash or who has not
held his CBM2 Partnership Units at all times since such offering could vary
materially from this amount. See "Federal Income Tax Considerations -- Tax
Treatment of Limited Partners Who Hold Units Following the Consolidation -- Tax
Allocations with Respect to Book-Tax Difference on Contributed Hotels" in the
Consent Solicitation.
State and Local Taxes. CBM2 Limited Partners holding Units may be
---------------------
subject to state and local taxation in a number of jurisdictions in which the
Company directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this regard, immediately
following
CBM2 Supp-20
<PAGE>
the Consolidation, the Company will own properties in 35 states across the
United States. Currently, CBM2 owns properties in 29 states. See "Federal Income
Tax Considerations--Tax Treatment of Limited Partners Who Hold Units Following
the Consolidation -- State and Local Taxes" in the Consent Solicitation.
Assumptions Used in Determining Tax Consequences of the Consolidation
In preparing the estimates set forth above, the Company and the Hotel
Partnership GP made several key assumptions, which are described below. If any
such assumption is not accurate with respect to a particular CBM2 Limited
Partner, the tax consequences of the Consolidation to such CBM2 Limited Partner
could be substantially different from those reflected above. ACCORDINGLY, EACH
CBM2 LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO
DETERMINE THE IMPACT OF SUCH CBM2 LIMITED PARTNER'S PARTICULAR TAX SITUATION ON
THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION.
First, with respect to a CBM2 Limited Partner's basis in his CBM2
Limited Partnership Units prior to the Consolidation, the Company and the Hotel
Partnership GP assumed that a CBM2 Limited Partner acquired his CBM2 Partnership
Units in the original offering of such Units for cash and has held such Units at
all times since. The adjusted tax basis of a CBM2 Limited Partner who did not
acquire his CBM2 Partnership Units in the original offering of such Units for
cash could vary materially from that of a CBM2 Limited Partner who did so. In
this regard, it should be noted that the adjusted tax basis of a CBM2 Limited
Partner who acquired his CBM2 Partnership Units in the original offering of such
interests for cash still could vary substantially from the estimates set forth
above for several reasons, including but not limited to (i) if the CBM2 Limited
Partner has received special allocations of items of CBM2 income, gain,
deduction, loss, or credit, or non-pro rata distributions, or made non-pro rata
contributions; or (ii) if a CBM2 Limited Partner's share of CBM2 nonrecourse
liabilities differs from his pro rata percentage of such liabilities immediately
prior to consummation of the Consolidation. If a CBM2 Limited Partner has an
adjusted tax basis in his CBM2 Partnership Units that is less than the tax basis
of a CBM2 Limited Partner who acquired his CBM2 Partnership Units in the
original offering of such Units for cash and has held such Units at all times
since, the Consolidation might result in the receipt by the CBM2 Limited Partner
of a deemed distribution of cash in excess of his adjusted tax basis in his CBM2
Partnership Units, which could result in the recognition of income or gain.
Second, the Company and the Hotel Partnership GP assumed that the
method expected to be used by the Company to allocate liabilities among the
Partners will be respected for federal income tax purposes. The Company will
allocate liabilities among the Partners as described in "Federal Income Tax
Considerations -- Tax Consequences of the Formation of the Company -- Relief
from Liabilities/Deemed Cash Distribution" in the Consent Solicitation. If the
method used by the Company were not respected for federal income tax purposes
and the nonrecourse liabilities actually allocable to a CBM2 Limited Partner are
less than the amount assumed above, the Consolidation might result in the
receipt by such CBM2 Limited Partner of a deemed distribution of cash that is
greater than the deemed distribution of cash expected to be received by such
CBM2 Limited Partner as described above in "Tax Consequences of Formation of the
Company -- Amount of Deemed Cash Distribution." For a CBM2 Limited Partner who
did not acquire his CBM2 Partnership Units in the original offering of such
Units for cash or who did not hold such Units at all times since, this deemed
distribution of cash could exceed his adjusted tax basis in his CBM2 Partnership
Units, which could result in the recognition of income or gain.
Third, the Company and the Hotel Partnership GP assumed that all of the
Hotel Partnerships will elect to participate in the Consolidation and that no
Notes will be issued. If less than all of the Hotel Partnerships elect to
participate in the Consolidation, however, the Consolidation still may be
consummated so long as the Minimum Participation Condition and all other
conditions to consummation of the Consolidation are satisfied or waived. See
"The Consolidation -- Conditions to Consummation of the Consolidation."
Moreover, the Company has reserved the right to exclude any Hotel Partnership
from participation in the Consolidation (even if the requisite number of Limited
Partners in a Hotel Partnership
CBM2 Supp-21
<PAGE>
have voted to approve of and participate in the Consolidation and each of the
other conditions to the Consolidation has been satisfied or waived) if the
Company determines that such exclusion is in its best interests. See "The
Consolidation -- Right to Exclude Hotel Partnerships." If less than all of the
Hotel Partnerships participate in the Consolidation, the Consolidation might
result in the receipt by CBM2 Limited Partners of a deemed distribution of cash
that is greater than the deemed distribution of cash expected to be received by
CBM2 Limited Partners as described above in "Tax Consequences of Formation of
the Company -- Amount of Deemed Cash Distribution." For a CBM2 Limited Partner
who did not acquire his CBM2 Partnership Units in the original offering of such
Units for cash or who did not hold such Units at all times since, this deemed
distribution of cash could exceed his adjusted tax basis in his CBM2 Partnership
Units, which could result in the recognition of income or gain.
Fourth, the Company and the Hotel Partnership GP assumed that Partners
in each Hotel Partnership would receive Units in the Consolidation with a value
exactly equal to the Exchange Value, that CRFLT would raise gross proceeds in
the Offering of $800 million, and that CRFLT would own a ____% interest in the
Company as a result of the contribution of the proceeds from the Offering to the
Company. With respect to the proceeds from the Offering, the Company and the
Hotel Partnership GP assumed that approximately $539 million would be used to
prepay certain indebtedness of the Hotel Partnerships (specifically the CBM2
Certificates, the RIBM1 Senior Mortgage and all of the outstanding indebtedness
of Res USA) and that approximately $36 million would be used to pay prepayment
penalties associated with these prepayments. To the extent that the value of the
Units received by the Partners of CBM2 in the Consolidation exceeds the Exchange
Value, the aggregate Book-Tax Difference of the CBM2 Hotels discussed above
would increase accordingly. If proceeds from the Offering are not used to prepay
the CBM2 Certificates, the Consolidation might result in the receipt by CBM2
Limited Partners of a deemed distribution of cash that is less than the deemed
distribution of cash expected to be received by CBM2 Limited Partners as
described above in "Tax Consequences of Formation of the Company -- Amount of
Deemed Cash Distribution." However, in the event the nonrecourse liabilities
actually allocable to a CBM2 Limited Partner are less than the amount assumed
above (including, for example, if the proceeds from the Offering exceed $800
million), the Consolidation might result in the receipt by such CBM2 Limited
Partner of a deemed distribution of cash that is greater than the deemed
distribution of cash expected to be received by such CBM2 Limited Partner as
described above in "Tax Consequences of Formation of the Company -- Amount of
Deemed Cash Distribution." For a CBM2 Limited Partner who did not acquire his
CBM2 Partnership Units in the original offering of such Units for cash or who
did not hold such Units at all times since, this deemed distribution of cash
could exceed his adjusted tax basis in his CBM2 Partnership Units, which could
result in the recognition of income or gain.
Finally, the Company and the Hotel Partnership GP assumed that the
Mergers will be treated for federal income tax purposes as the transfer by the
Partners of their interests in the Hotel Partnerships to the Company in exchange
for Units. There can be no assurance, however, that the IRS will not seek to
recharacterize each Merger as either (i) the liquidation of a Hotel Partnership
followed by the distribution by the Hotel Partnership of its assets to its
Partners and the subsequent transfers by such Partners of such assets to the
Company in exchange for Units, or (ii) the transfer by a Hotel Partnership of
its assets to the Company in exchange for Units and the subsequent distribution
of such Units to its Partners. If the Mergers are recharacterized in such a
manner, the tax consequences of the Consolidation to the CBM2 Limited Partners
likely would be materially affected.
EACH CBM2 LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX
ADVISOR TO DETERMINE THE IMPACT OF SUCH CBM2 LIMITED PARTNER'S PARTICULAR TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE
CONSOLIDATION. THE TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION TO A
PARTICULAR CBM2 LIMITED PARTNER COULD VARY SUBSTANTIALLY FROM THE ESTIMATES
DESCRIBED ABOVE.
Tax Treatment of CBM2 Limited Partners Who Exercise Dissenters' Rights
and Elect to Receive Notes
CBM2 Supp-22
<PAGE>
A CBM2 Limited Partner who exercises his Dissenters' Rights and elects
to receive Notes in connection with the Consolidation will be treated as having
made a taxable disposition of his CBM2 Partnership Units. The amount realized in
connection with such disposition will equal the sum of the "issue price" of the
Notes (i.e., the face amount of the Notes) (currently estimated as $_____ per
CBM2 Partnership Unit) plus the portion of the CBM2 liabilities allocable to the
CBM2 Limited Partner for federal income tax purposes (estimated as $_______ per
CBM2 Partnership Unit as of December 31, 1997). To the extent the amount
realized exceeds the CBM2 Limited Partner's adjusted basis in his CBM2
Partnership Units, the CBM2 Limited Partner will recognize gain. For a
discussion of the federal income tax rates applicable to the net capital gain
from the sale of a capital asset, see "Federal Income Tax Considerations -- Tax
Treatment of Limited Partners Who Hold Units Following the Consolidation --
Disposition of Units by Limited Partners" in the Consent Solicitation. In this
regard, the Hotel Partnership GP estimates that, as of December 31, 1997, if
CBM2 sold all of its Hotels in a fully taxable transaction for a net amount,
after payment of liabilities, equal to the Liquidation Value of CBM2, the
"unrecognized Section 1250 gain" per CBM2 Partnership Unit would be $______ and
the gain subject to tax as ordinary income under Section 1245 per CBM2
Partnership Unit would be $______.
A CBM2 Limited Partner who exercises Dissenters' Rights and elects to
receive Notes may be eligible to defer at least a portion of that gain under the
"installment sale" rules. Those rules, however, may not permit the CBM2 Limited
Partner to defer all of the gain (and, to the extent that the face amount of the
Notes (and any other installment obligations received by the taxpayer during the
year) outstanding at the end of the taxable year in which the Consolidation
occurs exceeds $5,000,000, will require that the CBM2 Limited Partner who defers
gain pay to the IRS interest on the resulting tax that has been deferred). The
CBM2 Limited Partner, for instance, will not be eligible to defer gain to the
extent that such gain would be taxed as ordinary income under Section 1245 of
the Code. In addition, to the extent that the CBM2 Limited Partner's share of
CBM2 liabilities exceeds his adjusted tax basis in his CBM2 Units immediately
prior to the Consolidation, the CBM2 Limited Partner will not be eligible to
defer gain recognized upon the receipt of Notes. Lastly, if a CBM2 Limited
Partner disposes of Notes, any gain that had been deferred would be recognized
in the year of disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR DISSENTING CBM2 LIMITED
PARTNER COULD HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE
CONSOLIDATION, AND THE SUBSEQUENT OWNERSHIP AND DISPOSITION OF NOTES. THEREFORE,
IT IS ESSENTIAL THAT SUCH CBM2 LIMITED PARTNERS CONSULT WITH THEIR OWN TAX
ADVISORS WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH
CBM2 LIMITED PARTNERS' RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING
JURISDICTION.
Tax Consequences if CBM2 Does Not Participate in the Consolidation
If CBM2 does not participate in the Consolidation, the CBM2 Limited
Partners would not have any tax consequences resulting from the Consolidation.
The consequences of continued ownership of CBM2 Partnership Units will be the
same as would have resulted if the Consolidation had not been proposed.
* * *
The above description is not exhaustive of all possible tax
considerations associated with the Consolidation. This summary does not discuss
foreign tax considerations, nor does it discuss all of the aspects of federal
income taxation or state and local taxation that may be relevant to CBM2 Limited
Partners in light of their particular circumstances. EACH CBM2 LIMITED PARTNER
IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE IMPACT OF
SUCH
CBM2 Supp-23
<PAGE>
CBM2 LIMITED PARTNER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX
CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION.
CBM2 Supp-24
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived
from the CBM2 financial statements for the First Three Quarters 1997 and the
First Three Quarters 1996 and for the five most recent fiscal years ended
January 3, 1997. The following data should be read in conjunction with CBM2's
financial statements and the notes thereto, Management's Discussion and Analysis
of Financial Condition and Results of Operations and the other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Years
-------------------- -------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (amounts in thousands, except per limited partner original investment amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues ........................ $101,428 $92,894 $133,182 $121,737 $112,392 $ 102,916 $93,434
Operating profit................. 43,942 37,539 54,012 46,296 37,984 40,254 29,848
Net income (loss)................ 13,625 7,191 10,541 11,215 (3,564) (6,019) (16,307)
Distributions
General Partner................ -- -- -- -- -- -- --
Limited Partner................ 11,539 3,308 6,982 2,714 8,820 8,820 8,820
-------- ------- -------- -------- -------- --------- -------
11,539 3,308 6,982 2,714 8,820 8,820 8,820
Per $1,000 limited partner
original investment:
Net income(loss)............... 88 46 68 72 (23) (34) (105)
Distributions.................. 78 22 47 18 60 60 60
EBITDA(1)........................ 64,786 58,452 83,969 77,048 67,531 69,356 60,858
Cash provided by
operating activities........... 36,135 21,521 38,059 35,974 25,720 26,506 23,976
Cash used in investing activities 10,826 8,735 17,253 14,213 12,132 14,194 13,728
Cash used in financing activities 27,613 26,019 34,317 8,213 16,875 13,020 8,830
Increase (decrease) in cash
and cash equivalents........... (2,304) (13,233) (13,511) 13,548 (3,287) (708) 1,418
Ratio of earnings to fixed
charges(2)..................... 1.39x 1.21x 1.21x 1.27x -- -- --
Deficiency of earnings to
fixed charges(2)............... -- -- -- -- 3,564 6,019 16,307
Total assets at book value....... 539,917 547,580 547,099 567,530 549,895 564,225 581,975
Total assets at value assigned
for consolidation............ -- -- -- -- -- --
Cash and cash equivalents........ 11,893 14,475 14,197 27,708 14,160 17,447 18,155
Total debt....................... 517,499 530,508 526,253 531,100 531,100 531,100 537,700
Partner's capital(deficit):
Limited partners............... (36,323) (37,235) (37,728) (40,760) (48,752) (36,546) (22,008)
General partners............... 6,468 5,619 5,787 5,260 4,700 4,878 5,179
Book value per $1,000
limited partner original
investment..................... (248) (255) (258) (279) (333) (250) (150)
Exchange Value per $1,000
limited partner original
investment..................... -- -- -- -- -- --
</TABLE>
- ------------------
(1) EBITDA consists of the sum of consolidated net income, interest expense,
depreciation and amortization. EBITDA data is presented because such data
is used by certain investors to determine the partnership's ability to
meet debt service requirements. The partnership considers EBITDA to be an
indicative measure of the partnership's operating performance due to the
significance of the partnership's long-lived assets and because EBITDA can
be used to measure the partnership's ability to service debt, fund capital
expenditures and
CBM2 Supp-25
<PAGE>
expand its business; however, such information should not be considered as
an alternative to net income, operating profit, cash flows from
operations, or any other operating or liquidity performance measure
prescribed by generally accepted accounting principles. Cash expenditures
for various long-term assets and interest expense have been, and will be,
incurred which are not reflected in the EBITDA presentations.
(2) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges is largely the result of
depreciation and amortization of $27,980,000, $27,856,000 and $29,757,000
for 1994, 1993 and 1992, respectively.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
First Three Quarters 1997 Compared to First Three Quarters 1996
Revenues. Revenues increased by $8.5 million to $101.4 million for the First
Three Quarters 1997. This represents a 9.2% increase for the period when
compared to the comparable period in 1996. The increase in revenue was achieved
primarily through an increase in revenue per available room ("REVPAR") partially
offset by an increase in hotel operating costs and expenses. REVPAR is a
commonly used indicator of market performance for hotels which represents the
combination of daily room rate charged and the average daily occupancy achieved.
REVPAR does not include food and beverage or other ancillary revenues generated
by the property.
For the First Three Quarters 1997, hotel sales increased $12.0 million, or 6.5%
over the comparable period in 1996. The increase in sales was achieved primarily
through an increase in the combined average room rate. The combined average room
rate increased $5.57 to $82.44 over the same period in 1996. The increase in
average room rate is primarily due to aggressive weekday pricing.
Combined average occupancy for the First Three Quarters 1997 increased slightly
by 0.3 percentage points to 82.1%. For the First Three Quarters 1997, 50 of
CBM2's 70 Hotels posted occupancy rates exceeding 80%. REVPAR for the period was
$67.66, an increase of 7.6% as compared to the same period in 1996.
Direct hotel operating costs and expenses. Direct hotel operating costs and
expenses increased from $90.5 million for the First Three Quarters 1996 to $93.9
million for the comparable period in 1997. As a percentage of total hotel sales,
these costs and expenses decreased to 48.1% in the First Three Quarters 1997 as
compared to 49.3% for the First Three Quarters 1996. This resulted in higher
room and food and beverage profit margins. Room profit and food and beverage
profit increased by 8.0% for the First Three Quarters 1997.
Interest Expense. Interest expense increased to $32.3 million for the First
Three Quarters 1997 from $32.1 million for the comparable period in 1996. The
increase in interest expense is due to the refinancing of the mortgage debt at
fixed rates which are higher than the variable interest rates that were in
effect through January 24, 1996. The weighted average interest rate for the
First Three Quarters 1997 was 8.5% as compared to 8.4% for the comparable period
in 1996.
Base and Courtyard Management Fees. The increase in base and Courtyard
management fees of 6.5%, from $11.0 million for the First Three Quarters 1996 to
$11.7 million for the comparable period in 1997 is due to the improved combined
hotel sales for the 70 Hotels.
Ground Rent, Taxes and Other. Ground rent, taxes and other increased by 4.1% for
the First Three Quarters 1997. However, as a percentage of total hotel sales,
ground rent remained stable at 4.5% while property tax expense decreased
slightly from 3.8% to 3.6%.
CBM2 Supp-26
<PAGE>
Incentive Management Fees. For the First Three Quarters 1997, $9.4 million of
incentive management fees were earned and paid as compared to $8.4 million
earned in the comparable period in 1996. The increase in incentive management
fees earned was the result of improved combined hotel operating results.
Net Income. Net income increased $6.4 million to $13.6 million, from $7.2
million for the comparable period in 1996. This increase was primarily due to
higher revenues as discussed above, partially offset by increases in management
fees.
1996 Compared to 1995
Revenues. Revenues increased by $11.4 million or 9.4%, to $133.2 million, over
1995. This increase in revenues was achieved primarily through an increase in
REVPAR partially offset by an increase in hotel operating costs and expenses, as
discussed below.
Total 1996 hotel sales of $263.7 million represented a $17.9 million, or 7.3%,
increase over 1995 results. This increase was achieved primarily through
increases in the combined average room rate which rose from $71.49 in 1995 to
$76.48 in 1996. As a result, 1996 room sales increased by $16.9 million, or
7.7%, to $235.9 million from $219.0 million in 1995 despite a one percent
decrease in occupancy to 80.4% during 1996. Forty of CBM2's 70 Hotels posted
occupancy rates exceeding 80% for 1996. REVPAR for the period increased nearly
6% to $61.51.
Direct hotel operating costs and expenses. Direct hotel operating costs and
expenses in 1996 increased $6.4 million, or 5.2%. The increase in direct hotel
operating costs and expenses is primarily due to an increase in certain variable
costs related to the increase in room sales. However, as a percentage of total
hotel sales, these costs and expenses decreased to 49.5% in 1996 as compared to
50.5% in 1995.
Indirect hotel operating costs and expenses. Indirect hotel operating costs and
expenses increased by $3.9 million, or 5.3%, from $72.4 million in 1995 to $76.3
million in 1996. As a percentage of total hotel sales these costs and expenses
decreased to 28.9% of total hotel sales in 1996 from 29.5% in 1995. The
components of this category are discussed below:
Depreciation. Depreciation decreased slightly in 1996 as compared to 1995 due to
a portion of the Hotels' furniture and equipment becoming fully depreciated in
1995.
Base and Courtyard management fees. Base and Courtyard management fees increased
7.4%, from $14.7 million in 1995 to $15.8 million in 1996 due to improved
combined hotel sales for the 70 Hotels for 1996 when compared to 1995.
Ground rent. The 1996 ground rent expense of $11.9 million represents a 3.0%
increase over 1995 levels as improved hotel operations resulted in Hotels paying
more ground rent as a percentage of sales rather than the minimum rent. As a
percentage of total hotel sales, ground rent expense was 4.5% and 4.7% in 1996
and 1995, respectively.
Incentive management fees. In 1996, $12.0 million of incentive management fees
were earned as compared to $10.5 million earned in 1995. The increase in
incentive management fees earned was the result of improved combined hotel
operating results.
Insurance and other. The 1996 insurance and other expenses increased by $1.2
million to $2.8 million when compared to 1995. The increase is primarily due to
an increase in equipment rent, insurance expenses and prior year adjustments.
CBM2 Supp-27
<PAGE>
Operating income. Operating income (hotel revenues less all costs and expenses
other than interest expense) increased by $7.6 million to $56.9 million in 1996,
from $49.3 million in 1995, primarily due to higher revenues.
Interest expense. Interest expense increased 21.7% to $46.4 million in 1996 from
$38.1 million in 1995. This increase in interest expense was due to the
refinancing of CBM2's debt at fixed rates which are higher than the prior year's
variable interest rates. The weighted average interest rate in 1996 was 8.4% as
compared to 7% in 1995.
Net income. Net income decreased $.7 million to $10.5 million, from $11.2
million in 1995. This decrease was primarily due to higher interest expense.
1995 Compared to 1994:
Revenues. Revenues increased by $9.3 million in 1995, to $121.7 million, a 8.3%
increase when compared to 1994. This increase in revenues was achieved primarily
through an increase in hotel sales partially offset by an increase in operating
costs and expenses, as discussed below.
Total 1995 hotel sales of $245.8 million represented a $13.7 million, or 5.9%,
increase over 1994 results. This increase was achieved primarily through
increases in the combined average room rate from $66.95 in 1994 to $71.49 in
1995. As a result, 1995 room sales increased by $14.8 million, or 7.2%, to
$219.0 million from $204.2 million in 1994 despite stable occupancy of
approximately 81% during these periods. Forty-five of CBM2's 70 Hotels posted
occupancy rates exceeding 80% for 1995. Food and beverage sales decreased by
4.6% from $18.5 million in 1994 to $17.6 million in 1995 as a result of the
Manager's continued efforts to match restaurant service to customer demands by
eliminating under-utilized services at low volume restaurants.
Direct hotel operating costs and expenses. Direct hotel operating costs and
expenses in 1995 increased $4.4 million, or 3.7%. The increase in direct hotel
operating costs and expenses is primarily due to an increase in certain variable
costs related to the increase in room sales. However, as a percentage of total
hotel sales, these costs and expenses decreased to 50.5% in 1995 as compared to
51.6% in 1994.
Indirect hotel operating costs and expenses. Indirect hotel operating costs and
expenses decreased $.4 million, or .5%, from $72.8 million in 1994 to $72.4
million in 1995. As a percentage of total hotel sales these costs and expenses
decreased to 29.5% of total hotel sales in 1995 from 31.4% in 1994. The
components of this category are discussed below:
Depreciation. Depreciation decreased slightly in 1995 as compared to 1994 due to
a portion of the Hotels' furniture and equipment becoming fully depreciated in
1994.
Base and Courtyard management fees. The increase in base and Courtyard
management fees of 5.9%, from $13.9 million in 1994 to $14.7 million in 1995 is
due to the improved combined hotel sales for the 70 Hotels for 1995 when
compared to 1994.
Ground rent. The 1995 ground rent expense of $11.5 million represents a 7.1%
increase over 1994 levels as improved hotel operations resulted in Hotels paying
more ground rent as a percent of sales rather than the minimum rent. As a
percentage of total hotel sales, ground rent expense remained the same at 4.7%
in 1994 and 1995.
Incentive management fees. In 1995, $10.5 million of incentive management fees
were earned as compared to $9.4 million earned in 1994. The increase in
incentive management fees earned was the result of improved combined hotel
operating results.
CBM2 Supp-28
<PAGE>
Insurance and other. The 1995 insurance and other expenses decreased $1.4
million to $1.6 million when compared to 1994 due to a $1.2 million loss on
fixed asset dispositions in 1994.
Operating income. Operating income (hotel expenses less all costs and expenses
other than interest expense) increased by $9.7 million to $49.3 million in 1995,
from $39.6 million in 1994, primarily due to higher hotel sales.
Interest expense. Interest expense decreased 11.6% to $38.1 million in 1995 from
$43.1 million in 1994. This decrease in interest expense was due to the
expiration of the interest rate swaps on Mortgage Debt A and Mortgage Debt B on
August 4, 1994 and October 18, 1994, respectively. Incremental interest expense,
as a result of the interest rate swaps, was $15.0 million for 1994.
Net income (loss). In 1995, CBM2 had net income of $11.2 million, an increase of
$14.8 million over 1994's net loss of $3.6 million. This increase was primarily
due to higher revenues and lower interest expense.
CAPITAL RESOURCES AND LIQUIDITY
Principal Sources and Uses of Cash
The principal source of cash for CBM2 is cash from operations. Its principal
uses of cash are to make debt service payments, fund the property improvement
fund, and to make distributions to the limited partners. Cash provided by
operations was $36.1 million and $21.5 million for the First Three Quarters 1997
and First Three Quarters 1996, respectively. Cash provided by operations was
$38.1 million, $36.0 million and $25.7 million for the fiscal years 1996, 1995
and 1994, respectively. Cash used in investing activities was $10.8 million and
$8.7 million for the First Three Quarters 1997 and First Three Quarters 1996,
respectively. Cash used in investing activities was $17.3 million, $14.2 million
and $12.1 million in fiscal years 1996, 1995 and 1994, respectively. CBM2's cash
used in investing activities consists primarily of contributions to the property
improvement fund and capital expenditures for improvements to existing hotels.
Contributions to the property improvement fund were $13.2 million, $12.3 million
and $11.8 million for fiscal years 1996, 1995 and 1994, respectively, and $9.8
million and $9.2 million for the First Three Quarters 1997 and First Three
Quarters 1996, respectively.
Cash used in financing activities was $27.6 million and $26 million for the
First Three Quarters 1997 and First Three Quarters 1996, respectively, and $34.3
million, $8.2 million and $16.9 million for fiscal years 1996, 1995, and 1994,
respectively. During 1996, CBM2 repaid $11.3 million of principal on the
Certificates, as defined below, and paid $42.5 million of interest on CBM2's
debt. CBM2 paid $42.1 million and $47.4 million in interest in 1995 and 1994,
respectively. No principal payments were made on CBM2's Mortgage Debt in 1995 or
1994. Distributions to limited partners were $7.0 million in 1996, $2.7 million
during 1995 from 1994 operations, $8.8 million in 1994 and $11.5 million in the
First Three Quarters 1997.
Refinancing
Partnership Structure
On January 24, 1996, CBM2 completed a refinancing of the Partnership's existing
debt through the private placements of $127.4 million of senior secured notes
(the "Senior Notes") and $410.2 million of multi-class commercial mortgage
pass-through certificates (the "Certificates").
In connection with the refinancing, the limited partners approved certain
amendments to the partnership agreement and the management agreement. The
partnership agreement amendment, among other things, allowed the formation of
certain subsidiaries, including Courtyard II Finance Limited Service REIT
("Finance"), a wholly owned subsidiary of CBM2, who along with CBM2 is the
co-issuer of the Senior Notes.
CBM2 Supp-29
<PAGE>
Additionally, CBM2 formed a wholly owned subsidiary, Courtyard II Associates
Management Corporation ("Managing General Partner"). Managing General Partner
was formed to be the managing general partner with a 1% general partner interest
in Courtyard II Associates, L.P. ("Associates"), a Delaware limited partnership.
CBM2 owns a 1% general partner interest and a 98% limited partner interest in
Associates. On January 24, 1996, CBM2 contributed 69 Hotels and their related
assets to Associates. The formation of Associates resulted in CBM2's primary
assets being its direct and indirect interest in Associates. Additionally,
substantially all of Associates' net equity will be restricted to dividends,
loans or advances to CBM2.
Associates holds a 99% membership interest in CBM Associates II LLC ("Associates
II") and the Managing General Partner holds the remaining 1% membership
interest. On January 24, 1996, CBM2 contributed the Hotel located in Deerfield,
IL (the "Deerfield Hotel") and its related assets to Associates and the Managing
General Partner who simultaneously contributed the Hotel and its related assets
to Associates II.
Each of the Managing General Partner, Associates and Associates II were formed
as a single purpose bankruptcy-remote entity to facilitate the refinancing.
CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of
Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to
Associates from the proceeds of the sale of the Certificates.
Debt Refinancing -- Overview
On January 24, 1996, net proceeds from the placement of the Senior Notes and the
Certificates and existing CBM2 cash were used as follows: (i) to repay existing
Mortgage Debt A of $275 million and Mortgage Debt B of $230.5 million, (ii) to
repay the industrial revenue bond financing on certain Hotels (the "IRB Debt")
of $25.6 million, (iii) to repay advances from Host related to certain Hotels of
$6.5 million and (iv) to pay certain costs of structuring and issuing the Senior
Notes and the Certificates.
Prior to the completion of the refinancing on January 24, 1996, Host or its
wholly owned subsidiary, CBM Two Corporation, (the "General Partner") provided
additional credit support to CBM2 through the following: (i) debt service
guarantees on Mortgage Debt A and B, (ii) foreclosure guarantees on the Mortgage
Debt A and B, (iii) obligations to advance funds related to the IRB Debt and
(iv) a facility for CBM2 to borrow funds to pay ground rent (the "Ground Rent
Facility"). Upon repayment of Mortgage Debt A, Mortgage Debt B, and the IRB
Debt, Host was released from these obligations.
Debt Refinancing - Senior Notes
The Senior Notes of $127.4 million were issued by CBM2 and Finance. The Senior
Notes bear interest at 10 3/4%, require semi-annual payments of interest and
require no payments of principal until maturity on February 1, 2008. The Senior
Notes are secured by a first priority pledge by CBM2 of (i) its 99% partnership
interest (consisting of a 98% limited partner interest and a 1% general partner
interest) in Associates and (ii) its 100% equity interest in the Managing
General Partner. Finance has nominal assets, does not conduct any operations and
does not provide any additional security for the Senior Notes.
The terms of the Senior Notes include requirements of CBM2 to establish and fund
a debt service reserve account in an amount equal to one six-month interest
payment on the Senior Notes ($6,848,000) and to maintain certain levels of
excess cash flow, as defined. In the event CBM2 fails to maintain the required
level of excess cash flow, CBM2 will be required to (i) suspend distributions to
its partners and other restricted payments, as defined, (ii) to fund a separate
supplemental debt service reserve account (the "Supplemental Debt Service
Reserve") in an amount up to two six-month interest payments on the Senior Notes
and (iii) if such failure were to continue, to offer to purchase a portion of
the Senior Notes at par.
CBM2 Supp-30
<PAGE>
The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the
Senior Notes may be redeemed, at the option of CBM2, at a premium declining to
par in 2004. The Senior Notes are non-recourse to CBM2 and its partners.
On June 4, 1996, CBM2 and Finance completed an exchange offer of its
unregistered 10 3/4% Series B Senior Secured Notes with an aggregate principal
amount of $127.4 million ("Old Notes") due 2008 for an equal amount of
registered notes ("New Notes"). The form and terms of the New Notes are
substantially identical to the form and terms of the Old Notes, except that the
New Notes have been registered under the Securities Act of 1933, as amended and
will not have any restrictions for transfer.
Debt Refinancing -- Certificates
The Certificates in an initial principal payment of $410.2 million were issued
by CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan
require monthly payments of principal and interest based on a 17-year
amortization schedule. The Mortgage Loan matures on January 28, 2008. However,
the maturity date of the Certificates/Mortgage Loan may be extended until
January 28, 2013 with the consent of 66 2/3% of the holders of the outstanding
Certificates affected thereby. The Certificates were issued in the following
classes and pass-through rates of interest.
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Class Balance Rate
----- ------------------- ------------
<S> <C> <C>
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
</TABLE>
The Class A-3IO Certificates receive payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate balance.
The balance of the Certificates was $390.1 million at September 12, 1997.
Principal amortization of $8.8 million of the Class A-1 Certificates was made
during the first three quarters of 1997.
The Certificates/Mortgage Loan maturities as of January 3, 1997 are as follows
(in thousands):
<TABLE>
<S> <C>
1997 $ 13,298
1998 14,331
1999 15,443
2000 16,642
2001 17,934
Thereafter 321,205
-----------
$ 398,853
===========
</TABLE>
The Mortgage Loan is secured primarily by 69 cross-defaulted and
cross-collateralized mortgages representing first priority mortgage liens on (i)
the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and
equipment and the property improvement fund, (ii) the fee interest in the land
leased from MII or their affiliates on which 53 Hotels are located, (iii) a
pledge of Associates membership interest in and the related right to receive
distributions from Associates II which owns the Deerfield Hotel and (iv) an
assignment of the Management Agreement, as defined below. The Mortgage Loan is
non-recourse to Associates, CBM2 and its partners.
CBM2 Supp-31
<PAGE>
Operating profit from the Hotels in excess of debt service on the Mortgage Loan
is available to be distributed to CBM2. Amounts distributed to CBM2 are used for
the following, in order of priority: (i) for debt service on the Senior Notes,
(ii) to fund the Supplemental Debt Service Reserve, if necessary, (iii) to offer
to purchase a portion of the Senior Notes at par, if necessary, (iv) for working
capital, see Item 13 "Certain Relationship and Related Transaction," and (v) for
distributions to the partners of CBM2.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
On June 30, 1996, CBM Funding completed an exchange offer of its Multi-class
Mortgage Pass-Through Certificates, Series 1996-1A with a principal balance of
$406.2 million at that time, ("Old Certificates") for an equal amount of
Multi-class Mortgage Pass-Through Certificates, Series 1996-1B ("New
Certificates"). The form and terms of the New Certificates are substantially
identical to the form and terms of the Old Certificates, except that the New
Certificates are registered under the Securities Act of 1933, as amended and
their transfers are not restricted.
Deferred Management Fees and Ground Lease Payments
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement").
Under the Management Agreement that became effective on December 30, 1995, the
Manager agreed to subordinate a portion of the Courtyard management fees and all
incentive management fees, and under an amendment to the ground leases with
Marriott International, Inc. and its affiliates (the "Marriott Ground Lessors")
that became effective on January 24, 1996, the Marriott Ground Lessors agreed to
subordinate their ground rent payments, to the payment of interest, principal
and premiums on the Mortgage Loan and the Senior Notes and debt incurred to
refinance the Mortgage Loan or the Senior Notes that meets specified criteria.
In addition, the Manager agreed to subordinate existing deferred base, Courtyard
and incentive management fees to the payment of debt service.
Deferred base, Courtyard and incentive management fees do not accrue interest
and will be repaid from a portion of operating cash flow but only after payment
of (i) debt service, (ii) a priority return to CBM2 and (iii) certain other
priorities as defined in the Management Agreement. Deferred ground rent owed to
the Marriott Ground Lessors does not accrue interest and will be repaid from a
portion of operating cash flow, but only after payment of debt service. Payment
of such deferred fees and deferred ground rent are restricted payments under the
covenants of the Senior Notes.
Historically, under the management agreement, the Manager subordinated receipt
of the Courtyard management fee to the payment of debt service (through the debt
refinancing date of January 24, 1996) and a 6% return to the limited partners
(through 1993). As of January 3, 1997, cumulative deferred base and Courtyard
management fees totaled $30.2 million.
Prior to 1994 no incentive management fees were earned by the Manager. For the
year ended December 29, 1995, $10.5 million in incentive management fees were
earned and paid to the Manager. For the year ended January 3, 1997, $12.0
million in incentive management fees were earned and $11.4 million were paid.
Therefore, $.6 million was deferred in fiscal year 1996. In the future,
additional incentive management fees may be earned, but payment will be limited
by the terms of the Management Agreement to 80% of the amount by which operating
profit less debt service exceeds the priority return to CBM2.
CBM2 Supp-32
<PAGE>
The priority return to CBM2, as defined, was reduced from 10% of invested
capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10% for 1999
and thereafter. Operating profit from the Hotels (which reflects the deduction
of the base and Courtyard management fees and MII ground rent) will be used to
pay the following, in order of priority: (i) debt service on the Senior Notes
and Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to
repay deferred ground rent to MII and their affiliates, (iv) to repay ground
lease advances to MII and their affiliates, (v) the priority return to CBM2
which is 7% of invested capital for 1996, (vi) eighty percent of the remaining
operating profit is applied to the payment of current incentive management fees,
(vii) to repay advances to CBM2, (viii) to repay foreclosure avoidance advances
to the Manager and (ix) fifty percent of the remaining operating profit to repay
deferred management fees to the Manager and fifty percent of remaining operating
profit is paid to CBM2. In 1996, CBM2 had $2.5 million of remaining operating
profit after the payment of i) through viii) above. Fifty percent of this
remaining operating profit was used to repay a portion of 1996 deferred
incentive management fees to the Manager and the remainder was paid to CBM2.
Property Improvement Fund
The Management Agreement requires annual contributions to a property improvement
fund to ensure that the physical condition and product quality of the Hotels are
maintained. Contributions to this fund are based on a percentage of annual total
hotel sales, currently equal to 5%. The Partnership believes that the 5%
contribution requirement is consistent with industry standards and provides a
sufficient reserve for the future capital repair and replacement needs of the
Hotels. In accordance with the Management Agreement, the annual required
contribution percentage may increase to up to 6% after December 31, 2000. The
balance in the fund totaled $29 million as of September 12, 1997. During the
period from 1992 through 1995, room renovation projects were completed at all of
the Hotels at an aggregate cost of approximately $30.7 million. Total capital
expenditures during fiscal year 1996, 1995 and 1994 were $11.2 million, $8.8
million and $13.4 million, respectively, and $11.5 million and $3.3 million for
the First Three Quarters 1997 and First Three Quarters 1996. All such capital
expenditures were funded from the property improvement fund.
General
As previously discussed, CBM2's debt was refinanced on January 24, 1996. The
General Partner believes that cash from hotel operations combined with the
ability to defer certain management fees to the Manager and ground rent payments
to MII and affiliates will provide adequate funds in the short term and long
term for the operational and capital needs of CBM2.
CBM2 Supp-33
<PAGE>
FINANCIAL STATEMENTS
CBM2 Supp-34
<PAGE>
Report of Independent Public Accountants
TO THE LIMITED PARTNERS OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Courtyard by
Marriott II Limited Partnership (a Delaware limited partnership) as of January
3, 1997 and December 29, 1995, and the related consolidated statements of
operations, changes in partners' capital (deficit) and cash flows for each of
the three fiscal years in the period ended January 3, 1997. These financial
statements referred to below are the responsibility of the General Partner's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Courtyard by
Marriott II Limited Partnership as of January 3, 1997 and December 29, 1995, and
the results of its operations and its cash flows for each of the three fiscal
years in the period ended January 3, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 13, 1997
CBM2 Supp-35
<PAGE>
Courtyard by Marriott II Limited Partnership
Consolidated Balance Sheets
January 3, 1997 and December 29, 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Property and equipment, net......................................................... $ 458,687 $ 474,480
Deferred financing costs, net of accumulated amortization........................... 17,442 18,482
Due from Courtyard Management Corporation........................................... 13,315 7,078
Prepaid expenses.................................................................... 28 --
Property improvement fund........................................................... 36,582 33,098
Restricted cash..................................................................... 6,848 6,684
Cash and cash equivalents........................................................... 14,197 27,708
--------- ---------
$ 547,099 $ 567,530
========= =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt................................................................................ $ 526,253 $ 531,100
Management fees due to Courtyard Management Corporation............................. 36,442 35,809
Due to Marriott International, Inc. and affiliates.................................. 9,169 9,402
Accounts payable and accrued liabilities............................................ 7,176 19,250
Due to Host Marriott Corporation.................................................... -- 7,469
--------- ---------
Total Liabilities................................................................. 579,040 603,030
--------- ---------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution.............................................................. 11,306 11,306
Cumulative net losses............................................................. (5,241) (5,768)
Capital distributions............................................................. (278) (278)
--------- ---------
5,787 5,260
--------- ---------
Limited Partners
Capital contributions, net of offering costs of $17,189........................... 129,064 129,064
Cumulative net losses............................................................. (99,582) (109,596)
Capital distributions............................................................. (67,025) (60,043)
Investor notes receivable......................................................... (185) (185)
--------- ---------
(37,728) (40,760)
--------- ---------
Total Partners' Deficit........................................................... (31,941) (35,500)
--------- ---------
$ 547,099 $ 567,530
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
CBM2 Supp-36
<PAGE>
Courtyard by Marriott II Limited Partnership
Consolidated Statements of Operations
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Hotel revenues (Note 3)..................................................$ 133,182 $ 121,737 $ 112,392
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Depreciation............................................................. 27,062 27,720 27,980
Base and Courtyard management fees....................................... 15,822 14,749 13,925
Incentive management fee................................................. 12,040 10,480 9,403
Ground rent.............................................................. 11,899 11,550 10,787
Property taxes........................................................... 9,537 9,324 9,453
Insurance and other...................................................... 2,810 1,618 2,860
------------ ------------ ------------
79,170 75,441 74,408
------------ ------------ ------------
OPERATING PROFIT............................................................. 54,012 46,296 37,984
Interest expense............................................................. (46,366) (38,113) (43,115)
Interest income.............................................................. 2,895 3,032 1,567
------------ ------------ ------------
NET INCOME (LOSS)............................................................$ 10,541 $ 11,215 $ (3,564)
============ ============ ============
ALLOCATION OF NET INCOME (LOSS)
General Partner..........................................................$ 527 $ 560 $ (178)
Limited Partners......................................................... 10,014 10,655 (3,386)
------------ ------------ ------------
$ 10,541 $ 11,215 $ (3,564)
============ ============ ============
NET INCOME (LOSS) PER LIMITED PARTNER UNIT (1,470 units).....................$ 6,812 $ 7,248 $ (2,303)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
CBM2 Supp-37
<PAGE>
Courtyard by Marriott II Limited Partnership
Consolidated Statements of Cash Flows
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................................$ 10,541 $ 11,215 $ (3,564)
Noncash items:
Depreciation................................................................ 27,062 27,720 27,980
Amortization of deferred financing costs as interest........................ 1,679 625 595
Deferred management fees.................................................... 633 -- 5,564
(Gain) loss on sale of equipment............................................ -- (12) 1,185
Deferred interest on IRB advances from
Host Marriott Corporation................................................. -- 638 341
Changes in operating accounts:
Due from Courtyard Management Corporation................................... (3,737) 1,311 (2,260)
Accounts payable and accrued liabilities.................................... 2,924 (5,114) (3,876)
Due to Host Marriott Corporation............................................ (1,015) (427) --
Prepaid expenses ........................................................... (28) 180 (181)
Management fees due to Courtyard Management Corporation..................... -- (162) --
Due to Marriott International, Inc. ........................................ -- -- (64)
----------- ----------- ----------
Cash provided by operations................................................... 38,059 35,974 25,720
----------- ----------- ----------
INVESTING ACTIVITIES
Additions to property and equipment, net...................................... (11,269) (8,786) (13,361)
Change in property improvement fund........................................... (3,484) (5,427) 1,229
Working capital provided to Courtyard Management Corporation.................. (2,500) -- --
----------- ----------- ----------
Cash used in investing activities............................................. (17,253) (14,213) (12,132)
----------- ----------- ----------
FINANCING ACTIVITIES
Proceeds from issuance of debt ............................................... 537,600 -- --
Repayments of debt............................................................ (531,100) -- --
Payment of financing costs.................................................... (15,835) (2,990) (20)
Payment of principal ......................................................... (11,347) -- --
Capital distributions......................................................... (6,982) (2,714) (8,820)
Deposit into the debt service reserve ........................................ (6,848) -- --
Use of (Deposit in) refinancing reserve accounts.............................. 6,684 (2,560) (4,124)
Repayment of advances from Host Marriott Corporation.......................... (6,489) -- (3,911)
Collections of investor notes receivable...................................... -- 51 --
----------- ----------- ----------
Cash used in financing activities............................................. (34,317) (8,213) (16,875)
----------- ----------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..................................$ (13,511) $ 13,548 $ (3,287)
CASH AND CASH EQUIVALENTS at beginning of year.................................... 27,708 14,160 17,447
----------- ----------- ----------
CASH AND CASH EQUIVALENTS at end of year..........................................$ 14,197 $ 27,708 $ 14,160
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.....................................$ 42,532 $ 42,092 $ 47,382
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
CBM2 Supp-38
<PAGE>
Courtyard by Marriott II Limited Partnership
Consolidated Statements of Changes in
Partners' Capital (Deficit)
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------------ -------------- ------------
<S> <C> <C> <C>
Balance, December 31, 1993.................................................$ 4,878 $ (36,546) $ (31,668)
Capital distributions.................................................. -- (8,820) (8,820)
Net loss............................................................... (178) (3,386) (3,564)
------------ -------------- ------------
Balance, December 30, 1994................................................. 4,700 (48,752) (44,052)
Payments received on investor notes receivable......................... -- 51 51
Capital distributions.................................................. -- (2,714) (2,714)
Net income............................................................. 560 10,655 11,215
------------ -------------- ------------
Balance, December 29, 1995................................................. 5,260 (40,760) (35,500)
Capital distributions.................................................. -- (6,982) (6,982)
Net income............................................................. 527 10,014 10,541
------------ -------------- ------------
Balance, January 3, 1997...................................................$ 5,787 $ (37,728) $ (31,941)
============ ============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
CBM2 Supp-39
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Courtyard by Marriott II Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed August 31, 1987 to acquire and own 70 Courtyard
by Marriott hotels (the "Hotels") and the land on which certain of the Hotels
are located. The Partnership's 70 hotel properties are located in 29 states in
the United States: nine in Illinois; eight in California; five in Florida; four
in Georgia; four in Texas and three or less in each of the other 24 states. On
December 29, 1995, Host Marriott Corporation's operations were divided into two
separate companies: Host Marriott Corporation ("Host Marriott") and Host
Marriott Services Corporation. The Hotels are managed as part of the Courtyard
by Marriott hotel system by Courtyard Management Corporation (the "Manager"), a
wholly-owned subsidiary of Marriott International, Inc. ("MII"). The sole
general partner of the Partnership, with a 5% interest, is CBM Two Corporation
(the "General Partner"), a wholly owned subsidiary of Host Marriott.
On January 18, 1988 (the "Final Closing Date"), 1,470 limited partnership
interests (the "Units"), representing a 95% interest in the Partnership, had
been sold in a private placement offering. The offering price per Unit was
$100,000, $21,200 payable at subscription with the balance due in four annual
installments through February 28, 1991, or, as an alternative, $94,357 in cash
at closing as full payment of the subscription price. The limited partners paid
$39,938,000 as of the Final Closing Date, representing 1,350 Units purchased on
the installment basis and 120 Units paid in full. The limited partners'
obligations to make the installment payments were evidenced by promissory notes
(the "Investor Notes") payable to the Partnership and secured by the Units. On
October 30, 1987 (the "Initial Closing Date"), the General Partner made a
capital contribution of equipment valued at $11,306,000 for its 5% general
partner interest.
On the Initial Closing Date, the Partnership began operations and executed a
purchase agreement (the "Purchase Agreement") with Host Marriott to acquire the
Hotels and the land on which certain of the Hotels are located for a total price
of $643.1 million. Of the total purchase price, $507.9 million was paid in cash
from the proceeds of the mortgage financing and sale of the Units, $40.2 million
from assumption of industrial development revenue bond financing (the "IRB
Debt") from Host Marriott and $95 million from a note (the "Deferred Purchase
Note") payable to Host Marriott. Twenty of the Hotels were conveyed to the
Partnership in 1987, thirty-four Hotels in 1988, twelve Hotels in 1989 and the
final four Hotels during the first half of 1990.
Under the Purchase Agreement, Host Marriott agreed to reduce the purchase price
of the Hotels by up to $9.3 million if the Hotels did not provide cash flow in
excess of debt service, as defined, equivalent to $9.3 million in 1989, (the
"Price Adjustment"). The required Price Adjustment for 1989 was $8,843,000. The
Price Adjustment was allocated as a reduction to the Partnership's property and
equipment in the accompanying consolidated financial statements.
In accordance with the partnership agreement, in 1990 and 1991 the General
Partner purchased 20.5 Units from defaulting investors. Additionally, on July
15, 1995, a limited partner assigned one Unit to the General Partner. Therefore,
as of January 3, 1997, the General Partner owns a total of 21.5 Units
representing a 1.39% limited partnership interest in the Partnership.
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4 million of
senior secured notes (the "Senior Notes") and $410.2 million of multi-class
commercial mortgage pass-through certificates (the "Certificates").
In connection with the refinancing, the limited partners approved certain
amendments to the partnership agreement and the Management Agreement. The
partnership agreement amendment, among other things, allowed the formation of
certain subsidiaries of the Partnership, including Courtyard II Finance Limited
Service REIT ("Finance"), a wholly-owned subsidiary of the Partnership, who
along with the Partnership is the co-issuer of the Senior Notes.
Additionally, the Partnership formed a wholly owned subsidiary, Courtyard II
Associates Management Corporation ("Managing General Partner"). Managing General
Partner was formed to be the managing general partner with a 1% general
CBM2 Supp-40
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware
limited partnership. The Partnership owns a 1% general partner interest and a
98% limited partner interest in Associates. On January 24, 1996, the Partnership
contributed 69 Hotels and their related assets to Associates. Formation of
Associates resulted in the Partnership's primary assets being its direct and
indirect interest in Associates. Additionally, substantially all of Associates'
net equity will be restricted to dividends, loans or advances to the
Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC ("Associates
II") and Managing General Partner holds the remaining 1% membership interest. On
January 24, 1996, the Partnership contributed the Hotel located in Deerfield, IL
(the "Deerfield Hotel") and its related assets to Associates and the Managing
General Partner who simultaneously contributed the Hotel and its related assets
to Associates II.
Each of the Managing General Partner, Associates and Associates II were formed
as a single purpose bankruptcy-remote entity to facilitate the refinancing.
CBM Funding Corporation ("CBM Funding"), a wholly owned subsidiary of
Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to
Associates from the proceeds of the sale of the Certificates.
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
a. Cash available for distribution is distributed (i) first, 5% to the General
Partner and 95% to the limited partners until the General Partner and the
limited partners (collectively, the "Partners") have received cumulative
distributions of sale proceeds and/or refinancing proceeds ("Capital
Receipts") equal to $77,368,421; (ii) next, 10% to the General Partner and
90% to the limited partners until the Partners have received cumulative
distributions of Capital Receipts equal to $158,306,000; and (iii)
thereafter, 25% to the General Partner and 75% to the limited partners.
Distributions to the General Partner are subordinate to an annual 10%
non-cumulative preferred return to the limited partners on their invested
capital, as defined.
b. Refinancing proceeds not retained by the Partnership will be distributed
(i) first, 5% to the General Partner and 95% to the limited partners until
the Partners have received cumulative distributions of refinancing proceeds
equal to $158,306,000 minus adjusted sale proceeds, as defined; and (ii)
thereafter, 25% to the General Partner and 75% to the limited partners.
c. Proceeds not retained by the Partnership from the sale or other disposition
of less than substantially all of the assets of the Partnership will be
distributed (i) first, 5% to the General Partner and 95% to the limited
partners until the Partners have received cumulative distributions of
Capital Receipts equal to $158,306,000; and (ii) thereafter, 25% to the
General Partner and 75% to the limited partners.
Proceeds from the sale of substantially all of the assets of the
Partnership or from a related series of Hotel sales leading to the sale of
substantially all of the assets of the Partnership will be distributed to
the Partners pro-rata in accordance with their capital account balances.
d. Net profits are generally allocated in the same ratio in which cash
available for distribution is distributed.
e. All items of gain, deduction or loss attributable to the contributed
equipment will be allocated to the General Partner.
f. In general, gain recognized by the Partnership will be allocated, with
respect to any year, in the following order of priority: (i) to all
Partners whose capital accounts have negative balances until such negative
balances are brought to zero; (ii) to all Partners up to the amount
necessary to bring their respective capital account balances to an amount
equal to their invested capital, as defined; and (iii) thereafter 25% to
the General Partner and 75% to the limited partners.
CBM2 Supp-41
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
Gain arising from the sale or other disposition (or from a related series
of sales or dispositions) of substantially all the assets of the
Partnership will be allocated (i) to the limited partners in an amount
equal to the excess, if any, of (1) the sum of 15% times the weighted
average of the limited partners' invested capital each year, over (2) the
sum of distributions to the limited partners of Capital Receipts in excess
of the limited partners' cumulative capital and distributions to limited
partners of cash available for distribution; and (ii) next, to the General
Partner until it has been allocated an amount equal to 33.33% of the amount
allocated to the limited partners under clause (i); and (iii) thereafter,
25% to the General Partner and 75% to the limited partners.
g. For financial reporting purposes, profits and losses are generally
allocated among the Partners based on their stated interests in cash
available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting.
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.
Working Capital and Supplies
Pursuant to the terms of the Partnership's management agreement discussed in
Note 8, the Partnership is required to provide the Manager with working capital
and supplies to meet the operating needs of the Hotels. The Manager converts
cash advanced by the Partnership into other forms of working capital consisting
primarily of operating cash, inventories, and trade receivables and payables
which are maintained and controlled by the Manager. Upon the termination of the
management agreement, the Manager is required to convert working capital and
supplies into cash and return it to the Partnership. As a result of these
conditions, the individual components of working capital and supplies controlled
by the Manager are not reflected in the accompanying consolidated balance sheet.
Fiscal Year
The Partnership's fiscal year ends on the Friday nearest to December 31. Fiscal
Year 1996 included 53 weeks compared to 52 weeks for fiscal years 1995 and 1994.
Revenues and Expenses
Revenues represent house profit from the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotels to the Manager. House profit
reflects hotel operating results which flow to the Partnership as property owner
and represents hotel sales less property-level expenses, excluding depreciation
and amortization, base, Courtyard and incentive management fees, property taxes,
ground rent and equipment rent, insurance and certain other costs, which are
disclosed separately in the consolidated statement of operations.
CBM2 Supp-42
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
Buildings and improvements 40 years
Leasehold improvements 40 years
Furniture and equipment 4 - 10 years
Certain property and equipment was pledged to secure the mortgage debt described
in Note 6.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties will be
less than their net book value. If a property is impaired, its basis is adjusted
to fair market value.
Deferred Financing Costs
Prior to 1996, deferred financing costs consist of costs incurred in connection
with obtaining Partnership financing for Mortgage Debt A and B, as defined in
Note 6. During 1996 and 1995, the Partnership paid $15,835,000 and $2,990,000,
respectively, in financing costs related to the debt refinancing discussed in
Note 6. Financing costs are amortized using the straight-line method, which
approximates the effective interest rate method, over the remaining life of the
respective mortgage debt. At January 3, 1997 and December 29, 1995, accumulated
amortization of financing costs totaled $1,453,000 and $3,806,000, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Ground Rent
The land leases with MII or affiliates of MII (see Note 7) include scheduled
increases in minimum rents per property. These scheduled rent increases, which
are included in minimum lease payments, are being recognized by the Partnership
on a straight-line basis over the lease terms which approximate 80 years. The
adjustment included in ground rent expense and Due to Marriott International,
Inc. and affiliates to reflect minimum lease payments on a straight-line basis
for 1996, 1995 and 1994 totaled $119,000 per year.
Income Taxes
Provision for Federal taxes has not been made in the accompanying consolidated
financial statements since the Partnership does not pay income taxes, but
rather, allocates its profits and losses to the individual Partners. Significant
differences exist between the net income/loss for financial reporting purposes
and the net income/loss reported in the Partnership's tax return. These
differences are due primarily to the use for income tax purposes of accelerated
depreciation methods, shorter depreciable lives for the assets, difference in
the timing of recognition of certain fees and straight-line rent adjustments. As
a result of these differences, the excess of the net Partnership liabilities
reported in the accompanying consolidated financial statements over the tax
basis in the net Partnership liabilities was $7,819,000 and $3,381,000,
respectively as of January 3, 1997 and December 29, 1995.
Interest Rate Swap Agreements
The Partnership was a party to two interest rate swap agreements (prior to their
expiration in 1994) to reduce the Partnership's exposure to floating interest
rates. The Partnership accounted for the swap arrangements as a hedge of
obligations to pay floating rates of interest and accordingly, recorded interest
expense based upon its payment obligations at fixed interest rates.
CBM2 Supp-43
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
Statement of Financial Accounting Standards
In the first quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on its consolidated financial statements.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1996 presentation.
NOTE 3. HOTEL REVENUES
Partnership Hotel revenues consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- -------------
<S> <C>
HOTEL SALES
Rooms.............................................................$ 235,861 $ 218,955 $ 204,203
Food and beverage................................................. 18,227 17,628 18,483
Other............................................................. 9,619 9,242 9,396
-------------- -------------- --------------
263,707 245,825 232,082
-------------- -------------- --------------
HOTEL EXPENSES
Departmental Direct Costs
Rooms........................................................... 50,653 48,091 45,088
Food and beverage............................................... 16,073 15,006 15,162
Other hotel operating expenses.................................... 63,799 60,991 59,440
-------------- -------------- --------------
130,525 124,088 119,690
- - -------------- -------------- --------------
HOTEL REVENUES........................................................$ 133,182 $ 121,737 $ 112,392
============== ============== ==============
</TABLE>
CBM2 Supp-44
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
January 3, December 29,
1997 1995
-------------- --------------
<S> <C> <C>
Land.....................................................................................$ 25,392 $ 25,392
Leasehold improvements................................................................... 438,921 435,913
Building and improvements................................................................ 78,559 77,053
Furniture and equipment.................................................................. 142,663 135,908
-------------- --------------
685,535 674,266
Less accumulated depreciation............................................................ (226,848) (199,786)
-------------- --------------
$ 458,687 $ 474,480
============== ==============
</TABLE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
As of January 3, 1997 As of December 29, 1995
------------------------------ ------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------- -------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Financial liabilities
Debt.......................................................$ 526,253 $ 540,420 $ 531,100 $ 531,100
Management fees due to Courtyard
Management Corporation..................................$ 36,442 $ 16,681 $ 35,809 $ 9,995
Due to Host Marriott Corporation...........................$ -- $ -- $ 7,469 $ 7,469
</TABLE>
The 1996 estimated fair value of debt obligations was based on the quoted market
prices at January 3, 1997.
The 1995 estimated fair values of debt obligations and amounts due to Host
Marriott Corporation are based on their carrying amounts as these items were
repaid on January 24, 1996. Consistent with the prior year, the 1996 management
fees due to the Courtyard Management Corporation are valued based on the
expected future payments from operating cash flow discounted at risk adjusted
rates.
NOTE 6. MORTGAGE DEBT
Overview
The Partnership's initial financing consisted of up to $500 million of
non-recourse mortgage debt (the "MFS Mortgage Debt") from Marriott Financial
Services, Inc. ("MFS"), a wholly-owned subsidiary of Host Marriott, to provide
financing for the purchase of 65 of the Hotels (the "non-IRB Hotels"). The
Partnership assumed the $40.2 million of IRB Debt to provide financing for the
purchase of the remaining 5 Hotels (the "IRB Hotels"). In 1988 and 1989, the
Partnership borrowed $275 million (the "Mortgage Debt A") and $230.5 million
(the "Mortgage Debt B") from two banks (the "Banks") to repay the MFS Mortgage
Debt and to pay financing costs.
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4 million of
senior secured notes (the "Senior Notes") and $410.2 million of multi-class
commercial mortgage pass-through certificates (the "Certificates").
CBM2 Supp-45
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
The net proceeds from the placement of the Senior Notes and the Certificates and
existing Partnership cash were used as follows: (i) to repay the Partnership's
existing Mortgage Debt A of $275 million and Mortgage Debt B of $230.5 million,
(ii) to repay the IRB Debt of $25.6 million, (iii) to repay the advances from
Host Marriott related to certain IRB Hotels of $6.5 million and (iv) to pay
certain costs of structuring and issuing the Senior Notes and the Certificates.
Upon repayment of Mortgage Debt A and Mortgage Debt B, Host Marriott was
released from its obligations under (i) the Mortgage Debt A and Mortgage Debt B
debt service guarantees, (ii) the foreclosure guarantee and (iii) the Ground
Rent Facility, as defined.
Bank Mortgage Debt
Mortgage Debt A and B were non-recourse and bore interest at a floating rate
equal to (i) the adjusted CD Rate or LIBOR, as defined, plus (ii) .75 percentage
points. Mortgage Debt A and B required no principal amortization prior to
maturity on December 15, 1995 and September 5, 1996, respectively.
During the period from 1989 through 1994, to reduce the Partnership's exposure
to floating interest rates, the Partnership entered into two swap agreements
effectively fixing the interest rates on Mortgage Note A and a large portion of
Mortgage Note B.
The combined effective interest rate for Mortgage Debt A and B was 6.67% from
January 1, 1996 through January 23, 1996, 7% for 1995, and 8.08% for 1994. The
combined average interest rate at January 23, 1996 for Mortgage Debt A and B was
6.58%.
As security for the Mortgage Debt A (36 Hotels) and Mortgage Debt B (29 Hotels)
the Banks held mortgages on the Partnership's fee or leasehold interest on the
respective Hotels. The Banks also had security interests under their respective
mortgages in the personal property associated with those Hotels and obtained an
assignment of the Partnership's rights under the management agreement and the
Purchase Agreement.
On December 15, 1995, the Partnership and the Mortgage Debt A lenders amended
the loan agreement to extend the maturity date of Mortgage Debt A from December
15, 1995 to February 15, 1996 (the "Extension Period"). This amendment provided
for interest during the Extension Period equal to the following:
<TABLE>
<S> <C>
December 16, 1995 through January 15, 1996....................Adjusted CD Rate or LIBOR plus 1 percentage point
January 16, 1996 through February 15, 1996....................Adjusted CD Rate or LIBOR plus 1.25 percentage points
</TABLE>
In connection with the Mortgage Debt A extension, the Partnership paid an
extension fee to the Banks of $1,085,000 of which the 1995 portion is included
in interest expense on the consolidated statement of operations.
Bank Mortgage Debt Guarantees
Prior to the initial refinancing, in 1987 Host Marriott had guaranteed payment
of up to $60 million of debt service on the MFS Mortgage Debt. As a result of
the initial refinancing, this guarantee was allocated $32.6 million to Mortgage
Debt A and $27.4 million to Mortgage Debt B. Any payments by Host Marriott under
the Mortgage Debt guarantees were treated as loans to the Partnership and bore
interest at one percentage point in excess of the prime rate of interest
announced by Bankers Trust Limited Service REIT of New York (the "Prime Rate").
During 1995, Host Marriott was released from its original Mortgage Debt A
guarantee obligation of $32.6 million as certain debt service coverage
requirements were met. As a result, as of December 30, 1995, $5.4 million and
$27.4 million, respectively, was available under Mortgage Debt A and B
guarantees. Host Marriott was released from the original guarantees on January
24, 1996, the date when Mortgage Debt A and Mortgage Debt B were repaid in full.
CBM2 Supp-46
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
During 1994, the Partnership, Manager and Mortgage Debt A and B lenders agreed
that the Partnership would establish reserve accounts for Mortgage Debt A and B
and contribute 1% of Hotel sales on the respective Mortgage Debt A and B
properties to these reserves from 1993 through the respective loan maturities.
The initial contribution, made in 1994, included the required contribution for
1993. On January 24, 1996, these reserves were used to pay costs associated with
the refinancing of these loans and to repay a portion of these loans upon
maturity.
In addition, the General Partner had provided a guarantee to MFS that, in the
event of a foreclosure, proceeds under the MFS Mortgage Debt would be at least
$75 million. This foreclosure guarantee was allocated $40.8 million to Mortgage
Debt A and $34.2 million to Mortgage Debt B. Upon completion of the debt
refinancing on January 24, 1996, Host Marriott was released from its obligations
pursuant to the foreclosure guarantee.
IRB Debt
The IRB Debt was refinanced on January 24, 1996 and the IRB Debt was repaid in
full. The $25.6 million of IRB Debt outstanding at December 29, 1995 was backed
by direct-pay letters of credit from commercial banks that would have expired in
1996. These issues were subject to mandatory prepayment upon expiration of the
letters of credit unless replacement letters of credit were secured. The IRB
Debt bore interest at daily, weekly or fixed rates at the option of the
Partnership, and was limited to a maximum interest rate of 15%. From December
30, 1995 through January 23, 1996, the interest rates on the IRB Debt ranged
from 2.65% to 6.1%. In 1995 and 1994, the interest rates on the IRB Debt ranged
from 1.9% to 6.1% and 1.15% to 6.05%, respectively. The interest rate on the IRB
Debt was 3.2% at January 23, 1996.
The bondholders had the right to demand purchase of any of the bonds at the
expiration of specified interest rate periods. Had the Partnership failed to
make the required payments of principal and interest on the IRB Debt, Host
Marriott would have been required to make such payments ("Host Marriott's IRB
Liability"). Through January 24, 1996, the Partnership purchased a total of
$15.4 million of bonds/IRB Debt with proceeds advanced by Host Marriott (see
below) when presented by certain bondholders. These loans bore interest at one
percentage point in excess of the Prime Rate (8.5% at January 23, 1996). The
weighted average interest rate was 9.5% for the period from January 1, 1996
through January 23, 1996, 9.83% for 1995 and 8.14% for 1994. In 1993 and 1994,
the Partnership was able to repay the General Partner $8.9 million. As of
December 29, 1995, $6.5 million of Host Marriott IRB Liability loans were
outstanding. As discussed above, the $6.5 million of Host Marriott IRB Liability
loans were repaid on January 24, 1996 from proceeds of the debt refinancing.
Ground Rent Facility
Fifty-three of the Hotels are situated on land leased from MII or affiliates of
MII, eight of the Hotels are situated on land leased from third parties. MFS had
agreed to lend the Partnership up to $25 million (the "Ground Rent Facility") to
the extent that the Partnership has insufficient funds to pay ground rent under
any ground lease, including third party ground leases, after payment of (i)
hotel operating expenses (except for ground rent) and (ii) debt service. No
amounts were ever advanced under the Ground Rent Facility. Upon refinancing of
the Partnership debt on January 24, 1996, MFS was released from the Ground Rent
Facility.
Debt Refinancing - Senior Notes
The Senior Notes of $127.4 million were issued by the Partnership and Finance.
The Senior Notes bear interest at 10 3/4%, require semi-annual payments of
interest and require no payments of principal until maturity on February 1,
2008. The Senior Notes are secured by a first priority pledge by the Partnership
of (i) its 99% partnership interest (consisting of a 98% limited partner
interest and a 1% general partner interest) in Associates and (ii) its 100%
equity interest in the Managing General Partner. Finance has nominal assets,
does not conduct any operations and does not provide any additional security for
the Senior Notes.
The terms of the Senior Notes include requirements of the Partnership to
establish and fund a debt service reserve account in an amount equal to one
six-month interest payment on the Senior Notes ($6,848,000 which is included as
restricted cash on the accompanying consolidated balance sheet at January 3,
1997) and to maintain certain levels of excess cash flow, as defined. In the
event the Partnership fails to maintain the required level of excess cash flow,
the Partnership will be required
CBM2 Supp-47
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
to (i) suspend distributions to its partners and other restricted payments, as
defined, (ii) to fund a separate supplemental debt service reserve account (the
"Supplemental Debt Service Reserve") in an amount up to two six-month interest
payments on the Senior Notes and (iii) if such failure were to continue, to
offer to purchase a portion of the Senior Notes at par.
The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the
Senior Notes may be redeemed, at the option of the Partnership, at a premium
declining to par in 2004. The Senior Notes are non-recourse to the Partnership
and its partners.
On June 4, 1996, the Partnership and Finance completed an exchange offer of its
unregistered 10 3/4% Series B Senior Secured Notes with an aggregate principal
amount of $127.4 million ("Old Notes") due 2008 for an equal amount of
registered notes ("New Notes"). The form and terms of the New Notes are
substantially identical to the form and terms of the Old Notes, except that the
New Notes have been registered under the Securities Act of 1933, as amended and
will not have any restrictions for transfer.
Debt Refinancing -- Certificates
The Certificates in an initial principal payment of $410.2 million were issued
by CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan
require monthly payments of principal and interest based on a 17-year
amortization schedule. The Mortgage Loan matures on January 28, 2008. However,
the maturity date of the Certificates/Mortgage Loan may be extended until
January 28, 2013 with the consent of 66 2/3% of the holders of the outstanding
Certificates affected thereby. The Certificates were issued in the following
classes and pass-through rates of interest.
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Class Balance Rate
---------------- -------------------- -------------
<S> <C> <C>
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
</TABLE>
The Class A-3IO Certificates receive payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate balance.
The balance of the Certificates was $398.9 million at January 3, 1997. Principal
amortization of $11.3 million of the Class A-1 Certificates was made during
1996. The weighted average interest rate on the Certificates was 7.7% from
January 24, 1996 through January 3, 1997, and the average interest rate was 7.6%
at January 3, 1997.
The Certificates/Mortgage Loan maturities are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 13,298
1998 14,331
1999 15,443
2000 16,642
2001 17,934
Thereafter 321,205
------------
$ 398,853
============
</TABLE>
The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-
collateralized mortgages representing first priority mortgage liens on (i) the
fee or leasehold interest in the 69 Hotels, related furniture, fixtures and
equipment and the property
CBM2 Supp-48
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
improvement fund, (ii) the fee interest in the land leased from MII or their
affiliates on which 53 Hotels are located, (iii) a pledge of Associates
membership interest in and the related right to receive distributions from
Associates II which owns the Deerfield Hotel and (iv) an assignment of the
Restated Management Agreement, as defined below. The Mortgage Loan is non-
recourse to Associates, the Partnership and its partners.
Operating profit from the Hotels in excess of debt service on the Mortgage Loan
is available to be distributed to the Partnership. Amounts distributed to the
Partnership are used for the following, in order of priority: (i) for debt
service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve,
if necessary, (iii) to offer to purchase a portion of the Senior Notes at par,
if necessary, (iv) for working capital as discussed in Note 8 and (v) for
distributions to the partners of the Partnership. The restricted net assets of
Associates is $81.1 million as of January 3, 1997.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
On June 30, 1996, CBM Funding completed an exchange offer of its Multi-class
Mortgage Pass-Through Certificates, Series 1996-1A with a principal balance of
$406.2 million at that time, ("Old Certificates") for an equal amount of
Multi-class Mortgage Pass-Through Certificates, Series 1996-1B ("New
Certificates"). The form and terms of the New Certificates are substantially
identical to the form and terms of the Old Certificates, except that the New
Certificates are registered under the Securities Act of 1933, as amended and
their transfers are not restricted.
NOTE 7. LEASES
The land on which 53 of the Hotels are located is leased from MII or affiliates
of MII. In addition, eight of the Hotels are located on land leased from third
parties. The land leases have remaining terms (including all renewal options)
expiring between the years 2024 and 2068. The MII land leases and the third
party land leases provide for rent based on specific percentages (from 2% to
15%) of certain sales categories subject to minimum amounts. The minimum rentals
are adjusted at various anniversary dates throughout the lease terms, as defined
in the agreements. The Partnership also rents certain equipment for use in the
Hotels.
In connection with the refinancing, the Partnership, as lessee, transferred its
rights and obligations pursuant to the 53 ground leases with MII and affiliates
to Associates. Additionally, MII and affiliates agreed to defer receipt of their
ground lease payments to the extent that the Partnership or Associates has
insufficient funds for debt service payments on the Senior Notes and the
Mortgage Loan.
Minimum future rental payments during the term of these operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Telephone
Lease Land Equipment Other
Year Leases Leases Leases
--------- -------------- ------------ ------------
<S> <C> <C> <C>
1997 $ 9,230 $ 1,125 $ 966
1998 9,230 1,106 561
1999 9,230 787 101
2000 9,230 589 --
2001 9,230 -- --
Thereafter 542,213 -- --
----------- --------- ----------
$ 588,363 $ 3,607 $ 1,628
=========== ========= ==========
</TABLE>
Total rent expense on land leases was $11,899,000 for 1996, $11,550,000 for 1995
and $10,787,000 for 1994.
CBM2 Supp-49
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
NOTE 8. MANAGEMENT AGREEMENT
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, the "Management Agreement".
Term
The Management Agreement has an initial term expiring in 2013. The Manager may
renew the term, as to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years. The
Partnership may terminate the Management Agreement if, during any three
consecutive years after 1992, specified minimum operating results are not
achieved. However, the Manager may prevent termination by paying to the
Partnership the amount by which the minimum operating results were not achieved.
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3 1/2% of gross sales from the Hotels, (ii) the Courtyard
management fee equal to 2 1/2% of gross sales from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the Partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds (the "First Equity Refinancing")).
Deferral Provisions
Due to the refinancing, beginning in 1996, one percent of the Courtyard
management fee is deferred through maturity of the Senior Notes and the Mortgage
Loan to the extent that the Partnership or Associates has insufficient funds for
debt service payments on the Senior Notes and the Mortgage Loan. This change
eliminated the previous deferral of the total Courtyard management fee to debt
service through December 31, 1997.
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10%
for 1999 and thereafter. Operating profit from the Hotels (which reflects the
deduction of the base and Courtyard management fees and MII ground rent) will be
used to pay the following, in order of priority: (i) debt service on the Senior
Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager,
(iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay
ground lease advances to MII and their affiliates, (v) the priority return to
the Partnership which is 7% of invested capital for 1996, (vi) eighty percent of
the remaining operating profit is applied to the payment of current incentive
management fees, (vii) to repay advances to the Partnership, (viii) to repay
foreclosure avoidance advances to the Manager and (ix) fifty percent of the
remaining operating profit to repay deferred management fees to the Manager and
fifty percent of remaining operating profit is paid to the Partnership. In 1996,
the Partnership had $2.5 million of remaining operating profit after the payment
of (i) through (viii) above. Fifty percent of this remaining operating profit
was used to repay a portion of 1996 deferred incentive management fees to the
Manager and the remainder was paid to the Partnership.
During 1996, $633,000 of incentive management fees were deferred while during
1995, $162,000 were repaid. Deferred incentive management fees were $6,197,000
and $5,564,000 as of January 3, 1997 and December 29, 1995, respectively.
Deferred Courtyard management fees totaled $22,341,000 as of January 3, 1997 and
December 29, 1995. Deferred base management fees as of January 3, 1997 and
December 29, 1995 were $7,904,000 and $8,066,000, respectively.
CBM2 Supp-50
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Consolidated Financial Statements
Chain Services
The Manager is required to furnish certain services ("Chain Services") which are
furnished generally on a central or regional basis to all hotels managed, owned
or leased in the Courtyard by Marriott hotel system. The total amount of Chain
Services allocated to the Partnership was $9,474,000 in 1996, $9,224,000 in 1995
and $8,981,000 in 1994.
Working Capital
The Partnership is required to provide the Manager with working capital and
fixed asset supplies to meet the operating needs of the Hotels. The refinancing
required certain enhancements to the cash management system of the Manager such
that additional working capital may be required for the operation of the Hotels.
Therefore, on January 24, 1996, the Partnership, Associates and the Manager
entered into a working capital maintenance agreement (the "Working Capital
Agreement") and deposited $2.5 million as additional working capital for the
operation of the Hotels. Upon termination of the Management Agreement, the
working capital and supplies will be returned to the Partnership. As of January
3, 1997, the working capital balance was $8,761,000. This includes the
$8,846,000 originally advanced less the $2,585,000 of excess working capital
returned to the Partnership in 1991 and the $2,500,000 advanced on January 24,
1996. At January 3, 1997 and December 29, 1995, accumulated depreciation related
to the supplies totaled $2,060,000.
In addition, the Working Capital Agreement provides that the Partnership and
Associates, collectively, reserve $2 million by February 1, 1997 and additional
amounts such that the total balance is $5 million by February 1, 1998 (the
"Working Capital Reserve"). The $2 million was reserved on January 31, 1997. The
Working Capital Reserve will be available for payment of hotel operating
expenses in the event that there is a downgrade in the long-term senior
unsecured debt of MII to below a certain level, as described in the Mortgage
Loan.
The obligation to fund the amounts required by the Working Capital Agreement is
subordinate to debt service on the Senior Notes and the Mortgage Loan.
Property Improvement Funds
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel sales. During 1994, the
Partnership, Manager and the Mortgage Debt A and B lenders agreed that the
Partnership would establish refinancing reserve accounts and contribute 1% of
Hotel sales on the respective Mortgage Debt A and B properties to these
reserves. Correspondingly, the Management Agreement was amended in order to
reduce the contribution to the property improvement fund from 6% to 5% of gross
Hotel sales for the Mortgage Debt A and B properties for 1993 through the
respective loan maturities. The contribution for the five IRB Hotels remained at
6%. Upon completion of the refinancing on January 24, 1996, the contribution to
the property improvement fund was established initially at 5% for all Hotels and
may be increased, at the option of the Manager, to 6% of gross Hotel sales in
2001. Additionally, the Partnership is no longer required to contribute 1% of
gross Hotel sales from the Mortgage Debt A and Mortgage Debt B Hotels to the
refinancing reserves.
NOTE 9. ENVIRONMENTAL CONTINGENCY
Based upon a study completed in December 1995, the Partnership has become aware
of environmental contamination at one of its fee-owned properties, the Deerfield
Hotel, caused by the previous use of the site as a landfill and not caused by
the Partnership. The property represents less than 5% of the Partnership's total
assets and revenues as of January 3, 1997. The Partnership is unable to
determine the need for remediation, its potential responsibility, if any, for
remediation and the extent of the Partnership's possible liability for any
remediation costs. There can be no assurance that the Partnership will not have
liability with respect to remediation of contamination at that site. The
Partnership does not believe that any of the environmental matters are likely to
have a material adverse effect on the business and operations of the
Partnership.
CBM2 Supp-51
<PAGE>
Courtyard by Marriott II Limited Partnership
Condensed Consolidated Balance Sheet
September 12, 1997
(Unaudited, in thousands)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net........................................................................ $ 458,154
Due from Courtyard Management Corporation.......................................................... 10,308
Other assets....................................................................................... 45,394
Restricted cash.................................................................................... 14,168
Cash and cash equivalents.......................................................................... 11,893
---------
$ 539,917
=========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt......................................................................................... $ 517,499
Management fees due to Courtyard Management Corporation...................................... 33,782
Due to Marriott International, Inc. and affiliates........................................... 9,140
Accounts payable and accrued liabilities..................................................... 9,351
---------
Total Liabilities......................................................................... 569,772
---------
PARTNERS' CAPITAL (DEFICIT)
General Partner.............................................................................. 6,468
Limited Partners............................................................................. (36,323)
---------
Total Partners' Deficit................................................................... (29,855)
---------
$ 539,917
=========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
CBM2 Supp-52
<PAGE>
Courtyard by Marriott II Limited Partnership
Condensed Consolidated Statements of Operations
For the Thirty-six Weeks Ended
September 12, 1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
REVENUES
Hotel revenues............................................................ $ 101,428 $ 92,894
---------- ---------
OPERATING COSTS AND EXPENSES
Depreciation.............................................................. 18,901 19,191
Ground rent, taxes and other.............................................. 17,464 16,771
Base and Courtyard management fees........................................ 11,721 11,002
Incentive management fees................................................. 9,400 8,391
---------- ---------
57,486 55,355
---------- ---------
OPERATING PROFIT................................................................ 43,942 37,539
Interest expense................................................................ (32,259) (32,070)
Interest income................................................................. 1,942 1,722
---------- ---------
NET INCOME...................................................................... $ 13,625 $ 7,191
========== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
CBM2 Supp-53
<PAGE>
Courtyard by Marriott II Limited Partnership
Condensed Consolidated Statements of Cash Flows
For the Thirty-six Weeks Ended
September 12, 1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................ $ 13,625 $ 7,191
Noncash items............................................................. 17,329 20,425
Changes in operating accounts............................................. 5,181 (6,095)
---------- ---------
Cash provided by operations............................................... 36,135 21,521
---------- ---------
INVESTING ACTIVITIES
Additions to property and equipment....................................... (18,368) (6,984)
Change in property improvement funds...................................... 7,542 (1,751)
---------- ---------
Cash used in investing activities......................................... (10,826) (8,735)
---------- ---------
FINANCING ACTIVITIES
Capital distributions..................................................... (11,539) (3,308)
Repayments of debt........................................................ (8,754) (538,192)
Change in reserve accounts................................................ (7,320) (164)
Proceeds from debt........................................................ -- 537,600
Payment of financing costs................................................ -- (15,466)
Repayment of advances from Host Marriott Corporation...................... -- (6,489)
---------- ---------
Cash used in financing activities......................................... (27,613) (26,019)
---------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS........................................... (2,304) (13,233)
CASH AND CASH EQUIVALENTS at beginning of period................................ 14,197 27,708
---------- ---------
CASH AND CASH EQUIVALENTS at end of period...................................... $ 11,893 $ 14,475
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest................................. $ 34,158 $ 32,203
========== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
CBM2 Supp-54
<PAGE>
Courtyard by Marriott II Limited Partnership
Notes to Condensed Consolidated Financial Statements
1. The accompanying condensed consolidated financial statements have been
prepared by the Courtyard By Marriott II Limited Partnership (the
"Partnership") without audit. Certain information and footnote
disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been
condensed or omitted from the accompanying statements. The Partnership
believes the disclosures made are adequate to make the information
presented not misleading. However, the condensed consolidated financial
statements should be read in conjunction with the Partnership's audited
financial statements for the fiscal year ended January 3, 1997 included
in this Prospectus Supplement.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which
include only normal recurring adjustments) necessary to present fairly
the financial position of the Partnership as of September 12, 1997 and
the results of operations for the twelve and thirty-six weeks ended
September 12, 1997 and September 6, 1996. Interim results are not
necessarily indicative of fiscal year performance because of seasonal
and short-term variations.
For financial reporting purposes, the net income of the Partnership is
allocated 95% to the Limited Partners and 5% to CBM Two Corporation
(the "General Partner"). Significant differences exist between the net
income for financial reporting purposes and the net income reported for
Federal income tax purposes. These differences are due primarily to the
use for income tax purposes of accelerated depreciation methods,
shorter depreciable lives for the assets, differences in the timing of
the recognition of certain fees and straight-line rent adjustments.
Certain reclassifications were made to the prior year financial
statements to conform to the 1997 presentation.
2. Revenues represent house profit of the Partnership's hotels since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit to the Courtyard Management
Corporation (the "Manager"), a wholly owned subsidiary of Marriott
International, Inc. ("MII"). House Profit reflects the net revenues
flowing to the Partnership as property owner and represents hotel
operating results less property-level expenses, excluding depreciation,
base, Courtyard and incentive management fees, property taxes, ground
rent, insurance and certain other costs, which are classified as
operating costs and expenses. Revenues consist of the following (in
thousands):
<TABLE>
<CAPTION>
Thirty-six Weeks Ended
September 12, September 6,
1997 1996
------------- ------------
<S> <C> <C>
HOTEL SALES
Rooms................................................... $ 176,228 $ 163,859
Food and beverage....................................... 12,325 12,613
Other................................................... 6,789 6,893
------------ ------------
195,342 183,365
------------ ------------
HOTEL EXPENSES
Departmental direct costs
Rooms............................................... 36,786 34,782
Food and beverage................................... 10,597 11,082
Other hotel operating expenses.......................... 46,531 44,607
------------ ------------
93,914 90,471
------------ ------------
REVENUES................................................ $ 101,428 $ 92,894
============ ============
</TABLE>
3. Pursuant to the terms of certain of the Partnership's debt, the
Partnership is required to establish with the lender a separate escrow
account for payments of insurance premiums and real estate taxes for
each mortgaged property if the credit rating of MII is downgraded by
Standard and Poor's Rating Services. On April 1, 1997, MII's credit
rating was downgraded and the Partnership subsequently transferred $4.2
million into the escrow reserve from the Manager's existing tax and
insurance reserve account. Through September 12, 1997, an additional
$3.1 million was transferred into the reserve account and real estate
taxes are being paid out of the reserve. The escrow reserve is included
in restricted cash and the resulting tax and insurance liability is
included in accounts payable and accrued liabilities in the
accompanying balance sheet.
CBM2 Supp-55
<PAGE>
CRF LODGING COMPANY, L.P.
Supplement Dated __________ __, 1998 for
Prospectus/Consent Solicitation Statement Dated _________ __, 1998 for
Marriott Residence Inn Limited Partnership
On the terms described in the Prospectus/Consent Solicitation Statement
(the "Consent Solicitation") dated ________ __, 1998, of which this Supplement
(the "Supplement") is a part, CRF Lodging Company, L.P. (the "Company"), a newly
formed Delaware limited partnership, whose sole general partner will be CRF
Lodging Trust ("CRFLT"), a Maryland real estate investment trust, is proposing
the consolidation (the "Consolidation") of Marriott Residence Inn Limited
Partnership ("RIBM1"), a Delaware limited partnership, and up to five other
limited partnerships (the "Hotel Partnerships") into an umbrella partnership
real estate investment trust (an "UPREIT") in order to consolidate and expand
the limited service and extended-stay hotel businesses currently conducted
separately by the Hotel Partnerships and Host Marriott Corporation ("Host").
Limited partners of RIBM1 are being asked to approve the Consolidation as
described in the Consent Solicitation. Upon approval of the Consolidation, a
newly formed direct or indirect wholly owned subsidiary of the Company (the
"Merger Partnership") will be merged with and into RIBM1 being the surviving
entity. In the merger, partners of RIBM1 will receive units of limited
partnership interest in the Company ("Units") in exchange for their interests in
RIBM1.
Following the Consolidation, the Company will own a portfolio of up to
221 limited service and extended-stay hotels operating under three Marriott
brand names (Courtyard by Marriott(R), Residence Inn by Marriott(R) and
Fairfield Inn by Marriott(R)) (the "Hotels"). Concurrently with the
Consolidation, CRFLT will consummate an initial public offering (the "Offering")
of its common shares of beneficial interest (the "Common Shares") and contribute
the proceeds thereof to the Company in exchange for Units. Following the
Offering, the Limited Service REIT anticipates that its Common Shares will be
listed on the New York Stock Exchange ("NYSE"). Beginning one year after the
Consolidation (the "Initial Holding Period"), Limited Partners will have the
right to redeem their Units and receive, at the election of CRFLT, either Common
Shares on a one-for-one basis (subject to adjustment) or cash in an amount equal
to the market value of such shares (the "Unit Redemption Right"). CRFLT expects
to qualify as a real estate investment trust (a "REIT") under the Internal
Revenue Code of 1986, as amended (the "Code").
RIBM One Corporation (the "Hotel Partnership GP"), the general partner
of RIBM1, believes that the terms of the Consolidation provide substantial
benefits and are fair to the Limited Partners of RIBM1 and recommend that all
Limited Partners of RIBM1 vote FOR the Consolidation.
Limited Partners of RIBM1 should consider the risks and other
considerations described more fully in the Consent Solicitation under "Risk
Factors," including the following:
. There is uncertainty at the time of voting as to the Hotel
Partnerships that will participate in the Consolidation and thus,
uncertainty as to the size and leverage of the Company until after
the end of the Solicitation Period.
. The Consolidation involves a fundamental change in the nature of a
Limited Partner's investment from an investment in a fixed portfolio,
limited life partnership where a Limited Partner could receive a
distribution upon liquidation of the partnership into an investment
in a public real estate company which expects to acquire additional
hotels and where a Limited Partner likely may realize value from his
investment only through a sale of Common Shares received pursuant to
the Unit Redemption Right.
. As a result of the Consolidation, a Limited Partner of RIBM1, which
owns 15 Residence Inns, will own an interest in a much larger
portfolio of Hotels, including up to 121 Courtyard Hotels, 35
additional Residence Inns and 50 Fairfield Inns, and a material
adverse change affecting any of the Company's assets will affect all
Limited Partners
RIBM1 Supp-1
<PAGE>
regardless of whether a particular Limited Partner previously held an
interest in such asset.
. No independent representative was retained to negotiate on behalf of
the Limited Partners of RIBM1 or the other Hotel Partnerships. If one
had been, the terms of the Consolidation may have been more favorable
to the Limited Partners of RIBM1 or the other Hotel Partnerships.
. Conflicts of interest exist in connection with the structuring of
the Consolidation, including the fact that subsidiaries of Host serve
as the general partners of all of the Hotel Partnerships and other
subsidiaries of Host will serve as the Lessees of the Hotels. Such
conflicts of interest may result in decisions that do not fully
reflect the interests of all Partners in the Hotel Partnerships.
. Host and its subsidiaries will realize substantial benefits from the
Consolidation, including receipt of Units having an estimated value
of at least $_____ million in exchange for their Hotel Partnership
Interests in RIBM1 (representing a 1% general partner interest) ($___
million in the aggregate for their Hotel Partnership Interests in all
of the Hotel Partnerships)(based upon the estimated Exchange Values),
$_____ million in cash from the sale of two limited service and
extended-stay hotels owned by Host (the "Acquisition Hotels") based
upon their aggregate Appraised Value, as adjusted, economic benefits
under the Leases and, because the Consolidation has been structured
to permit all Partners (including the Limited Partners) to defer
recognition of gain, the ability to defer significant potential tax
liabilities attributable to taxable gain in excess of sale proceeds
of approximately $______ million.
. The allocation of Units among the Hotel Partnerships is based upon
their respective Exchange Values, the calculation of which involves
numerous assumptions and estimates. There is no assurance that the
value of the Units to be received in the Consolidation equals the
fair market value of the Hotels and other assets contributed by RIBM1
and the other Hotel Partnerships.
. Current federal income tax law prohibits the Company from operating
the Hotels directly. Therefore, the Company will be substantially
dependent upon the Lessees and Managers for its revenue and the
Company will have limited control over the operations of the Hotels.
. Approval of the Consolidation by Limited Partners holding a majority
of the outstanding Partnership Units of RIBM1 will bind all Limited
Partners in RIBM1.
. Limited Partners of Hotel Partnerships who vote against the
Consolidation and comply with certain specified procedures
("Dissenting Partners") will not have a right to receive cash based
on an appraisal of their Hotel Partnership Interests but instead can
elect to tender the Units they receive in the Consolidation in
exchange for unsecured notes (the "Notes"), for which there will be
no public market, in an amount equal to the Liquidation Value (as
defined herein) of their Hotel Partnership Interests. As of September
12, 1997, on a pro forma basis assuming the Full Consolidation
Scenario (as defined herein), the Company would have had aggregate
consolidated liabilities to which the Notes were effectively
subordinated of approximately $939 million.
. There are limitations on actual or constructive ownership of more
than 9.9% of the number or value of CRFLT's outstanding Common
Shares.
. Taxation of CRFLT as a regular corporation if it fails to qualify as
a REIT and taxation of the Company as a corporation if it fails to
qualify as a partnership for federal income tax purposes either of
which would, among other things, result in a decrease in cash
available for distribution and a material reduction in the value of
the Common Shares and Units.
The effects of the Consolidation may be different for Limited Partners
of the various Hotel Partnerships. This Supplement has been prepared to
highlight for the Limited Partners of RIBM1 (the "RIBM1 Limited Partners") the
risks, benefits, effects and fairness of the Consolidation and to provide
additional information specific to RIBM1. Supplements have also been prepared
for each of the other Hotel Partnerships. This Supplement, together with the
supplements of the other Hotel Partnerships (collectively, the "Supplements"),
are a part of the Consent Solicitation Statement. Upon receipt of a written
request by a Limited Partner or his representative so designated in writing, the
Hotel Partnership GP will send a copy of any Supplement without charge. All
requests for a copy of a Supplement should be directed to: _________________
_____________________.
The Consolidation is subject to various conditions, one of which is
that at least four Hotel Partnerships, including CBM1, CBM2 and RIBM1, must
approve the Consolidation (the "Minimum
RIBM1 Supp-2
<PAGE>
Participation Condition"). See "The Consolidation - Conditions to the
Consolidation" in the Consent Solicitation.
All cross-references refer to the Consent Solicitation unless stated
otherwise. Capitalized terms not defined herein shall have the meaning set forth
in the Consent Solicitation. The information contained herein, unless otherwise
indicated, assumes the Consolidation occurs with an Offering yielding gross
proceeds of $800 million, all Hotel Partnerships participate, no Notes are
issued and $539 million of outstanding indebtedness is repaid (the "Full
Consolidation Scenario").
Risk Factors
In deciding whether to approve the Consolidation, RIBM1 Limited
Partners should consider certain risks and other factors. The Hotel Partnership
GP believes that RIBM1 Limited Partners should particularly consider the
following, which should be read in conjunction with the information in the
Consent Solicitation under "Risk Factors" and "Federal Income Tax
Considerations:"
Uncertainties at the Time of Voting. There are several uncertainties at
the time the Limited Partners must vote on the Consolidation, including (i) the
identity of the Hotel Partnerships that will participate in the Consolidation
and, thus, the Hotels that will be acquired by the Company (which will affect
such matters as the size, scope and leverage of the Company), (ii) the Exchange
Value for each Hotel Partnership (which will be adjusted for changes in working
capital, indebtedness and various other items prior to the Closing Date) and
(iii) the costs of prepaying certain indebtedness of the Hotel Partnerships
(which costs will be determined based upon the interest rates on applicable U.S.
Treasuries at the time of the prepayment). See "Determination of Exchange Values
and Allocation of Units."
Fundamental Change in Nature of Investment; Potential Underperformance.
The Consolidation involves a fundamental change in the nature of a Limited
Partner's investment from an investment in which a Limited Partner participates
in the profits from the operation of the Hotels and is entitled to receive
distributions from any net proceeds of a sale or refinancing of RIBM1's assets,
to an investment in an entity who will receive rents from the lessees which will
bear the risks and receive the benefits from the hotels' operation and Limited
Partners likely may realize the value from their investment only through the
exercise of the Unit Redemption Right and sale of the Common Shares received as
a result thereof and not from liquidation proceeds. Continuing RIBM1 would allow
RIBM1 Limited Partners an opportunity to eventually receive liquidation proceeds
from the sale of RIBM1's Hotels, and an RIBM1 Limited Partner's share of these
sale proceeds could be higher than the amount a limited partner might realize
from the sale of Units or exercise of the Unit Redemption Right (or payments on
Notes received by any Dissenting Partner). In addition, the Company has the
ability to acquire additional hotels, can reinvest proceeds from sales or
refinancings of existing hotels in additional hotels and has a general partner
that is a publicly traded entity. An investment in the Company may not
outperform an investment in RIBM1. See "Comparison of Hotel Partnership
Interests, Units and Common Shares."
Exposure to Risks from Other Hotels and Brands. As a result of the
Consolidation, Limited Partners in RIBM1, which owns 15 Residence Inns, will own
interests in a much larger partnership with a broader range of assets, including
up to 121 Courtyard Hotels, 35 additional Residence Inns and 50 Fairfield Inns.
A material adverse change affecting one of the Company's assets will affect all
Limited Partners regardless of whether a particular Limited Partner previously
was an investor in such affected asset. In addition, each of the three Marriott
brands which initially will comprise the Company operates in a different market
segment and targets different consumers and, as a result, may be affected
differently in different economic and market conditions.
RIBM1 Supp-3
<PAGE>
Limitations on Sales or Refinancings of the Courtyard Hotels. Because
of substantial taxable gains that would be recognized by the Hotel Partnership
GPs of CBM1 and CBM2, which are subsidiaries of Host, none of the assets of CBM1
and CBM2 (the "Courtyard Hotels") can be sold for a period of __ years from the
Closing Date of the Consolidation (other than pursuant to a tax-deferred
exchange) without the consent of Host (the "Lock-out Provisions"). Such Lock-out
Provisions are only applicable so long as Host holds the Units received in the
Consolidation relating to its Hotel Partnership Interests in CBM1 and CBM2 and
has not transferred, sold or otherwise disposed of such Units in a taxable
transaction. In addition, the Partnership Agreement contains certain
restrictions regarding the ability of the Company to repay or refinance
indebtedness secured by the Courtyard Hotels. These restrictions will limit the
ability of the Company to change its portfolio in response to market conditions
and to the extent the Courtyard Hotels do not perform as well as the Residence
Inns or Fairfield Inns in its portfolio, the Company will have limited
flexibility to dispose of any such underperforming assets even if such disposal
would be in the best interests of the Company.
Conflicts of Interest in the Consolidation. Conflicts of interest in
connection with the Consolidation which include conflicts arising from the fact
that subsidiaries of Host serve as the Hotel Partnership GP of RIBM1 (which
holds a 1% general partner interest in RIBM1) and as Hotel Partnership GPs of
the other Hotel Partnerships (with varying interests) and other subsidiaries of
Host will serve as Lessees of the Hotels at the same time as the Hotel
Partnership GP is recommending the Consolidation and is
RIBM1 Supp-4
<PAGE>
involved in establishing the terms and structure of the Consolidation, including
the structuring of the Leases. In addition, Host and its subsidiaries will
receive substantial benefits from the Consolidation. These conflicts of interest
may result in decisions that do not fully reflect the interests of all Limited
Partners of RIBM1 or the other Hotel Partnerships.
Substantial Benefits to Related Parties. The Consolidation will permit
Host to continue to be involved in the ownership and operation of the Hotels and
realize substantial benefits therefrom. Host and its subsidiaries will receive
Units with an estimated value of at least $____ million in exchange for their
Hotel Partnership Interests in RIBM1 ($____ million in the aggregate for their
Hotel Partnerships Interests in all of the Hotel Partnerships) (based upon the
estimated Exchange Values) and $___ million in cash from the sale of the
Acquisition Hotels to the Company (based upon their aggregate Appraised Value,
as adjusted). Subsidiaries of Host will be the Lessees of the Hotels and may
receive significant economic benefits in connection with the Leases, including
the receipt of income to the extent sales from the Hotels exceed operating costs
and expenses payable by the Lessees, management fees and rental payments to the
Company. Because the Consolidation has been structured to permit all Partners
(including the Limited Partners) to defer recognition of gain, the Consolidation
will also permit the Hotel Partnership GPs of CBM1 and CBM2, which are
subsidiaries of Host, to defer significant tax liabilities attributable to
taxable gain in excess of sale proceeds (estimated at approximately $____
million) that otherwise would be incurred upon any sale of the Courtyard
Hotels(other than in a tax-deferred exchange such as the Consolidation) or upon
substantial reductions in the amount of debt now secured by the Courtyard
Hotels. In the case of the Courtyard Hotels, the Partnership Agreement imposes
certain restrictions on the sale of those Hotels and the refinancing, prepayment
or reduction of the debt secured by those such Hotels for ___ years from the
Closing Date of the Consolidation without the consent of Host, in order to defer
the recognition of gain, which gain would be disproportionately borne by the
Hotel Partnership GPs of CBM1 and CBM2 because of prior allocations to them of
tax losses. The Company also will repay, either in cash or Common Shares, at the
election of a subsidiary of Host, a loan of approximately $13 million owed to
such subsidiary of Host by CBM1.
Method of Allocation of Units. The allocation of Units among the Hotel
Partnerships will be based upon their respective Exchange Values, which in turn
are based upon the Appraised Value of each Hotel Partnership's Hotels as
adjusted for such things, among others, as net non-real estate assets (including
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables) and cash reserves) ("Net Other Assets"), existing
indebtedness (including an adjustment for prepayment and defeasance costs),
deferred maintenance and FF&E shortfalls, deferred management fees and
Consolidation Expenses. There is, however, no assurance that the value of the
Units to be received by participants in the Consolidation will equal the fair
market value of the Hotels and other assets contributed by such participants.
Absence of Arm's Length Negotiations No independent representative was
retained to negotiate on behalf of the Limited Partners of RIBM1 or any of the
other Hotel Partnerships. The Hotel Partnership GP has obtained an opinion from
American Appraisal Associates, an independent, nationally recognized hotel
valuation and financial advisory firm ("AAA"), as to (i) the fairness, from a
financial point of view, to the Limited Partners of each Hotel Partnership of
the methodologies used to determine the Exchange Value of RIBM1 and each other
Hotel Partnership and the allocation of Units among each of the Hotel
Partnerships in the Consolidation, (ii) the fairness and reasonableness, from
the standpoint of each Hotel Partnership, of the underlying assumptions used to
determine the Exchange Value of each Hotel Partnership and the purchase price of
each Acquisition Hotel (including, without limitation, the assumptions used to
determine the various adjustments to the Appraised Values of the Hotels), (iii)
the fairness and reasonableness to the Limited Partners of each Hotel
Partnership of the methodology used to allocate Units received by each Hotel
Partnership among its general and Limited Partners, (iv) the fairness and
reasonableness, from the standpoint of each Hotel Partnership, of the
methodologies and underlying assumptions used to determine the Continuation
Value and the Liquidation Value of each Hotel Partnership (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) and (v) the fairness and reasonableness, from
the Company's standpoint, of the economic terms of the Leases. However, AAA has
not negotiated with the Hotel Partnership GP and has not participated in
establishing the terms of the Consolidation. Consequently, the terms and
conditions of the Consolidation may have been more favorable to RIBM1 Limited
Partners or the Limited Partners of the other Hotel Partnerships if such terms
and conditions were the result of arm's length negotiations.
Lack of Control over Hotel Operations. Due to current federal income
tax law prohibitions on a REIT's ability to derive revenues directly from the
operation of a hotel, the Company will lease its Hotels to the Lessees, which
will operate the Hotels by continuing to retain the Managers pursuant to the
Management Agreements. Neither CRFLT nor the Company will operate the Hotels or
participate in the decisions affecting the daily operations of the Hotels.
Although the Company will have certain rights as lessor under the Leases
(including control over certain owner-funded capital expenditures), neither
CRFLT nor the Company will have the authority to require the Lessees or the
Managers to operate the Hotels in any particular manner or to govern any
particular aspect of their operation.
Expiration of Leases. The Leases expire at the end of __ years and
there can be no assurance that such Leases will be renewed. If such Leases are
terminated at the end of their terms, the Company will be required to find other
lessees (which lessees must be satisfactory to the Managers). There can be no
assurance as to whether satisfactory lessees could be found or as to the terms
or conditions on which the Company would be able to enter into new leases with
such lessees.
The Company's Dependence on the Lessees and Managers for Revenue. The
Company will be dependent upon the Lessees for its revenue, and the Lessees'
ability to pay rent to the Company will be substantially dependent upon the
Managers' ability to operate the Hotels profitably.
No Limitation on Debt. There are no limitations in CRFLT's or the
Company's organizational documents which limit the amount of indebtedness either
may incur.
Risks of Leverage. The Company has substantial indebtedness. As of
September 12, 1997, on a pro forma basis assuming the Full Consolidation
Scenario, the Company had outstanding indebtedness totaling $780 million. The
Company's business is capital intensive and the Company
RIBM1 Supp-5
<PAGE>
will have significant capital requirements in the future. The Company's leverage
level could affect its ability to (i) obtain financing in the future, (ii)
undertake refinancings on terms and subject to conditions deemed acceptable by
the Company, (iii) make distributions to partners, (iv) pursue its acquisition
strategy or (v) compete effectively or operate successfully under adverse
economic conditions.
Original Anticipated Holding Period About to Expire. In the original
offering document of RIBM1, the Hotel Partnership GP stated that it expected to
sell all of RIBM1's Hotels before the end of 1998, but if all of the Hotels were
not sold by the end of 2001, then the Hotel Partnership GP would use its
reasonable best efforts to sell such Hotels thereafter. An RIBM1 Limited
Partner's share of the proceeds from a liquidation, if any, of RIBM1 could be
higher than what a limited partner might realize, following the Initial Holding
Period, from a sale of Common Shares received pursuant to the Unit Redemption
Right.
Rental Revenues from Hotels Subject to Rights of Lenders. In accordance
with the loan agreements with respect to outstanding indebtedness of RIBM1 and
the other Hotel Partnerships, the rental revenues received by the Company under
the Leases will first be used to satisfy the debt service on such outstanding
indebtedness and any cash flow remaining thereafter will be available to satisfy
all other obligations of the Company (including paying property taxes and
insurance, funding the required FF&E reserves for the Hotels and capital
improvements) and to make distributions to partners (including CRFLT).
Ownership Limitations. No person may own in excess of 9.9% of the
number or value of outstanding Common Shares of CRFLT, without the consent of
the Board of Trustees of CRFLT, in its sole and absolute discretion. During the
period of time subsidiaries of Host are acting as Lessees, Host and its
affiliates are prohibited from owning in excess of 4.9% (by value) of the
Company.
Majority Vote of RIBM1 Limited Partners Binds All RIBM1 Limited
Partners. Approval of the Consolidation by RIBM1 Limited Partners holding a
majority of the outstanding Partnership Units of RIBM1 will cause RIBM1 to
participate in the Consolidation, and such approval will bind all RIBM1 Limited
Partners, including RIBM1 Limited Partners who voted against or abstained from
voting with respect to the Consolidation.
Effect of Subsequent Events upon Recognition of Gain. Even though the
RIBM1 Limited Partners who do not receive Notes as a result of exercising
Dissenters' Rights generally are not expected to recognize significant taxable
gain at the time of the Consolidation, there are a variety of events and
transactions (including the sale of one or more of the Hotels or the reduction
of indebtedness securing one or more of the Hotels) that could cause an RIBM1
Limited Partner to recognize all or a part of the gain that otherwise has been
deferred through the Consolidation. See "Federal Income Tax Considerations --
Tax Consequences of the Formation of the Company -- Effect of Subsequent
Events." The Partnership Agreement does not impose any restrictions on the
Company's ability to dispose of the Hotels or to refinance debt secured by the
Hotels, other than with respect to the Courtyard Hotels (which restriction can
be waived with the consent of Host). In addition, CRFLT expressly is not
required to take into account the tax consequences of the limited partners in
deciding whether to cause the Company to undertake specific transactions, and
the limited partners have no right to approve or disapprove such transactions.
See "Description of Units -- Sales of Assets and Lock-out Provisions."
Failure of the Company to Qualify as a Partnership for Tax Purposes.
Taxation of the Company as a corporation if it fails to qualify as a
partnership, and the Company's subsequent liability for federal, state and local
taxes on its income and property, would, among other things, have the effect of
reducing cash available for distribution to holders of Units, would cause CRFLT
to fail to qualify as a REIT for tax purposes, and could cause the holders of
Units to recognize taxable gain at the time the Company ceases to qualify as a
partnership.
Failure of CRFLT to Qualify as a REIT for Tax Purposes. Taxation of
CRFLT as a corporation if it fails to qualify as a REIT, and CRFLT's subsequent
liability for federal, state and local taxes on its income and property, would,
among other things, have the effect of reducing cash available for distribution
to CRFLT's shareholders and reducing materially the value of the Common Shares
and Units.
State and Local Taxes. RIBM1 Limited Partners holding Units may be
subject to state and local taxation in a number of jurisdictions in which the
Company directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this regard, immediately
following the Consolidation, the Company will own properties in 35 states across
the United States. Currently, RIBM1 own properties in seven states.
RIBM1 Supp-6
<PAGE>
Dissenting Partners Have No Cash Appraisal Rights and May Elect to
Receive Only Notes. RIBM1 Limited Partners who vote against the Consolidation
and comply with certain specified procedures ("Dissenting Partners") will not
have a right to receive cash based on an appraisal of their interests in RIBM1
or otherwise, but instead can elect to tender the Units they receive in the
Consolidation in exchange for unsecured seven-year notes (the "Notes"), for
which there will be no public market, in an amount equal to the Liquidation
Value of their Hotel Partnership Interests. If the Notes are sold, they may sell
at prices substantially below their issuance price. Noteholders are likely to
receive the full face amount of the Notes only if they hold the Notes to
maturity, which is approximately seven years after the Consolidation, or if the
Company repays or refinances the Notes at or prior to maturity or realizes net
sales or excess refinancing proceeds from Hotels owned by a Noteholder's former
Hotel Partnership. Because the Notes are unsecured obligations of the Company,
they will be effectively subordinate to all secured debt of the Company and all
obligations of the Hotel Partnerships which will be the owners of the Hotels. As
of September 12, 1997, on a pro forma basis assuming the Full Consolidation
Scenario, the Company would have had aggregate consolidated liabilities to which
the Notes were effectively subordinated of approximately $939 million. See
"Rights of Dissenting Partners" and "Description of the Notes."
Expected Benefits of the Consolidation
The Hotel Partnership GP believes that participating in the
Consolidation would likely be beneficial to the RIBM1 Limited Partners for the
reasons set forth below. This information is qualified by and should be read in
conjunction with the information in the Consent Solicitation under "Background
and Reasons for the Consolidation -- Expected Benefits of the Consolidation."
These benefits, which should be viewed as alternatives to continuing the
business and operations of RIBM1, are expected to include:
. Enhanced Liquidity of Investment. The Consolidation will offer RIBM1
Limited Partners significantly enhanced liquidity with respect to
their investments in RIBM1 because, after expiration of the Initial
Holding Period, RIBM1 Limited Partners would be able to exercise
their Unit Redemption Right (subject to certain limited exceptions)
and receive, at CRFLT's election, either freely tradable Common
Shares of CRFLT or the cash equivalent thereof. The exercise of the
Unit Redemption Right, however, would result in recognition of
taxable income or gain at that time.
. Public Market Valuation of Assets. The Hotel Partnership GP believes
that the public market valuations of the equity securities of many
publicly traded real estate companies, including REITs that focus on
the lodging industry, are in part based upon the growth potential of
such companies and currently exceed the private market values of
their real estate assets. There can be no assurance, however, that
the Common Shares of CRFLT will trade at a premium to the private
market values of the Hotels or that the relative pricing differential
will not change or be eliminated in the future.
. Regular Quarterly Cash Distributions. The Hotel Partnership GP
expects that the Company will make regular quarterly cash
distributions to holders of Units in proportion to their percentage
interests in the Company. While these distributions may not be higher
than RIBM1's current distributions, the ability to receive
distributions quarterly and in regular amounts would be enhanced.
RIBM1 Supp-7
<PAGE>
. Substantial Tax Deferral. The Hotel Partnership GP expects that RIBM1
Limited Partners who do not exercise Dissenters' Rights generally
should be able to obtain the benefits of the Consolidation while
continuing to defer recognition for federal income tax purposes of at
least a substantial portion, if not all, of the gain with respect to
their interests in RIBM1 that otherwise would be recognized in the
event of a liquidation of RIBM1 or a sale or other disposition of its
Hotels in a taxable transaction. Thereafter, such RIBM1 Limited
Partners generally should be able to defer at least a substantial
portion of such built-in gain until they elect to exercise their Unit
Redemption Right or the Hotels currently owned by RIBM1 are sold or
otherwise disposed of in a taxable transaction by the Company. The
federal income tax consequences of the Consolidation are highly
complex and, with respect to each RIBM1 Limited Partner, are
dependent upon many variables, including the particular circumstances
of such Partner. See "Federal Income Tax Considerations - Tax
Consequences of the Formation of the Company" in the Consent
Solicitation. Each RIBM1 Limited Partner is urged to consult with his
own tax advisors as to the consequences of the Consolidation in light
of his particular circumstances.
. Risk Diversification. The consolidation of the Hotels, as well as
future hotel acquisitions by the Company, will diversify the
investment risks to RIBM1 Limited Partners over a broader group of
hotels, geographic locations, range of product types and market
segments and will reduce the dependence of an investment upon the
performance of, and the exposure to the risks associated with, the 15
Residence Inns currently owned by RIBM1 and the single market segment
(extended-stay) in which RIBM1 currently operates.
. Reduction in Leverage and Interest Costs. Upon consummation of the
Consolidation and the Offering, it is expected that the aggregate
amount of consolidated indebtedness of the Company will be reduced,
by application of a portion of the net proceeds from the Offering, by
between approximately $390 million and $539 million (excluding
prepayment and defeasance costs which also will be required to be
paid), depending upon the Hotel Partnerships which participate in the
Consolidation and the proceeds raised in the Offering, resulting in
significant interest and debt service savings and reduced overall
leverage levels for Limited Partners of the Hotel Partnerships. The
Second Mortgage of RIBM1 will remain outstanding following the
Consolidation. The Company will be less leveraged than RIBM1 is
currently.
. Growth Potential. The Hotel Partnership GP believes that substantial
opportunities exist to acquire or develop limited service and
extended-stay hotel properties at attractive prices and that RIBM1 is
not in a position to take advantage of such opportunities because of
its lack of access to additional sources of capital on favorable
terms and restrictions on additional acquisitions and development
imposed by its partnership agreement. In addition, the Company's
structure and capitalization as part of an UPREIT should provide it
with substantial flexibility to structure acquisitions of additional
hotels utilizing debt, cash, Units or Common Shares (or any
combination thereof), which may permit the Company to structure
acquisitions of hotel properties on an income tax-deferred basis to
sellers.
. Greater Access to Capital. With publicly traded securities, a larger
base of assets and a greater equity value than RIBM1 individually,
CRFLT expects to have greater access to the capital necessary for
funding the operations of the Company and consummating acquisitions
on more attractive terms than would be available to RIBM1
individually. This greater access to capital should provide greater
financial stability to the Company and reduce the level of risk
associated with refinancing existing loans upon maturity, as compared
to RIBM1 individually.
RIBM1 Supp-8
<PAGE>
Determination of Exchange Values and Allocation of Units
The Company and the Hotel Partnership GP established the Exchange Value
for the equity interests in RIBM1 by (i) obtaining an independent appraisal of
the value of the Hotels owned by RIBM1, as of ______ __, 1998 (the "Appraised
Value"), as disclosed below; (ii) adding the amount of other assets (such as
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables) and cash reserves), net of liabilities (excluding
mortgage and other debt and deferred management fees) ("Net Other Assets") as of
________ __, 1998 (the "Initial Valuation Date"); (iii) subtracting the
estimated balance of the mortgage debt owed by RIBM1 as of June 30, 1998, which
is the estimated closing date for the Consolidation; (iv) subtracting the
estimated balance of other debt of RIBM1 as of June 30, 1998; (v) adjusting for
the estimated prepayment and defeasance costs; (vi) subtracting the amount of
deferred management fees payable to the Manager under the RIBM1 Management
Agreement for RIBM1's Hotels; (vii) subtracting an amount equal to the estimated
cost to complete any deferred maintenance items identified in the engineer's
report relating to RIBM1's Hotels; (viii) subtracting an amount equal to the
estimated cost (if any) of bringing the condition of FF&E at RIBM1's Hotels to
normal levels; (ix) subtracting RIBM1's pro rata share (based upon relative
Exchange Values) of estimated Consolidation Expenses and (x) making certain
other adjustments.
Prior to the distribution of the Last Preliminary Prospectus in the
Offering, a final determination of the Exchange Values will be made, as of the
date that is the end of the most recent accounting period that has ended at
least ___ days prior to the date on which the Last Preliminary Prospectus is
distributed to investors (the "Final Valuation Date") to reflect (i) the amount
of Net Other Assets, the actual principal balances of mortgage and other debt
(including an adjustment for prepayment and defeasance costs) and the amount of
deferred management fees payable, (ii) any amounts actually expended by RIBM1
after the Initial Valuation Date to perform deferred maintenance or make up FF&E
shortfalls previously subtracted in determining the estimated Exchange Value of
RIBM1 and (iii) any revised estimate and allocation of Consolidation Expenses.
The actual value of Units issued to Partners in each Participating Hotel
Partnership will be based on these Exchange Values.
The Hotels were appraised as of _______ __, 1998, by AAA, an
independent, nationally recognized hotel valuation and financial advisory firm
experienced in the appraisals of lodging properties such as the Hotels. Each
appraisal (an "Appraisal") was reviewed by an MAI appraiser and certified by
such MAI appraiser as having been prepared in accordance with the requirements
of the Standards of Professional Practice of the Appraisal Institute and the
Uniform Standards of Professional Appraisal Practice of the Appraisal
Foundation. The Appraisals are not guarantees of present or future values, and
no assurance can be given as to the actual value of the Hotels. The Appraisals
should be read in conjunction with other information, such as, but not limited
to, the audited financial statements of RIBM1.
Appraised Value of Hotels Owned by RIBM1
(Dollars in thousands)
Appraised Value........................................................$
--------
Calculation of Estimated Exchange Value
as of Initial Valuation Date
(Dollars in thousands)
Appraised Value $
Net Other Assets
Mortgage debt
Other debt
RIBM1 Supp-9
<PAGE>
Prepayment penalties and/or
defeasance costs
Deferred management fees
Deferred maintenance costs
FF&E shortfall
Consolidation Expenses
Other adjustments(1)
-----
Exchange Value $
=====
- ----------------
(1) Includes environmental remediation and certain other costs.
Distribution of Units Among General and Limited Partners
Based on Estimated Exchange Values
(Dollars in thousands)
<TABLE>
<CAPTION>
Limited Partners General Partner
------------------------------- ----------------------------
Estimated
Value of Units
per $1,000
Limited
Estimated Estimated % Estimated % of Partner Estimated % of Estimated
Total Value of Units Received Original Units Received Value of
Hotel Partnership of Units/(1)/ Total/(2)/ by RIBM1 Investment(2) by RIBM1 Units/(1)/
- ----------------- ------------ ---------- -------------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
RIBM1 $ % % $ % $
=========== =========== ============== ============ ============ ===========
</TABLE>
- ----------------
/(1)/ Assumes the value of the Units is equal to the initial public offering
price of CRFLT's Common Shares in the Offering and that the aggregate
value of the Units received by RIBM1 is just equal to (but does not
exceed) the estimated Exchange Value.
/(2)/ Represents the estimated percentage of the total value of Units allocated
to the Hotel Partnerships as a group and does not reflect the issuance of
Units to CRFLT in exchange for the proceeds of the Offering (which will
reduce the percentage of each Hotel Partnership in proportion to their
respective Exchange Values). Thus, for example, if CRFLT purchases 50% of
the Company using the proceeds received from public investors in the
Offering, then each of the percentages set forth above would be reduced by
50%. The estimated values of Units would be not affected.
RIBM1 Supp-10
<PAGE>
Exchange Value of RIBM1
for Allocation of Units to RIBM1
as of Initial Valuation Date
<TABLE>
<CAPTION>
Per $1,000 Limited
Partner Original
Investment
--------------------------------
Percent of Percent of
Estimated Aggregate Estimated Aggregate
Exchange Exchange Exchange Exchange
Description Value Value Value Value
----------- ----------- ------------ ----------- ------------
(in thousands) (in dollars)
<S> <C> <C> <C> <C>
100% Participation,
No Notes Issued............. $ % $ %
100% Participation,
Maximum Notes Issued........
Minimum Participation,
No Notes Issued.............
Minimum Participation,
Maximum Notes Issued........
</TABLE>
Cash Distributions
Historical Cash Distributions Paid by RIBM1. The following table sets forth
the distributions paid to RIBM1 Limited Partners (per $1,000 limited partner
original investment) for the periods indicated below. The information below
should be read in conjunction with the information in this Supplement under the
caption "Selected Financial Data."
Historical Cash Distributions Paid by RIBM1
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended ------------------------------------------------
September 12, 1997 1996 1995 1994 1993 1992
------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
From net income.......................... $ 24 $ 75 $ 13 $ 50 $ 49 $ 68
Representing return of capital/(1)/...... -- -- -- -- -- --
------------ ------- ------- ------- ------- -------
Total............................. $ 24 $ 75 $ 13 $ 50 $ 49 $ 68
============ ======= ======= ======= ======= =======
</TABLE>
- -----------
/(1)/ Computed as all distributions in excess of distributions from operating
cash flow.
Compensation and Distributions to the Hotel Partnership GP. Under the
partnership agreement of RIBM1, the Hotel Partnership GP does not receive fees
or compensation in connection with managing the affairs of the Hotel Partnership
but the Hotel Partnership GP and its affiliates are reimbursed for certain costs
and expenses incurred on behalf of RIBM1. The following information has been
prepared to compare the amount of reimbursements paid and cash distributions
made by RIBM1 to the Hotel Partnership GP and its affiliates to the amounts that
would have been paid if the reimbursement and distribution structure which will
be in effect after the Consolidation had been in effect for the years presented.
Following the Consolidation, CRFLT will be operated as a self-administered
REIT and as a result no reimbursements or other compensation will be received by
the Hotel Partnership GP other than distributions on Units received in the
Consolidation in exchange for its Hotel Partnership Interests.
RIBM1 Supp-11
<PAGE>
During the thirty-six weeks ended September 12, 1997 and the fiscal years
1996, 1995 and 1994, amounts actually paid by RIBM1 to the Hotel Partnership GP
are shown below under "Historical" and the estimated amounts that would have
been paid had the Consolidation been in effect for the years presented (assuming
the Full Consolidation Scenario) are shown under "Pro Forma."
Historical and Pro Forma Reimbursements and Distributions
(in thousands)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended --------------------------------------
September 12, 1997 1996 1995 1994
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Historical
Reimbursements $ 115 $ 218 $ 151 $ 118
Distributions 16 50 8 33
--------------- -------- -------- --------
Total Historical $ 131 $ 268 $ 159 $ 151
=============== ======== ======== ========
Pro Forma
Reimbursements $ $ $ $
Distributions attributable to Units
--------------- -------- -------- --------
Total Pro Forma $ $ $ $
=============== ======== ======== ========
</TABLE>
Certain Information Regarding Hotels Owned by RIBM1
Residence Inns are extended-stay, limited service hotels which cater
primarily to business and family travelers who stay more than five consecutive
nights. Residence Inns typically have 88 to 144 studio and two-story penthouse
suites. Residence Inns generally are located in suburban settings throughout the
United States and feature a series of residential style buildings with
landscaped walkways, courtyards and recreational areas. Residence Inns do not
have restaurants, but offer a complimentary continental breakfast. In addition,
most Residence Inns provide a complimentary evening hospitality hour. Each suite
contains a fully equipped kitchen and many suites have woodburning fireplaces.
<TABLE>
<CAPTION>
Location of Hotel Number of Rooms Date Opened
- ----------------- --------------- -----------
<S> <C> <C>
Costa Mesa, CA 144 1986
La Jolla, CA 287 1986
Long Beach, CA 216 1987
Boulder, CO 128 1986
Atlanta Buckhead, GA 136 1987
Atlanta Cumberland, GA 130 1987
Atlanta Dunwoody, GA 144 1984
Chicago Lombard, IL 144 1987
Southfield, MI 144 1986
St. Louis Chesterfield, MO 104 1986
St. Louis Galleria, MO 152 1986
Cincinnati North, OH 144 1985
Columbus North, OH 96 1985
Dayton North, OH 64 1987
Dayton South, OH 96 1985
-----
TOTAL 2,129
=====
</TABLE>
RIBM1 Supp-12
<PAGE>
The table below sets forth certain performance information for RIBM1's
Residence Inns for the indicated periods.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
-------------------- ---------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of properties.............. 15 15 15 15 15
Number of rooms 2,129 2,129 2,129 2,129 2,129
Average daily rate................ $ 92.17 $ 88.59 $ 88.02 $ 81.14 $ 75.53
Occupancy......................... 84.4% 85.7% 83.5% 85.8% 86.8%
REVPAR............................ $ 77.80 $ 75.91 $ 73.45 $ 69.64 $ 65.56
% REVPAR change 2.5% -- 5.5% 6.2% --
</TABLE>
Amendments to the Partnership Agreement of RIBM1
Transfer of Interests in the Hotel Partnerships to the Company
--------------------------------------------------------------
Immediately Prior to the Consummation of the Consolidation. For federal income
- ----------------------------------------------------------
tax purposes, immediately prior to the consummation of the Consolidation, each
Hotel Partnership GP will contribute a one percent partnership interest in such
Hotel Partnership to the Company in exchange for Units reflecting the estimated
Exchange Value attributable to such one percent partnership interest. In RIBM1,
the Hotel Partnership GP owns only a one percent general partner interest and
therefore such a contribution would require the transfer of its entire general
partner interest which, under Section 6.01 of the partnership agreement, is
prohibited. Thus, in order to consummate the Consolidation, Section 6.01 of the
partnership agreement of RIBM1 requires an amendment to allow for the transfer
of the entire one percent general partner interest of the Hotel Partnership GP
to the Company and for the substitution of the Company as general partner of
RIBM1. Section 6.01 of the partnership agreement of RIBM1 will be amended to
read as follows:
Section 6.01. Limitation on Voluntary Withdrawal. Except as provided
by Section 5.02B, the General Partner shall not have the right (but
shall have the power) to retire or withdraw voluntarily from the
Partnership. The General Partner may, with the Consent of the Limited
Partners, sell, transfer or assign its entire general partner Interest
or any portion thereof. Upon such sale, transfer or assignment of its
entire general partner Interest, such purchaser, transferee or
assignee shall become the substitute General Partner of the
Partnership immediately prior to the withdrawal of the General Partner
and shall continue the business of the Partnership without
dissolution.
The consent of a majority of the outstanding limited partner interests of
RIBM1 is required to amend Section 6.01 of the partnership agreement.
Permit RIBM1 to Enter into the Lease with the Lessee. The Lease for RIBM1's
----------------------------------------------------
Hotels must be entered into not later than the close of business on the business
day immediately preceding the Closing Date. The partnership agreement of RIBM1
already allows for the sale, lease or other disposition of its Hotels upon the
consent in writing of Limited Partners holding at least one-half of the
outstanding limited partnership interests.
Other Amendments. Amendments to certain terms and sections of the
----------------
partnership agreement of RIBM1 would be made in order to (a) delete certain
obsolete references to entities and agreements that are no longer in existence,
(b) update the partnership agreement to reflect the passage of time since the
formation of RIBM1 and (c) make any other amendments to the partnership
agreement necessary or advisable to consummate the Consolidation. The Hotel
Partnership GP does not believe that these amendments would affect the rights of
the RIBM1 Limited Partners in any material respect nor the duties and
obligations of the Hotel Partnership GP.
RIBM1 Supp-13
<PAGE>
These changes are included, along with the other proposed amendments, in the
copy of the partnership agreement, as proposed to be amended, which is attached
hereto. The amended partnership agreement is marked to indicate the revisions
made to the existing partnership agreement and should be read in its entirety.
Deleted provisions are contained in brackets and struck through and added
provisions are in bold type and underlined.
The Hotel Partnership GP recommends that the RIBM1 Limited Partners vote to
approve the requested amendments to the partnership agreement of RIBM1.
Fairness
General. There are no material differences with respect to the fairness of
the Consolidation to the Hotel Partnerships, individually or in the aggregate.
Therefore, the discussion of the fairness of the Consolidation set forth below
is intended to summarize the Hotel Partnership GP's belief as to fairness and
the material factors on which such belief is based. For a more detailed
discussion of the fairness of the Consolidation, see the section entitled
"Fairness Analysis and Opinion" in the Consent Solicitation.
Hotel Partnership GP's Belief as to Fairness. The Hotel Partnership GP
believes that the terms of the Consolidation provide substantial benefits and
are fair to the RIBM1 Limited Partners and recommends that all RIBM1 Limited
Partners vote FOR the Consolidation. In arriving at this conclusion, the Hotel
Partnership GP has relied primarily on the following factors, as well as others
described under "Fairness Analysis and Opinion -- Fairness Analysis" in the
Consent Solicitation: (i) its view that the expected benefits of the
Consolidation for the RIBM1 Limited Partners outweigh the risks and potential
detriments to the RIBM1 Limited Partners (see "Background and Reasons for the
Consolidation -- Reasons for the Consolidation" in the Consent Solicitation),
(ii) its view that the Exchange Value established for RIBM1 and the resulting
value allocable to the RIBM1 Limited Partners represents fair consideration for
the interests held by the RIBM1 Limited Partners and is fair to such RIBM1
Limited Partners from a financial point of view and (iii) the Fairness Opinion
of AAA as described below.
Basis for Hotel Partnership GP's Belief as to Fairness.
Comparison of Alternatives. To assist RIBM1 Limited Partners in evaluating
the Consolidation, the Hotel Partnership GP has attempted to compare the
estimated value of Units to be received in the Consolidation with: (i) the face
amount of Notes that will be issued to Dissenting Partners who elect to exchange
the Units they receive in the Consolidation for Notes; (ii) estimates of the
value of the Hotel Partnership Interests in RIBM1 assuming that RIBM1 continues
as an operating business and its assets are sold in ten years (the "Continuation
Value"); and (iii) estimates of the value of the Hotel Partnership Interests in
RIBM1 on a liquidation basis, assuming that RIBM1's Hotels are sold at their
Appraised Values and the net proceeds (together with its Net Other Assets),
after payment of debts and other obligations (including defeasance costs or
prepayment penalties and deferred management fees) and an allowance for
liquidation costs, expenses and contingencies equal to 2% of the Appraised
Values of the Hotels (the "Liquidation Value"), are distributed to the Partners
of RIBM1 in accordance with the partnership agreement of RIBM1. The Hotel
Partnership GP has not attempted to estimate the value of Hotel Partnership
Interests in RIBM1 following a standalone UPREIT reorganization because the
Hotel Partnership GP does not believe such a reorganization is feasible and such
valuation estimates would be subject to substantial uncertainties. Since the
estimated value of the Units and the estimated value under the alternatives to
the Consolidation are dependent upon a number of estimates, variables and
assumptions, as well as varying market conditions, no assurance can be given
that the estimated values indicated could be realized. However, the Hotel
Partnership GP believes that analyzing the alternatives in terms of estimated
values, based upon currently available market data and reasonable estimates and
assumptions, establishes a reasonable basis for comparing the Units to the
alternatives. The results of this comparative analysis (including the
methodology and assumptions used to derive estimated
RIBM1 Supp-14
<PAGE>
values) are summarized under "Background and Reasons for the Consolidation --
Comparison of Alternative Consideration" and "Fairness Analysis and Opinion --
Comparison of Alternatives" in the Consent Solicitation.
The following table summarizes the results of the comparative analysis
described above. There can be no assurance, however, that the actual value of
Units received in the Consolidation, the actual face amount of Notes offered to
Dissenting Partners, the actual value of continuing RIBM1 or the actual net
liquidation proceeds would not differ substantially from those estimated for
purposes of this analysis.
Summary of Comparative Valuation Alternatives/(1)/
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Face Amount of
Estimated Notes Offered Estimated Estimated Liquidation
Value to Dissenting Continuation Value if Assets Sold
Hotel Partnership of Units/(2)/ Partners/(3)/ Value/(4)/ at Appraised Value/(5)/
----------------- ------------- ------------- ------------ -----------------------
<S> <C> <C> <C> <C>
RIBM1................ $ $ $ $
</TABLE>
- --------------------
(1) A limited partner original investment of $1,000 equates to one Partnership
Unit in RIBM1.
(2) Assumes that RIBM1 is allocated Units with a value equal only to its
estimated Exchange Value. The amounts in this column represent the portion
of the estimated Exchange Value of RIBM1 that would be allocable to RIBM1
Limited Partners per $1,000 limited partner original investment.
(3) The amounts in this column are equivalent to the portion of the Liquidation
Value of RIBM1 that would be reflected in the Notes to be issued to RIBM1
Dissenting Partners per $1,000 limited partner original investment. See
footnote (5) below.
(4) The amounts in this column represent the estimated amount that would be
distributed to RIBM1 Limited Partners per $1,000 limited partner original
investment if RIBM1 were continued for ten years and then sold for its
estimated value, determined using a discounted cash flow analysis applied
to the anticipated cash flows from the operation and sale of each Hotel and
taking into account the terms of existing debt obligations (the
"Continuation Value").
(5) The amounts in this column represent the amount that would be distributed
to RIBM1 Limited Partners per $1,000 limited partner original investment if
RIBM1 sold its Hotels at their Appraised Values as of _____ __, 1998, and
distributed the net proceeds (after payment of debts and other obligations
(including defeasance costs or prepayment penalties and deferred management
fees) and an allowance for liquidation costs, expenses and contingencies
equal to 2% of the Appraised Value of the Hotels) (the "Liquidation
Value"), in accordance with its partnership agreement.
RIBM1 Supp-15
<PAGE>
Fairness Opinion. AAA, an independent, nationally recognized hotel
valuation and financial advisory firm, has rendered the Fairness Opinion,
attached as Appendix B to the Consent Solicitation, which concluded that: (i)
the methodologies used to determine the Exchange Value of each Hotel Partnership
and to allocate the Units among each of the Hotel Partnerships are fair, from a
financial point of view, to the Limited Partners of each Hotel Partnership: (ii)
the underlying assumptions used to determine the Exchange Value of each Hotel
Partnership and the purchase price of each Acquisition Hotel (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) are fair and reasonable from the standpoint of
each Hotel Partnership; (iii) the methodology used to allocate Units received
by each Hotel Partnership among its general and Limited Partners is fair and
reasonable to the Limited Partners; (iv) the methodologies and the underlying
assumptions used to determine the Continuation Value and the Liquidation Value
of each Hotel Partnership (including, without limitation, the assumptions used
to determine the various adjustments to the Appraised Values of the Hotels) are
fair and reasonable from the standpoint of each Hotel Partnership and (v) the
economic terms of the Leases are fair and reasonable from the standpoint of the
Company. See "Fairness Analysis and Opinion -- Fairness Opinion" in the Consent
Solicitation.
RIBM1 Supp-16
<PAGE>
Federal Income Tax Considerations
In addition to the federal income tax considerations discussed in the
sections of the Prospectus entitled "Federal Income Tax Considerations" and
"Risk Factors -- Federal Income Tax Risks," RIBM1 Limited Partners should read
carefully the following discussion of federal income tax considerations
applicable specifically to the RIBM1 Limited Partners. The numerical data and
estimates included in this discussion are based on various factual assumptions
and information which are believed by the Company and the Hotel Partnership GP
to be reliable. However, some of these assumptions inevitably will not
materialize, and unanticipated events and circumstances will occur. Therefore,
there likely will be differences between the numerical data and estimates
included herein and actual results, and the variations may be material and
adverse.
Applicability of Tax Opinions
Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to CRFLT and the
Company, has provided to CRFLT and the Company an opinion letter (substantially
in the form of Appendix E to the Consent Solicitation) as to certain federal
income tax consequences of the Consolidation. The opinion letter is based upon
certain assumptions and certain representations provided by CRFLT, the Company
and the Hotel Partnership GPs. These representations generally involve factual
matters relating to the organization, ownership and operations (including the
income, assets, businesses, liabilities and properties) of the Hotel
Partnerships prior to the Consolidation and of CRFLT, the Company and the Hotel
Partnerships following the Consolidation. In addition, on the Closing Date,
Hogan & Hartson expects to provide to CRFLT and the Company an opinion letter
(substantially in the form of Exhibit __ to the Prospectus) as to certain
federal income tax consequences relating to the Offering. See "Federal Income
Tax Considerations -- Summary of Tax Opinions" in the Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is
substantially in the form of Appendix E to the Consent Solicitation is
applicable to the RIBM1 Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code
and Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson on the Closing Date will be based on
the same authorities as of the date of the Closing. No assurance can be given
that future legislation, Treasury Regulations, administrative interpretations
and court decisions will not significantly change the law or the above
conclusions reached by counsel. In addition, any such change could apply
retroactively to transactions preceding the date of change. Moreover, opinions
of counsel merely represent counsel's best judgment with respect to the probable
outcome on the merits and are not binding on the IRS or the courts. Accordingly,
even if there is no change in applicable law, no assurance can be provided that
such opinions (which do not bind the IRS or the courts) will not be challenged
by the IRS or will not be sustained by a court if so challenged. Neither CRFLT,
the Company nor the Hotel Partnership GPs have requested or plan to request any
rulings from the IRS concerning the tax consequences of the Consolidation or the
treatment of either the Company or CRFLT subsequent to the Consolidation.
RIBM1 Supp-17
<PAGE>
Tax Consequences of Formation of the Company
Overview. Hogan & Hartson has provided an opinion to the effect that
--------
the formation of the Company will not result in the recognition of taxable gain
or loss at the time of the Consolidation to an RIBM1 Limited Partner (i) who
does not exercise his Unit Redemption Right on a date sooner than the date two
years after the date of the consummation of the Consolidation; (ii) who does not
receive a cash distribution (or a deemed cash distribution resulting from relief
from liabilities, including as a result of the prepayment of the RIBM1 Senior
Mortgage with proceeds from the Offering) in connection with the Consolidation
in excess of his aggregate adjusted basis in his RIBM1 Partnership Unit at the
time of the Consolidation; (iii) who does not receive Notes upon exercise of
Dissenters' Rights; (iv) who is not required to recognize gain by reason of the
exercise by another RIBM1 Limited Partner of Dissenters' Rights and the option
to receive Notes; and (v) who does not have his "at risk" amount fall below zero
as a result of the Consolidation. See "Federal Income Tax Considerations --
Summary of Tax Opinions" in the Consent Solicitation. With respect to the
foregoing exceptions to nonrecognition treatment, the Company and the Hotel
Partnership GP believe that an RIBM1 Limited Partner who acquired his RIBM1
Partnership Units in the original offering of such Units for cash and who has
held such Units at all times since (i) should not be considered to receive, as a
result of the Consolidation, a distribution (or a deemed cash distribution
resulting from relief from liabilities, including as a result of the prepayment
of the RIBM1 Senior Mortgage with proceeds from the Offering) that exceeds his
aggregate adjusted basis in his RIBM1 Partnership Unit at the time of the
Consolidation, and (ii) should not have his "at risk" amount fall below zero as
a result of the Consolidation. See "Federal Income Tax Considerations -- Tax
Consequences of the Formation of the Company -- Overview" in the Consent
Solicitation.
With respect to the exercise of Dissenters' Rights, Hogan & Hartson is
of the opinion that although the matter is not free from doubt, an RIBM1 Limited
Partner who does not exercise Dissenters' Rights and elects to receive Notes in
connection with the Consolidation should not be required to recognize gain by
reason of another RIBM1 Limited Partner's exercise of such rights. With respect
to the exercise of a Unit Redemption Right, Hogan & Hartson is of the opinion
that it is more likely than not that an RIBM1 Limited Partner's exercise of his
Unit Redemption Right more than one year after the date of consummation of the
Consolidation but less than two years after such date will not cause the
Consolidation itself to be a taxable transaction for the RIBM1 Limited Partner
(or the other RIBM1 Limited Partners). See "Federal Income Tax Considerations --
Summary of Tax Opinions" in the Consent Solicitation. Opinions of counsel,
however, do not bind the IRS or the courts, and no assurances can be provided
that such opinions will not be challenged by the IRS or will be sustained by a
court if so challenged.
Amount of Deemed Cash Distribution. With respect to his RIBM1
----------------------------------
Partnership Units, an RIBM1 Limited Partner will receive no actual cash
distribution in connection with the Consolidation but will be deemed to receive
a cash distribution in connection with the Consolidation to the extent that his
share of Company liabilities immediately after the Consolidation is less than
his share of RIBM1 liabilities immediately prior to the Consolidation (for
example, because of the use of proceeds from the Offering to prepay the RIBM1
Senior Mortgage). See "Federal Income Tax Considerations -- Tax Consequences of
the Formation of the Company -- Relief from Liabilities/Deemed Cash
Distribution" in the Consent Solicitation. As a consequence of the Consolidation
(including the use of proceeds from the Offering to prepay the RIBM1 Senior
Mortgage), the Company and the Hotel Partnership GP believe, based upon and
subject to the assumptions and other limitations described below, that (i) the
RIBM1 Limited Partners' aggregate share of indebtedness should decrease by
$______ (from $________ (on December 31, 1997) to $_________); and (ii) the
share of indebtedness of an individual RIBM1 Limited Partner who acquired his
RIBM1 Partnership Unit in the original offering of such Units for cash and has
held such Units at all times since should decrease by $_____ per RIBM1
Partnership Unit (from $_____ (on December 31, 1997) to $_______). For an RIBM1
Limited Partner who did not acquire his RIBM1 Partnership Units in the original
offering of such
RIBM1 Supp-18
<PAGE>
Units for cash or who has not held his RIBM1 Partnership Units at all times
since such offering, the above information could vary materially.
Estimated Amount of Taxable Gain. An RIBM1 Limited Partner will
recognize taxable gain as a result of the deemed cash distribution discussed in
the previous paragraph, however, only to the extent that the deemed cash
distribution exceeds his adjusted tax basis in his RIBM1 Partnership Units
immediately prior to the Consolidation. As described below, the Company and the
Hotel Partnership GP estimate that as of December 31, 1997, the adjusted tax
basis of an RIBM1 Limited Partner who acquired his RIBM1 Partnership Units in
the original offering of such Units for cash and has held such Units at all
times since was ______ per RIBM1 Partnership Unit (which is greater than the
deemed cash distribution of _____ per RIBM1 Partnership Unit discussed in the
previous paragraph). Accordingly, the Company and the Hotel Partnership GP
believe, based upon and subject to the assumptions and other limitations
described below, that an RIBM1 Limited Partner who acquired his RIBM1
Partnership Units in the original offering of such Units for cash and has held
the Units at all times since should not recognize gain due to the deemed cash
distribution resulting from the relief from liabilities in connection with the
Consolidation.
The adjusted tax basis of an RIBM1 Partner who did not acquire his
RIBM1 Partnership Units in the original offering of such Units for cash or who
has not held his RIBM1 Partnership Units at all times since such offering could
vary materially from that of an RIBM1 Limited Partner who did so. If an RIBM1
Limited Partner has an adjusted tax basis in his RIBM1 Partnership Units (per
RIBM1 Partnership Unit) that is less than the adjusted tax basis of an RIBM1
Limited Partner who acquired his RIBM1 Partnership Units in the original
offering of such Units for cash and has held such Units at all times since, he
could recognize gain due to the deemed cash distribution resulting from the
relief from liabilities in connection with the Consolidation.
Tax Treatment of RIBM1 Limited Partners Who Hold Units Following the
Consolidation
Initial Basis in Units. In general, an RIBM1 Limited Partner will have
----------------------
an initial tax basis in his Units ("Initial Basis") received in the
Consolidation with respect to his RIBM1 Partnership Units equal to the basis in
his RIBM1 Partnership Units at the time of the Consolidation, reduced to reflect
any deemed cash distributions resulting from a reduction in his share of RIBM1
liabilities and increased to reflect any gain required to be recognized in
connection with the Consolidation. As of December 31, 1997, an RIBM1 Limited
Partner who acquired his RIBM1 Partnership Units in the original offering of
such Units for cash and has held such Units at all times since, had an adjusted
tax basis in his RIBM1 Partnership Units of $____ per RIBM1 Partnership Unit
(after giving effect to the Consolidation, including the prepayment of
indebtedness contemplated in connection therewith). Based upon and subject to
the assumptions and other limitations described below, the Company and the Hotel
Partnership GP believe that the tax basis of such an RIBM1 Limited Partner in
his Units received in the Consolidation with respect to his RIBM1 Partnership
Units would be $____ per RIBM1 Partnership Unit. For an RIBM1 Limited Partner
who did not acquire his RIBM1 Partnership Units in the original offering of such
Units for cash or who has not held his RIBM1 Partnership Units at all times
since such offering, the above information could vary materially. For a
discussion of the federal income tax considerations for an RIBM1 Limited Partner
from a reduction in basis that may result from the Consolidation, see "Federal
Income Tax Considerations -- Tax Consequences of Formation of the Company --
Initial Tax Basis of Units" in the Consent Solicitation.
Tax Allocations with Respect to Contributed Hotels upon a Sale of RIBM1
-----------------------------------------------------------------------
Hotels. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
- ------
attributable to appreciated or depreciated property that is contributed to a
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with, or benefits from, the unrealized gain or
unrealized loss associated with the property at the time of contribution. The
amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the time
of contribution and the adjusted tax basis of such property at
RIBM1 Supp-19
<PAGE>
the time of contribution (referred to as "Book-Tax Difference"). The Company and
the Hotel Partnership GP, based upon and subject to the assumptions and other
limitations described below, estimate that the Book-Tax Difference of the RIBM1
Hotels will be $________ upon the consummation of the Consolidation.
In the event that the Company were to sell all of the RIBM1 Hotels, the
Partners of RIBM1 would be specially allocated by the Company an amount of
taxable gain equal to the Book-Tax Difference with respect to the RIBM1 Hotels
($ ____ in the aggregate if the RIBM1 Hotels were sold immediately after the
consummation of the Consolidation, according to the estimate in the previous
paragraph). The share of such gain allocable to an RIBM1 Limited Partner who
acquired his RIBM1 Partnership Units in the original offering of such Units for
cash and held such Units at all times since would be $___ per RIBM1 Partnership
Unit. The share of such gain of an RIBM1 Limited Partner who did not acquire his
RIBM1 Partnership Units in the original offering of such Units for cash or who
has not held his RIBM1 Partnership Units at all times since such offering could
vary materially from this amount. If the Company were to sell one or more, but
not all, of the RIBM1 Hotels, the former Partners of RIBM1 would be specially
allocated by the Company an amount of taxable gain equal to that portion of the
Book-Tax Difference for the RIBM1 Hotels that is attributable to the RIBM1 Hotel
or Hotels sold. The Partnership Agreement does not impose any restrictions upon
the Company from causing the sale of any or all of the RIBM1 Hotels. See
"Federal Income Tax Considerations -- Tax Treatment of Limited Partners Who Hold
Units Following the Consolidation -- Sale of Individual Hotels" in the Consent
Solicitation.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
------------------------------------------------------------
allocations of depreciation to the RIBM1 Limited Partners will change
significantly as a result of the Consolidation for two reasons. First, as
described above, pursuant to Section 704(c) of the Code, depreciation and
deductions attributable to the RIBM1 Hotels will be required to be allocated for
federal income tax purposes in a manner such that the RIBM1 Partners are charged
with the Book-Tax Difference associated with the RIBM1 Hotels at the time of the
consummation of the Consolidation. Consequently, an RIBM1 Limited Partner will
be allocated less depreciation with respect to the RIBM1 Hotels than would be
the case if the Consolidation had not occurred and the RIBM1 Limited Partner had
continued to hold his RIBM1 Partnership Units. Second, the Consolidation will
cause the technical termination of RIBM1 and each of the other Hotel
Partnerships under Section 708(b)(1)(B) of the Code. Section 168(i)(7) of the
Code provides, in effect, that when a partnership terminates under Section
708(b)(1)(B) of the Code, the partnership must begin new depreciation periods
for its property. As a result, the remaining bases of the RIBM1 Hotels and the
Hotels held by the other Hotel Partnerships will be depreciated over 39 years,
rather than over the remaining current life of such Hotels (which ranges from 8
years to 25 years). See "Federal Income Tax Considerations -- Tax Treatment of
Limited Partners Who Hold Units Following the Consolidation -- Effect of
Consolidation on Depreciation" in the Consent Solicitation.
To illustrate the consequences of these changes for an RIBM1 Limited
Partner, the Company and the Hotel Partnership GP estimate, based upon and
subject to the assumptions and other limitations described below, that if the
Consolidation were consummated on January 1, 1998, the amount of income for 1998
that would be allocated to an RIBM1 Limited Partner who acquired his RIBM1
Partnership Units in the original offering of such Units for cash and held such
Units at all times since would increase by $____ per RIBM1 Partnership Unit
(from $_____ to $_____) over the estimated amount of income that would have been
allocated to such RIBM1 Limited Partner for 1998 if RIBM1 did not participate in
the Consolidation. No attempt is made here to estimate the effect of the
Consolidation on tax allocations in years subsequent to the 1998 taxable year,
but the Consolidation is expected to effect such allocations as well. The amount
of income allocable to an RIBM1 Limited Partner who did not acquire his RIBM1
Partnership Units in the original offering of such Units for cash or who has not
held his RIBM1 Partnership Units at all times since such offering could vary
materially from this amount. See "Federal Income Tax Considerations -- Tax
Treatment
RIBM1 Supp-20
<PAGE>
of Limited Partners Who Hold Units Following the Consolidation -- Tax
Allocations with Respect to Book-Tax Difference on Contributed Hotels" in the
Consent Solicitation.
State and Local Taxes. RIBM1 Limited Partners holding Units may be
---------------------
subject to state and local taxation in a number of jurisdictions in which the
Company directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this regard, immediately
following the Consolidation, the Company will own properties in 35 states across
the United States. Currently, RIBM1 owns properties in seven states. See
"Federal Income Tax Considerations -- Tax Treatment of Limited Partners Who Hold
Units Following the Consolidation -- State and Local Taxes" in the Consent
Solicitation.
Assumptions Used in Determining Tax Consequences of the Consolidation
In preparing the estimates set forth above, the Company and the Hotel
Partnership GP made several key assumptions, which are described below. If any
such assumption is not accurate with respect to a particular RIBM1 Limited
Partner, the tax consequences of the Consolidation to such Limited Partner could
be substantially different from those reflected above. ACCORDINGLY, EACH RIBM1
LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO
DETERMINE THE IMPACT OF SUCH RIBM1 LIMITED PARTNER'S PARTICULAR TAX SITUATION ON
THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION.
First, with respect to an RIBM1 Limited Partner's basis in his RIBM1
Partnership Units prior to the Consolidation, the Company and the Hotel
Partnership GP assumed that an RIBM1 Limited Partner acquired his RIBM1
Partnership Units in the original offering of such Units for cash and has held
such Units at all times since. The adjusted tax basis of an RIBM1 Limited
Partner who did not acquire his RIBM1 Partnership Units in the original offering
of such Units for cash could vary materially from that of an RIBM1 Limited
Partner who did so. In this regard, it should be noted that the adjusted tax
basis of an RIBM1 Partner who acquired his RIBM1 Partnership Units in the
original offering of such interests for cash still could vary substantially from
the estimates set forth above for several reasons, including but not limited to
(i) if the RIBM1 Limited Partner has received special allocations of items of
RIBM1 income, gain, deduction, loss, or credit, or non-pro rata distributions,
or made non-pro rata contributions; or (ii) if an RIBM1 Limited Partner's share
of RIBM1 nonrecourse liabilities differs from his pro rata percentage of such
liabilities immediately prior to consummation of the Consolidation. If an RIBM1
Limited Partner has an adjusted tax basis in his RIBM1 Partnership Units that is
less than the tax basis of an RIBM1 Limited Partner who acquired his RIBM1
Partnership Units in the original offering of such Units for cash and has held
such Units at all times since, the Consolidation might result in the receipt by
the RIBM1 Limited Partner of a deemed distribution of cash in excess of his
adjusted tax basis in his RIBM1 Partnership Units, which could result in the
recognition of income or gain.
Second, the Company and the Hotel Partnership GP assumed that the
method expected to be used by the Company to allocate liabilities among the
Partners will be respected for federal income tax purposes. The Company will
allocate liabilities among the Partners as described in "Federal Income Tax
Considerations -- Tax Consequences of the Formation of the Company -- Relief
from Liabilities/Deemed Cash Distribution" in the Consent Solicitation. If the
method used by the Company were not respected for federal income tax purposes
and the nonrecourse liabilities actually allocable to an RIBM1 Limited Partner
are less than the amount assumed above, the Consolidation might result in the
receipt by such RIBM1 Limited Partner of a deemed distribution of cash that is
greater than the deemed distribution of cash expected to be received by such
RIBM1 Limited Partner as described above in "Tax Consequences of Formation of
the Company -- Amount of Deemed Cash Distribution." For an RIBM1 Limited Partner
who did not acquire his RIBM1 Partnership Units in the original offering of such
Units for cash or who did not hold such Units at all times since, this
RIBM1 Supp-21
<PAGE>
deemed distribution of cash could exceed his adjusted tax basis in his RIBM1
Partnership Units, which could result in the recognition of income or gain.
Third, the Company and the Hotel Partnership GP assumed that all of the
Hotel Partnerships will elect to participate in the Consolidation and that no
Notes will be issued. If less than all of the Hotel Partnerships elect to
participate in the Consolidation, however, the Consolidation still may be
consummated so long as the Minimum Participation Condition and all other
conditions to consummation of the Consolidation are satisfied or waived. See
"The Consolidation -- Conditions to Consummation of the Consolidation."
Moreover, the Company has reserved the right to exclude any Hotel Partnership
from participation in the Consolidation (even if the requisite number of Limited
Partners in a Hotel Partnership have voted to approve of and participate in the
Consolidation and each of the other conditions to the Consolidation has been
satisfied or waived) if the Company determines that such exclusion is in its
best interests. See "The Consolidation -- Right to Exclude Hotel Partnerships."
If less than all of the Hotel Partnerships participate in the Consolidation, the
Consolidation might result in the receipt by RIBM1 Limited Partners of a deemed
distribution of cash that is greater than the deemed distribution of cash
expected to be received by RIBM1 Limited Partners as described above in "Tax
Consequences of Formation of the Company -- Amount of Deemed Cash Distribution."
For an RIBM1 Limited Partner who did not acquire his RIBM1 Partnership Units in
the original offering of such Units for cash or who did not hold such Units at
all times since, this deemed distribution of cash could exceed his adjusted tax
basis in his RIBM1 Partnership Units, which could result in the recognition of
income or gain.
Fourth, the Company and the Hotel Partnership GP assumed that Partners
in each Hotel Partnership would receive Units in the Consolidation with a value
exactly equal to the Exchange Value, that CRFLT would raise gross proceeds in
the Offering of $800 million, and that CRFLT would own a ____% interest in the
Company as a result of the contribution of the proceeds from the Offering to the
Company. With respect to the proceeds of the Offering, the Company and the Hotel
Partnership GP assumed that approximately $539 million would be used to prepay
certain indebtedness of the Hotel Partnerships (specifically the CBM2
Certificates, the RIBM1 Senior Mortgage and all of the outstanding indebtedness
of Res USA) and that approximately $36 million would be used to pay prepayment
penalties associated with these prepayments. To the extent that the value of the
Units received by the Partners of RIBM1 in the Consolidation exceeds the
Exchange Value, the aggregate Book-Tax Difference of the RIBM1 Hotels discussed
above would increase accordingly. If proceeds from the Offering are not used to
prepay the RIBM1 Senior Mortgage, the Consolidation might result in the receipt
by such RIBM1 Limited Partner of a deemed distribution of cash that is less than
the deemed distribution of cash expected to be received by RIBM1 Limited
Partners as described above in "Tax Consequences of Formation of the Company --
Amount of Deemed Cash Distribution." However, in the event the nonrecourse
liabilities actually allocable to an RIBM1 Limited Partner are less than the
amount assumed above (including, for example, if the proceeds of the Offering
exceed $800 million), the Consolidation might result in the receipt by such
RIBM1 Limited Partner of a deemed distribution of cash that is greater than the
deemed distribution of cash expected to be received by such RIBM1 Limited
Partner as described above in "Tax Consequences of Formation of the Company --
Amount of Deemed Cash Distribution." For an RIBM1 Limited Partner who did not
acquire his RIBM1 Partnership Units in the original offering of such Units for
cash or who did not hold such Units at all times since, this deemed distribution
of cash could exceed his adjusted tax basis in his RIBM1 Partnership Units,
which could result in the recognition of income or gain.
Finally, the Company and the Hotel Partnership GP assumed that the
Mergers will be treated for federal income tax purposes as the transfer by the
Partners of their interests in the Hotel Partnerships to the Company in exchange
for Units. There can be no assurance, however, that the IRS will not seek to
recharacterize each Merger as either (i) the liquidation of a Hotel Partnership
followed by the distribution by the Hotel Partnership of its assets to its
Partners and the subsequent
RIBM1 Supp-22
<PAGE>
transfers by such Partners of such assets to the Company in exchange for Units,
or (ii) the transfer by a Hotel Partnership of its assets to the Company in
exchange for Units and the subsequent distribution of such Units to its
Partners. If the Mergers are recharacterized in such a manner, the tax
consequences of the Consolidation to the RIBM1 Limited Partners likely would be
materially affected.
EACH RIBM1 PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX
ADVISOR TO DETERMINE THE IMPACT OF SUCH RIBM1 LIMITED PARTNER'S PARTICULAR TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE
CONSOLIDATION. THE TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION TO A
PARTICULAR RIBM1 LIMITED PARTNER COULD VARY SUBSTANTIALLY FROM THE ESTIMATES
DESCRIBED ABOVE.
Tax Treatment of RIBM1 Limited Partners Who Exercise Dissenters' Rights
and Elect to Receive Notes
An RIBM1 Limited Partner who exercises his Dissenters' Rights and
elects to receive Notes in connection with the Consolidation will be treated as
having made a taxable disposition of his RIBM1 Partnership Units. The amount
realized in connection with such disposition will equal the sum of the "issue
price" of the Notes (i.e., the face amount of the Notes) (currently estimated as
$_____ per RIBM1 Partnership Unit) plus the portion of the RIBM1 liabilities
allocable to the RIBM1 Limited Partner for federal income tax purposes
(estimated as $_______ per RIBM1 Partnership Unit as of December 31, 1997). To
the extent the amount realized exceeds the RIBM1 Limited Partner's adjusted
basis in his RIBM1 Partnership Units, the RIBM1 Limited Partner will recognize
gain. For a discussion of the federal income tax rates applicable to the net
capital gain from the sale of a capital asset, see "Federal Income Tax
Considerations -- Tax Treatment of Limited Partners Who Hold Units Following the
Consolidation -- Disposition of Units by Limited Partners" in the Consent
Solicitation. In this regard, the Hotel Partnership GP estimates that, as of
December 31, 1997, if RIBM1 sold all of its Hotels in a fully taxable
transaction for a net amount, after payment of liabilities, equal to the
Liquidation Value of RIBM1, the "unrecognized Section 1250 gain" per RIBM1
Partnership Unit would be $______ and the gain subject to tax as ordinary income
under Section 1245 per RIBM1 Partnership Unit would be $______.
A RIBM1 Limited Partner who exercises Dissenters' Rights and elects to
receive Notes may be eligible to defer at least a portion of that gain under the
"installment sale" rules. Those rules, however, may not permit the RIBM1 Limited
Partner to defer all of the gain (and, to the extent that the face amount of the
Notes (and any other installment obligations received by the taxpayer during the
year) outstanding at the end of the taxable year in which the Consolidation
occurs exceeds $5,000,000, will require that the RIBM1 Limited Partner who
defers gain pay to the IRS interest on the resulting tax that has been
deferred). The RIBM1 Limited Partner, for instance, will not be eligible to
defer gain to the extent that such gain would be taxed as ordinary income under
Section 1245 of the Code. In addition, to the extent that the RIBM1 Limited
Partner's share of RIBM1 liabilities exceeds his adjusted tax basis in his RIBM1
Units immediately prior to the Consolidation, the RIBM1 Limited Partner will not
be eligible to defer gain recognized upon the receipt of Notes. Lastly, if an
RIBM1 Limited Partner disposes of Notes, any gain that had been deferred would
be recognized in the year of disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR DISSENTING RIBM1 LIMITED
PARTNER COULD HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE
CONSOLIDATION, AND THE SUBSEQUENT OWNERSHIP AND DISPOSITION OF NOTES. THEREFORE,
IT IS ESSENTIAL THAT SUCH RIBM1 LIMITED PARTNERS CONSULT WITH THEIR OWN TAX
ADVISORS WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH
RIBM1 LIMITED PARTNERS' RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING
JURISDICTION.
RIBM1 Supp-23
<PAGE>
Tax Consequences if RIBM1 Does Not Participate in the Consolidation
If RIBM1 does not participate in the Consolidation, the RIBM1 Limited
Partners would not have any tax consequences resulting from the Consolidation.
The consequences of continued ownership of RIBM1 Partnership Units will be the
same as would have resulted if the Consolidation had not been proposed.
* * *
The above description is not exhaustive of all possible tax
considerations associated with the Consolidation. This summary does not discuss
foreign tax considerations, nor does it discuss all of the aspects of federal
income taxation or state and local taxation that may be relevant to RIBM1
Limited Partners in light of their particular circumstances. EACH RIBM1 LIMITED
PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE
IMPACT OF SUCH RIBM1 LIMITED PARTNER'S PARTICULAR TAX SITUATION ON THE
ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION.
RIBM1 Supp-24
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived
from the RIBM1 financial statements for the First Three Quarters 1997 and the
First Three Quarters 1996 and for the five most recent fiscal years in the
period ended January 3, 1997. The following data should be read in conjunction
with RIBM1's financial statements and the notes thereto, Management's Discussion
and Analysis of Financial Condition and Results of Operations and the other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
-------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (amounts in thousands, except per, limited partner original investment amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 23,225 $ 22,825 $ 32,084 $ 30,069 $ 27,305 $ 25,193 $ 23,961
Operating profit .................... 12,091 11,360 16,151 14,400 11,663 10,432 9,481
Net income (loss).................... 3,300 2,360 3,087 1,517 (1,588) (2,891) (3,856)
Distributions:
General Partner.................... 16 34 50 8 33 33 45
Limited Partner.................... 1,595 3,279 4,919 854 3,280 3,214 4,461
----- ----- ----- --- ----- ----- -----
1,611 3,313 4,969 862 3,313 3,247 4,506
Per $1,000 limited partner
original investment:
Net income (loss).................. 56 38 47 23 (24) (44) (58)
Distributions...................... 24 50 75 13 50 49 68
EBITDA(1)............................ 15,989 15,738 22,118 20,898 18,457 16,837 15,822
Cash provided by
operating activities............... 8,464 6,389 10,820 9,388 7,955 6,494 6,942
Cash used in investing activities.... 2,646 2,246 3,182 2,993 2,767 2,548 2,495
Cash used in financing activities.... 3,765 5,037 11,480 4,497 3,313 3,247 4,506
Increase (decrease) in cash
and cash equivalents............... 2,053 (894) (3,842) 1,898 1,875 699 (59)
Ratio of earnings to fixed
charges(2)......................... 1.36x 1.25x 1.23x 1.11x -- -- --
Deficiency of earnings to
fixed charges (2).................. -- -- -- -- 1,588 2,891 3,856
Total assets at book value........... 151,924 155,176 151,658 157,061 155,640 157,602 160,870
Total assets at value assigned
for consolidation.................. -- -- -- -- -- --
Cash and cash equivalents............ 5,482 6,377 3,429 7,271 5,373 3,498 2,799
Total debt........................... 121,360 128,168 123,519 129,823 130,362 130,362 130,343
Partner's capital:
Limited partners................... 6,863 6,112 5,192 7,055 6,407 11,259 17,335
General partners................... 146 138 129 148 141 190 252
Book value per $1,000 limited
partner original investment........ 105 93 79 108 98 172 264
Exchange Value per $1,000
limited partner original investment -- -- -- -- -- --
</TABLE>
(1) EBITDA consists of the sum of consolidated net income, interest expense,
depreciation and amortization. EBITDA data is presented because such data is
used by certain investors to determine the partnership's ability to meet
debt service requirements. The partnership considers EBITDA to be an
indicative measure of the partnership's operating performance due to the
significance of the partnership's long-lived assets and because EBITDA can
be used to measure the partnership's ability to service debt, fund capital
expenditures and expand its business; however, such information should not
be considered as an alternative to net income, operating profit, cash flows
from operations, or any other operating or liquidity performance measure
prescribed by generally accepted accounting principles. Cash expenditures
for various long-term assets and interest expense have been, and will be,
incurred which are not reflected in the EBITDA presentations.
(2) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
RIBM1 Supp-25
<PAGE>
deficiency of earnings to fixed charges is largely the result of
depreciation and amortization of $6,518,000, $6,265,000 and $6,187,000 in
1994, 1993 and 1992, respectively.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
First Three Quarters 1997 Compared to First Three Quarters 1996
Revenues. Revenues for the First Three Quarters 1997 increased $.4 million,
or 2%, to $23.2 million. Revenues and operating profit were impacted primarily
by growth in revenue per available room ("REVPAR") of nearly 3%. Hotel sales
increased $1.2 million, or 3%, to $43.9 million in the First Three Quarters 1997
also reflecting the improvement in REVPAR. REVPAR is a commonly used indicator
of market performance for hotels which represents the combination of daily room
rate charged and the average daily occupancy achieved. REVPAR does not include
food and beverage or other ancillary revenues generated by the property. REVPAR
increased for the First Three Quarters 1997 due primarily to an increase in
average room rates of 4%, while average occupancy decreased just over one
percentage point. Due to the high occupancy of these properties, the partnership
expects future increases in REVPAR to be driven by room rate increases, rather
than occupancy increases. However, there can be no assurance that REVPAR will
continue to increase in the future.
Operating Costs and Expenses. Operating costs and expenses decreased $.3
million to $11.1 million for the First Three Quarters 1997. As a percentage of
revenues, hotel operating costs and expenses were 48% and 50% of revenues for
the First Three Quarters 1997 and the First Three Quarters 1996, respectively.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased by $.7 million to
$12.1 million, or 52% of revenues, in the First Three Quarters 1997 from $11.4
million, or 50% of revenues, for the First Three Quarters 1996.
Interest Expense. Interest expense decreased $.3 million to $9 million for
the First Three Quarters 1997 as a result of principal amortization on RIBM1's
debt.
Net Income. Net income for the First Three Quarters 1997 increased $.9
million to $3.3 million, or 14% of revenues, compared to net income of $2.4
million, or 11% of revenues, for the First Three Quarters 1996.
1996 Compared to 1995
Revenues. Revenues increased $2.0 million, or 7%, to $32.1 million in 1996
from $30.1 million in 1995 as a result of strong growth in REVPAR of nearly 6%.
Hotel sales increased $4.1 million, or 7%, to $60.8 million in 1996. The
increase in REVPAR was the result of an increase in average room rates of 9%
partially offset by a decrease in average occupancy of two percentage points.
Operating Costs and Expenses. Operating costs and expenses increased to
$15.9 million in 1996 from $15.7 million in 1995. As a percentage of hotel
revenues, operating costs and expenses represented 50% of revenues for 1996 and
52% in 1995.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased $1.8 million to
$16.2 million, or 50% of total revenues, in 1996 from $14.4 million, or 48% of
revenues, in 1995.
Interest Expense. Interest expense remained unchanged at $13.4 million.
Net Income. Net income increased $1.6 million to $3.1 million, or 10% of
total revenues, in 1996 from $1.5 million, or 5% of total revenues, in 1995 due
primarily to improved lodging results.
RIBM1 Supp-26
<PAGE>
1995 Compared to 1994
Revenues. Revenues increased $2.8 million, or 10%, to $30.1 million in 1995
from $27.3 million in 1994 as a result of strong growth in REVPAR of 6%. The
increase in REVPAR was primarily the result of a 7% increase in average room
rates partially offset by a decrease of one percentage point in average
occupancy.
Operating Costs and Expenses. Operating costs and expenses increased to
$15.7 million, or 52% of revenues, in 1995 from $15.6 million, or 57% of
revenues, in 1994.
Operating Profit. Operating profit increased $2.8 million to $14.4 million,
or 48% of revenues, in 1995 from $11.7 million, or 43% of revenues, in 1994 due
to the changes in revenues and operating costs discussed above.
Interest Expense. Interest expense decreased to $13.4 million for 1995 from
$13.5 million in 1994.
Net Income. Net income increased $3.1 million to $1.5 million, or 5% of
revenues, in 1995, from a net loss of $1.6 million in 1994 due to the items
discussed above.
Liquidity and Capital Resources
Cash provided by operations was $8.5 million and $6.4 million for the First
Three Quarters 1997 and the First Three Quarters 1996, respectively. Cash
provided by operations was $10.8 million in 1996, $9.4 million in 1995 and $8
million in 1994. The improved cash from operations was a result of improved
hotel lodging results.
Cash used in investing activities was $2.6 million and $2.2 million for the
First Three Quarters 1997 and the First Three Quarters 1996, respectively, and
$3.2 million, $3 million and $2.8 million in fiscal years 1996, 1995 and 1994,
respectively. RIBM1's cash used in investing activities consists primarily of
contributions to the property improvement funds and capital expenditures for
improvements to existing hotels.
RIBM1's cash used in financing activities was $3.8 million and $5 million
for the First Three Quarters 1997 and the First Three Quarters 1996,
respectively. Cash used in financing activities was $11.5 million, $4.5 million
and $3.3 million in 1996, 1995 and 1994, respectively. RIBM1's cash financing
activities primarily consisted of capital distributions to partners, repayment
of debt and payment of financing costs, as well as the refinancing of certain
debts of RIBM1. RIBM1 refinanced mortgage debt of $129 million and a $1.4
million loan from Host Marriott with proceeds from $130 million non-recourse
mortgage loans in 1995. The new mortgage debt is comprised of a $100 million
note bearing interest at 8.6% and a $30 million second mortgage bearing interest
at 15.25% for a blended interest rate of 10.13%. Principal amortization is
required through maturity in September 2002. In addition, on a cash available
basis, $2 million of additional amortization is required on the first mortgage.
RIBM1 Supp-27
<PAGE>
FINANCIAL STATEMENTS
RIBM1 Supp-28
<PAGE>
Report of Independent Public Accountants
TO THE LIMITED PARTNERS OF MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Marriott Residence Inn Limited
Partnership (a Delaware limited partnership) as of January 3, 1997 and December
29, 1995, and the related statements of operations, changes in partners' capital
and cash flows for each of the three fiscal years in the period ended January 3,
1997. These financial statements are the responsibility of the General Partner's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide 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 Marriott Residence Inn Limited
Partnership as of January 3, 1997 and December 29, 1995, and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended January 3, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 21, 1997
RIBM1 Supp-29
<PAGE>
Marriott Residence Inn Limited Partnership
Balance Sheets
January 3, 1997 and December 29, 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Property and equipment, net............................................................$ 140,272 $ 142,331
Due from Residence Inn by Marriott, Inc. .............................................. 2,462 1,329
Property improvement fund.............................................................. 2,767 3,136
Deferred financing and organization costs, net of accumulated amortization............. 2,728 2,994
Cash and cash equivalents.............................................................. 3,429 7,271
------------ ------------
$ 151,658 $ 157,061
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt......................................................................$ 123,519 $ 129,823
Incentive management fee due to Residence Inn by Marriott, Inc. ................... 19,326 15,960
Base management fee due to Residence Inn by Marriott, Inc. ........................ 1,499 2,014
Accounts payable and accrued expenses.............................................. 1,993 2,061
------------ ------------
Total Liabilities.............................................................. 146,337 149,858
------------ ------------
PARTNERS' CAPITAL
General Partner
Capital contribution........................................................... 663 663
Capital distributions.......................................................... (387) (337)
Cumulative net losses.......................................................... (147) (178)
------------ ------------
129 148
------------ ------------
Limited Partners
Capital contribution, net of offering costs of $7,550.......................... 58,050 58,050
Capital distributions.......................................................... (38,313) (33,394)
Cumulative net losses.......................................................... (14,545) (17,601)
------------ ------------
5,192 7,055
------------ ------------
Total Partners' Capital........................................................ 5,321 7,203
------------ ------------
$ 151,658 $ 157,061
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
RIBM1 Supp-30
<PAGE>
Marriott Residence Inn Limited Partnership
Statements of Operations
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES (Note 3) ......................................................$ 32,084 $ 30,069 $ 27,305
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Depreciation and amortization......................................... 5,620 5,976 6,518
Incentive management fee.............................................. 3,366 3,130 2,838
Residence Inn system fee.............................................. 2,321 2,158 2,032
Property taxes........................................................ 2,229 2,235 2,270
Base management fee................................................... 1,216 1,135 1,069
Equipment rent and other.............................................. 1,181 1,035 915
------------ ------------ ------------
15,933 15,669 15,642
------------ ------------ ------------
OPERATING PROFIT........................................................ 16,151 14,400 11,663
Interest expense........................................................ (13,411) (13,405) (13,527)
Interest income......................................................... 347 522 276
------------ ------------ ------------
NET INCOME (LOSS).......................................................$ 3,087 $ 1,517 $ (1,588)
============ ============ ============
ALLOCATION OF NET INCOME (LOSS)
General Partner.......................................................$ 31 $ 15 $ (16)
Limited Partners...................................................... 3,056 1,502 (1,572)
------------ ------------ ------------
$ 3,087 $ 1,517 $ (1,588)
============ ============ ============
NET INCOME (LOSS) PER LIMITED PARTNER UNIT
(65,600 Units)........................................................$ 47 $ 23 $ (24)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
RIBM1 Supp-31
<PAGE>
Marriott Residence Inn Limited Partnership
Statements of Changes in Partners' Capital
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------------ ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993..............................................$ 190 $ 11,259 $ 11,449
Capital distributions................................................ (33) (3,280) (3,313)
Net loss............................................................. (16) (1,572) (1,588)
------------ ----------- -----------
Balance, December 30, 1994.............................................. 141 6,407 6,548
Capital distributions................................................ (8) (854) (862)
Net income........................................................... 15 1,502 1,517
------------ ----------- -----------
Balance, December 29, 1995.............................................. 148 7,055 7,203
Capital distributions................................................ (50) (4,919) (4,969)
Net income........................................................... 31 3,056 3,087
------------ ----------- -----------
Balance, January 3, 1997................................................$ 129 $ 5,192 $ 5,321
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
RIBM1 Supp-32
<PAGE>
Marriott Residence Inn Limited Partnership
Statements of Cash Flows
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................$ 3,087 $ 1,517 $ (1,588)
Noncash items:
Depreciation and amortization........................................ 5,620 5,976 6,518
Deferred incentive management fee.................................... 3,366 3,130 2,838
Amortization of deferred financing costs as interest................. 473 191 288
(Gain) loss on dispositions of property and equipment................ (10) (18) 119
Changes in operating accounts:
Due from Residence Inn by Marriott, Inc. ............................ (1,133) 417 (321)
Accounts payable and accrued expenses................................ (68) (1,334) 101
Base management fee due to Residence Inn by Marriott, Inc. .......... (515) (491) --
---------- ---------- ----------
Cash provided by operations.......................................... 10,820 9,388 7,955
---------- ---------- ----------
INVESTING ACTIVITIES
Additions to property and equipment, net................................. (3,561) (3,095) (1,360)
Change in property improvement fund, net................................. 379 102 (1,407)
---------- ---------- ----------
Cash used in investing activities.................................... (3,182) (2,993) (2,767)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from mortgage loan.............................................. -- 130,000 --
Repayment of mortgage debt............................................... -- (128,967) --
Payment of note payable to Host Marriott Corporation..................... -- (1,395) --
Principal payments on mortgage debt...................................... (6,304) (177) --
Capital distributions to partners........................................ (4,969) (862) (3,313)
Refinancing costs........................................................ (207) (3,096) --
---------- ---------- ----------
Cash used in financing activities.................................... (11,480) (4,497) (3,313)
---------- ---------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............................. (3,842) 1,898 1,875
CASH AND CASH EQUIVALENTS at beginning of year................................ 7,271 5,373 3,498
---------- ---------- ----------
CASH AND CASH EQUIVALENTS at end of year......................................$ 3,429 $ 7,271 $ 5,373
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest..........................................$ 12,992 $ 14,547 $ 13,333
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
RIBM1 Supp-33
<PAGE>
Marriott Residence Inn Limited Partnership
Notes to Financial Statements
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Residence Inn Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed March 29, 1988 to acquire, own and operate 15
Residence Inn by Marriott hotels (the "Inns") and the land on which the Inns are
located. The Inns are located in seven states in the United States: four in
Ohio, three in California, three in Georgia, two in Missouri and one in
Illinois, Colorado and Michigan, and as of January 3, 1997, have a total of
2,129 suites.
On December 29, 1995, Host Marriott Corporation's operations were divided into
two separate companies: Host Marriott Corporation ("Host Marriott") and Host
Marriott Services Corporation. The sole general partner of the Partnership, with
a 1% interest, is RIBM One Corporation (the "General Partner"), a Delaware
corporation and wholly-owned subsidiary of Host Marriott.
Between March 29, 1988 and April 22, 1988 (the "Closing Date"), 65,600 limited
partnership interests (the "Units") were sold in a public offering. The offering
price per Unit was $1,000. The General Partner contributed $662,627 for its 1%
general partnership interest. The Inns are managed by Residence Inn by Marriott,
Inc. (the "Manager"), a wholly-owned subsidiary of Marriott International, Inc.
("MII"), as part of the Residence Inn by Marriott hotel system.
Partnership Allocations and Distributions
Net profits for Federal income tax purposes are generally allocated to the
partners in proportion to the distributions of cash available for distribution.
The Partnership generally distributes cash available for distribution as
follows: (i) first, 99% to the limited partners and 1% to the General Partner,
until the partners have received, with respect to such year, an amount equal to
10% of their Net Capital Investment, defined as the excess of original capital
contributions over cumulative distributions of net refinancing and sales
proceeds ("Capital Receipts"); (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of Capital
Receipts previously distributed:
(a) 99% to the limited partners and 1% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts of less
than 50% of their original capital contributions; or
(b) 85% to the limited partners and 15% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts equal
to or greater than 50% but less than 100% of their original capital
contributions; or
(c) 70% to the limited partners and 30% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts equal
to 100% or more of their original capital contributions.
Losses and net losses are allocated 99% to the limited partners and 1% to the
General Partner.
Capital Receipts not retained by the Partnership will generally be distributed
(i) first, 99% to the limited partners and 1% to the General Partner until the
partners have received cumulative distributions from all sources equal to a
cumulative simple return of 12% per annum on their Net Capital Investment and an
amount equal to their contributed capital, payable only from Capital Receipts;
(ii) next, if the Capital Receipts are from a sale, 100% to the General Partner
until it has received 2% of the gross proceeds from the sale; and (iii)
thereafter, 70% to the limited partners and 30% to the General Partner.
Gains will generally be allocated (i) first, to those partners whose capital
accounts have negative balances until such negative balances are brought to
zero; (ii) second, to all partners in amounts necessary to bring each of their
respective
RIBM1 Supp-34
<PAGE>
Marriott Residence Inn Limited Partnership
Notes to Financial Statements
capital account balances equal to their invested capital, as defined,
plus a 12% return on such invested capital; (iii) next, to the General Partner
in an amount necessary to bring the General Partner's capital account balance to
an amount which is equal to 2% of the gross proceeds from the sale; and (iv)
thereafter, 70% to the limited partners and 30% to the General Partner.
Proceeds from the sale of substantially all of the assets of the Partnership
will be distributed to the partners in accordance with their capital account
balances as adjusted to take into account the gain or loss resulting from such
sale.
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting.
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.
Fiscal Year
The Partnership's fiscal year ends on the Friday nearest to December 31. Fiscal
year 1996 included 53 weeks compared to 52 weeks for fiscal years 1995 and 1994.
Revenues and Expenses
Revenues represent house profit of the Inns because the Partnership has
delegated substantially all of the operating decisions related to the generation
of house profit of the Inns to the Manager. House profit reflects Inn operating
results which flow to the Partnership as property owner and represents gross Inn
sales less property-level expenses, excluding depreciation and amortization,
base, Residence Inn system and incentive management fees, property taxes,
equipment rent and other costs, which are disclosed separately in the statement
of operations.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
Land improvements 40 years
Buildings and improvements 40 years
Furniture and equipment 3 to 10 years
All property and equipment is pledged as security for the mortgage debt
described in Note 6.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual hotel basis will be less than their net book value. If a property is
impaired, its basis is adjusted to fair market value.
RIBM1 Supp-35
<PAGE>
Marriott Residence Inn Limited Partnership
Notes to Financial Statements
Income Taxes
Provision for Federal and state income taxes has not been made in the financial
statements since the Partnership does not pay income taxes but rather allocates
its profits and losses to the partners. Significant differences exist between
the net income or loss for financial reporting purposes and the net income or
loss reported in the Partnership's tax return. These differences are due
primarily to the use, for income tax purposes, of accelerated depreciation
methods, shorter depreciable lives and differences in the timing of the
recognition of base and incentive management fee expenses. As a result of these
differences, the net excess between the Partnership's net assets reported in the
accompanying financial statements and the tax basis of such net assets at
January 3, 1997 and December 29, 1995 was $15,689,000 and $12,611,000,
respectively.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the debt financing and are amortized over the term thereof. The
original mortgage debt described in Note 6 matured on April 24, 1995. Deferred
financing costs associated with the original mortgage debt totaling $2,017,000
were fully amortized at maturity and removed from the Partnership's books. Costs
incurred in connection with the mortgage debt refinancing totaled $3,303,000 and
will be amortized using the straight-line method, which approximates the
effective interest method, over the seven year term of the loan. At January 3,
1997 and December 29, 1995, accumulated amortization of deferred financing costs
totaled $575,000 and $102,000, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Statements of Financial Accounting Standards
In the first quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on its financial statements.
Reclassifications
Certain reclassifications were made to prior year financial statements to
conform to the 1996 presentation.
RIBM1 Supp-36
<PAGE>
Marriott Residence Inn Limited Partnership
Notes to Financial Statements
NOTE 3. REVENUES
Partnership revenues consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
INN SALES
Suites............................................................... $ 58,019 $ 53,945 $ 50,805
Other operating departments.......................................... 2,805 2,780 2,635
------------ ------------ -------------
60,824 56,725 53,440
------------ ------------ -------------
INN EXPENSES
Departmental direct costs
Suites............................................................ 11,756 10,839 10,060
Other operating departments....................................... 1,024 1,013 974
Other Inn operating expenses......................................... 15,960 14,804 15,101
------------ ------------ -------------
28,740 26,656 26,135
------------ ------------ -------------
REVENUES................................................................ $ 32,084 $ 30,069 $ 27,305
============ ============ =============
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
January 3, December 29,
1997 1995
------------ ------------
<S> <C> <C>
Land and improvements................................................... $ 46,441 $ 46,441
Buildings and improvements.............................................. 112,592 111,840
Furniture and equipment................................................. 35,902 33,093
------------ ------------
194,935 191,374
Less accumulated depreciation........................................... (54,663) (49,043)
------------ ------------
$ 140,272 $ 142,331
============ ============
</TABLE>
RIBM1 Supp-37
<PAGE>
Marriott Residence Inn Limited Partnership
Notes to Financial Statements
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are shown below. The fair
value of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
As of January 3, 1997 As of December 29, 1995
----------------------------- ------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Mortgage debt...................................... $ 123,519 $ 126,949 $ 129,823 $ 129,823
Incentive management fee due to Residence
Inn by Marriott, Inc. ........................... $ 19,326 $ 4,100 $ 15,960 $ 1,800
Base management fee due to Residence
Inn by Marriott, Inc. ........................... $ 1,499 $ 1,499 $ 2,014 $ 1,600
</TABLE>
The estimated fair value of debt obligations is based on the expected future
debt service payments discounted at risk adjusted rates. Base and incentive
management fees payable are valued based on the expected future payments from
operating cash flow discounted at risk adjusted rates.
NOTE 6. MORTGAGE DEBT
As of December 30, 1994, the Partnership's debt consisted of a $123,000,000
nonrecourse mortgage loan (the "Term Loan"), $5,967,000 borrowed under a $10
million revolving credit facility (the "Revolving Loan") and a $1,395,000 note
payable to Host Marriott for an expansion at the St. Louis Galleria Inn. Both
the Term Loan and the note payable to Host Marriott carried interest at a fixed
rate of 10.4% and required no principal amortization prior to maturity. The
Revolving Loan was available to provide interest payments on up to $19 million
of the principal amount of the Term Loan. Borrowings carried interest at a
floating rate equal to .5% over the one, two, three or six-month London
Interbank Offered Rate ("LIBOR") as elected by the Partnership and required no
principal amortization prior to maturity. The Partnership did not borrow under
the Revolving Loan in 1995.
The Term Loan, Revolving Loan and note payable matured on April 24, 1995. The
Term Loan and Revolving Loan went into default on the maturity date as the
Partnership was unable to secure replacement financing. Effective April 25, 1995
through August 31, 1995, the lender granted a forbearance on the Term loan and
the Revolving Loan in which both loans began to accrue interest at 10.4%.
However, effective September 1, 1995, pursuant to the loan documents, both the
Term Loan and Revolving Loan began to accrue interest at the Default Rate, as
defined, of prime plus 2.5 percentage points through October 11, 1995. Host
Marriott granted the Partnership a six-month forbearance of the note payable
upon maturity on April 24, 1995 at the original interest rate. During the
forbearance period, the Partnership was required to make monthly debt service
payments of interest only on the Term Loan and Revolving Loan and quarterly
payments of interest only on the note payable.
The Partnership's debt was refinanced on October 12, 1995 at which time the Term
Loan, Revolving Loan and note payable to Host Marriott were fully repaid with
the proceeds from a $130 million nonrecourse mortgage loan (the "Mortgage
Debt"). The Mortgage Debt is comprised of a $100 million note (the "Senior
Mortgage") which bears interest at 8.6% and a $30 million note (the "Second
Mortgage") which bears interest at 15.25% for a blended interest rate of 10.13%.
Both the Senior Mortgage and Second Mortgage require monthly amortization of
principal and mature on September 30, 2002. In addition to the required monthly
amortization, during each of the four years from 1996 through 1999, the
Partnership is required to pay, on a cash available basis, an additional $2
million annually toward principal amortization on the Senior Mortgage.
Additionally, during the entire seven year term, the Partnership has the option
to pay up to an additional $1 million principal payment annually on the Second
Mortgage and up to another $1
RIBM1 Supp-38
<PAGE>
Marriott Residence Inn Limited Partnership
Notes to Financial Statements
million optional principal payment which would be applied in a 2:1 ratio to the
Senior and Second Mortgage, respectively. The weighted-average interest rate for
1996 and 1995 was 10.13% and 10.14%, respectively. In 1994, the weighted-average
interest rate on the Revolving Loan was 4.8%. During 1996, the Partnership made
payments of $4,719,000 and $1,585,000 on the Senior Mortgage and Second
Mortgage, respectively. At January 3, 1997, the outstanding principal balance of
the Senior Mortgage and the Second Mortgage was $95,124,000 and $28,395,000,
respectively.
Host Marriott was released from their $15 million debt service guarantee
obligation on the date of the original debt maturity of April 24, 1995. No
amounts were advanced under this obligation.
Both the Senior Mortgage and the Second Mortgage are secured by the Inns, the
land on which they are located, a security interest in all personal property
associated with the Inns including furniture and equipment, inventory, contracts
and other general intangibles and an assignment of the Partnership's rights
under the management agreement.
Principal amortization of the Senior and Second Mortgages at January 3, 1997 is
as follows (in thousands):
<TABLE>
<S> <C>
1997....................................................$ 4,943
1998.................................................... 5,503
1999.................................................... 6,319
2000.................................................... 5,231
2001.................................................... 6,252
Thereafter.............................................. 95,271
---------
$ 123,519
=========
</TABLE>
NOTE 7. MANAGEMENT AGREEMENT
The Manager operates the Inns pursuant to a long-term management agreement with
an initial term expiring December 28, 2007. The Manager has the option to extend
the agreement on one or more of the Inns for up to five 10-year terms. The
Manager earns a base management fee equal to 2% of gross revenues. Through 1990,
payment of the base management fee was subordinated to qualifying debt service
payments and retention by the Partnership of annual cash flow from operations of
$6,626,263. Deferred base management fees are payable from operating cash flow,
as defined. Beginning in 1991 and thereafter, base management fees are paid
currently. Pursuant to the terms of the management agreement, the Partnership
paid deferred base management fees of $515,000 and $491,000 for 1996 and 1995,
respectively.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of operating profit, as defined (20% in any year in which operating profit is
equal to or greater than $23.5 million). The incentive management fee is payable
out of 50% of cash flow from operations remaining after payments of qualifying
debt service, retention by the Partnership of annual cash flow from operations
of $6,626,263 and the deferred base management fee. After the Partnership has
retained an additional 5% return, the incentive management fee is payable out of
75% of the remaining cash flow from operations. Through 1989, the Manager was
not entitled to accrue any unpaid incentive management fees. Incentive
management fees earned after 1989 are payable in the future from operating cash
flow, as defined. Unpaid incentive management fees are paid from cash flow
available for incentive management fees following payment of the then current
incentive management fees. Through January 3, 1997, no incentive management fees
have been paid to the Manager, however, approximately $300,000 is expected to be
paid during 1997.
The management agreement also provides for a Residence Inn system fee equal to
4% of suite revenues. In addition, the Manager is reimbursed for each Inn's pro
rata share of the actual costs and expenses incurred by the Manager in providing
certain services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. As franchisor of the Residence Inn by Marriott system,
the Manager maintains a marketing fund to pay the costs associated with certain
system-wide advertising, promotional, and public relations materials and
programs, and operating a toll-free reservation system. Each Inn contributes
2.5% of suite revenues to the marketing fund. During 1996, 1995
RIBM1 Supp-39
<PAGE>
Marriott Residence Inn Limited Partnership
Notes to Financial Statements
and 1994, the Partnership paid a Residence Inn system fee of $2,321,000,
$2,158,000 and $2,032,000, reimbursed the Manager for $1,031,000, $988,000 and
$982,000 of Chain Services and contributed $1,450,000, $1,349,000 and $1,270,000
to the marketing fund, respectively. Chain Services and contributions to the
marketing fund are included in other Inn operating expenses in Note 3.
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of the management
agreement, the working capital will be returned to the Partnership. The
individual components of working capital controlled by the Manager are not
reflected in the Partnership's balance sheet. As of January 3, 1997 and December
29, 1995, $775,000 has been advanced to the Manager for working capital.
The management agreement provides for the establishment of a property
improvement fund for the Inns which provides for the replacement of furniture,
fixtures and equipment. Contributions to the property improvement fund are equal
to 5% of gross revenues of each Inn. Contributions to the property improvement
fund for 1996, 1995 and 1994 were $3,041,000, $2,836,000 and $2,672,000,
respectively.
RIBM1 Supp-40
<PAGE>
Marriott Residence Inn Limited Partnership
Condensed Balance Sheet
September 12, 1997
(Unaudited, in thousands)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net...............................................$ 139,781
Due from Residence Inn by Marriott, Inc. ................................. 2,041
Deferred financing costs, net............................................. 2,396
Property improvement fund................................................. 2,224
Cash and cash equivalents................................................. 5,482
-----------
$ 151,924
===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt.............................................................$ 121,360
Management fees due to Residence Inn by Marriott, Inc. ................... 22,252
Accounts payable and accrued expenses..................................... 1,303
-----------
Total Liabilities..................................................... 144,915
-----------
PARTNERS' CAPITAL
General Partner .......................................................... 146
Limited Partners.......................................................... 6,863
-----------
Total Partners' Capital............................................... 7,009
-----------
$ 151,924
===========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
RIBM1 Supp-41
<PAGE>
Marriott Residence Inn Limited Partnership
Condensed Statements of Operations
For the Thirty-six Weeks Ended September 12, 1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUES............................................................ $ 23,225 $ 22,825
----------- -----------
OPERATING COSTS AND EXPENSES
Depreciation and amortization..................................... 3,681 4,127
Incentive management fee.......................................... 2,427 2,382
Residence Inn system fee.......................................... 1,669 1,629
Property taxes.................................................... 1,634 1,633
Base management fee............................................... 877 854
Equipment rent and other.......................................... 846 840
----------- -----------
11,134 11,465
----------- -----------
OPERATING PROFIT.................................................... 12,091 11,360
Interest expense.................................................... (9,008) (9,251)
Interest income..................................................... 217 251
----------- -----------
NET INCOME.......................................................... $ 3,300 $ 2,360
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
RIBM1 Supp-42
<PAGE>
Marriott Residence Inn Limited Partnership
Condensed Statements of Cash Flows
For the Thirty-six Weeks Ended September 12,1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.....................................................$ 3,300 $ 2,360
Noncash items.................................................. 5,433 6,120
Change in operating accounts................................... (269) (2,091)
------- -------
Cash provided by operations.................................. 8,464 6,389
------- -------
INVESTING ACTIVITIES
Additions to property and equipment............................ (3,189) (2,767)
Change in property improvement fund............................ 543 521
------- -------
Cash used in investing activities............................ (2,646) (2,246)
------- -------
FINANCING ACTIVITIES
Capital distributions.......................................... (1,611) (3,313)
Principal repayment on mortgage debt........................... (2,159) (1,655)
Financing costs................................................ 5 (69)
------- -------
Cash used in financing activities............................ (3,765) (5,037)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. 2,053 (894)
CASH AND CASH EQUIVALENTS at beginning of period................. 3,429 7,271
------- -------
CASH AND CASH EQUIVALENTS at end of period.......................$ 5,482 $ 6,377
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.........................................$ 9,314 $ 9,818
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
RIBM1 Supp-43
<PAGE>
Marriott Residence Inn Limited Partnership
Notes to Condensed Financial Statements
(Unaudited)
1. The accompanying condensed financial statements have been prepared by
Marriott Residence Inn Limited Partnership (the "Partnership") without
audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted from the accompanying
statements. The Partnership believes the disclosures made are adequate to
make the information presented not misleading. However, the condensed
financial statements should be read in conjunction with the Partnership's
audited financial statements for the fiscal year ended January 3, 1997
included in this Prospectus Supplement. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
The net income of the Partnership is allocated 99% to the limited partners
and 1% to Marriott RIBM One Corporation (the "General Partner").
Significant differences exist between the net income for financial
reporting purposes and the net income for Federal income tax purposes.
These differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods and shorter depreciable lives of the
assets, and differences in the timing of the recognition of incentive
management fee expense.
2. Revenues represent house profit of the Partnership Inns since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Inns to Residence Inn by
Marriott, Inc. (the "Manager"), a wholly owned subsidiary of Marriott
International, Inc. House Profit reflects the net revenues flowing to the
Partnership as property owner and represents Inn operating results less
property-level expenses, excluding depreciation, base, system and incentive
management fees, property taxes, insurance and certain other costs, which
are classified as operating costs and expenses. Revenues consist of the
following (in thousands):
<TABLE>
<CAPTION>
Thirty-six Weeks Ended
-------------------------------------
September 12, September 6,
1997 1996
------------- ------------
<S> <C> <C>
INN SALES
Suites....................................... $ 41,738 $ 40,725
Other operating departments.................. 2,118 1,954
----------- -----------
43,856 42,679
----------- -----------
INN EXPENSES
Departmental direct costs
Suites..................................... 8,569 8,110
Other operating departments................ 810 744
Other Inn operating expenses................. 11,252 11,000
----------- -----------
20,631 19,854
----------- -----------
REVENUES....................................... $ 23,225 $ 22,825
=========== ===========
</TABLE>
3. Pursuant to the management agreement, the Manager has not been paid any
incentive management fees year-to-date since the Partnership's Inns did not
meet the performance criteria specified in the management agreement.
However, because these fees have been earned and may be paid in the future,
they have been accrued in the financial statements.
RIBM1 Supp-44
<PAGE>
CRF LODGING COMPANY, L.P.
Supplement Dated ________ __, 1998 for
Prospectus/Consent Solicitation Statement Dated ______ __ , 1998 for
Marriott Residence Inn II Limited Partnership
On the terms described in the Prospectus/Consent Solicitation Statement
(the "Consent Solicitation") dated _________ __, 1998, of which this Supplement
(the "Supplement") is a part, CRF Lodging Company, L.P. (the "Company"), a newly
formed Delaware limited partnership, whose sole general partner will be CRF
Lodging Trust ("CRFLT"), a Maryland real estate investment trust, is proposing
the consolidation (the "Consolidation") of Marriott Residence Inn II Limited
Partnership ("RIBM2"), a Delaware limited partnership, and up to five other
limited partnerships (the "Hotel Partnerships") into an umbrella partnership
real estate investment trust (an "UPREIT") in order to consolidate and expand
the limited service and extended-stay hotel businesses currently conducted
separately by the Hotel Partnerships and Host Marriott Corporation ("Host").
Limited Partners of RIBM2 are being asked to approve the Consolidation as
described in the Consent Solicitation. Upon approval of the Consolidation, a
newly formed direct or indirect wholly owned subsidiary of the Company (the
"Merger Partnership") will be merged with and into RIBM2 with RIBM2 being the
surviving entity. In the merger, partners of RIBM2 will receive units of limited
partnership interest in the Company ("Units") in exchange for their interests in
RIBM2.
Following the Consolidation, the Company will own a portfolio of up to
221 limited service and extended-stay hotels operating under three Marriott
brand names (Courtyard by Marriott(R), Residence Inn by Marriott(R) and
Fairfield Inn by Marriott(R)) (the "Hotels"). Concurrently with the
Consolidation, CRFLT will consummate an initial public offering (the "Offering")
of its common shares of beneficial interest (the "Common Shares") and contribute
the proceeds thereof to the Company in exchange for Units. Following the
Offering, CRFLT anticipates that its Common Shares will be listed on the New
York Stock Exchange ("NYSE"). Beginning one year after the Consolidation (the
"Initial Holding Period"), Limited Partners will have the right to redeem their
Units and receive, at the election of CRFLT, either Common Shares on a
one-for-one basis (subject to adjustment) or cash in an amount equal to the
market value of such shares (the "Unit Redemption Right"). CRFLT expects to
qualify as a real estate investment trust (a "REIT") under the Internal Revenue
Code of 1986, as amended (the "Code").
Marriott RIBM Two Corporation (the "Hotel Partnership GP"), the general
partner of RIBM2, believes that the terms of the Consolidation provide
substantial benefits and are fair to the Limited Partners of RIBM2 and recommend
that all Limited Partners of RIBM2 vote FOR the Consolidation.
Limited Partners of RIBM2 should consider the risks and other
considerations described more fully in the Consent Solicitation under "Risk
Factors," including the following:
. There is uncertainty at the time of voting as to the Hotel
Partnerships that will participate in the Consolidation and thus,
uncertainty as to the size and leverage of the Company until after the
end of the Solicitation Period.
. The Consolidation involves a fundamental change in the nature of a
Limited Partner's investment from an investment in a fixed portfolio,
limited life partnership where a Limited Partner could receive a
distribution upon liquidation of the partnership into an investment in
a public real estate company which expects to acquire additional
hotels and where a Limited Partner likely may realize value for his
investment only through a sale of Common Shares received pursuant to
the Unit Redemption Right.
. As a result of the Consolidation, a Limited Partner of RIBM2, which
owns 23 Residence Inns, will own an interest in a much larger portfolio
of Hotels, including up to 121 Courtyard
RIBM2 Supp-1
<PAGE>
Hotels, 27 additional Residence Inns and 50 Fairfield Inns, and a
material adverse change affecting any of the Company's assets will
affect all Limited Partners regardless of whether a particular Limited
Partner previously held an interest in such asset.
. No independent representative was retained to negotiate on behalf of
the Limited Partners of RIBM2 or the other Hotel Partnerships. If one
had been, the terms of the Consolidation may have been more favorable
to the Limited Partners of RIBM2 or the other Hotel Partnerships.
. Conflicts of interest exist in connection with the structuring of the
Consolidation, including the fact that subsidiaries of Host serve as
the general partners of all of the Hotel Partnerships and other
subsidiaries of Host will serve as the Lessees of the Hotels. Such
conflicts of interest may result in decisions that do not fully reflect
the interests of all Partners in the Hotel Partnerships.
. Host and its subsidiaries will realize substantial benefits from the
Consolidation, including receipt of Units having an estimated value of
at least $____ million in exchange for their Hotel Partnership
Interests in RIBM2 (representing a 1% general partnership interest)
($____ million in the aggregate for their Hotel Partnership Interests
in all of the Hotel Partnerships) (based upon the estimated Exchange
Values), $____ million in cash from the sale of two limited service and
extended-stay hotels owned by Host (the "Acquisition Hotels") based
upon their aggregate Appraised Value, as adjusted, economic benefits
under the Leases and, because the Consolidation has been structured to
permit all Partners (including the Limited Partners) to defer
recognition of gain, the ability to defer significant potential tax
liabilities attributable to taxable gain in excess of sale proceeds of
approximately $___ million.
. The allocation of Units among the Hotel Partnerships is based upon
their respective Exchange Values, the calculation of which involves
numerous assumptions and estimates. There is no assurance that the
value of the Units to be received in the Consolidation equals the fair
market value of the Hotels and other assets contributed by the Hotel
Partnerships.
. Current federal income tax law prohibits the Company from operating
the Hotels directly. Therefore, the Company will be substantially
dependent upon the Lessees and Managers for its revenue and the Company
will have limited control over the operations of the Hotels.
. Approval of the Consolidation by Limited Partners holding a majority of
the outstanding Partnership Units of RIBM2 will bind all Limited
Partners of RIBM2.
. Limited Partners of Hotel Partnerships who vote against the
Consolidation and comply with certain specified procedures ("Dissenting
Partners") will not have a right to receive cash based on an appraisal
of their Hotel Partnership Interests but instead can elect to tender
the Units they receive in the Consolidation in exchange for unsecured
notes (the "Notes"), for which there will be no public market, in an
amount equal to the Liquidation Value (as defined herein) of their
Hotel Partnership Interests. As of September 12, 1997, on a pro forma
basis assuming the Full Consolidation Scenario (as defined herein), the
Company would have had aggregate consolidated liabilities to which the
Notes were effectively subordinated of approximately $939 million.
. There are limitations on actual or constructive ownership of more than
9.9% of the number or value of CRFLT's outstanding Common Shares.
. Taxation of CRFLT as a regular corporation if it fails to qualify as a
REIT, and taxation of the Company as a corporation if it fails to
qualify as a partnership for federal income tax purposes, either of
which would, among other things, result in a decrease in cash available
for distribution and a material reduction in the value of Common Shares
and Units.
The effects of the Consolidation may be different for Limited Partners
of the various Hotel Partnerships. This Supplement has been prepared to
highlight for the Limited Partners of RIBM2 (the "RIBM2 Limited Partners") the
risks, benefits, effects and fairness of the Consolidation and to provide
additional information specific to RIBM2. Supplements have also been prepared
for each of the other Hotel Partnerships. This Supplement, together with the
supplements of the other Hotel Partnerships (collectively, the "Supplements"),
are a part of the Consent Solicitation Statement. Upon receipt of a written
request by a Limited Partner or his representative so designated in writing, the
Hotel Partnership GP will send a copy of any Supplement without charge. All
requests for a copy of a Supplement should be directed to:_____________________.
RIBM2 Supp-2
<PAGE>
The Consolidation is subject to various conditions, one of which is
that at least four Hotel Partnerships, including CBM1, CBM2 and RIBM1, must
approve the Consolidation (the "Minimum Participation Condition"). See "The
Consolidation -- Conditions to the Consolidation" in the Consent Solicitation.
For purposes of this Supplement, the term Minimum Participation shall refer to
the participation in the Consolidation by each of those Hotel Partnerships and
RIBM2.
All cross-references refer to the Consent Solicitation unless stated
otherwise. Capitalized terms not defined herein shall have the meaning set forth
in the Consent Solicitation. The information contained herein, unless otherwise
indicated, assumes the Consolidation occurs with an Offering yielding gross
proceeds of $800 million, all Hotel Partnerships participate, no Notes are
issued and $539 million of outstanding indebtedness is repaid (the "Full
Consolidation Scenario").
Risk Factors
In deciding whether to approve the Consolidation, RIBM2 Limited
Partners should consider certain risks and other factors. The Hotel Partnership
GP believes that RIBM2 Limited Partners should particularly consider the
following, which should be read in conjunction with the information in the
Consent Solicitation under "Risk Factors" and "Federal Income Tax
Considerations."
Uncertainties at the Time of Voting. There are several uncertainties at
the time the Limited Partners must vote on the Consolidation, including (i) the
identity of the Hotel Partnerships that will participate in the Consolidation
and, thus, the Hotels that will be acquired by the Company (which will affect
such matters as the size, scope and leverage of the Company), (ii) the Exchange
Value for each Hotel Partnership (which will be adjusted for changes in working
capital, indebtedness and various other items prior to the Closing Date) and
(iii) the costs of prepaying certain indebtedness of the Hotel Partnerships
(which costs will be determined based upon the interest rates on applicable U.S.
Treasuries at the time of the prepayment). See "Determination of Exchange Values
and Allocation of Units."
Fundamental Change in Nature of Investment; Potential Underperformance.
The Consolidation involves a fundamental change in the nature of a Limited
Partner's investment from an investment in which a Limited Partner participates
in the profits from the operation of the Hotels and is entitled to receive
distributions from any net proceeds of a sale or refinancing of RIBM2's assets,
to an investment in an entity who will receive rents from lessees which will
bear the risks and receive the benefits from the hotels' operation and Limited
Partners likely may realize the value from their investment only through the
exercise of the Unit Redemption Right and sale of the Common Shares received as
a result thereof and not from liquidation proceeds. Continuing RIBM2 would allow
RIBM2 Limited Partners an opportunity to eventually receive liquidation
proceeds from the sale of RIBM2's Hotels, and an RIBM2 Limited Partner's share
of these sale proceeds could be higher than the amount a limited partner might
realize from the sale of Units or exercise of the Unit Redemption Right (or
payments on Notes received by any Dissenting Partner). In addition, the Company
has the ability to acquire additional hotels, can reinvest proceeds from sales
or refinancings of existing hotels in additional hotels and has a general
partner that is a publicly traded entity. An investment in the Company may not
outperform an investment in RIBM2. See "Comparison of Hotel Partnership
Interests, Units and Common Shares."
Exposure to Risks from Other Hotels and Brands. As a result of the
Consolidation, Partners of RIBM2, which owns 23 Residence Inns, will own
interests in a much larger partnership with a broader range of assets, including
up to 121 Courtyard Hotels, 27 additional Residence Inns and 50 Fairfield Inns.
A material adverse change affecting one of the Company's assets will affect all
Limited Partners regardless of whether a particular Limited Partner previously
was an investor in such affected asset. In addition, each of the three Marriott
brands which initially will comprise the Company operates in a different market
segment and targets
RIBM2 Supp-3
<PAGE>
different consumers and, as a result, may be affected differently in different
economic and market conditions.
Limitations on Sales or Refinancings of the Courtyard Hotels. Because
of substantial taxable gains that would be recognized by the Hotel Partnership
GPs of CBM1 and CBM2, which are subsidiaries of Host, none of the assets of CBM1
and CBM2 (the "Courtyard Hotels") can be sold for a period of __ years from the
Closing Date of the Consolidation (other than pursuant to a tax-deferred
exchange) without the consent of Host (the "Lock-out Provisions"). Such Lock-out
Provisions are only applicable so long as Host holds the Units received in the
Consolidation relating to its Hotel Partnership Interests in CBM1 and CBM2 and
has not transferred, sold or otherwise disposed of such Units in a taxable
transaction. In addition, the Partnership Agreement contains certain
restrictions regarding the ability of the Company to repay or refinance
indebtedness secured by the Courtyard Hotels. These restrictions will limit the
ability of the Company to change its portfolio in response to market conditions
and to the extent the Courtyard Hotels do not perform as well as the Residence
Inns or Fairfield Inns in its portfolio, the Company will have limited
flexibility to dispose of any such underperforming assets even if such disposal
would be in the best interests of the Company.
RIBM2 Supp-4
<PAGE>
Conflicts of Interest in the Consolidation. Conflicts of interest exist
in connection with the Consolidation which include conflicts arising from the
fact that subsidiaries of Host serve as the Hotel Partnership GP of RIBM2 (which
holds a 1% general partner interest in RIBM2) and as Hotel Partnership GPs of
the other Hotel Partnerships (with varying interests) and other subsidiaries of
Host will serve as Lessees of the Hotels at the same time as the Hotel
Partnership GP is recommending the Consolidation is involved in establishing the
terms and structure of the Consolidation, including the structuring of the
Leases. In addition, Host and its subsidiaries will receive substantial benefits
from the Consolidation. These conflicts of interest may result in decisions that
do not fully reflect the interests of all Limited Partners of RIBM2 or the other
Hotel Partnerships.
Substantial Benefits to Related Parties. The Consolidation will permit
Host to continue to be involved in the ownership and operation of the Hotels and
realize substantial benefits therefrom. Host and its subsidiaries will receive
Units with an estimated value of at least $____ million in exchange for their
Hotel Partnership Interests in RIBM2 ($____ million in the aggregate for their
Hotel Partnership Interests in all of the Hotel Partnerships) (based upon the
estimated Exchange Values) and $___ million in cash from the sale of the
Acquisition Hotels to the Company (based upon their aggregate Appraised Value,
as adjusted). Subsidiaries of Host will be the Lessees of the Hotels and may
receive significant economic benefits in connection with the Leases, including
the receipt of income to the extent sales from the Hotels exceed operating costs
and expenses payable by the Lessees, management fees and rental payments to the
Company. Because the Consolidation has been structured to permit all Partners
(including the Limited Partners) to defer recognition of gain, the Consolidation
will permit the Hotel Partnership GPs of CBM1 and CBM2, which are subsidiaries
of Host, to defer significant tax liabilities (estimated at approximately $____
million) that otherwise would be incurred upon any sale of the Courtyard Hotels
(other than in a tax-deferred exchange such as the Consolidation) or upon
substantial reductions in the amount of debt now secured by the Courtyard
Hotels. In the case of the Courtyard Hotels, the Partnership Agreement imposes
certain restrictions on the sale of such Hotels and the refinancing, prepayment
or reduction of the debt secured by those Hotels for __ years from the Closing
Date of the Consolidation without the consent of Host, in order to defer the
recognition of gain, which gain would be disproportionately borne by the Hotel
Partnership GPs of CBM1 and CBM2 because of prior allocations to them of tax
losses. The Company also will repay, either in cash or Common Shares, at the
election of a subsidiary of Host, a loan of approximately $13 million owed to
such subsidiary of Host by CBM1.
Method of Allocation of Units. The allocation of Units among the Hotel
Partnerships will be based upon their respective Exchange Values, which in turn
are based upon the Appraised Value of each Hotel Partnership's Hotels as
adjusted for such things, among others, as net non-real estate assets (including
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables) and cash reserves) ("Net other Assets"), existing
indebtedness (including an adjustment for prepayment and defeasance costs),
deferred maintenance and FF&E shortfalls, deferred management fees and
Consolidation Expenses. There is, however, no assurance that the value of the
Units to be received by participants in the Consolidation will equal the fair
market value of the Hotels and other assets contributed by such participants.
Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the Limited Partners of RIBM2 or any of the
other Hotel Partnerships. The Hotel Partnership GP has obtained an opinion from
American Appraisal Associates, an independent, nationally recognized hotel
valuation and financial advisory firm ("AAA"), as to (i) the fairness, from a
financial point of view, to the Limited Partners of the methodologies used to
determine the Exchange Value of RIBM2 and each other Hotel Partnership and
allocation of Units among each of the Hotel Partnerships in the Consolidation,
(ii) the fairness and reasonableness, from the standpoint of each Hotel
Partnership, of the underlying assumptions used to determine the Exchange Value
of each Hotel Partnership and the purchase price of each Acquisition Hotel
(including, without limitation, the assumptions used to determine the various
adjustments to the Appraised Values of the Hotels), (iii) the fairness and
reasonableness to the Limited Partners of each Hotel Partnership of the
methodology used to allocate Units received by each Hotel Partnership among its
general and Limited Partners, (iv) the fairness and reasonableness, from the
standpoint of each Hotel Partnership, of the methodologies and underlying
assumptions used to determine the Continuation Value and the Liquidation Value
of each Hotel Partnership (including, without limitation, the assumptions used
to determine the various adjustments to the Appraised Values of the Hotels) and
(v) the fairness and reasonableness, from the Company's standpoint, of the
economic terms of the Leases. However, AAA has not negotiated with the Hotel
Partnership GP and has not participated in establishing the terms of the
Consolidation. Consequently, the terms and conditions of the Consolidation may
have been more favorable to RIBM2 Limited Partners or the Limited Partners of
the other Hotel Partnerships if such terms and conditions were the result of
arm's length negotiations.
Lack of Control over Hotel Operations. Due to current federal income
tax law prohibitions on a REIT's ability to derive revenues directly from the
operation of a hotel, the Company will lease its Hotels to the Lessees, which
will operate the Hotels by continuing to retain the Managers pursuant to the
Management Agreements. Neither CRFLT nor the Company will operate the Hotels or
participate in the decisions affecting the daily operations of the Hotels.
Although the Company will have certain rights as lessor under the Leases
(including control over certain owner-funded capital expenditures), neither
CRFLT nor the Company will have the authority to require the Lessees or the
Managers to operate the Hotels in any particular manner or to govern any
particular aspect of their operation.
Expiration of Leases. The Leases expire at the end of __ years and
there can be no assurance that such Leases will be renewed. If such Leases are
terminated at the end of their terms, the Company will be required to find other
lessees (which lessees must be satisfactory to the Managers). There can be no
assurance as to whether satisfactory lessees could be found or as to the terms
or conditions on which the Company would be able to enter into new leases with
such lessees.
The Company's Dependence on the Lessees and Managers for Revenue. The
Company will be dependent upon the Lessees for its revenue, and the Lessees'
ability to pay rent to the Company will be substantially dependent upon the
Managers' ability to operate the Hotels profitably.
No Limitation on Debt. There are no limitations in CRFLT's or the
Company's organizational documents which limit the amount of indebtedness either
may incur.
RIBM2 Supp-5
<PAGE>
Risks of Leverage. The Company has substantial indebtedness. As of
September 12, 1997, on a pro forma basis assuming the Full Consolidation
Scenario, the Company had outstanding indebtedness totaling $780 million. The
Company's business is capital intensive and the Company will have significant
capital requirements in the future. The Company's leverage level could affect
its ability to (i) obtain financing in the future, (ii) undertake refinancings
on terms and subject to conditions deemed acceptable by the Company, (iii) make
distributions to partners, (iv) pursue its acquisition strategy or (v) compete
effectively or operate successfully under adverse economic conditions.
Original Anticipated Holding Period About to Expire. In the original
offering document of RIBM2, the Hotel Partnership GP stated that it expected to
sell all of RIBM2's Hotels before the end of 1998. An RIBM2 Limited Partner's
share of the proceeds from a liquidation of RIBM2 could be higher than what a
limited partner might realize, following the Initial Holding Period, from a sale
of Common Shares received pursuant to the Unit Redemption Right.
Rental Revenues from Hotels Subject to Rights of Lenders. In accordance
with the loan agreements with respect to outstanding indebtedness of RIBM2 and
the other Hotel Partnerships, the rental revenues received by the Company under
the Leases will first be used to satisfy the debt service on such outstanding
indebtedness and any cash flow remaining thereafter will be available to satisfy
all other obligations of the Company (including paying property taxes and
insurance, funding the required FF&E reserves for the Hotels and capital
improvements and to make distributions to partners (including CRFLT).
Ownership Limitations. No person may own in excess of 9.9% of the
number or value of outstanding Common Shares of CRFLT, without the consent of
the Board of Trustees of CRFLT, in its sole and absolute discretion. During the
period of time subsidiaries of Host are acting as Lessees, Host and its
affiliates are prohibited from owning in excess of 4.9% (by value) of the
Company.
Majority Vote of RIBM2 Limited Partners Binds All RIBM2 Limited
Partners. Approval of the Consolidation by RIBM2 Limited Partners holding a
majority of the outstanding Partnership Units of RIBM2 will cause RIBM2 to
participate in the Consolidation, and such approval will bind all RIBM2 Limited
Partners, including RIBM2 Limited Partners who voted against or abstained from
voting with respect to the Consolidation.
Effect of Subsequent Events upon Recognition of Gain. Even though the
RIBM2 Limited Partners who do not receive Notes as a result of exercising
Dissenters' Rights generally are not expected to recognize significant taxable
gain at the time of the Consolidation, there are a variety of events and
transactions (including the sale of one or more of the Hotels or the reduction
of indebtedness securing one or more of the Hotels) that could cause an RIBM2
Limited Partner to recognize all or a part of the gain that otherwise has been
deferred through the Consolidation. See "Federal Income Tax Considerations --
Tax Consequences of the Formation of the Company -- Effect of Subsequent
Events." The Partnership Agreement does not impose any restrictions on the
Company's ability to dispose of the Hotels or to refinance debt secured by the
Hotels, other than with respect to the Courtyard Hotels (which restriction can
be waived with the consent of Host). In addition, the Partnership Agreement
expressly provides that CRFLT, as general partner of the Company, is not
required to take into account the tax consequences of the limited partners in
deciding whether to cause the Company to undertake specific transactions, and
the limited partners have no right to approve or disapprove such transactions.
See "Description of Units -- Sales of Assets and Lock-out Provisions."
Failure of the Company to Qualify as a Partnership for Tax Purposes.
Taxation of the Company as a corporation if it fails to qualify as a
partnership, and the Company's subsequent liability for federal, state and local
taxes on its income and property, would, among other things, have the effect of
reducing cash available for distribution to holders of Units, would cause CRFLT
to fail to qualify as a REIT for tax purposes, and could cause the holders of
Units to recognize taxable gain at the time the Company ceases to qualify as a
partnership.
Failure of CRFLT to Qualify as a REIT for Tax Purposes. Taxation of
CRFLT as a corporation if it fails to qualify as a REIT, and CRFLT's subsequent
liability for federal, state and local taxes on its income and property, would,
among other things, have the effect of reducing cash available for distribution
to CRFLT's shareholders and reducing materially the value of the Common Shares
and Units.
State and Local Taxes. RIBM2 Limited Partners holding Units may be
subject to state and local taxation in a number of jurisdictions in which the
Company directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this regard, immediately
following the Consolidation, the Company will own properties in 35 states across
the United States. Currently, RIBM2 owns properties in 16 states.
RIBM2 Supp-6
<PAGE>
Dissenting Partners Have No Cash Appraisal Rights and May Elect to
Receive Only Notes. RIBM2 Limited Partners who vote against the Consolidation
and comply with certain specified procedures ("Dissenting Partners") will not
have a right to receive cash based on an appraisal of their interests in RIBM2
or otherwise, but instead can elect to tender the Units they receive in the
Consolidation in exchange for unsecured seven-year notes (the "Notes"), for
which there will be no public market, in an amount equal to the Liquidation
Value of their Hotel Partnership Interests. If the Notes are sold, they may sell
at prices substantially below their issuance price. Noteholders are likely to
receive the full face amount of the Notes only if they hold the Notes to
maturity, which is approximately seven years after the Consolidation, or if the
Company repays or refinances the Notes at or prior to maturity or realizes net
sales or excess refinancing proceeds from Hotels owned by a Noteholder's former
Hotel Partnership. Because the Notes are unsecured obligations of the Company,
they will be effectively subordinate to all secured debt of the Company and all
obligations of the Hotel Partnerships which will be the owners of the Hotels. As
of September 12, 1997, on a pro forma basis assuming the Full Consolidation
Scenario, the Company had aggregate consolidated liabilities to which the Notes
were effectively subordinated of approximately $939 million. See "Rights of
Dissenting Partners" and "Description of the Notes."
Expected Benefits of the Consolidation
The Hotel Partnership GP believes that participating in the
Consolidation would likely be beneficial to the RIBM2 Limited Partners for the
reasons set forth below. This information is qualified by and should be read in
conjunction with the information in the Consent Solicitation under "Background
and Reasons for the Consolidation -- Expected Benefits of the Consolidation."
These benefits, which should be viewed as alternatives to continuing the
business and operations of RIBM2, are expected to include:
. Enhanced Liquidity of Investment. The Consolidation will offer
RIBM2 Limited Partners significantly enhanced liquidity with
respect to their investments in RIBM2 because, after expiration of
the Initial Holding Period, RIBM2 Limited Partners would be able
to exercise their Unit Redemption Right (subject to certain
limited exceptions) and receive, at CRFLT's election, either
freely tradable Common Shares of CRFLT or the cash equivalent
thereof. The exercise of the Unit Redemption Right, however, would
result in recognition of taxable income or gain at that time.
. Public Market Valuation of Assets. The Hotel Partnership GP
believes that the public market valuations of the equity
securities of many publicly traded real estate companies,
including REITs that focus on the lodging industry, are in part
based upon the growth potential of such companies and currently
exceed the private market values of their real estate assets.
There can be no assurance, however, that the Common Shares of
CRFLT will trade at a premium to the private market values of the
Hotels or that the relative pricing differential will not change
or be eliminated in the future.
RIBM2 Supp-7
<PAGE>
. Regular Quarterly Cash Distributions. The Hotel Partnership
GP expects that the Company will make regular quarterly cash
distributions to holders of Units in proportion to their
percentage interests in the Company. While these distributions
may not be higher than RIBM2's current distributions, the
ability to receive distributions quarterly and in regular
amounts would be enhanced.
. Substantial Tax Deferral. The Hotel Partnership GP expects
that RIBM2 Limited Partners who do not exercise Dissenters'
Rights generally should be able to obtain the benefits of the
Consolidation while continuing to defer recognition for
federal income tax purposes of at least a substantial portion,
if not all, of the gain with respect to their interests in
RIBM2 that otherwise would be recognized in the event of a
liquidation of RIBM2 or a sale or other disposition of its
Hotels in a taxable transaction. Thereafter, such RIBM2
Limited Partners generally should be able to defer at least a
substantial portion of such built-in gain until they elect to
exercise their Unit Redemption Right or the Hotels currently
owned by RIBM2 are sold or otherwise disposed of in a taxable
transaction by the Company. The federal income tax
consequences of the Consolidation are highly complex and, with
respect to each RIBM2 Limited Partner, are dependent upon many
variables, including the particular circumstances of such
RIBM2 Limited Partner. See "Federal Income Tax Considerations
-- Tax Consequences of the Formation of the Company" in the
Consent Solicitation. Each RIBM2 Limited Partner is urged to
consult with his own tax advisors as to the consequences of
the Consolidation in light of his particular circumstances.
. Risk Diversification. The consolidation of the Hotels, as
well as future hotel acquisitions by the Company, will
diversify the investment risks to RIBM2 Limited Partners over
a broader group of hotels, geographic locations, range of
product types and market segments and will reduce the
dependence of an investment upon the performance of, and the
exposure to the risks associated with, the 23 Residence Inns
currently owned by RIBM2 and the single market segment
(extended-stay) in which RIBM2 currently operates.
. Reduction in Leverage and Interest Costs. Upon consummation of
the Consolidation and the Offering, it is expected that the
aggregate amount of consolidated indebtedness of the Company
will be reduced, by application of a portion of the net
proceeds from the Offering, by between approximately $390
million and $539 million (excluding prepayment and defeasance
costs which also will be required to be paid), depending upon
the Hotel Partnerships which participate in the Consolidation
and the proceeds raised in the Offering, resulting in
significant interest and debt service savings and reduced
overall leverage levels for Limited Partners of the Hotel
Partnerships. The current outstanding indebtedness of RIBM2
will remain outstanding following the Consolidation. The
Company will be less leveraged than RIBM2 is currently.
. Growth Potential. The Hotel Partnership GP believes that
substantial opportunities exist to acquire or develop limited
service and extended-stay hotel properties at attractive
prices and that RIBM2 is not in a position to take advantage
of such opportunities because of its lack of access to
additional sources of capital on favorable terms and
restrictions on additional acquisitions and development
imposed by its partnership agreement. In addition, the
Company's structure and capitalization as part of an UPREIT
should provide it with substantial flexibility to structure
acquisitions of additional hotels utilizing debt, cash, Units
or Common Shares (or any combination thereof), which may
permit the Company to structure acquisitions of hotel
properties on an income tax-deferred basis to sellers.
RIBM2 Supp-8
<PAGE>
. Greater Access to Capital. With publicly traded securities, a
larger base of assets and a greater equity value than RIBM2
individually, CRFLT expects to have greater access to the capital
necessary for funding the operations of the Company and
consummating acquisitions on more attractive terms than would be
available to RIBM2 individually. This greater access to capital
should provide greater financial stability to the Company and
reduce the level of risk associated with refinancing existing
loans upon maturity, as compared to RIBM2 individually.
Determination of Exchange Values and Allocation of Units
The Company and the Hotel Partnership GP established the Exchange Value
for the equity interests in RIBM2 by (i) obtaining an independent appraisal of
the value of the Hotels owned by RIBM2, as of ______ __, 1998 (the "Appraised
Value"), as disclosed below; (ii) adding the amount of other assets (such as
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables) and cash reserves), net of liabilities (excluding
mortgage and other debt and deferred management fees) ("Net Other Assets") as of
__________, 199_ (the "Initial Valuation Date"); (iii) subtracting the estimated
balance of the mortgage debt owed by RIBM2 as of June 30, 1998, which is the
estimated closing date for the Consolidation; (iv) subtracting the estimated
balance of other debt of RIBM2 as of June 30, 1998; (v) adjusting for the
estimated prepayment and defeasance costs; (vi) subtracting the amount of
deferred management fees payable to the Manager under the RIBM2 Management
Agreement for RIBM2's Hotels; (vii) subtracting an amount equal to the estimated
cost to complete any deferred maintenance items identified in the engineer's
report relating to RIBM2's Hotels; (viii) subtracting an amount equal to the
estimated cost (if any) of bringing the condition of FF&E at RIBM2's Hotels to
normal levels; (ix) subtracting RIBM2's pro rata share (based upon relative
Exchange Values) of estimated Consolidation Expenses and (x) making certain
other adjustments.
Prior to the distribution of the Last Preliminary Prospectus in the
Offering, a final determination of the Exchange Values will be made, as of the
date that is the end of the most recent accounting period that has ended at
least ___ days prior to the date on which the Last Preliminary Prospectus is
distributed to investors (the "Final Valuation Date") to reflect (i) the amount
of Net Other Assets, the actual principal balances of mortgage and other debt
(including an adjustment for prepayment and defeasance costs) and the amount of
deferred management fees payable, (ii) any amounts actually expended by RIBM2
after the Initial Valuation Date to perform deferred maintenance or make up FF&E
shortfalls previously subtracted in determining the estimated Exchange Value of
RIBM2 and (iii) any revised estimate and allocation of Consolidation Expenses.
The actual value of Units issued to Partners in each Participating Hotel
Partnership will be based on these Exchange Values.
The Hotels were appraised as of _____ __, 1998, by AAA, an independent,
nationally recognized hotel valuation and financial advisory firm experienced in
the appraisals of lodging properties such as the Hotels. Each appraisal (an
"Appraisal") was reviewed by an MAI appraiser and certified by such MAI
appraiser as having been prepared in accordance with the requirements of the
Standards of Professional Practice of the Appraisal Institute and the Uniform
Standards of Professional Appraisal Practice of the Appraisal Foundation. The
Appraisals are not guarantees of present or future values, and no assurance can
be given as to the actual value of the Hotels. The Appraisals should be read in
conjunction with other information, such as, but not limited to, the audited
financial statements of RIBM2.
RIBM2 Supp-9
<PAGE>
Appraised Value of Hotels Owned by RIBM2
(Dollars in thousands)
<TABLE>
<S> <C>
Appraised Value................................................... $
---------
</TABLE>
Calculation of Estimated Exchange Value
as of Initial Valuation Date
(Dollars in thousands)
<TABLE>
<S> <C>
Appraised Value $
Net Other Assets
Mortgage debt
Other debt
Prepayment penalties and/or
defeasance costs
Deferred management fees
Deferred maintenance costs
FF&E shortfall
Consolidation Expenses
Other adjustments/(1)/
------
Exchange Value $
======
</TABLE>
- --------------
/(1)/ Includes environmental remediation and certain other costs.
Distribution of Units Among General and Limited Partners
Based on Estimated Exchange Values
(Dollars in thousands)
<TABLE>
<CAPTION>
Limited Partners General Partner
--------------------------------- ----------------------------
Estimated
Value of Units
per $1,000
Limited
Estimated Estimated % Estimated % of Partner Estimated % of Estimated
Total Value of Units Received Original Units Received Value of
Hotel Partnership of Units/(1)/ Total/(2)/ by RIBM2 Investment/(2)/ by RIBM2 Units/(1)/
- ----------------- ------------- ------------- --------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
RIBM2 $ % % $ % $
============= ============= =============== =============== =============== ==========
</TABLE>
- ----------------
/(1)/ Assumes the value of the Units is equal to the initial public offering
price of CRFLT's Common Shares in the Offering and that the aggregate
value of the Units received by RIBM2 is just equal to (but does not
exceed) the estimated Exchange Value.
/(2)/ Represents the estimated percentage of the total value of Units allocated
to the Hotel Partnerships as a group and does not reflect the issuance of
Units to CRFLT in exchange for the proceeds of the Offering (which will
reduce the percentage of each Hotel Partnership in proportion to their
respective Exchange Values). Thus, for example, if CRFLT purchases 50% of
the Company using the proceeds received from public investors in the
Offering, then each of the percentages set forth above would be reduced by
50%. The estimated values of Units would be not affected.
RIBM2 Supp-10
<PAGE>
Exchange Value of RIBM2
for Allocation of Units to RIBM2
as of Initial Valuation Date
<TABLE>
<CAPTION>
Per $1,000 Limited Partner
Original
Investment
--------------------------------
Percent of Percent of
Estimated Aggregate Estimated Aggregate
Exchange Exchange Exchange Exchange
Description Value Value Value Value
----------- -------------- ------------- ------------ --------------
(in thousands) (in dollars)
<S> <C> <C> <C> <C>
100% Participation,
No Notes Issued................... $ % $ %
100% Participation,
Maximum Notes Issued..............
Minimum Participation,
No Notes Issued...................
Minimum Participation,
Maximum Notes Issued..............
</TABLE>
Cash Distributions
Historical Cash Distributions Paid by RIBM2. The following table sets
forth the distributions paid to RIBM2 Limited Partners (per $1,000 limited
partner original investment) for the periods indicated below. The information
below should be read in conjunction with the information in this Supplement
under the caption "Selected Financial Data."
Historical Cash Distributions Paid by RIBM2
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended -------------------------------------------------------
September 12, 1997 1996 1995 1994 1993 1992
------------------ -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
From net income...................... $ 50 $ ---- $ 70 $ 72 $ 66 $ 79
Representing return of capital/(1)/.. ---- ---- ---- ---- ---- ----
------------ ------- ------- ------- ------- -------
Total....................... $ 50 $ ---- $ 70 $ 72 $ 66 $ 79
============ ======= ======= ======= ======= =======
</TABLE>
- -----------
/(1)/ Computed as all distributions in excess of distributions from operating
cash flow.
RIBM2 Supp-11
<PAGE>
Compensation and Distributions to the Hotel Partnership GP. Under the
partnership agreement of RIBM2, the Hotel Partnership GP does not receive fees
or compensation in connection with managing the affairs of the Hotel Partnership
but the Hotel Partnership GP and its affiliates are reimbursed for certain costs
and expenses incurred on behalf of RIBM2. The following information has been
prepared to compare the amount of reimbursements paid and cash distributions
made by RIBM2 to the Hotel Partnership GP and its affiliates to the amounts that
would have been paid if the reimbursement and distribution structure which will
be in effect after the Consolidation had been in effect for the years presented.
Following the Consolidation, CRFLT will be operated as a
self-administered REIT and as a result no reimbursements or other compensation
will be received by the Hotel Partnership GP other than distributions on Units
received in the Consolidation in exchange for its Hotel Partnership Interests.
During the thirty-six weeks ended September 12, 1997 and the fiscal
years 1996, 1995 and 1994, amounts actually paid by RIBM2 to the Hotel
Partnership GP are shown below under "Historical" and the estimated amounts that
would have been paid had the Consolidation been in effect for the years
presented (assuming the Full Consolidation Scenario) are shown under "Pro
Forma."
Historical and Pro Forma Reimbursements and Distributions
(in thousands)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended ----------------------------
September 12, 1997 1996 1995 1994
-------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Historical
Reimbursements $ 36 $ 131 $ 89 $ 126
Distributions 35 ---- 49 51
------- ------- ------- -------
Total Historical $ 71 $ 131 $ 138 $ 177
======= ======= ======= =======
Pro Forma
Reimbursements $ $ $ $
Distributions attributable to Units
------- ------- ------- -------
Total Pro Forma $ $ $ $
======= ======= ======= =======
</TABLE>
Certain Information Regarding Hotels Owned by RIBM2
Residence Inns are extended-stay hotels which cater primarily to
business and family travelers who stay more than five consecutive nights.
Residence Inns typically have 88 to 144 studio and two-story penthouse suites.
Residence Inns generally are located in suburban settings throughout the United
States and feature a series of residential style buildings with landscaped
walkways, courtyards and recreational areas. Residence Inns do not have
restaurants, but offer a complimentary continental breakfast. In addition, most
Residence Inns provide a complimentary evening hospitality hour. Each suite
contains a fully-equipped kitchen and many suites have woodburning fireplaces.
RIBM2 Supp-12
<PAGE>
<TABLE>
<CAPTION>
Location of Hotel Number of Rooms Date Opened
- ----------------- --------------- -----------
<S> <C> <C>
Birmingham, AL 128 1986
Arcadia, CA 120 1989
Irvine, CA 112 1989
Placentia, CA 112 1988
Boca Raton, FL 120 1988
Jacksonville, FL 112 1986
Pensacola, FL 64 1985
St. Petersburg, FL 88 1986
Chicago-Deerfield, IL 128 1989
Shreveport-Bossier City, LA 72 1983
Boston-Danvers, MA 96 1989
Kalamazoo, MI 83 1989
Jackson, MS 120 1986
Las Vegas, NV 192 1989
Santa Fe, NM 120 1986
Charlotte North, NC 91 1988
Greensboro, NC 128 1987
Akron, OH 112 1987
Valley Forge, PA 88 1988
Columbia, SC 128 1988
Spartanburg, SC 88 1985
Memphis, TN 105 1986
Lubbock, TX 80 1986
---------
TOTAL 2,487
=========
</TABLE>
The table below sets forth certain performance information for RIBM2's
Residence Inns for the indicated periods.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
-------------------- ------------------------------------------
1997 1996 1996 1995 1994
----------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of properties............. 23 23 23 23 23
Number of rooms.................. 2,487 2,487 2,487 2,487 2,487
Average daily rate............... $ 88.90 $ 84.68 $ 84.65 $ 80.92 $ 75.25
Occupancy........................ 85.7% 86.3% 84.5% 86.5% 87.5%
REVPAR........................... $ 76.20 $ 73.12 $ 71.50 $ 70.01 $ 65.84
% REVPAR change.................. 4.2% -- 2.1% 6.3% --
</TABLE>
Amendments to the Partnership Agreement of RIBM2
Transfer of Interests in the Hotel Partnerships to the Company
--------------------------------------------------------------
Immediately Prior to the Consummation of the Consolidation. For federal income
- ----------------------------------------------------------
tax purposes, immediately prior to the consummation of the Consolidation, each
Hotel Partnership GP will contribute a one percent partnership interest in the
Hotel Partnership to the Company in exchange for Units reflecting the estimated
Exchange Value attributable to such one percent partnership interest. In RIBM2,
the Hotel Partnership GP owns only a one percent general partner interest and
therefore such a contribution would require the transfer of its entire general
partner interest, which is prohibited
RIBM2 Supp-13
<PAGE>
under Section 6.01 of the partnership agreement of RIBM2. Thus, in order to
consummate the Consolidation, Section 6.01 of the partnership agreement of RIBM2
requires an amendment to allow for the transfer of the entire one percent
general partner interest of the Hotel Partnership GP to the Company and for the
substitution of the Company as general partner of RIBM2. Accordingly, Section
6.01 of the partnership agreement of RIBM2 will be amended to read as follows:
Section 6.01. Limitation on Voluntary Withdrawal. Except as
provided by Section 5.02B, the General Partner shall not have
the right (but shall have the power) to retire or withdraw
voluntarily from the Partnership. The General Partner may,
with the Consent of the Limited Partners, sell, transfer or
assign its entire general partner Interest or any portion
thereof. Upon such sale, transfer or assignment of its entire
general partner Interest, such purchaser, transferee or
assignee shall become the substitute General Partner of the
Partnership immediately prior to the withdrawal of the General
Partner and shall continue the business of the Partnership
without dissolution.
The consent of a majority of the outstanding limited partner interests
in RIBM2 is required to amend Section 6.01 of the partnership agreement of
RIBM2.
Permit RIBM2 to Enter into the Lease with the Lessee. The Lease for
----------------------------------------------------
RIBM2's Hotels must be entered into not later than the close of business on the
business day immediately preceding the Closing Date. The partnership agreement
for RIBM2 allows for the sale, lease or other disposition of the partnership's
hotels upon the consent of a majority of the outstanding limited partner
interests. Therefore, RIBM2 Limited Partners are being asked to consent to RIBM2
entering into the Lease with the Lessee.
Other Amendments. Amendments to certain terms and sections of the
----------------
partnership agreement of RIBM2 will be made in order to (a) delete certain
obsolete references to entities and agreements that are no longer in existence,
(b) update the partnership agreement to reflect the passage of time since the
formation of RIBM2 and (c) make any other amendments to the partnership
agreement necessary or advisable to consummate the Consolidation. The Hotel
Partnership GP does not believe that these amendments would affect the rights of
the RIBM2 Limited Partners in any material respect nor the duties and
obligations of the Hotel Partnership GP. These changes are included, along with
the other proposed amendments, in the copy of the partnership agreement, as
proposed to be amended, which is attached hereto. The amended partnership
agreement is marked to indicate the revisions made to the existing partnership
agreement and should be read in its entirety. Deleted provisions are contained
in brackets and struck through and added provisions are in bold type and
underlined.
The Hotel Partnership GP recommends that the RIBM2 Limited Partners
vote to approve the requested amendment to the partnership agreement of RIBM2.
Fairness
General. There are no material differences with respect to the fairness
of the Consolidation to the Hotel Partnerships, individually or in the
aggregate. Therefore, the discussion of the fairness of the Consolidation set
forth below is intended to summarize the Hotel Partnership GP's belief as to
fairness and the material factors on which such belief is based. For a more
detailed discussion of the fairness of the Consolidation, see the section
entitled "Fairness Analysis and Opinion" in the Consent Solicitation.
Hotel Partnership GP's Belief as to Fairness. The Hotel Partnership GP
believes that the terms of the Consolidation provide substantial benefits and
are fair to the RIBM2 Limited
RIBM2 Supp-14
<PAGE>
Partners and recommends that all RIBM2 Limited Partners vote FOR the
Consolidation. In arriving at this conclusion, the Hotel Partnership GP has
relied primarily on the following factors, as well as others described under
"Fairness Analysis and Opinion -- Fairness Analysis" in the Consent
Solicitation: (i) its view that the expected benefits of the Consolidation for
the RIBM2 Limited Partners outweigh the risks and potential detriments to the
RIBM2 Limited Partners (see "Background and Reasons for the Consolidation --
Reasons for the Consolidation" in the Consent Solicitation), (ii) its view that
the Exchange Value established for RIBM2 and the resulting value allocable to
the RIBM2 Limited Partners represents fair consideration for the interests held
by the RIBM2 Limited Partners and is fair to such RIBM2 Limited Partners from a
financial point of view and (iii) the Fairness Opinion of AAA as described
below.
Basis for Hotel Partnership GP's Belief as to Fairness.
Comparison of Alternatives. To assist RIBM2 Limited Partners in
evaluating the Consolidation, the Hotel Partnership GP has attempted to compare
the estimated value of Units to be received in the Consolidation with: (i) the
face amount of Notes that will be issued to Dissenting Partners who elect to
exchange the Units they receive in the Consolidation for Notes; (ii) estimates
of the value of the Hotel Partnership Interests in RIBM2 assuming that RIBM2
continues as an operating business and its assets are sold in ten years (the
"Continuation Value"); and (iii) estimates of the value of the Hotel Partnership
Interests in RIBM2 on a liquidation basis, assuming that RIBM2's Hotels are sold
at their Appraised Values and the net proceeds (together with its Net Other
Assets), after payment of debts and other obligations (including defeasance
costs or prepayment penalties and deferred management fees) and an allowance for
liquidation costs, expenses and contingencies equal to 2% of the Appraised
Values of the Hotels (the "Liquidation Value"), are distributed to the Partners
of RIBM2 in accordance with the partnership agreement of RIBM2. The Hotel
Partnership GPs has not attempted to estimate the value of Hotel Partnership
Interests in RIBM2 following a standalone UPREIT reorganization because the
Hotel Partnership GP does not believe such a reorganization is feasible and such
valuation estimates would be subject to substantial uncertainties. Since the
estimated value of the Units and the estimated value under the alternatives to
the Consolidation are dependent upon a number of estimates, variables and
assumptions, as well as varying market conditions, no assurance can be given
that the estimated values indicated could be realized. However, the Hotel
Partnership GP believes that analyzing the alternatives in terms of estimated
values, based upon currently available market data and reasonable estimates and
assumptions, establishes a reasonable basis for comparing the Units to the
alternatives. The results of this comparative analysis (including the
methodology and assumptions used to derive estimated values) are summarized
under "Background and Reasons for the Consolidation -- Comparison of Alternative
Consideration" and "Fairness Analysis and Opinion -- Comparison of Alternatives"
in the Consent Solicitation.
RIBM2 Supp-15
<PAGE>
The following table summarizes the results of the comparative analysis
described above. There can be no assurance, however, that the actual value of
Units received in the Consolidation, the actual face amount of Notes offered to
Dissenting Partners, the actual value of continuing RIBM2 or the actual net
liquidation proceeds would not differ substantially from those estimated for
purposes of this analysis.
Summary of Comparative Valuation Alternatives/(1)/
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Face Amount of
Estimated Notes Offered Estimated Estimated Liquidation
Value to Dissenting Continuation Value if Assets Sold
Hotel Partnership of Units/(2)/ Partners/(3)/ Value/(4)/ at Appraised Value/(5)/
----------------- ------------- ------------- ------------ -----------------------
<S> <C> <C> <C> <C>
RIBM2.................... $ $ $ $
</TABLE>
- --------------------
(1) A limited partner original investment of $1,000 equates to one Partnership
Unit in RIBM2.
(2) Assumes that RIBM2 is allocated Units with a value equal only to its
estimated Exchange Value. The amounts in this column represent the portion
of the estimated Exchange Value of RIBM2 that would be allocable to RIBM2
Limited Partners per $1,000 limited partner original investment.
(3) The amounts in this column are equivalent to the portion of the Liquidation
Value of RIBM2 that would be reflected in the Notes to be issued to RIBM2
Dissenting Partners per $1,000 limited partner original investment. See
footnote (5) below.
(4) The amounts in this column represent the estimated amount that would be
distributed to RIBM2 Limited Partners per $1,000 limited partner original
investment if RIBM2 were continued for ten years and then sold for its
estimated value, determined using a discounted cash flow analysis applied to
the anticipated cash flows from the operation and sale of each Hotel and
taking into account the terms of existing debt obligations (the
"Continuation Value").
(5) The amounts in this column represent the amount that would be distributed to
RIBM2 Limited Partners per $1,000 limited partner original investment if
RIBM2 sold its Hotels at their Appraised Values as of _____ __, 1998, and
distributed the net proceeds (after payment of debts and other obligations
(including defeasance costs or prepayment penalties and deferred management
fees) and an allowance for liquidation costs, expenses and contingencies
equal to 2% of the Appraised Value of the Hotels) (the "Liquidation Value"),
in accordance with its partnership agreement.
Fairness Opinion. AAA, an independent, nationally recognized hotel
valuation and financial advisory firm, has rendered the Fairness Opinion,
attached as Appendix B to the Consent Solicitation, which concluded that: (i)
the methodologies used to determine the Exchange Value of each Hotel Partnership
and to allocate the Units among each of the Hotel Partnerships are fair, from a
financial point of view, to the Limited Partners of each Hotel Partnership, (ii)
the underlying assumptions used to determine the Exchange Value of each Hotel
Partnership and the purchase price of each Acquisition Hotel (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) are fair and reasonable from the standpoint of
each Hotel Partnership; (iii) the methodology used to allocate Units received
by each Hotel Partnership among its general and Limited Partners is fair and
reasonable to the Limited Partners; (iv) the methodologies and the underlying
assumptions used to determine the Continuation Value and the Liquidation Value
of each Hotel Partnership (including, without limitation, the assumptions used
to determine the various adjustments to the Appraised Values of the Hotels) are
fair and reasonable from the standpoint of each Hotel Partnership and (v) the
economic terms of the
RIBM2 Supp-16
<PAGE>
Leases are fair and reasonable from the standpoint of the Company. See "Fairness
Analysis and Opinion -- Fairness Opinion" in the Consent Solicitation.
Federal Income Tax Considerations
In addition to the federal income tax considerations discussed in the
sections of the Consent Solicitation entitled "Federal Income Tax
Considerations" and "Risk Factors -- Federal Income Tax Risks," RIBM2 Limited
Partners should read carefully the following discussion of federal income tax
considerations applicable specifically to the RIBM2 Limited Partners. The
numerical data and estimates included in this discussion are based on various
factual assumptions and information which are believed by the Company and the
Hotel Partnership GP to be reliable. However, some of these assumptions
inevitably will not materialize, and unanticipated events and circumstances will
occur. Therefore, there likely will be differences between the numerical data
and estimates included herein and actual results, and the variations may be
material and adverse.
Applicability of Tax Opinions
Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to CRFLT and the
Company, has provided to CRFLT and the Company an opinion letter (substantially
in the form of Appendix E to the Consent Solicitation) as to certain federal
income tax consequences of the Consolidation. The opinion letter is based upon
certain assumptions and certain representations provided by CRFLT, the Company
and the Hotel Partnership GPs. These representations generally involve factual
matters relating to the organization, ownership and operations (including the
income, assets, businesses, liabilities and properties) of the Hotel
Partnerships prior to the Consolidation and of CRFLT, the Company and the Hotel
Partnerships following the Consolidation. In addition, on the Closing Date,
Hogan & Hartson expects to provide to CRFLT and the Company an opinion letter
(substantially in the form of Exhibit __ to the Prospectus) as to certain
federal income tax consequences relating to the Offering. See "Federal Income
Tax Considerations -- Summary of Tax Opinions" in the Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is
substantially in the form of Appendix E to the Consent Solicitation is
applicable to the RIBM2 Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code and
Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson on the Closing Date, will be based on
the same authorities as of the date of the Closing. No assurance can be given
that future legislation, Treasury Regulations, administrative interpretations
and court decisions will not significantly change the law or the above
conclusions reached by counsel. In addition, any such change could apply
retroactively to transactions preceding the date of change. Moreover, opinions
of counsel merely represent counsel's best judgment with respect to the probable
outcome on the merits and are not binding on the IRS or the courts. Accordingly,
even if there is no change in applicable law, no assurance can be provided that
such opinions (which do not bind the IRS or the courts) will not be challenged
by the IRS or will not be sustained by a court if so challenged. Neither CRFLT,
the Company nor the Hotel Partnership GPs have requested or plan to request any
rulings from the IRS concerning the tax consequences of the Consolidation or the
treatment of either the Company or CRFLT subsequent to the Consolidation.
RIBM2 Supp-17
<PAGE>
Tax Consequences of Formation of the Company
Overview. Hogan & Hartson has provided an opinion to the effect that the
--------
formation of the Company will not result in the recognition of taxable gain or
loss at the time of the Consolidation to an RIBM2 Limited Partner (i) who does
not exercise his Unit Redemption Right on a date sooner than the date two years
after the date of the consummation of the Consolidation; (ii) who does not
receive a cash distribution (or a deemed cash distribution resulting from relief
from liabilities, including as a result of the prepayment of certain Hotel
Partnership liabilities with proceeds from the Offering) in connection with the
Consolidation in excess of his aggregate adjusted basis in his RIBM2 Partnership
Unit at the time of the Consolidation; (iii) who does not receive Notes upon
exercise of Dissenters' Rights; (iv) who is not required to recognize gain by
reason of the exercise by another RIBM2 Limited Partner of Dissenters' Rights
and the option to receive Notes; and (v) who does not have his "at risk" amount
fall below zero as a result of the Consolidation. See "Federal Income Tax
Considerations -- Summary of Tax Opinions" in the Consent Solicitation. With
respect to the foregoing exceptions to nonrecognition treatment, the Company and
the Hotel Partnership GP believe that an RIBM2 Limited Partner who acquired his
RIBM2 Partnership Units in the original offering of such Units for cash and who
has held such Units at all times since (i) should not be considered to receive,
as a result of the Consolidation, a distribution (or a deemed cash distribution
resulting from relief from liabilities, including as a result of the prepayment
of certain Hotel Partnership liabilities with proceeds from the Offering) that
exceeds his aggregate adjusted basis in his RIBM2 Partnership Unit at the time
of the Consolidation, and (ii) should not have his "at risk" amount fall below
zero as a result of the Consolidation. See "Federal Income Tax Considerations --
Tax Consequences of the Formation of the Company -- Overview" in the Consent
Solicitation.
With respect to the exercise of Dissenters' Rights, Hogan & Hartson is of
the opinion that although the matter is not free from doubt, an RIBM2 Limited
Partner who does not exercise Dissenters' Rights and elects to receive Notes in
connection with the Consolidation should not be required to recognize gain by
reason of another RIBM2 Limited Partner's exercise of such rights. With respect
to the exercise of a Unit Redemption Right, Hogan & Hartson is of the opinion
that it is more likely than not that an RIBM2 Limited Partner's exercise of his
Unit Redemption Right more than one year after the date of consummation of the
Consolidation but less than two years after such date will not cause the
Consolidation itself to be a taxable transaction for the RIBM2 Limited Partner
(or the other RIBM2 Limited Partners). See "Federal Income Tax Considerations --
Summary of Tax Opinions" in the Consent Solicitation. Opinions of counsel,
however, do not bind the IRS or the courts, and no assurances can be provided
that such opinions will not be challenged by the IRS or will be sustained by a
court if so challenged.
Amount of Deemed Cash Distribution. With respect to his RIBM2 Partnership
----------------------------------
Units, an RIBM2 Limited Partner will receive no actual cash distribution in
connection with the Consolidation but will be deemed to receive a cash
distribution in connection with the Consolidation to the extent that his share
of Company liabilities immediately after the Consolidation is less than his
share of RIBM2 liabilities immediately prior to the Consolidation. See "Federal
Income Tax Considerations -- Tax Consequences of the Formation of the Company --
Relief from Liabilities/Deemed Cash Distribution" in the Consent Solicitation.
As a consequence of the Consolidation, the Company and the Hotel Partnership GP
believe, based upon and subject to the assumptions and other limitations
described below, that (i) the RIBM2 Limited Partners' aggregate share of
indebtedness should decrease by $______ (from $________ (on December 31, 1997)
to $_________); and (ii) the share of indebtedness of an individual RIBM2
Limited Partner who acquired his RIBM2 Partnership Unit in the original offering
of such Units for cash and has held such Units at all times since should
decrease by $_____ per RIBM2 Partnership Unit (from $_____ (on December 31,
1997) to $_______). For an RIBM2 Limited Partner who did not acquire his RIBM2
Partnership Units in the original offering of such Units for cash or who has not
held his RIBM2 Partnership Units at all times since such offering, the above
information could vary materially.
RIBM2 Supp-18
<PAGE>
Estimated Amount of Taxable Gain. An RIBM2 Limited Partner will recognize
--------------------------------
taxable gain as a result of the deemed cash distribution discussed in the
previous paragraph, however, only to the extent that the deemed cash
distribution exceeds his adjusted tax basis in his RIBM2 Partnership Units
immediately prior to the Consolidation. As described below, the Company and the
Hotel Partnership GP estimate that as of December 31, 1997, the adjusted tax
basis of an RIBM2 Limited Partner who acquired his RIBM2 Partnership Units in
the original offering of such Units for cash and has held such Units at all
times since was ______ per RIBM2 Partnership Unit (which is greater than the
deemed cash distribution of _____ per RIBM2 Partnership Unit discussed in the
previous paragraph). Accordingly, the Company and the Hotel Partnership GP
believe, based upon and subject to the assumptions and other limitations
described below, that an RIBM2 Limited Partner who acquired his RIBM2
Partnership Units in the original offering of such Units for cash and has held
the Units at all times since should not recognize gain due to the deemed cash
distribution resulting from the relief from liabilities in connection with the
Consolidation.
The adjusted tax basis of an RIBM2 Limited Partner who did not acquire his
RIBM2 Partnership Units in the original offering of such Units for cash or who
has not held his RIBM2 Partnership Units at all times since such offering could
vary materially from that of a Limited Partner who did so. If an RIBM2 Limited
Partner has an adjusted tax basis in his RIBM2 Partnership Units (per RIBM2
Partnership Unit) that is less than the adjusted tax basis of an RIBM2 Limited
Partner who acquired his RIBM2 Partnership Units in the original offering of
such Units for cash and has held such Units at all times since, he could
recognize gain due to the deemed cash distribution resulting from the relief
from liabilities in connection with the Consolidation.
Tax Treatment of RIBM2 Limited Partners Who Hold Units Following the
Consolidation
Initial Basis in Units. In general, an RIBM2 Limited Partner will have an
----------------------
initial tax basis in his Units ("Initial Basis") received in the Consolidation
with respect to his RIBM2 Partnership Units equal to the basis in his RIBM2
Partnership Units at the time of the Consolidation, reduced to reflect any
deemed cash distributions resulting from a reduction in his share of RIBM2
liabilities and increased to reflect any gain required to be recognized in
connection with the Consolidation. As of December 31, 1997, an RIBM2 Limited
Partner who acquired his RIBM2 Partnership Units in the original offering of
such Units for cash and has held such Units at all times since, had an adjusted
tax basis in his RIBM2 Partnership Units of $____ per RIBM2 Partnership Unit
(after giving effect to the Consolidation, including the prepayment of
indebtedness contemplated in connection therewith). Based upon and subject to
the assumptions and other limitations described below, the Company and the Hotel
Partnership GP believe that the tax basis of such an RIBM2 Limited Partner in
his Units received in the Consolidation with respect to his RIBM2 Partnership
Units would be $____ per RIBM2 Partnership Unit. For an RIBM2 Limited Partner
who did not acquire his RIBM2 Partnership Units in the original offering of such
Units for cash or who has not held his RIBM2 Partnership Units at all times
since such offering, the above information could vary materially. For a
discussion of the federal income tax considerations for a Limited Partner from a
reduction in basis that may result from the Consolidation, see "Federal Income
Tax Considerations -- Tax Consequences of Formation of the Company -- Initial
Tax Basis of Units" in the Consent Solicitation.
Tax Allocations with Respect to Contributed Hotels upon a Sale of RIBM2
-----------------------------------------------------------------------
Hotels. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
- ------
attributable to appreciated or depreciated property that is contributed to a
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with, or benefits from, the unrealized gain or
unrealized loss associated with the property at the time of contribution. The
amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the time
of contribution and the adjusted tax basis of such property at the time of
contribution (referred to as "Book-Tax Difference"). The Company and the Hotel
Partnership GP, based upon and subject to the assumptions and other limitations
described below,
RIBM2 Supp-19
<PAGE>
estimate that the Book-Tax Difference of the RIBM2 Hotels will be $_________
upon the consummation of the Consolidation.
In the event that the Company were to sell all of the RIBM2 Hotels, the
Partners of RIBM2 would be specially allocated by the Company an amount of
taxable gain equal to the Book-Tax Difference with respect to the RIBM2 Hotels
($ ____ in the aggregate if the RIBM2 Hotels were sold immediately after the
consummation of the Consolidation, according to the estimate in the previous
paragraph). The share of such gain allocable to an RIBM2 Limited Partner who
acquired his RIBM2 Partnership Units in the original offering of such Units for
cash and held such Units at all times since would be $___ per RIBM2 Partnership
Unit. The share of such gain of an RIBM2 Limited Partner who did not acquire his
RIBM2 Partnership Units in the original offering of such Units for cash or who
has not held his RIBM2 Partnership Units at all times since such offering could
vary materially from this amount. If the Company were to sell one or more, but
not all, of the RIBM2 Hotels, the former Partners of RIBM2 would be specially
allocated by the Company an amount of taxable gain equal to that portion of the
Book-Tax Difference for the RIBM2 Hotels that is attributable to the RIBM2 Hotel
or Hotels sold. The Partnership Agreement does not impose any restrictions upon
the Company from causing the sale of any or all of the RIBM2 Hotels. See
"Federal Income Tax Considerations -- Tax Treatment of Limited Partners Who Hold
Units Following the Consolidation -- Sale of Individual Hotels" in the Consent
Solicitation.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
------------------------------------------------------------
allocations of depreciation to the RIBM2 Limited Partners will change
significantly as a result of the Consolidation for two reasons. First, as
described above, pursuant to Section 704(c) of the Code, depreciation and
deductions attributable to the RIBM2 Hotels will be required to be allocated for
federal income tax purposes in a manner such that the RIBM2 Limited Partners are
charged with the Book-Tax Difference associated with the RIBM2 Hotels at the
time of the consummation of the Consolidation. Consequently, an RIBM2 Limited
Partner will be allocated less depreciation with respect to the RIBM2 Hotels
than would be the case if the Consolidation had not occurred and the RIBM2
Limited Partner had continued to hold his RIBM2 Partnership Units. Second, the
Consolidation will cause the technical termination of RIBM2 and each of the
other Hotel Partnerships under Section 708(b)(1)(B) of the Code. Section
168(i)(7) of the Code provides, in effect, that when a partnership terminates
under Section 708(b)(1)(B) of the Code, the partnership must begin new
depreciation periods for its property. As a result, the remaining bases of the
RIBM2 Hotels and the Hotels held by the other Hotel Partnerships will be
depreciated over 39 years, rather than over the remaining current life of such
Hotels (which ranges from 8 years to 25 years). See "Federal Income Tax
Considerations--Tax Treatment of Limited Partners Who Hold Units Following the
Consolidation--Effect of Consolidation on Depreciation" in the Consent
Solicitation.
To illustrate the consequences of these changes for an RIBM2 Limited
Partner, the Company and the Hotel Partnership GP estimate, based upon and
subject to the assumptions and other limitations described below, that if the
Consolidation were consummated on January 1, 1998, the amount of income for 1998
that would be allocated to an RIBM2 Limited Partner who acquired his RIBM2
Partnership Units in the original offering of such Units for cash and held such
Units at all times since would increase by $____ per RIBM2 Partnership Unit
(from $_____ to $_____) over the estimated amount of income that would have been
allocated to such RIBM2 Limited Partner for 1998 if RIBM2 did not participate in
the Consolidation. No attempt is made here to estimate the effect of the
Consolidation on tax allocations in years subsequent to the 1998 taxable year,
but the Consolidation is expected to effect such allocations as well. The amount
of income allocable to an RIBM2 Limited Partner who did not acquire his RIBM2
Partnership Units in the original offering of such Units for cash or who has not
held his RIBM2 Partnership Units at all times since such offering could vary
materially from this amount. See "Federal Income Tax Considerations -- Tax
Treatment of Limited Partners Who Hold Units Following the Consolidation -- Tax
Allocations with Respect to Book-Tax Difference on Contributed Hotels" in the
Consent Solicitation.
RIBM2 Supp-20
<PAGE>
State and Local Taxes. RIBM2 Limited Partners holding Units may be subject
---------------------
to state and local taxation in a number of jurisdictions in which the Company
directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this regard, immediately
following the Consolidation, the Company will own properties in 35 states across
the United States. Currently, RIBM2 owns properties in 16 states. See "Federal
Income Tax Considerations -- Tax Treatment of Limited Partners Who Hold Units
Following the Consolidation -- State and Local Taxes" in the Consent
Solicitation.
Assumptions Used in Determining Tax Consequences of the Consolidation
In preparing the estimates set forth above, the Company and the Hotel
Partnership GP made several key assumptions, which are described below. If any
such assumption is not accurate with respect to a particular RIBM2 Limited
Partner, the tax consequences of the Consolidation to such RIBM2 Limited Partner
could be substantially different from those reflected above. ACCORDINGLY, EACH
RIBM2 LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO
DETERMINE THE IMPACT OF SUCH RIBM2 LIMITED PARTNER'S PARTICULAR TAX SITUATION ON
THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION.
First, with respect to an RIBM2 Limited Partner's basis in his RIBM2
Partnership Units prior to the Consolidation, the Company and the Hotel
Partnership GP assumed that an RIBM2 Limited Partner acquired his RIBM2
Partnership Units in the original offering of such Units for cash and has held
such Units at all times since. The adjusted tax basis of an RIBM2 Limited
Partner who did not acquire his RIBM2 Partnership Units in the original offering
of such Units for cash could vary materially from that of an RIBM2 Limited
Partner who did so. In this regard, it should be noted that the adjusted tax
basis of an RIBM2 Limited Partner who acquired his RIBM2 Partnership Units in
the original offering of such interests for cash still could vary substantially
from the estimates set forth above for several reasons, including but not
limited to (i) if the RIBM2 Limited Partner has received special allocations of
items of RIBM2 income, gain, deduction, loss, or credit, or non-pro rata
distributions, or made non-pro rata contributions; or (ii) if an RIBM2 Limited
Partner's share of RIBM2 nonrecourse liabilities differs from his pro rata
percentage of such liabilities immediately prior to consummation of the
Consolidation. If an RIBM2 Limited Partner has an adjusted tax basis in his
RIBM2 Partnership Units that is less than the tax basis of an RIBM2 Limited
Partner who acquired his RIBM2 Partnership Units in the original offering of
such Units for cash and has held such Units at all times since, the
Consolidation might result in the receipt by the RIBM2 Limited Partner of a
deemed distribution of cash in excess of his adjusted tax basis in his RIBM2
Partnership Units, which could result in the recognition of income or gain.
Second, the Company and the Hotel Partnership GP assumed that the method
expected to be used by the Company to allocate liabilities among the Partners
will be respected for federal income tax purposes. The Company will allocate
liabilities among the Partners as described in "Federal Income Tax
Considerations -- Tax Consequences of the Formation of the Company -- Relief
from Liabilities/Deemed Cash Distribution" in the Consent Solicitation. If the
method used by the Company were not respected for federal income tax purposes
and the nonrecourse liabilities actually allocable to an RIBM2 Limited Partner
are less than the amount assumed above, the Consolidation might result in the
receipt by such RIBM2 Limited Partner of a deemed distribution of cash that is
greater than the deemed distribution of cash expected to be received by such
RIBM2 Limited Partner as described above in "Tax Consequences of Formation of
the Company -- Amount of Deemed Cash Distribution." For an RIBM2 Limited Partner
who did not acquire his RIBM2 Partnership Units in the original offering of such
Units for cash or who did not hold such Units at all times since, this deemed
distribution of cash could exceed his adjusted tax basis in his RIBM2
Partnership Units, which could result in the recognition of income or gain.
RIBM2 Supp-21
<PAGE>
Third, the Company and the Hotel Partnership GP assumed that all of the
Hotel Partnerships will elect to participate in the Consolidation and that no
Notes will be issued. If less than all of the Hotel Partnerships elect to
participate in the Consolidation, however, the Consolidation still may be
consummated so long as the Minimum Participation Condition and all other
conditions to consummation of the Consolidation are satisfied or waived. See
"The Consolidation -- Conditions to Consummation of the Consolidation."
Moreover, the Company has reserved the right to exclude any Hotel Partnership
from participation in the Consolidation (even if the requisite number of Limited
Partners in a Hotel Partnership have voted to approve of and participate in the
Consolidation and each of the other conditions to the Consolidation has been
satisfied or waived) if the Company determines that such exclusion is in its
best interests. See "The Consolidation -- Right to Exclude Hotel Partnerships."
If less than all of the Hotel Partnerships participate in the Consolidation, the
Consolidation might result in the receipt by RIBM2 Limited Partners of a deemed
distribution of cash that is greater than the deemed distribution of cash
expected to be received by RIBM2 Limited Partners as described above in "Tax
Consequences of Formation of the Company -- Amount of Deemed Cash Distribution."
For an RIBM2 Limited Partner who did not acquire his RIBM2 Partnership Units in
the original offering of such Units for cash or who did not hold such Units at
all times since, this deemed distribution of cash could exceed his adjusted tax
basis in his RIBM2 Partnership Units, which could result in the recognition of
income or gain.
Fourth, the Company and the Hotel Partnership GP assumed that Partners in
each Hotel Partnership would receive Units in the Consolidation with a value
exactly equal to the Exchange Value, that CRFLT would raise gross proceeds in
the Offering of $800 million, and that CRFLT would own a ____% interest in the
Company as a result of the contribution of the proceeds from the Offering to the
Company. With respect to the proceeds from the Offering, the Company and the
Hotel Partnership GP assumed that approximately $539 million would be used to
prepay certain indebtedness of the Hotel Partnerships (specifically the CBM2
Certificates, the RIBM1 Senior Mortgage and all of the outstanding indebtedness
of Res USA) and that approximately $36 million would be used to pay prepayment
penalties associated with these prepayments. To the extent that the value of the
Units received by the Partners of RIBM2 in the Consolidation exceeds the
Exchange Value, the aggregate Book-Tax Difference of the RIBM2 Hotels discussed
above would increase accordingly. In the event the nonrecourse liabilities
actually allocable to an RIBM2 Limited Partner are less than the amount assumed
above (including, for example, if the proceeds from the Offering exceed $800
million), the Consolidation might result in the receipt by such RIBM2 Limited
Partner of a deemed distribution of cash that is greater than the deemed
distribution of cash expected to be received by such RIBM2 Limited Partner as
described above in "Tax Consequences of Formation of the Company -- Amount of
Deemed Cash Distribution." For an RIBM2 Limited Partner who did not acquire his
RIBM2 Partnership Units in the original offering of such Units for cash or who
did not hold such Units at all times since, this deemed distribution of cash
could exceed his adjusted tax basis in his RIBM2 Partnership Units, which could
result in the recognition of income or gain.
Finally, the Company and the Hotel Partnership GP assumed that the Mergers
will be treated for federal income tax purposes as the transfer by the Partners
of their interests in the Hotel Partnerships to the Company in exchange for
Units. There can be no assurance, however, that the IRS will not seek to
recharacterize each Merger as either (i) the liquidation of a Hotel Partnership
followed by the distribution by the Hotel Partnership of its assets to its
Partners and the subsequent transfers by such Partners of such assets to the
Company in exchange for Units, or (ii) the transfer by a Hotel Partnership of
its assets to the Company in exchange for Units and the subsequent distribution
of such Units to its Partners. If the Mergers are recharacterized in such a
manner, the tax consequences of the Consolidation to the RIBM2 Limited Partners
likely would be materially affected.
RIBM2 Supp-22
<PAGE>
EACH RIBM2 LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX
ADVISOR TO DETERMINE THE IMPACT OF SUCH RIBM2 LIMITED PARTNER'S PARTICULAR TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE
CONSOLIDATION. THE TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION TO A
PARTICULAR RIBM2 LIMITED PARTNER COULD VARY SUBSTANTIALLY FROM THE ESTIMATES
DESCRIBED ABOVE.
Tax Treatment of RIBM2 Limited Partners Who Exercise Dissenters' Rights and
Elect to Receive Notes
An RIBM2 Limited Partner who exercises his Dissenters' Rights and elects to
receive Notes in connection with the Consolidation will be treated as having
made a taxable disposition of his RIBM2 Partnership Units. The amount realized
in connection with such disposition will equal the sum of the "issue price" of
the Notes (i.e., the face amount of the Notes) (currently estimated as $_____
per RIBM2 Partnership Unit) plus the portion of the RIBM2 liabilities allocable
to the RIBM2 Limited Partner for federal income tax purposes (estimated as
$_______ per RIBM2 Partnership Unit as of December 31, 1997). To the extent the
amount realized exceeds the RIBM2 Limited Partner's adjusted basis in his RIBM2
Partnership Units, the RIBM2 Limited Partner will recognize gain. For a
discussion of the federal income tax rates applicable to the net capital gain
from the sale of a capital asset, see "Federal Income Tax Considerations -- Tax
Treatment of Limited Partners Who Hold Units Following the Consolidation --
Disposition of Units by Limited Partners" in the Consent Solicitation. In this
regard, the Hotel Partnership GP estimates that, as of December 31, 1997, if
RIBM2 sold all of its Hotels in a fully taxable transaction for a net amount,
after payment of liabilities, equal to the Liquidation Value of RIBM2, the
"unrecognized Section 1250 gain" per RIBM2 Partnership Unit would be $______ and
the gain subject to tax as ordinary income under Section 1245 per RIBM2
Partnership Unit would be $______.
An RIBM2 Limited Partner who exercises Dissenters' Rights and elects to
receive Notes may be eligible to defer at least a portion of that gain under the
"installment sale" rules. Those rules, however, may not permit the RIBM2 Limited
Partner to defer all of the gain (and, to the extent that the face amount of the
Notes (and any other installment obligations received by the taxpayer during the
year) outstanding at the end of the taxable year in which the Consolidation
occurs exceeds $5,000,000, will require that the RIBM2 Limited Partner who
defers gain pay to the IRS interest on the resulting tax that has been
deferred). The RIBM2 Limited Partner, for instance, will not be eligible to
defer gain to the extent that such gain would be taxed as ordinary income under
Section 1245 of the Code. In addition, to the extent that the RIBM2 Limited
Partner's share of RIBM2 liabilities exceeds his adjusted tax basis in his RIBM2
Units immediately prior to the Consolidation, the RIBM2 Limited Partner will not
be eligible to defer gain recognized upon the receipt of Notes. Lastly, if an
RIBM2 Limited Partner disposes of Notes, any gain that had been deferred would
be recognized in the year of disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR DISSENTING RIBM2 LIMITED
PARTNER COULD HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE
CONSOLIDATION, AND THE SUBSEQUENT OWNERSHIP AND DISPOSITION OF NOTES. THEREFORE,
IT IS ESSENTIAL THAT SUCH RIBM2 LIMITED PARTNERS CONSULT WITH THEIR OWN TAX
ADVISORS WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH
RIBM2 LIMITED PARTNERS' RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING
JURISDICTION.
Tax Consequences if RIBM2 Does Not Participate in the Consolidation
If RIBM2 does not participate in the Consolidation, the RIBM2 Limited
Partners would not have any tax consequences resulting from the Consolidation.
The consequences of continued
RIBM2 Supp-23
<PAGE>
ownership of RIBM2 Partnership Units will be the same as would have resulted if
the Consolidation had not been proposed.
* * *
The above description is not exhaustive of all possible tax considerations
associated with the Consolidation. This summary does not discuss foreign tax
considerations, nor does it discuss all of the aspects of federal income
taxation or state and local taxation that may be relevant to RIBM2 Limited
Partners in light of their particular circumstances. EACH RIBM2 LIMITED PARTNER
IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE IMPACT OF
SUCH RIBM2 LIMITED PARTNER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX
CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION.
RIBM2 Supp-24
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived
from the RIBM2 financial statements for the First Three Quarters 1997 and the
First Three Quarters 1996 and for the five most recent fiscal years in the
period ended January 3, 1997. The following data should be read in conjunction
with RIBM2's consolidated financial statements and the notes thereto,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the other financial information included elsewhere herein.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
-------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (amounts in thousands, except per limited partner original investment amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues .......................... $25,160 $24,255 $34,035 $33,300 $30,441 $28,290 $27,025
Operating profit................... 12,301 11,321 15,419 15,141 13,192 11,340 8,108
Net income (loss).................. 3,697 2,511 2,663 1,603 (528) (2,452) (5,686)
Distributions:
General Partner ................. 36 -- -- 49 51 46 56
Limited Partner.................. 3,500 -- -- 4,900 5,040 4,620 5,530
------- ------- ------- ------- ------- ------- -------
3,536 -- -- 4,949 5,091 4,666 5,586
Per $1,000 limited partner
original investment:
Net income (loss)................ 52 36 38 23 (7) (35) (80)
Distributions.................... 50 -- -- 70 72 66 79
EBITDA(1).......................... 17,569 16,888 23,631 23,437 20,720 18,964 17,871
Cash provided by
operating activities............. 9,256 1,026 3,932 19,808 9,877 8,616 8,102
Cash used in investing activities.. 5,699 7,831 7,240 3,425 3,172 3,021 2,906
Cash used in financing activities.. 4,082 527 2,576 5,515 5,091 4,666 5,586
Increase (decrease) in cash
and cash equivalents............. (525) (7,332) (5,884) 10,868 1,614 929 (390)
Ratio of earnings to fixed
charges(2)....................... 1.4x 1.27x 1.20x 1.11x -- -- --
Deficiency of earnings to
fixed charges(2)................. -- -- -- -- 528 2,452 5,686
Total assets at book value......... 166,271 165,118 165,510 165,362 159,801 162,216 166,301
Total assets at value assigned
for consolidation.............. -- -- -- -- -- -- --
Cash and cash equivalents.......... 7,483 6,560 8,008 13,892 3,024 1,410 481
Total debt......................... 139,455 140,000 140,000 137,089 137,089 137,089 137,089
Partner's capital:
Limited partners................. 9,195 8,884 9,034 6,398 9,711 15,274 22,321
General partners................. 172 169 171 144 177 233 304
Book value per $1,000 limited
partner original investment...... 131 127 129 91 139 218 319
Exchange Value per $1,000
limited partner original
investment....................... -- -- -- -- -- --
</TABLE>
- ---------------
(1) EBITDA consists of the sum of consolidated net income, interest expense,
depreciation and amortization. EBITDA data is presented because such data
is used by certain investors to determine the partnership's ability to meet
debt service requirements. The partnership considers EBITDA to be an
indicative measure of the partnership's operating performance due to the
significance of the partnership's long-lived assets and because EBITDA can
be used to measure the partnership's ability to service debt, fund capital
expenditures and expand its business; however, such information should not
be considered as an alternative to net income, operating profit, cash flows
from operations, or any other operating or liquidity performance measure
RIBM2 Supp-25
<PAGE>
prescribed by generally accepted accounting principles. Cash expenditures
for various long-term assets and interest expense have been, and will be,
incurred which are not reflected in the EBITDA presentations.
(2) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges is largely the result of
depreciation and amortization of $7,279,000, $7,492,000 and $9,606,000 for
1994, 1993 and 1992, respectively.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
First Three Quarters 1997 Compared to First Three Quarters 1996
Revenues. Revenues for the First Three Quarters 1997 increased $.9 million,
or 4%, to $25.2 million. Revenues and operating profit were impacted primarily
by growth in revenue per available room ("REVPAR"). REVPAR is a commonly used
indicator of market performance for hotels which represents the combination of
daily room rate charged and the average daily occupancy achieved. REVPAR does
not include food and beverage or other ancillary revenues generated by the
property. Hotel sales increased $1.9 million, or 4%, to $50.3 million in the
First Three Quarters 1997 reflecting the improvements in REVPAR for the period.
REVPAR increased 4% for the First Three Quarters 1997 due primarily to an
increase in average room rates of 5%, while average occupancy decreased less
than one percentage point. Due to the high occupancy of these properties, the
partnership expects future increases in REVPAR to be driven by room rate
increases, rather than occupancy increases. However, there can be no assurance
that REVPAR will continue to increase in the future.
Operating Costs and Expenses. Operating costs and expenses decreased to
$12.9 million for the First Three Quarters 1997 from $13 million for the First
Three Quarters 1996. As a percentage of hotel revenues, hotel operating costs
and expenses were 51% and 53% of revenues for the First Three Quarters 1997 and
the First Three Quarters 1996, respectively.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased by $1 million to
$12.3 million, or 49% of revenues, for the First Three Quarters 1997 from $11.3
million, or 47% of revenues, for the First Three Quarters 1996.
Interest Expense. Interest expense remained unchanged at $9.1 million for
the First Three Quarters 1997.
Net Income. Net income for the First Three Quarters 1997 increased $1.2
million to $3.7 million, or 15% of revenues, compared to net income of $2.5
million, or 10% of revenues, for the First Three Quarters 1996.
1996 Compared to 1995
Revenues. Revenues increased $.7 million, or 2%, to $34 million in 1996
from $33.3 million in 1995 as a result of growth in REVPAR of 2%. Hotel sales
increased $2.7 million, or 4%, to $69.6 million in 1996 reflecting the
improvements in REVPAR for the year. The increase in REVPAR was the result of an
increase in average room rates of 5% with a decrease in average occupancy of two
percentage points. Results were further impacted by a one percentage point
decrease in the house profit margin.
Operating Costs and Expenses. Operating costs and expenses increased $.4
million to $18.6 million in 1996 from $18.2 million in 1995. As a percentage of
hotel revenues, operating costs and expenses represented 55% of revenues for
1996 and 55% in 1995.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased $.3 million to
$15.4 million, or 45% of revenues, in 1996 from $15.1 million, or 45% of
revenues, in 1995.
RIBM2 Supp-26
<PAGE>
Interest Expense. Interest expense decreased $.7 million to $13.3 million
because the refinanced debt carried a lower average interest rate of 8.85%
versus 10% under the old loan.
Net Income. Net income increased $1.1 million to $2.7 million, or 8% of
revenues, in 1996 from $1.6 million, or 5% of total revenues, in 1995 due
primarily to improved operating results.
1995 Compared to 1994
Revenues. Revenues increased $2.9 million, or 10%, to $33.3 million in 1995
from $30.4 million in 1994 as a result of strong growth in REVPAR of over 6%.
The increase in REVPAR was primarily the result of an 8% increase in average
room rates and a decrease of one percentage point in average occupancy.
Operating Costs and Expenses. Operating costs and expenses increased $1
million to $18.2 million, or 55% of revenues, in 1995, from $17.2 million, or
57% of revenues, in 1994.
Operating Profit. Operating profit increased $1.9 million to $15.1 million,
or 45% of revenues, in 1995 from $13.2 million, or 43% of revenues, in 1994 due
to the changes in revenues and operating costs discussed above.
Interest Expense. Interest expense remained unchanged at $14 million for
1995 and 1994.
Net Income. Net income increased $2.1 million to $1.6 million, or 5% of
revenues, in 1995, from a net loss of $.5 million in 1994 due to the items
discussed above.
Liquidity and Capital Resources
Cash provided by operations was $9.3 million and $1 million for the First
Three Quarters 1997 and the First Three Quarters 1996, respectively, and $3.9
million in 1996, $19.8 million in 1995 and $9.9 million in 1994.
Cash used in investing activities for the First Three Quarters 1997 and the
First Three Quarters 1996 was $5.7 million and $7.8 million, respectively. Cash
used in investing activities was $7.2 million, $3.4 million and $3.2 million in
1996, 1995 and 1994, respectively. RIBM2's cash investing activities consists
primarily of contributions to the property improvement fund and capital
expenditures for improvements to existing hotels and contributions to restricted
cash reserves required under the new terms of the mortgage debt.
Cash used in financing activities for the First Three Quarters 1997 and the
First Three Quarters 1996 was $4.1 million and $.5 million, respectively. Cash
used in financing activities was $2.6 million, $5.5 million and $5.1 million in
1996, 1995 and 1994, respectively. RIBM2's cash financing activities primarily
consist of capital distributions to partners, repayment of debt and payment of
financing costs, as well as the refinancing of certain debts of the partnership.
In March 1996, RIBM2 refinanced mortgage debt of $137 million with proceeds from
a $140 million non-recourse mortgage loan. The excess proceeds from the loan
were primarily used to establish a reserve for certain capital expenditures. The
refinanced debt is nonrecourse to RIBM2, bears interest at a fixed rate of 8.85%
and matures in 2006. Principal amortization is required on the loan over the ten
year term based on a 25-year amortization. In connection with the refinancing,
RIBM2 contributed the Bossier City Residence Inn to a newly formed wholly owned
subsidiary.
RIBM2 Supp-27
<PAGE>
FINANCIAL STATEMENTS
RIBM2 Supp-28
<PAGE>
Report of Independent Public Accountants
TO THE LIMITED PARTNERS OF MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Marriott
Residence Inn II Limited Partnership (a Delaware limited partnership) and
Bossier RIBM TWO LLC, its wholly owned subsidiary limited liability company, as
of January 3, 1997 and December 29, 1995, and the related consolidated
statements of operations, changes in partners' capital and cash flows for each
of the three fiscal years in the period ended January 3, 1997. These financial
statements are the responsibility of the General Partner's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Marriott Residence
Inn II Limited Partnership and subsidiary as of January 3, 1997 and December 29,
1995, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended January 3, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 21, 1997
RIBM2 Supp-29
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Consolidated Balance Sheets
January 3, 1997 and December 29, 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
ASSETS
Property and equipment, net.........................................................$ 144,792 $ 148,116
Deferred financing costs, net of accumulated amortization........................... 3,797 566
Due from Residence Inn by Marriott, Inc............................................. 2,472 1,150
Property improvement fund........................................................... 2,150 1,638
Restricted cash reserves............................................................ 4,291 --
Cash and cash equivalents........................................................... 8,008 13,892
----------- -----------
$ 165,510 $ 165,362
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt................................................................... $ 140,000 $ 137,089
Incentive management fee due to Residence Inn by Marriott, Inc.................. 14,610 12,258
Base management fee due to Residence Inn by Marriott, Inc....................... -- 743
Accounts payable and accrued expenses........................................... 1,695 8,730
----------- -----------
Total Liabilities............................................................ 156,305 158,820
----------- -----------
PARTNERS' CAPITAL
General Partner
Capital contribution......................................................... 707 707
Capital distributions........................................................ (390) (390)
Cumulative net losses........................................................ (146) (173)
------------ ------------
171 144
----------- -----------
Limited Partners
Capital contributions, net of offering costs of $7,845....................... 62,155 62,155
Capital distributions........................................................ (38,640) (38,640)
Cumulative net losses........................................................ (14,481) (17,117)
----------- -----------
9,034 6,398
----------- -----------
Total Partners' Capital...................................................... 9,205 6,542
----------- -----------
$ 165,510 $ 165,362
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
RIBM2 Supp-30
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Consolidated Statements of Operations
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
REVENUES (Note 3).................................................................$ 34,035 $ 33,300 $ 30,441
--------- --------- ---------
OPERATING COSTS AND EXPENSES
Depreciation and amortization................................................. 7,700 7,796 7,279
Incentive management fee...................................................... 3,542 3,502 3,133
Residence Inn system fee...................................................... 2,639 2,535 2,384
Property taxes................................................................ 2,141 2,092 2,174
Base management fee........................................................... 1,393 1,337 1,261
Equipment rent and other...................................................... 1,201 897 1,018
--------- --------- ---------
18,616 18,159 17,249
--------- --------- ---------
OPERATING PROFIT.................................................................. 15,419 15,141 13,192
Interest expense.................................................................. (13,268) (14,038) (13,969)
Interest income................................................................... 512 500 249
--------- --------- ---------
NET INCOME (LOSS).................................................................$ 2,663 $ 1,603 $ (528)
========= ========= =========
ALLOCATION OF NET INCOME (LOSS)
General Partner...............................................................$ 27 $ 16 $ (5)
Limited Partners.............................................................. 2,636 1,587 (523)
--------- --------- ---------
$ 2,663 $ 1,603 $ (528)
========= ========= =========
NET INCOME (LOSS) PER LIMITED PARTNER UNIT (70,000 Units).........................$ 38 $ 23 $ (7)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
RIBM2 Supp-31
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Consolidated Statements of Changes in Partners' Capital
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
--------- ------------- ----------
<S> <C> <C> <C>
Balance, December 31, 1993................................................ $ 233 $ 15,274 $ 15,507
Capital distributions................................................. (51) (5,040) (5,091)
Net loss.............................................................. (5) (523) (528)
---------- -------------- ----------
Balance, December 30, 1994................................................ 177 9,711 9,888
Capital distributions................................................. (49) (4,900) (4,949)
Net income............................................................ 16 1,587 1,603
--------- ------------- ----------
Balance, December 29, 1995................................................ 144 6,398 6,542
Net income............................................................ 27 2,636 2,663
--------- ------------- ----------
Balance, January 3, 1997.................................................. $ 171 $ 9,034 $ 9,205
========= ============= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
RIBM2 Supp-32
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Consolidated Statements of Cash Flows
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................................$ 2,663 $ 1,603 $ (528)
Noncash items:
Depreciation and amortization.............................................. 7,700 7,796 7,279
Deferred incentive management fee.......................................... 2,352 3,502 3,133
Amortization of deferred financing costs as interest....................... 322 299 302
(Gain) loss on dispositions of property and equipment...................... (5) -- 110
Changes in operating accounts:
Accounts payable and accrued expenses...................................... (7,035) 7,701 71
Due from Residence Inn by Marriott, Inc.................................... (1,322) 1,203 (490)
Base management fee due to Residence Inn by Marriott, Inc.................. (743) (2,296) --
----------- ----------- ----------
Cash provided by operations............................................. 3,932 19,808 9,877
----------- ----------- ----------
INVESTING ACTIVITIES
Additions to property and equipment, net...................................... (4,376) (3,009) (3,309)
Additions to restricted capital expenditure reserve........................... (2,357) -- --
Change in property improvement fund........................................... (507) (416) 137
----------- ----------- ----------
Cash used in investing activities....................................... (7,240) (3,425) (3,172)
----------- ----------- ----------
FINANCING ACTIVITIES
Proceeds from mortgage loan................................................... 140,000 -- --
Repayment of mortgage debt.................................................... (137,089) -- --
Payment of financing costs.................................................... (3,553) (566) --
Additions to debt service reserve............................................. (1,934) -- --
Capital distributions to partners............................................. -- (4,949) (5,091)
----------- ----------- ----------
Cash used in investing activities....................................... (2,576) (5,515) (5,091)
----------- ----------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ (5,884) 10,868 1,614
CASH AND CASH EQUIVALENTS at beginning of year.................................. 13,892 3,024 1,410
----------- ----------- ----------
CASH AND CASH EQUIVALENTS at end of year........................................$ 8,008 $ 13,892 $ 3,024
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................................$ 18,985 $ 7,053 $ 13,666
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
RIBM2 Supp-33
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Residence Inn II Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed on November 23, 1988, to acquire, own and
operate 23 Residence Inn by Marriott hotels (the "Inns") and the land on which
the Inns are located. The Inns are located in 16 states in the United States:
four in Florida, three in California, two in North Carolina and South Carolina,
respectively, and one in Alabama, Illinois, Louisiana, Massachusetts, Michigan,
Mississippi, Nevada, New Mexico, Ohio, Pennsylvania, Tennessee and Texas. As of
January 3, 1997, the Inns have a total of 2,487 suites.
On December 29, 1995, Host Marriott Corporation's operations were divided into
two separate companies: Host Marriott Corporation ("Host Marriott") and Host
Marriott Services Corporation. The sole general partner of the Partnership, with
a 1% interest, is Marriott RIBM Two Corporation (the "General Partner"), a
wholly-owned subsidiary of Host Marriott.
To facilitate the refinancing of the Partnership's mortgage debt, on March 22,
1996, as permitted by the Partnership Agreement, the Partnership transferred
ownership of the Bossier City Residence Inn to a newly formed subsidiary,
Bossier RIBM TWO LLC (the "LLC"), a Delaware limited liability company. The
general partner of the LLC with a 1% interest is Bossier RIBM TWO, Inc., a
wholly owned subsidiary of the Partnership. The remaining 99% interest in the
LLC is owned by the Partnership. The Inns are managed by Residence Inn by
Marriott, Inc. (the "Manager"), a wholly-owned subsidiary of Marriott
International, Inc. ("MII"), as part of the Residence Inn by Marriott hotel
system.
Between November 23, 1988 and December 29, 1988, 70,000 limited partnership
interests (the "Units") were sold in a public offering. The offering price per
unit was $1,000. The General Partner contributed $707,100 for its 1% general
partnership interest. The Partnership acquired 17 of the Inns on the closing
date. The remaining six Inns were acquired during 1989.
Partnership Allocations and Distributions
Net profits for Federal income tax purposes are generally allocated to the
partners in proportion to the distributions of cash available for distribution.
The Partnership generally distributes cash available for distribution as
follows: (i) first, 99% to the limited partners and 1% to the General Partner,
until the partners have received, with respect to such year, an amount equal to
10% of their Net Capital Investment, defined as the excess of original capital
contributions over cumulative distributions of net refinancing and sales
proceeds ("Capital Receipts"); (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of Capital
Receipts previously distributed:
(a) 99% to the limited partners and 1% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts of
less than 50% of their original capital contributions; or
(b) 90% to the limited partners and 10% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts equal
to or greater than 50% but less than 100% of their original capital
contributions; or
(c) 75% to the limited partners and 25% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts equal
to 100% or more of their original capital contributions.
For Federal income tax purposes, losses and net losses are allocated 99% to the
limited partners and 1% to the General Partner.
Capital Receipts not retained by the Partnership will generally be distributed
(i) first, 99% to the limited partners and 1% to the General Partner until the
partners have received cumulative distributions from all sources equal to a
cumulative simple return of 12% per annum on their Net Capital Investment and an
amount equal to their contributed capital, payable only from Capital Receipts;
(ii) next, if the Capital Receipts are from a sale, 100% to the General Partner
until it has received 2% of the gross proceeds from the sale; and (iii)
thereafter, 75% to the limited partners and 25% to the General Partner.
RIBM2 Supp-34
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Notes to Consolidated Financial Statements
Gains will generally be allocated (i) first, to those partners whose capital
accounts have negative balances until such negative balances are brought to
zero; (ii) second, to all partners in amounts necessary to bring their
respective capital account balances equal to their invested capital, as defined,
plus a 12% return on such invested capital; (iii) next, to the General Partner
in an amount necessary to bring the General Partner's capital account balance to
an amount which is equal to 2% of the gross proceeds from the sale, and (iv)
thereafter, 75% to the limited partners and 25% to the General Partner.
Proceeds from the sale of substantially all of the assets of the Partnership
will be distributed to the partners in accordance with their capital account
balances as adjusted to take into account gain or loss resulting from such sale.
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting.
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.
Fiscal Year
The Partnership's fiscal year ends on the Friday nearest to December 31. Fiscal
year 1996 included 53 weeks compared to 52 weeks for fiscal years 1995 and 1994.
Revenues and Expenses
Revenues represent house profit from the Partnership's Inns because the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit from the Inns to the Manager. House profit
reflects the net revenues flowing to the Partnership as property owner and
represents Inn operating results less property-level expenses, excluding
depreciation and amortization, base, Residence Inn system and incentive
management fees, property taxes, equipment rent and other costs, which are
disclosed separately in the consolidated statement of operations.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
Land improvements 40 years
Building and improvements 40 years
Furniture and equipment 3 to 10 years
All property and equipment is pledged as security for the mortgage debt
described in Note 6.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual hotel basis will be less than their net book value. If a property is
impaired, its basis is adjusted to fair market value.
RIBM2 Supp-35
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Notes to Consolidated Financial Statements
Income Taxes
Provision for Federal and state income taxes has not been made in the financial
statements since the Partnership does not pay income taxes but rather allocates
profits and losses to the individual partners. Significant differences exist
between the net income (loss) for financial reporting purposes and the net
income (loss) as reported in the Partnership's tax return. These differences are
due primarily to the use, for income tax purposes, of accelerated depreciation
methods and shorter depreciable lives of the assets and the timing of the
recognition of base and incentive management fee expense. As a result of these
differences, the excess between the Partnership's net assets reported in the
accompanying consolidated financial statements and the tax basis of such net
assets was $411,000 and $3,275,000 as of January 3, 1997 and December 29, 1995,
respectively.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the debt financing and are amortized over the term thereof. Deferred
financing costs associated with the original mortgage debt totaling $2,114,000
were fully amortized at December 29, 1995 and have been removed from the
Partnership's accounts. As of January 3, 1997, the Partnership incurred
$4,119,000 of additional financing costs in connection with the refinanced
mortgage debt described in Note 6 and are being amortized using the straight
line method, which approximates the effective interest method, over the ten year
term of the mortgage debt. As of January 3, 1997 and December 29, 1995,
accumulated amortization of deferred financing costs totaled $322,000 and $0,
respectively.
Restricted Cash Reserves
On March 22,1996, the Partnership was required to establish certain reserves in
conjunction with the refinancing of the Mortgage Debt as described in Note 6.
The balances in those reserves at January 3, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Capital Expenditure Reserve................$ 2,357
Debt Service Reserve....................... 1,934
--------
$ 4,291
========
</TABLE>
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Statements of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Adoption of SFAS 121 did not have an
effect on the Partnership's financial statements.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1996 presentation.
RIBM2 Supp-36
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Notes to Consolidated Financial Statements
NOTE 3. REVENUES
Partnership revenues consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
INN SALES
Suites................................................$ 65,969 $ 63,374 $ 59,606
Other operating departments........................... 3,675 3,491 3,428
--------- --------- ---------
69,644 66,865 63,034
--------- --------- ---------
INN EXPENSES
Departmental direct costs
Suites................................................ 14,313 13,279 12,742
Other operating expenses.............................. 21,296 20,286 19,851
--------- --------- ---------
35,609 33,565 32,593
--------- --------- ---------
REVENUES..................................................$ 34,035 $ 33,300 $ 30,441
========= ========= =========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
January 3, December 29,
1997 1995
---------- ------------
<S> <C> <C>
Land and improvements...............................$ 57,362 $ 57,362
Building and improvements........................... 102,054 101,077
Furniture and equipment............................. 48,761 45,362
--------- ---------
208,177 203,801
Accumulated depreciation............................ (63,385) (55,685)
--------- ---------
$ 144,792 $ 148,116
========= =========
</TABLE>
RIBM2 Supp-37
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Notes to Consolidated Financial Statements
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
As of January 3, 1997 As of December 29, 1995
---------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Mortgage debt $ 140,000 $ 140,000 $ 137,089 $ 137,089
Incentive management fee due to Residence
Inn by Marriott, Inc. $ 14,610 $ 2,800 $ 12,258 $ 6,800
Base management fee due to Residence
Inn by Marriott, Inc. $ -- $ -- $ 743 $ 743
</TABLE>
The estimated fair value of the mortgage debt obligation is based on expected
future debt service payments discounted at estimated risk adjusted rates. Base
and incentive management fees payable are valued based on the expected future
payments from operating cash flow discounted at risk adjusted rates.
NOTE 6. MORTGAGE DEBT
As of December 29, 1995, the Partnership's mortgage debt consisted of a
$131,500,000 nonrecourse mortgage loan (the "Term Loan") and $5,589,000 borrowed
under a $10 million revolving credit facility (the "Revolving Loan"). Both the
Term Loan and the Revolving Loan matured on December 30, 1995. However, the
third party lender granted the Partnership an initial and subsequent forbearance
which effectively extended the maturity of the loans through March 22, 1996.
During the forbearance period, the Partnership was required to make interest
only payments on the total outstanding debt balance of $137,089,000 at a fixed
rate of 10.174%. During 1995, the Term Loan carried interest at a fixed rate of
10.17% per annum and required no amortization of principal. The Revolving Loan
was available to provide interest payments on up to $20 million of the principal
amount of the Term Loan. Borrowings under the Revolving Loan carried interest
per annum at a floating rate equal to .625% plus the one, two, three or six
month London Interbank Offered Rate ("LIBOR"), as elected by the Partnership and
required no amortization of principal. Interest on the borrowings could also
have been funded under the Revolving Loan. There were no borrowings under the
Revolving Loan in 1995. The weighted average interest rate on the Revolving Loan
was 6.9% and 5.0% in 1995 and 1994, respectively.
On March 22, 1996 (the "Closing Date") the General Partner was successful in
refinancing the Term Loan and the Revolving Loan with a new third party lender.
In conjunction with the refinancing, the principal amount of the Partnership's
mortgage debt was increased from $137.1 million to $140 million. The refinanced
mortgage debt (the "Mortgage Debt") continues to be nonrecourse to the
Partnership, bears interest at a fixed rate of 8.85% based upon actual number of
days over a 360 day year for a 10-year term expiring March 10, 2006 and requires
payments of interest only during the first loan year (April 1996 through March
1997) and principal amortization based upon a 25-year amortization schedule
beginning with the second loan year.
RIBM2 Supp-38
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Notes to Consolidated Financial Statements
Principal amortization of the Mortgage Debt at January 3, 1997 is as follows (in
thousands):
<TABLE>
<S> <C>
1997 ...................... $ 910
1998 ...................... 1,508
1999 ...................... 1,649
2000 ...................... 1,767
2001 ...................... 1,968
Thereafter................... 132,198
-----------
$ 140,000
===========
</TABLE>
The Mortgage Debt is secured by first mortgages on 22 of the Partnership's 23
Inns, the land on which they are located, a security interest in all personal
property associated with those Inns including furniture and equipment,
inventory, contracts, and other intangibles and the Partnership's rights under
the management agreement. Although the Partnership continues to own 23 Residence
Inns, during the course of performing environmental studies at the properties,
the lender determined that the Bossier City Inn did not pass certain required
thresholds to enable the property to collateralize the Mortgage Debt.
Additionally, as part of the refinancing, the Partnership is required to deposit
$500,000 into a reserve account and fund $250,000 annually into the account to
provide for any claim, investigation, or litigation that may arise from any
environmental condition at the Bossier City Inn. The initial $500,000 deposit
will be funded and maintained by the lender. The Partnership is required to
repay the initial reserve as promptly as possible if the Partnership draws on
the deposit or by the end of the 10-year term in March 2006. Any draws upon the
account will accrue interest at the 30-day London Interbank Offered Rate
("LIBOR") plus 4.5%. If the Partnership does not need to draw on the reserve
account, the lender will hold the reserve until such time as the Mortgage Debt
is either repaid, or a governmental authority determines that the statute of
limitations on filing any claims has expired or that no further remedial
activities are required at the property. Based upon the results of the
environmental studies performed, the Partnership believes that it is remote that
it will be necessary to draw on the reserve.
Pursuant to the terms of the Mortgage Debt, the Partnership must establish and
maintain certain reserves including:
. $3,482,000 Debt Service Reserve - This reserve is to be fully funded by
mid-1997 and is to equal three months of debt service.
. $2,357,000 Capital Expenditure Reserve - This reserve was fully funded on
the Closing Date. The funds will be expended for various renewals and
replacements, site improvements, Americans with Disabilities Act of 1990
modifications and environmental remediation projects identified during the
course of the appraisals and environmental studies undertaken in
conjunction with the refinancing.
. $900,000 Working Capital Reserve - This reserve is to be funded from 1996
cash from operations. This reserve will provide additional funds to the
Partnership Inns in the future if needed.
. $500,000 Bossier City Inn Environmental Reserve - As discussed above, this
reserve will be funded by the lender.
NOTE 7. MANAGEMENT AGREEMENT
As of December 29, 1995, the Manager operated the Inns pursuant to a long-term
management agreement (the "Original Management Agreement") with an initial term
expiring on December 28, 2007. The Manager had the option to extend the Original
Management Agreement on one or more of the Inns for up to five 10-year terms. To
facilitate the refinancing, effective March 22, 1996, the Original Management
Agreement was restated into two separate management agreements. The Partnership
entered into a management agreement with the Manager for the 22 Inns the
Mortgage Debt is secured by and the LLC also entered into a management agreement
with the Manager for the Bossier City Inn (collectively, the "Restated
Management Agreements"). The terms of the Restated Management Agreements do not
differ from the Original Management Agreement with the exception of the term.
Pursuant to the Restated Management Agreements, the initial term expires
December 31, 2012, with the Manager having the option to extend the agreement on
one or more of the Inns for up to four 10-year terms.
RIBM2 Supp-39
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Notes to Consolidated Financial Statements
The Manager earns a base management fee equal to 2% of the Inns' gross revenues.
Through 1991, payment of the base management fee was subordinate to qualifying
debt service payments, a provision for Partnership administrative expenses and
retention by the Partnership of annual cash flow from operations of $7,070,707.
Deferred base management fees are payable in the future from operating cash
flow, as defined. Beginning in 1992 and thereafter, base management fees are
paid currently. Pursuant to the terms of the Restated Management Agreements, the
Partnership paid the remaining $743,000 of deferred base management fees in
1996.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of operating profit, as defined (23.5% in any year in which operating profit is
equal to or greater than $25.3 million; however, cumulative incentive management
fees cannot exceed 20% of cumulative operating profit). The incentive management
fee is payable out of 50% of cash flow from operations remaining after payment
of debt service, provision for Partnership administrative expenses, payment of
the base management fee, payment of deferred base management fees and retention
by the Partnership of annual cash flow from operations of $7,070,707. After the
Partnership has retained an additional 5% return, the incentive management fee
is payable out of 75% of the remaining cash flow from operations. Through 1991,
the Manager was not entitled to accrue any unpaid incentive management fees.
Incentive management fees earned after 1991 will be payable in the future from
operating cash flow, as defined. As of January 3, 1997, $1,190,000 of incentive
management fees were paid. There were no incentive management fees paid to the
Manager in 1995. Deferred incentive management fees were $14,610,000 and
$12,258,000 as of January 3, 1997 and December 29, 1995, respectively.
The Restated Management Agreements provide for a Residence Inn system fee equal
to 4% of suite revenues. In addition, the Manager is reimbursed for each Inn's
pro rata share of the actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. Such reimbursements were limited through 1991 to 2% of
gross revenues from Inn operations. As franchisor of the Residence Inn by
Marriott system, the Manager maintains a marketing fund to pay the costs
associated with certain system-wide advertising, promotional, and public
relations materials and programs and the operation of a toll-free reservation
system. Each Inn contributes 2.5% of suite revenues to the marketing fund. For
1996, 1995 and 1994, the Partnership paid a Residence Inn system fee of
$2,639,000, $2,535,000 and $2,384,000, reimbursed the Manager for $1,558,000,
$1,498,000 and $1,486,000 of Chain Services and contributed $1,649,000,
$1,584,000 and $1,490,000 to the marketing fund, respectively. Chain Services
and contributions to the marketing fund are included in other operating expenses
in Note 3.
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of the Restated
Management Agreements, the working capital will be returned to the Partnership.
The individual components of working capital controlled by the Manager are not
reflected in the Partnership's balance sheet. As of January 3, 1997 and December
29, 1995, $1,150,000 has been advanced to the Manager for working capital which
is included in Due from Residence Inn by Marriott, Inc. in the accompanying
consolidated balance sheet.
The Restated Management Agreements provide for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are 5% of gross Inn revenues. Total contributions to the property improvement
fund for 1996, 1995 and 1994 were $3,482,000, $3,343,000 and $3,152,000,
respectively.
RIBM2 Supp-40
<PAGE>
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Balance Sheet
September 12, 1997
(Unaudited, in thousands)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net......................................................................................$ 144,211
Due from Residence Inn by Marriott, Inc.......................................................................... 3,163
Deferred financing costs, net.................................................................................... 3,512
Property improvement fund........................................................................................ 1,354
Restricted reserves.............................................................................................. 6,548
Cash and cash equivalents........................................................................................ 7,483
-----------
$ 166,271
===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt....................................................................................................$ 139,455
Incentive management fee due to Residence Inn by Marriott, Inc................................................... 15,648
Accounts payable and accrued expenses............................................................................ 1,801
-----------
Total Liabilities........................................................................................... 156,904
-----------
PARTNERS' CAPITAL
General Partner ................................................................................................. 172
Limited Partners................................................................................................. 9,195
-----------
Total Partners' Capital..................................................................................... 9,367
-----------
$ 166,271
===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
RIMB2 Supp-41
<PAGE>
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Statements of Operations
For the Thirty-six Weeks Ended
September 12, 1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
REVENUES.........................................................................................$ 25,160 $ 24,255
--------- --------
OPERATING COSTS AND EXPENSES
Depreciation................................................................................... 4,820 5,272
Incentive management fee....................................................................... 2,645 2,541
Residence Inn system fee....................................................................... 1,910 1,833
Property taxes................................................................................. 1,544 1,531
Base management fee............................................................................ 1,005 968
Equipment rent and other....................................................................... 935 789
--------- --------
12,859 12,934
--------- --------
OPERATING PROFIT................................................................................. 12,301 11,321
Interest expense................................................................................. (9,052) (9,105)
Interest income.................................................................................. 448 295
--------- --------
NET INCOME.......................................................................................$ 3,697 $ 2,511
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
RIMB2 Supp-42
<PAGE>
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Statements of Cash Flows
For the Thirty-six Weeks Ended
September 12, 1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................................... $ 3,697 $ 2,511
Noncash items................................................................................ 6,143 6,993
Change in operating accounts................................................................. (584) (8,478)
--------- --------
Cash provided by operations............................................................. 9,256 1,026
--------- --------
INVESTING ACTIVITIES
Additions to property and equipment.......................................................... (4,239) (2,780)
Additions to restricted reserves............................................................. (2,257) (1,908)
Change in property improvement fund.......................................................... 797 (3,143)
--------- --------
Cash used in investing activities....................................................... (5,699) (7,831)
--------- --------
FINANCING ACTIVITIES
Capital distributions........................................................................ (3,536) --
Repayment of mortgage debt................................................................... (546) (137,089)
Proceeds from mortgage loan.................................................................. -- 140,000
Payment of financing costs................................................................... -- (3,438)
--------- --------
Cash used in financing activities....................................................... (4,082) (527)
--------- --------
DECREASE IN CASH AND CASH EQUIVALENTS.......................................................... (525) (7,332)
CASH AND CASH EQUIVALENTS at beginning of period............................................... 8,008 13,892
--------- --------
CASH AND CASH EQUIVALENTS at end of period..................................................... $ 7,483 $ 6,560
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest....................................................................... $ 9,421 $ 14,786
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
RIMB2 Supp-43
<PAGE>
Marriott Residence Inn II Limited Partnership
Notes to Condensed Consolidated Financial Statements
1. The accompanying condensed consolidated financial statements have been
prepared by Marriott Residence Inn II Limited Partnership (the
"Partnership") without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted
from the accompanying statements. The Partnership believes the disclosures
made are adequate to make the information presented not misleading.
However, the condensed consolidated financial statements should be read in
conjunction with the Partnership's audited financial statements for the
fiscal year ended January 3, 1997 included in this Prospectus Supplement.
Interim results are not necessarily indicative of fiscal year performance
because of seasonal and short-term variations.
2. Pursuant to the terms of the mortgage debt, the Partnership is required to
establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes (the "Tax and Insurance Escrow
Reserves") for each mortgaged property if the credit rating of Marriott
International, Inc. ("MII") is downgraded by Standard and Poor's Rating
Services. The manager of the Partnership's Inns, Residence Inn by
Marriott, Inc. (the "Manager") is a wholly owned subsidiary of MII. On
April 1, 1997, MII's credit rating was downgraded and the Partnership
subsequently transferred $834,000 into the Tax and Insurance Escrow
Reserves from the Manager's existing tax and insurance reserve account. In
addition, the mortgage debt requires the Partnership to fund an additional
month's debt service into the debt service reserve account over a six
month period as a result of this downgrade. During the thirty-six weeks
ended September 12, 1997, $774,000 was funded out of Partnership cash from
operations into this reserve. The additional month's debt service was
fully funded by November 1997. The tax and insurance escrow reserves and
the debt service reserve are shown as restricted cash and the resulting
tax and insurance liability is included with accounts payable and accrued
expenses in the accompanying balance sheet.
3. Revenues represent house profit of the Partnership Inns since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Inns to the Manager.
House profit reflects the net revenues flowing to the Partnership as
property owner and represents Inn operating results less property-level
expenses, excluding depreciation, Residence Inn system, base and incentive
management fees, real and personal property taxes, equipment rent,
insurance and certain other costs, which are classified as operating costs
and expenses.
RIMB2 Supp-44
<PAGE>
Marriott Residence Inn II Limited Partnership and Subsidiary
Notes to Condensed Consolidated Financial Statements
Revenues consist of the following (in thousands):
<TABLE>
<CAPTION>
Thirty-six Weeks Ended
--------------------------------------
September 12, September 6,
1997 1996
------------- ------------
<S> <C> <C>
INN SALES
Suites................................................................. $ 47,755 $ 45,823
Other operating departments............................................ 2,594 2,564
-------- --------
50,349 48,387
-------- --------
INN EXPENSES
Departmental Direct Costs
Suites............................................................... 10,365 9,676
Other operating departments.......................................... 1,062 973
Other Inn operating expenses........................................... 13,762 13,483
-------- --------
25,189 24,132
-------- --------
REVENUES.................................................................. $ 25,160 $ 24,255
======== ========
</TABLE>
RIMB2 Supp-45
<PAGE>
CRF LODGING COMPANY, L.P.
Supplement Dated __________ __, 1998 for
Prospectus/Consent Solicitation Statement Dated _________ __, 1998 for
Marriott Residence Inn USA Limited Partnership
On the terms described in the Prospectus/Consent Solicitation Statement
(the "Consent Solicitation") dated ________ __, 1998, of which this Supplement
(the "Supplement") is a part, CRF Lodging Company, L.P. (the "Company"), a newly
formed Delaware limited partnership, whose sole general partner will be CRF
Lodging Trust ("CRFLT"), a Maryland real estate investment trust, is proposing
the consolidation (the "Consolidation") of Marriott Residence Inn USA Limited
Partnership ("Res USA"), a Delaware limited partnership, and up to five other
limited partnerships (the "Hotel Partnerships") into an umbrella partnership
real estate investment trust (an "UPREIT") in order to consolidate and expand
the limited service and extended-stay hotel businesses currently conducted
separately by the Hotel Partnerships and Host Marriott Corporation ("Host").
Limited Partners of Res USA are being asked to approve the Consolidation as
described in the Consent Solicitation. Upon approval of the Consolidation, a
newly formed direct or indirect wholly owned subsidiary of the Company (the
"Merger Partnership") will be merged with and into Res USA with Res USA being
the surviving entity. In the merger, partners of Res USA will receive units of
limited partnership interest in the Company ("Units") in exchange for their
interests in Res USA.
Following the Consolidation, the Company will own a portfolio of up to
221 limited service and extended-stay hotels operating under three Marriott
brand names (Courtyard by Marriott(R), Residence Inn by Marriott(R) and
Fairfield Inn by Marriott(R)) (the "Hotels"). Concurrently with the
Consolidation, CRFLT will consummate an initial public offering (the "Offering")
of its common shares of beneficial interest (the "Common Shares") and contribute
the proceeds thereof to the Company in exchange for Units. Following the
Offering, CRFLT anticipates that its Common Shares (the "Common Shares") will be
listed on the New York Stock Exchange ("NYSE"). Beginning one year after the
Consolidation (the "Initial Holding Period"), Limited Partners will have the
right to redeem their Units and receive, at the election of CRFLT, either Common
Shares on a one-for-one basis (subject to adjustment) or cash in an amount equal
to the market value of such shares (the "Unit Redemption Right"). CRFLT expects
to qualify as a real estate investment trust (a "REIT") under the Internal
Revenue Code of 1986, as amended (the "Code").
Marriott RIBM Three Corporation (the "Hotel Partnership GP"), the
general partner of Res USA, believes that the terms of the Consolidation provide
substantial benefits and are fair to the Limited Partners of Res USA and
recommend that all Limited Partners of Res USA vote FOR the Consolidation.
Limited Partners of Res USA should consider the risks and other
considerations described more fully in the Consent Solicitation under "Risk
Factors," including the following:
. There is uncertainty at the time of voting as to the Hotel
Partnerships that will participate in the Consolidation and thus,
uncertainty as to the size and leverage of the Company until after the
end of the Solicitation Period.
. The Consolidation involves a fundamental change in the nature of a
Limited Partner's investment from an investment in a fixed portfolio,
limited life partnership where a Limited Partner could receive a
distribution upon liquidation of the partnership into an investment in
a public real estate company which expects to acquire additional
hotels and where a Limited Partner likely may realize value for his
investment only through a sale of Common Shares received pursuant to
the Unit Redemption Right.
. As a result of the Consolidation, a Limited Partner of Res USA, which
owns 11 Residence Inns, will own an interest in a much larger portfolio
of Hotels, including up to 121 Courtyard Hotels, 39 additional
Residence Inns and 50 Fairfield Inns, and a material
Res USA Supp-1
<PAGE>
adverse change affecting any of the Company's assets will affect all
Limited Partners regardless of whether a particular Limited Partner
previously held an interest in such asset.
. No independent representative was retained to negotiate on behalf of
the Limited Partners of Res USA or the other Hotel Partnerships. If one
had been, the terms of the Consolidation may have been more favorable
to the Limited Partners of Res USA or the other Hotel Partnerships.
. Conflicts of interest exist in connection with the structuring of the
Consolidation, including the fact that subsidiaries of Host serve as
the general partners of all of the Hotel Partnerships and other
subsidiaries of Host will serve as the Lessees of the Hotels. Such
conflicts of interest may result in decisions that do not fully reflect
the interests of all Partners in the Hotel Partnerships.
. Host and its subsidiaries will realize substantial benefits from the
Consolidation, including receipt of Units having an estimated value of
at least $____ million in exchange for their Hotel Partnership
Interests in Res USA (representing a 5% general partner interest) ($___
million in the aggregate for their Hotel Partnership Interests in all
of the Hotel Partnerships) (based upon the estimated Exchange Values),
$___ million in cash from the sale of two limited service and extended-
stay hotels owned by Host (the "Acquisition Hotels") based upon their
aggregate Appraised Value, as adjusted, economic benefits under the
Leases and, because the Consolidation has been structured to permit all
Partners (including the Limited Partners) to defer recognition of gain,
the ability to defer significant potential tax liabilities attributable
to taxable gain in excess of sale proceeds of approximately $___
million.
. The allocation of Units among the Hotel Partnerships is based upon
their respective Exchange Values, the calculation of which involves
numerous assumptions and estimates. There is no assurance that the
value of the Units to be received in the Consolidation equals the fair
market value of the Hotels and other assets contributed by Res USA and
the other Hotel Partnerships.
. Current federal income tax law prohibits the Company from operating
the Hotels directly. Therefore, the Company will be substantially
dependent upon the Lessees and Managers for its revenue and the Company
will have limited control over the operations of the Hotels.
. Approval of the Consolidation by Limited Partners holding a majority of
the outstanding Partnership Units of Res USA will bind all Limited
Partners of Res USA. One Limited Partner of Res USA owns in excess of
70% of the outstanding Partnership Units. Therefore, such Limited
Partner can control the participation of Res USA in the Consolidation.
. Limited Partners of Hotel Partnerships who vote against the
Consolidation and comply with certain specified procedures ("Dissenting
Partners") will not have a right to receive cash based on an appraisal
of their Hotel Partnership Interests but instead can elect to tender
the Units they receive in the Consolidation in exchange for unsecured
notes (the "Notes"), for which there will be no public market, in an
amount equal to the Liquidation Value (as defined herein) of their
Hotel Partnership Interests. As of September 12, 1997, on a pro forma
basis assuming the Full Consolidation Scenario (as defined herein), the
Company would have had aggregate consolidated liabilities to which the
Notes were effectively subordinated of approximately $939 million.
. There are limitations on actual or constructive ownership of more than
9.9% of the number or value of CRFLT's outstanding Common Shares.
. Taxation of CRFLT as a regular corporation if it fails to qualify as a
REIT, and taxation of the Company as a corporation if it fails to
qualify as a partnership for federal income tax purposes, either of
which would, among other things, result in a decrease in cash available
for distribution and a material reduction in the value of the Common
Shares and Units.
The effects of the Consolidation may be different for Limited Partners
of the various Hotel Partnerships. This Supplement has been prepared to
highlight for the Limited Partners of Res USA (the "Res USA Limited Partners")
the risks, benefits, effects and fairness of the Consolidation and to provide
additional information specific to Res USA. Supplements have also been prepared
for each of the other Hotel Partnerships. This Supplement, together with the
supplements of the other Hotel Partnerships (collectively, the "Supplements"),
are a part of the Consent Solicitation Statement. Upon receipt of a written
request by a Limited Partner or his representative so designated in writing, the
Hotel Partnership GP will send a copy of any Supplement without
Res USA Supp-2
<PAGE>
charge. All requests for a copy of a Supplement should be directed to:
__________________________________.
The Consolidation is subject to various conditions, one of which is
that at least four Hotel Partnerships, including CBM1, CBM2 and RIBM1, must
approve the Consolidation (the "Minimum Participation Condition"). See "The
Consolidation -- Conditions to the Consolidation" in the Consent Solicitation.
For purposes of this Supplement, the term Minimum Participation shall refer to
the participation in the Consolidation by each of those Hotel Partnerships and
Res USA.
All cross-references refer to the Consent Solicitation unless stated
otherwise. Capitalized terms not defined herein shall have the meaning set forth
in the Consent Solicitation. The information contained herein, unless otherwise
indicated, assumes the Consolidation occurs with an Offering yielding gross
proceeds of $800 million, all Hotel Partnerships participate, no Notes are
issued and $539 million of outstanding indebtedness is repaid (the "Full
Consolidation Scenario").
Risk Factors
In deciding whether to approve the Consolidation, Limited Partners
should consider certain risks and other factors. The Hotel Partnership GP
believes that Limited Partners should particularly consider the following, which
should be read in conjunction with the information in the Consent Solicitation
under "Risk Factors" and "Federal Income Tax Considerations."
Uncertainties at the Time of Voting. There are several uncertainties at
the time the Limited Partners must vote on the Consolidation, including (i) the
identity of the Hotel Partnerships that will participate in the Consolidation
and, thus, the Hotels that will be acquired by the Company (which will affect
such matters as the size, scope and leverage of the Company), (ii) the Exchange
Value for each Hotel Partnership (which will be adjusted for changes in working
capital, indebtedness and various other items prior to the Closing Date) and
(iii) the costs of prepaying certain indebtedness of the Hotel Partnerships
(which costs will be determined based upon the interest rates on applicable U.S.
Treasuries at the time of the prepayment). See "Determination of Exchange Values
and Allocation of Units."
Fundamental Change in Nature of Investment; Potential Underperformance.
The Consolidation involves a fundamental change in the nature of a Limited
Partner's investment from an investment in which a Limited Partner participates
in the profits from the operation of the Hotels and is entitled to receive
distributions from any net proceeds of a sale or refinancing of Res USA's
assets, to an investment in an entity who will receive rents from the Lessees
which will bear the risks and receive the benefits from the hotels' operation
and Limited Partners likely may realize the value from their investment only
through the exercise of the Unit Redemption Right and sale of the Common Shares
received as a result thereof and not from liquidation proceeds. Continuing Res
USA would allow Res USA Limited Partners an opportunity to eventually receive
liquidation proceeds from the sale of Res USA's Hotels, and a Res USA Limited
Partner's share of these sale proceeds could be higher than the amount a limited
partner might realize from the sale of Units or exercise of the Unit Redemption
Right (or payments on Notes received by any Dissenting Partner). In addition,
the Company has the ability to acquire additional hotels, can reinvest proceeds
from sales or refinancings of existing hotels in additional hotels and has a
general partner that is a publicly traded entity. An investment in the Company
may not outperform an investment in Res USA. See "Comparison of Hotel
Partnership Interests, Units and Common Shares."
Exposure to Risks from Other Hotels and Brands. As a result of the
Consolidation, Limited Partners in Res USA, which owns 11 Residence Inns, will
own interests in a much larger partnership with a broader range of assets,
including up to 121 Courtyard Hotels, 39 additional Residence Inns and 50
Fairfield Inns. A material adverse change affecting one of the Company's assets
will affect all Limited Partners regardless of whether a particular Limited
Partner previously was an investor
Res USA Supp-3
<PAGE>
in such affected asset. In addition, each of the three Marriott brands which
initially will comprise the Company operates in a different market segment and
targets different consumers and, as a result, may be affected differently in
different economic and market conditions.
Limitations on Sales or Refinancings of the Courtyard Hotels. Because
of substantial taxable gains that would be recognized by the Hotel Partnership
GPs of CBM1 and CBM2, which are subsidiaries of Host, none of the assets of CBM1
and CBM2 (the "Courtyard Hotels") can be sold for a period of ___ years from the
Closing Date of the Consolidation (other than pursuant to a tax-deferred
exchange) without the consent of Host (the "Lock-out Provisions"). Such Lock-out
Provisions are only applicable so long as Host holds the Units received in the
Consolidation relating to its Hotel Partnership Interests in CBM1 and CBM2 and
has not transferred, sold or otherwise disposed of such Units in a taxable
transaction. In addition, the Partnership Agreement contains certain
restrictions regarding the ability of the Company to repay or refinance
indebtedness secured by the Courtyard Hotels. These restrictions will limit the
ability of the Company to change its portfolio in response to market conditions
and, to the extent the Courtyard Hotels do not perform as well as the Residence
Inns or Fairfield Inns in its portfolio, the Company will have limited
flexibility to dispose of any such underperforming assets even if such disposal
would be in the best interests of the Company.
Res USA Supp-4
<PAGE>
of the Consolidation may have been more favorable to Res USA Limited Partners or
the Limited Partners of the other Hotel Partnerships if such terms and
conditions were the result of arm's length negotiations.
Conflicts of Interest in the Consolidation. Conflicts of interest exist
in connection with the Consolidation which include conflicts arising from the
fact that subsidiaries of Host serve as the Hotel Partnership GP of Res USA
(which holds a 5% general partner interest in Res USA) and as Hotel Partnership
GPs of the other Hotel Partnerships (with varying interests) and other
subsidiaries of Host will serve as Lessees of the Hotels at the same time as the
Hotel Partnership GP is recommending the Consolidation and is involved in
establishing the terms and structure of the Consolidation, including the
structuring of the Leases. In addition, Host and its subsidiaries will receive
substantial benefits from the Consolidation. These conflicts of interest may
result in decisions that do not fully reflect the interests of all Limited
Partners of Res USA of the other Hotel Partnerships.
Substantial Benefits to Related Parties. The Consolidation will permit
Host to continue to be involved in the ownership and operation of the Hotels and
realize substantial benefits therefrom. Host and its subsidiaries will receive
Units with an estimated value of at least $____ million in exchange for their
Hotel Partnership Interests in Res USA ($____ million in the aggregate for their
Hotel Partnership Interests in all of the Hotel Partnerships) (based upon the
estimated Exchange Values) and $____ million in cash from the sale of the
Acquisition Hotels to the Company (based upon their aggregate Appraised Value,
as adjusted). Subsidiaries of Host will be the Lessees of the Hotels and may
receive significant economic benefits in connection with the Leases, including
the receipt of income to the extent sales from the Hotels exceed operating costs
and expenses payable by the Lessees, management fees and rental payments to the
Company. Because the Consolidation has been structured to permit all Partners
(including the Limited Partners) to defer recognition of gain, the Consolidation
will also permit the Hotel Partnership GPs of CBM1 and CBM2, which are
subsidiaries of Host, to defer significant tax liabilities attributable to
taxable gain in excess of sale proceeds (estimated at approximately $____
million) that otherwise would be incurred upon any sale of the Courtyard Hotels
(other than in a tax-deferred exchange such as the Consolidation) or upon
substantial reductions in the amount of debt now secured by the Courtyard
Hotels. In the case of the Courtyard Hotels, the Partnership Agreement imposes
certain restrictions on the sale of such Hotels and the refinancing, prepayment
or reduction of the debt secured by the Courtyard Hotels for ___ years from the
Closing Date of the Consolidation without the consent of Host, in order to defer
the recognition of gain, which gain would be disproportionately borne by the
Hotel Partnership GPs of CBM1 and CBM2 because of prior allocations to them of
tax losses. The Company also will repay, either in cash or Common Shares, at the
election of a subsidiary of Host, a loan of approximately $13 million owed to
such subsidiary of Host by CBM1.
Method of Allocation of Units. The allocation of Units among the Hotel
Partnerships will be based upon their respective Exchange Values, which in turn
are based upon the Appraised Value of each Hotel Partnership's Hotels as
adjusted for such things, among others, as net non-real estate assets (including
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables) and cash reserves) ("Net Other Assets"), existing
indebtedness (including an adjustment for prepayment and defeasance costs),
deferred maintenance and FF&E shortfalls, deferred management fees and
Consolidations Expenses. There is, however, no assurance that the value of the
Units to be received by participants in the Consolidation will equal the fair
market value of the Hotels and other assets contributed by such participants.
Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the Limited Partners of Res USA or any of the
other Hotel Partnerships. The Hotel Partnership GP has obtained an opinion from
American Appraisal Associates, an independent, nationally recognized hotel
valuation and financial advisory firm ("AAA"), as to (i) the fairness, from a
financial point of view, to the Limited Partners of each Hotel Partnership, of
the methodologies used to determine the Exchange Value of Res USA and each other
Hotel Partnership and the allocation of Units among each of the Hotel
Partnerships in the Consolidation, (ii) the fairness and reasonableness, from
the standpoint of each Hotel Partnership, of the underlying assumptions used to
determine the Exchange Value of each Hotel Partnership and the purchase price of
each Acquisition Hotel (including, without limitation, the assumptions used to
determine the various adjustments to the Appraised Values of the Hotels), (iii)
the fairness and reasonableness to the Limited Partners of each Hotel
Partnership of the methodology used to allocate Units received by each Hotel
Partnership among its general and Limited Partners, (iv) the fairness and
reasonableness, from the standpoint of each Hotel Partnership, of the
methodologies and underlying assumptions used to determine the Continuation
Value and the Liquidation Value of each Hotel Partnership (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) and (v) the fairness and reasonableness, from
the Company's standpoint, of the economic terms of the Leases. However, AAA has
not negotiated with the Hotel Partnership GP and has not participated in
establishing the terms of the Consolidation. Consequently, the terms and
conditions of the Consolidation may have been more favorable to Res USA Limited
Partners or the Limited Partners of the other Hotel Partnerships if such terms
and conditions were the result of arm's length negotiations.
Lack of Control over Hotel Operations. Due to current federal income
tax law prohibitions on a REIT's ability to derive revenues directly from the
operation of a hotel, the Company will lease its Hotels to the Lessees, which
will operate the Hotels by continuing to retain the Managers pursuant to the
Management Agreements. Neither CRFLT nor the Company will operate the Hotels or
participate in the decisions affecting the daily operations of the Hotels.
Although the Company will have certain rights as lessor under the Leases
(including control over certain owner-funded capital expenditures), neither
CRFLT nor the Company will have the authority to require the Lessees or the
Managers to operate the Hotels in any particular manner or to govern any
particular aspect of their operation.
Res USA Supp-5
<PAGE>
Expiration of Leases. The Leases expire at the end of ___ years and
there can be no assurance that such Leases will be renewed. If such Leases are
terminated at the end of their terms, the Company will be required to find other
lessees (which lessees must be satisfactory to the Managers). There can be no
assurance as to whether satisfactory lessees could be found or as to the terms
or conditions on which the Company would be able to enter into new leases with
such lessees.
The Company's Dependence on the Lessees and Managers for Revenue. The
Company will be dependent upon the Lessees for its revenue, and the Lessees'
ability to pay rent to the Company will be substantially dependent upon the
Managers' ability to operate the Hotels profitably.
No Limitation on Debt. There are no limitations in CRFLT's or the
Company's organizational documents which limit the amount of indebtedness either
may incur.
Risks of Leverage. The $58 million Term Loan of Res USA is payable in
full at maturity on December 31, 1998. There can be no assurance that such Term
Loan could be repaid or refinanced by December 31, 1998. The need to refinance
such debt by the end of 1998 will have the effect of reducing or eliminating
distributions to Res USA Limited Partners because Res USA will require cash
reserves in anticipation of the refinancing. In addition, the Company has
substantial indebtedness. As of September 12, 1997, on a pro forma basis
assuming the Full Consolidation Scenario, the Company had outstanding
indebtedness totaling $780 million. The Company's business is capital intensive
and the Company will have significant capital requirements in the future. The
Company's leverage level could affect its ability to (i) obtain financing in the
future, (ii) undertake refinancings on terms and subject to conditions deemed
acceptable by the Company, (iii) make distributions to partners, (iv) pursue its
acquisition strategy or (v) compete effectively or operate successfully under
adverse economic conditions.
Original Anticipated Holding Period About to Expire. In the original
offering document of Res USA, the Hotel Partnership GP stated that it would sell
its Hotels, subject to certain agreements and the majority consent of the Res
USA Limited Partners, by December 31, 1998, for the best price it could
reasonably obtain under the circumstances. A Res USA Limited Partner's share of
the proceeds from a liquidation of Res USA could be higher than what a limited
partner might realize, following the Initial Holding Period, from a sale of
Common Shares received pursuant to the Unit Redemption Right.
Rental Revenues from Hotels Subject to Rights of Lenders. In accordance
with the loan agreements with respect to outstanding indebtedness of Res USA and
the other Hotel Partnerships, the rental revenues received by the Company under
the Leases will first be used to satisfy the debt service on such outstanding
indebtedness and any cash flow remaining thereafter will be available to satisfy
all other obligations of the Company (including paying property taxes and
insurance, funding the required FF&E reserves for the Hotels and capital
improvements) and to make distributions to partners (including CRFLT).
Ownership Limitations. No person may own in excess of 9.9% of the
number or value of outstanding Common Shares of CRFLT, without the consent of
the Board of Trustees of CRFLT, in its sole and absolute discretion. During the
period of time subsidiaries of Host are acting as Lessees, Host and its
affiliates are prohibited from owning in excess of 4.9% (by value) of the
Company.
Majority Vote of Res USA Limited Partners Binds All Res USA Limited
Partners. Approval of the Consolidation by Res USA Limited Partners holding a
majority of the outstanding Partnership Units of Res USA will cause Res USA to
participate in the Consolidation, and such approval will bind all Res USA
Limited Partners, including Res USA Limited Partners who voted against or
abstained from voting with respect to the Consolidation. One Res USA Limited
Partner holds in excess of 70% of the outstanding Partnership Units in Res USA
and thus can control the participation of Res USA in the Consolidation.
Effect of Subsequent Events upon Recognition of Gain. Even though the
Res USA Limited Partners who do not receive Notes as a result of exercising
Dissenters' Rights generally are not expected to recognize significant taxable
gain at the time of the Consolidation, there are a variety of events and
transactions (including the sale of one or more of the Hotels or the reduction
of indebtedness securing one or more of the Hotels) that could cause a Res USA
Limited Partner to recognize all or a part of the gain that otherwise has been
deferred through the Consolidation. See "Federal Income Tax Considerations --
Tax Consequences of the Formation of the Company -- Effect of Subsequent
Events." The Partnership Agreement does not impose any restrictions on the
Company's ability to dispose of the Hotels or to refinance debt secured by the
Hotels, other than with respect to the Courtyard Hotels (which restriction can
be waived with the consent of Host). In addition, the Partnership Agreement
expressly provides that CRFLT, as general partner of the Company, is not
required to take into account the tax consequences of the limited partners in
deciding whether to cause the Company to undertake specific transactions and
the limited partners have no right to approve or disapprove such transactions.
See "Description of Units -- Sales of Assets and Lock-out Provisions."
Res USA Supp-6
<PAGE>
Failure of the Company to Qualify as a Partnership for Tax Purposes.
Taxation of the Company as a corporation if it fails to qualify as a
partnership, and the Company's subsequent liability for federal, state and local
taxes on its income and property, would, among other things, have the effect of
reducing cash available for distribution to holders of Units, would cause CRFLT
to fail to qualify as a REIT for tax purposes, and could cause the holders of
Units to recognize taxable gain at the time the Company ceases to qualify as a
partnership.
Failure of CRFLT to Qualify as a REIT for Tax Purposes. Taxation of
CRFLT as a corporation if it fails to qualify as a REIT, and CRFLT's subsequent
liability for federal, state and local taxes on its income and property, would,
among other things, have the effect of reducing cash available for distribution
to CRFLT's shareholders and reducing materially the value of the Common Shares
and Units.
Tax Consequences for Res USA Limited Partners Who Are Not U.S. Persons.
A Res USA Limited Partner who is not a U.S. Person may be subject to special tax
considerations with respect to the Consolidation and/or the subsequent ownership
and disposition of Units in one or more countries other than the United States,
including, for example, the country in which such Res USA Limited Partner
resides, any countries in which he conducts business, and, if the Res USA
Limited Partner is an entity, the country in which it is organized and/or has
its commercial domicile. In addition, the Company may have to withhold and pay
tax to the IRS in connection with the Consolidation with respect to any Res USA
Limited Partner that is not a U.S. Person (even though no taxable gain for U.S.
federal income tax purposes would be recognized in connection with the
Consolidation) unless the Res USA Limited Partner receives from the IRS a
"withholding tax certificate" showing no tax is due in connection with the
Consolidation.
State and Local Taxes. Res USA Limited Partners holding Units may be
subject to state and local taxation in a number of jurisdictions in which the
Company directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this regard, immediately
following the Consolidation, the Company will own properties in 35 states across
the United States. Currently, Res USA owns properties in eight states.
Dissenting Partners Have No Cash Appraisal Rights and May Elect to
Receive Only Notes. Res USA Limited Partners who vote against the
Consolidation and comply with certain specified procedures ("Dissenting
Partners") will not have a right to receive cash based on an appraisal of their
interests in Res USA or otherwise, but instead can elect to tender the Units
they receive in the Consolidation in exchange for unsecured seven-year notes
(the "Notes"), for which there will be no public market, in an amount equal to
the Liquidation Value of their Hotel Partnership Interests. If the Notes are
sold, they may sell at prices substantially below their issuance price.
Noteholders are likely to receive the full face amount of the Notes only if they
hold the Notes to maturity, which is approximately seven years after the
Consolidation, or if the Company repays or refinances the Notes at or prior to
maturity or realizes net sales or excess refinancing proceeds from Hotels owned
by a Noteholder's former Hotel Partnership. Because the Notes are unsecured
obligations of the Company, they will be effectively subordinate to all secured
debt of the Company and all obligations of the Hotel Partnerships which will be
the owners of the Hotels. As of September 12, 1997, on a pro forma basis
assuming the Full Consolidation Scenario, the Company had aggregate consolidated
liabilities
Res USA Supp-7
<PAGE>
to which the Notes were effectively subordinated of approximately $939 million.
See "Rights of Dissenting Partners" and "Description of the Notes."
Expected Benefits of the Consolidation
The Hotel Partnership GP believes that participating in the
Consolidation would likely be beneficial to the Res USA Limited Partners for the
reasons set forth below. This information is qualified by and should be read in
conjunction with the information in the Consent Solicitation under "Background
and Reasons for the Consolidation -- Expected Benefits of the Consolidation."
These benefits, which should be viewed as alternatives to continuing the
business and operations of Res USA, are expected to include:
. Enhanced Liquidity of Investment. Currently, there is no
market for the Hotel Partnership Interests in Res USA. The
Consolidation will offer Res USA Limited Partners
significantly enhanced liquidity with respect to their
investments in Res USA because, after expiration of the
Initial Holding Period, Res USA Limited Partners would be
able to exercise their Unit Redemption Right (subject to
certain limited exceptions) and receive, at CRFLT's election,
either freely tradable Common Shares of CRFLT or the cash
equivalent thereof. The exercise of the Unit Redemption
Right, however, would result in recognition of taxable income
or gain at that time.
. Public Market Valuation of Assets. The Hotel Partnership GP
believes that the public market valuations of the equity
securities of many publicly traded real estate companies,
including REITs that focus on the lodging industry, are in
part based upon the growth potential of such companies and
currently exceed the private market values of their real
estate assets. There can be no assurance, however, that the
Common Shares of CRFLT will trade at a premium to the private
market values of the Hotels or that the relative pricing
differential will not change or be eliminated in the future.
. Regular Quarterly Cash Distributions. The Hotel Partnership
GP expects that the Company will make regular quarterly cash
distributions to holders of Units in proportion to their
percentage interests in the Company. While these
distributions may not be higher than Res USA's current
distributions, the ability to receive distributions quarterly
and in regular amounts would be enhanced.
. Substantial Tax Deferral. The Hotel Partnership GP expects
that Res USA Limited Partners who do not exercise Dissenters'
Rights generally should be able to obtain the benefits of the
Consolidation while continuing to defer recognition for
federal income tax purposes of at least a substantial
portion, if not all, of the gain with respect to their
interests in Res USA that otherwise would be recognized in
the event of a liquidation of Res USA or a sale or other
disposition of its Hotels in a taxable transaction.
Thereafter, such Res USA Limited Partners generally should be
able to defer at least a substantial portion of such built-in
gain until they elect to exercise their Unit Redemption Right
or the Hotels currently owned by Res USA are sold or
otherwise disposed of in a taxable transaction by the
Company. The federal income tax consequences of the
Consolidation are highly complex and, with respect to each
Res USA Limited Partner, are dependent upon many variables,
including the particular circumstances of such Res USA
Limited Partner. See "Federal Income Tax Considerations - Tax
Consequences of the Formation of the Company" in the Consent
Solicitation. Each Res USA Limited Partner is urged to
consult with his own tax advisors as to the consequences of
the Consolidation in light of his particular circumstances.
Res USA Supp-8
<PAGE>
. Risk Diversification. The consolidation of the Hotels, as
well as future hotel acquisitions by the Company, will
diversify the investment risks to Res USA Limited Partners
over a broader group of hotels, geographic locations, range
of product types and market segments and will reduce the
dependence of an investment upon the performance of, and the
exposure to the risks associated with, the 11 Residence Inns
currently owned by Res USA and the single market segment
(extended-stay) in which Res USA currently operates.
. Reduction in Leverage and Interest Costs. Upon consummation
of the Consolidation and the Offering, it is expected that
the aggregate amount of consolidated indebtedness of the
Company will be reduced, by application of a portion of the
net proceeds from the Offering, by between approximately $390
million and $539 million (excluding prepayment and defeasance
costs which also will be required to be repaid), depending
upon the Hotel Partnerships which participate in the
Consolidation and the proceeds raised in the Offering,
resulting in significant interest and debt service savings
and reduced overall leverage levels for Limited Partners in
the Hotel Partnerships. All of Res USA's outstanding
indebtedness will be repaid in the Consolidation. The Company
will be less leveraged than Res USA is currently.
. Growth Potential. The Hotel Partnership GP believes that
substantial opportunities exist to acquire or develop limited
service and extended-stay hotel properties at attractive
prices and that Res USA is not in a position to take
advantage of such opportunities because of its lack of access
to additional sources of capital on favorable terms and
restrictions on additional acquisitions and development
imposed by its partnership agreement. In addition, the
Company's structure and capitalization as part of an UPREIT
should provide it with substantial flexibility to structure
acquisitions of additional hotels utilizing debt, cash, Units
or Common Shares (or any combination thereof), which may
permit the Company to structure acquisitions of hotel
properties on an income tax-deferred basis to sellers.
. Greater Access to Capital. With publicly traded securities, a
larger base of assets and a greater equity value than Res USA
individually, CRFLT expects to have greater access to the
capital necessary for funding the operations of the Company
and consummating acquisitions on more attractive terms than
would be available to Res USA individually. This greater
access to capital should provide greater financial stability
to the Company and reduce the level of risk associated with
refinancing existing loans upon maturity, as compared to Res
USA individually.
Determination of Exchange Values and Allocation of Units
The Company and the Hotel Partnership GP established the Exchange Value
for the equity interests in Res USA by (i) obtaining an independent appraisal of
the value of the Hotels owned by Res USA, as of ______ __, 1998 (the "Appraised
Value"), as disclosed below; (ii) adding the amount of other assets (such as
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables) and cash reserves), net of liabilities (excluding
mortgage and other debt and deferred management fees) ("Net Other Assets") as of
________ __, 1998 (the "Initial Valuation Date"); (iii) subtracting the
estimated balance of the mortgage debt owed by Res USA as of June 30, 1998,
which is the estimated closing date for the Consolidation; (iv) subtracting the
estimated balance of other debt of Res USA as of June 30, 1998; (v) adjusting
for the estimated prepayment and defeasance costs; (vi) subtracting the amount
of deferred management fees payable to the Manager under the Res USA Management
Agreement for Res USA's Hotels; (vii) subtracting an amount equal to the
estimated cost to
Res USA Supp-9
<PAGE>
complete any deferred maintenance items identified in the engineer's report
relating to Res USA's Hotels; (viii) subtracting an amount equal to the
estimated cost (if any) of bringing the condition of FF&E at Res USA's Hotels to
normal levels; (ix) subtracting Res USA's pro rata share (based upon relative
Exchange Values) of estimated Consolidation Expenses and (x) making certain
other adjustments.
Prior to the distribution of the Last Preliminary Prospectus in the
Offering, a final determination of the Exchange Values will be made, as of the
date that is the end of the most recent accounting period that has ended at
least ___ days prior to the date on which the Last Preliminary Prospectus is
distributed to investors (the "Final Valuation Date") to reflect (i) the amount
of Net Other Assets, the actual principal balances of mortgage and other debt
(including an adjustment for prepayment and defeasance costs) and the amount of
deferred management fees payable, (ii) any amounts actually expended by Res USA
after the Initial Valuation Date to perform deferred maintenance or make up FF&E
shortfalls previously subtracted in determining the estimated Exchange Value of
Res USA and (iii) any revised estimate and allocation of Consolidation Expenses.
The actual value of Units issued to Partners in each Participating Hotel
Partnership will be based on these Exchange Values.
The Hotels were appraised as of _________ ___, 1998, by AAA, an
independent, nationally recognized hotel valuation, and financial advisory firm
experienced in the appraisals of lodging properties such as the Hotels. Each
appraisal (an "Appraisal") was reviewed by an MAI appraiser and certified by
such MAI appraiser as having been prepared in accordance with the requirements
of the Standards of Professional Practice of the Appraisal Institute and the
Uniform Standards of Professional Appraisal Practice of the Appraisal
Foundation. The Appraisals are not guarantees of present or future values, and
no assurance can be given as to the actual value of the Hotels. The Appraisals
should be read in conjunction with other information, such as, but not limited
to, the audited financial statements of Res USA.
Appraised Value of Hotels owned by Res USA
(Dollars in thousands)
Appraised Value.................................... $
--------
Calculation of Estimated Exchange Value
as of Initial Valuation Date
(Dollars in thousands)
<TABLE>
<S> <C>
Appraised Value $
Net Other Assets
Mortgage debt
Other debt
Prepayment penalties
and/or defeasance costs
Deferred management fees
Deferred maintenance costs
FF&E shortfall
Consolidation Expenses
Other adjustments/(1)/
------
Exchange Value $ --
======
</TABLE>
- -------------------------
/(1)/ Includes environmental remediation and certain other costs.
Res USA Supp-10
<PAGE>
Distribution of Units Among General and Limited Partners
Based on Estimated Exchange Values
(Dollars in thousands)
<TABLE>
<CAPTION>
Limited Partners General Partner
------------------------------- -----------------------------
Estimated
Value of Units
per $1,000
Limited
Estimated Estimated % of Partner Estimated % of Estimated
Total Value Estimated % of Units Received Original Units Received Value of
Hotel Partnership of Units/(1)/ Total/(2)/ by Res USA Investment/(2)/ by Res USA Units/(1)/
- ----------------- ------------- -------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Res USA $ % % $ % $
========== ============ ============ ============ ============== ===========
</TABLE>
- ----------------
/(1)/ Assumes the value of the Units is equal to the initial public offering
price of CRFLT's Common Shares in the Offering and that the aggregate
value of the Units received by Res USA is just equal to (but does not
exceed) the estimated Exchange Value.
/(2)/ Represents the estimated percentage of the total value of Units allocated
to the Hotel Partnerships as a group and does not reflect the issuance of
Units to CRFLT in exchange for the proceeds of the Offering (which will
reduce the percentage of each Hotel Partnership in proportion to their
respective Exchange Values). Thus, for example, if CRFLT purchases 50% of
the Company using the proceeds received from public investors in the
Offering, then each of the percentages set forth above would be reduced by
50%. The estimated values of Units would be not affected.
Exchange Value of Res USA
for Allocation of Units to Res USA
as of Initial Valuation Date
<TABLE>
<CAPTION>
Per $1,000 Limited
Partner Original
Investment
----------------------------
Percent of Percent of
Estimated Aggregate Estimated Aggregate
Exchange Exchange Exchange Exchange
Description Value Value Value Value
----------- --------- ---------- --------- ----------
(in thousands) (in dollars)
<S> <C> <C> <C> <C>
100% Participation,
No Notes Issued...................... $ % $ %
100% Participation,
Maximum Notes Issued................
Minimum Participation,
No Notes Issued.....................
Minimum Participation,
Maximum Notes Issued.................
</TABLE>
Cash Distributions
Historical Cash Distributions Paid by Res USA. The following table sets
forth the distributions paid to Res USA Limited Partners (per $1,000 limited
partner original investment) for the periods indicated below. The information
below should be read in conjunction with the information in this Supplement
under the caption "Selected Financial Data."
Res USA Supp-11
<PAGE>
Historical Cash Distributions Paid by Res USA
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended --------------------------------------------------
September 12, 1997 1996 1995 1994 1993 1992
------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
From net income...................... $ 52 $ 116 $ 112 $ 105 $ 102 $ 122
Representing return of capital/(1)/.. -- -- -- -- -- --
-------- ------- ------ ------ ------ ------
Total............................. $ 52 $ 116 $ 112 $ 105 $ 102 $ 122
======== ======= ====== ====== ====== ======
</TABLE>
- -----------
/(1)/ Computed as all distributions in excess of distributions from operating
cash flow.
Compensation and Distributions to the Hotel Partnership GP. Under the
partnership agreement of Res USA, the Hotel Partnership GP does not receive fees
or compensation in connection with managing the affairs of the Hotel Partnership
but the Hotel Partnership GP and its affiliates are reimbursed for certain costs
and expenses incurred on behalf of Res USA. The following information has been
prepared to compare the amount of reimbursements paid and cash distributions
made by Res USA to the Hotel Partnership GP and its affiliates to the amounts
that would have been paid if the reimbursement and distribution structure which
will be in effect after the Consolidation had been in effect for the years
presented.
Following the Consolidation, CRFLT will be operated as a
self-administered REIT and as a result no reimbursements or other compensation
will be received by the Hotel Partnership GP other than distributions on Units
received in the Consolidation in exchange for its Hotel Partnership Interests.
During the thirty-six weeks ended September 12, 1997 and the fiscal
years 1996, 1995 and 1994, amounts actually paid by Res USA to the Hotel
Partnership GP are shown below under "Historical" and the estimated amounts that
would have been paid had the Consolidation been in effect for the years
presented (assuming the Full Consolidation Scenario) are shown under "Pro
Forma."
Historical and Pro Forma Reimbursements and Distributions
(in thousands)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended -------------------------------------------
September 12, 1997 1996 1995 1994
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Historical
Reimbursements $ 46 $ 97 $ 71 $ 37
Distributions 352 364 95 --
------ ------ ------- ------
Total Historical $ 398 $ 461 $ 166 $ 37
====== ====== ======= ======
Pro Forma
Reimbursements $ $ $ $
Distributions attributable to Units ------ ====== ======= =======
Total Pro Forma $ $ $ $
====== ====== ======= =======
</TABLE>
Res USA Supp-12
<PAGE>
Certain Information Regarding Hotels Owned by Res USA
Residence Inns are extended-stay hotels which cater primarily to
business and family travelers who stay more than five consecutive nights.
Residence Inns typically have 88 to 144 studio and two-story penthouse suites.
Residence Inns generally are located in suburban settings throughout the United
States and feature a series of residential style buildings with landscaped
walkways, courtyards and recreational areas. Residence Inns do not have
restaurants, but offer a complimentary continental breakfast. In addition, most
Residence Inns provide a complimentary evening hospitality hour. Each suite
contains a fully equipped kitchen and many suites have woodburning fireplaces.
<TABLE>
<CAPTION>
Location of Hotel Number of Rooms Date Opened
- ----------------- --------------- -----------
<S> <C> <C>
Montgomery, AL 94 1986
Bakersfield, CA 114 1990
Pleasant Hill, CA 126 1990
San Ramon, CA 106 1990
Meriden, CT 106 1990
Atlanta-Airport, GA 126 1990
Boston-Tewksbury, MA 130 1990
Raleigh, NC 144 1986
Cincinnati-Blue Ash, OH 118 1990
Dallas-Los Colinas, TX 120 1989
Houston-Clear Lake, TX 110 1990
-----
TOTAL 1,294
=====
</TABLE>
The table below sets forth certain performance information for Res
USA's Residence Inns for the indicated periods.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
--------------------- -----------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of properties......... 11 11 11 11 11
Number of rooms.............. 1,294 1,294 1,294 1,294 1,294
Average daily rate........... $ 93.07 $ 87.67 $ 88.29 $ 82.73 $ 78.32
Occupancy.................... 88.6% 88.6% 86.8% 88.7% 88.1%
REVPAR....................... $ 82.44 $ 77.69 $ 76.63 $ 73.41 $ 69.00
% REVPAR change.............. 6.1% -- 4.4% 6.4% --
</TABLE>
Amendments to the Partnership Agreement of Res USA
Transfer of Interests in the Hotel Partnerships to the Company
--------------------------------------------------------------
Immediately Prior to the Consummation of the Consolidation. For federal income
- ------------------------------------------------------------
tax purposes, immediately prior to the consummation of the Consolidation, each
Hotel Partnership GP will contribute a one percent partnership interest in all
of the Hotel Partnerships to the Company in exchange for Units reflecting the
estimated Exchange Value attributable to such one percent partnership interest.
In Res USA, the Hotel Partnership GP owns only a five percent general partner
interest; therefore, the transfer to the Company of a one percent general
partner interest does not require the admittance of a new general partner but
does require an amendment to Section 6.01 of the partnership agreement to allow
a general partner to transfer, sell or assign its general partner interest or
any portion thereof in the partnership. Section 6.01 of the partnership
agreement of Res USA will be amended as follows:
Res USA Supp-13
<PAGE>
Section 6.01. Limitation on Voluntary Withdrawal. Except as
provided by Section 5.02B, the General Partner shall not have
the right (but shall have the power) to retire or withdraw
voluntarily from the Partnership. The General Partner may,
with the Consent of the Limited Partners, sell, transfer or
assign its entire general partner Interest or any portion
thereof. Upon such sale, transfer or assignment of its entire
general partner Interest, such purchaser, transferee or
assignee shall become the substitute General Partner of the
Partnership immediately prior to the withdrawal of the General
Partner and shall continue the business of the Partnership
without dissolution.
The consent of a majority of the outstanding limited partner interests
in Res USA is required to amend Section 6.01 of the partnership agreement.
Permit Res USA to Enter into the Lease with the Lessee. The Lease for
------------------------------------------------------
Res USA's Hotels must be entered into not later than the close of business on
the business day immediately preceding the Closing Date. The partnership
agreement of Res USA allows for the sale, lease or other disposition of its
Hotels with the consent of a majority of the outstanding limited partnership
interests of Res USA. However, such sale, lease or other disposition must be
done in accordance with certain procedures specified in the partnership
agreement including, among other things, the requirement to obtain three
appraisals and to purchase the hotels for cash. Therefore, the partnership
agreement of Res USA must be amended to eliminate those certain procedures. The
new Section 5.02B(x) of the partnership agreement of Res USA shall read as
follows:
(x) cause the Partnership to sell, lease or otherwise dispose
(or consent to the sale, lease or other disposition), directly
or indirectly, in one transaction or a series of related
transactions of any or all of the Hotels.
The consent of a majority of the outstanding limited partner interests
in Res USA is required to amend Section 5.02 of the partnership agreement.
Other Amendments. Amendments to certain terms and sections of the
----------------
partnership agreement of Res USA will be made in order to (a) delete certain
obsolete references to entities and agreements that are no longer in existence,
(b) update the partnership agreement to reflect the passage of time since the
formation of Res USA and (c) make any other amendments to the partnership
agreement to consummate the Consolidation. The Hotel Partnership GP does not
believe that these amendments would affect the rights of the Res USA Limited
Partners in any material respect nor the duties and obligations of the Hotel
Partnership GP. These changes are included, along with the other proposed
amendments, in the copy of the partnership agreement, as proposed to be amended,
which is attached hereto. The amended partnership agreement is marked to
indicate the revisions made to the existing partnership agreement and should be
read in its entirety. Deleted provisions are contained in brackets and struck
through and added provisions are in bold type and underlined.
The Hotel Partnership GP recommends that the Res USA Limited Partners
vote to approve the requested amendments to the partnership agreement of Res
USA.
Fairness
General. There are no material differences with respect to the fairness
of the Consolidation to the Hotel Partnerships, individually or in the
aggregate. Therefore, the discussion of the fairness of the Consolidation set
forth below is intended to summarize the Hotel Partnership GP's belief as to
Res USA Supp-14
<PAGE>
fairness and the material factors on which such belief is based. For a more
detailed discussion of the fairness of the Consolidation, see the section
entitled "Fairness Analysis and Opinion" in the Consent Solicitation.
Hotel Partnership GP's Belief as to Fairness. The Hotel Partnership GP
believes that the terms of the Consolidation provide substantial benefits and
are fair to the Res USA Limited Partners and recommends that all Res USA Limited
Partners vote FOR the Consolidation. In arriving at this conclusion, the Hotel
Partnership GP has relied primarily on the following factors, as well as others
described under "Fairness Analysis and Opinion -- Fairness Analysis" in the
Consent Solicitation: (i) its view that the expected benefits of the
Consolidation for the Res USA Limited Partners outweigh the risks and potential
detriments to the Res USA Limited Partners (see "Background and Reasons for the
Consolidation -- Reasons for the Consolidation" in the Consent Solicitation),
(ii) its view that the Exchange Value established for Res USA and the resulting
value allocable to the Res USA Limited Partners represents fair consideration
for the interests held by the Res USA Limited Partners and is fair to such Res
USA Limited Partners from a financial point of view and (iii) the Fairness
Opinion of AAA as described below.
Basis for Hotel Partnership GP's Belief as to Fairness.
Comparison of Alternatives. To assist Res USA Limited Partners in
evaluating the consolidation, the Hotel Partnership GP has attempted to compare
the estimated value of Units to be received in the Consolidation with: (i) the
face amount of Notes that will be issued to Dissenting Partners who elect to
exchange the Units they receive in the Consolidation for Notes; (ii) estimates
of the value of the Hotel Partnership Interests in Res USA assuming that Res USA
continues as an operating business and its assets are sold in ten years (the
"Continuation Value"); and (iii) estimates of the value of the Hotel Partnership
Interests in Res USA on a liquidation basis, assuming that Res USA Hotels are
sold at their Appraised Values and the net other proceeds (together with its Net
Other Assets), after payment of debts and other obligations (including
defeasance costs or prepayment penalties and deferred management fees) and an
allowance for liquidation costs, expenses and contingencies equal to 2% of the
Appraised Values of the Hotels (the "Liquidation Value") are distributed to the
Partners of Res USA in accordance with the partnership agreement of Res USA. The
Hotel Partnership GP has not attempted to estimate the value of Hotel
Partnership Interests of Res USA following a standalone UPREIT reorganization
because the Hotel Partnership GP does not believe such a reorganization is
feasible and such valuation estimates would be subject to substantial
uncertainties. Since the estimated value of the Units and the estimated value
under the alternatives to the Consolidation are dependent upon a number of
estimates, variables and assumptions, as well as varying market conditions, no
assurance can be given that the estimated values indicated could be realized.
However, the Hotel Partnership GP believes that analyzing the alternatives in
terms of estimated values, based upon currently available market data and
reasonable estimates and assumptions, establishes a reasonable basis for
comparing the Units to the alternatives. The results of this comparative
analysis (including the methodology and assumptions used to derive estimated
values) are summarized under "Background and Reasons for the Consolidation --
Comparison of Alternative Considerations" and "Fairness Analysis and Opinion --
Comparison of Alternatives" in the Consent Solicitation.
The following table summarizes the results of the comparative analysis
described above. There can be no assurance, however, that the actual value of
Units received in the Consolidation, the actual face amount of Notes offered to
Dissenting Partners, the actual value of continuing Res USA or the actual net
liquidation proceeds would not differ substantially from those estimated for
purposes of this analysis.
Res USA Supp-15
<PAGE>
Summary of Comparative Valuation Alternatives/(1)/
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Face Amount of
Estimated Notes Offered Estimated Estimated Liquidation
Value to Dissenting Continuation Value if Assets Sold
Hotel Partnership of Units/(2)/ Partners/(3)/ Value/(4)/ at Appraised Value/(5)/
- ----------------- ------------- ------------- ------------ -----------------------
<S> <C> <C> <C> <C>
Res USA............. $ $ $ $
</TABLE>
- -------------------
/(1)/ A limited partner original investment of $1,000 equates to 1/100th of a
Partnership Unit in Res USA.
/(2)/ Assumes that each Res USA Limited Partner is allocated Units with a value
equal only to its estimated Exchange Value. The amounts in this column
represent the portion of the estimated Exchange Value of Res USA that
would be allocable to Res USA Limited Partners per $1,000 limited partner
original investment.
/(3)/ The amounts in this column are equivalent to the portion of the
Liquidation Value of Res USA that would be reflected in the Notes to be
issued to Res USA Dissenting Partners per $1,000 limited partner original
investment. See footnote (5) below.
/(4)/ The amounts in this column represent the estimated amount that would be
distributed to Res USA Limited Partners per $1,000 limited partner
original investment if Res USA was continued for ten years and then sold
for its estimated value, determined using a discounted cash flow analysis
applied to the anticipated cash flows from the operation and sale of each
Hotel and taking into account the terms of existing debt obligations (the
"Continuation Value").
/(5)/ The amounts in this column represent the amount that would be distributed
to Res USA Limited Partners per $1,000 limited partner original
investment if Res USA sold its Hotels at their Appraised Values as of
_____ __, 1998, and distributed the net proceeds (after payment of debts
and other obligations (including defeasance costs or prepayment penalties
and deferred management fees) and an allowance for liquidation costs,
expenses and contingencies equal to 2% of the Appraised Value of the
Hotels) (the "Liquidation Value"), in accordance with its partnership
agreement.
Fairness Opinion. AAA, an independent, nationally recognized hotel
valuation and financial advisory firm, has rendered the Fairness Opinion,
attached as Appendix B to the Consent Solicitation, which concluded that: (i)
the methodologies used to determine the Exchange Value of each Hotel Partnership
and to allocate the Units among each of the Hotel Partnerships are fair, from a
financial point of view, to the Limited Partners of each Hotel Partnership, (ii)
the underlying assumptions used to determine the Exchange Value of each Hotel
Partnership and the purchase price of each Acquisition Hotel (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) are fair and reasonable from the standpoint of
each Hotel Partnership; (iii) the methodology used to allocate Units received
by each Hotel Partnership among its general and Limited Partners is fair and
reasonable to the Limited Partners; (iv) the methodologies and the underlying
assumptions used to determine the Continuation Value and the Liquidation Value
of each Hotel Partnership (including, without limitation, the assumptions used
to determine the various adjustments to the Appraised Values of the Hotels) are
fair and reasonable from the standpoint of each Hotel Partnership and (v) the
economic terms of the Leases are fair and reasonable from the standpoint of the
Company. See "Fairness Analysis and Opinion -- Fairness Opinion" in the Consent
Solicitation.
Federal Income Tax Considerations
In addition to the federal income tax considerations discussed in the
sections of the Consent Solicitation entitled "Federal Income Tax
Considerations" and "Risk Factors -- Federal Income Tax Risks," Res USA Limited
Partners should read carefully the following discussion of federal income
Res USA Supp-16
<PAGE>
tax considerations applicable specifically to the Res USA Limited Partners. The
numerical data and estimates included in this discussion are based on various
factual assumptions and information which are believed by the Company and the
Hotel Partnership GP to be reliable. However, some of these assumptions
inevitably will not materialize, and unanticipated events and circumstances will
occur. Therefore, there likely will be differences between the numerical data
and estimates included herein and actual results, and the variations may be
material and adverse.
Applicability of Tax Opinions
Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to CRFLT and the
Company, has provided to CRFLT and the Company an opinion letter (substantially
in the form of Appendix E to the Consent Solicitation) as to certain federal
income tax consequences of the Consolidation. The opinion letter is based upon
certain assumptions and certain representations provided by CRFLT, the Company
and the Hotel Partnership GPs. These representations generally involve factual
matters relating to the organization, ownership and operations (including the
income, assets, businesses, liabilities and properties) of the Hotel
Partnerships prior to the Consolidation and of CRFLT, the Company and the Hotel
Partnerships following the Consolidation. In addition, on the Closing Date,
Hogan & Hartson expects to provide to CRFLT and the Company an opinion letter
(substantially in the form of Exhibit __ to the Prospectus) as to certain
federal income tax consequences relating to the Offering. See "Federal Income
Tax Considerations -- Summary of Tax Opinions" in the Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is
substantially in the form of Appendix E to the Consent Solicitation is
applicable to the Res USA Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code
and Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson on the Closing Date will be based on
the same authorities as of the date of the Closing. No assurance can be given
that future legislation, Treasury Regulations, administrative interpretations
and court decisions will not significantly change the law or the above
conclusions reached by counsel. In addition, any such change could apply
retroactively to transactions preceding the date of change. Moreover, opinions
of counsel merely represent counsel's best judgment with respect to the probable
outcome on the merits and are not binding on the IRS or the courts. Accordingly,
even if there is no change in applicable law, no assurance can be provided that
such opinions (which do not bind the IRS or the courts) will not be challenged
by the IRS or will not be sustained by a court if so challenged. Neither CRFLT,
the Company nor the Hotel Partnership GPs have requested or plan to request any
rulings from the IRS concerning the tax consequences of the Consolidation or the
treatment of either the Company or CRFLT subsequent to the Consolidation.
Tax Consequences of Formation of the Company
Overview. Hogan & Hartson has provided an opinion to the effect that
--------
the formation of the Company will not result in the recognition of taxable gain
or loss at the time of the Consolidation to a Res USA Limited Partner (i) who
does not exercise his Unit Redemption Right on a date sooner than the date two
years after the date of the consummation of the Consolidation; (ii) who does not
receive a cash distribution (or a deemed cash distribution resulting from relief
from liabilities, including as a result of the prepayment of the indebtedness of
Res USA with proceeds from the Offering) in connection with the Consolidation in
excess of his aggregate adjusted basis in his Res USA Partnership Unit at the
time of the Consolidation; (iii) who does not receive Notes upon
Res USA Supp-17
<PAGE>
exercise of Dissenters' Rights; (iv) who is not required to recognize gain by
reason of the exercise by another Res USA Limited Partner of Dissenters' Rights
and the option to receive Notes; and (v) who does not have his "at risk" amount
fall below zero as a result of the Consolidation. See "Federal Income Tax
Considerations -- Summary of Tax Opinions" in the Consent Solicitation. With
respect to the foregoing exceptions to nonrecognition treatment, the Company and
the Hotel Partnership GP believe that a Res USA Limited Partner who acquired his
Res USA Partnership Units in the original offering of such Units for cash and
who has held such Units at all times since (i) should not be considered to
receive, as a result of the Consolidation, a distribution (or a deemed cash
distribution resulting from relief from liabilities, including as a result of
the prepayment of the indebtedness of Res USA with Offering proceeds) that
exceeds his aggregate adjusted basis in his Res USA Partnership Unit at the time
of the Consolidation, and (ii) should not have his "at risk" amount fall below
zero as a result of the Consolidation. See "Federal Income Tax Considerations --
Tax Consequences of the Formation of the Company -- Overview" in the Consent
Solicitation.
With respect to the exercise of Dissenters' Rights, Hogan & Hartson is
of the opinion that although the matter is not free from doubt, a Res USA
Limited Partner who does not exercise Dissenters' Rights and elects to receive
Notes in connection with the Consolidation should not be required to recognize
gain by reason of another Res USA Limited Partner's exercise of such rights.
With respect to the exercise of a Unit Redemption Right, Hogan & Hartson is of
the opinion that it is more likely than not that a Res USA Limited Partner's
exercise of his Unit Redemption Right more than one year after the date of
consummation of the Consolidation but less than two years after such date will
not cause the Consolidation itself to be a taxable transaction for the Res USA
Limited Partner (or the other Res USA Limited Partners). See "Federal Income Tax
Considerations -- Summary of Tax Opinions" in the Consent Solicitation. Opinions
of counsel, however, do not bind the IRS or the courts, and no assurances can be
provided that such opinions will not be challenged by the IRS or will be
sustained by a court if so challenged.
Amount of Deemed Cash Distribution. With respect to his Res USA
----------------------------------
Partnership Units, a Res USA Limited Partner will receive no actual cash
distribution in connection with the Consolidation but will be deemed to receive
a cash distribution in connection with the Consolidation to the extent that his
share of Company liabilities immediately after the Consolidation is less than
his share of Res USA liabilities immediately prior to the Consolidation (for
example, because of the use of proceeds from the Offering to prepay the
indebtedness of Res USA). See "Federal Income Tax Considerations -- Tax
Consequences of the Formation of the Company -- Relief from Liabilities/Deemed
Cash Distribution" in the Consent Solicitation. As a consequence of the
Consolidation (including the use of proceeds from the Offering to prepay the
indebtedness of Res USA), the Company and the Hotel Partnership GP believe,
based upon and subject to the assumptions and other limitations described below,
that (i) the Res USA Limited Partners' aggregate share of indebtedness should
decrease by $______ (from $________ (on December 31, 1997) to $_________); and
(ii) the share of indebtedness of an individual Res USA Limited Partner who
acquired his Res USA Partnership Unit in the original offering of such Units for
cash and has held such Units at all times since should decrease by $_____ per
Res USA Partnership Unit (from $_____ (on December 31, 1997) to $_______). For a
Res USA Limited Partner who did not acquire his Res USA Partnership Units in the
original offering of such Units for cash or who has not held his Res USA
Partnership Units at all times since such offering, the above information could
vary materially.
Estimated Amount of Taxable Gain. A Res USA Limited Partner will
--------------------------------
recognize taxable gain as a result of the deemed cash distribution discussed in
the previous paragraph, however, only to the extent that the deemed cash
distribution exceeds his adjusted tax basis in his Res USA Partnership Units
immediately prior to the Consolidation. As described below, the Company and the
Hotel Partnership GP estimate that as of December 31, 1997, the adjusted tax
basis of a Res USA Limited Partner who acquired his Res USA Partnership Units in
the original offering of such
Res USA Supp-18
<PAGE>
Units for cash and has held such Units at all times since was ______ per Res USA
Partnership Unit (which is greater than the deemed cash distribution of _____
per Res USA Partnership Unit discussed in the previous paragraph). Accordingly,
the Company and the Hotel Partnership GP believe, based upon and subject to the
assumptions and other limitations described below, that a Res USA Limited
Partner who acquired his Res USA Partnership Units in the original offering of
such Units for cash and has held the Units at all times since should not
recognize gain due to the deemed cash distribution resulting from the relief
from liabilities in connection with the Consolidation.
The adjusted tax basis of a Res USA Limited Partner who did not acquire
his Res USA Partnership Units in the original offering of such Units for cash or
who has not held his Res USA Partnership Units at all times since such offering
could vary materially from that of a Limited Partner who did so. If a Res USA
Limited Partner has an adjusted tax basis in his Res USA Partnership Units (per
Res USA Partnership Unit) that is less than the adjusted tax basis of a Res USA
Limited Partner who acquired his Res USA Partnership Units in the original
offering of such Units for cash and has held such Units at all times since, he
could recognize gain due to the deemed cash distribution resulting from the
relief from liabilities in connection with the Consolidation.
Tax Treatment of Res USA Limited Partners Who Hold Units Following the
Consolidation
Initial Basis in Units. In general, a Res USA Limited Partner will have
----------------------
an initial tax basis in his Units ("Initial Basis") received in the
Consolidation with respect to his Res USA Partnership Units equal to the basis
in his Res USA Partnership Units at the time of the Consolidation, reduced to
reflect any deemed cash distributions resulting from a reduction in his share of
Res USA liabilities and increased to reflect any gain required to be recognized
in connection with the Consolidation. As of December 31, 1997, a Res USA Limited
Partner who acquired his Res USA Partnership Units in the original offering of
such Units for cash and has held such Units at all times since, had an adjusted
tax basis in his Res USA Partnership Units of $____ per Res USA Partnership Unit
(after giving effect to the Consolidation, including the prepayment of
indebtedness contemplated in connection therewith). Based upon and subject to
the assumptions and other limitations described below, the Company and the Hotel
Partnership GP believe that the tax basis of such a Res USA Limited Partner in
his Units received in the Consolidation with respect to his Res USA Partnership
Units would be $____ per Res USA Partnership Unit. For a Res USA Limited Partner
who did not acquire his Res USA Partnership Units in the original offering of
such Units for cash or who has not held his Res USA Partnership Units at all
times since such offering, the above information could vary materially. For a
discussion of the federal income tax considerations for a Limited Partner from a
reduction in basis that may result from the Consolidation, see "Federal Income
Tax Considerations -- Tax Consequences of Formation of the Company -- Initial
Tax Basis of Units" in the Consent Solicitation.
Tax Allocations with Respect to Contributed Hotels upon a Sale of Res
---------------------------------------------------------------------
USA Hotels. Pursuant to Section 704(c) of the Code, income, gain, loss and
- ----------
deduction attributable to appreciated or depreciated property that is
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of such unrealized gain or unrealized loss is generally
equal to the difference between the fair market value of the contributed
property at the time of contribution and the adjusted tax basis of such property
at the time of contribution (referred to as "Book-Tax Difference"). The Company
and the Hotel Partnership GP, based upon and subject to the assumptions and
other limitations described below, estimate that the Book-Tax Difference of the
Res USA Hotels will be $________ upon the consummation of the Consolidation.
Res USA Supp-19
<PAGE>
In the event that the Company were to sell all of the Res USA Hotels,
the Partners of Res USA would be specially allocated by the Company an amount of
taxable gain equal to the Book-Tax Difference with respect to the Res USA Hotels
($ ____ in the aggregate if the Res USA Hotels were sold immediately after the
consummation of the Consolidation, according to the estimate in the previous
paragraph). The share of such gain allocable to a Res USA Limited Partner who
acquired his Res USA Partnership Units in the original offering of such Units
for cash and held such Units at all times since would be $___ per Res USA
Partnership Unit. The share of such gain of a Res USA Limited Partner who did
not acquire his Res USA Partnership Units in the original offering of such Units
for cash or who has not held his Res USA Partnership Units at all times since
such offering could vary materially from this amount. If the Company were to
sell one or more, but not all, of the Res USA Hotels, the former Partners of Res
USA would be specially allocated by the Company an amount of taxable gain equal
to that portion of the Book-Tax Difference for the Res USA Hotels that is
attributable to the Res USA Hotel or Hotels sold. The Partnership Agreement does
not impose any restrictions upon the Company from causing the sale of any or all
of the Res USA Hotels. See "Federal Income Tax Considerations -- Tax Treatment
of Limited Partners Who Hold Units Following the Consolidation -- Sale of
Individual Hotels" in the Consent Solicitation.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
------------------------------------------------------------
allocations of depreciation to the Res USA Limited Partners will change
significantly as a result of the Consolidation for two reasons. First, as
described above, pursuant to Section 704(c) of the Code, depreciation and
deductions attributable to the Res USA Hotels will be required to be allocated
for federal income tax purposes in a manner such that the Res USA Partners are
charged with the Book-Tax Difference associated with the Res USA Hotels at the
time of the consummation of the Consolidation. Consequently, a Res USA Limited
Partner will be allocated less depreciation with respect to the Res USA Hotels
than would be the case if the Consolidation had not occurred and the Res USA
Limited Partner had continued to hold his Res USA Partnership Units. Second, the
Consolidation will cause the technical termination of Res USA and each of the
other Hotel Partnerships under Section 708(b)(1)(B) of the Code. Section
168(i)(7) of the Code provides, in effect, that when a partnership terminates
under Section 708(b)(1)(B) of the Code, the partnership must begin new
depreciation periods for its property. As a result, the remaining bases of the
Res USA Hotels and the Hotels held by the other Hotel Partnerships will be
depreciated over 39 years, rather than over the remaining current life of such
Hotels (which ranges from 8 years to 25 years). See "Federal Income Tax
Considerations -- Tax Treatment of Limited Partners Who Hold Units Following the
Consolidation -- Effect of Consolidation on Depreciation" in the Consent
Solicitation.
To illustrate the consequences of these changes for a Res USA Limited
Partner, the Company and the Hotel Partnership GP estimate, based upon and
subject to the assumptions and other limitations described below, that if the
Consolidation were consummated on January 1, 1998, the amount of income for 1998
that would be allocated to a Res USA Limited Partner who acquired his Res USA
Partnership Units in the original offering of such Units for cash and held such
Units at all times since would increase by $____ per Res USA Partnership Unit
(from $_____ to $_____) over the estimated amount of income that would have been
allocated to such Res USA Limited Partner for 1998 if Res USA did not
participate in the Consolidation. No attempt is made here to estimate the effect
of the Consolidation on tax allocations in years subsequent to the 1998 taxable
year, but the Consolidation is expected to effect such allocations as well. The
amount of income allocable to a Res USA Limited Partner who did not acquire his
Res USA Partnership Units in the original offering of such Units for cash or who
has not held his Res USA Partnership Units at all times since such offering
could vary materially from this amount. See "Federal Income Tax Considerations
- -- Tax Treatment of Limited Partners Who Hold Units Following the Consolidation
- -- Tax Allocations with Respect to Book-Tax Difference on Contributed Hotels" in
the Consent Solicitation.
State and Local Taxes. Res USA Limited Partners holding Units may be
---------------------
subject to state and local taxation in a number of jurisdictions in which the
Company directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this
Res USA Supp-20
<PAGE>
regard, immediately following the Consolidation, the Company will own properties
in 35 states across the United States. Currently, Res USA owns properties in
eight states. See "Federal Income Tax Considerations -- Tax Treatment of Limited
Partners Who Hold Units Following the Consolidation -- State and Local Taxes" in
the Consent Solicitation.
Assumptions Used in Determining Tax Consequences of the Consolidation
In preparing the estimates set forth above, the Company and the Hotel
Partnership GP made several key assumptions, which are described below. If any
such assumption is not accurate with respect to a particular Res USA Limited
Partner, the tax consequences of the Consolidation to such Res USA Limited
Partner could be substantially different from those reflected above.
ACCORDINGLY, EACH RES USA LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS
OWN TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH RES USA LIMITED PARTNER'S
PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN
THE CONSOLIDATION.
First, with respect to a Res USA Limited Partner's basis in his Res USA
Partnership Units prior to the Consolidation, the Company and the Hotel
Partnership GP assumed that a Res USA Limited Partner acquired his Res USA
Partnership Units in the original offering of such Units for cash and has held
such Units at all times since. The adjusted tax basis of a Res USA Limited
Partner who did not acquire his Res USA Partnership Units in the original
offering of such Units for cash could vary materially from that of a Res USA
Limited Partner who did so. In this regard, it should be noted that the adjusted
tax basis of a Res USA Limited Partner who acquired his Res USA Partnership
Units in the original offering of such interests for cash still could vary
substantially from the estimates set forth above for several reasons, including
but not limited to (i) if the Res USA Limited Partner has received special
allocations of items of Res USA income, gain, deduction, loss, or credit, or
non-pro rata distributions, or made non-pro rata contributions; or (ii) if a Res
USA Limited Partner's share of Res USA nonrecourse liabilities differs from his
pro rata percentage of such liabilities immediately prior to consummation of the
Consolidation. If a Res USA Limited Partner has an adjusted tax basis in his Res
USA Partnership Units that is less than the tax basis of a Res USA Limited
Partner who acquired his Res USA Partnership Units in the original offering of
such Units for cash and has held such Units at all times since, the
Consolidation might result in the receipt by the Res USA Limited Partner of a
deemed distribution of cash in excess of his adjusted tax basis in his Res USA
Partnership Units, which could result in the recognition of income or gain.
Second, the Company and the Hotel Partnership GP assumed that the
method expected to be used by the Company to allocate liabilities among the
Partners will be respected for federal income tax purposes. The Company will
allocate liabilities among the Partners as described in "Federal Income Tax
Considerations -- Tax Consequences of the Formation of the Company -- Relief
from Liabilities/Deemed Cash Distribution" in the Consent Solicitation. If the
method used by the Company were not respected for federal income tax purposes
and the nonrecourse liabilities actually allocable to a Res USA Limited Partner
are less than the amount assumed above, the Consolidation might result in the
receipt by such Res USA Limited Partner of a deemed distribution of cash that is
greater than the deemed distribution of cash expected to be received by such Res
USA Limited Partner as described above in "Tax Consequences of Formation of the
Company -- Amount of Deemed Cash Distribution." For a Res USA Limited Partner
who did not acquire his Res USA Partnership Units in the original offering of
such Units for cash or who did not hold such Units at all times since, this
deemed distribution of cash could exceed his adjusted tax basis in his Res USA
Partnership Units, which could result in the recognition of income or gain.
Third, the Company and the Hotel Partnership GP assumed that all of the
Hotel Partnerships will elect to participate in the Consolidation and that no
Notes will be issued. If less
Res USA Supp-21
<PAGE>
than all of the Hotel Partnerships elect to participate in the Consolidation,
however, the Consolidation still may be consummated so long as the Minimum
Participation Condition and all other conditions to consummation of the
Consolidation are satisfied or waived. See "The Consolidation -- Conditions to
Consummation of the Consolidation." Moreover, the Company has reserved the right
to exclude any Hotel Partnership from participation in the Consolidation (even
if the requisite number of Limited Partners in a Hotel Partnership have voted to
approve of and participate in the Consolidation and each of the other conditions
to the Consolidation has been satisfied or waived) if the Company determines
that such exclusion is in its best interests. See "The Consolidation -- Right to
Exclude Hotel Partnerships." If less than all of the Hotel Partnerships
participate in the Consolidation, the Consolidation might result in the receipt
by Res USA Limited Partners of a deemed distribution of cash that is greater
than the deemed distribution of cash expected to be received by Res USA Limited
Partners as described above in "Tax Consequences of Formation of the Company --
Amount of Deemed Cash Distribution." For a Res USA Limited Partner who did not
acquire his Res USA Partnership Units in the original offering of such Units for
cash or who did not hold such Units at all times since, this deemed distribution
of cash could exceed his adjusted tax basis in his Res USA Partnership Units,
which could result in the recognition of income or gain.
Fourth, the Company and the Hotel Partnership GP assumed that Partners
in each Hotel Partnership would receive Units in the Consolidation with a value
exactly equal to the Exchange Value, that CRFLT would raise gross proceeds in
the Offering of $800 million, and that CRFLT would own a ____% interest in the
Company as a result of the contribution of the proceeds from the Offering to the
Company. With respect to the proceeds from the Offering, the Company and the
Hotel Partnership GP assumed that approximately $539 million would be used to
prepay certain indebtedness of the Hotel Partnerships (specifically the CBM2
Certificates, the RIBM1 Senior Mortgage and all of the outstanding indebtedness
of Res USA) and that approximately $36 million would be used to pay prepayment
penalties associated with these prepayments. To the extent that the value of the
Units received by the Partners of Res USA in the Consolidation exceeds the
Exchange Value, the aggregate Book-Tax Difference of the Res USA Hotels
discussed above would increase accordingly. If proceeds from the Offering are
not used to prepay the indebtedness of Res USA, the Consolidation might result
in the receipt by Res USA Limited Partners of a deemed distribution of cash that
is less than the deemed distribution of cash expected to be received by Res USA
Limited Partners as described above in "Tax Consequences of Formation of the
Company -- Amount of Deemed Cash Distribution." However, in the event the
nonrecourse liabilities actually allocable to a Res USA Limited Partner are less
than the amount assumed above (including, for example, if the proceeds from the
Offering exceed $800 million), the Consolidation might result in the receipt by
such Res USA Limited Partner of a deemed distribution of cash that is greater
than the deemed distribution of cash expected to be received by such Res USA
Limited Partner as described above in "Tax Consequences of Formation of the
Company -- Amount of Deemed Cash Distribution." For a Res USA Partner who did
not acquire his Res USA Partnership Units in the original offering of such Units
for cash or who did not hold such Units at all times since, this deemed
distribution of cash could exceed his adjusted tax basis in his Res USA
Partnership Units, which could result in the recognition of income or gain.
Finally, the Company and the Hotel Partnership GP assumed that the
Mergers will be treated for federal income tax purposes as the transfer by the
Partners of their interests in the Hotel Partnerships to the Company in exchange
for Units. There can be no assurance, however, that the IRS will not seek to
recharacterize each Merger as either (i) the liquidation of a Hotel Partnership
followed by the distribution by the Hotel Partnership of its assets to its
Partners and the subsequent transfers by such Partners of such assets to the
Company in exchange for Units, or (ii) the transfer by a Hotel Partnership of
its assets to the Company in exchange for Units and the subsequent distribution
of such Units to its Partners. If the Mergers are recharacterized in such a
manner, the tax consequences of the Consolidation to the Res USA Partners likely
would be materially affected.
Res USA Supp-22
<PAGE>
EACH RES USA LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN
TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH RES USA LIMITED PARTNER'S PARTICULAR
TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE
CONSOLIDATION. THE TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION TO A
PARTICULAR RES USA LIMITED PARTNER COULD VARY SUBSTANTIALLY FROM THE ESTIMATES
DESCRIBED ABOVE.
Tax Treatment of Res USA Limited Partners Who Exercise Dissenters'
Rights and Elect to Receive Notes
A Res USA Limited Partner who exercises his Dissenters' Rights and
elects to receive Notes in connection with the Consolidation will be treated as
having made a taxable disposition of his Res USA Partnership Units. The amount
realized in connection with such disposition will equal the sum of the "issue
price" of the Notes (i.e., the face amount of the Notes) (currently estimated as
$_____ per Res USA Partnership Unit) plus the portion of the Res USA liabilities
allocable to the Res USA Limited Partner for federal income tax purposes
(estimated as $_______ per Res USA Partnership Unit as of December 31, 1997). To
the extent the amount realized exceeds the Res USA Limited Partner's adjusted
basis in his Res USA Partnership Units, the Res USA Limited Partner will
recognize gain. For a discussion of the federal income tax rates applicable to
the net capital gain from the sale of a capital asset, see "Federal Income Tax
Considerations -- Tax Treatment of Limited Partners Who Hold Units Following the
Consolidation -- Disposition of Units by Limited Partners" in the Consent
Solicitation. In this regard, the Hotel Partnership GP estimates that, as of
December 31, 1997, if Res USA sold all of its Hotels in a fully taxable
transaction for a net amount, after payment of liabilities, equal to the
Liquidation Value of Res USA, the "unrecognized Section 1250 gain" per Res USA
Partnership Unit would be $______ and the gain subject to tax as ordinary income
under Section 1245 per Res USA Partnership Unit would be $______.
A Res USA Limited Partner who exercises Dissenters' Rights and elects
to receive Notes may be eligible to defer at least a portion of that gain under
the "installment sale" rules. Those rules, however, may not permit the Res USA
Limited Partner to defer all of the gain (and, to the extent that the face
amount of the Notes (and any other installment obligations received by the
taxpayer during the year) outstanding at the end of the taxable year in which
the Consolidation occurs exceeds $5,000,000, will require that the Res USA
Limited Partner who defers gain pay to the IRS interest on the resulting tax
that has been deferred). The Res USA Limited Partner, for instance, will not be
eligible to defer gain to the extent that such gain would be taxed as ordinary
income under Section 1245 of the Code. In addition, to the extent that the Res
USA Limited Partner's share of Res USA liabilities exceeds his adjusted tax
basis in his Res USA Units immediately prior to the Consolidation, the Res USA
Limited Partner will not be eligible to defer gain recognized upon the receipt
of Notes. Lastly, if a Res USA Limited Partner disposes of Notes, any gain that
had been deferred would be recognized in the year of disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR DISSENTING RES USA LIMITED
PARTNER COULD HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE
CONSOLIDATION, AND THE SUBSEQUENT OWNERSHIP AND DISPOSITION OF NOTES. THEREFORE,
IT IS ESSENTIAL THAT SUCH RES USA LIMITED PARTNERS CONSULT WITH THEIR OWN TAX
ADVISORS WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH
RES USA LIMITED PARTNERS' RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING
JURISDICTION.
Special Considerations for Res USA Limited Partners Who Are Not U.S.
Persons
Res USA Supp-23
<PAGE>
The Consolidation involves special tax considerations for Res USA
Limited Partners who are not U.S. Persons (for example, a citizen or resident of
the United States, a partnership, corporation of other entity organized under
the laws of the United States or any political subdivision thereof, or an estate
or trust subject to United States income tax).
First, a Res USA Limited Partner who is not a U.S. Person may be
subject to special tax considerations with respect to the Consolidation and/or
the subsequent ownership and disposition of Units in one or more countries other
than the United States, including, for example, the country in which such Res
USA Limited Partner resides, any countries in which he conducts business, and,
if the Res USA Limited Partner is an entity, the country in which it is
organized and/or has its commercial domicile. The tax laws of other countries
differ significantly from those of the United States, and thus there can be no
assurance that a Res USA Limited Partner who is not a U.S. Person will not incur
significant adverse tax consequences as a result of the Consolidation under laws
of one or more countries other than the United States. IT IS ESSENTIAL THAT A
RES USA LIMITED PARTNER WHO IS NOT A U.S. PERSON CONSULT WITH HIS OWN TAX
ADVISORS WITH REGARD TO ANY TAX CONSEQUENCES OF THE CONSOLIDATION AND/OR THE
SUBSEQUENT OWNERSHIP AND DISPOSITION OF OP UNITS ARISING UNDER THE LAWS OF ANY
FOREIGN TAXING JURISDICTION.
Second, under the Foreign Investment in Real Property Tax Act
("FIRPTA"), the Company may have to withhold and pay tax to the IRS in
connection with the Consolidation with respect to any Res USA Limited Partner
who is not a U.S. Person (even though no taxable gain for U.S. federal income
tax purposes would be recognized in connection with the Consolidation) unless
the Res USA Limited Partner receives from the IRS a "withholding tax
certificate" showing no tax is due in connection with the Consolidation. The
amount required to be withheld would be 10% of the Res USA Limited Partner's
share of the liabilities of Res USA at the time of the Consolidation. To the
extent that the amount withheld by the Company and paid to the IRS exceeded the
Res USA Limited Partner's actual federal income tax liability attributable to
the Consolidation, the Res USA Limited Partner could seek a refund from the IRS.
The Units issued to any Res USA Limited Partner who is not a U.S. Person would
be reduced by the amount of tax required to be withhold and paid to the IRS. A
RES USA LIMITED PARTNER WHO IS NOT A U.S. PERSON SHOULD CONSULT WITH HIS TAX
ADVISORS REGARDING THE PROCESS FOR OBTAINING FROM THE IRS A "WITHHOLDING
CERTIFICATE" SHOWING THAT NO TAX IS DUE IN CONNECTION WITH THE CONSOLIDATION.
The application for such a certificate is the responsibility of the Res USA
Limited Partner and not either Res USA or the Company.
Tax Consequences if Res USA Does Not Participate in the Consolidation
If Res USA does not participate in the Consolidation, the Res USA
Limited Partners would not have any tax consequences resulting from the
Consolidation. The consequences of continued ownership of Res USA Partnership
Units will be the same as would have resulted if the Consolidation had not been
proposed.
* * *
The above description is not exhaustive of all possible tax
considerations associated with the Consolidation. This summary does not discuss
all of the aspects of federal income taxation or state and local taxation that
may be relevant to Res USA Limited Partners in light of their particular
circumstances. EACH RES USA LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH
HIS OWN TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH RES USA LIMITED PARTNER'S
PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN
THE CONSOLIDATION.
Res USA Supp-24
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived
from the Res USA financial statements for the First Three Quarters 1997 and the
First Three Quarters 1996 and for the five most recent fiscal years ended
January 3, 1997. The following data should be read in conjunction with Res USA's
financial statements and the notes thereto, Management's Discussion and Analysis
of Financial Condition and Results of Operations and the other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Years
--------------------- ----------------------------------------------------------------
- -----------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (amounts in thousands, except per limited partner original investment amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $16,973 $16,012 $20,896 $19,788 $18,173 $16,608 $15,657
Operating profit............... 9,804 9,646 12,365 12,102 11,477 9,966 9,166
Net income..................... 5,568 5,145 6,415 6,087 5,210 3,577 2,740
Distributions:
General Partner.............. 352 365 364 95 -- -- 143
Limited Partner.............. 3,179 5,359 7,031 6,802 6,359 6,181 7,438
------- ------- ------- ------- ------- ------- -------
3,531 5,724 7,395 6,897 6,359 6,181 7,581
Per $1,000 limited partner
original investment:
Net income................... 92 90 100 95 84 56 43
Distributions................ 52 88 116 112 105 102 122
EBITDA(1)...................... 13,045 12,678 16,518 16,083 15,152 13,663 12,584
Cash provided by
operating activities......... 7,464 7,511 10,286 10,548 8,781 7,683 6,670
Cash provided by (used in)
investing activities......... 1,759 (1,392) (2,158) (2,338) (1,826) (1,004) (4,943)
Cash used in financing
activities................... 9,487 6,275 8,125 7,591 6,883 6,242 140
Increase (decrease) in cash
and cash equivalents......... (264) (156) 3 619 72 437 1,587
Ratio of earnings to fixed
charges(2)................... 2.25x 2.07x 2.0x 1.94x 1.80x 1.54x 1.42x
Total assets at book value..... 86,695 91,565 90,667 92,405 93,843 95,519 98,220
Total assets at value assigned
for consolidation............ -- -- -- -- -- --
Cash and cash equivalents...... 2,454 2,559 2,718 2,715 2,096 2,024 1,587
Total debt..................... 55,662 61,797 61,618 62,348 63,043 63,567 63,627
Partners' capital:
Limited partners............. 27,172 25,835 25,062 25,998 27,018 28,249 30,844
General partner.............. 3,381 3,407 3,455 3,498 3,288 3,207 3,216
Book value per $1,000
limited partner original
investment................... 447 425 412 428 444 465 508
Exchange Value per $1,000
limited partner original
investment................... -- -- -- -- -- --
</TABLE>
- ------------------
Res USA Supp-25
<PAGE>
(1) EBITDA consists of the sum of net income, interest expense, depreciation and
amortization. EBITDA data is presented because such data is used by certain
investors to determine the partnership's ability to meet debt service
requirements. The partnership considers EBITDA to be an indicative measure
of the partnership's operating performance due to the significance of the
partnership's long-lived assets and because EBITDA can be used to measure
the partnership's ability to service debt, fund capital expenditures and
expand its business; however, such information should not be considered as
an alternative to net income, operating profit, cash flows from operations,
or any other operating or liquidity performance measure prescribed by
generally accepted accounting principles. Cash expenditures for various
long-term assets and interest expense have been, and will be, incurred which
are not reflected in the EBITDA presentations.
(2) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
First Three Quarters 1997 Compared to First Three Quarters 1996
Revenues. Revenues for the First Three Quarters 1997 increased $1 million,
or 6%, to $17 million. Hotel sales increased $1 million, or 3%, to $30.4 million
in the First Three Quarters 1997 reflecting the improvements in revenue per
available room ("REVPAR") for the period. REVPAR is a commonly used indicator of
market performance for hotels which represents the combination of the daily room
rate charged and the average daily occupancy achieved. REVPAR does not include
food and beverage or other ancillary revenues generated by the property. Revenue
and operating profit were impacted primarily by growth in REVPAR of 6%. REVPAR
increased for the First Three Quarters 1997 due primarily to an increase in
average room rates of 6%, while average occupancy remained unchanged. Results
were further enhanced by a 1.5 percentage point increase in house profit margin.
Due to the high occupancy of these properties, Res USA expects future increases
in REVPAR to be driven by room rate increases, rather than occupancy increases.
However, there can be no assurance that REVPAR will continue to increase in the
future.
Operating Costs and Expenses. Operating costs and expenses increased $.8
million to $7.2 million for the First Three Quarters 1997 due primarily to the
accrual of incentive management fees associated with 1997 operations. Prior to
1997, base and incentive management fees were earned only to the extent they
could be paid through current operating cash flow. Subsequent to 1996, any base
and incentive management fees unpaid through current operating cash flow will be
earned but deferred. As a percentage of revenues, operating costs and expenses
were 42% and 40% of revenues for the First Three Quarters 1997 and the First
Three Quarters 1996, respectively.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased by $.2 million to
$9.8 million, or 58% of revenues, for the First Three Quarters 1997 from $9.6
million, or 60% of revenues, for the First Three Quarters 1996.
Interest Expense. Interest expense decreased $.3 million to $4.5 million
for the First Three Quarters 1997 due primarily to a decrease in the overall
amount of debt resulting from the payoff of the $5.4 million note payable to
Host.
Net Income. Net income for the First Three Quarters 1997 increased $.5
million to $5.6 million, or 33% of revenues, compared to net income of $5.1
million, or 32% of revenues, for the First Three Quarters 1996.
1996 Compared to 1995
Res USA Supp-26
<PAGE>
Revenues. Revenues increased $1.1 million, or 6%, to $20.9 million in 1996
from $19.8 million in 1995 as a result of strong growth in REVPAR of over 4%.
Hotel sales increased $2.2 million, or 6%, to $38.7 million in 1996 reflecting
improvements in REVPAR for the year. The increase in REVPAR was the result of an
increase in average room rates of 7% with a decrease in average occupancy of
nearly two percentage points.
Operating Costs and Expenses. Operating costs and expenses increased $.8
million, or 10%, to $8.5 million in 1996 from $7.7 million in 1995, primarily
reflecting an increase in base, system and incentive management fees associated
with higher levels of revenue and operating cash flow. As a percentage of hotel
revenues, operating costs and expenses represented 41% of revenues for 1996 and
39% of revenues in 1995.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased $.3 million to
$12.4 million, or 59% of revenues, in 1996 from $12.1 million, or 61% of
revenues, in 1995.
Interest Expense. Interest expense decreased $.1 million to $6.4 million as
a result of principal amortization.
Net Income. Net income increased $.3 million to $6.4 million, or 31% of
revenues, in 1996 from $6.1 million, or 31% of revenues, in 1995 due primarily
to improved lodging results.
1995 Compared to 1994
Revenues. Revenues increased $1.6 million, or 9%, to $19.8 million in 1995
from $18.2 million in 1994 as a result of strong growth in REVPAR of 6%. The
increase in REVPAR was primarily the result of a 6% increase in average room
rates and an increase of less than one percentage point in average occupancy.
Operating Costs and Expenses. Operating costs and expenses increased $1
million to $7.7 million, or 39% of revenues, in 1995, from $6.7 million, or 37%
of revenues, in 1994 due primarily to the payment of base and incentive
management fees resulting from higher levels of operating cash flow.
Operating Profit. Operating profit increased $.6 million, or 5%, to $12.1
million, or 61% of revenues, in 1995 from $11.5 million, or 63% of revenues, in
1994 due to the changes in revenues and operating costs discussed above.
Interest Expense. Interest expense remained unchanged at $6.5 million for
1995 and 1994.
Net Income. Net income increased $.9 million to $6.1 million, or 31% of
revenues, in 1995, from $5.2 million, or 29% of revenues, in 1994 due to the
items discussed above.
Liquidity and Capital Resources
Cash provided by operations was $7.5 million for both First Three Quarters
1997 and the First Three Quarters 1996, respectively, and $10.3 million in 1996,
$10.5 million in 1995 and $8.8 million in 1994.
Cash provided by investing activities for the First Three Quarters 1997 was
$1.8 million as a result of the expiration of restrictions on certain cash
reserves, while cash used in investing activities for the First Three Quarters
1996 was $1.4 million. Cash used in investing activities was $2.2 million, $2.3
million and $1.8 million in 1996, 1995 and 1994, respectively. Res USA's cash
Res USA Supp-27
<PAGE>
investing activities consist primarily of contributions to the property
improvement fund and capital expenditures for improvements to existing hotels.
Cash used in financing activities for the First Three Quarters 1997 and the
First Three Quarters 1996 was $9.5 million and $6.3 million, respectively.
During the First Three Quarters 1997, Res USA repaid the note payable to Host
primarily using cash from its previously restricted cash reserve which became
available during the period. Cash used in financing activities was $8.1 million,
$7.6 million and $6.9 million in 1996, 1995 and 1994, respectively. Res USA's
cash financing activities primarily consist of capital distributions to partners
and the payment of principal amortization on Res USA's mortgage debt and payment
of financing costs, as well as the refinancing of certain debts of the
partnership.
Res USA Supp-28
<PAGE>
FINANCIAL STATEMENTS
Res USA Supp-29
<PAGE>
Report of Independent Public Accountants
TO THE LIMITED PARTNERS OF MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP:
We have audited the accompanying statement of assets, liabilities and partners'
capital of Marriott Residence Inn USA Limited Partnership (a Delaware limited
partnership) as of January 3, 1997 and December 29, 1995 and the related
statements of operations, changes in partners' capital and cash flows for each
of the three fiscal years in the period ended January 3, 1997. These financial
statements are the responsibility of the General Partner'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 an 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 Marriott Residence Inn USA
Limited Partnership as of January 3, 1997 and December 29, 1995, and the results
of its operations and its cash flows for each of the three fiscal years in the
period ended January 3, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.,
October 23, 1997
Res USA Supp-30
<PAGE>
Marriott Residence Inn USA Limited Partnership
Balance Sheets
January 3, 1997 and December 29, 1995
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
ASSETS
Property and equipment, net...................................... $ 78,422,490 $ 80,186,971
Cash and cash equivalents........................................ 2,718,188 2,714,940
Restricted cash.................................................. 3,793,208 3,793,208
Property improvement fund........................................ 3,193,973 2,952,451
Due from Residence Inn by Marriott, Inc. ........................ 1,024,993 809,143
Other assets..................................................... 1,514,190 1,948,250
------------- --------------
Total Assets................................................ $ 90,667,042 $ 92,404,963
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt..................................................... $ 56,225,275 $ 62,348,091
Note payable due to Host Marriott Corporation..................... 5,392,667 --
Accounts payable and accrued expenses............................. 532,673 560,327
------------- --------------
Total Liabilities............................................... 62,150,615 62,908,418
------------- --------------
PARTNERS' CAPITAL
General Partner
Capital contributions........................................... 3,200,000 3,200,000
Cumulative net income, net of offering costs of $70,681
as of January 3, 1997 and December 29, 1995................... 856,371 535,614
Capital distributions........................................... (601,601) (237,551)
-------------- ---------------
Total General Partner's Capital............................... 3,454,770 3,498,063
------------- --------------
Limited Partners
Capital contributions........................................... 97,671,062 97,671,062
Cumulative net income, net of offering costs of $3,692,932
as of January 3, 1997 and December 29, 1995................... 19,201,530 13,107,139
Capital distributions........................................... (91,810,935) (84,779,719)
-------------- ---------------
Total Limited Partners' Capital................................. 25,061,657 25,998,482
------------- --------------
Total Partners' Capital....................................... 28,516,427 29,496,545
------------- --------------
$ 90,667,042 $ 92,404,963
============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Res USA Supp-31
<PAGE>
Marriott Residence Inn USA Limited Partnership
Statements of Operations
For the Fiscal Years Ended January 3, 1997, December 29, 1995 and
December 30, 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- --------------- -------------
<S> <C> <C> <C>
REVENUES
Hotel revenues.................................... $ 20,895,608 $ 19,787,596 $ 18,172,557
-------------- --------------- -------------
OPERATING COSTS AND EXPENSES
Depreciation and amortization..................... 3,726,389 3,523,142 3,404,225
Residence Inn system fee.......................... 1,471,520 1,383,142 1,300,019
Property taxes.................................... 1,426,548 1,322,162 1,384,325
Base management fee............................... 774,482 730,764 --
Equipment rent and other.......................... 663,614 629,175 606,917
Incentive management fee.......................... 467,633 97,604 --
-------------- --------------- -------------
Total Operating Costs and Expenses............ 8,530,186 7,685,989 6,695,486
-------------- --------------- -------------
OPERATING PROFIT....................................... 12,365,422 12,101,607 11,477,071
Interest Expense....................................... (6,377,022) (6,472,841) (6,537,778)
Interest Income........................................ 426,748 457,802 270,284
-------------- --------------- -------------
NET INCOME............................................. $ 6,415,148 $ 6,086,568 $ 5,209,577
============== =============== =============
ALLOCATION OF NET INCOME
General Partner................................... $ 320,757 $ 304,328 $ 81,790
Limited Partners.................................. 6,094,391 5,782,240 5,127,787
-------------- --------------- -------------
$ 6,415,148 $ 6,086,568 $ 5,209,577
============== =============== =============
NET INCOME PER LIMITED PARTNER UNIT (608 UNITS)........ $ 10,024 $ 9,510 $ 8,434
============== =============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Res USA Supp-32
<PAGE>
Marriott Residence Inn USA Limited Partnership
Statements of Changes in Partners' Capital (Deficit)
For the Fiscal Years Ended January 3, 1997, December 29, 1995
and December 30, 1994
<TABLE>
<CAPTION>
General Partner Limited Partners Total
--------------- ---------------- ---------
<S> <C> <C> <C>
Balance, December 31, 1993........................... $ 3,206,458 $ 28,249,260 $ 31,455,718
Capital distributions........................... -- (6,358,805) (6,358,805)
Net income...................................... 81,790 5,127,787 5,209,577
----------- ------------ ------------
Balance, December 30, 1994........................... 3,288,248 27,018,242 30,306,490
Capital distributions........................... (94,513) (6,802,000) (6,896,513)
Net income...................................... 304,328 5,782,240 6,086,568
----------- ------------ ------------
Balance, December 29, 1995........................... 3,498,063 25,998,482 29,496,545
Capital distributions........................... (364,050) (7,031,216) (7,395,266)
Net income...................................... 320,757 6,094,391 6,415,148
----------- ------------ ------------
Balance, January 3, 1997............................. $ 3,454,770 $ 25,061,657 $ 28,516,427
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Res USA Supp-33
<PAGE>
Marriott Residence Inn USA Limited Partnership
Statements of Cash Flows
For the Fiscal Years Ended January 3, 1997, December 29, 1995 and
December 30, 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 6,415,148 $ 6,086,568 $ 5,209,577
Noncash items:
Depreciation and amortization.......................... 3,726,389 3,523,142 3,404,225
Amortization of deferred financing
costs as interest expense.......................... 388,465 388,465 388,465
Working capital changes:
Due from Residence Inn By Marriott, Inc. .............. (215,850) 483,483 (219,308)
Accounts payable and accrued expenses.................. (27,653) 66,364 (2,334)
----------- ----------- -----------
Cash provided by operations............................... 10,286,499 10,548,022 8,780,625
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net.................. (1,916,314) (1,926,973) (549,132)
Changes in restricted cash................................ -- -- (288,899)
Changes in property improvement fund, net................. (241,522) (411,221) (987,725)
----------- ----------- -----------
Cash used in investing activities......................... (2,157,836) (2,338,194) (1,825,756)
----------- ----------- -----------
FINANCING ACTIVITIES
Capital distributions to partners......................... (7,395,266) (6,896,513) (6,358,805)
Repayment of mortgage principal........................... (6,122,816) (694,800) (523,991)
Proceeds from note payable to Host
Marriott Corporation................................... 5,392,667 -- --
----------- ----------- -----------
Cash used in financing activities......................... (8,125,415) (7,591,313) (6,882,796)
----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS......................... 3,248 618,515 72,073
CASH AND CASH EQUIVALENTS at beginning of year................ 2,714,940 2,096,425 2,024,352
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year...................... $ 2,718,188 $ 2,714,940 $ 2,096,425
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest.................................... $ 5,989,000 $ 6,084,000 $ 6,149,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Res USA Supp-34
<PAGE>
Marriott Residence Inn USA Limited Partnership
Notes to Financial Statements
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Residence Inn USA Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire, own and operate 11 Residence Inn by
Marriott hotels (the "Inns"). The Inns are located in eight states and have a
total of 1,294 suites. On December 29, 1995, Host Marriott Corporation's
operations were divided into two separate companies: Host Marriott Corporation
("Host Marriott") and Host Marriott Services Corporation. The sole general
partner of the Partnership is Marriott RIBM Three Corporation (the "General
Partner"), a wholly-owned subsidiary of Host Marriott. The Inns are managed by
Residence Inn by Marriott, Inc. (the "Manager"), a wholly-owned subsidiary of
Marriott International, Inc. ("MII"), as part of the Residence Inn by Marriott
hotel system.
The Partnership was formed on August 21, 1991 and operations commenced on
December 30, 1991 (the "Closing Date"). On the Closing Date, the Inns were
contributed to the Partnership pursuant to the terms of a contribution agreement
between Host Marriott, the Manager, several wholly-owned subsidiaries of Host
Marriott (collectively, the "Contributing Limited Partners") and the
Partnership. In consideration of their contribution, the Contributing Limited
Partners received 608 limited partner interests ("Units"), representing a 95%
interest, and the proceeds of a $58,000,000 mortgage loan (see Note 6). The
General Partner contributed $3,200,000 for a 5% interest in the Partnership.
On June 30, 1992 (the "Initial Equity Closing Date"), the Contributing Limited
Partners transferred 170 Units to non-Host Marriott investors. All remaining
Units were transferred between December 31, 1992 and December 2, 1994. For U.S.
Federal income tax reporting purposes (IRC Section 708 (b) (1) (B)), a
termination of the Partnership occurred on March 15, 1993 (the "Remeasurement
Date") as a result of the sale of 50% of the interests in the Partnership's
capital and profits in the previous twelve months. As a result of the
termination, for tax purposes, the Partnership was treated as distributing its
properties to the partners who immediately thereafter contributed the properties
to a new partnership. There were no adjustments made to these financial
statements as a result of this termination.
Partnership Allocations and Distributions
Pursuant to the terms of the partnership agreement, Partnership allocations, for
U.S. Federal income tax purposes, and distributions subsequent to the Initial
Equity Closing Date are generally made as follows:
a. Cash available for distribution will generally be distributed (i) first,
100% to the limited partners, until the limited partners have received, with
respect to such year, an amount equal to 11% of their average daily
outstanding Net Invested Capital, defined as the excess of capital
contributions over cumulative distributions of net refinancing and/or sales
proceeds ("Capital Receipts"); (ii) second, 100% to the General Partner
until the General Partner has received, with respect to such year, an amount
equal to 11% of Net Invested Capital; (iii) third, 5% to the General Partner
and 95% to the limited partners, until the partners have received cumulative
distributions of Capital Receipts equal to the partners' capital
contributions; and (iv) thereafter, 15% to the General Partner and 85% to
the limited partners.
b. Capital Receipts not retained by the Partnership will be distributed (i)
first, 100% to the limited partners until the limited partners have received
an amount equal to the unpaid portion of a 14%
Res USA Supp-35
<PAGE>
Marriott Residence Inn USA Limited Partnership
Notes to Financial Statements
return on Net Invested Capital; (ii) second, 100% to the limited partners
until the partners have received cumulative distributions of Capital
Receipts equal to their capital contributions; (iii) third, 100% to the
General Partner until the partner has received an amount equal to the unpaid
portion of a 14% return on Net Invested Capital; (iv) fourth, 100% to the
General Partner until the General Partner has received cumulative
distributions of Capital Receipts equal to its capital contribution; and (v)
thereafter, 15% to the General Partner and 85% to the limited partners.
c. Proceeds from the sale of substantially all of the assets of the Partnership
will be distributed to the partners in accordance with their capital account
balances as adjusted to take into account any gain or loss resulting from
such sale.
d. Net profits will generally be allocated to the partners in proportion to the
distributions of cash available for distribution; however, the General
Partner will not be allocated less than 1%.
e. Net losses will generally be allocated 5% to the General Partner and 95% to
the limited partners.
f. Gain recognized by the Partnership will generally be allocated (i) first, to
all partners whose capital accounts have negative balances until such
balances are brought to zero; (ii) next, to all partners in the amount
necessary to bring their respective capital account balances to an amount
equal to their Net Invested Capital plus a 14% return on Net Invested
Capital; and (iii) thereafter, in amounts necessary to bring the ratio of
the General Partner and limited partners capital account balances in excess
of capital priority amounts, as defined, to 15% and 85%, respectively.
g. Losses recognized by the Partnership will generally be allocated (i) first,
85% to limited partners and 15% to the General Partner until positive
capital account balances in excess of capital priority amounts, as defined,
have been eliminated; (ii) next, to all partners whose capital accounts have
positive balances until such balances have been eliminated; and (iii)
thereafter, 100% to the General Partner.
For financial reporting purposes, profits and losses are allocated among
partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting.
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.
Fiscal Year
The Partnership's fiscal year ends on the Friday nearest to December 31. Fiscal
year 1996 included 53 weeks compared to 52 weeks for fiscal years 1995 and 1994.
Res USA Supp-36
<PAGE>
Marriott Residence Inn USA Limited Partnership
Notes to Financial Statements
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Property and Equipment
Property and equipment is recorded at cost. Property and equipment contributed
by Host Marriott and its affiliates has been recorded at its carryover basis.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
Buildings and improvements 40 years
Furniture and equipment 4 - 10 years
All property and equipment is pledged as security for the mortgage debt
described in Note 6.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual property basis will be less than their net book value. If a property
is impaired, its basis is adjusted to fair market value.
Restricted Cash Reserve
A restricted cash reserve was available to support distributions to the limited
partners if, and to the extent, cash distributions for any year through 1996
otherwise would be insufficient to provide the limited partners an annualized
return on the limited partners' capital contributions equal to 10.75% for 1995
and 11% for 1996. The remaining balance in the restricted cash reserve at
February 15, 1997 became part of the Partnership's general working capital and
was used to repay the note payable due to Host Marriott.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt (see Note 6) and are amortized using the straight
line method, which approximates the effective interest method, over the term of
the loan. Accumulated amortization of the deferred financing costs were
$1,945,357 and $1,556,892 as of January 3, 1997 and December 29, 1995,
respectively.
Revenues and Expenses
Revenues represent house profit from the Partnership's Inns since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotels to the Manager. House profit
reflects hotel operating results which flow to the Partnership as property owner
and represents hotel sales less property-level expenses, excluding depreciation
and amortization, base, system and incentive management fees, property taxes,
ground rent and equipment rent, insurance and certain other costs, which are
disclosed separately in the consolidated statements of operations.
Interest Rate Swap Agreements
Res USA Supp-37
<PAGE>
Marriott Residence Inn USA Limited Partnership
Notes to Financial Statements
The Partnership has entered into an interest rate swap agreement to diversify
certain of its debt to a fixed rate basis. The interest rate differential to be
paid or received on the interest rate swap agreement is accrued as interest
rates change and is recognized as an adjustment to interest expense.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual Partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives for the assets,
differences in the timing of recognition of certain fees and straight-line rent
adjustments. As a result of these differences, the excess of the tax basis in
Partnership net liabilities over the Partnership net liabilities reported in the
accompanying financial statements is $12,469,327 and $17,252,102 as of January
3, 1997 and December 29, 1995, respectively.
Statement of Financial Accounting Standards
In the first quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on its consolidated financial statements.
Reclassifications
Certain reclassifications were made to prior year financial statements to
conform to the 1996 presentation.
NOTE 3. REVENUES
Partnership revenues consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
INN SALES
Suites...................................... $ 36,788,045 $ 34,578,543 $ 32,500,478
Other operating departments................. 1,936,057 1,959,573 1,941,741
-------------- -------------- ---------------
38,724,102 36,538,116 34,442,219
-------------- -------------- ---------------
INN EXPENSES
Departmental direct costs
Suites................................... 7,297,185 6,747,535 6,312,650
Other operating departments.............. 717,598 718,995 721,524
Other Inn operating expenses................ 9,813,711 9,283,990 9,235,488
-------------- -------------- ---------------
17,828,494 16,750,520 16,269,662
-------------- -------------- ---------------
REVENUES....................................... $ 20,895,608 $ 19,787,596 $ 18,172,557
============== ============== ===============
</TABLE>
Res USA Supp-38
<PAGE>
Marriott Residence Inn USA Limited Partnership
Notes to Financial Statements
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
January 3, December 29,
1997 1995
------------- -------------
<S> <C> <C>
Land and improvements $ 9,658,977 $ 9,658,977
Buildings and improvements 71,038,777 70,833,045
Furniture and equipment 14,875,637 13,165,055
------------- -------------
95,573,391 93,657,077
Less accumulated depreciation (17,150,901) (13,470,106)
------------- -------------
$ 78,422,490 $ 80,186,971
============= =============
</TABLE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. Fair values
of financial instruments not included in this table are estimated to be equal to
their carrying amounts:
<TABLE>
<CAPTION>
As of January 3, 1997 As of December 29, 1995
--------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Debt $56,225,275 $58,488,178 $62,348,091 $65,617,374
Note Payable due to Host Marriott $ 5,392,667 $ 5,392,667 $ -- $ --
</TABLE>
The estimated fair value of Mortgage Debt and Note Payable due to Host Marriott
obligations are based on the expected future debt service payments discounted at
risk adjusted rates.
NOTE 6. DEBT
Term Loan
On the Closing Date, the Partnership entered into a loan agreement with a life
insurance company, as lead lender and servicer, to provide $58,000,000 of
non-recourse debt (the "Term Loan"). The Term Loan is amortized on the basis of
a 25-year amortization schedule commencing March 1994 with a balloon payment due
at maturity on December 31, 1998.
The Term Loan is evidenced by (i) promissory notes aggregating $31,000,000 (the
"Fixed Rate Notes") which bear interest at a fixed rate of 9.66% per annum and
(ii) promissory notes aggregating $27,000,000 (the "Floating Rate Notes") which
bear interest at 1.85 percentage points over the three-month London Interbank
Offered Rate ("LIBOR"). On the Closing Date, the Partnership entered into an
interest rate swap agreement (the "Swap Agreement") with a third party to
effectively fix the interest rate on the Floating Rate Notes at 9.66% per annum
until maturity of the Term Loan. The counterparty's obligations under the Swap
Agreement are guaranteed by the parent company of the counterparty, a national
investment banking institution. The Partnership does not anticipate
nonperformance by the counterparty. The Partnership's obligations under the Swap
Agreement are secured by a pledge of collateral by the General Partner.
Res USA Supp-39
<PAGE>
Marriott Residence Inn USA Limited Partnership
Notes to Financial Statements
The Term Loan is secured by first mortgages on the Partnership's fee or
leasehold interest in ten of the Inns (the "Term Loan Inns"), a security
interest in all personal property associated with the Term Loan Inns including
furniture and equipment, inventory, contracts and other general intangibles, and
an assignment of the Partnership's rights under the management agreement. As
additional security, Host Marriott provided a debt service guarantee of all
amounts due under the Term Loan up to $12,000,000. On December 20, 1995, Host
Marriott was released from all liability under the debt service guarantee
pursuant to performance termination criteria specified in the guarantee
agreement.
Raleigh Mortgage Loan
On the Closing Date, the Partnership assumed one of the Contributing Limited
Partner's obligations under a nonrecourse mortgage loan in the original
principal amount of $5,900,000 with respect to the Raleigh Inn. The loan carried
a fixed interest rate of 10.25% and required monthly payments of interest and
principal, based on a 30-year amortization schedule, until maturity on July 1,
1996. On July 1, 1996, the Raleigh Mortgage Loan was fully repaid with proceeds
advanced under a loan from Host Marriott.
Note Payable to Host Marriott
On July 1, 1996, the Raleigh Mortgage Loan was repaid in full with proceeds of a
$5,392,667 unsecured nonrecourse loan from Host Marriott. Interest on the loan
accrues at prime plus one percent. The loan matured on April 30, 1997 with the
entire $5,392,667 balance due at that time. The Partnership repaid the loan with
funds in the restricted cash reserve, which became part of the Partnership's
general working capital in February 1997, and cash from Partnership operations.
During 1996, $209,095 of interest was paid to Host Marriott. The weighted
average interest rate was 9.25% for the fiscal year ended January 3, 1997. As of
January 3, 1997, the interest rate was 9.25%.
Scheduled maturities of debt at January 3, 1997 are as follows:
<TABLE>
<S> <C>
1997................................$ 6,152,900
1998................................ 55,465,042
--------------
$ 61,617,942
==============
</TABLE>
NOTE 7. MANAGEMENT AGREEMENT
The Manager operates the Inns pursuant to a long-term management agreement with
an initial term expiring December 30, 2011. The Manager has the option to extend
the agreement on one or more Inns for up to five 10-year terms. The Manager
earns a base management fee equal to 2% of the Inns' gross revenues, which is
subordinate to payment of qualifying debt service payments, a provision for
Partnership administrative expenses, payment of any amounts due Host Marriott
under the debt service guarantee, and retention by the Partnership of annual
cash flow from operations of $7,040,000. The Manager is also entitled to an
incentive management fee equal to 20% of operating profit, as defined, in excess
of $9,500,000 for each calendar year. The incentive management fee is payable
out of 50% of cash flow from operations remaining after payment of debt service,
provision for Partnership administrative expenses, payment of any amounts due
Host Marriott under the debt service guarantee, retention by the Partnership of
annual cash flow from operations of $7,040,000, payment of current base
management fees, payment of amounts due pursuant to any loans from Host Marriott
and deferred base management fees. Through January 3,
Res USA Supp-40
<PAGE>
Marriott Residence Inn USA Limited Partnership
Notes to Financial Statements
1997, base and incentive management fees not paid currently were waived by the
Manager. Subsequent to January 3, 1997, any base and incentive management fees
not paid will be accrued by the Partnership. For the fiscal years ended January
3, 1997 and December 29, 1995, $774,482 and $730,764 of base management fees and
$467,633 and $97,604 of incentive management fees, respectively, were paid to
the Manager.
The management agreement also provides for a Residence Inn system fee equal to
4% of suite revenues. In addition, the Manager is reimbursed for each Inn's pro
rata share of the actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. As franchisor of the Residence Inn by Marriott system,
the Manager maintains a marketing fund to pay the costs associated with certain
system-wide advertising, promotional and public relations materials and programs
and the operation of a toll-free reservation system. Each Inn contributes 2.5%
of suite revenues to the marketing fund. For fiscal years 1996, 1995 and 1994,
the Partnership paid Residence Inn system fees of $1,471,520, $1,383,142 and
$1,300,019, reimbursed the Manager for $748,229, $718,555 and $713,470 of Chain
Services and contributed $919,701, $864,464 and $812,512 to the marketing fund,
respectively. The Partnership is required to provide the Manager with working
capital to meet the operating needs of the Inns. As of January 3, 1997 and
December 29, 1995, $642,500 has been advanced to the Manager for working
capital.
The management agreement also provides for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are equal to 5% of gross revenues of each Inn. For fiscal years 1996, 1995 and
1994, the Partnership contributed $1,936,000, $1,827,000 and $1,722,000
respectively, to the property improvement fund.
Pursuant to the terms of the contribution agreement, to the extent that the
Partnership's net cash flow, as defined, for the fiscal year is less than
$6,536,000 in 1995 and $6,688,000 in 1996, the Contributing Limited Partners are
required to refund to the Partnership a portion of prior distributions received
as a "post closing adjustment" to the contribution value of the Inns. The
maximum post closing adjustment in any fiscal year is $9,600,000 and will occur
only if the available restricted cash reserves are exhausted. As of January 3,
1997, there has been no post closing adjustment paid to the Partnership. The
post closing adjustment period expired on February 15, 1997.
NOTE 8. MERIDEN GROUND LEASE
On the Closing Date, the Partnership assumed all of Host Marriott's rights and
obligations as tenant under the ground lease with respect to the land on which
the Meriden Inn is located. The initial term of the ground lease will expire on
August 14, 2013. The Partnership will have the option to extend the term thereof
for up to ten consecutive periods of five years each. Rent for the initial term
in the amount of $1,200,000 was prepaid by Host Marriott and is amortized on a
straight-line basis over the initial term of the lease. Rent after the initial
term will be prepaid in varying amounts at the beginning of each applicable
extended term. As of January 3, 1997 and December 29, 1995, accumulated
amortization of the prepaid ground rent was $228,601 and $183,006, respectively.
Res USA Supp-41
<PAGE>
Marriott Residence Inn USA Limited Partnership
Condensed Balance Sheet
September 12, 1997
(Unaudited, in thousands)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net..................................... $ 79,975
Cash and cash equivalents....................................... 2,454
Property improvement fund....................................... 690
Due from Residence Inn by Marriott, Inc. ....................... 643
Other assets.................................................... 2,933
-----------
$ 86,695
===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt................................................... $ 55,662
Accounts payable and accrued expenses........................... 480
-----------
Total Liabilities............................................. 56,142
-----------
PARTNERS' CAPITAL
General Partner................................................. 3,381
Limited Partners................................................ 27,172
-----------
Total Partners' Capital....................................... 30,553
-----------
$ 86,695
===========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
Res USA Supp-42
<PAGE>
Marriott Residence Inn USA Limited Partnership
Condensed Statements of Operations
For the Thirty-six Weeks Ended September 12, 1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
REVENUES
Hotel revenues.................................... $ 16,973 $ 16,012
---------- ----------
OPERATING COSTS AND EXPENSES
Depreciation and amortization..................... 3,019 2,737
Residence Inn system fee.......................... 1,156 1,115
Property taxes.................................... 1,082 1,113
Base management fee............................... 565 533
Equipment rent and other.......................... 503 544
Incentive management fee.......................... 844 324
---------- ----------
Total Operating Costs and Expenses.............. 7,169 6,366
---------- ----------
OPERATING PROFIT..................................... 9,804 9,646
Interest expense..................................... (4,458) (4,796)
Interest income...................................... 222 295
---------- ----------
NET INCOME........................................... $ 5,568 $ 5,145
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
Res USA Supp-43
<PAGE>
Marriott Residence Inn USA Limited Partnership
Condensed Statements of Cash Flows
For the Thirty-six Weeks Ended September 12, 1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................................... $ 5,568 $ 5,145
Noncash items:
Depreciation and amortization.................................... 3,019 2,737
Amortization of deferred financing
costs as interest expense........................................ 291 291
Changes in working capital accounts:
Due from Residence Inn by Marriott, Inc. ........................ (1,361) (628)
Accounts payable and accrued expenses............................ (53) (34)
--------- ---------
Cash provided by operations........................................ 7,464 7,511
--------- ---------
INVESTING ACTIVITIES
Additions to property and equipment, net........................... (4,538) (835)
Changes in restricted cash......................................... 3,793 --
Changes in property improvement fund, net.......................... 2,504 (557)
--------- ---------
Cash provided by (used in) investing activities.................... 1,759 (1,392)
--------- ---------
FINANCING ACTIVITIES
Capital distributions to partners.................................. (3,531) (5,724)
Repayment of mortgage principal.................................... (563) (5,944)
Proceeds from note payable to Host Marriott........................ -- 5,393
Repayment of note payable to Host Marriott......................... (5,393) --
--------- ---------
Cash used in financing activities.................................. (9,487) (6,275)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS................................ (264) (156)
CASH AND CASH EQUIVALENTS at beginning of year........................ 2,718 2,715
--------- ---------
CASH AND CASH EQUIVALENTS at end of year.............................. $ 2,454 $ 2,559
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest............................................. $ 4,167 $ 4,505
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
Res USA Supp-44
<PAGE>
Marriott Residence Inn USA Limited Partnership
Notes to Condensed Financial Statements
1. The accompanying condensed financial statements have been prepared by
Marriott Residence Inn USA Limited Partnership (the "Partnership") without
audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted from the accompanying
statements. The Partnership believes the disclosures made are adequate to
make the information presented not misleading. However, the condensed
financial statements should be read in conjunction with the Partnership's
audited financial statements for the fiscal year ended January 3, 1997
included in this Prospectus Supplement. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
The net income of the Partnership is allocated 99% to the limited partners
and 1% to the General Partner. Significant differences exist between the
net income for financial reporting purposes and the net income for Federal
income tax purposes. These differences are due primarily to the use, for
income tax purposes, of accelerated depreciation methods and shorter
depreciable lives of the assets, and differences in the timing of the
recognition of incentive management fee expense.
2. Revenues represent house profit of the Partnership Inns since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Inns to the Residence Inn
by Marriott, Inc. (the "Manager"), a wholly owned subsidiary of Marriott
International, Inc. House profit reflects the net revenues flowing to the
Partnership as property owner and represents Inn operating results less
property-level expenses, excluding depreciation and amortization, base,
system and incentive management fees, property taxes, insurance and certain
other costs, which are classified as operating costs and expenses. Revenues
consist of the following (in thousands):
<TABLE>
<CAPTION>
Thirty-six Weeks Ended
------------------------------
September 12, September 6,
1997 1996
---- ----
<S> <C> <C>
INN SALES
Suites........................................ $ 28,887 $ 27,874
Other operating departments................... 1,470 1,483
--------- ---------
30,357 29,357
--------- ---------
INN EXPENSES
Departmental Direct Costs
Suites................................... 5,512 5,440
Other operating departments.............. 544 562
Other Inn operating expenses.................. 7,328 7,343
--------- ---------
13,384 13,345
--------- ---------
REVENUES...................................... $ 16,973 $ 16,012
========= =========
</TABLE>
3. In February 1997, the remaining balance of $3,793,208 in the restricted
cash reserve became part of the Partnership's general working capital. On
February 28, 1997, the Partnership utilized these funds to make a partial
repayment on the note payable to Host Marriott Corporation. The remainder
of $1,599,459 on the note was paid on June 2, 1997 from operating cash.
Res USA Supp-45
<PAGE>
Marriott Residence Inn USA Limited Partnership
Notes to Condensed Financial Statements
4. Prior to January 1, 1997, pursuant to the management agreement, the Manager
waived base and incentive management fees not paid by the Partnership.
Beginning in January 1997, base and incentive management fees not paid are
considered contingent fees and are payable from cash flow available after
the payment of current management fees. Current incentive management fees
are payable out of 50% of cash flow from operations remaining after payment
of debt service, provision for Partnership administrative expenses,
retention by the Partnership of annual cash flow from operations of
$7,040,000, payment of current base management fees, payment of amounts due
pursuant to any loans from Host Marriott and deferred base management fees.
Res USA Supp-46
<PAGE>
CRF LODGING COMPANY, L.P.
Supplement Dated __________ __, 1998 for
Prospectus/Consent Solicitation Statement Dated _________ __, 1998 for
Fairfield Inn by Marriott Limited Partnership
On the terms described in the Prospectus/Consent Solicitation Statement
(the "Consent Solicitation") dated _______________ __, 1998, of which this
Supplement (the "Supplement") is a part, CRF Lodging Company, L.P. (the
"Company"), a newly formed Delaware limited partnership, whose sole general
partner will be CRF Lodging Trust ("CRFLT"), a Maryland real estate investment
trust, is proposing the consolidation (the "Consolidation") of Fairfield Inn by
Marriott Limited Partnership ("FIBM"), a Delaware limited partnership, and up to
five other limited partnerships (the "Hotel Partnerships") into an umbrella
partnership real estate investment trust (an "UPREIT") in order to consolidate
and expand the limited service and extended-stay hotel businesses currently
conducted separately by the Hotel Partnerships and Host Marriott Corporation
("Host"). Limited Partners of FIBM are being asked to approve the Consolidation
as described in the Consent Solicitation. Upon approval of the Consolidation, a
newly formed direct or indirect wholly owned subsidiary of the Company (the
"Merger Partnership") will be merged with and into FIBM with FIBM being the
surviving entity. In the merger, partners of FIBM will receive units of limited
partnership interest in the Company ("Units") in exchange for their interests in
FIBM.
Following the Consolidation, the Company will own a portfolio of up to
221 limited service and extended-stay hotels operating under three Marriott
brand names (Courtyard by Marriott(R), Residence Inn by Marriott(R) and
Fairfield Inn by Marriott(R)) (the "Hotels"). Concurrently with the
Consolidation, CRFLT will consummate an initial public offering (the "Offering")
of its common shares of beneficial interest (the "Common Shares") and contribute
the proceeds thereof to the Company in exchange for Units. Following the
Offering, CRFLT anticipates that its Common Shares will be listed on the New
York Stock Exchange ("NYSE"). Beginning one year after the Consolidation (the
"Initial Holding Period"), Limited Partners will have the right to redeem their
Units and receive, at the election of CRFLT, either Common Shares on a
one-for-one basis (subject to adjustment) or cash in an amount equal to the
market value of such shares (the "Unit Redemption Right"). CRFLT expects to
qualify as a real estate investment trust (a "REIT") under the Internal Revenue
Code of 1986, as amended (the "Code").
Marriott FIBM Corporation (the "Hotel Partnership GP"), the general
partner of FIBM, believes that the terms of the Consolidation provide
substantial benefits and are fair to the Limited Partners of FIBM and recommend
that all Limited Partners of FIBM vote FOR the Consolidation.
Limited Partners of FIBM should consider the risks and other
considerations described more fully in the Consent Solicitation under "Risk
Factors," including the following:
.There is uncertainty at the time of voting as to the Hotel
Partnerships that will participate in the Consolidation and thus,
uncertainty as to the size and leverage of the Company until after the
end of the Solicitation Period.
.The Consolidation involves a fundamental change in the nature of a
Limited Partner's investment from an investment in a fixed portfolio,
limited life partnership where a Limited Partner could receive a
distribution upon liquidation of the partnership into an investment in
a public real estate company which expects to acquire additional
hotels and where a Limited Partner likely may realize value from his
investment only through a sale of Common Shares received pursuant to
the Unit Redemption Right.
.As a result of the Consolidation, a Limited Partner of FIBM, which
owns 50 Fairfield Inns, will own an interest in a much larger portfolio
of Hotels, including up to 121 Courtyard Hotels and 50 Residence Inns,
and a material adverse change affecting any of the
FIBM Supp-1
<PAGE>
Company's assets will affect all Limited Partners regardless of whether
a particular Limited Partner previously held an interest in such asset.
.No independent representative was retained to negotiate on behalf of
the Limited Partners of FIBM or the other Hotel Partnerships. If one
had been, the terms of the Consolidation may have been more favorable
to the Limited Partners of FIBM or the other Hotel Partnerships.
.Conflicts of interest exist in connection with the structuring of the
Consolidation, including the fact that subsidiaries of Host serve as
general partners of all of the Hotel Partnerships and other
subsidiaries of Host will serve as the Lessees of the Hotels. Such
conflicts of interest may result in decisions that do not fully reflect
the interests of all Partners in the Hotel Partnerships.
.Host and its subsidiaries will realize substantial benefits from the
Consolidation, including receipt of Units having an estimated value of
at least $____ million in exchange for their Hotel Partnership
Interests in FIBM (representing a 1% general partner interest and a
9.95% limited partner interest)($___ million in the aggregate for their
Hotel Partnership Interests in all of the Hotel Partnerships) (based
upon the estimated Exchange Values), $_______ million in cash from the
sale of two limited service and extended-stay hotels owned by Host (the
"Acquisition Hotels") based upon their aggregate Appraised Value, as
adjusted, economic benefits under the Leases and, because the
Consolidation has been structured to permit all Partners (including the
Limited Partners) to defer recognition of gain, the ability to defer
significant potential tax liabilities attributable to taxable gain in
excess of sale proceeds of approximately $_____ million.
.The allocation of Units among the Hotel Partnerships is based upon
their respective Exchange Values, the calculation of which involves
numerous assumptions and estimates. There is no assurance that the
value of the Units to be received in the Consolidation equals the fair
market value of the Hotels and other assets contributed by the Hotel
Partnerships.
.Current federal income tax law prohibits the Company from operating
the Hotels directly. Therefore, the Company will be substantially
dependent upon the Lessees and Managers for its revenue and the Company
will have limited control over the operations of the Hotels.
.Approval of the Consolidation by Limited Partners holding a majority
of the outstanding Partnership Units of FIBM will bind all
Limited Partners of FIBM. Host and its subsidiaries own approximately
11% of the outstanding Hotel Partnership Interests in FIBM.
.Limited Partners of Hotel Partnerships who vote against the
Consolidation and comply with certain specified procedures ("Dissenting
Partners") will not have a right to receive cash based on an appraisal
of their Hotel Partnership Interests but instead can elect to tender
the Units they receive in the Consolidation in exchange for unsecured
notes (the "Notes"), for which there will be no public market, in an
amount equal to the Liquidation Value (as defined herein) of their
Hotel Partnership Interests. As of September 12, 1997, on a pro forma
basis assuming the Full Consolidation Scenario (as defined herein), the
Company would have had aggregate consolidated liabilities to which the
Notes were effectively subordinated of approximately $939 million.
.There are limitations on actual or constructive ownership of more than
9.9% of the number or value of CRFLT's outstanding Common Shares.
.Taxation of CRFLT as a regular corporation if it fails to qualify as a
REIT and taxation of the Company as a corporation if it fails to
qualify as a partnership for federal income tax purposes, either of
which would, among other things, result in a decrease in cash available
for distribution and a material reduction in the value of the Common
Shares and Units.
The effects of the Consolidation may be different for Limited Partners
of the various Hotel Partnerships. This Supplement has been prepared to
highlight for the Limited Partners of FIBM (the "FIBM Limited Partners") the
risks, benefits, effects and fairness of the Consolidation and to provide
additional information specific to FIBM. Supplements have also been prepared for
each of the other Hotel Partnerships. This Supplement, together with the
supplements of the other Hotel Partnerships (collectively, the "Supplements"),
are a part of the Consent Solicitation Statement. Upon receipt of a written
request by a Limited Partner or his representative so designated in writing, the
Hotel Partnership GP will send a copy of any Supplement without charge. All
requests for a copy of a Supplement should be directed to:______________________
FIBM Supp-2
<PAGE>
The Consolidation is subject to various conditions, one of which is
that at least four Hotel Partnerships, including CBM1, CBM2 and RIBM1, must
approve the Consolidation (the "Minimum Participation Condition"). See "The
Consolidation -- Conditions to the Consolidation" in the Consent Solicitation.
For purposes of this Supplement, the term Minimum Participation shall refer to
the participation in the Consolidation by each of those Hotel Partnerships and
FIBM.
All cross-references refer to the Consent Solicitation unless stated
otherwise. Capitalized terms not defined herein shall have the meaning set forth
in the Consent Solicitation. The information contained herein assumes the
Consolidation occurs with an Offering yielding gross proceeds of $800 million,
all Hotel Partnerships participate, no Notes are issued and $539 million of
outstanding indebtedness is repaid (the "Full Consolidation Scenario").
Risk Factors
In deciding whether to approve the Consolidation, FIBM Limited Partners
should consider certain risks and other factors. The Hotel Partnership GP
believes that FIBM Limited Partners should particularly consider the following,
which should be read in conjunction with the information in the Consent
Solicitation under "Risk Factors" and "Federal Income Tax Considerations:"
Uncertainties at the Time of Voting. There are several uncertainties at
the time the Limited Partners must vote on the Consolidation, including (i) the
identity of the Hotel Partnerships that will participate in the Consolidation
and, thus, the Hotels that will be acquired by the Company (which will affect
such matters as the size, scope and leverage of the Company), (ii) the Exchange
Value for each Hotel Partnership (which will be adjusted for changes in working
capital, indebtedness and various other items prior to the Closing Date) and
(iii) the costs of prepaying certain indebtedness of the Hotel Partnerships
(which costs will be determined based upon the interest rates on applicable U.S.
Treasuries at the time of the prepayment). See "Determination of Exchange Values
and Allocation of Units."
Fundamental Change in Nature of Investment; Potential Underperformance.
The Consolidation involves a fundamental change in the nature of a Limited
Partner's investment from an investment in which a Limited Partner participates
in the profits from the operation of the Hotels and is entitled to receive
distributions from any net proceeds of a sale or refinancing of FIBM's assets,
to an investment in an entity who will receive rents from the lessees which will
bear the risks and receive the benefits from the hotels' operation and Limited
Partners likely may realize the value from their investment only through the
exercise of the Unit Redemption Right and sale of the Common Shares received as
a result thereof and not from liquidation proceeds. Continuing FIBM would allow
FIBM Limited Partners an opportunity to eventually receive liquidation proceeds
from the sale of FIBM's properties, and an FIBM Limited Partner's share of these
sale proceeds could be higher than the amount a limited partner might realize
from the sale of Units or exercise of the Unit Redemption Right (or payments on
Notes received by any Dissenting Partner). In addition, the Company has the
ability to acquire additional hotels, can reinvest proceeds from sales or
refinancings of existing hotels in additional hotels and has a general partner
that is a publicly traded entity. An investment in the Company may not
outperform an investment in FIBM. See "Comparison of Hotel Partnership
Interests, Units and Common Shares."
Exposure to Risks from Other Hotels and Brands. As a result of the
Consolidation, Limited Partners of FIBM, which owns 50 Fairfield Inns, will own
interests in a much larger partnership with a broader range of assets, including
up to 121 Courtyard Hotels and 50 Residence Inns. A material adverse change
affecting one of the Company's assets will affect all Limited Partners
regardless of whether a particular Limited Partner previously was an investor in
such affected asset. In addition, each of the three Marriott brands which
initially will comprise the Company operates in a different market segment and
targets different consumers, and, as a result, may be affected differently in
different economic and market conditions.
FIBM Supp-3
<PAGE>
Limitations on Sales or Refinancings of the Courtyard Hotels. Because
of substantial taxable gains that would be recognized by the Hotel Partnership
GPs of CBM1 and CBM2, which are subsidiaries of Host, none of the assets of CBM1
and CBM2 (the "Courtyard Hotels") can be sold for a period of ___ years from the
Closing Date of the Consolidation (other than pursuant to a tax-deferred
exchange) without the consent of Host (the "Lock-out Provisions"). Such Lock-out
Provisions are only applicable so long as Host holds the Units received in the
Consolidation relating to its Hotel Partnership Interests in CBM1 and CBM2 and
has not transferred, sold or otherwise disposed of such Units in a taxable
transaction. In addition, the Partnership Agreement contains certain
restrictions regarding the ability of the Company to repay or refinance
indebtedness secured by the Courtyard Hotels. These restrictions will limit the
ability of the Company to change its portfolio in response to market conditions
and to the extent the Courtyard Hotels do not perform as well as the Residence
Inns or Fairfield Inns in its portfolio, the Company will have limited
flexibility to dispose of any such underperforming assets even if such disposal
would be in the best interests of the Company.
Conflicts of Interest in the Consolidation. Conflicts of interest exist
in connection with the Consolidation which include conflicts arising from the
fact that subsidiaries of Host serve as the Hotel Partnership GP of FIBM (which
holds a 1% general partner interest and a 9.95% limited
FIBM Supp-4
<PAGE>
partner interest in FIBM) and as Hotel Partnership GPs of the other Hotel
Partnerships (with varying interests) and other subsidiaries of Host will serve
as Lessees of the Hotels at the same time as the Hotel Partnership GP is
recommending the Consolidation and is involved in establishing the terms and
structure of the Consolidation, including the structuring of the Leases. In
addition, Host and its subsidiaries will receive substantial benefits from the
Consolidation. These conflicts of interest may result in decisions that do not
fully reflect the interests of all Limited Partners of FIBM or the other Hotel
Partnerships.
Substantial Benefits to Related Parties. The Consolidation will permit
Host to continue to be involved in the ownership and operation of the Hotels and
realize substantial benefits therefrom. Host and its subsidiaries will receive
Units with an estimated value of at least $____ million in exchange for their
Hotel Partnership Interests in FIBM ($____ million in the aggregate for their
Hotel Partnership Interests in all of the Hotel Partnerships) (based upon the
estimated Exchange Values) and $___ million in cash from the sale of the
Acquisition Hotels to the Company (based upon their aggregate Appraised Value,
as adjusted). Subsidiaries of Host will be the Lessees of the Hotels and may
receive significant economic benefits in connection with the Leases, including
the receipt of income to the extent sales from the Hotels exceed operating costs
and expenses payable by the Lessees, management fees and rental payments to the
Company. Because the Consolidation has been structured to permit all Partners
(including the Limited Partners) to defer recognition of gain, the Consolidation
will also permit the Hotel Partnership GPs of CBM1 and CBM2, which are
subsidiaries of Host, to defer significant tax liabilities attributable to
taxable gain in excess of sale proceeds (estimated at approximately $____
million) that otherwise would be incurred upon any sale of the Courtyard Hotels
(other than in a tax-deferred exchange such as the Consolidation) or upon
substantial reductions in the amount of debt now secured by the Courtyard
Hotels. In the case of the Courtyard Hotels, the Partnership Agreement imposes
certain restrictions on the sale of such Hotels and the refinancing, prepayment
or reduction of the debt secured by those Hotels for ___ years from the Closing
Date of the Consolidation without the consent of Host, in order to defer the
recognition of gain, which gain would be disproportionately borne by the Hotel
Partnership GPs of CBM1 and CBM2 because of prior allocations to them of tax
losses. The Company also will repay, either in cash or Common Shares, at the
election of a subsidiary of Host, a loan of approximately $13 million owed to
such subsidiary of Host by CBM1.
Method of Allocation of Units. The allocation of Units among the Hotel
Partnerships will be based upon their respective Exchange Values, which in turn
are based upon the Appraised Value of each Hotel Partnership's Hotels as
adjusted for such things, among others, as net non-real estate assets (including
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables) and cash reserves) ("Net Other Assets"), existing
indebtedness (including an adjustment for prepayment and defeasance costs),
deferred maintenance and FF&E shortfalls, deferred management fees and
Consolidation Expenses. There is, however, no assurance that the value of the
Units to be received by participants in the Consolidation will equal the fair
market value of the Hotels and other assets contributed by such participants.
Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the Limited Partners of FIBM or any of the
other Hotel Partnerships. The Hotel Partnership GP has obtained an opinion from
American Appraisal Associates, an independent, nationally recognized hotel
valuation and financial advisory firm ("AAA"), as to (i) the fairness, from a
financial point of view, to the Limited Partners of each Hotel Partnership, of
the methodologies used to determine the Exchange Value of FIBM and each other
Hotel Partnership and the allocation of Units among each of the Hotel
Partnerships in the Consolidation, (ii) the fairness and reasonableness, from
the standpoint of each Hotel Partnership, of the underlying assumptions used to
determine the Exchange Value of each Hotel Partnership and the purchase price of
each Acquisition Hotel (including, without limitation, the assumptions used to
determine the various adjustments to the Appraised Values of the Hotels), (iii)
the fairness and reasonableness to the Limited Partners of each Hotel
Partnership of the methodology used to allocate Units received by each Hotel
Partnership among its general and Limited Partners, (iv) the fairness and
reasonableness, from the standpoint of each Hotel Partnership, of the
methodologies and underlying assumptions used to determine the Continuation
Value and the Liquidation Value of each Hotel Partnership (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) and (v) the fairness and reasonableness, from
the Company's standpoint, of the economic terms of the Leases. However, AAA has
not negotiated with the Hotel Partnership GP and has not participated in
establishing the terms of the Consolidation. Consequently, the terms and
conditions of the Consolidation may have been more favorable to FIBM Limited
Partners or the Limited Partners of the other Hotel Partnerships if such terms
and conditions were the result of arm's length negotiations.
Lack of Control over Hotel Operations. Due to current federal income
tax law prohibitions on a REIT's ability to derive revenues directly from the
operation of a hotel, the Company will lease its Hotels to the Lessees, which
will operate the Hotels by continuing to retain the Managers pursuant to the
Management Agreements. Neither CRFLT nor the Company will operate the Hotels or
participate in the decisions affecting the daily operations of the Hotels.
Although the Company will have certain rights as lessor under the Leases
(including control over certain owner-funded capital expenditures), neither
CRFLT nor the Company will have the authority to require the Lessees or the
Managers to operate the Hotels in any particular manner or to govern any
particular aspect of their operation.
Expiration of Leases. The Leases expire at the end of ___ years and
there can be no assurance that such Leases will be renewed. If such Leases are
terminated at the end of their terms, the Company will be required to find other
lessees (which lessees must be satisfactory to the Managers). There can be no
assurance as to whether satisfactory lessees could be found or as to the terms
or conditions on which the Company would be able to enter into new leases with
such lessees.
The Company's Dependence on the Lessees and Managers for Revenue. The
Company will be dependent upon the Lessees for its revenue, and the Lessees'
ability to pay rent to the Company will be substantially dependent upon the
Managers' ability to operate the Hotels profitably.
No Limitation on Debt. There are no limitations in CRFLT's or the
Company's organizational documents which limit the amount of indebtedness either
may incur.
FIBM Supp-5
<PAGE>
Risks of Leverage. The Company has substantial indebtedness. As of
September 12, 1997, on a pro forma basis assuming the Full Consolidation
Scenario, the Company had outstanding indebtedness totaling $780 million. The
Company's business is capital intensive and the Company will have significant
capital requirements in the future. The Company's leverage level could affect
its ability to (i) obtain financing in the future, (ii) undertake refinancings
on terms and subject to conditions deemed acceptable by the Company, (iii) make
distributions to partners, (iv) pursue its acquisition strategy, or (v) compete
effectively or operate successfully under adverse economic conditions.
Original Anticipated Holding Period Expires in Three Years. In the
original offering document of FIBM, the Hotel Partnership GP stated that it
expected to sell its Hotels before the end of 2000, at which time FIBM would be
liquidated. An FIBM Limited Partner's share of the proceeds from a liquidation
of FIBM could be higher than what a limited partner might realize, following the
Initial Holding Period, from a sale of Common Shares received pursuant to the
Unit Redemption Right.
Rental Revenues from Hotels Subject to Rights of Lenders. In accordance
with the loan agreements with respect to outstanding indebtedness of FIBM and
the other Hotel Partnerships, the rental revenues received by the Company under
the Leases will first be used to satisfy the debt service on such outstanding
indebtedness and any cash flow remaining thereafter will be available to satisfy
all other obligations of the Company (including paying property taxes and
insurance, funding the required FF&E reserves for the Hotels and capital
improvements) and to make distributions to partners (including CRFLT).
Ownership Limitations. No person may own in excess of 9.9% of the
number or value of outstanding Common Shares of CRFLT, without the consent of
the Board of Trustees of CRFLT, in its sole and absolute discretion. During the
period of time subsidiaries of Host are acting as Lessees, Host and its
affiliates are prohibited from owning in excess of 4.9% (by value) of the
Company.
Majority Vote of FIBM Limited Partners Binds All FIBM Limited Partners.
Approval of the Consolidation by FIBM Limited Partners holding a majority of the
outstanding Partnership Units of FIBM will cause FIBM to participate in the
Consolidation, and such approval will bind all FIBM Limited Partners, including
FIBM Limited Partners who voted against or abstained from voting with respect to
the Consolidation. Host and its subsidiaries own approximately 11% of the
outstanding Partnership Units of FIBM.
Effect of Subsequent Events upon Recognition of Gain. Even though the
FIBM Limited Partners who do not receive Notes as a result of exercising
Dissenters' Rights generally are not expected to recognize significant taxable
gain at the time of the Consolidation, there are a variety of events and
transactions (including the sale of one or more of the Hotels or the reduction
of indebtedness securing one or more of the Hotels) that could cause an FIBM
Limited Partner to recognize all or a part of the gain that otherwise has been
deferred through the Consolidation. See "Federal Income Tax Considerations --
Tax Consequences of the Formation of the Company -- Effect of Subsequent
Events." The Partnership Agreement does not impose any restrictions on the
Company's ability to dispose of the Hotels or to refinance debt secured by the
Hotels, other than with respect to the Courtyard Hotels (which restriction can
be waived with the consent of Host). In addition, the Partnership Agreement
expressly provides that CRFLT, as general partner of the Company, is not
required to take into account the tax consequences of the limited partners in
deciding whether to cause the Company to undertake specific transactions and
the limited partners have no right to approve or disapprove such transactions.
See "Description of Units -- Sales of Assets and Lock-out Provisions."
Failure of the Company to Qualify as a Partnership for Tax Purposes.
Taxation of the Company as a corporation if it fails to qualify as a
partnership, and the Company's subsequent liability for federal, state and local
taxes on its income and property, would, among other things, have the effect of
reducing cash available for distribution to holders of Units, would cause CRFLT
to fail to qualify as a REIT for tax purposes, and could cause the holders of
Units to recognize taxable gain at the time the Company ceases to qualify as a
partnership.
Failure of CRFLT to Qualify as a REIT for Tax Purposes. Taxation of
CRFLT as a corporation if it fails to qualify as a REIT, and CRFLT's subsequent
liability for federal, state and local taxes on its income and property, would,
among other things, have the effect of reducing cash available for distribution
to CRFLT's shareholders and reducing materially the value of the Common Shares
and Units.
Tax Consequences for FIBM Limited Partners Who Are Not U.S. Persons. An
FIBM Limited Partner who is not a U.S. Person may be subject to special tax
considerations with respect
FIBM Supp-6
<PAGE>
to the Consolidation and/or the subsequent ownership and disposition of Units in
one or more countries other than the United States, including, for example, the
country in which such FIBM Limited Partner resides, any countries in which he
conducts business, and, if the FIBM Limited Partner is an entity, the country in
which it is organized and/or has its commercial domicile. In addition, the
Company may have to withhold and pay tax to the IRS in connection with the
Consolidation with respect to any FIBM Limited Partner that is not a U.S. Person
(even though no taxable gain for U.S. federal income tax purposes would be
recognized in connection with the Consolidation) unless the FIBM Limited Partner
receives from the IRS a "withholding tax certificate" showing no tax is due in
connection with the Consolidation.
State and Local Taxes. FIBM Limited Partners holding Units may be
subject to state and local taxation in a number of jurisdictions in which CRFLT
directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this regard, immediately
following the Consolidation, CRFLT will own properties in 35 states across the
United States. Currently, FIBM owns properties in 16 states.
Dissenting Partners Have No Cash Appraisal Rights and May Elect to
Receive Only Notes. FIBM Limited Partners who vote against the Consolidation
and comply with certain specified procedures ("Dissenting Partners") will not
have a right to receive cash based on an appraisal of their interests in FIBM or
otherwise, but instead can elect to tender the Units they receive in the
Consolidation in exchange for unsecured seven-year notes (the "Notes"), for
which there will be no public market, in an amount equal to the Liquidation
Value of their Hotel Partnership Interests. If the Notes are sold, they may sell
at prices substantially below their issuance price. Noteholders are likely to
receive the full face amount of the Notes only if they hold the Notes to
maturity, which is approximately seven years after the Consolidation, or if the
Company repays or refinances the Notes at or prior to maturity or realizes net
sales or excess refinancing proceeds from Hotels owned by a Noteholder's former
Hotel Partnership. Because the Notes are unsecured obligations of the Company,
they will be effectively subordinate to all secured debt of the Company and all
obligations of the Hotel Partnerships which will be the owners of the Hotels. As
of September 12, 1997, on a pro forma basis assuming the Full Consolidation
Scenario, the Company would have had aggregate consolidated liabilities to which
the Notes were effectively subordinated of approximately $939 million. See
"Rights of Dissenting Partners" and "Description of the Notes."
Expected Benefits of the Consolidation
The Hotel Partnership GP believes that participating in the
Consolidation would likely be beneficial to the FIBM Limited Partners for the
reasons set forth below. This information is qualified by and should be read in
conjunction with the information in the Consent Solicitation under "Background
and Reasons for the Consolidation -- Expected Benefits of the Consolidation."
These benefits, which should be viewed as alternatives to continuing the
business and operations of FIBM, are expected to include:
. Enhanced Liquidity of Investment. The Consolidation will
offer FIBM Limited Partners significantly enhanced liquidity
with respect to their investments in FIBM because, after
expiration of the Initial Holding Period, FIBM Limited
Partners would be able to exercise their Unit Redemption Right
(subject to certain limited exceptions) and receive, at
CRFLT's election, either freely tradable Common Shares
FIBM Supp-7
<PAGE>
of CRFLT or the cash equivalent thereof. The exercise of the
Unit Redemption Right, however, would result in recognition of
taxable income or gain at that time.
. Public Market Valuation of Assets. The Hotel Partnership GP
believes that the public market valuations of the equity
securities of many publicly traded real estate companies,
including REITs that focus on the lodging industry, are in
part based upon the growth potential of such companies and
currently exceed the private market values of their real
estate assets. There can be no assurance, however, that the
Common Shares of CRFLT will trade at a premium to the private
market values of the Hotels or that the relative pricing
differential will not change or be eliminated in the future.
. Regular Quarterly Cash Distributions. The Hotel Partnership
GP expects that the Company will make regular quarterly cash
distributions to holders of Units in proportion to their
percentage interests in the Company. While these distributions
may not be higher than FIBM's current distributions, the
ability to receive distributions quarterly and in regular
amounts would be enhanced.
. Substantial Tax Deferral. The Hotel Partnership GP expects
that FIBM Limited Partners who do not exercise Dissenters'
Rights generally should be able to obtain the benefits of the
Consolidation while continuing to defer recognition for
federal income tax purposes of at least a substantial portion,
if not all, of the gain with respect to their interests in
FIBM that otherwise would be recognized in the event of a
liquidation of FIBM or a sale or other disposition of its
Hotels in a taxable transaction. Thereafter, such FIBM Limited
Partners generally should be able to defer at least a
substantial portion of such built-in gain until they elect to
exercise their Unit Redemption Right or the Hotels currently
owned by FIBM are sold or otherwise disposed of in a taxable
transaction by the Company. The federal income tax
consequences of the Consolidation are highly complex and, with
respect to each FIBM Limited Partner, are dependent upon many
variables, including the particular circumstances of such FIBM
Limited Partner. See "Federal Income Tax Considerations -- Tax
Consequences of the Formation of the Company" in the Consent
Solicitation. Each FIBM Limited Partner is urged to consult
with his own tax advisors as to the consequences of the
Consolidation in light of his particular circumstances.
. Risk Diversification. The consolidation of the Hotels, as
well as future hotel acquisitions by the Company, will
diversify the investment risks to FIBM Limited Partners over a
broader group of hotels, geographic locations, range of
product types and market segments and will reduce the
dependence of an investment upon the performance of, and the
exposure to the risks associated with, the 50 Fairfield Inns
currently owned by FIBM and the single market segment (economy
limited service) in which FIBM currently operates.
. Reduction in Leverage and Interest Costs. Upon consummation
of the Consolidation and the Offering, it is expected that the
aggregate amount of consolidated indebtedness of the Company
will be reduced, by application of a portion of the net
proceeds from the Offering, by between approximately $390
million and $539 million (excluding prepayment and defeasance
costs which also will be required to be paid), depending upon
the Hotel Partnerships which participate in the Consolidation
and the proceeds raised in the Offering, resulting in
significant interest and debt service savings and reduced
overall leverage levels for Limited Partners of the Hotel
Partnerships. The current
FIBM Supp-8
<PAGE>
outstanding indebtedness of FIBM will remain outstanding
following the Consolidation. The Company will be less
leveraged than FIBM is currently.
. Growth Potential. The Hotel Partnership GP believes that
substantial opportunities exist to acquire or develop limited
service and extended-stay hotel properties at attractive
prices and that FIBM is not in a position to take advantage of
such opportunities because of its lack of access to additional
sources of capital on favorable terms and restrictions on
additional acquisitions and development imposed by its
partnership agreement. In addition, the Company's structure
and capitalization as part of an UPREIT should provide it with
substantial flexibility to structure acquisitions of
additional hotels utilizing debt, cash, Units or Common Shares
(or any combination thereof), which may permit the Company to
structure acquisitions of hotel properties on an income
tax-deferred basis to sellers.
. Greater Access to Capital. With publicly traded securities, a
larger base of assets and a greater equity value than FIBM
individually, CRFLT expects to have greater access to the
capital necessary for funding the operations of the Company
and consummating acquisitions on more attractive terms than
would be available to FIBM individually. This greater access
to capital should provide greater financial stability to the
Company and reduce the level of risk associated with
refinancing existing loans upon maturity, as compared to FIBM
individually.
Determination of Exchange Values and Allocation of Units
The Company and the Hotel Partnership GP established the Exchange Value
for the equity interests in FIBM by (i) obtaining an independent appraisal of
the value of the Hotels owned by FIBM, as of ______ __, 1998 (the "Appraised
Value"), as disclosed below; (ii) adding the amount of other assets (such as
cash, amounts due from Marriott International and affiliates (i.e., working
capital and rent receivables, and cash reserves), net of liabilities (excluding
mortgage and other debt and deferred management fees) ("Net Other Assets") as of
________ __, 1998 (the "Initial Valuation Date"); (iii) subtracting the
estimated balance of the mortgage debt owed by FIBM as of June 30, 1998, which
is the estimated closing date for the Consolidation; (iv) subtracting the
estimated balance of other debt of FIBM as of June 30, 1998; (v) adjusting for
the estimated prepayment and defeasance costs; (vi) subtracting the amount of
deferred management fees payable to the Manager under the FIBM Management
Agreement for FIBM's Hotels; (vii) subtracting an amount equal to the estimated
cost to complete any deferred maintenance items identified in the engineer's
report relating to FIBM's Hotels; (viii) subtracting an amount equal to the
estimated cost (if any) of bringing the condition of FF&E at FIBM's Hotels to
normal levels; (ix) subtracting FIBM's pro rata share (based upon relative
Exchange Values) of estimated Consolidation Expenses and (x) making certain
other adjustments.
Prior to the distribution of the Last Preliminary Prospectus in the
Offering, a final determination of the Exchange Values will be made, as of the
date that is the end of the most recent accounting period that has ended at
least ___ days prior to the date on which the Last Preliminary Prospectus is
distributed to investors (the "Final Valuation Date") to reflect (i) the amount
of Net Other Assets, the actual principal balances of mortgage and other debt
(including an adjustment for prepayment and defeasance costs) and the amount of
deferred management fees payable, (ii) any amounts actually expended by FIBM
after the Initial Valuation Date to perform deferred maintenance or make up FF&E
shortfalls previously subtracted in determining the estimated Exchange Value of
FIBM and (iii) any revised estimate and allocation of Consolidation Expenses.
The actual value of Units issued to Partners in each Participating Hotel
Partnership will be based on these Exchange Values.
The Hotels were appraised as of __________ __, 1998, by AAA, an
independent, nationally recognized hotel valuation and financial advisory firm
experienced in the appraisals of lodging properties such as the Hotels. Each
appraisal (an
FIBM Supp-9
<PAGE>
"Appraisal") was reviewed by an MAI appraiser and certified by such MAI
appraiser as having been prepared in accordance with the requirements of the
Standards of Professional Practice of the Appraisal Institute and the Uniform
Standards of Professional Appraisal Practice of the Appraisal Foundation. The
Appraisals are not guarantees of present or future values, and no assurance can
be given as to the actual value of the Hotels. The Appraisals should be read in
conjunction with other information, such as, but not limited to, the audited
financial statements of FIBM.
Appraised Value of Each Hotel Owned by FIBM
(Dollars in thousands)
Appraised Value...................................... $
-------
Calculation of Estimated Exchange Value
as of Initial Valuation Date
(Dollars in thousands)
<TABLE>
<S> <C>
Appraised Value $
Net Other Assets
Mortgage debt
Other debt
Prepayment penalties
and/or defeasance costs
Deferred management fees
Deferred maintenance costs
FF&E shortfall
Consolidation Expenses
Other adjustments/(1)/
--------
Exchange Value $
========
</TABLE>
- ---------------------
/(1)/ Includes environmental remediation and certain other costs.
FIBM Supp-10
<PAGE>
Distribution of Units Among General and Limited Partners
Based on Estimated Exchange Value
(Dollars in thousands)
<TABLE>
<CAPTION>
Limited Partners General Partner
------------------------------------- --------------------------
Estimated
Value of
Units per
$1,000
Limited
Estimated Estimated % Estimated % of Partner Estimated % of Estimated
Total Value of Units Received Original Units Received Value of
Hotel Partnership of Units/(1)/ Total/(2)/ by FIBM Investment/(2)/ by FIBM Units/(1)/
- ----------------- ------------ ----------- -------------- --------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
FIBM $ % % $ % $
=========== =========== ============== ============ ============ ==========
</TABLE>
- ----------------
/(1)/ Assumes the value of the Units is equal to the initial public offering
price of CRFLT's Common Shares in the Offering and that the aggregate
value of the Units received by FIBM is just equal to (but does not exceed)
the estimated Exchange Value.
/(2)/ Represents the estimated percentage of the total value of Units allocated
to the Hotel Partnerships as a group and does not reflect the issuance of
Units to CRFLT in exchange for the proceeds of the Offering (which will
reduce the percentage of each Hotel Partnership in proportion to their
respective Exchange Values). Thus, for example, if CRFLT purchases 50% of
the Company using the proceeds received from public investors in the
Offering, then each of the percentages set forth above would be reduced by
50%. The estimated values of Units would be not affected.
Exchange Value of FIBM
for Allocation of Units to FIBM
as of Initial Valuation Date
<TABLE>
<CAPTION>
Per $1,000 Limited Partner
Original
Investment
----------------------------------
Percent of Percent of
Estimated Aggregate Estimated Aggregate
Exchange Exchange Exchange Exchange
Description Value Value Value Value
----------- ----- ----- ----- -----
(in thousands) (in dollars)
<S> <C> <C> <C> <C>
100% Participation,
No Notes Issued...................... $ % $ %
100% Participation,
Maximum Notes Issued................
Minimum Participation,
No Notes Issued.....................
Minimum Participation,
Maximum Notes Issued.................
</TABLE>
Cash Distributions
Historical Cash Distributions Paid by FIBM. The following table sets
forth the distributions paid to FIBM Limited Partners (per $1,000 limited
partner original investment) for the periods indicated below. The information
below should be read in conjunction with the information in this Supplement
under the caption "Selected Financial Data."
FIBM Supp-11
<PAGE>
Historical Cash Distributions Paid by FIBM
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended --------------------------------------------------
September 12, 1997 1996 1995 1994 1993 1992
------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
From net income...................... $ 10 $ 100 $ 100 $ 100 $ 99 $ 95
Representing return of capital/(1)/.. -- -- -- -- -- --
-------- ------ ------ ------ ------ ------
Total............................. $ 10 $ 100 $ 100 $ 100 $ 99 $ 95
======== ====== ====== ====== ====== ======
</TABLE>
- -----------
/(1)/ Computed as all distributions in excess of distributions from operating
cash flow.
Compensation and Distributions to the Hotel Partnership GP. Under the
partnership agreement of FIBM, the Hotel Partnership GP does not receive fees or
compensation in connection with managing the affairs of the Hotel Partnership
but the Hotel Partnership GP and its affiliates are reimbursed for certain costs
and expenses incurred on behalf of FIBM. The following information has been
prepared to compare the amount of reimbursements paid and cash distributions
made by FIBM to the Hotel Partnership GP and its affiliates to the amounts that
would have been paid if the reimbursement and distribution structure which will
be in effect after the Consolidation had been in effect for the years presented.
Following the Consolidation, CRFLT will be operated as a
self-administered REIT and as a result no reimbursements or other compensation
will be received by the Hotel Partnership GP other than distributions on Units
received in the Consolidation in exchange for its Hotel Partnership Interests.
During the thirty-six weeks ended September 12, 1997 and the fiscal
years 1996, 1995 and 1994, amounts actually paid by FIBM to the Hotel
Partnership GP are shown below under "Historical," and the estimated amounts
that would have been paid had the Consolidation been in effect for the years
presented (assuming the Full Consolidation Scenario) are shown under "Pro
Forma."
Historical and Pro Forma Reimbursements and Distributions
(in thousands)
<TABLE>
<CAPTION>
Thirty-six Weeks Fiscal Year
Ended -------------------------------
September 12, 1997 1996 1995 1994
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Historical
Reimbursements $ 97 $ 102 $ 92 $ 94
Distributions 9 84 84 84
----- ----- ----- -----
Total Historical $ 106 $ 186 $ 176 $ 178
===== ===== ===== =====
Pro Forma
Reimbursements $ $ $ $
Distributions attributable to Units
----- ----- ----- -----
Total Pro Forma $ $ $ $
===== ===== ===== =====
</TABLE>
FIBM Supp-12
<PAGE>
Certain Information Regarding the Hotels Owned by FIBM
Fairfield Inn properties are economy-priced, limited services hotels
aimed at budget conscious individual business and pleasure travelers, as well as
families. Fairfield Inns typically have approximately 135 rooms at locations in
suburban areas or near airports throughout the United States. Fairfield Inns
have limited public space and do not include restaurants; however, they do offer
a complimentary continental breakfast.
<TABLE>
<CAPTION>
Location of Hotel Number of Rooms Date Opened
- ----------------- --------------- -----------
<S> <C> <C>
Birmingham - Homewood, AL 132 1988
Montgomery, AL 133 1988
Los Angeles, - Buena Park, CA 135 1990
Los Angeles - Placentia, CA 135 1990
Gainesville, FL 135 1990
Miami-West, FL 135 1989
Orlando - International Drive, FL 135 1989
Orlando - South, FL 133 1988
Atlanta - Airport, GA 132 1987
Atlanta - Gwinnett Mall, GA 135 1988
Atlanta - Northlake, GA 133 1988
Atlanta - Northwest, GA 130 1987
Atlanta - Peachtree Corners, GA 135 1989
Atlanta - Southlake, GA 134 1989
Atlanta - Savannah, GA 135 1990
Des Moines - West, IA 135 1990
Bloomington - Normal, IL 132 1988
Chicago - Lansing, IL 135 1989
Peoria, IL 135 1989
Rockford, IL 135 1989
Indianapolis - Castleton, IN 132 1988
Indianapolis - College Park, IN 132 1988
Kansas City - Merriam, KS 135 1989
Kansas City - Overland Park, KS 134 1989
Detroit - Airport, MI 133 1988
Detroit - Auburn Hills, MI 134 1989
Detroit - Madison Heights, MI 134 1989
Detroit - Warren, MI 131 1988
Detroit - West (Canton), MI 133 1988
Kalamazoo, MI 133 1988
St. Louis - Hazelwood, MO 135 1989
Charlotte - Airport, NC 135 1989
Charlotte - Northeast, NC 133 1988
Durham, NC 135 1990
Fayetteville, NC 135 1989
Greensboro, NC 135 1989
Raleigh - Northeast, NC 132 1988
Wilmington, NC 134 1989
Cleveland - Airport, OH 135 1989
Columbus - North, OH 135 1989
Dayton - North, OH 135 1989
Toledo - Holland, OH 135 1989
Florence, SC 135 1989
Greenville, SC 132 1989
Hilton Head, SC 120 1989
Johnson City, TN 132 1988
Hampton, VA 134 1989
Virginia Beach, VA 134 1990
Madison, WI 135 1988
Milwaukee - Brookfield, WI 135 1989
-----
TOTAL 6,681
=====
</TABLE>
FIBM Supp-13
<PAGE>
The chart below sets forth certain performance information for FIBM's
Fairfield Inns for the indicated periods:
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
-------------------- -----------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of properties.... 50 50 50 50 50
Number of rooms......... 6,681 6,681 6,681 6,681 6,681
Average daily rate...... $50.89 $50.23 $49.57 $45.26 $41.51
Occupancy............... 78.4% 79.1% 76.6% 80.6% 81.5%
REVPAR.................. $39.92 $39.76 $37.98 $36.47 $33.83
% REVPAR change......... 0.4% -- 4.1% 7.8% --
</TABLE>
Amendments to the Partnership Agreement of FIBM
Transfer of Interests in the Hotel Partnerships to the Company
--------------------------------------------------------------
Immediately Prior to the Consummation of the Consolidation. For federal income
- ------------------------------------------------------------
tax purposes, immediately prior to the consummation of the Consolidation, each
Hotel Partnership GP will contribute a one percent partnership interest in the
Hotel Partnership to the Company in exchange for Units reflecting the estimated
Exchange Value attributable to such one percent partnership interest. The Hotel
Partnership GP owns both limited partner and general partner interests. In order
to contribute a one percent interest in FIBM to the Company, an amendment to
change the requirements for assignments of limited partner interests is
required. Section 7.01 of the partnership agreement of FIBM will be amended to
delete paragraph A restricting assignment of limited partnership interests to
the first day of a Fiscal Quarter (as defined in the partnership agreement of
FIBM).
The consent of a majority of the outstanding limited partner interests
in FIBM is required to amend Section 7.01 of the partnership agreement of FIBM.
The Hotel Partnership GP, which owns approximately 11% of the outstanding
partnership interests, is allowed to vote its limited partnership interests and
intends to vote for such amendment.
Permit FIBM to Enter into the Lease with the Lessee. The Lease for
---------------------------------------------------
FIBM's Hotels must be entered into no later than the close of business on the
business day immediately preceding the Closing Date. Therefore, the partnership
agreement of FIBM must be amended to allow FIBM to enter into the Lease with the
Lessee. The partnership agreement of FIBM allows for the sale, lease or other
disposition of the partnership's hotels with the consent of a majority of the
outstanding limited partnership interests of FIBM. However, such sale, lease or
other disposition must be done in accordance with certain procedures specified
in the partnership agreement including, among other things, the requirement to
obtain three appraisals and to purchase such hotels for cash. Therefore, the
partnership agreement of FIBM must be amended to eliminate those certain
procedures. The new Section 5.02B(x) of the partnership agreement of FIBM shall
read as follows:
(x) cause the Partnership to sell, lease or otherwise
dispose (or consent to the sale, lease or other disposition),
directly or indirectly, in one transaction or a series of
related transactions of any or all of the Hotels.
The consent of a majority of the outstanding limited partner interests
in FIBM is required to amend Section 5.02B of the partnership agreement of FIBM.
The Hotel Partnership GP, which
FIBM Supp-14
<PAGE>
owns approximately 11% of the outstanding partnership interests, is allowed to
vote its limited partnership interests and intends to vote for such amendment.
Other Amendments. Amendments to certain terms and sections of the
----------------
partnership agreement of FIBM will be made in order to (a) delete certain
obsolete references to entities and agreements that are no longer in existence,
(b) update the partnership agreement to reflect the passage of time since the
formation of FIBM and (c) make any other amendments to the partnership agreement
necessary or advisable to consummate the Consolidation. The Hotel Partnership GP
does not believe that these amendments would affect the rights of the FIBM
Limited Partners in any material respect nor the duties and obligations of the
Hotel Partnership GP. These changes are included, along with the other proposed
amendments, in the copy of the partnership agreement, as proposed to be amended,
which is attached hereto. The amended partnership agreement is marked to
indicate the revisions made to the existing partnership agreement and should be
read in its entirety. Deleted provisions are contained in brackets and struck
through and added provisions are in bold type and underlined.
The Hotel Partnership GP recommends that the FIBM Limited Partners vote
to approve the requested amendments to the partnership agreement of FIBM. The
Hotel Partnership GP intends to vote its limited partner interests FOR the
requested amendments.
Fairness
General. There are no material differences with respect to the fairness
of the Consolidation to the Hotel Partnerships, individually or in the
aggregate. Therefore, the discussion of the fairness of the Consolidation set
forth below is intended to summarize the Hotel Partnership GP's belief as to
fairness and the material factors on which such belief is based. For a more
detailed discussion of the fairness of the Consolidation, see the section
entitled "Fairness Analysis and Opinion" in the Consent Solicitation.
Hotel Partnership GP's Belief as to Fairness. The Hotel Partnership GP
believes that the terms of the Consolidation provide substantial benefits and
are fair to the FIBM Limited Partners and recommends that all FIBM Limited
Partners vote FOR the Consolidation. In arriving at this conclusion, the Hotel
Partnership GP has relied primarily on the following factors, as well as others
described under "Fairness Analysis and Opinion -- Fairness Analysis" in the
Consent Solicitation: (i) its view that the expected benefits of the
Consolidation for the FIBM Limited Partners outweigh the risks and potential
detriments to the FIBM Limited Partners (see "Background and Reasons for the
Consolidation -- Reasons for the Consolidation" in the Consent Solicitation),
(ii) its view that the estimated Exchange Value established for FIBM and the
resulting value allocable to the FIBM Limited Partners represent fair
consideration for the interests held by the FIBM Limited Partners and is fair to
such FIBM Limited Partners from a financial point of view and (iii) the Fairness
Opinion of AAA as described below.
Basis for Hotel Partnership GP's Belief as to Fairness.
Comparison of Alternatives. To assist FIBM Limited Partners in
evaluating the consolidation, the Hotel Partnership GP has attempted to compare
the estimated value of Units to be received in the Consolidation with: (i) the
face amount of Notes that will be issued to Dissenting Partners who elect to
exchange the Units they receive in the Consolidation for Notes; (ii) estimates
of the value of the Hotel Partnership Interests in FIBM assuming that FIBM
continues as an operating business and its assets are sold in ten years (the
"Continuation Value"); and (iii) estimates of the value of the Hotel Partnership
Interests in FIBM on a liquidation basis, assuming that FIBM's Hotels are sold
at their Appraised Values and the net proceeds (together with its Net Other
Assets), after payment of debts and other obligations (including defeasance
costs or prepayment penalties and deferred management fees) and an allowance for
liquidation costs, expenses and
FIBM Supp-15
<PAGE>
contingencies equal to 2% of the Appraised Values of the Hotels (the
"Liquidation Value") are distributed to the Partners of FIBM in accordance with
the partnership agreement of FIBM. The Hotel Partnership GP has not attempted to
estimate the value of Hotel Partnership Interests following a standalone UPREIT
reorganization because the Hotel Partnership GP does not believe such a
reorganization is feasible and such valuation estimates would be subject to
substantial uncertainties. Since the value of the Units and the estimated value
under the alternatives to the Consolidation are dependent upon a number of
estimates, variables and assumptions, as well as varying market conditions, no
assurance can be given that the estimated values indicated could be realized.
However, the Hotel Partnership GP believes that analyzing the alternatives in
terms of estimated values, based upon currently available market data and
reasonable estimates and assumptions, establishes a reasonable basis for
comparing the Units to the alternatives. The results of this comparative
analysis (including the methodology and assumptions used to derive estimated
values) are summarized under "Background and Reasons for the Consolidation --
Comparison of Alternative Consideration" and "Fairness Analysis and Opinion --
Comparison of Alternatives" in the Consent Solicitation.
The following table summarizes the results of the comparative analysis
described above. There can be no assurance, however, that the actual value of
Units received in the Consolidation, the actual face amount of Notes offered to
Dissenting Partners, the actual value of continuing FIBM or the actual net
liquidation proceeds would not differ substantially from those estimated for
purposes of this analysis.
Summary of Comparative Valuation Alternatives/(1)/
(Per $1,000 Limited Partner Original Investment)
<TABLE>
<CAPTION>
Face Amount of Notes
Estimated Offered to Estimated Estimated Liquidation
Value Dissenting Continuation Value if Assets Sold
Hotel Partnership of Units/(2)/ Partners/(3)/ Value/(4)/ at Appraised Value/(5)/
----------------- ------------- ------------- ---------- -----------------------
<S> <C> <C> <C> <C>
FIBM.................. $ $ $ $
- --------------------
</TABLE>
/(1)/ A limited partner original investment of $1,000 equates to one
Partnership Unit in FIBM.
/(2)/ Assumes that FIBM is allocated Units with a value equal only to its
estimated Exchange Value. The amounts in this column represent the
portion of the estimated Exchange Value of FIBM that would be allocable
to FIBM Limited Partners per $1,000 limited partner original investment.
/(3)/ The amounts in this column are equivalent to the portion of the
Liquidation Value of FIBM that would be reflected in the Notes to be
issued to FIBM Dissenting Partners per $1,000 limited partner original
investment. See footnote (5) below.
/(4)/ The amounts in this column represent the estimated amount that would be
distributed to FIBM Limited Partners per $1,000 limited partner original
investment if FIBM was continued for ten years and then sold for its
estimated value, determined using a discounted cash flow analysis applied
to the anticipated cash flows from the operation and sale of each Hotel
and taking into account the terms of existing debt obligations (the
"Continuation Value").
/(5)/ The amounts in this column represent the amount that would be distributed
to FIBM Limited Partners per $1,000 limited partner original investment
if FIBM sold its Hotels at their Appraised Values as of _____ __, 1998,
and distributed the net proceeds (after payment of debts and other
obligations (including defeasance costs or prepayment penalties and
deferred incentive management fees) and an allowance for liquidation
costs, expenses and contingencies equal to 2% of the Appraised Value of
the Hotels) (the "Liquidation Value"), in accordance with its partnership
agreement.
Fairness Opinion. AAA, an independent, nationally recognized hotel
valuation and financial advisory firm, has rendered the Fairness Opinion,
attached as Appendix B to the
FIBM Supp-16
<PAGE>
Consent Solicitation, which concluded that: (i) the methodologies used to
determine the Exchange Value of each Hotel Partnership and to allocate the Units
among each of the Hotel Partnerships are fair, from a financial point of view,
to the Limited Partners of each Hotel Partnership, (ii) the underlying
assumptions used to determine the Exchange Value of each Hotel Partnership and
the purchase price of each Acquisition Hotel (including, without limitation, the
assumptions used to determine the various adjustments to the Appraised Values of
the Hotels) are fair and reasonable from the standpoint of each Hotel
Partnership; (iii) the methodology used to allocate Units received by each
Hotel Partnership among its general and Limited Partners is fair and reasonable
to the Limited Partners; (iv) the methodologies and the underlying assumptions
used to determine the Continuation Value and the Liquidation Value of each Hotel
Partnership (including, without limitation, the assumptions used to determine
the various adjustments to the Appraised Values of the Hotels) are fair and
reasonable from the standpoint of each Hotel Partnership and (v) the economic
terms of the Leases are fair and reasonable from the standpoint of the Company.
See "Fairness Analysis and Opinion -- Fairness Opinion" in the Consent
Solicitation.
Federal Income Tax Considerations
In addition to the federal income tax considerations discussed in the
sections of the Consent Solicitation entitled "Federal Income Tax
Considerations" and "Risk Factors -- Federal Income Tax Risks," FIBM Limited
Partners should read carefully the following discussion of federal income tax
considerations applicable specifically to the FIBM Limited Partners. The
numerical data and estimates included in this discussion are based on various
factual assumptions and information which are believed by the Company and the
Hotel Partnership GP to be reliable. However, some of these assumptions
inevitably will not materialize, and unanticipated events and circumstances will
occur. Therefore, there likely will be differences between the numerical data
and estimates included herein and actual results, and the variations may be
material and adverse.
Applicability of Tax Opinions
Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to CRFLT and the
Company, has provided to CRFLT and the Company an opinion letter (substantially
in the form of Appendix E to the Consent Solicitation) as to certain federal
income tax consequences of the Consolidation. The opinion letter is based upon
certain assumptions and certain representations provided by CRFLT, the Company
and the Hotel Partnership GPs. These representations generally involve factual
matters relating to the organization, ownership and operations (including the
income, assets, businesses, liabilities and properties) of the Hotel
Partnerships prior to the Consolidation and of CRFLT, the Company and the Hotel
Partnerships following the Consolidation. In addition, on the Closing Date,
Hogan & Hartson expects to provide to CRFLT and the Company an opinion letter
(substantially in the form of Exhibit __ to the Prospectus) as to certain
federal income tax consequences relating to the Offering. See "Federal Income
Tax Considerations -- Summary of Tax Opinions" in the Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is
substantially in the form of Appendix E to the Consent Solicitation is
applicable to the FIBM Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code
and Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson on the date of the Closing will be
based on the same authorities as of the Closing Date. No assurance can be
given that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change the law or the
above conclusions reached by counsel. In addition, any such change could apply
retroactively to transactions preceding the date of change.
FIBM Supp-17
<PAGE>
Moreover, opinions of counsel merely represent counsel's best judgment with
respect to the probable outcome on the merits and are not binding on the IRS or
the courts. Accordingly, even if there is no change in applicable law, no
assurance can be provided that such opinions (which do not bind the IRS or the
courts) will not be challenged by the IRS or will not be sustained by a court if
so challenged. Neither CRFLT, the Company nor the Hotel Partnership GPs have
requested or plan to request any rulings from the IRS concerning the tax
consequences of the Consolidation or the treatment of either the Company or
CRFLT subsequent to the Consolidation.
Tax Consequences of Formation of the Company
Overview. Hogan & Hartson has provided an opinion to the effect that
--------
the formation of the Company will not result in the recognition of taxable gain
or loss at the time of the Consolidation to an FIBM Limited Partner (i) who does
not exercise his Unit Redemption Right on a date sooner than the date two years
after the date of the consummation of the Consolidation; (ii) who does not
receive a cash distribution (or a deemed cash distribution resulting from relief
from liabilities, including as a result of the prepayment of certain Hotel
Partnership liabilities with proceeds from the Offering) in connection with the
Consolidation in excess of his aggregate adjusted basis in his FIBM Partnership
Unit at the time of the Consolidation; (iii) who does not receive Notes upon
exercise of Dissenters' Rights; (iv) who is not required to recognize gain by
reason of the exercise by another FIBM Limited Partner of Dissenters' Rights and
the option to receive Notes; and (v) who does not have his "at risk" amount fall
below zero as a result of the Consolidation. See "Federal Income Tax
Considerations -- Summary of Tax Opinions" in the Consent Solicitation. With
respect to the foregoing exceptions to nonrecognition treatment, the Company and
the Hotel Partnership GP believe that an FIBM Limited Partner who acquired his
FIBM Partnership Units in the original offering of such Units for cash and who
has held such Units at all times since (i) should not be considered to receive,
as a result of the Consolidation, a distribution (or a deemed cash distribution
resulting from relief from liabilities, including as a result of the prepayment
of certain Hotel Partnership liabilities with proceeds from the Offering) that
exceeds his aggregate adjusted basis in his FIBM Partnership Unit at the time of
the Consolidation, and (ii) should not have his "at risk" amount fall below zero
as a result of the Consolidation. See "Federal Income Tax Considerations -- Tax
Consequences of the Formation of the Company --Overview" in the Consent
Solicitation.
With respect to the exercise of Dissenters' Rights, Hogan & Hartson is
of the opinion that although the matter is not free from doubt, an FIBM Limited
Partner who does not exercise Dissenters' Rights and elects to receive Notes in
connection with the Consolidation should not be required to recognize gain by
reason of another FIBM Limited Partner's exercise of such rights. With respect
to the exercise of a Unit Redemption Right, Hogan & Hartson is of the opinion
that it is more likely than not that an FIBM Limited Partner's exercise of his
Unit Redemption Right more than one year after the date of consummation of the
Consolidation but less than two years after such date will not cause the
Consolidation itself to be a taxable transaction for the FIBM Limited Partner
(or the other FIBM Limited Partners). See "Federal Income Tax Considerations --
Summary of Tax Opinions" in the Consent Solicitation. Opinions of counsel,
however, do not bind the IRS or the courts, and no assurances can be provided
that such opinions will not be challenged by the IRS or will be sustained by a
court if so challenged.
Amount of Deemed Cash Distribution. With respect to his FIBM
----------------------------------
Partnership Units, an FIBM Limited Partner will receive no actual cash
distribution in connection with the Consolidation but will be deemed to receive
a cash distribution in connection with the Consolidation to the extent that his
share of Company liabilities immediately after the Consolidation is less than
his share of FIBM liabilities immediately prior to the Consolidation. See
"Federal Income Tax Considerations -- Tax Consequences of the Formation of the
Company -- Relief from Liabilities/Deemed Cash Distribution" in the Consent
Solicitation. As a consequence of the Consolidation, the Company and the Hotel
Partnership GP believe, based upon and subject to the assumptions and other
limitations described below, that (i) the FIBM Limited Partners' aggregate share
of indebtedness should
FIBM Supp-18
<PAGE>
decrease by $______ (from $________ (on December 31, 1997) to $_________); and
(ii) the share of indebtedness of an individual FIBM Limited Partner who
acquired his FIBM Partnership Unit in the original offering of such Units for
cash and has held such Units at all times since should decrease by $_____ per
FIBM Partnership Unit (from $_____ (on December 31, 1997) to $_______). For an
FIBM Limited Partner who did not acquire his FIBM Partnership Units in the
original offering of such Units for cash or who has not held his FIBM
Partnership Units at all times since such offering, the above information could
vary materially.
Estimated Amount of Taxable Gain. An FIBM Limited Partner will
--------------------------------
recognize taxable gain as a result of the deemed cash distribution discussed in
the previous paragraph, however, only to the extent that the deemed cash
distribution exceeds his adjusted tax basis in his FIBM Partnership Units
immediately prior to the Consolidation. As described below, the Company and the
Hotel Partnership GP estimate that as of December 31, 1997, the adjusted tax
basis of an FIBM Limited Partner who acquired his FIBM Partnership Units in the
original offering of such Units for cash and has held such Units at all times
since was ______ per FIBM Partnership Unit (which is greater than the deemed
cash distribution of _____ per FIBM Partnership Unit discussed in the previous
paragraph). Accordingly, the Company and the Hotel Partnership GP believe, based
upon and subject to the assumptions and other limitations described below, that
an FIBM Limited Partner who acquired his FIBM Partnership Units in the original
offering of such Units for cash and has held the Units at all times since should
not recognize gain due to the deemed cash distribution resulting from the relief
from liabilities in connection with the Consolidation.
The adjusted tax basis of an FIBM Limited Partner who did not acquire
his FIBM Partnership Units in the original offering of such Units for cash or
who has not held his FIBM Partnership Units at all times since such offering
could vary materially from that of an FIBM Limited Partner who did so. If an
FIBM Limited Partner has an adjusted tax basis in his FIBM Partnership Units
(per FIBM Partnership Unit) that is less than the adjusted tax basis of an FIBM
Limited Partner who acquired his FIBM Partnership Units in the original offering
of such Units for cash and has held such Units at all times since, he could
recognize gain due to the deemed cash distribution resulting from the relief
from liabilities in connection with the Consolidation.
Tax Treatment of FIBM Limited Partners Who Hold Units Following the
Consolidation
Initial Basis in Units. In general, an FIBM Limited Partner will have
----------------------
an initial tax basis in his Units ("Initial Basis") received in the
Consolidation with respect to his FIBM Partnership Units equal to the basis in
his FIBM Partnership Units at the time of the Consolidation, reduced to reflect
any deemed cash distributions resulting from a reduction in his share of FIBM
liabilities and increased to reflect any gain required to be recognized in
connection with the Consolidation. As of December 31, 1997, an FIBM Limited
Partner who acquired his FIBM Partnership Units in the original offering of such
Units for cash and has held such Units at all times since, had an adjusted tax
basis in his FIBM Partnership Units of $____ per FIBM Partnership Unit (after
giving effect to the Consolidation, including the prepayment of indebtedness
contemplated in connection therewith). Based upon and subject to the assumptions
and other limitations described below, the Company and the Hotel Partnership GP
believe that the tax basis of such an FIBM Limited Partner in his Units received
in the Consolidation with respect to his FIBM Partnership Units would be $____
per FIBM Partnership Unit. For an FIBM Limited Partner who did not acquire his
FIBM Partnership Units in the original offering of such Units for cash or who
has not held his FIBM Partnership Units at all times since such offering, the
above information could vary materially. For a discussion of the federal income
tax considerations for a Limited Partner from a reduction in basis that may
result from the Consolidation, see "Federal Income Tax Considerations -- Tax
Consequences of Formation of the Company -- Initial Tax Basis of Units" in the
Consent Solicitation.
FIBM Supp-19
<PAGE>
Tax Allocations with Respect to Contributed Hotels upon a Sale of FIBM
----------------------------------------------------------------------
Hotels. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
- ------
attributable to appreciated or depreciated property that is contributed to a
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with, or benefits from, the unrealized gain or
unrealized loss associated with the property at the time of contribution. The
amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the time
of contribution and the adjusted tax basis of such property at the time of
contribution (referred to as "Book-Tax Difference"). The Company and the Hotel
Partnership GP, based upon and subject to the assumptions and other limitations
described below, estimate that the Book-Tax Difference of the FIBM Hotels will
be $________ upon the consummation of the Consolidation.
In the event that the Company were to sell all of the FIBM Hotels, the
Partners of FIBM would be specially allocated by the Company an amount of
taxable gain equal to the Book-Tax Difference with respect to the FIBM Hotels ($
____ in the aggregate if the FIBM Hotels were sold immediately after the
consummation of the Consolidation, according to the estimate in the previous
paragraph). The share of such gain allocable to an FIBM Limited Partner who
acquired his FIBM Partnership Units in the original offering of such Units for
cash and held such Units at all times since would be $___ per FIBM Partnership
Unit. The share of such gain of an FIBM Limited Partner who did not acquire his
FIBM Partnership Units in the original offering of such Units for cash or who
has not held his FIBM Partnership Units at all times since such offering could
vary materially from this amount. If the Company were to sell one or more, but
not all, of the FIBM Hotels, the former Partners of FIBM would be specially
allocated by the Company an amount of taxable gain equal to that portion of the
Book-Tax Difference for the FIBM Hotels that is attributable to the FIBM Hotel
or Hotels sold. The Partnership Agreement does not impose any restrictions upon
the Company from causing the sale of any or all of the FIBM Hotels. See "Federal
Income Tax Considerations -- Tax Treatment of Limited Partners Who Hold Units
Following the Consolidation -- Sale of Individual Hotels" in the Consent
Solicitation.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
------------------------------------------------------------
allocations of depreciation to the FIBM Limited Partners will change
significantly as a result of the Consolidation for two reasons. First, as
described above, pursuant to Section 704(c) of the Code, depreciation and
deductions attributable to the FIBM Hotels will be required to be allocated for
federal income tax purposes in a manner such that the FIBM Partners are charged
with the Book-Tax Difference associated with the FIBM Hotels at the time of the
consummation of the Consolidation. Consequently, an FIBM Limited Partner will be
allocated less depreciation with respect to the FIBM Hotels than would be the
case if the Consolidation had not occurred and the FIBM Limited Partner had
continued to hold his FIBM Partnership Units. Second, the Consolidation will
cause the technical termination of FIBM and each of the other Hotel Partnerships
under Section 708(b)(1)(B) of the Code. Section 168(i)(7) of the Code provides,
in effect, that when a partnership terminates under Section 708(b)(1)(B) of the
Code, the partnership must begin new depreciation periods for its property. As a
result, the remaining bases of the FIBM Hotels and the Hotels held by the other
Hotel Partnerships will be depreciated over 39 years, rather than over the
remaining current life of such Hotels (which ranges from 8 years to 25 years).
See "Federal Income Tax Considerations -- Tax Treatment of Limited Partners Who
Hold Units Following the Consolidation -- Effect of Consolidation on
Depreciation" in the Consent Solicitation.
To illustrate the consequences of these changes for an FIBM Limited
Partner, the Company and the Hotel Partnership GP estimate, based upon and
subject to the assumptions and other limitations described below, that if the
Consolidation were consummated on January 1, 1998, the amount of income for 1998
that would be allocated to an FIBM Limited Partner who acquired his FIBM
Partnership Units in the original offering of such Units for cash and held such
Units at all times since would increase by $____ per FIBM Partnership Unit (from
$_____ to $_____) over the estimated amount of income that would have been
allocated to such FIBM Limited Partner for 1998 if FIBM did not participate in
the Consolidation. No attempt is made here to estimate the effect of
FIBM Supp-20
<PAGE>
the Consolidation on tax allocations in years subsequent to the 1998 taxable
year, but the Consolidation is expected to effect such allocations as well. The
amount of income allocable to an FIBM Limited Partner who did not acquire his
FIBM Partnership Units in the original offering of such Units for cash or who
has not held his FIBM Partnership Units at all times since such offering could
vary materially from this amount. See "Federal Income Tax Considerations -- Tax
Treatment of Limited Partners Who Hold Units Following the Consolidation -- Tax
Allocations with Respect to Book-Tax Difference on Contributed Hotels" in the
Consent Solicitation.
State and Local Taxes. FIBM Limited Partners holding Units may be
---------------------
subject to state and local taxation in a number of jurisdictions in which the
Company directly or indirectly holds real property and would be required to file
periodic tax returns in those jurisdictions. In this regard, immediately
following the Consolidation, the Company will own properties in 35 states across
the United States. Currently, FIBM owns properties in 16 states. See "Federal
Income Tax Considerations -- Tax Treatment of Limited Partners Who Hold Units
Following the Consolidation -- State and Local Taxes" in the Consent
Solicitation.
Assumptions Used in Determining Tax Consequences of the Consolidation
In preparing the estimates set forth above, the Company and the Hotel
Partnership GP made several key assumptions, which are described below. If any
such assumption is not accurate with respect to a particular FIBM Limited
Partner, the tax consequences of the Consolidation to such Partner could be
substantially different from those reflected above. ACCORDINGLY, EACH FIBM
LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO
DETERMINE THE IMPACT OF SUCH FIBM LIMITED PARTNER'S PARTICULAR TAX SITUATION ON
THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION.
First, with respect to an FIBM Limited Partner's basis in his FIBM
Partnership Units prior to the Consolidation, the Company and the Hotel
Partnership GP assumed that an FIBM Limited Partner acquired his FIBM
Partnership Units in the original offering of such Units for cash and has held
such Units at all times since. The adjusted tax basis of an FIBM Limited Partner
who did not acquire his FIBM Partnership Units in the original offering of such
Units for cash could vary materially from that of an FIBM Limited Partner who
did so. In this regard, it should be noted that the adjusted tax basis of an
FIBM Limited Partner who acquired his FIBM Partnership Units in the original
offering of such interests for cash still could vary substantially from the
estimates set forth above for several reasons, including but not limited to (i)
if the FIBM Limited Partner has received special allocations of items of FIBM
income, gain, deduction, loss, or credit, or non-pro rata distributions, or made
non-pro rata contributions; or (ii) if an FIBM Limited Partner's share of FIBM
nonrecourse liabilities differs from his pro rata percentage of such liabilities
immediately prior to consummation of the Consolidation. If an FIBM Limited
Partner has an adjusted tax basis in his FIBM Partnership Units that is less
than the tax basis of an FIBM Limited Partner who acquired his FIBM Partnership
Units in the original offering of such Units for cash and has held such Units at
all times since, the Consolidation might result in the receipt by the FIBM
Limited Partner of a deemed distribution of cash in excess of his adjusted tax
basis in his FIBM Partnership Units, which could result in the recognition of
income or gain.
Second, the Company and the Hotel Partnership GP assumed that the
method expected to be used by the Company to allocate liabilities among the
Partners will be respected for federal income tax purposes. The Company will
allocate liabilities among the Partners as described in "Federal Income Tax
Considerations -- Tax Consequences of the Formation of the Company -- Relief
from Liabilities/Deemed Cash Distribution" in the Consent Solicitation. If the
method used by the Company were not respected for federal income tax purposes
and the nonrecourse liabilities actually allocable to an FIBM Limited Partner
are less than the amount assumed above, the Consolidation might result in the
receipt by such FIBM Limited Partner of a deemed distribution of cash that is
greater than the deemed distribution of cash expected to be received by such
FIBM
FIBM Supp-21
<PAGE>
Limited Partner as described above in "Tax Consequences of Formation of the
Company -- Amount of Deemed Cash Distribution." For an FIBM Limited Partner who
did not acquire his FIBM Partnership Units in the original offering of such
Units for cash or who did not hold such Units at all times since, this deemed
distribution of cash could exceed his adjusted tax basis in his FIBM Partnership
Units, which could result in the recognition of income or gain.
Third, the Company and the Hotel Partnership GP assumed that all of the
Hotel Partnerships will elect to participate in the Consolidation and that no
Notes will be issued. If less than all of the Hotel Partnerships elect to
participate in the Consolidation, however, the Consolidation still may be
consummated so long as the Minimum Participation Condition and all other
conditions to consummation of the Consolidation are satisfied or waived. See
"The Consolidation -- Conditions to Consummation of the Consolidation."
Moreover, the Company has reserved the right to exclude any Hotel Partnership
from participation in the Consolidation (even if the requisite number of Limited
Partners in a Hotel Partnership have voted to approve of and participate in the
Consolidation and each of the other conditions to the Consolidation has been
satisfied or waived) if the Company determines that such exclusion is in its
best interests. See "The Consolidation -- Right to Exclude Hotel Partnerships."
If less than all of the Hotel Partnerships participate in the Consolidation, the
Consolidation might result in the receipt by FIBM Limited Partners of a deemed
distribution of cash that is greater than the deemed distribution of cash
expected to be received by FIBM Limited Partners as described above in "Tax
Consequences of Formation of the Company -- Amount of Deemed Cash Distribution."
For an FIBM Limited Partner who did not acquire his FIBM Partnership Units in
the original offering of such Units for cash or who did not hold such Units at
all times since, this deemed distribution of cash could exceed his adjusted tax
basis in his FIBM Partnership Units, which could result in the recognition of
income or gain.
Fourth, the Company and the Hotel Partnership GP assumed that Partners
in each Hotel Partnership would receive Units in the Consolidation with a value
exactly equal to the Exchange Value, that CRFLT would raise gross proceeds in
the Offering of $800 million, and that CRFLT would own a ____% interest in the
Company as a result of the contribution of the proceeds from the Offering to the
Company. With respect to the proceeds from the Offering, the Company and the
Hotel Partnership GP assumed that approximately $539 million would be used to
prepay certain indebtedness of the Hotel Partnerships (specifically the CBM2
Certificates, the RIBM1 Senior Mortgage and all of the outstanding indebtedness
of Res USA) and that approximately $36 million would be used to pay prepayment
penalties associated with these prepayments. To the extent that the value of the
Units received by the Partners of FIBM in the Consolidation exceeds the Exchange
Value, the aggregate Book-Tax Difference of the FIBM Hotels discussed above
would increase accordingly. In the event the nonrecourse liabilities actually
allocable to an FIBM Limited Partner are less than the amount assumed above
(including, for example, if the proceeds from the Offering exceed $800 million),
the Consolidation might result in the receipt by such FIBM Partner of a deemed
distribution of cash that is greater than the deemed distribution of cash
expected to be received by such FIBM Limited Partner as described above in "Tax
Consequences of Formation of the Company -- Amount of Deemed Cash Distribution."
For an FIBM Limited Partner who did not acquire his FIBM Partnership Units in
the original offering of such Units for cash or who did not hold such Units at
all times since, this deemed distribution of cash could exceed his adjusted tax
basis in his FIBM Partnership Units, which could result in the recognition of
income or gain.
Finally, the Company and the Hotel Partnership GP assumed that the
Mergers will be treated for federal income tax purposes as the transfer by the
Partners of their interests in the Hotel Partnerships to the Company in exchange
for Units. There can be no assurance, however, that the IRS will not seek to
recharacterize each Merger as either (i) the liquidation of a Hotel Partnership
followed by the distribution by the Hotel Partnership of its assets to its
Partners and the subsequent transfers by such Partners of such assets to the
Company in exchange for Units, or (ii) the transfer by a Hotel Partnership of
its assets to the Company in exchange for Units and the subsequent distribution
of such Units to its Partners. If the Mergers are recharacterized in such a
FIBM Supp-22
<PAGE>
manner, the tax consequences of the Consolidation to the FIBM Limited Partners
likely would be materially affected.
EACH FIBM LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX
ADVISOR TO DETERMINE THE IMPACT OF SUCH PARTNER'S PARTICULAR TAX SITUATION ON
THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION. THE TAX
CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION TO A PARTICULAR FIBM PARTNER
COULD VARY SUBSTANTIALLY FROM THE ESTIMATES DESCRIBED ABOVE.
Tax Treatment of FIBM Limited Partners Who Exercise Dissenters' Rights
and Elect to Receive Notes
An FIBM Limited Partner who exercises his Dissenters' Rights and elects
to receive Notes in connection with the Consolidation will be treated as having
made a taxable disposition of his FIBM Partnership Units. The amount realized in
connection with such disposition will equal the sum of the "issue price" of the
Notes (i.e., the face amount of the Notes) (currently estimated as $_____ per
FIBM Partnership Unit) plus the portion of the FIBM liabilities allocable to the
FIBM Limited Partner for federal income tax purposes (estimated as $_______ per
FIBM Partnership Unit as of December 31, 1997). To the extent the amount
realized exceeds the FIBM Limited Partner's adjusted basis in his FIBM
Partnership Units, the FIBM Limited Partner will recognize gain. For a
discussion of the federal income tax rates applicable to the net capital gain
from the sale of a capital asset, see "Federal Income Tax Considerations -- Tax
Treatment of Limited Partners Who Hold Units Following the Consolidation --
Disposition of Units by Limited Partners" in the Consent Solicitation. In this
regard, the Hotel Partnership GP estimates that, as of December 31, 1997, if
FIBM sold all of its Hotels in a fully taxable transaction for a net amount,
after payment of liabilities, equal to the Liquidation Value of FIBM, the
"unrecognized Section 1250 gain" per FIBM Partnership Unit would be $______ and
the gain subject to tax as ordinary income under Section 1245 per FIBM
Partnership Unit would be $______.
An FIBM Limited Partner who exercises Dissenters' Rights and elects to
receive Notes may be eligible to defer at least a portion of that gain under the
"installment sale" rules. Those rules, however, may not permit the FIBM Limited
Partner to defer all of the gain (and, to the extent that the face amount of the
Notes (and any other installment obligations received by the taxpayer during the
year) outstanding at the end of the taxable year in which the Consolidation
occurs exceeds $5,000,000, will require that the FIBM Limited Partner who defers
gain pay to the IRS interest on the resulting tax that has been deferred). The
FIBM Limited Partner, for instance, will not be eligible to defer gain to the
extent that such gain would be taxed as ordinary income under Section 1245 of
the Code. In addition, to the extent that the FIBM Limited Partner's share of
FIBM liabilities exceeds his adjusted tax basis in his FIBM Units immediately
prior to the Consolidation, the FIBM Limited Partner will not be eligible to
defer gain recognized upon the receipt of Notes. Lastly, if an FIBM Limited
Partner disposes of Notes, any gain that had been deferred would be recognized
in the year of disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR DISSENTING FIBM LIMITED
PARTNER COULD HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE
CONSOLIDATION, AND THE SUBSEQUENT OWNERSHIP AND DISPOSITION OF NOTES. THEREFORE,
IT IS ESSENTIAL THAT SUCH FIBM LIMITED PARTNERS CONSULT WITH THEIR OWN TAX
ADVISORS WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH
FIBM LIMITED PARTNERS' RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING
JURISDICTION.
Special Considerations for FIBM Limited Partners Who Are Not U.S.
Persons
FIBM Supp-23
<PAGE>
The Consolidation involves special tax considerations for FIBM Partners
who are not U.S. Persons (for example, a citizen or resident of the United
States, a partnership, corporation of other entity organized under the laws of
the United States or any political subdivision thereof, or an estate or trust
subject to United States income tax).
First, an FIBM Limited Partner who is not a U.S. Person may be subject
to special tax considerations with respect to the Consolidation and/or the
subsequent ownership and disposition of Units in one or more countries other
than the United States, including, for example, the country in which such FIBM
Limited Partner resides, any countries in which he conducts business, and, if
the FIBM Limited Partner is an entity, the country in which it is organized
and/or has its commercial domicile. The tax laws of other countries differ
significantly from those of the United States, and thus there can be no
assurance that an FIBM Limited Partner who is not a U.S. Person will not incur
significant adverse tax consequences as a result of the Consolidation under laws
of one or more countries other than the United States. IT IS ESSENTIAL THAT AN
FIBM LIMITED PARTNER WHO IS NOT A U.S. PERSON CONSULT WITH HIS OWN TAX ADVISORS
WITH REGARD TO ANY TAX CONSEQUENCES OF THE CONSOLIDATION AND/OR THE SUBSEQUENT
OWNERSHIP AND DISPOSITION OF OP UNITS ARISING UNDER THE LAWS OF ANY FOREIGN
TAXING JURISDICTION.
Second, under the Foreign Investment in Real Property Tax Act
("FIRPTA"), the Company may have to withhold and pay tax to the IRS in
connection with the Consolidation with respect to any FIBM Limited Partner that
is not a U.S. Person (even though no taxable gain for U.S. federal income tax
purposes would be recognized in connection with the Consolidation) unless the
FIBM Limited Partner receives from the IRS a "withholding tax certificate"
showing no tax is due in connection with the Consolidation. The amount required
to be withheld would be 10% of the FIBM Limited Partner's share of the
liabilities of FIBM at the time of the Consolidation. To the extent that the
amount withheld by the Company and paid to the IRS exceeded the FIBM Partner's
actual federal income tax liability attributable to the Consolidation, the FIBM
Limited Partner could seek a refund from the IRS. The Units issued to any FIBM
Limited Partner who is not a U.S. Person would be reduced by the amount of tax
required to be withhold and paid to the IRS. AN FIBM LIMITED PARTNER WHO IS NOT
A U.S. PERSON SHOULD CONSULT WITH HIS TAX ADVISORS REGARDING THE PROCESS FOR
OBTAINING FROM THE IRS A "WITHHOLDING CERTIFICATE" SHOWING THAT NO TAX IS DUE IN
CONNECTION WITH THE CONSOLIDATION. The application for such a certificate is the
responsibility of the FIBM Limited Partner and not either FIBM or the Company.
Tax Consequences if FIBM Does Not Participate in the Consolidation
If FIBM does not participate in the Consolidation, the FIBM Limited
Partners would not have any tax consequences resulting from the Consolidation.
The consequences of continued ownership of FIBM Partnership Units will be the
same as would have resulted if the Consolidation had not been proposed.
* * *
The above description is not exhaustive of all possible tax
considerations associated with the Consolidation. This summary does not discuss
foreign tax considerations, nor does it discuss all of the aspects of federal
income taxation or state and local taxation that may be relevant to FIBM Limited
Partners in light of their particular circumstances. EACH FIBM LIMITED PARTNER
IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE IMPACT OF
SUCH FIBM LIMITED PARTNER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX
CONSEQUENCES OF PARTICIPATING IN THE CONSOLIDATION.
FIBM Supp-24
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial statement
data derived from the FIBM financial statements for the First Three Quarters
1997 and the First Three Quarters 1996 and for the five most recent fiscal years
ended January 3, 1997. The following data should be read in conjunction with
FIBM's financial statements and the notes thereto, Management's Discussion and
Analysis of Financial Condition and Results of Operations and the other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
First Three Quarters Fiscal Year
-------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (amounts in thousands, except per limited partner original investment amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 33,009 $ 34,064 $ 47,065 $ 45,262 $ 40,854 $ 37,641 $ 36,240
Operating profit ............. 11,983 13,180 17,316 15,015 11,977 9,834 12,755
Net income (loss)............. 2,347 2,284 1,420 (951) (4,174) (5,958) (3,410)
Distributions
General Partner............. 9 63 84 84 84 83 80
Limited Partner............. 833 6,251 8,334 8,334 8,334 8,229 7,917
-------- -------- -------- -------- -------- -------- --------
842 6,314 8,418 8,418 8,418 8,312 7,997
Per $1,000 limited partner
original investment:
Net income (loss)........... 28 27 17 (11) (50) (71) (41)
Distributions............... 10 75 100 100 100 99 95
EBITDA(1)..................... 22,003 23,004 31,304 28,972 26,929 24,816 27,070
Cash provided by
operating activities........ 16,136 15,021 17,508 16,357 14,670 12,942 11,369
Cash used in investing
activities.................. 13,861 3,960 5,762 5,698 5,163 4,132 2,105
Cash used in financing
activities.................. 3,405 6,319 8,758 8,418 8,418 8,312 7,997
Increase (decrease) in cash
and cash equivalents........ (1,130) 4,742 2,988 2,241 1,089 498 1,267
Ratio of earnings to fixed
charges(2).................. 1.21x 1.19x 1.08x -- -- -- --
Deficiency of earnings to
fixed charges (2)........... -- -- -- 951 4,174 5,958 3,410
Total assets at book value.... 189,771 185,003 184,992 185,481 191,939 200,882 211,112
Total assets at value assigned
for consolidation........... -- -- -- -- -- -- --
Cash and cash equivalents..... 8,898 11,782 10,028 7,040 4,799 3,710 3,212
Total debt.................... 163,250 164,846 164,847 164,850 164,850 164,850 164,850
Partner's capital:
Limited partners............ 3,189 5,719 1,698 8,626 17,901 30,367 44,829
General partner............. 83 109 68 138 232 358 503
Book value per $1,000 limited
partner original investment. 39 69 21 104 216 367 542
Exchange Value per $1,000
limited partner
original investment......... -- -- -- -- -- --
</TABLE>
FIBM Supp-25
<PAGE>
- --------------------
(1) EBITDA consists of the sum of net income, interest expense, depreciation and
amortization. EBITDA data is presented because such data is used by certain
investors to determine the partnership's ability to meet debt service
requirements. The partnership considers EBITDA to be an indicative measure
of the partnership's operating performance due to the significance of the
partnership's long-lived assets and because EBITDA can be used to measure
the partnership's ability to service debt, fund capital expenditures and
expand its business; however, such information should not be considered as
an alternative to net income, operating profit, cash flows from operations,
or any other operating or liquidity performance measure prescribed by
generally accepted accounting principles. Cash expenditures for various
long-term assets and interest expense have been, and will be, incurred which
are not reflected in the EBITDA presentations.
(2) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The deficiency
of earnings to fixed charges is largely the result of depreciation and
amortization of $13,338,000, $14,639,000, $14,310,000 and $14,022,000 in
1995, 1994, 1993 and 1992, respectively.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
First Three Quarters 1997 Compared to First Three Quarters 1996
Revenues. Revenues for the First Three Quarters 1997 decreased $1.1 million
to $33 million. Hotel sales decreased $.1 million to $69.3 million in the First
Three Quarters 1997. Revenue per available room ("REVPAR") is a commonly used
indicator of market performance for hotels which represents the combination of
daily room rate charged and the average daily occupancy achieved. REVPAR does
not include food and beverage or other ancillary revenues generated by the
property. REVPAR increased slightly for the First Three Quarters 1997 due
primarily to an increase in average room rates of one percent, while average
occupancy decreased less than one percentage point. Due to the high occupancy of
these properties, FIBM expects future increases in REVPAR to be driven by room
rate increases, rather than occupancy increases. However, there can be no
assurance that REVPAR will continue to increase in the future.
Operating Costs and Expenses. Operating costs and expenses increased to $21
million for the First Three Quarters 1997 from $20.9 million for the First Three
Quarters 1996. As a percentage of hotel revenues, hotel operating costs and
expenses were 64% and 61% of revenues for the First Three Quarters 1997 and the
First Three Quarters 1996, respectively.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, FIBM's operating profit decreased by $1.2
million to $12 million, or 36% of revenues, for the First Three Quarters 1997
from $13.2 million, or 39% of revenues, for the First Three Quarters 1996.
Interest Expense. Interest expense decreased $1.0 million to $10.3 million
for the First Three Quarters 1997 due to the impact of FIBM's refinanced debt.
Net Income. Net income remained unchanged at $2.3 million, or 7% of
revenues, for the First Three Quarters 1997.
1996 Compared to 1995
Revenues. Revenues increased $1.8 million, or 4%, to $47.1 million in 1996
from $45.3 million in 1995 as a result of growth in REVPAR of 4%. Hotel sales
increased $5.7 million, or 6%, to $97.4 million in 1996 also reflecting
improvements in REVPAR for the year. The increase in REVPAR was the result of an
increase in average room rates of nearly 10%, while average occupancy decreased
four percentage points. The decrease in occupancy was primarily the result of
efforts to maximize the average room rate and ultimately increase REVPAR, but
was also impacted by market conditions and increased competition.
FIBM Supp-26
<PAGE>
Operating Costs and Expenses. Operating costs and expenses decreased $.4
million to $29.8 million in 1996 from $30.3 million in 1995. As a percentage of
hotel revenues, operating costs and expenses represented 63% of revenues for
1996 and 67% in 1995.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased $2.3 million to
$17.3 million, or 37% of total revenues, in 1996 from $15 million, or 33% of
revenues, in 1995.
Interest Expense. Interest expense remained at $16.6 million for 1996 and
1995.
Net Income. Net income increased $2.4 million to $1.4 million, or 3% of
total revenues, in 1996 from a net loss of $1 million in 1995 due primarily to
improved lodging results.
1995 Compared to 1994
Revenues. Revenues increased $4.4 million, or 11%, to $45.3 million in 1995
from $40.9 million in 1994 as a result of strong growth in REVPAR of nearly 8%.
The increase in REVPAR was primarily the result of a 9% increase in average room
rates and a one percentage point decrease in average occupancy.
Operating Costs and Expenses. Operating costs and expenses increased $1.4
million to $30.3 million, or 67% of hotel revenues, in 1995, from $28.9 million,
or 71% of hotel revenues, in 1994.
Operating Profit. Operating profit increased $3 million to $15 million, or
33% of revenues, in 1995 from $12 million, or 29% of revenues, in 1994 due to
the changes in revenues and operating costs discussed above.
Interest Expense. Interest expense increased $.1 million to $16.6 million
in 1995.
Net Loss. Net loss decreased to $1 million in 1995, from a net loss of $4.2
million in 1994 due to the items discussed above.
Liquidity and Capital Resources
Cash provided by operations was $16.1 million and $15 million for the First
Three Quarters 1997 and First Three Quarters 1996, respectively, and $17.5
million in 1996, $16.4 million in 1995 and $14.7 million in 1994.
Cash used in investing activities was $13.9 million and $4 million for the
First Three Quarters 1997 and the First Three Quarters 1996, respectively, and
$5.8 million, $5.7 million and $5.2 million in 1996, 1995 and 1994,
respectively. FIBM's cash investing activities consisted primarily of
contributions to the property improvement fund and capital expenditures for
improvements to existing hotels.
Cash used in financing activities was $8.8 million, $8.4 million and $8.4
million in 1996, 1995 and 1994, respectively. The partnership's cash used in
financing activities was $3.4 million and $6.3 million for the First Three
Quarters of 1997 and the First Three Quarters 1996, respectively. FIBM's cash
financing activities primarily consisted of capital distributions to partners.
In January 1997, FIBM refinanced its outstanding mortgage debt. The
principal amount of the refinanced non-recourse debt increased from $164.8 to
$165.4 million with the proceeds being used to repay existing debt and related
financing costs. The refinanced non-recourse debt requires monthly principal and
interest payments amortized over 20 years, bears interest at 8.4% and matures in
2007. As part of the refinancing, FIBM is required to establish various reserves
for
FIBM Supp-27
<PAGE>
capital expenditures, working capital, debt service and insurance needs.
During the First Three Quarters 1997, FIBM deposited $6.5 million into reserve
accounts for these needs.
FIBM Supp-28
<PAGE>
FINANCIAL STATEMENTS
FIBM Supp-29
<PAGE>
Report of Independent Public Accountants
TO THE PARTNERS OF FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Fairfield Inn by Marriott
Limited Partnership (a Delaware limited partnership) as of January 3, 1997 and
December 29, 1995, and the related statements of operations, changes in
partners' capital and cash flows for each of the three fiscal years in the
period ended January 3, 1997. These financial statements are the responsibility
of the General Partner's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide 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 Fairfield Inn by Marriott
Limited Partnership as of January 3, 1997 and December 29, 1995, and the results
of its operations and its cash flows for each of the three fiscal years in the
period ended January 3, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 28, 1997
FIBM Supp-30
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Balance Sheets
January 3, 1997 and December 29, 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Property and equipment, net.......................................................$ 164,148 $ 172,099
Deferred financing and organization costs, net of accumulated amortization........ 4,622 644
Property improvement fund......................................................... 3,115 2,641
Due from Marriott International, Inc. and affiliates.............................. 3,079 3,057
Cash and cash equivalents......................................................... 10,028 7,040
--------- ---------
Total Assets..................................................................$ 184,992 $ 185,481
========= =========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt ....................................................................$ 164,847 $ 164,850
Due to Marriott International, Inc. and affiliates................................ 13,451 11,199
Accounts payable and accrued liabilities.......................................... 4,928 668
--------- ---------
Total Liabilities............................................................. 183,226 176,717
--------- ---------
PARTNERS' CAPITAL
General Partner
Capital contribution, net of offering costs of $1,109......................... 813 813
Capital distributions......................................................... (509) (425)
Cumulative net losses......................................................... (236) (250)
--------- ---------
68 138
--------- ---------
Limited Partners
Capital contributions, net of offering costs of $7,250........................ 75,479 75,479
Capital distributions......................................................... (50,436) (42,102)
Cumulative net losses......................................................... (23,345) (24,751)
--------- ---------
1,698 8,626
--------- ---------
Total Partners' Capital....................................................... 1,766 8,764
--------- ---------
$ 184,992 $ 185,481
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FIBM Supp-31
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Statements of Operations
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Inn (Note 3)..................................................$ 47,065 $ 45,262 $ 40,854
--------- --------- ---------
OPERATING COSTS AND EXPENSES
Depreciation and amortization................................. 13,239 13,338 14,639
Incentive management fee...................................... 4,898 4,666 4,304
Property taxes................................................ 3,270 3,528 3,542
Fairfield Inn system fee...................................... 2,923 2,751 2,555
Ground rent................................................... 2,627 2,570 2,499
Base management fee........................................... 1,949 1,834 851
Insurance and other........................................... 843 1,560 487
--------- --------- ---------
29,749 30,247 28,877
--------- --------- ---------
OPERATING PROFIT.................................................. 17,316 15,015 11,977
Interest expense.................................................. (16,645) (16,585) (16,464)
Interest income................................................... 749 619 313
--------- --------- ---------
NET INCOME/(LOSS).................................................$ 1,420 $ (951) $ (4,174)
========= ========= =========
ALLOCATION OF NET INCOME/(LOSS)
General Partner...............................................$ 14 $ (10) $ (42)
Limited Partners.............................................. 1,406 (941) (4,132)
--------- --------- ---------
$ 1,420 $ (951) $ (4,174)
========= ========= =========
NET INCOME/(LOSS) PER LIMITED PARTNER UNIT
(83,337 UNITS)................................................$ 17 $ (11) $ (50)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FIBM Supp-32
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Statements of Changes in Partners' Capital
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
-------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1993................................$ 358 $ 30,367 $ 30,725
Capital distributions.................................. (84) (8,334) (8,418)
Net loss............................................... (42) (4,132) (4,174)
-------- -------- --------
Balance, December 30, 1994................................ 232 17,901 18,133
Capital distributions.................................. (84) (8,334) (8,418)
Net loss............................................... (10) (941) (951)
-------- -------- --------
Balance, December 29, 1995................................ 138 8,626 8,764
Capital distributions.................................. (84) (8,334) (8,418)
Net income............................................. 14 1,406 1,420
-------- -------- --------
Balance, January 3, 1997..................................$ 68 $ 1,698 $ 1,766
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FIBM Supp-33
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Statements of Cash Flows
For the Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................................$ 1,420 $ (951) $ (4,174)
Noncash items:
Depreciation and amortization....................................... 13,239 13,338 14,639
Deferred management fee............................................. 2,470 2,857 3,429
Amortization of deferred financing costs as interest expense........ 646 644 523
Loss on disposal of equipment....................................... -- 591 301
Straight-line ground rent adjustment................................ -- -- 246
Changes in operating accounts:
Accounts payable and accrued liabilities............................ (27) 279 (16)
Due to/from Marriott International, Inc. and affiliates............. (240) (401) (278)
--------- --------- ---------
Cash provided by operations..................................... 17,508 16,357 14,670
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property and equipment, net............................... (5,288) (4,495) (5,552)
Change in property improvement fund.................................... (474) (1,203) 389
--------- --------- ---------
Cash used in investing activities............................... (5,762) (5,698) (5,163)
--------- --------- ---------
FINANCING ACTIVITIES
Capital distributions.................................................. (8,418) (8,418) (8,418)
Payment of financing costs............................................. (337) -- --
Repayment of mortgage debt............................................. (3) -- --
--------- --------- ---------
Cash used in financing activities............................... (8,758) (8,418) (8,418)
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS..................................... 2,988 2,241 1,089
CASH AND CASH EQUIVALENTS at beginning of year............................ 7,040 4,799 3,710
--------- --------- ---------
CASH AND CASH EQUIVALENTS at end of year..................................$ 10,028 $ 7,040 $ 4,799
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest........................................$ 15,941 $ 15,941 $ 15,941
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FIBM Supp-34
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Notes to Financial Statements
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Fairfield Inn by Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire, own and operate 50 Fairfield Inn by
Marriott properties (the "Inns") located in sixteen states and the land on which
18 of the Inns are situated. The Partnership leases the land underlying 32 of
the Inns from Marriott International, Inc. ("MII") and certain of its affiliates
(the "Land Leases"). Of the Partnership's 50 Inns, seven are located in each of
Georgia and North Carolina; six in Michigan; four in each of Florida, Illinois,
and Ohio; and three or less in each of the other ten states. On December 29,
1995, Host Marriott Corporation's operations were divided into two separate
companies: Host Marriott Corporation ("Host Marriott") and Host Marriott
Services Corporation. The sole general partner of the Partnership, with a 1%
interest, is Marriott FIBM One Corporation (the "General Partner"), a Delaware
corporation and a wholly-owned subsidiary of Host Marriott. The Inns are managed
by Fairfield FMC Corporation (the "Manager"), a wholly-owned subsidiary of MII,
as part of the Fairfield Inn by Marriott hotel system.
The Partnership was formed on August 23, 1989, and operations commenced on July
31, 1990 (the "Closing Date"). Between November 17, 1989, and the Closing Date,
83,337 limited partnership interests (the "Units") were sold in a public
offering. The offering price per unit was $1,000. The General Partner
contributed $841,788 for its 1% general partnership interest and $1.1 million to
establish the initial working capital reserve of the Partnership at $1.5 million
(as required in the partnership agreement). In addition, the General Partner has
a 10% limited partnership interest through the purchase of Units on the Closing
Date.
On November 17, 1989, the Partnership executed a purchase agreement (the
"Purchase Agreement") with Host Marriott to acquire the Inns and the land on
which 18 Inns are situated for $235.5 million. The total purchase price was paid
from proceeds of the mortgage financing and sale of the Units.
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
a. Cash available for distribution for each fiscal year will be distributed
quarterly as follows: (i) 99% to the limited partners and 1% to the General
Partner (collectively, the "Partners") until the Partners have received,
with respect to such fiscal year, an amount equal to the Partners'
Preferred Distribution (9% of the excess of original cash contributions
over cumulative distributions of net refinancing and sales proceeds
("Capital Receipts") on an annualized basis in 1990, 9.5% in 1991 and 1992
and 10% for each year thereafter); (ii) remaining cash available for
distribution will be distributed as follows, depending on the amount of
Capital Receipts previously distributed:
1) 99% to the limited partners and 1% to the General Partner, if the
Partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions; or
2) 90% to the limited partners and 10% to the General Partner, if the
Partners have received aggregate cumulative distributions of Capital
Receipts equal to or greater than 50% but less than 100% of their
original capital contributions; or
FIBM Supp-35
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Notes to Financial Statements
3) 80% to the limited partners and 20% to the General Partner, if the
Partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital contributions.
b. Refinancing proceeds and sale proceeds from the sale or other disposition
of less than substantially all of the assets of the Partnership will be
distributed (i) 99% to the limited partners and 1% to the General Partner
until the Partners have received the then outstanding Partners' 12%
Preferred Distribution, as defined, and cumulative distributions of Capital
Receipts equal to 100% of their original capital contributions; and (ii)
thereafter, 80% to the limited partners and 20% to the General Partner.
c. Sale proceeds from the sale of substantially all of the assets of the
Partnership will be distributed to the Partners pro-rata in accordance with
their capital account balances as adjusted to take into account gain or
loss resulting from such sale.
d. Net profits for each fiscal year generally will be allocated in the same
manner in which cash available for distribution is distributed. Net losses
for each fiscal year generally will be allocated 99% to the limited
partners and 1% to the General Partner.
e. Gains recognized by the Partnership generally will be allocated in the
following order of priority: (i) to those Partners whose capital accounts
have negative balances until such negative balances are brought to zero;
(ii) to all Partners up to the amount necessary to bring the Partners'
capital account balances to an amount equal to their pro-rata share of the
Partners' 12% Preferred Distribution, as defined, plus their Net Invested
Capital, as defined; and (iii) thereafter, 80% to the limited partners and
20% to the General Partner.
f. For financial reporting purposes, profits and losses are allocated among
the Partners based on their stated interests in cash available for
distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting.
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.
Working Capital and Supplies
Pursuant to the terms of the Partnership's management agreement discussed in
Note 8, the Partnership is required to provide the Manager with working capital
and supplies to meet the operating needs of the Inns. The Manager converts cash
advanced by the Partnership into other forms of working capital consisting
primarily of operating cash, inventories, and trade receivables and payables
which are maintained and controlled by the Manager. Upon the termination of the
management agreement, the Manager is required to convert working capital and
supplies into cash and return it to the Partnership. As a result of these
FIBM Supp-36
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Notes to Financial Statements
conditions, the individual components of working capital and supplies controlled
by the Manager are not reflected in the accompanying balance sheet.
Fiscal Year
The Partnership's fiscal year ends on the Friday nearest to December 31. Fiscal
year 1996 included 53 weeks compared to 52 weeks for fiscal years 1995 and 1994.
Revenues and Expenses
Inn revenues represent house profit of the Partnership's Inns since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Inns to the Manager. House profit
reflects Inn operating results which flow to the Partnership as property owner
and represents gross Inn sales less property-level expenses, excluding
depreciation and amortization, Fairfield Inn system, base and incentive
management fees, property taxes, ground and equipment rent, insurance and
certain other costs, which are disclosed separately in the statement of
operations (see Note 3).
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
Land improvements 30 years
Leasehold improvements 30 years
Building and improvements 30 years
Furniture and equipment 4 to 10 years
All property and equipment is pledged as security for the mortgage debt
described in Note 6.
The Partnership assesses impairment of its real estate properties based on
whether estimated future undiscounted cash flows from such properties on an
individual property basis will be less than their net book value. If a property
is impaired, its basis is adjusted to fair market value.
Deferred Financing and Organization Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt (see Note 6) and are amortized over the term
thereof. Organization costs incurred in the formation of the Partnership were
amortized using the straight-line method over five years and were fully
amortized as of December 29, 1995. As of January 3, 1997, the Partnership
incurred approximately $4,622,000 of costs in connection with the proposed
refinancing (see Note 6). At January 3, 1997 and December 29, 1995, accumulated
amortization of deferred financing costs totaled $3,513,000 and $2,867,000,
respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Ground Rent
The Land Leases with MII or affiliates (see Note 7) include scheduled increases
in minimum rents per property. These scheduled rent increases, which are
included in minimum lease payments, are being
FIBM Supp-37
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Notes to Financial Statements
recognized by the Partnership on a straight-line basis over the 99 year term of
the leases. The adjustment included in ground rent expense and Due to Marriott
International, Inc. and affiliates to reflect minimum lease payments on a
straight-line basis was a decrease of $218,000 for 1996 and 1995, and was an
increase of $246,000 for 1994. Deferred ground rent as of January 3, 1997 and
December 29, 1995 was $665,000 and $883,000, respectively.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates profits and losses to the individual Partners.
Significant differences exist between the net income (loss) for financial
reporting purposes and the net income (loss) as reported in the Partnership's
tax return. These differences are due primarily to the use for income tax
purposes of accelerated depreciation methods, shorter depreciable lives of the
assets and differences in the timing of recognition of certain fees and
straight-line rent adjustments. As a result of these differences, the excess of
the net assets reported in the accompanying financial statements over the
Partnership's tax basis in net assets is $2,013,000 and $9,588,000 as of January
3, 1997 and December 29, 1995, respectively.
New Statement of Financial Accounting Standards
In the first quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on its financial statements.
Reclassifications
Certain reclassifications were made to prior year financial statements to
conform to the 1996 presentation.
NOTE 3. REVENUES
Partnership revenues consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
SALES..........................................................$ 97,441 $ 91,693 $ 85,153
--------- --------- ---------
EXPENSES
Departmental Direct Costs
Rooms...................................................... 49,109 45,239 43,295
Chain Services............................................. 1,267 1,192 1,004
--------- --------- ---------
50,376 46,431 44,299
--------- --------- ---------
REVENUES.......................................................$ 47,065 $ 45,262 $ 40,854
========= ========= =========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
January 3, December 29,
1997 1995
--------- -----------
<S> <C> <C>
Land and improvements.....................................................$ 37,134 $ 36,958
Leasehold improvements.................................................... 89,056 89,056
Building and improvements................................................. 57,247 52,957
Furniture and equipment................................................... 67,007 66,185
--------- ---------
</TABLE>
FIBM Supp-38
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Notes to Financial Statements
<TABLE>
<S> <C> <C>
250,444 245,156
Less accumulated depreciation and amortization............................ (86,296) (73,057)
--------- ---------
$ 164,148 $ 172,099
========= =========
</TABLE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
As of January 3, 1997 As of December 29, 1995
---------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Mortgage debt....................................................$ 164,847 $ 164,847 $ 164,850 $ 164,850
Management fees due to Fairfield FMC Corporation.................$ 12,786 $ 843 $ 10,316 $ 1,017
</TABLE>
The estimated fair value of the mortgage debt is based on the expected future
debt service payments discounted at estimated market rates. Management fees due
to Fairfield FMC Corporation (included in Due to Marriott International, Inc.
and affiliates on the accompanying balance sheet) are valued based on the
expected future payments from operating cash flow discounted at risk adjusted
rates.
NOTE 6. MORTGAGE DEBT
On July 31, 1990, the Partnership borrowed $164.9 million, bearing a fixed
interest rate of 9.67%, pursuant to the terms of a non-recourse mortgage loan
agreement (the "Mortgage Debt") to finance a portion of the purchase price of
the Inns. The Mortgage Debt required semi-annual interest payments with no
principal payments required through maturity. Although the Mortgage Debt matured
on December 31, 1996, the Partnership was unable to refinance the debt until
January 13, 1997 (see Note 9). During the period of December 31, 1996 through
January 13, 1997, the existing Mortgage Debt bore interest at a default rate of
12.67%.
The Mortgage Debt was secured by a first mortgage on the Partnership's fee or
leasehold interest in each Inn, a security interest in all personal property
associated with the Inns and a security interest in the Partnership's rights
under the management agreement, the Purchase Agreement, and the Land Leases.
NOTE 7. LAND LEASES
The land on which 32 of the Inns are situated is leased by the Partnership from
MII or its affiliates. The Land Leases expire on November 30, 2088 and provide
that the Partnership will pay annual rents equal to the greater of a specified
minimum rent for each property or a percentage rent based on gross sales of the
Inn operated thereon. The minimum rentals are adjusted at various anniversary
dates through 1999, as defined in the agreements. The minimum rentals are
adjusted annually for the remaining life of the leases based on changes in the
Consumer Price Index. The percentage rent, which also varies from property to
property, is fixed at predetermined percentages of gross sales that increase
over time.
FIBM Supp-39
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Notes to Financial Statements
Minimum future rental payments during the term of the Land Leases are as follows
(in thousands):
<TABLE>
<CAPTION>
Lease Year Minimum Rental
---------- --------------
<S> <C>
1997 $ 2,659
1998 2,659
1999 2,659
2000 2,659
2001 2,659
Thereafter 231,333
---------
$ 244,628
=========
</TABLE>
Total rental expense on the Land Leases was $2,627,000 for 1996, $2,570,000 for
1995 and $2,499,000 for 1994.
Under the terms of the Land Leases, during any fiscal year from 1993 through
1996, the payment of rental expense was subordinate to an $8.4 million annual
return to the Partnership. Any rent that was not paid currently as a result of
such subordination was payable out of Capital Receipts remaining after the
Partnership's payment or retention of certain priority returns and other
amounts. No rental expense was subordinated for 1993 through 1996.
Subsequent to year-end, the Land Leases were amended (see Note 9).
NOTE 8. MANAGEMENT AGREEMENT
The Manager operates the Inns pursuant to a long-term management agreement (the
"Management Agreement") with an initial term expiring on December 31, 2009. The
Manager may renew the Management Agreement, as to one or more of the Inns at its
option, for up to five additional 10-year terms plus one five-year term. The
Partnership may terminate the Management Agreement after December 1995 if
specified minimum operating results are not achieved. However, the Manager may
prevent termination by paying the Partnership the amount by which the minimum
operating results were not achieved.
The Manager earns a base management fee equal to 1% of gross sales from Inn
operations for each fiscal year through 1994 and 2% of gross sales from Inn
operations for each fiscal year thereafter. For the years 1993 through 1996,
payment of the base management fee was subordinate to an $8.4 million annual
return to the Partnership subject to certain aggregate limitations when combined
with ground rent deferrals for the same period. The maximum amount of base
management fees and ground rent to be subordinated during this four-year period
was limited to $8,000,000. Any base management fees that were not paid currently
as a result of such subordination were payable out of Capital Receipts subject
to the Partnership payment or retention of certain priority returns and other
amounts. As of January 3, 1997, no base management fees or ground rent were
deferred. The Management Agreement also provides for payment of a Fairfield Inn
system fee equal to 3% of gross sales from Inn operations.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of Operating Profit, as defined, increasing to 20% after the Inns have achieved
total Operating Profit during any 12 month period equal to or greater than $33.9
million. The incentive management fee is payable out of 50% of cash flow from
operations remaining after payment of ground rent, debt service, partnership
administrative expenses and the owner's priority return, as defined. In
accordance with the Management Agreement, incentive management fees through 1992
were waived by the Manager, as cash flow available for incentive
FIBM Supp-40
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Notes to Financial Statements
management fees, as defined, was insufficient to pay the fees. Incentive
management fees earned after 1992 accrue and are payable as outlined above or
from Capital Receipts. During 1996, 1995 and 1994, the Manager deferred
$2,470,000, $2,857,000 and $3,429,000 of incentive management fees,
respectively. Cumulative deferred incentive management fees at January 3, 1997
and December 29, 1995 were $12,786,000 and $10,316,000, respectively.
The Manager is required to furnish certain services ("Chain Services") which are
furnished generally on a central or regional basis to all managed or owned Inns
in the Fairfield Inn by Marriott hotel system. The total amount of Chain
Services allocated to the Partnership for 1996, 1995 and 1994 was $1,267,000,
$1,192,000 and $1,004,000, respectively. In addition, the Manager maintains a
marketing fund to pay the costs associated with certain system-wide advertising,
marketing, sales, promotional and public relations materials and programs. Each
Inn within the system contributes 2.5% of gross Inn sales to the marketing fund.
The Manager has no ownership interest in the marketing fund. For 1996, 1995 and
1994, the Partnership contributed $2,436,000, $2,292,000 and $2,129,000,
respectively, to the marketing fund.
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. Upon termination of the Management Agreement,
the working capital will be returned to the Partnership. As of January 3, 1997
and December 29, 1995, $1,000,000 had been advanced to the Manager for working
capital and is included in Due from Fairfield FMC Corporation on the
accompanying balance sheet.
The Management Agreement provides for the establishment of a property
improvement fund for the Inns to cover (a) the cost of certain non-routine
repairs and maintenance to the Inns which are normally capitalized; and (b) the
cost of replacements and renewals to the Inns' property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross sales of each Inn equal to 6% for 1996, 1995 and 1994. For 1996, 1995 and
1994, the Partnership contributed $5,846,000, $5,502,000 and $5,109,000,
respectively, to the property improvement fund.
Subsequent to year-end, the Management Agreement was amended (see Note 9).
NOTE 9. SUBSEQUENT EVENT
Mortgage Debt
On January 13, 1997 (the "Refinancing Date") the Mortgage Debt was successfully
refinanced with a new third party lender. The principal amount of the
Partnership's refinanced debt was increased from $164.8 million to $165.4
million. Proceeds from the new loan were used to repay the existing mortgage
debt and pay refinancing costs. The refinanced debt continues to be
non-recourse, bears interest at a fixed rate of 8.40% and requires monthly
payments of principal and interest based upon a 20-year amortization schedule
for a 10-year term expiring January 11, 2007. Thereafter, until the final
maturity date of January 11, 2017, interest is payable at an adjusted rate, as
defined, and all excess cash flow is applied toward principal amortization.
FIBM Supp-41
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Notes to Financial Statements
Debt maturities under the refinanced mortgage are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 3,002
1998 3,639
1999 3,912
2000 4,253
2001 4,625
Thereafter 145,969
--------
$165,400
========
</TABLE>
The refinanced mortgage debt is secured by first mortgages on all of the Inns,
the land on which they are located, or an assignment of the Partnership's
interest under the Land Leases, including ownership interest in all improvements
thereon, fixtures and personal property related thereto.
As part of the refinancing, the Partnership is required to establish various
reserves for capital expenditures, working capital, debt service and insurance
needs. On the Refinancing Date, the Partnership established reserves totaling
$3.9 million for certain capital expenditure items. The funds will be expended
during 1997 for various renewals and replacements, site improvements, Americans
with Disabilities Act of 1990 modifications and environmental studies undertaken
in conjunction with the refinancing. Additionally, the Partnership is required
to deposit two months' debt service payments, or $2,850,000, into a debt service
reserve payable in 12 equal consecutive monthly installments commencing on March
11, 1997. The Partnership is also required to deposit $161,000 into a ground
rent reserve payable in six equal monthly installments commencing on March 11,
1997. The Partnership is also obligated to fund $300,000 into an earthquake
restoration reserve account, payable in 3 consecutive monthly installments
commencing on January 31, 1997. Transfers from this fund are to be made in
conjunction with any damages (not covered by insurance) suffered from
earthquakes to the two Inns located in California.
In addition, the Partnership has entered into a Working Capital Maintenance and
Supplemental Debt Service Agreement ("Agreement") with the Manager, effective
January 13, 1997. As part of this Agreement, the Partnership has agreed to
furnish the Manager additional working capital to be deposited into a segregated
interest bearing account (the "Working Capital Reserve"). The Working Capital
Reserve is to be funded from Operating Profit, as defined, retained by or
distributed to the Partnership as such amounts become available, until the
Working Capital Reserve reaches $670,000. This Agreement also requires the
funding of another segregated account for debt service shortfalls (the
"Supplemental Debt Service Reserve"). This reserve is also to be funded out of
Operating Profit retained or distributed to the Partnership as such amounts
become available, until the Supplemental Debt Service Reserve reaches
$1,425,000.
The lender is currently working on the securitization of the mortgage debt
through the issuance and sale of commercial mortgage-backed securities. In
connection with the securitization, the Partnership may be required to establish
additional reserves.
Management Agreement
The Management Agreement (see Note 8) has also been amended in conjunction with
the refinancing, effective January 13, 1997. Per the amendment, the initial term
of the Management Agreement has been extended ten years from December 31, 2009
to December 31, 2019. However, the renewal period has been shortened. The
Manager may renew the Management Agreement, as to one or more of the Inns at its
option, for up to four successive periods of ten years and one period of five
years. The amendment also
FIBM Supp-42
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Notes to Financial Statements
reduces the owner's priority return, as defined, by the amount of any
outstanding advances by the Manager for working capital needs or funding of
shortfalls in the debt service reserve account. These loans bear interest at 1%
above the prime rate. Additionally, the amendment increases the amount of the
contribution to the property improvement fund by 1% of gross sales of each Inn.
Commencing in 1997 and for all fiscal years thereafter, the Partnership will
contribute 7% of gross sales of each Inn. However, if the Manager determines 7%
exceeds the amount needed for making capital expenditures, then the Manager can
adjust the incentive management fee calculation to exclude as a deduction in
calculating incentive fees up to one percentage point of contributions to the
property improvement fund.
Land Leases
Additionally, the Land Leases (see Note 7) have also been amended beginning in
1997. Until the refinanced mortgage debt is repaid, the payment of rental
expense exceeding 3% of gross sales from the 32 leased Inns in the aggregate
shall be deferred in any fiscal year that cash flow is less than regularly
scheduled principal and interest payments on the mortgage debt.
FIBM Supp-43
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Condensed Balance Sheet
September 12, 1997
(Unaudited, in thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Property and equipment, net............................................................................... $ 159,392
Due from Fairfield FMC Corporation........................................................................ 2,862
Other assets.............................................................................................. 10,350
Restricted cash .......................................................................................... 8,269
Cash and cash equivalents................................................................................. 8,898
----------
$ 189,771
==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt............................................................................................. $ 163,250
Due to Marriott International, Inc. and affiliates........................................................ 17,301
Note payable.............................................................................................. 3,500
Accounts payable and accrued liabilities................................................................. 2,449
----------
Total Liabilities...................................................................................... 186,500
----------
PARTNERS' CAPITAL
General Partner .......................................................................................... 82
Limited Partners.......................................................................................... 3,189
----------
Total Partners' Capital.............................................................................. 3,271
----------
$ 189,771
==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
FIBM Supp-44
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Condensed Statements of Operations
For the Thirty-six Weeks Ended
September 12, 1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
REVENUES
Inn..................................................................................... $ 33,009 $ 34,064
---------- -----------
OPERATING COSTS AND EXPENSES
Depreciation and amortization........................................................... 9,395 9,379
Ground rent, taxes and other............................................................ 4,872 4,788
Incentive management fee................................................................ 3,296 3,262
Fairfield Inn system fee................................................................ 2,078 2,081
Base management fee..................................................................... 1,385 1,374
---------- -----------
21,026 20,884
---------- -----------
OPERATING PROFIT.......................................................................... 11,983 13,180
Interest expense.......................................................................... (10,261) (11,341)
Interest income........................................................................... 625 445
---------- -----------
NET INCOME................................................................................ $ 2,347 $ 2,284
========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
FIBM Supp-45
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Condensed Statements of Cash Flows
For the Thirty-six Weeks Ended
September 12, 1997 and September 6, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income....................................................................................$ 2,347 $ 2,284
Noncash items ............................................................................... 13,006 10,771
Working capital changes....................................................................... 783 1,966
--------- --------
Cash provided by operating activities....................................................... 16,136 15,021
--------- --------
INVESTING ACTIVITIES
Deposits to reserves, net..................................................................... (6,475) --
Additions to property and equipment........................................................... (4,640) (3,160)
Change in property improvement fund........................................................... (2,746) (800)
--------- --------
Cash used in investing activities........................................................... (13,861) (3,960)
--------- --------
FINANCING ACTIVITIES
Proceeds from mortgage debt................................................................... 165,400 --
Repayment of mortgage debt.................................................................... (164,847) --
Scheduled principal payments on mortgage debt................................................. (2,150) (3)
Payment of financing costs.................................................................... (4,466) (2)
Proceeds from note payable.................................................................... 3,500 --
Capital distributions......................................................................... (842) (6,314)
--------- --------
Cash used in financing activities........................................................... (3,405) (6,319)
--------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................................. (1,130) 4,742
CASH AND CASH EQUIVALENTS at beginning of period................................................. 10,028 7,040
--------- --------
CASH AND CASH EQUIVALENTS at end of period.......................................................$ 8,898 $ 11,782
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest...............................................................$ 9,928 $ 7,970
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
FIBM Supp-46
<PAGE>
Fairfield Inn by Marriott Limited Partnership
Notes to Condensed Financial Statements
1. The accompanying condensed financial statements have been prepared
by Fairfield Inn By Marriott Limited Partnership (the "Partnership") without
audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted from the accompanying statements. The
Partnership believes the disclosures made are adequate to make the information
presented not misleading. However, the condensed financial statements should be
read in conjunction with the Partnership's audited financial statements for the
fiscal year ended January 3, 1997 included elsewhere in this Prospectus
Supplement. Interim results are not necessarily indicative of fiscal year
performance because of seasonal and short-term variations.
For financial reporting purposes, the net profits of the Partnership
are allocated 99% to the Limited Partners and 1% to the general partner.
Significant differences exist between the net income for financial reporting
purposes and the net income for Federal income tax purposes. These differences
are due primarily to the use for income tax purposes of accelerated depreciation
methods, shorter depreciable lives for the assets and straight-line rent
adjustments.
2. Pursuant to the terms of the mortgage debt, the Partnership is
required to establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes (the "Tax and Insurance Escrow
Reserves") for each mortgaged property if the credit rating of Marriott
International, Inc. ("MII") is downgraded by Standard and Poors Rating Services.
The manager of the Partnership's hotels, Fairfield FMC Corporation (the
"Manager") is a wholly owned subsidiary of MII. On April 1, 1997, MII's credit
rating was downgraded and the Partnership subsequently transferred $1.7 million
into the Tax and Insurance Escrow Reserves from the Manager's existing tax and
insurance reserve account. In addition, the mortgage debt requires the
Partnership to fund an additional month's debt service into the debt service
reserve account over a six-month period as a result of this downgrade. During
the thirty-six weeks ended September 12, 1997, $1.4 million was funded out of
Partnership cash from operations into this reserve. All reserves are shown as
restricted cash and the resulting tax and insurance liability is included with
accounts payable and accrued liabilities in the accompanying condensed balance
sheet.
3. Revenues represent house profit of the Partnership's Inns since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the hotels to the Manager. House profit
reflects the net revenues flowing to the Partnership as property owner and
represents hotel operating results less property-level expenses, excluding
depreciation, base, system and incentive management fees, property taxes,
insurance and certain other costs, which are classified as operating costs and
expenses. Revenues consist of hotel operating results as follows (in thousands):
<TABLE>
<CAPTION>
Thirty-six Weeks Ended
--------------------------------
September 12, September 6,
1997 1996
-------------- -----------
<S> <C> <C>
INN SALES........................................ $ 69,255 $ 69,383
----------- -----------
INN EXPENSES
Departmental Direct Costs
Rooms........................................ 35,415 34,417
Chain services............................... 831 902
----------- -----------
36,246 35,319
----------- -----------
INN REVENUES..................................... $ 33,009 $ 34,064
============ ============
</TABLE>
FIBM Supp-47
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Trustees and Officers.
The Declaration of Trust of CRFLT authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former trustee or officer or (b) any individual who, while a
trustee of CRFLT and at the request of CRFLT, serves or has served another real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise from and against any claim or
liability to which such person may become subject or which such person may incur
by reason of his or her status as a present or former Trustee or officer of
CRFLT. The Bylaws of CRFLT obligate it, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (a) any present or former
trustee or officer who is made party to the proceeding by reason of his service
in that capacity or (b) any individual who, while a trustee or officer of CRFLT
and at the request of CRFLT, serves or has served another real estate investment
trust, corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a trustee, director, officer or partner of such real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity, against any claim or
liability to which he may become subject by reason of such status. The
Declaration of Trust and Bylaws also permit CRFLT to indemnify and advance
expenses to any person who served as a predecessor of CRFLT in any of the
capacities described above and to any employee or agent of CRFLT or a
predecessor of CRFLT. The Bylaws require CRFLT to indemnify a trustee or officer
who has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity.
The Maryland REIT Law permits a Maryland real estate investment trust
to indemnify and advance expenses to its trustees, officers, employees and
agents to the same extent as permitted by the MGCL for trustees and officers of
Maryland corporations. CRFLT will indemnify its present and former trustees and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the trustee
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the trustee or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the trustee or officer had reasonable cause to believe that the act
or omission was unlawful. However, under Maryland law, CRFLT may not indemnify
for an adverse judgment in a suit by or in the right of the corporation. The
Bylaws of CRFLT require it, as a condition to advancing expenses, to obtain (a)
a written affirmation by the trustee or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by CRFLT as
authorized by the Bylaws and (b) a written statement by or on his behalf to
repay the amount paid or reimbursed by CRFLT if it shall ultimately be
determined that the standard of conduct was not met.
Item 21. Exhibits and Financial Statement Schedules.
Financial Statement Schedules
- -----------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Schedule I - Condensed Combined Consolidated Financial Information of Registrant.................S-2
Schedule III - Real Estate and Accumulated Depreciation..........................................S-7
</TABLE>
II-1
<PAGE>
Exhibits
- --------
2.1** -- Form of Agreement and Plan of Merger between the Hotel
Partnerships and the Merger Partnerships
3.1** -- Amended and Restated Agreement of Limited Partnership
dated ___________ __, 1998 of CRF Lodging Company, L.P.
3.2** -- Amended and Restated Agreement of Limited Partnership
dated ____________ __, 199_ of Courtyard by Marriott
Limited Partnership
3.3** -- Amended and Restated Agreement of Limited Partnership
dated ____________ __, 199_ of Courtyard by Marriott II
Limited Partnership
3.4** -- Amended and Restated Agreement of Limited Partnership
dated as of March 29, 1988 of Marriott Residence Inn
Limited Partnership
3.5** -- Amended and Restated Agreement of Limited Partnership
dated as of November 23, 1988 of Marriott Residence Inn II
Limited Partnership
3.6** -- Amended and Restated Agreement of Limited Partnership
dated as of November 17, 1989 of Fairfield Inn by Marriott
Limited Partnership
3.7** -- Certificate of Incorporation dated December 4, 1997 of CRF
Lodging I, Inc., the general partner
3.8** -- Bylaws dated December 4, 1997 of CRF Lodging I, Inc., the
general partner
4.1** -- Form of Indenture between CRF Lodging Company, L.P. and
[Trustee]
4.2** -- Form of Note
5.1** -- Form of Opinion of Hogan & Hartson L.L.P. regarding
legality of the securities being registered
8.1** -- Form of Opinion of Hogan & Hartson L.L.P. regarding tax
matters
10.1** -- Form of Management Agreement
10.2** -- Form of Lease
12.1 -- Computation of Ratios of Earnings to Fixed Charges
21.1** -- List of Subsidiaries of CRF Lodging Company, L.P.
23.1** -- Consent of Hogan & Hartson L.L.P. (included in Exhibit
5.1)
23.2 -- Consent of Arthur Anderson LLP
23.3** -- Consent of American Appraisal Associates
25.1** -- Statement of Eligibility and Qualification of [Trustee]
[bound separately]
99.1** -- Appraisals dated ____________ __, 1998 of American
Appraisal Associates
99.2** -- Fairness Opinion dated __________ __, 1998 of American
Appraisal Associates
- ---------------
** To be filed by amendment.
Item 22. Undertakings.
The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed
pursuant to the immediately preceding paragraph or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed a new registration statement relating to the
II-2
<PAGE>
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to trustees, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as express
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Trust Indenture Act.
The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject to and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bethesda, State of
Maryland, on December 18, 1997.
CRF LODGING COMPANY, L.P.
BY: CRF LODGING I, Inc., as general
partner of CRF Lodging Company, L.P.
By: /s/ Robert E. Parsons, Jr.
-----------------------------------
Name: Robert E. Parsons, Jr.
Title: President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert E. Parsons, Jr. President December 18, 1997
- ----------------------------- (Chief Executive
Robert E. Parsons, Jr. Officer)
/s/ W. Edward Walter Vice President and December 18, 1997
- ----------------------------- Director (Chief
W. Edward Walter Financial Officer)
/s/ Larry K. Harvey Vice President December 18, 1997
- ----------------------------- (Chief Accounting
Larry K. Harvey Officer)
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Partners of CRF Group:
We have audited in accordance with generally accepted auditing
standards, the combined consolidated financial statements of CRF Group (the
"Company") included in this registration statement and have issued our report
thereon dated December 16, 1997. Our audits were made for the purpose of forming
an opinion on the basic combined consolidated financial statements taken as a
whole. The schedules appearing on pages S-2 through S-7 are the responsibility
of the Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
combined consolidated financial statements. These schedules have been subjected
to the auditing procedures applied in the audits of the basic combined
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic combined consolidated financial statements taken as a
whole.
Arthur Andersen LLP
Washington, D.C.
December 16, 1997
S-1
<PAGE>
SCHEDULE I
PAGE 1 OF 5
CRF GROUP
CONDENSED COMBINED CONSOLIDATED FINANCIAL
INFORMATION OF REGISTRANT
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
January 3, 1997
(in millions)
<TABLE>
<S> <C>
ASSETS
Investments in restricted subsidiaries................................................ $ 81
Property and equipment, net........................................................... 829
Other assets.......................................................................... 70
Cash and cash equivalents............................................................. 45
---------
Total Assets..................................................................... $ 1,025
=========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt ........................................................................... $ 906
Due to Host Marriott.............................................................. 13
Management fees payable to affiliates of Marriott International, Inc.............. 74
Deferred ground rent.............................................................. 21
Other liabilities................................................................. 17
---------
Total liabilities................................................................ 1,031
PARTNERS' CAPITAL (DEFICIT)
General partners.................................................................. 11
Limited partners.................................................................. (17)
---------
Partners' deficit................................................................ (6)
---------
$ 1,025
=========
</TABLE>
See Accompanying Notes to Condensed Combined Consolidated Financial Statements.
S-2
<PAGE>
SCHEDULE I
PAGE 2 OF 5
CRF GROUP
CONDENSED COMBINED CONSOLIDATED FINANCIAL
INFORMATION OF REGISTRANT
CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 3, 1997
(in millions)
<TABLE>
<S> <C>
Revenues......................................................................... $ 240
Operating costs and expenses..................................................... 141
---------
Operating profit ................................................................ 99
Interest income.................................................................. 4
Interest expense................................................................. (89)
----------
Income before equity in earnings of restricted subsidiaries...................... 14
Equity in earnings of restricted subsidiaries.................................... 24
---------
Net income...................................................................... $ 38
=========
</TABLE>
See Accompanying Notes to Condensed Combined Consolidated Financial Statements.
S-3
<PAGE>
SCHEDULE I
PAGE 3 OF 5
CRF GROUP
CONDENSED COMBINED CONSOLIDATED FINANCIAL
INFORMATION OF REGISTRANT
CONDENSED COMBINED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED JANUARY 3,1997
(in millions)
<TABLE>
<S> <C>
Cash provided by operations..................................................... $ 79
---------
Investing Activities
Additions to property and equipment....................................... (34)
Changes in property improvement fund...................................... 9
Dividends from restricted subsidiaries.................................... 17
Contribution to Associates................................................ (11)
Other..................................................................... (2)
----------
Cash used in investing activities.................................... (21)
----------
Financing Activities
Proceeds from issuance of debt............................................ 273
Repayment of debt......................................................... (271)
Scheduled principal payments.............................................. (35)
Capital distributions..................................................... (30)
Deposit into the debt service reserve account............................. (9)
Payment of financing costs................................................ (10)
----------
Cash used in financing activities.................................... (82)
----------
Decrease in Cash and Cash Equivalents........................................... $ (24)
==========
</TABLE>
See Accompanying Notes to Condensed Combined Consolidated Financial Statements.
S-4
<PAGE>
SCHEDULE I
PAGE 4 OF 5
CRF GROUP
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL
INFORMATION OF REGISTRANT
1. The accompanying condensed combined consolidated financial information
includes the accounts of the following limited partnerships:
. Courtyard by Marriott Limited Partnership ("CBM1")
. Courtyard by Marriott II Limited Partnership ("CBM2")
. Marriott Residence Inn Limited Partnership ("RIBM1")
. Marriott Residence Inn II Limited Partnership ("RIBM2")
. Marriott Residence Inn USA Limited Partnership ("Res USA")
. Fairfield Inn by Marriott Limited Partnership ("FIBM")
The limited partnerships listed above (referred to collectively as the "Hotel
Partnerships") own 219 hotel properties containing 30,149 rooms throughout
the United States.
The accompanying condensed combined consolidated financial information of the
Hotel Partnerships present the financial position, results of operations and
cash flows of the Hotel Partnerships with the investment in, and operations
of, consolidated subsidiaries with restricted net assets on the equity method
of accounting.
The accompanying combined consolidated financial information of the CRF Group
(the "Company") have been presented on a combined basis because the Hotel
Partnerships have common general partners and because the Hotel Partnerships
are expected to be the subject of a consolidation (the "Consolidation") with
and into CRF Lodging Company, L.P. Following the Consolidation, the partners
of the Hotel Partnerships will become limited partners of the Company. CRF
Lodging Trust ("CRFLT"), a newly formed trust, expects to qualify as a real
estate investment trust (a "REIT") and will be the sole general partner of
the Company. Concurrently with the Consolidation, CRFLT will make an initial
public offering of its common shares and contribute the net proceeds to the
Company in exchange for the sole general partner interest and a substantial
limited partner interest in the Company. The Consolidation will be treated as
a combination of interests at book value for financial reporting purposes.
2. On January 24, 1996, CBM2 completed a refinancing of existing debt through
the private placements of $127.4 million of senior secured notes (the "Senior
Notes") and $410.2 million of multi-class commercial mortgage pass-through
certificates (the "Certificates").
In connection with the refinancing, the limited partners of CBM2 approved
certain amendments to the CBM2 partnership agreement and the CBM2 management
agreement. The partnership agreement amendment, among other things, allowed
the formation of certain subsidiaries of CBM2, including Courtyard II Finance
Company ("Finance"), a wholly-owned subsidiary of CBM2, who along with CBM2
is the co-issuer of the Senior Notes.
Additionally, CBM2 formed a wholly-owned subsidiary, Courtyard II Associates
Management Corporation ("Managing General Partner"). Managing General Partner
was formed to be the managing general partner with a 1% general partner
interest in Courtyard II Associates L.P. ("Associates"), a Delaware limited
partnership. CBM2 owns a 1% general partner interest and a 98% limited
partner interest in Associates. On January 24, 1996, CBM2 contributed 69
Hotels and their related assets to Associates. Formation of Associates
resulted in CBM2's primary assets being its direct and indirect interest in
Associates. Substantially all of Associates' net equity is restricted to
distributions, loans or advances to CBM2.
S-5
<PAGE>
SCHEDULE I
PAGE 5 OF 5
Associates holds a 99% membership interest in CBM Associates II LLC
("Associates II") and Managing General Partner holds the remaining 1%
membership interest. On January 24, 1996, CBM2 contributed the Hotel located
in Deerfield, IL (the "Deerfield Hotel") and its related assets to Associates
and the Managing General Partner simultaneously contributed the Hotel and its
related assets to Associates II.
CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of
Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to
Associates from the proceeds of the sale of the Certificates.
Associates is a restricted subsidiary of CBM2 and is accounted for under the
equity method of accounting on the accompanying condensed combined
consolidated financial information of the Company.
S-6
<PAGE>
Schedule III
CRF GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION
January 3, 1997
(in millions)
<TABLE>
<CAPTION>
Gross Amount at
Initial Costs January 3, 1997
----------------------- Subsequent -------------------------------------
Building & Costs Building &
Description Debt Land Improvements Capitalized Land Improvements Total
- ------------------------------ ------- ---- -------------- -------------- ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Hotel Properties, each less
than 5% of total........... $ 1,173 $ 206 $ 1,212 $ 72 $ 207 $ 1,283 $ 1,490
Notes:
</TABLE>
<TABLE>
<CAPTION>
Date of
Accumulated Completion of Date Depreciation
Description Depreciation Construction Acquired Life
- ------------------------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Hotel Properties, each less
than 5% of total........... $ 302 Various Various 30-40 years
Notes:
</TABLE>
(A) The change in total cost of properties for the fiscal years ended January
3, 1997, December 29, 1995 and December 30, 1994 is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1993........................ $ 1,451
Additions:
Capital expenditures..................... 12
----------
Balance at December 30, 1994........................ 1,463
Additions:
Capital expenditures..................... 8
----------
Balance at December 29, 1995........................ 1,471
Additions:
Capital expenditures..................... 19
----------
Balance at January 3, 1997.......................... $ 1,490
==========
</TABLE>
(B) The change in accumulated depreciation and amortization for the fiscal
years ended January 3, 1997, December 29, 1995 and December 30, 1994 is as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1993............................. $ 183
Depreciation and amortization..................... 38
--------
Balance at December 30, 1994............................. 221
Depreciation and amortization..................... 40
--------
Balance at December 29, 1995............................. 261
Depreciation and amortization..................... 41
--------
Balance at January 3, 1997............................... $ 302
========
</TABLE>
(C) The aggregate cost of properties for federal income tax purposes is
approximately $1,430 million at January 3, 1997.
(D) The total cost of properties excludes construction-in-progress properties.
S-7
<PAGE>
EXHIBIT 12.1
THE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in millions, except ratio amounts)
<TABLE>
<CAPTION>
Historical
----------------------------------------------------------------
First Three
Quarters Fiscal Years
---------------- -------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from Operations before extraordinary items.. $42 $30 $38 $24 ($3) ($12) ($33)
Add:
Fixed charges................................. 89 89 128 124 124 124 126
---------------- -------------------------------------------
Adjusted earnings.................................. $131 $119 $166 $148 $121 $112 $93
================ ===========================================
Fixed charges:
Interest on indebtedness and amortization of
deferred financing costs.................... $83 $83 $120 $116 $116 $116 $118
Portion of rents representative of the
interest factor............................. 6 6 8 8 8 8 8
---------------- -------------------------------------------
Total fixed charges................................ $89 $89 $128 $124 $124 $124 $126
================ ===========================================
Ratio of earnings to fixed charges................. 1.47 1.34 1.30 1.19 -- -- --
================ ===========================================
Deficiency of earnings to fixed charges............ -- -- -- -- $3 $12 $33
================ ===========================================
<CAPTION>
Pro Forma Pro Forma
Assuming 100% Assuming Minimum
Participation Participation
with No Notes Issued with No Notes Issued
-------------------------- --------------------------
First Three Fiscal First Three Fiscal
Quarters Year Quarters Year
-------------------------- --------------------------
1997 1996 1996 1997 1996 1996
-------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from Operations before extraordinary items.. $69 $53 $83 $54 $37 $63
Add:
Fixed charges................................. 57 56 81 47 47 68
-------------------------- --------------------------
Adjusted earnings.................................. $126 $109 $164 $101 $84 $131
========================== ==========================
Fixed charges:
Interest on indebtedness and amortization of
deferred financing costs.................... $51 $50 $73 $42 $42 $61
Portion of rents representative of the
interest factor............................. 6 6 8 5 5 7
-------------------------- --------------------------
Total fixed charges................................ $57 $56 $81 $47 $47 $68
========================== ==========================
Ratio of earnings to fixed charges................. 2.21 1.95 2.02 2.15 1.79 1.93
========================== ==========================
Deficiency of earnings to fixed charges............ -- -- -- -- -- --
========================== ==========================
</TABLE>
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Washington, D.C.
December 16, 1997
