<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
LASALLE HOTEL PROPERTIES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
----------------
220 EAST 42ND STREET
NEW YORK, NEW YORK 10017
(212) 661-6161
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
----------------
JON E. BORTZ
220 EAST 42ND STREET
NEW YORK, NEW YORK 10017
(212) 661-6161
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------------
COPIES TO:
MICHAEL F. TAYLOR, ESQ. J. GREGORY MILMOE, ESQ.
BROWN & WOOD LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM
ONE WORLD TRADE CENTER LLP
NEW YORK, NEW YORK 10048-0557 919 THIRD AVENUE
(212) 839-5300 NEW YORK, NEW YORK 10022
---------------- (212) 735-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
----------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest,
$.01 par value....... 16,617,500 $20.00 $332,350,000 $98,044
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 2,167,500 Common Shares issuable upon exercise of an over-
allotment option granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee.
----------------
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 THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS
----------------------- ---------------------------------
<S> <C>
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus... Forepart of Registration Statement and Outside
Front Cover Page of Prospectus
2. Inside Front and Outside
Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus................. Prospectus
3. Summary Information, Risk
Factors and Ratio of
Earnings to Fixed Charges.. Prospectus Summary; The Company; Risk Factors
4. Determination of Offering
Price...................... Outside Front Cover Page; Underwriting
5. Dilution................... Dilution
6. Selling Security Holders... Not applicable
7. Plan of Distribution....... Outside Front Cover Page; Underwriting
8. Use of Proceeds............ Use of Proceeds; Structure and Formation of the
Company
9. Selected Financial Data.... Selected Financial Information
10. Management's Discussion and
Analysis of Financial
Condition and Results of Management's Discussion and Analysis of
Operations................. Financial Condition and Results of Operations
11. General Information as to Outside Front Cover Page; Prospectus Summary;
Registrant................. The Company; REIT Management; Structure and
Formation of the Company; Shares of Beneficial
Interest
12. Policy with Respect to
Certain Activities......... Prospectus Summary; The Company; Policies with
Respect to Certain Activities; Partnership
Agreement; Shares of Beneficial Interest;
Additional Information
13. Investment Policies of Prospectus Summary; The Company; Business and
Registrant................. Growth Strategies; Policies with Respect to
Certain Activities
14. Description of Real
Estate..................... Prospectus Summary; The Initial Hotels
15. Operating Data............. The Company; The Initial Hotels; Financial
Statements
16. Tax Treatment of Registrant Prospectus Summary; Federal Income Tax
and its Security Holders... Consequences
17. Market Price of and
Dividends on the
Registrant's Common Equity
and Related Shareholder Risk Factors; Distribution Policy; The Company;
Matters.................... Structure and Formation of the Company
18. Description of Registrant's
Securities................. Shares of Beneficial Interest
19. Legal Proceedings.......... The Initial Hotels
20. Security Ownership of
Certain Beneficial Owners
and Management............. Principal Shareholders
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS
----------------------- ---------------------------------
<S> <C>
21. Trustees and Executive
Officers.................. REIT Management
22. Executive Compensation.... REIT Management
23. Certain Relationships and
Related Transactions...... The Company; REIT Management; Structure and
Formation of the Company; Certain Relationships
and Transactions
24. Selection, Management and
Custody of Registrant's Outside Front Cover Page; Prospectus Summary;
Investments............... The Company; The Initial Hotels
25. Policies with Respect to
Certain Transactions...... Policies with Respect to Certain Activities
26. Limitations of Liability.. The Company; Shares of Beneficial Interest; REIT
Management
27. Financial Statements and Prospectus Summary; Selected Financial
Information............... Information; Financial Statements
28. Interests of Named Experts
and Counsel............... Experts; Legal Matters
29. Disclosure of Commission
Position on
Indemnification for REIT Management
Securities Act
Liabilities...............
</TABLE>
<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 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 FEBRUARY 5, 1998
PROSPECTUS
- --------------------------------------------------------------------------------
14,450,000 Shares
LASALLE HOTEL PROPERTIES
Common Shares of Beneficial Interest
- --------------------------------------------------------------------------------
LaSalle Hotel Properties (together with its subsidiaries, the "Company") has
been formed to own hotel properties and to continue and expand the hotel
investment activities of LaSalle Partners Incorporated, and certain of its
affiliates (collectively "LaSalle"). The Company will be managed and advised by
LaSalle Hotel Advisors, Inc. (the "Advisor"), a wholly owned subsidiary of
LaSalle, and will be the exclusive vehicle for LaSalle's full service hotel
property investment activities in the United States. See "REIT Management--
Advisory Agreement." Upon completion of this offering (the "Offering"), the
Company, which intends to operate as a real estate investment trust ("REIT"),
will own, through an operating partnership (the "Operating Partnership"), three
convention, two resort, and five business oriented full service hotels, in
eight states containing an aggregate of 3,379 guest rooms (the "Initial
Hotels") and will seek to selectively acquire and develop additional hotel
properties, particularly upscale and luxury full service hotels located in
convention, resort and major urban business markets. Seven of the Initial
Hotels will be leased to independent lessees and three of the Initial Hotels
will be leased to an affiliated lessee (collectively, the "Lessees") under
participating leases ("Participating Leases") which provide for the payment of
the greater of a base rent or participating rent and are designed to allow the
Company to achieve substantial participation in revenue growth at the Initial
Hotels. All ten of the Initial Hotels will be managed by independent,
unaffiliated operators (the "Operators").
All of the common shares of beneficial interest, $0.01 par value per share (the
"Common Shares"), offered hereby are being sold by the Company. Upon completion
of the Offering, LaSalle is expected to own approximately 10.8% of the equity
of the Company in the form of Common Shares and interests exchangeable for
Common Shares. The Company intends to make regular quarterly distributions to
its shareholders, commencing with a pro rata distribution with respect to the
quarter ending June 30, 1998.
Prior to the Offering, there has been no public market for the Common Shares.
It is currently anticipated that the initial public offering price will be
between $ and $ per Common Share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Company intends to apply for listing of the Common Shares on the New York Stock
Exchange ("NYSE") under the symbol "LHO".
SEE "RISK FACTORS" ON PAGES 20 TO 31 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON SHARES OFFERED HEREBY, INCLUDING:
. Dependence on rent payments from Lessees for all of the Company's income
and the Company's limited control over the operations of hotels it owns
due to tax restrictions that prevent REITs from operating hotels;
. The Company's estimated annual distributions represent 97.2% of its
estimated Cash Available for Distribution, resulting in the possibility
that the Company may be required to fund distributions from working
capital or borrowings or reduce such distributions;
. Conflicts of interest with and the receipt of material benefits by the
Advisor and the Contributors (as hereafter defined);
. The lack of appraisals for the Initial Hotels, including the possibility
that the purchase prices paid by the Company for the Initial Hotels may
exceed the market value of such hotels;
. Risks affecting the hotel industry generally, and the Company's hotels
specifically, including competition, increases in operating costs,
dependence on business and leisure travelers and the need for future
capital expenditures in excess of budgeted amounts;
. The Company has been recently organized and has no operating history;
. Tax risks, including adverse consequences, if the Company fails to qualify
as a REIT, which would reduce the amounts available for distribution to
shareholders; and
. Limitations contained in the Company's organizational documents, including
restrictions on ownership of more than 9.8% of the outstanding Common
Shares, may make a change in control of the Company more difficult to
achieve.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share........................... $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
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</TABLE>
- --------------------------------------------------------------------------------
(1) The Company and the Operating Partnership have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
approximately $ .
(3) The Company has granted the Underwriters a 30 day over-allotment option to
purchase up to 2,167,500 additional Common Shares on the same terms and
conditions as set forth above. If all such additional Common Shares are
purchased by the Underwriters, the total Price to Public will be $ , the
total Underwriting Discounts and Commissions will be $ and the total
Proceeds to Company will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The Common Shares are being offered by the several Underwriters, subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and
to withdrawal, cancellation or modification of the offer without notice.
Delivery of the shares to the Underwriters is expected to be made through the
facilities of the Depository Trust Company, New York, New York, on or about
, 1998.
PRUDENTIAL SECURITIES INCORPORATED
, 1998
<PAGE>
[MAP]
[PICTURES OF THE PROPERTIES]
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES
INCLUDING PURCHASES OF THE COMMON SHARES TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON SHARES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON SHARES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 3
The Company.............................................................. 3
The Advisor.............................................................. 5
Risk Factors............................................................. 6
Business and Growth Strategies........................................... 7
The Initial Hotels....................................................... 8
Structure and Formation of the Company................................... 11
The Offering............................................................. 14
Distribution Policy...................................................... 14
Tax Status of the Company................................................ 14
SUMMARY FINANCIAL INFORMATION............................................. 16
RISK FACTORS.............................................................. 20
Dependence on Lessees and Payments Under the Participating Leases........ 20
Lack of Control Over Operations of the Initial Hotels.................... 20
Estimated Cash Available for Distribution May Not be Sufficient to Make
Distributions at Expected Levels........................................ 20
Conflicts; Dependence on Advisor......................................... 21
Benefits to Related Parties.............................................. 21
Lack of Appraisals for the Initial Hotels; No Assurance as to Value...... 22
Hotel Industry Risks..................................................... 22
Lack of Operating History or Revenues.................................... 23
Tax Risks................................................................ 23
Potential Anti-takeover Effect of Certain Provisions of Maryland Law and
of the Company's Declaration of Trust and Bylaws........................ 24
Immediate and Substantial Dilution....................................... 27
Effect on the Price of Common Shares of Shares Eligible for Future Sale.. 27
Contingent Liabilities of Selling Partnerships........................... 28
No Prior Market for Common Shares........................................ 28
Real Estate Financing Risk............................................... 28
Risks of Investing in Real Estate........................................ 28
Risks of Leverage........................................................ 30
Adverse Effect of Increase in Market Interest Rates on Price of Common
Shares.................................................................. 31
Reliance on Board of Trustees and Ability of Board to Change Policies.... 31
THE COMPANY............................................................... 32
BUSINESS AND GROWTH STRATEGIES............................................ 34
Acquisition Strategies................................................... 34
Internal Growth Strategies............................................... 35
Development.............................................................. 37
Financing Strategies..................................................... 38
USE OF PROCEEDS........................................................... 39
DISTRIBUTION POLICY....................................................... 40
CAPITALIZATION............................................................ 42
DILUTION.................................................................. 43
SELECTED FINANCIAL INFORMATION............................................ 44
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 47
Pro Forma Results of Operations for the Company......................... 47
Results of Operations of the Initial Hotels............................. 48
Liquidity and Capital Resources......................................... 50
Inflation............................................................... 51
Seasonality............................................................. 51
THE HOTEL INDUSTRY....................................................... 52
THE INITIAL HOTELS....................................................... 53
Descriptions of Initial Hotels.......................................... 53
The Participating Leases................................................ 62
Property Leases......................................................... 66
Condominium Declaration................................................. 67
Franchise and Brand Agreements.......................................... 69
Affiliated Lessee....................................................... 70
Operator Agreements..................................................... 70
Excluded Properties..................................................... 71
Employees............................................................... 72
Environmental Matters................................................... 72
Competition............................................................. 72
Insurance............................................................... 73
Legal Proceedings....................................................... 73
REIT MANAGEMENT.......................................................... 74
Advisory Agreement...................................................... 74
Conflicts Between the Company and the Advisor........................... 76
Trustees and Officers of the Company, the Advisor and Relevant
Affiliates............................................................. 77
Share Option and Incentive Plan......................................... 78
STRUCTURE AND FORMATION OF THE COMPANY................................... 80
Benefits to Related Parties............................................. 81
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES.............................. 82
Investment Policies..................................................... 82
Financing............................................................... 82
Policies and Procedures for Addressing Conflicts........................ 83
Policies with Respect to Other Activities............................... 84
CERTAIN RELATIONSHIPS AND TRANSACTIONS................................... 85
Advisory Agreement...................................................... 85
The Affiliated Lessee................................................... 85
Relationships Among Officers, Trustees and Contributors................. 85
Acquisition of Interests in Certain of the Initial Hotels............... 85
The Participating Leases................................................ 85
The Operator Agreements................................................. 85
PARTNERSHIP AGREEMENT.................................................... 86
Operational Matters..................................................... 86
Liability and Indemnification........................................... 88
Transfers of Interests.................................................. 88
Extraordinary Transactions.............................................. 89
PRINCIPAL SHAREHOLDERS................................................... 90
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SHARES OF BENEFICIAL INTEREST............................................. 91
General.................................................................. 91
Common Shares............................................................ 91
Preferred Shares......................................................... 92
Power To Issue Additional Common Shares and Preferred Shares............. 92
Restrictions on Ownership and Transfer................................... 92
Transfer Agent and Registrar............................................. 94
CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S DECLARATION OF TRUST
AND BYLAWS............................................................... 95
Number of Trustees; Classification and Removal of Board of Trustees;
Other Provisions........................................................ 95
Changes in Control Pursuant to Maryland Law.............................. 96
Amendments to the Declaration of Trust and Bylaw......................... 96
Advance Notice of Trustee Nominations and New Business................... 97
Meetings of Shareholders................................................. 97
Anti-Takeover Effect of Certain Provisions of Maryland Law and of the
Declaration of Trust and Bylaws......................................... 97
Maryland Asset Requirements.............................................. 97
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SHARES ELIGIBLE FOR FUTURE SALE........................................... 98
General.................................................................. 98
Registration Rights...................................................... 98
FEDERAL INCOME TAX CONSEQUENCES........................................... 100
General.................................................................. 100
Taxation of the Company.................................................. 100
Taxation of Shareholders................................................. 107
Other Tax Considerations................................................. 111
State and Local Tax...................................................... 112
UNDERWRITING.............................................................. 113
EXPERTS................................................................... 114
LEGAL MATTERS............................................................. 115
ADDITIONAL INFORMATION.................................................... 115
INDEX TO FINANCIAL STATEMENTS............................................. F-1
GLOSSARY OF SELECTED TERMS................................................ G-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the financial statements and notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus assumes (i) an initial public offering price
of $20.00 per Common Share (representing the assumed initial public offering
price), (ii) the completion of the transactions described under "Formation
Transactions," and (iii) the Underwriters' over-allotment option will not be
exercised. Unless the context requires otherwise, (i) the term "Company," as
used herein, includes LaSalle Hotel Properties, a Maryland real estate
investment trust and LaSalle Hotel Operating Partnership, L.P., a Delaware
limited partnership (the "Operating Partnership") and (ii) the term "Advisor,"
as used herein, includes LaSalle Hotel Advisors, Inc., a Maryland corporation
and the entities through which LaSalle Partners Incorporated has conducted its
hotel investment activities. See "Glossary of Selected Terms" beginning on page
G-1 for the definitions of certain terms used in this Prospectus.
THE COMPANY
The Company, which intends to operate as a real estate investment trust
("REIT") for federal income tax purposes, has been formed to own hotel
properties and to continue and expand the hotel investment activities of
LaSalle Partners Incorporated and certain of its affiliates (collectively,
"LaSalle"). The Company will be managed and advised by the Advisor, a wholly
owned subsidiary of LaSalle. Pursuant to an exclusivity agreement, the Company
will become the exclusive vehicle for LaSalle's full service hotel property
investment activities in the United States. See "REIT Management--Advisory
Agreement." Upon completion of the Offering and the Formation Transactions, the
Company will own three convention, two resort, and five business oriented full
service hotels, located in ten different markets in eight states containing an
aggregate of 3,379 guest rooms (the "Initial Hotels") and will seek to
selectively acquire and develop additional hotel properties, particularly
upscale and luxury full service hotels located in convention, resort and major
urban business markets. See "The Initial Hotels--Descriptions of the Initial
Hotels." Seven of the Initial Hotels will be leased to unaffiliated lessees
(affiliates of whom will also operate those Initial Hotels) and three of the
Initial Hotels will be leased to the affiliated lessee (together, the
"Lessees") under participating leases ("Participating Leases") which provide
for the payment of the greater of a base rent or participating rent and are
designed to allow the Company to achieve substantial participation in revenue
growth at the Initial Hotels. See "The Initial Hotels--The Participating
Leases." All ten of the Initial Hotels will be managed by independent,
unaffiliated operators (the "Operators"). See "The Initial Hotels--Operator
Agreements."
The Initial Hotels are primarily upscale or luxury full service hotels,
diversified by location in convention, resort and business oriented markets and
by brand or franchise affiliation with premier internationally recognized hotel
companies. The Company's Initial Hotels include two Le Meridiens(R), three
Marriotts(R), one Radisson(R), two Holiday Inns(R), one independent upscale
hotel and one independent luxury all-suite hotel. For the nine months ended
September 30, 1997, the Initial Hotels had a weighted average occupancy of
74.7%, average daily room rate ("ADR") of $112.84, and room revenue per
available room ("REVPAR") of $84.27.
3
<PAGE>
The Initial Hotels have achieved significant growth in occupancy, ADR and
REVPAR for the past three years as set forth in the following chart.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ----------- -----------------
<S> <C> <C> <C>
Number of Rooms................... 3,364 3,374(1) 3,379(1)
Occupancy......................... 71.5% 72.5% 74.7%
ADR............................... $ 102.34 $ 108.15 $ 112.84
REVPAR............................ $ 73.21 $ 78.44 $ 84.27
Total Revenue ($ in thousands).... $ 148,808 $ 159,593 $128,014
</TABLE>
- --------
(1) Adjusted to reflect actual expansions of certain of the Initial Hotels.
For 1995, 1996 and the nine months ended September 30, 1997, average
occupancy rates, ADR and REVPAR for the U.S. lodging industry were 65.1%, 65.2%
and 66.5%, $65.81, $69.66 and $74.96, and $42.83, $45.47 and $49.85,
respectively, according to Smith Travel Research, Inc. ("Smith Travel
Research"). See "The Hotel Industry." Management believes the growth in
occupancy, ADR and REVPAR at the Initial Hotels is due to: the strength of the
continuing recovery of the hotel industry in general and, more specifically,
the strength of the convention, resort and urban business markets for upscale
and luxury hotels; renovation and repositioning strategies and aggressive asset
management by LaSalle; and superior management and marketing by the Operators.
Each of the Initial Hotels has been recently renovated, is currently being
renovated or has plans for renovation in the near term. Since January 1, 1995,
approximately $26.0 million of capital improvements have been completed at the
Initial Hotels. Following completion of the Offering, the Company expects to
have approximately $10.5 million reserved to supplement annual capital
expenditure reserves and to fund planned renovations at certain of the Initial
Hotels. The Company believes that the renovations at the Initial Hotels will
promote further gains in REVPAR. Additionally, the Company is reviewing plans
to expand rooms and/or meeting space at five of the Initial Hotels.
The Company believes that it can be distinguished from other real estate
companies and REITs that are focused on the acquisition and ownership of hotel
properties in the following major respects:
. Reputation, Experience and Resources of LaSalle. LaSalle is an
institutionally respected real estate services and investment firm which
has extensive experience in the acquisition, investment management,
finance, development and disposition of hotel properties, including over
$500 million of hotel acquisitions and investments since 1994 and over
$500 million of new hotel development. Through the Advisor, LaSalle will
provide the Company with hotel investment advisory services on an
exclusive basis, including acquisitions, research, due diligence,
investment management, accounting, finance, risk management and human
resources.
. Focus on Convention, Resort and Major Urban Business Markets. Consistent
with the historical focus of the Advisor and with the Initial Hotels,
the Company will be primarily focused on investments in hotels located
in convention, resort and major urban business markets, which management
believes will continue to benefit from the recovery in the hotel sector.
Within these markets, the Company will be primarily focused on upscale
and luxury full service hotels. Convention, resort and urban business
hotels, the full service sector of these hotel markets generally, and
the upscale and luxury segments in particular, have experienced the
least amount of new supply and have the highest barriers to entry as a
result of high per property costs, high per room development costs
(relative to the price per room at which such hotels can be purchased)
and long lead times for new development.
. Multiple Independent, Unaffiliated Operators. The Company believes that
the exclusive use of independent, unaffiliated hotel operators
eliminates the potential for serious conflicts of interest which
4
<PAGE>
have existed in other hotel REITs. Additionally, the use of multiple
operators provides diversification and creates a network of operators
that is expected to continue to generate acquisition opportunities for
the Company. The Company intends to continue to develop its
relationships with premier internationally recognized hotel operating
companies such as Marriott(R), Radisson(R) and Le Meridien(R) and other
nationally respected operating companies.
. Acquisition of Hotel Properties Subject to Long-Term Agreements. The
Company believes that many of its competitors for hotels are focused
primarily on properties that can be acquired free of long-term
management and/or franchise agreements. Unlike these competitors, the
Company intends to use a variety of unaffiliated operators, and as a
result will pursue acquisitions of hotel properties solely based on
their investment potential. The Company believes there will be less
competition for the acquisition of hotel properties subject to long-term
management and/or franchise agreements, enabling such properties to be
acquired at relatively attractive multiples of cash flow and discounts
to replacement cost. Generally, the Company will seek to have the
operators of these and its other hotels become lessees and invest in
units of the Operating Partnership ("Units") or in the Common Shares of
the Company.
THE ADVISOR
The Advisor is a New York based wholly owned subsidiary of LaSalle. LaSalle
is a leading real estate services and investment firm that provides investment
management services, real estate management services and corporate and
financial services to corporations and other real estate owners, users and
investors worldwide. LaSalle believes it is the fourth largest manager of
institutional equity capital invested in U.S. real estate properties and
securities as well as the fourth largest manager of institutional real estate
equity investments in the United Kingdom. As of September 30, 1997, LaSalle had
approximately $15.0 billion of real estate assets under management. In July
1997, LaSalle successfully completed an initial public offering of its common
stock, which is listed on the NYSE under the symbol "LAP."
LaSalle, through the Advisor, will conduct all of its future hotel property
investment activities in domestic full service hotels exclusively for the
benefit of the Company. See "REIT Management--Advisory Agreement." The Advisor
is led by a dedicated team of experienced hotel investment professionals which
has overseen numerous acquisitions, renovations, brand conversions, operator
selections, management contract negotiations, lease and franchise negotiations,
property repositionings and successful dispositions of hotel investments.
Management of the Advisor also oversaw the completion of the development and
opening of the 367 room super-luxury Four Seasons New York Hotel, and is
currently responsible for the development of a 258 room luxury full service
hotel in Philadelphia on behalf of the University of Pennsylvania.
In order to provide incentives to the Advisor and align its interests with
those of the shareholders of the Company, the Company has entered into an
incentive-based advisory agreement with the Advisor (the "Advisory Agreement").
The Advisor will receive a base fee to be paid in cash, calculated as a
percentage of the Company's net operating income ("NOI") and an incentive fee
to be paid in Common Shares of the Company based on growth in the Company's
Funds from Operations per share, to manage and advise the Company, providing
resources and a scope of services not otherwise available or affordable to the
Company. In addition, upon completion of the Offering, LaSalle will own
approximately 10.8% of the equity of the Company in the form of Common Shares
and Units (based on the assumed initial public offering price of $20.00 per
share), thereby further aligning the interests of LaSalle and the Advisor with
those of the Company's shareholders. See "Risk Factors--Conflicts" and "REIT
Management--Advisory Agreement."
The Company's executive offices are located at 220 East 42nd Street, New
York, New York 10017, and its telephone number is (212) 661-6161.
5
<PAGE>
RISK FACTORS
An investment in the Common Shares involves various material risks, and
prospective investors should carefully consider the matters discussed under
"Risk Factors" prior to making an investment decision. Such risks include,
among others:
. Dependence upon rental payments from the Lessees for all of the
Company's income, including risks related to the ability of the Lessees
to make rent payments sufficient to permit the Company to make
distributions to its shareholders, the failure or delay in making rent
payments, the failure of the Lessees or the Operators to effectively
manage the Initial Hotels, to meet obligations under the franchise or
brand licensing agreements and the limited operating history of the
Lessees.
. Dependence upon the ability of the Lessees and the Operators to manage
the Initial Hotels and, because of REIT qualification requirements,
restrictions on the Company's ability to operate the Initial Hotels.
. The Company's estimated initial annual distributions represent 97.2% of
its estimated Cash Available for Distribution, resulting in the
possibility that the Company may be required to fund distributions from
working capital or borrowings or reduce such distributions.
. Contributors (as defined below) who are holders of Units may experience
different and more adverse tax consequences compared to those
experienced by other holders of Common Shares or other holders of Units
upon the sale of any of the Initial Hotels. In addition, because the
timing and amount of incentive and other fees received by the Advisor
may be affected by various determinations, including the sale or
disposition of properties, the Advisor may have a conflict of interest
with respect to such determinations. LaSalle is a significant
shareholder of the Company and could influence decisions regarding the
Advisory Agreement and fees relating to such agreement, and regarding
enforcement of the Company's rights against the Affiliated Lessee. Also,
there may be conflicts of interest between the Company and certain
members of the Board of Trustees and certain executive officers of the
Company who are also officers and directors of the Advisor and
shareholders, officers and/or directors of LaSalle.
. Receipt by the Advisor and the Contributors of material benefits from
the Formation Transactions, including, but not limited to (i) receipt by
the Contributors of an aggregate of 4,285,810 Common Shares and Units
(valued at approximately $85.7 million, assuming the initial public
offering price of $20.00 per share), repayment of approximately $250.0
million of indebtedness associated with the Contributors' interests in
the Initial Hotels, rights to purchase 843,111 Common Shares and
approximately $50.4 million in cash in exchange for their interests in
the Initial Hotels and in connection with the Formation Transactions,
(ii) the grant to the Advisor of options to acquire 443,396 Common
Shares, (iii) receipt by the Advisor of the right to appoint two members
of the initial Board of Trustees of the Company and receipt by one of
the Contributors of the right to appoint one member of the initial Board
of Trustees of the Company and (iv) ownership by LaSalle of a 45.5%
interest in the Affiliated Lessee (as defined below).
. Risks associated with the lack of appraisals for the Initial Hotels and
the possibility that the purchase price paid by the Company for
interests in the Initial Hotels, including interests acquired from the
Contributors and certain of their affiliates, may exceed the market
value of such hotels.
. Risks affecting the hotel industry generally, and the Initial Hotels
specifically, including competition for guests, increases in operating
costs due to inflation and other factors, dependence on business,
commercial and leisure travelers, increases in energy costs and other
expenses of travel, seasonality, potential loss of franchise or brand
licenses and the need for future expenditures for capital improvements
and for replacement of furniture, fixtures and equipment ("FF&E") in
excess of budgeted amounts.
. The Company has been recently organized, has no operating history or
employees and is dependent on the Advisor for its management and
administration.
6
<PAGE>
. Tax risks, including taxation of the Company as a corporation if it
fails to qualify as a REIT, and taxation of the Operating Partnership as
a corporation if it were deemed not to be a partnership for income tax
purposes and the Company's liability for federal and state taxes on its
income in either such event, which could have a material adverse effect
on Cash Available for Distribution.
. Limitations contained in the Company's organizational documents,
including restrictions on ownership of more than 9.8% of the outstanding
Common Shares may make a change in control of the Company more difficult
to achieve.
. Immediate and substantial dilution of $1.58 per share in the net
tangible book value of the Common Shares acquired by purchasers in the
Offering upon completion of the Offering and the Formation Transactions.
. The potential adverse effect on the market price of the Common Shares of
future or potential sales of Common Shares by LaSalle. The Advisor is
subject to restrictions for specified periods on the disposition of its
Common Shares.
. The risk that adequate financing for acquisitions and development
activities will continue to be available to the Company under the Line
of Credit (as defined herein), extensions of the Line of Credit and any
replacement credit facilities.
. Potential liabilities assumed by the Company as a result of its
acquisition of all of the partnership interests in the entities that own
certain of the Initial Hotels, including contingent liabilities of such
selling entities.
. The absence of a prior public market for the Common Shares and the lack
of assurance that an active trading market for the Common Shares will
develop.
BUSINESS AND GROWTH STRATEGIES
The Company's primary objectives are to maximize current returns to its
shareholders through increases in Cash Available for Distribution and to
increase long-term total returns to shareholders through appreciation in the
value of its Common Shares. As further discussed below, to achieve these
objectives, the Company will seek to (i) invest in or acquire additional hotel
properties on favorable terms and (ii) enhance the return from, and the value
of, the Initial Hotels and any additional hotels. The Initial Hotels and any
additional hotels will be subject to Participating Leases which will allow the
Company to participate in any increased revenues from the hotels pursuant to
participating rent payments.
The Company will seek to achieve revenue growth principally through (i)
acquisitions of full service hotel properties located in convention, resort and
major urban business markets in the U.S. and abroad, especially upscale and
luxury full service hotels in such markets and where the Company, through
LaSalle's extensive research and local market experience, perceives strong
demand growth or significant barriers to entry, (ii) renovations and/or
expansions at certain of the Initial Hotels, and (iii) selective development of
hotel properties, particularly upscale and luxury full service hotel properties
in high demand markets where development economics are favorable.
The Company's hotel investment strategy has been developed with the benefit
of the proprietary research and experience of LaSalle's investment research
group. Utilizing this research, the Company intends to acquire additional hotel
properties in targeted markets, consistent with the growth strategies outlined
above and which:
. possess unique competitive advantages in the form of location, physical
facilities or other attributes;
. are available at significant discounts to replacement cost, including
when such discounts result from reduced competition for properties with
long-term management and/or franchise agreements;
7
<PAGE>
. would benefit from brand or franchise conversion, new management,
renovations or redevelopment or other active and aggressive asset
management strategies; or
. have expansion opportunities.
The Company believes its acquisition capabilities will be enhanced by the
considerable experience, resources and relationships of LaSalle in the hotel
industry specifically and the real estate industry generally. Additionally, the
Company believes that having multiple independent hotel operators creates a
network that will continue to generate significant acquisition opportunities.
See "Business and Growth Strategies--Acquisition Strategies" and "Policies with
Respect to Certain Activities--Investment Policies."
The Company will also selectively undertake development and redevelopment of
hotel properties, particularly upscale and luxury full service hotel
properties, as well as expansion of certain of the Initial Hotels. Of the
Initial Hotels, one has a major expansion opportunity of 100 rooms and 9,600
square feet of meeting space and four have minor expansion opportunities
aggregating 30 rooms and 10,000 square feet of meeting space. Of these
expansion opportunities, the Company anticipates initiating or completing
construction of 119 rooms and 9,600 square feet of meeting space in 1998. See
"Business and Growth Strategies--Internal Growth Strategies."
Upon completion of the Offering and the Formation Transactions, the debt to
total market capitalization ratio of the Company will be approximately 9.8%
(based upon the assumed initial public offering price of $20.00 per share). The
Company currently has a policy, subject to the discretion of the Board of
Trustees, of incurring debt only if upon such incurrence the Company's debt-to-
total market capitalization ratio would be 45% or less. The Company anticipates
obtaining a $200 million revolving line of credit (the "Line of Credit"), the
borrowings from which will be utilized primarily for the acquisition and
renovation of additional hotels and the renovation and expansion of certain of
the Initial Hotels. See "Policies with Respect to Certain Activities--
Investment Policies."
THE INITIAL HOTELS
The Initial Hotels consist of ten full service hotels containing an aggregate
of 3,379 guest rooms with an average ADR of $112.84 for the nine months ended
September 30, 1997, which target both business and leisure travelers, including
groups and those attending meetings and conventions, who prefer a full range of
high quality facilities, services and amenities. The Company's Initial Hotels
include two Le Meridiens(R), three Marriotts(R), one Radisson(R), two Holiday
Inns(R), one independent upscale hotel and one independent luxury all-suite
hotel. Full service hotels generally provide a significant array of guest
services and offer a full range of meeting and conference facilities and
banquet space. Facilities also typically include restaurants and lounge areas,
gift shops and recreational facilities, including swimming pools. As a result,
full service hotels often generate significant revenue from sources other than
guest room revenue.
The Initial Hotels include three luxury, six upscale and one mid-price full
service hotel located in three convention, two resort and five business
oriented markets in eight states. The Company believes that the categorization
of the Initial Hotels corresponds to lodging industry standards based on their
market ADR or brand affiliation. The Company believes that the quality and
diversity of its initial portfolio will moderate any potential effect on the
Company of regional economic conditions or local market competition affecting
specific hotel brands or markets. No assurances can be given, however,
regarding the future performance of the Initial Hotels.
For the period January 1, 1995 through September 30, 1997, approximately
$26.0 million of capital improvements have been made at the Initial Hotels. In
addition, upon completion of the Offering, the Company will have cash reserved
of approximately $10.5 million to supplement annual capital reserves and to
fund planned
8
<PAGE>
renovations at certain of the Initial Hotels. The Company believes that the
Initial Hotels will continue to benefit from favorable market conditions,
recent and planned capital improvements and repositionings and planned
expansions. See "The Initial Hotels--Descriptions of the Initial Hotels."
The table on the following page sets forth certain information with respect
to the Initial Hotels. The Lessees are obligated to pay the Company the greater
of Base or Participating Rent at each of the Initial Hotels.
9
<PAGE>
THE INITIAL HOTELS
<TABLE>
<CAPTION>
RENOVATIONS
AND CAPITAL
YEAR IMPROVEMENT
NUMBER ACQUIRED EXPENDITURES,
OF GUEST YEAR BUILT/ BY THE 1/1/95-
INITIAL HOTEL(1) LOCATION ROOMS(2) RENOVATED(3) CONTRIBUTORS 9/30/97(4)
- ---------------- -------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
CONVENTION
ORIENTED:
Radisson Hotel
South and Plaza
Tower(8)......... Bloomington, MN 580 1969/1997 1995 $ 5,474
Le Meridien New
Orleans.......... New Orleans, LA 494 1984/1997 1996 1,956
Le Meridien
Dallas(9)........ Dallas, TX 396 1980/1995 1997 2,123
RESORT ORIENTED:
Marriott Seaview Galloway Twnshp. 300 1912/1997 1997 4,397
Resort(10)....... (Atlantic City), NJ
Holiday Inn
Beachside
Resort(11)....... Key West, FL 222 1960/1996 1997 1,561
BUSINESS
ORIENTED:
LaGuardia Airport
Marriott(10)(12).. New York, NY 436 1981/1996 1998 4,317
Omaha Marriott
Hotel(10)........ Omaha, NE 301 1982/1996 1996 1,677
Camberley Plaza
Sabal Park
Hotel............ Tampa, FL 265 1986/1996 1995 1,188
Holiday Inn Plaza
Park............. Visalia, CA 257 1976/1995 1994 1,715
Le Montrose All
Suite Hotel
De Gran
Luxe(13)......... West Hollywood, CA 128 1976/1997 1994 1,550
----- -------
Total/Weighted
Average......... 3,379 $25,958
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------------------
PRO FORMA
LESSEE
INCOME ROOM
TOTAL BEFORE LESSEE REVENUE
REVENUE PRO EXPENSES AND AVERAGE PER
OF THE FORMA PRO FORMA PARTICIPATING DAILY AVAILABLE
INITIAL BASE PARTICIPATING LEASE AVERAGE RATE ROOM
INITIAL HOTEL(1) HOTELS RENT(5) RENT(5) PAYMENTS(6) OCCUPANCY (ADR) (REVPAR)(7)
- ---------------- -------- ------- ------------- ------------- --------- ------- -----------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND REVFAR)
<S> <C> <C> <C> <C> <C> <C> <C>
CONVENTION
ORIENTED:
Radisson Hotel
South and Plaza
Tower(8)......... $ 25,553 $ 5,196 $ 7,268 $ 8,553 71.4% $ 90.99 $ 64.94
Le Meridien New
Orleans.......... 23,225 6,471 8,477 8,983 72.5% 130.21 94.36
Le Meridien
Dallas(9)........ 14,852 2,603 3,186 3,592 68.2% 106.22 72.44
RESORT ORIENTED:
Marriott Seaview 29,169 4,608 6,742 8,875 67.4% 150.59 101.43
Resort(10).......
Holiday Inn
Beachside
Resort(11)....... 7,851 2,211 2,819 3,035 75.2% 106.28 79.94
BUSINESS
ORIENTED:
LaGuardia Airport
Marriott(10)(12).. 26,655 4,637 6,497 8,553 81.2% 136.08 110.48
Omaha Marriott
Hotel(10)........ 14,721 2,564 4,106 4,979 78.5% 100.77 79.10
Camberley Plaza
Sabal Park
Hotel............ 10,218 2,172 3,052 3,181 77.1% 87.20 67.24
Holiday Inn Plaza
Park............. 5,843 956 1,238 1,462 61.5% 61.31 37.69
Le Montrose All
Suite Hotel
De Gran
Luxe(13)......... 6,765 2,243 2,863 3,014 80.4% 134.22 107.96
-------- ------- ------------- ------------- --------- ------- -----------
Total/Weighted
Average......... $164,852 $33,661 $46,248 $54,227 73.0% $111.27 $ 81.23
</TABLE>
- ----
(1) Each of the Initial Hotels will be wholly-owned by the Company following
the Offering.
(2) As of September 30, 1997.
(3) The Company defines a renovation as a significant upgrade of guest rooms
or common areas with capital expenditures averaging at least $2,000 per
guest room. In some cases, renovations occurred over more than one
calendar year. Year renovated reflects the calendar year in which the
most recent of such renovations was completed.
(4) Represents total capital expenditures at each hotel from January 1, 1995
through September 30, 1997; dollars in thousands.
(5) Represents Base and Participating Rent calculated on a pro forma basis as
if October 1, 1996 were the beginning of a lease year. Under the terms of
the Participating Leases, the Lessees are obligated to pay the greater of
Base or Participating Rent.
(6) Represents pro forma Lessee net income before pro forma Participating
Lease payments and pro forma management fees of $8,107 paid to the
Operators. Management fees are subordinate to Participating Lease
payments to the Company, for all properties except the LaGuardia Airport
Marriott ($2,067 management fee), the Omaha Marriott Hotel ($1,158
management fee), and the Marriott Seaview Resort ($2,003 management fee).
See "Selected Financial Information--Lessees."
(7) REVPAR is determined by dividing room revenue by available rooms for the
applicable period.
(8) Figures for the Radisson Hotel South and Plaza Tower are through
September 24, 1997, the end of the hotel's fiscal period.
(9) Le Meridien Dallas Hotel is anticipated to be renovated in 1998 at a cost
of approximately $9,500 per room.
(10) Figures for the hotels are through October 10, 1997, the end of the
hotels' fiscal periods.
(11) Holiday Inn Beachside Resort was originally built in 1960, with its most
recent addition completed in 1989.
(12) LaGuardia Airport Marriott is expected to be acquired by the Company in
March 1998. Renovation and Capital Expenditures are for the period
January 1, 1995 through August 31, 1997.
(13) Le Montrose All Suite Hotel De Gran Luxe was built in 1976 as an
apartment building and was converted to a hotel in 1989.
10
<PAGE>
STRUCTURE AND FORMATION OF THE COMPANY
The chart below depicts the structure of the Company upon completion of the
Offering and the Formation Transactions.
<TABLE>
<CAPTION>
LASALLE HOTEL PROPERTIES
(THE "COMPANY")
<S> <C>
82.3% General and
Limited Partnership Interest
LASALLE HOTEL
ADVISORS, INC.
(THE "ADVISOR")
LaSalle
Hotel
Operating Partnership, L.P.
(the "Operating
Partnership")
Participating Leases Participating Leases
Participating Lease Participating Lease
Payments Payments
9.0% owned by the
Company; 45.5%
owned by LaSalle;
45.5% owned by
Charitable Orga- Seven
nization Affiliated Independent
Lessee Unaffiliated
Lessees
Operator Agreements for the following Initial Hotels: Operator Agreements for the following Initial Hotels:
Marriott Seaview Resort Le Meridien New Orleans
Omaha Marriott Hotel Le Meridien Dallas
LaGuardia Airport Marriott Holiday Inn Beachside Resort
Camberley Plaza Sabal Park
Holiday Inn Plaza Park
Le Montrose All Suite Hotel De Gran Luxe
Radisson South and Plaza Tower
</TABLE>
11
<PAGE>
The Company will be managed by the Advisor in accordance with the terms of
the Advisory Agreement. The Initial Hotels will be leased by the Operating
Partnership to the Lessees and will be operated by the Operators pursuant to
the terms of the Operator Agreements.
The principal transactions in connection with the formation of the Company as
a REIT and the acquisition of the Initial Hotels ("Formation Transactions")
will be as follows:
. The Company was formed as a Maryland real estate investment trust on
January 15, 1998.
. The Operating Partnership was formed as a Delaware limited partnership
on January 13, 1998.
. The Advisor was formed as a Maryland corporation on January 23, 1998.
. The partnerships owning three of the Initial Hotels (Camberley Plaza
Sabal Park Hotel, Holiday Inn Plaza Park and Le Montrose All Suite Hotel
De Gran Luxe) entered into a loan agreement on January 30, 1998 with an
affiliate of Prudential Securities Incorporated (the "Bridge Loan")
pursuant to which the three partnerships borrowed an aggregate of $48.0
million, the proceeds of which were used to purchase the interest of
Cargill Financial Services Corporation and its affiliates ("Cargill") in
those three Initial Hotels and to repay outstanding mortgage and other
indebtedness on such Initial Hotels and certain expenses in connection
therewith. Amounts outstanding under the Bridge Loan will be repaid with
a portion of the net proceeds from the Offering.
. The Company will sell 14,450,000 Common Shares in the Offering.
Approximately $265.8 million of the estimated net proceeds to the
Company from the Offering, 969,500 Common Shares and rights to purchase
843,111 Common Shares will be contributed to the Operating Partnership
in exchange for an approximate 82.3% equity interest in the Operating
Partnership. The Company will be the sole general partner of the
Operating Partnership.
. Each of the Initial Hotels is owned by one or more contributors (the
"Contributors") consisting of: LaSalle, affiliates of Steinhardt Group,
Inc. ("Steinhardt"), affiliates of Cargill, Radisson Group, Inc.
("Radisson"), Outrigger Lodging Services ("OLS") and an affiliate of the
Durbin Companies, Inc. ("Durbin"). The Operating Partnership will
acquire a 100% interest in each of the Initial Hotels for an aggregate
of approximately 3,316,310 Units, 969,500 Common Shares, rights to
purchase 843,111 Common Shares, approximately $50.4 million in cash and
the repayment of approximately $250.0 million of outstanding mortgage
and other indebtedness on the Initial Hotels (including the $48.0
million Bridge Loan) and certain expenses in connection therewith.
. LaSalle will form LaSalle Hotel Lessee, Inc., an Illinois corporation
(the "Affiliated Lessee"), to serve as lessee for the three Initial
Hotels for which the Operator has declined to serve as lessee. The
Affiliated Lessee will be owned as follows: 9.0% by the Company, 45.5%
by LaSalle and 45.5% by a charitable organization.
. The Operating Partnership will lease the Initial Hotels to the Lessees
for terms of between six and 11 years pursuant to separate Participating
Leases, which provide for rent equal to the greater of Base Rent or
Participating Rent. The Lessees will contract with the Operators to
operate the Initial Hotels under separate Operator Agreements providing,
with respect to seven of the Initial Hotels, for the subordination of
the payment of all management fees to the Lessees' obligations to pay
rent to the Operating Partnership.
See "Structure and Formation of the Company."
As a result of the Formation Transactions, the Advisor, the Contributors and
certain Trustees will receive the following benefits:
. The Advisor will enter into the Advisory Agreement (as defined below)
pursuant to which the Advisor will receive annual base and incentive
fees based upon the performance of the Company. See "REIT Management--
Advisory Agreement."
12
<PAGE>
. The Advisor will have the right to appoint two members of the initial
Board of Trustees of the Company.
. The Advisor will receive options to acquire 443,396 Common Shares.
. LaSalle will own a 45.5% interest in the Affiliated Lessee.
. The Operating Partnership will acquire interests in the Initial Hotels
from LaSalle in exchange for 1,050,960 Units valued at approximately
$21.0 million and 969,500 Common Shares valued at approximately $19.4
million (based on the assumed initial public offering price of $20.00
per share).
. The Operating Partnership will acquire interests in six of the Initial
Hotels from Steinhardt in exchange for 1,657,350 Units valued at
approximately $33.1 million (based on the assumed initial public
offering price of $20.00 per share), rights to purchase 678,236 Common
Shares at the initial public offering price per share, the right to
appoint one member of the initial Board of Trustees of the Company and
$19.2 million in cash. Additionally, the Operating Partnership will
acquire Steinhardt's interest in the LaGuardia Airport Marriott for
approximately $0.4 million in cash.
. The Operating Partnership will acquire interests in five of the Initial
Hotels from Cargill in exchange for 198,750 Units valued at
approximately $4.0 million (based on the assumed initial public offering
price of $20.00 per share), rights to purchase 164,875 Common Shares at
the initial public offering price per share and $30.4 million in cash.
Additionally, the Operating Partnership will acquire Cargill's interest
in the LaGuardia Airport Marriott for approximately $0.4 million in
cash.
. The Operating Partnership will acquire interests in two of the Initial
Hotels from OLS, the Operator and partial owner of such hotels, in
exchange for 84,350 Units valued at approximately $1.7 million (based on
the assumed initial public offering price of $20.00 per share).
. The Operating Partnership will acquire interests in one of the Initial
Hotels from Radisson, the Operator and partial owner of such hotel, in
exchange for 320,450 Units valued at approximately $6.4 million (based
on the assumed initial public offering price of $20.00 per share).
. The Operating Partnership will acquire interests in one of the Initial
Hotels from Durbin, the Operator and partial owner of such hotel, in
exchange for 4,450 Units valued at approximately $0.1 million (based on
the assumed initial public offering price of $20.00 per share).
. Certain tax consequences to the Contributors from the conveyance of
their interests in the Initial Hotels to the Operating Partnership will
be deferred.
. Contributors receiving Units and/or rights to purchase Common Shares in
the Formation Transactions will have registration rights with respect to
Common Shares issued in exchange for Units or upon exercise of such
rights.
. Each non-employee Trustee of the Company will receive options to acquire
5,000 Common Shares.
13
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Shares Offered Hereby.................... 14,450,000 shares
Common Shares to be Outstanding after the
Offering....................................... 18,735,810 shares(1)
Use of Proceeds................................. To acquire an 82.3%
partnership interest in the
Operating Partnership. The
Operating Partnership will
use such funds to acquire the
Initial Hotels, to repay
certain mortgage and other
existing indebtedness in
connection with the
acquisition of the Initial
Hotels, to establish cash
reserves for capital
improvements at certain of
the Initial Hotels and to pay
certain fees and expenses in
connection with the Offering
and the Formation
Transactions. See "Use of
Proceeds."
Proposed NYSE Symbol............................ LHO
</TABLE>
- --------
(1) Includes the Common Shares being offered hereby, and 969,500 Common Shares
and 3,316,310 Units expected to be issued in connection with the Formation
Transactions that may be exchanged for cash or, at the option of the
Company, Common Shares on a one-for-one basis. Assumes that the
Underwriters' over-allotment option to purchase up to 2,167,500 shares will
not be exercised and excludes 1,311,507 shares reserved for issuance upon
the exercise of options and rights to be granted pursuant to the Company's
share purchase rights and the Share Option Plan (as defined herein)
concurrently with the Offering.
DISTRIBUTION POLICY
The Company presently intends to make regular quarterly distributions to its
shareholders. The Company intends to declare and pay a pro rata distribution
with respect to the period commencing on the completion of the Offering and
ending on June 30, 1998, based upon $0.305 per share for a full quarter. On an
annualized basis, this would be $1.22 per share, or an annual distribution rate
of 6.1% (based on the assumed initial public offering price per share of
$20.00). This estimated initial distribution represents 97.2% of estimated Cash
Available for Distribution of pro forma estimated Cash Available for
Distribution for the twelve month period ended December 31, 1996. The holders
of Units will be entitled to distributions per Unit which are equal to the
distributions payable on a per share basis with respect to the Common Shares.
See "Partnership Agreement." The Company does not intend to reduce the expected
distribution per share if the Underwriters' over-allotment option is exercised,
resulting in an increase in the number of Common Shares outstanding on account
of such exercise.
The Board of Trustees, in its sole discretion, will determine the actual
distribution rate based on the Company's actual results of operations, Cash
Available for Distribution, economic conditions, tax considerations (including
those related to REITs) and other factors. See "Distribution Policy."
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its taxable year ending December 31, 1998, and believes its organization
and proposed method of operation will enable it to meet the requirements for
qualification as a REIT. REITs are subject to a number of organizational and
operational requirements, including a requirement that they currently
distribute at least 95% of their taxable income (excluding net capital gain).
14
<PAGE>
If the Company qualifies for taxation as a REIT, the Company generally will
not be subject to Federal income tax on that portion of its ordinary income or
net capital gain that is currently distributed to shareholders. If the Company
fails to qualify as a REIT in any taxable year, the Company will be subject to
Federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. See "Federal Income Tax
Considerations--Failure to Qualify" for a more detailed discussion of the
consequences of a failure of the Company to qualify as a REIT. Even if the
Company qualifies for taxation as a REIT, the Company may be subject to certain
foreign state and local taxes on its income and property and to Federal income
and excise taxes on its undistributed income and certain other categories of
income. See "Federal Income Tax Consequences."
15
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth unaudited summary pro forma consolidated
financial data for the Company and summary combined historical financial data
for the Initial Hotels (excluding Marriott Seaview Resort and LaGuardia Airport
Marriott). This information should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this Prospectus. The
pro forma operating data is presented as if the consummation of the Offering
and the related Formation Transactions, the acquisition of the Initial Hotels,
and the application of the estimated net proceeds of the Offering and the
initial borrowings under the Line of Credit (as described under "Use of
Proceeds") had occurred on January 1, 1996 and all the Initial Hotels had been
leased pursuant to the Participating Leases as of that date and carried forward
through each period presented. The pro forma balance sheet data is presented as
if the aforementioned transactions had occurred on September 30, 1997.
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA(1)
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
OPERATING DATA:
Participating Lease revenue(2)...................... $44,118 $35,253
Depreciation........................................ 17,405 13,054
Real estate and personal property taxes, property
and casualty insurance............................. 6,250 4,520
General and administrative(3)....................... 730 548
Interest(4)......................................... 3,456 2,592
Advisory fees(5).................................... 1,663 1,364
Other............................................... 414 311
Minority interest(6)................................ 2,513 2,277
------- -------
Total expenses and minority interest.............. $32,431 $24,666
Net income applicable to common shareholders........ $11,687 $10,587
Net income per share................................ $ 0.76 $ 0.69
Weighted average number of Common Shares
outstanding........................................ 15,420 15,420
OTHER DATA:
Funds from Operations(7)............................ $26,011 $21,330
Additions to capital expenditure reserves........... (7,153) (5,628)
Amortization of debt issuance costs................. 500 375
Cash Available for Distribution..................... $19,358 $16,077
Distributions....................................... $18,812 $14,109
Number of Common Shares outstanding................. 15,420 15,420
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1997
-------------
<S> <C>
BALANCE SHEET DATA:
Investment in hotel properties, net............................... $374,382
Total assets...................................................... $387,414
Borrowings against Line of Credit................................. $ 40,771
Minority interest(6).............................................. $ 61,329
Shareholders' equity.............................................. $285,314
</TABLE>
16
<PAGE>
COMBINED INITIAL HOTELS
SUMMARY COMBINED HISTORICAL FINANCIAL DATA(8)
(EXCLUDING MARRIOTT SEAVIEW RESORT AND LAGUARDIA AIRPORT MARRIOTT)
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- ---------------------
1994 1995 1996 1996 1997
-------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Room revenue............ $ 1,085 $ 10,396 $ 28,958 $ 20,641 $ 43,941
Food and beverage reve-
nue.................... 481 4,639 15,553 10,714 19,346
Telephone revenue....... 67 580 1,258 900 1,961
Other revenue........... 109 810 2,400 1,685 3,038
-------- -------- -------- --------- ----------
Total revenue......... $ 1,742 $ 16,425 $ 48,169 $ 33,940 $ 68,286
Operating expenses:
Departmental and operat-
ing expenses........... $ 1,417 $ 12,427 $ 32,769 $ 22,698 $ 44,808
Management fees......... 65 462 1,861 1,304 3,238
Property taxes.......... 37 404 1,826 1,249 2,231
Interest expense........ 176 1,580 4,701 3,148 7,161
Depreciation and amorti-
zation................. 133 1,518 5,026 3,505 6,819
Advisory fees........... 33 231 451 317 622
-------- -------- -------- --------- ----------
Total expenses........ $ 1,861 $ 16,622 $ 46,634 $ 32,221 $ 64,879
Net income (loss)......... $ (119) $ (197) $ 1,535 $ 1,719 $ 3,407
BALANCE SHEET DATA:
Investment in hotel prop-
erties, net.............. $ 14,083 $ 60,554 $133,105 $ 59,643 $ 172,356
Total assets.............. $ 16,705 $ 67,557 $147,311 $ 67,535 $ 196,210
Long-term debt............ $ 8,776 $ 42,736 $ 94,466 $ 42,347 $ 124,809
Partners' capital(9)...... $ 7,256 $ 20,774 $ 45,686 $ 20,665 $ 59,822
CASH FLOW DATA:
Net cash provided by (used
in) operating activi-
ties..................... $ (34) $ 1,731 $ 6,949 $ 4,216 $ 11,407
Net cash provided by (used
in) investment activi-
ties..................... $(15,571) $(48,957) $(77,634) $ (1,030) $ (47,775)
Net cash provided by (used
in) financing activi-
ties..................... $ 15,869 $ 48,038 $ 74,147 $ (3,115) $ (41,228)
OTHER DATA:
Available Room Nights..... 28,678 206,487 472,293 328,279 577,491
</TABLE>
- --------
(1) The pro forma information does not purport to represent what the Company's
or the Initial Hotels' financial position or results of operations would
actually have been if the consummation of the Formation Transactions had,
in fact, occurred on such dates, or to project the Company's or the Initial
Hotels' financial position or the results of operations at any future date
or for any future period.
(2) Represents lease payments from Lessees calculated on a pro forma basis by
applying the rent provisions of the Participating Leases to the pro forma
revenues of the Initial Hotels, as though the hotels were acquired January
1, 1996 and leased pursuant to the Participating Leases since that date.
The rent formula used in computing the pro forma Participating Lease
revenue includes an adjustment to reduce the threshold revenue amounts in
the Participating Lease formulas by 1.8% and 1.5% to reflect the change in
the Consumer Price Index as defined herein for the periods ending December
31, 1996 and September 30, 1997, respectively. See "The Initial Hotels--The
Participating Leases" for the Participating Lease formulas.
(3) Represents general and administrative expenses for professional fees,
trustees' and officers' insurance, trustee's fees and expenses, and other
expenses associated with operating as a public company.
17
<PAGE>
(4) Represents (i) interest expense at an assumed interest rate of 7.25% on
approximately $40.8 million of pro forma borrowings against the Line of
Credit in connection with the completion of the Formation Transactions,
and (ii) amortization of debt issuance costs associated with the Line of
Credit over the term of the facility.
(5) Represents advisory fees to be paid to the Advisor for management,
advisory and administrative services to be provided to the Company. The
Advisor will receive an annual base fee up to 5% of the Company's net
operating income, as defined, and an annual incentive fee based on growth
in Funds from Operations per share.
(6) Minority interest represents the interest in the Operating Partnership
that will not be owned by the Company and is calculated at approximately
17.7% of the pro forma net income of the Operating Partnership.
(7) Funds from operations ("Funds from Operations" or "FFO"), as defined by
the National Association of Real Estate Investment Trusts ("NAREIT"),
represents net income applicable to common shareholders (computed in
accordance with generally accepted accounting principles), excluding gains
(losses) from debt restructuring and sales of property (including
furniture and equipment), plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs), and
after adjustments for unconsolidated partnerships and joint ventures. The
Company considers Funds from Operations to be an appropriate measure of
the performance of an equity REIT. Funds from Operations does not
represent cash generated from operating activities in accordance with
generally accepted accounting principles, is not necessarily indicative of
cash flow available to fund cash needs and should not be considered as an
alternative to net income as an indication of performance or to cash flow
as a measure of liquidity. Although Funds from Operations has been
computed in accordance with the current NAREIT definition, Funds from
Operations as presented may not be comparable to other similarly titled
measures used by other REITs. Funds from Operations should not be
considered as an alternative for net income as a measure of profitability
nor is it comparable to cash flows provided by operating activities
determined in accordance with GAAP.
Funds from Operations does not reflect cash expenditures for capital
improvements or principal amortization of indebtedness on the Initial
Hotels.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
Pro forma net income......................... $11,687 $10,587
Pro forma depreciation, net of minority
interest.................................... 14,324 10,743
------- -------
Pro forma Funds from Operations.............. $26,011 $21,330
</TABLE>
(8) The Initial Hotels (excluding Marriott Seaview Resort and the LaGuardia
Airport Marriott, both of which were acquired after September 30, 1997)
were acquired at various times over the reporting period as follows:
<TABLE>
<CAPTION>
NUMBER OF
PERIOD: HOTELS OWNED
------- ------------
<S> <C>
Year ended 1994................................................. 2
Year ended 1995................................................. 4
Year ended 1996................................................. 6
Nine months ended September 30, 1997............................ 8
</TABLE>
18
<PAGE>
The following table sets forth certain summary unaudited pro forma
operating data as if the aforementioned hotel acquisitions had been
consummated as of the beginning of each respective period. These amounts do
not include Marriott Seaview Resort and the LaGuardia Airport Marriott,
neither of which were acquired by the Company prior to September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues................... $40,897 $79,461 $104,771 $ 77,602 $ 83,388
Total depreciation............... $ 4,590 $ 8,420 $ 10,359 $ 7,679 $ 7,942
Total interest................... $ 4,315 $ 9,087 $ 12,728 $ 9,463 $ 9,509
Total expenses................... $41,121 $77,995 $102,848 $ 74,173 $ 79,351
Net income (loss)................ $ (224) $ 1,466 $ 1,923 $ 3,429 $ 4,037
</TABLE>
(9) Partners' capital represents the interests of the Contributors and their
predecessors in the Initial Hotels.
19
<PAGE>
RISK FACTORS
In addition to the other information presented in this Prospectus,
prospective investors should carefully consider the following matters before
purchasing Common Shares in the Offering.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks
and uncertainties and that actual results may differ materially from those
included within the forward-looking statements as a result of various factors.
Factors that could cause or contribute to such differences include, but are
not limited to, those described below, under the headings "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"The Initial Hotels", "Business and Growth Strategies" and elsewhere in this
Prospectus.
DEPENDENCE ON LESSEES AND PAYMENTS UNDER THE PARTICIPATING LEASES. The
Company's ability to make distributions to its shareholders will depend solely
upon the ability of the Lessees to make rent payments under the Participating
Leases (which will be dependent primarily on the ability of the Lessees to
generate sufficient revenues from the Initial Hotels in excess of operating
expenses). Any failure or delay by the Lessees in making rent payments would
adversely affect the Company's ability to make anticipated distributions to
its shareholders. Such failure or delay by the Lessees may be caused by
reductions in revenue from the Initial Hotels or in the net operating income
of the Lessees or otherwise. In addition, all but two of the Lessees are newly
organized limited purpose entities and all of the Lessees have limited assets.
Although failure on the part of a Lessee to materially comply with the terms
of a Participating Lease (including failure to pay rent when due) would give
the Company the right to terminate such lease, repossess the applicable
property and enforce the payment obligations under the Participating Lease,
the Company would then be required to find another lessee to lease such
property. There can be no assurance that the Company would be able to enforce
the payment obligations of the defaulting Lessee, find another lessee or, if
another lessee were found, that the Company would be able to enter into a new
lease on favorable terms.
LACK OF CONTROL OVER OPERATIONS OF THE INITIAL HOTELS. The Company also will
be dependent on the ability of the Lessees and Operators to operate and manage
the Initial Hotels. To maintain its status as a REIT, the Company will not be
able to operate the Initial Hotels or any subsequently acquired hotels. As a
result, the Company will be unable to directly implement strategic business
decisions with respect to the operation and marketing of its hotels, such as
decisions with respect to the setting of room rates, repositioning of a hotel,
change of franchise and brand affiliation, food and beverage prices and
certain similar matters. Although the Company, through the Advisor, intends to
consult with the Lessees and Operators with respect to strategic business
plans (including capital improvements, hotel repositionings, expansions,
renovations and improvements to food and beverage facilities) affecting the
Initial Hotels, the Lessees and Operators will be under no obligation to
implement any of the Company's recommendations with respect to such matters.
No assurance can be given that the Lessees and Operators will operate the
Initial Hotels successfully or in a manner which will maximize the Company's
return on its investment in each Initial Hotel.
ESTIMATED CASH AVAILABLE FOR DISTRIBUTION MAY NOT BE SUFFICIENT TO MAKE
DISTRIBUTIONS AT EXPECTED LEVELS. The Company's estimated initial annual
distributions represent 97.2% of the Company's pro forma estimated Cash
Available for Distribution for the year ended December 31, 1996. Accordingly
the Company initially may be unable to pay its estimated initial annual
distribution of $1.22 per share to shareholders out of Cash Available for
Distribution as calculated under "Distribution Policy" below. Under such
circumstances, the Company could be required to fund distributions from
working capital, utilize borrowings under the Line of Credit, if available, to
provide funds for such distribution, or to reduce the amount of such
distribution. There can be no assurance that revenues generated by the
Company's hotels will not decline and that future Cash Available for
Distribution will be sufficient to make expected distributions to the
Company's shareholders. If
20
<PAGE>
expected distributions are not made, the market price of the Common Shares
likely would be adversely affected. In the event the Underwriters' over-
allotment is exercised, pending investment of the proceeds therefrom, the
Company's ability to pay such distribution out of Cash Available for
Distribution may be further adversely affected.
CONFLICTS; DEPENDENCE ON ADVISOR. The Company does not have any employees
and is dependent on the Advisor for all strategic business direction,
management and administrative services. In the event that the Advisor does not
perform its obligations under the Advisory Agreement or if the Advisory
Agreement were to be terminated, the Company would not have any employees to
provide such services and no assurance can be given that a satisfactory
replacement advisor could be engaged on acceptable terms; the failure to do so
could have a material adverse effect on the Company's financial condition or
results of operations.
LaSalle is a full service real estate firm that provides investment
management services, management services and corporate and financial services.
Although the Advisory Agreement will limit LaSalle's ability to engage in any
activities that would compete with the business of the Company, no assurance
can be given that LaSalle's activities will not be in competition with or
otherwise conflict with the business of the Company.
The interests of the Company and the Advisor potentially may conflict due to
the ongoing relationships between the two entities. Because the timing and
amount of incentive and other fees received by the Advisor may be affected by
various determinations, including the sale or disposition of properties, the
Advisor may have a conflict of interest with respect to such determinations.
In addition, LaSalle is a significant shareholder of the Company and could
influence decisions regarding the Advisory Agreement and fees relating to such
agreement. Although all agreements with the Advisor must be approved by a
majority of the Company's Independent Trustees, no assurance of arm's-length
negotiations can be given.
In addition, Stuart L. Scott and Jon E. Bortz serve as Trustees of the
Company and also serve as officers and directors of LaSalle and the Advisor
and Mr. Bortz and Michael Barnello (who is also an officer and director of the
Advisor) also serve as officers of the Company. Messrs. Scott, Bortz and
Barnello, as well as certain other officers and Trustees of the Company and
directors of the Advisor, also own shares (and/or options or other rights to
acquire shares) in LaSalle, either directly or indirectly. With respect to the
various contractual arrangements between the two entities, the potential
exists for disagreement as to the quality of services provided by the Advisor
and as to contractual compliance. In addition, certain situations could arise
where actions taken by the Advisor in its capacity as manager or adviser of
the Excluded Properties (as defined herein) in its conduct of other activities
permitted under the Advisory Agreement would not necessarily be in the best
interests of the Company. The failure of the Advisor or the Company, as the
case may be, to enforce the material terms of the Advisory Agreement could
result in a monetary loss to the Company, which loss could have a material
adverse effect on the Company's financial condition or results of operations.
The Company will have limited recourse for indemnification claims against
certain of the Contributors under the contribution agreements pursuant to
which the Company acquired the Initial Hotels; the Units received by LaSalle
as consideration for contributing its interests in the Initial Hotels will be
pledged for one year to secure indemnification obligations under these
contribution agreements. Also, certain holders of Units, consisting of the
Contributors who hold Units, may experience different and more adverse tax
consequences compared to those experienced by holders of Common Shares or
other holders of Units upon the sale of any of the Initial Hotels. Therefore,
such holders and the Company may have different objectives regarding the
appropriate pricing and timing of any sale of the Initial Hotels and regarding
the appropriate characteristics of additional hotels to be considered for
acquisition, and their status as holders of Units may influence the Company
not to sell particular properties even though such sales might otherwise be
financially advantageous to the Company and its shareholders.
BENEFITS TO RELATED PARTIES. The Advisor and the Contributors will receive
material benefits from the Formation Transactions, including, but not limited
to, (i) receipt by the Contributors of an aggregate of 4,285,810 Common Shares
and Units (valued at approximately $85.7 million, assuming the initial public
offering price of $20.00 per share), repayment of approximately $250.0 million
of indebtedness associated with the Contributors' interests in the Initial
Hotels, rights to purchase 843,111 Common Shares and approximately $50.4
million in
21
<PAGE>
cash in exchange for their interests in the Initial Hotels and in connection
with the Formation Transactions, (ii) the grant to the Advisor of options to
acquire 443,396 Common Shares, (iii) receipt by the Advisor of the right to
appoint two members of the initial Board of Trustees of the Company and by one
of the Contributors of the right to appoint one member of the initial Board of
Trustees of the Company and (iv) ownership by LaSalle of a 45.5% interest in
the Affiliated Lessee (as defined below).
LACK OF APPRAISALS FOR THE INITIAL HOTELS; NO ASSURANCE AS TO VALUE. In
establishing the purchase prices of the Initial Hotels, no independent
appraisals were obtained. In addition, there were no arm's length negotiations
with respect to the Company's acquisition of interests in the Initial Hotels
from the Contributors. Accordingly, there can be no assurance that the price
paid by the Company for the Initial Hotels, including interests acquired from
the Contributors, does not exceed the value of the hotels and other assets
acquired by the Company.
The valuation of the Company has been determined based upon a capitalization
of the Company's estimated Cash Available for Distribution (as described in
"Summary Financial Information") and the other factors discussed under
"Underwriting" rather than an asset-by-asset valuation based on historical
cost or current market value. This methodology has been used because the
Company's management believes it appropriate to value the Company as an
ongoing business rather than with the view to values that could be obtained
from a liquidation of the Company or of individual assets owned by the
Company.
HOTEL INDUSTRY RISKS
Operating Risks. The Initial Hotels will be subject to all operating risks
common to the hotel industry. These risks include, among other things, (i)
competition for guests from other hotels, some of which may have greater
marketing and financial resources than the Company, the Lessees and the
Operators; (ii) increases in operating costs due to inflation and other
factors, which increases may not have been offset in recent years, and may not
be offset in the future by increased room rates; (iii) dependence on business
and leisure travelers, which demand may fluctuate and be seasonal; (iv)
increases in energy costs, airline fares and other expenses related to travel,
which may deter travelling; and (v) adverse effects of general and local
economic conditions. These factors could adversely affect the ability of the
Lessees to generate revenues and to make rent payments and therefore the
Company's ability to make expected distributions to its shareholders.
Risks of Necessary Operating Costs and Capital Expenditures; Required Hotel
Renovations. Hotels require ongoing renovations and other capital
improvements, including periodic replacement or refurbishment of FF&E. Under
the terms of the Participating Leases, the Company is obligated to establish a
reserve to pay the cost of certain capital expenditures at the Initial Hotels
and to pay for periodic replacement or refurbishment of FF&E. The Company, in
consultation with the Lessees and the Operators, will control the use of funds
in this reserve. However, if capital expenditures exceed the Company's
expectations, there can be no assurance that sufficient sources of financing
will be available to fund such expenditures. The additional cost of such
expenditures could have an adverse effect on Cash Available for Distribution.
In addition, the Company may acquire hotels in the future that require
significant renovation. Renovation of hotels involves certain risks, including
the possibility of environmental problems, construction cost overruns and
delays, uncertainties as to market demand or deterioration in market demand
after commencement of renovation and the emergence of unanticipated
competition from other hotels.
Competition for Investment Opportunities. The Company may be competing for
investment opportunities with entities that have substantially greater
financial resources than the Company, including lodging companies and other
REITs. These entities generally may be able to accept more risk than the
Company can prudently manage, including risks with respect to the
creditworthiness of a hotel operator or the geographic proximity of its
investments. Competition generally may reduce the number of suitable
investment opportunities offered to the Company and increase the bargaining
power of property owners seeking to sell.
Seasonality of Hotel Industry. The hotel industry is seasonal in nature.
Generally, hotel revenue for business hotels is greater in the second and
third quarters of a calendar year, although this may not be true for
22
<PAGE>
hotels in major tourist destinations. Revenue for hotels in tourist areas
generally is substantially greater during the tourist season than during other
times of the year. Seasonal variations in revenue at the Initial Hotels may
cause quarterly fluctuations in the Company's lease revenue. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonality."
Franchise and Brand Licensing Agreements. Two of the Initial Hotels are
subject to franchise agreements and seven are subject to brand licensing
agreements. In addition, hotels in which the Company invests subsequently may
be operated pursuant to franchise and brand agreements. The continuation of
such franchise or brand agreements is subject to specified operating standards
and other terms and conditions. Licensors typically inspect licensed
properties periodically to confirm adherence to operating standards. Action or
inaction on the part of any of the Company, the Lessees or the Operators could
result in a breach of such standards or other terms and conditions of the
franchise or brand licenses and could result in the loss or cancellation of a
franchise or brand license. It is possible that a licensor could condition the
continuation of a franchise or brand license on the completion of capital
improvements which the Board of Trustees determines are too expensive or
otherwise unwarranted in light of general economic conditions or the operating
results or prospects of the affected hotel. In that event, the Board of
Trustees may elect to allow the franchise or brand license to lapse. In any
case, if a license is terminated, the Company and the Lessee may seek to
obtain a suitable replacement license or to operate the hotel independent of a
franchise or brand license. The loss of a franchise or brand license could
have a material adverse effect upon the operations or the underlying value of
the hotel covered by the license because of the loss of associated name
recognition, marketing support and centralized reservation systems provided by
the licensor, or due to any penalties payable upon early termination of a
license.
Limited Number of Properties. The Company initially will own interests in
only ten hotels. Significant adverse changes in the operations of any property
could have a material adverse effect on lease revenues and the Company's
ability to make expected distributions to its shareholders.
Investment in Single Industry. The Company's current strategy is to acquire
interests only in hotels. As a result, the Company will be subject to risks
inherent in investments in a single industry. The effects on Cash Available
for Distribution resulting from a downturn in the hotel industry may be more
pronounced than if the Company had investments in more than one industry.
LACK OF OPERATING HISTORY OR REVENUES. The Company, the Advisor and certain
of the Lessees have been recently organized and have no operating history.
There can be no assurance that the Company will be able to generate sufficient
Cash Available for Distribution to make anticipated distributions to
shareholders. The Company, the Advisor and the Lessees also will be subject to
the risks generally associated with the formation of any new business.
TAX RISKS
Failure to Qualify as a REIT. The Company intends to operate so as to
qualify as a REIT for federal income tax purposes commencing with its 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 long as it distributes at least 95% of its
REIT taxable income. Although the Company believes that it will be organized
and will operate in such a manner so as to qualify as a REIT, no assurance can
be given that the Company will be organized or will be able to operate in a
manner so as to qualify as a REIT or remain so qualified. Qualification as a
REIT involves the application of highly technical and complex Code provisions
for which there are only limited judicial or administrative interpretations.
The determination of various factual matters and circumstances not entirely
within the Company's control may affect its ability to qualify and to continue
to qualify as a REIT. The complexity of these provisions and of the applicable
income tax regulations that have been promulgated under the Code is greater in
the case of a REIT that holds its assets through a partnership, such as the
Company. Moreover, no assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not change
the tax laws with respect to qualification as a
23
<PAGE>
REIT or the federal income tax consequences of such qualification. The Company
will rely on the opinion of Brown & Wood llp, counsel to the Company, to the
effect that, based on various assumptions relating to the organization and
operation of the Company and representations made by the Company as to certain
factual matters, the Company's proposed method of operation will enable it to
meet the requirements for qualification and taxation as a REIT. Such legal
opinion will not be binding on the IRS. Moreover, Brown & Wood llp has
undertaken no obligation to update such opinion nor will Brown & Wood llp
monitor the Company's compliance with the Code's REIT provisions. See "Federal
Income Tax Consequences."
If the Company fails to qualify as a REIT in any taxable year, the Company
will not be allowed a deduction for distributions to its shareholders in
computing its taxable income and will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
the applicable corporate rate. In addition, unless it were entitled to relief
under certain statutory provisions, the Company would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This disqualification would reduce the funds of the
Company available for investment or distribution to shareholders because of
the additional tax liability of the Company for the year or years involved.
If the Company were to fail to qualify as a REIT, it no longer would be
subject to the distribution requirements of the Code and, to the extent that
distributions to shareholders would have been made in anticipation of the
Company's qualifying as a REIT, the Company might be required to borrow funds
or to liquidate certain of its assets to pay the applicable corporate income
tax. Although the Company currently intends to operate in a manner designed to
qualify as a REIT, it is possible that future economic, market, legal, tax or
other considerations may cause the Company's Board of Trustees to decide to
revoke the REIT election. See "Federal Income Tax Consequences."
Adverse Effects of REIT Minimum Distribution Requirements. In order to
qualify as a REIT, the Company generally will be required each year to
distribute to its shareholders at least 95% of its taxable income (excluding
net capital gain). In addition, the Company may be subject to income and
excise tax if the Company does not meet certain distribution requirements. See
"Federal Income Tax Consequences--Taxation of the Company--Annual Distribution
Requirements."
The Company intends to make distributions to its shareholders to comply with
the 95% distribution requirement and to avoid federal income tax and excise
tax. The Company's income will consist primarily of the Company's share of the
income of the Operating Partnership, and the Company's cash flow will consist
primarily of its share of distributions from the Operating Partnership.
Differences in timing between the receipt of income and the payment of
expenses in arriving at taxable income of the Company and the effect of
nondeductible capital expenditures, the creation of reserves or required debt
amortization payments could require the Company to borrow funds through the
Operating Partnership on a short term or long-term basis to meet the
distribution requirements that are necessary to continue to qualify as a REIT
and to avoid federal income and excise tax. The requirement to distribute a
substantial portion of the Company's net taxable income could cause the
Company to distribute amounts that otherwise would be spent on future
acquisitions, capital expenditures or repayment of debt, which could require
the Company to borrow funds or to sell assets to fund the cost of these items.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S DECLARATION OF TRUST AND BYLAWS
Certain provisions of Maryland law and of the Company's Declaration of Trust
and Bylaws may have the effect of discouraging a third party from making an
acquisition proposal for the Company and could delay, defer or prevent a
transaction or a change in control of the Company under circumstances that
could give the holders of Common Shares the opportunity to realize a premium
over the then prevailing market prices of the Common Shares. Such provisions
include the following:
Ownership Limitation. In order for the Company to maintain its qualification
as a REIT under the Code, not more than 50% in value of the outstanding shares
of the Company may be owned, directly or indirectly, by
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five or fewer individuals (as defined in the Code to include certain entities)
at any time during the last half of the Company's taxable year (other than the
first year for which the election to be treated as a REIT has been made).
Furthermore, if the holder of 10% or more of the shares or interests in assets
or net profits of any lessee were to own, actually or constructively, 10% or
more in value of the shares of the Company, the lessee could become a Related
Party Tenant (as defined in "Federal Income Tax Consequences--Requirements for
Qualification as a REIT--Income Tests") of the Company, which could result in
loss of REIT status for the Company. For the purpose of preserving the
Company's REIT qualification, among other reasons, the Company's Declaration
of Trust prohibits direct or indirect ownership (taking into account
applicable ownership provisions of the Code) of more than 9.8% of any class of
the Company's outstanding shares by any person (the "Ownership Limitation").
Generally, the shares owned by affiliated owners will be aggregated for
purposes of the Ownership Limitation. Although the Board of Trustees presently
has no intention of doing so, the Board of Trustees could waive these
restrictions if evidence satisfactory to the Board of Trustees and the
Company's tax counsel were presented that the changes in ownership would not
then or in the future jeopardize the Company's status as a REIT and the Board
of Trustees otherwise decided such action would be in the best interests of
the Company. Shares acquired or transferred in breach of the limitation will
be automatically transferred to a trust for the exclusive benefit of one or
more charitable organizations and the purchaser-transferee shall not be
entitled to vote or to participate in dividends or other distributions. In
addition, Common Shares acquired or transferred in breach of the limitation
may be purchased from such trust by the Company for the lesser of the price
paid and the average closing price for the ten trading days immediately
preceding redemption. A transfer of shares to a person who, as a result of the
transfer, violates the Ownership Limitation will be void.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company in which
holders of some, or a majority, of the 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 interests. See "Shares of
Beneficial Interest--Restrictions on Transfer" and "Federal Income Tax
Consequences--Requirements for Qualification as a REIT."
Staggered Board. The Board of Trustees will be divided into three classes of
trustees. The initial terms of the first, second and third classes will expire
in 1999, 2000 and 2001, respectively. Trustees of each class will be chosen
for three year terms upon the expiration of the current class terms, and,
beginning in 1999 and each year thereafter, one class of trustees will be
elected by the shareholders. A trustee may be removed, with or without cause,
by the affirmative vote of 75.0% of the votes entitled to be cast for the
election of trustees, which super-majority vote may have the effect of
delaying, deferring or preventing a change of control of the Company. The
staggered terms of trustees may reduce the possibility of a tender offer or an
attempt to change control of the Company even though a tender offer or change
in control might be in the best interests of the shareholders. See "Certain
Provisions of Maryland Law and of the Company's Declaration of Trust and
Bylaws--Number of Trustees; Classification of the Board of Trustees."
Preferred Shares. The Declaration of Trust authorizes the Board of Trustees
to issue up to 20 million preferred shares, $.01 par value per share (the
"Preferred Shares"), to reclassify unissued shares, and to establish the
preferences, conversion and other rights, voting powers, restrictions,
limitations and restrictions on ownership, limitations as to dividends or
other distributions, qualifications, and terms and conditions of redemption
for each such class or series of any Preferred Shares issued. No Preferred
Shares will be issued or outstanding as of the closing of the Offering.
Maryland Business Combination Law. Under the Maryland General Corporation
Law, as amended (the "MGCL"), certain "business combinations" (including
certain issuances of equity securities) between a Maryland REIT such as the
Company and any person who owns 10% or more of the voting power of the REIT's
shares (an "Interested Shareholder") or an affiliate thereof are prohibited
for five years after the most recent date on which the Interested Shareholder
became an Interested Shareholder. Thereafter, any such business combination
must be approved by two super-majority votes unless, among other conditions,
the REIT's common shareholders receive a minimum price (as defined in the
MGCL) for their shares and the consideration is received
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in cash or in the same form as previously paid by the Interested Shareholder
for its common shares. See "Certain Provisions of Maryland Law and of the
Company's Declaration of Trust and Bylaws--Business Combinations."
Maryland Control Share Acquisition Statute. In addition to certain
provisions of the Declaration of Trust, the Maryland control share acquisition
statutes may have the effect of discouraging a third party from making an
acquisition proposal for the Company. The MGCL provides that "control shares"
of a Maryland corporation acquired in a "control share acquisition" have no
voting rights except to the extent approved by a vote of two-thirds of the
votes eligible under the statute to be cast on the matter. "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 of all voting power. Control shares do not
include shares that 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.
If voting rights are not approved at a meeting of shareholders then, subject
to certain conditions and limitations, the issuer may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value. 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
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 Company's Bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any persons of shares of the
Company. There can be no assurance that such provision will not be amended or
eliminated at any point in the future. If the foregoing exemption in the
Company's Bylaws is rescinded, the control share acquisition statute could
have the effect of delaying, deferring, preventing or otherwise discouraging
offers to acquire the Company and of increasing the difficulty of consummating
any such offer.
Certain Provisions of the Partnership Agreement. The Partnership Agreement
provides that the Company may not generally engage in any merger,
consolidation or other combination with or into another person or sale of all
or substantially all of its assets, or any reclassification, or any
recapitalization or change of outstanding Common Shares (a "Business
Combination"), unless the holders of Units will receive, or have the
opportunity to receive, the same consideration per Unit as holders of Common
Shares receive per Common Share in the transaction; if holders of Units will
not be treated in such manner in connection with a proposed Business
Combination, the Company may not engage in such transaction unless Unitholders
holding more than 50% of the Units vote to approve the Business Combination.
In addition, as provided in the Partnership Agreement, the Company will not
consummate a Business Combination with respect to which the Company conducted
a vote of the shareholders unless the matter would have been approved had
holders of Units been able to vote together with the shareholders on the
transaction. The foregoing provisions of the Partnership Agreement would under
no circumstances enable or require the Company to engage in a Business
Combination which required the approval of the Company's shareholders if the
Company's shareholders did not in fact give the requisite approval. Rather, if
the Company's shareholders did approve a Business Combination, the Company
would not consummate the transaction unless (i) the Company as general partner
first conducts a vote of Unitholders (including the Company) on the matter,
(ii) the Company votes the Units held by it in the same proportion as the
shareholders of the Company voted on the matter at the shareholder vote and
(iii) the result of such vote of the Unitholders (including the proportionate
vote of the Company's Units) is that had such vote been a vote of
shareholders, the Business Combination would have been approved by the
shareholders. As a result of these provisions of the Partnership Agreement, a
third party may be inhibited from making an acquisition proposal that it would
otherwise make, or the Company, despite having the requisite authority under
its Declaration of Trust, may not be authorized to engage in a proposed
Business Combination.
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IMMEDIATE AND SUBSTANTIAL DILUTION. As set forth more fully under
"Dilution," the pro forma net tangible book value per Common Share of the
assets of the Company after the Offering will be substantially less than the
expected initial public offering price per Common Share in the Offering.
Accordingly, purchasers of the Common Shares offered hereby will experience
immediate and substantial dilution of $1.58 per share in the net tangible book
value of the Common Shares from the initial public offering price. See
"Dilution."
EFFECT ON THE PRICE OF COMMON SHARES OF SHARES ELIGIBLE FOR FUTURE
SALE. Following the Offering, the Company intends, subject to market
conditions, to increase its capital resources through additional offerings of
Common Shares. Such offerings may result in dilution of the equity of
shareholders of the Company or reduction of the market price of the Common
Shares, or both. The amount, timing or nature of future sales of Common Shares
will depend upon the general economic environment, market conditions and
numerous other factors, none of which can be predicted.
Upon the completion of the Offering, the Company will have outstanding
15,419,500 Common Shares (17,587,000 Common Shares if the Underwriters' over-
allotment option is exercised in full). In addition, 3,316,310 Common Shares
are reserved for issuance upon exchange of Units issued to the Contributors.
The Common Shares issued in the Offering will be freely tradable by persons
other than "affiliates" of the Company without restriction under the
Securities Act, subject to the limitations on ownership set forth in this
Prospectus.
Sales of a substantial number of Common Shares (including Common Shares
issued upon the exercise of options or share purchase rights or in redemption
of Units issued to the Contributors), or the perception that such sales could
occur, could adversely affect prevailing market prices of the Common Shares.
In connection with the Formation Transactions approximately 969,500 restricted
Common Shares and 3,316,310 Units will be issued in addition to the Common
Shares sold by the Company in the Offering. None of the Contributors may
exchange such Units for Common Shares for one year from the closing of the
Offering. See "Structure and Formation of the Company." The Company, its
officers and Trustees, the Advisor and the Contributors will not be permitted
to offer, sell, contract to sell or otherwise dispose of any Units or Common
Shares of the Company, or any securities convertible or exercisable or
exchangable for any Units or Common Shares of the Company for the applicable
holding period (other than pursuant to the Share Option Plan and the share
purchase rights granted to the Contributors), for a period of 180 days, in the
case of the Company, and one year, in the case of the Company's officers and
Trustees, the Advisor and the Contributors, from the closing of the Offering
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters. See "Shares Eligible for Future Sale." At the
conclusion of such period, the restricted Common Shares, any Common Shares
issued upon redemption of Units and the shares purchased in the Offering may
be sold in the public market pursuant to registration rights granted by the
Company or available exemptions from registration. In addition, 1,311,507
Common Shares will be reserved for issuance pursuant to the Company's share
purchase rights and the Share Option Plan and, when issued, these shares will
be available for sale in the public markets from time to time pursuant to
exemptions from registration requirements or upon registration. Certain of
such Common Shares are required to be registered under registration rights
agreements. No prediction can be made about the effect, if any, that future
sales of Common Shares will have on the market price of the Common Shares.
All Common Shares (including Common Shares that are issuable upon the
exchange of Units) and Units issued to the Contributors in connection with the
Formation Transactions will be deemed to be "restricted securities" within the
meaning of Rule 144 under the Securities Act and may not be transferred unless
such Common Shares are registered under the Securities Act or an exemption
from registration is available, including any exemption from registration
provided under Rule 144. In general, upon satisfaction of certain conditions,
Rule 144 permits the sale of certain amounts of restricted securities one year
following the date of acquisition of the restricted securities from the
Company and, after two years, permits unlimited sales by persons unaffiliated
with the Company.
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CONTINGENT LIABILITIES OF SELLING PARTNERSHIPS. Because the Company is
acquiring all the partnership interests in the entities that own certain of
the Initial Hotels, the Company may become liable for certain liabilities,
including contingent liabilities of such selling entities. There is,
therefore, a risk that unforeseen liabilities could exist for which the
Company could be liable and which could materially and adversely affect Cash
Available for Distribution.
NO PRIOR MARKET FOR COMMON SHARES. Prior to the Offering, there has been no
public market for the Common Shares. Application will be made to list the
Common Shares on the NYSE, subject to official notice of issuance. See
"Underwriting." The initial public offering price may not be indicative of the
market price for the Common Shares after the Offering, and there can be no
assurance that an active public market for the Common Shares will develop or
continue after the Offering. See "Underwriting" for a discussion of factors to
be considered in determining the initial public offering price. There also can
be no assurances that, upon listing, the Company will continue to meet the
criteria for continued listing of the Common Shares on the NYSE.
REAL ESTATE FINANCING RISK. The Company anticipates that it will finance its
acquisitions and development activities in part with the proceeds from the
Line of Credit, extensions of the Line of Credit and replacement credit
facilities. There can be no assurance that the Company will continue to be
able to obtain such financing or acceptable terms.
RISKS OF INVESTING IN REAL ESTATE
General Risks. The Company's purchase of the Initial Hotels is subject to
varying degrees of risk generally incident to the ownership of real property.
The value of the Initial Hotels, and therefore the Company's income and
ability to make distributions to its shareholders, is dependent upon the
ability of the Lessees and Operators to operate the properties in a manner
sufficient to maintain or increase revenues and to generate sufficient income
in excess of operating expenses to make rent payments under the Participating
Leases. Income from the Initial Hotels may be adversely affected by changes in
national economic conditions, changes in local market conditions due to
changes in general or local economic conditions and neighborhood
characteristics, competition from other hotel properties, changes in interest
rates and in the availability, cost and terms of mortgage funds, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements, particularly in older
structures, changes in real estate tax rates and other operating expenses,
changes in governmental rules and fiscal policies, civil unrest, acts of God,
including earthquakes and other natural disasters (which may result in
uninsured losses), acts of war, adverse changes in zoning laws, and other
factors which are beyond the control of the Company.
Illiquidity of Real Estate. Real estate investments are relatively illiquid.
The ability of the Company to vary its portfolio in response to changes in
economic and other conditions is limited. No assurances can be given that the
market value of any of the Initial Hotels will not decrease in the future.
Because management believes it is appropriate to value the Company as an
ongoing business rather than through liquidation values of the Company or the
Initial Hotels, the valuation of the Company has been determined based
primarily upon a capitalization of the estimated Cash Available for
Distribution and the other factors set forth in the section captioned
"Underwriting," rather than on a property by property basis considering
historical cost or current market value. There can be no assurance that the
Company will be able to dispose of an investment when it finds disposition
advantageous or necessary or that the sale price of any disposition will
recoup or exceed the amount of the Company's investment.
Uninsured and Underinsured Losses. Each Participating Lease specifies
comprehensive insurance to be maintained on each of the Initial Hotels,
including liability, fire and extended coverage. The Company believes such
specified coverage is of the type and amount customarily obtained for or by an
owner on real property assets. Leases for subsequently acquired hotels will
contain similar provisions. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes, hurricanes and
floods, that may be uninsurable or not economically insurable. The Company's
Board of Trustees and the Advisor will use their discretion in determining
amounts, coverage limits and deductibility provisions of insurance, with a
view to maintaining
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appropriate insurance coverage on the Company's interest in the hotel
properties at a reasonable cost and on suitable terms. This may result in
insurance coverage that, in the event of a substantial loss, would not be
sufficient to pay the full current market value or current replacement cost of
the Company's lost investment. Inflation, changes in building codes and
ordinances, environmental considerations, and other factors also might make it
unfeasible to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the
insurance proceeds received by the Company might not be adequate to restore
its economic position with respect to such property.
Environmental Matters. Under various United States Federal, state, and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such property.
Such laws often impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of contamination from hazardous or toxic substances, or
the failure to remediate such contaminated property properly, may adversely
affect the owner's ability to borrow using such real property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances also may be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is or ever was owned or operated by such person. Certain environmental laws
and common law principles could be used to impose liability for release of
asbestos-containing materials ("ACMs") into the air and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or businesses may be
operated, and these restrictions may require expenditures.
In connection with the acquisition of its interests in the Initial Hotels,
the Company or the Operating Partnership potentially may be liable for any
such costs. The cost of defending against claims of liability or remediating
the contaminated property could materially adversely affect the Cash Available
for Distribution to the Company's shareholders.
Phase I environmental assessments have been obtained on all of the Initial
Hotels from various qualified independent environmental engineers. The most
recent Phase I reports for the Initial Hotels were prepared in 1997, except
for two of the Initial Hotels for which the Phase I reports were prepared in
1996. The purpose of Phase I audits is to identify potential environmental
contamination for which the Initial Hotels may be responsible and the
potential for other environmental liabilities. The Phase I audit reports have
not revealed any environmental liability that the Company believes would have
a material adverse effect on the Company's business, assets, results of
operations or liquidity, nor is the Company aware of any such liability.
Nevertheless, it is possible that these reports do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware.
Fluctuations in Property Taxes. Each Initial Hotel is subject to real and
personal property taxes. The real and personal property taxes on the Initial
Hotels may increase or decrease as property tax rates change and as the
properties are reassessed by taxing authorities. If property taxes increase,
the Company's ability to make expected distributions to its shareholders could
be adversely affected.
Consents and Rights of First Refusal. Le Meridien New Orleans Hotel is
subject to a ground lease with a third party lessor. Any proposed sale of Le
Meridien New Orleans Hotel by the Operating Partnership or any proposed
assignment of the Operating Partnership's leasehold interest in the ground
lease will require the consent of the third party lessor. As a result, the
Company and the Operating Partnership may not be able to sell, assign,
transfer or convey the Operating Partnership's interest in Le Meridien New
Orleans without the consent of such third party lessor, even if such
transactions may be in the best interests of the shareholders of the Company.
Le Meridien Dallas Hotel is subject to a right of first refusal for the sale
of this Initial Hotel in favor of the owner of the balance of the condominium
units. In addition, the Company will be subject to certain rights of first
refusal with respect to the following Initial Hotels: Radisson Hotel South and
Plaza Tower, Marriott Seaview Resort and LaGuardia Airport Marriott. See "The
Initial Hotels--Operator Agreements." Future hotels acquired by the Company
may be subject to similar restrictions.
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Compliance with Americans with Disabilities Act. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all public accommodations are required
to meet certain federal requirements related to access and use by disabled
persons. A determination that the Company is not in compliance with the ADA
could result in imposition of fines or an award of damages to private
litigants. If the Company were required to make modifications to comply with
the ADA, the Company's ability to make expected distributions to its
shareholders could be adversely affected.
Acquisition and Development Risks. The Company intends to pursue
acquisitions of additional hotels and, under appropriate circumstances, may
pursue development opportunities. Acquisitions entail risks that investments
will fail to perform in accordance with expectations and that estimates of the
costs of acquisition and of renovation will prove inaccurate, as well as
general investment risks associated with any new real estate investment. New
project development is subject to numerous risks, including risks of
construction delays or cost overruns that may increase project costs, new
project commencement risks such as receipt of zoning, occupancy and other
required governmental approvals and permits and the incurrence of development
costs in connection with projects that are not pursued to completion. The fact
that the Company must in general, distribute 95% of its net taxable income in
order to maintain its qualification as a REIT may limit the Company's ability
to rely upon lease income from the Initial Hotels or subsequently acquired
hotels to finance acquisitions or new developments. As a result, if debt or
equity financing were not available on acceptable terms, further acquisitions
or development activities might be curtailed or Cash Available for
Distribution might be adversely affected.
RISKS OF LEVERAGE. Upon completion of the Offering and the Formation
Transactions, the debt to total market capitalization ratio of the Company
will be approximately 9.8% based upon the assumed initial public offering
price of $20.00 per share. The Company currently has a policy of incurring
debt only if upon such incurrence the Company's debt to total market
capitalization ratio would be 45% or less. However, the organizational
documents of the Company do not contain any limitation on the amount of
indebtedness the Company may incur. Accordingly, the Board of Trustees could
alter or eliminate this policy and would do so, for example, if it were
necessary in order for the Company to continue to qualify as a REIT. If this
policy were changed, the Company could become more highly leveraged, resulting
in an increase in debt service that could adversely affect the Company's Cash
Available for Distribution to shareholders and could increase the risk of
default on the Company's indebtedness. See "Policies with Respect to Certain
Activities--Financing Policies."
The Company has established its debt policy relative to the total market
capitalization of the Company rather than relative to the book value of its
assets. The Company has used total market capitalization because it believes
that the book value of its assets (which to a large extent is the depreciated
original cost of real property, the Company's primary tangible assets) does
not accurately reflect its ability to borrow and to meet debt service
requirements. The market capitalization of the Company, however, is more
variable than book value, and does not necessarily reflect the fair market
value of the underlying assets of the Company at all times. The Company also
will consider factors other than market capitalization in making decisions
regarding the incurrence of indebtedness, such as the purchase price of
properties to be acquired with debt financing, the estimated market value of
its properties upon refinancing and the ability of particular properties and
the Company as a whole to generate cash flow to cover expected debt service.
There can be no assurances that the Company will be able to meet its debt
service obligations and, to the extent that it cannot, the Company risks the
loss of some or all of its assets to foreclosure. Adverse economic conditions
could result in higher interest rates which could increase debt service
requirements on floating rate debt and could reduce the amounts available for
distribution to shareholders. The Company may obtain one or more forms of
interest rate protection (swap agreements, interest rate cap contracts, etc.)
to hedge against the possible adverse effects of interest rate fluctuations.
Adverse economic conditions could cause the terms on which borrowings become
available to be unfavorable. In such circumstances, if the Company is in need
of capital to repay indebtedness in accordance with its terms or otherwise, it
could be required to liquidate one or more investments in hotel properties at
times which may not permit realization of the maximum return on such
investments.
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ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATES ON PRICE OF COMMON
SHARES. One of the factors that may influence the price of the Common Shares
in public trading markets will be the annual yield from distributions by the
Company on the Common Shares as compared to yields on certain financial
instruments. Thus, an increase in market interest rates will result in higher
yields on certain financial instruments, which could adversely affect the
market price of the Common Shares.
RELIANCE ON BOARD OF TRUSTEES AND ABILITY OF BOARD TO CHANGE
POLICIES. Shareholders will have no right or power to take part in the
management of the Company except through the exercise of voting rights on
certain specified matters. The Board of Trustees will be responsible for
directing the management of the business and affairs of the Company. The major
policies of the Company, including its policies with respect to acquisitions,
financing, growth, operations, debt capitalization and distributions, will be
determined by its Board of Trustees. The Board of Trustees may amend or revise
these and other policies from time to time without a vote of the shareholders
of the Company. See "Policies and Objectives with Respect to Certain
Activities."
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THE COMPANY
The Company, which intends to operate as a REIT for federal income tax
purposes, has been formed to own hotel properties and to continue and expand
the hotel property investment activities of LaSalle on an exclusive basis. The
Company will be managed and advised by the Advisor, a wholly owned subsidiary
of LaSalle. Upon completion of the Offering and the Formation Transactions,
the Company will own, through the Operating Partnership, three convention, two
resort, and five business oriented full service hotels, located in ten
different markets in eight states containing an aggregate of 3,379 guest
rooms, and will seek to selectively acquire and develop additional hotel
properties, particularly upscale and luxury full service hotels located in
convention, resort and major urban business markets. Seven of the Initial
Hotels will be leased to independent lessees (affiliates of whom will also
operate those Initial Hotels) and three of the Initial Hotels will be leased
to an affiliated Lessee under Participating Leases which provide for the
payment of the greater of a base rent or participating rent and are designed
to allow the Company to achieve substantial participation in revenue growth at
the Initial Hotels. All ten of the Initial Hotels will be managed by
independent, unaffiliated Operators.
The Company believes that it can be distinguished from other real estate
companies and REITs that are focused on the ownership of hotel properties in
the following major respects:
. Reputation, Experience and Resources of LaSalle. LaSalle is an
institutionally respected full service real estate firm which has
extensive experience in the acquisition, investment management, finance,
development and disposition of hotel properties, including over $500
million of hotel acquisitions and investments since 1994 and over $500
million of new hotel development. Through the Advisor, LaSalle will
provide the Company with hotel investment advisory services on an
exclusive basis, including domestic and international acquisitions,
research, due diligence, investment management, accounting, finance,
risk management and human resources.
. Focus on Convention, Resort and Urban Business Hotels. Consistent with
the historical focus of the Advisor and with the Company's Initial
Hotels, the Company will be primarily focused on investments in hotels
located in convention, resort and major urban business markets, which
management believes will continue to benefit from the recovery in the
hotel sector. Within these markets, the Company will be primarily
focused on upscale and luxury full service hotels. The full service
sector convention, resort and urban business hotels, of these hotel
markets generally, and the upscale and luxury segments in particular,
have experienced the least amount of new supply and have the highest
barriers to entry as a result of high per property costs, high per room
development costs (relative to the price per room at which such hotels
can be purchased) and long lead times for new development.
. Multiple Independent, Unaffiliated Operators. The Company believes that
the exclusive use of independent, unaffiliated hotel operators
eliminates the potential for serious conflicts of interest which have
existed in other hotel REITs. Additionally, the use of multiple
operators provides diversification and creates a network of operators
that is expected to continue to generate acquisition opportunities for
the Company. The Company intends to continue to develop its
relationships with premier internationally recognized hotel operating
companies such as Marriott(R), Radisson(R) and Le Meridien(R) and other
nationally respected operating companies.
. Acquisition of Hotel Properties Subject to Long-Term Agreements. The
Company believes that many of its competitors for hotels are focused
primarily on properties that can be acquired free of long-term
management and/or franchise agreements. Unlike these competitors, the
Company intends to use a variety of unaffiliated operators, and as a
result will pursue acquisitions of hotel properties solely based on
their investment potential. The Company believes there will be less
competition for the acquisition of hotel properties subject to long-term
management and/or franchise agreements, enabling such properties to be
acquired at relatively attractive multiples of cash flow and discounts
to replacement cost. Generally, the Company will seek to have the
operators of these and its other hotels become lessees and invest in
Units of the Operating Partnership or in the Common Shares of the
Company. Four of the five Lessees/Operators of the Initial Hotels will
own an aggregate of 590,650 Common
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Shares and Units upon completion of the Offering. Where the Operator
declines to serve as the lessee for a hotel (as with three of the
Initial Hotels), the Company will lease the hotel to an affiliated
lessee on terms designed to maximize the Company's participation in the
revenue growth of the hotel in a manner consistent with the Company's
status as a REIT.
33
<PAGE>
BUSINESS AND GROWTH STRATEGIES
The Company's primary objectives are to maximize current returns to its
shareholders through increases in Cash Available for Distribution and to
increase long-term total returns to shareholders through appreciation in the
value of its Common Shares. To achieve these objectives, the Company will seek
to (i) invest in or acquire additional hotel properties on favorable terms and
(ii) enhance the return from, and the value of, the Initial Hotels and any
additional hotels. The Initial Hotels and any additional hotels will be
subject to Participating Leases which will allow the Company to participate in
increased revenues from the hotels pursuant to participating rent payments.
The Company will seek to achieve revenue growth principally through (i)
acquisitions of full service hotel properties located in convention, resort
and major urban business markets in the U.S. and abroad, especially upscale
and luxury full service hotels in such markets and where the Company, through
LaSalle's extensive research and local market experience, perceives strong
demand growth or significant barriers to entry, (ii) renovations and/or
expansions at certain of the Initial Hotels, and (iii) selective development
of hotel properties, particularly upscale and luxury full service properties
in high demand markets where development economics are favorable.
ACQUISITION STRATEGIES
The Company's hotel investment strategy has been developed with the benefit
of the proprietary research and experience of LaSalle's investment research
group. LaSalle's research group assists the Company in the formulation of its
investment and investment management strategies through the research and
analysis of four interrelated areas which are likely to affect the future
performance of hotel properties. These areas of research are:
.socioeconomic, business and technological trends;
.capital markets flows;
.regional economic trends; and
.property market fundamentals.
Utilizing this research, the Company has identified and targeted hotel
property investment strategies and specific markets for investment with a
focus on:
. Convention Markets and Convention Oriented Hotels. Convention markets
and convention oriented hotels have benefited from the growth in room
demand generated by the increases in the number of conventions and
convention attendees since 1991. From 1991 to 1995, the most recent
period for which information is available, the number of conventions
held increased by 6.9% and the number of convention attendees increased
by 51.2%, according to Meetings and Conventions Magazine. As a result of
this growth and to accommodate projected growth, the number and size of
convention facilities in the U.S. are projected to continue to increase.
Hotels in convention markets are direct beneficiaries of this growth.
. Resort Markets and Resort Hotels. Resorts have experienced increased
demand resulting from higher levels of discretionary spending devoted to
travel and leisure activities. The higher levels of leisure spending
have been fueled by the demographic shift in the U.S. population,
resulting in a growing number and percentage of individuals in the
higher leisure spending age groups as well as by the sustained economic
recovery in the U.S. The Company believes that the projected
demographics in the U.S. will continue to benefit resort markets. Many
resort markets also have significant barriers to entry, including
limited availability of land for hotel development and environmental
impact issues.
. Major Urban Business Markets. Major urban business markets are
continuously identified and ranked by LaSalle's research, based on
factors which are expected to favorably impact hotel room demand,
including projections of: growth in gross metropolitan product ("GMP")
and employment; the breadth
34
<PAGE>
and diversification of the components of the GMP; migration of
population and businesses in and out of the market area; local
infrastructure investment; and the frequency and capacity of the airline
service to each market. Initially, the Company's efforts will be
primarily focused on acquiring urban hotels located in its targeted
business markets.
. Upscale and Luxury Full Service Sectors. Convention, resort and urban
business hotels, the full service hotel sector generally, and the
upscale and luxury segments thereof in particular, have experienced the
least amount of new supply and have the highest barriers to entry as a
result of high per property costs, high per room development costs
(relative to the price per room at which such hotels can be purchased)
and long lead times for new development.
While no assurance can be given as to future results, based on the research
described above, the Company believes that upscale and luxury full service
hotels located in selected convention, resort and major urban business markets
will outperform all other sectors of the hotel industry over the next several
years. These sectors and markets are regularly analyzed to determine the
likelihood and amount of new hotel room supply. By comparing the room demand
and supply and balancing the risks of each market, the Company will target
markets where it will focus its acquisition efforts. The Company intends to
acquire additional hotel properties in its targeted markets consistent with the
investment fundamentals outlined above and which meet one or more of the
following criteria:
. hotels that benefit from unique competitive advantages in the form of
location, physical facilities or other attributes which cannot be easily
or affordably replicated;
. hotels available at significant discounts to replacement cost, including
when such discounts result from reduced competition for properties with
long-term management and/or franchise agreements;
. hotels that the Company believes possess sound operating fundamentals
but are underperforming and would benefit from brand or franchise
conversion, new management, renovation or redevelopment or other active
and aggressive asset management strategies;
. hotels that offer significant expansion opportunities on a basis that
the Company believes will provide an attractive return on its
investment;
. portfolios of hotels that exhibit some or all of the criteria discussed
above, where purchasing several hotels in one transaction would enable
the Company to obtain a favorable price or to purchase attractive hotels
that otherwise would not be available to the Company; and
. upscale and luxury full service hotel properties located outside of the
United States (initially Canada, Mexico, Europe and Central and South
America, in particular) that are available for purchase in a joint
venture or alliance with major independent or hotel brand operating
companies.
The Company intends to capitalize on LaSalle's significant industry and
national presence and relationships with numerous hotel operators and
franchisors, institutional investors and other hotel owners and brokers, in
order to access acquisition opportunities not readily available or widely
marketed. Since the beginning of 1994, the Advisor has completed 15 hotel
acquisitions or investments aggregating over $500 million, most of which were
negotiated transactions or were marketed on a limited basis. Many of these
opportunities resulted from management's relationships with different operators
who sought a relationship with LaSalle. The Company believes that having
multiple operators will facilitate the implementation of its growth strategy.
In addition to the five different Operators of the Initial Hotels, the Company
believes that there are a number of other capable operators who desire to have
a relationship with the Company and who could generate acquisition
opportunities for the Company. Also, the Company believes that certain
additional hotel brand owners who also operate their hotels are interested in
developing a relationship with the Company and may become additional lessees as
a means of expanding their brands.
INTERNAL GROWTH STRATEGIES
The Initial Hotels have demonstrated strong internal growth, resulting from
improved market conditions as well as from active asset management by LaSalle.
Management believes that, based on the favorable historical
35
<PAGE>
operating results of the Initial Hotels, the strength of LaSalle's and the
Lessee/Operators' existing management teams and the structure of the
Participating Leases, the Initial Hotels should provide the Company with the
opportunity for significant revenue growth. In addition, the Company believes
that the Initial Hotels will continue to benefit from favorable market
conditions, recent and planned capital improvements, repositionings and
expansions. The Company believes that it has structured and negotiated its
business relationships with the Lessees and the Operators, including the
investments by certain Lessees in the Company, as well as the Participating
Leases, to provide incentives to the Lessees/Operators to operate and maintain
the Initial Hotels in a manner that will maximize revenue growth and the
Company's Cash Available for Distribution. As a number of factors could affect
revenue growth at the Initial Hotels, however, no assurance can be given that
any such revenue growth will occur.
For the period January 1, 1995 through September 30, 1997, approximately
$26.0 million of capital improvements have been made at the Initial Hotels. In
addition, upon completion of the Offering the Company expects to have
approximately $10.5 million reserved to supplement annual capital reserves and
to fund planned renovations at certain of the Initial Hotels. In addition to
planned expansions, recent, ongoing and planned major improvements include:
. During the past four years, at the Holiday Inn Plaza Park substantial
upgrades were completed to its rooms, corridors and public areas in
excess of $2.0 million, and the Company plans to invest an additional
$586,000 in 1998 to complete the repositioning of the hotel;
. Over $1.7 million was expended at Le Montrose All Suite Hotel De Gran
Luxe during the past three years to reposition and upgrade the hotel,
and convert long-term tenant units to hotel use;
. Between 1995 and 1997, $4.3 million was expended at the LaGuardia
Airport Marriott to replace guest room soft goods, renovate bathrooms
and public spaces, and replace windows throughout the hotel;
. During the period 1996 through 1997, the Holiday Inn Beachside Resort
and Conference Center benefitted from the completion of a $1.2 million
refurbishment of the public space, guest rooms and exterior of the
buildings;
. Approximately $1.0 million was expended in 1997 and the first quarter of
1998 to reconcept and renovate the restaurant, and upgrade the
ballroom/meeting spaces and the lobby at the Omaha Marriott;
. During the period 1996 through 1997, $4.0 million was spent at the
Radisson Hotel South and Plaza Tower to renovate 166 guest rooms,
complete the conversion of over 11,000 square feet of retail space to
upscale meeting space, renovate one food and beverage outlets and to
enhance the main entrance;
. In 1997, an extensive three-year $6.4 million renovation at Le Meridien
New Orleans Hotel began, including significant technological
enhancements, a complete renovation of the guest rooms and suites and
upgrades to the public areas;
. During 1998, over $3.9 million is expected to be spent at Le Meridien
Dallas Hotel to complete the renovation of the guest rooms and upgrade
the physical plant;
. In 1998 and 1999, the Company plans to invest over $8.0 million to
upgrade the golf courses and renovate the interior spaces of the
Marriott Seaview Resort, including the guest rooms, ballroom and meeting
spaces, lobby and public areas; and
. The Company expects to make improvements to the Camberley Plaza Sabal
Park Hotel in conjunction with the anticipated change in the hotel's
chain affiliation, which is expected to occur in 1998;
Additionally, the Company is reviewing plans to expand certain of the
Initial Hotels. Management believes that such expansions generally represent
relatively lower risk, lower cost and higher yielding investment opportunities
than new development due to the Company's ability to leverage off existing
hotel infrastructure, established market presence and operational economies of
scale. Of the Initial Hotels, one has a major expansion opportunity consisting
of 100 rooms and 9,600 square feet of meeting space, and three have minor
expansion opportunities aggregating approximately 30 rooms and 10,000 square
feet of meeting space.
36
<PAGE>
More specifically, LaSalle has completed a feasibility analysis and initial
plans, and anticipates initiating or completing construction in 1998, of an
expansion to the Omaha Marriott, consisting of 100 rooms and approximately
9,600 square feet of meeting space. The expansion is currently projected to
cost approximately $15.0 million, including a remaining fee of $428,000 which
will be paid to LaSalle for its development services, pursuant to its contract
with the existing owners of the hotel, which contract will be assigned to the
Company. Management believes that the expansion will enhance the
competitiveness of the hotel in the market, increase revenues and provide an
attractive return on investment.
The minor expansion opportunities include up to 22 rooms in the Le Meridien
Dallas Hotel (11 of which will be completed in the first quarter of 1998);
10,000 square feet of meeting space at the Marriott Seaview Resort outside of
Atlantic City, New Jersey; four suites at Le Montrose All Suite Hotel in West
Hollywood, California (all of which are expected to be completed in 1998) and
four rooms at the Camberley Plaza Sabal Park Hotel.
The Company believes a regular program of capital improvements, including
replacement and refurbishment of FF&E at the Initial Hotels, as well as the
periodic renovation and redevelopment of certain of the Initial Hotels will
maintain the competitiveness of the Initial Hotels and maximize revenue
growth.
Each Participating Lease requires the Company to establish and fund monthly
reserves of between 4.0% and 5.5% of total revenues which, for the twelve
months ended September 30, 1997, aggregated approximately 7.5% of room revenue
or an average of approximately $2,233 per guest room for the Initial Hotels.
The reserves will be utilized by the Lessees in the replacement and
refurbishment of FF&E and other capital expenditures necessary to maintain the
competitive position of the Initial Hotels. The Company and the Lessees and
Operators will agree on the use of the funds in this reserve, and the Company
will have the right to approve the Lessees'/Operators' annual and long-term
capital expenditure budgets. While the Company expects its reserves to be
adequate to fund recurring capital needs, the Company may use Cash Available
for Distribution in excess of distributions paid (subject to Federal income
tax restrictions on the Company's ability to retain earnings) or funds drawn
under the Line of Credit to fund additional capital improvements, as
necessary, including major renovations or expansions at the Company's hotels.
DEVELOPMENT
While the Company does not currently anticipate undertaking a substantial
amount of new development, management has significant experience in the
development and renovation of hotels and other real estate properties,
gathered over the last 17 years. Jon E. Bortz, the Chief Executive Officer and
President of the Company and the Chairman and Chief Executive Officer of the
Advisor, has overseen over $1 billion of development and redevelopment
projects, including upscale and luxury full service hotel development or
renovation projects representing over $500 million of new investment dollars.
Mr. Bortz's hotel development experience includes the successful completion
and opening of the 367 room super-luxury Four Seasons New York Hotel in New
York City and the 258 room luxury full service Inn at Penn currently under
construction on the campus of the University of Pennsylvania in Philadelphia.
The Advisor believes its senior management is well qualified to identify and
underwrite new hotel development opportunities, but anticipates utilizing
outside development specialists, including LaSalle, to implement such
development activities, and paying fair market compensation for such services.
LaSalle has overseen and implemented over 80 million square feet of new
development or redevelopment projects in the last 30 years throughout the
United States.
Should the Company retain LaSalle to provide development services, the
terms, conditions and pricing of these services will be subject to approval by
a majority of the Independent Trustees of the Company.
37
<PAGE>
FINANCING STRATEGIES
Upon completion of the Offering, the Company will have a debt to total
market capitalization ratio of approximately 9.8% (based on the assumed
initial public offering price of $20.00 per share) and, accordingly, believes
it will have access to various types of financing, including debt and equity
securities offerings and secured and unsecured borrowings sufficient to enable
it to actively pursue growth opportunities. The Company anticipates obtaining
a commitment for a $200 million Line of Credit which is intended primarily to
fund future acquisitions, renovations and expansions of hotel properties and
for working capital requirements. The Company currently anticipates that the
Line of Credit will be secured by interests in some or all of the Initial
Hotels. The Company has no existing commitments for the Line of Credit and
there can be no assurance that such financing will be available on terms
satisfactory to the Company, if at all. While its organizational documents
contain no limitation on the amount of debt it may incur, the Company, subject
to the discretion of the Board of Trustees, currently has a policy of
incurring debt only if upon such incurrence the Company's debt to total market
capitalization ratio would be 45% or less.
38
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Shares in the
Offering, after the deduction of underwriting discounts, commissions, and
estimated Offering expenses are estimated to be approximately $265.8 million
(approximately $306.1 million if the Underwriters' over-allotment option is
exercised in full). In connection with the Formation Transactions, the Company
will contribute the net proceeds from the Offering to the Operating
Partnership and the Operating Partnership will borrow approximately $40.8
million under the Line of Credit. The Operating Partnership will use the
estimated net proceeds of the Offering, the initial borrowings under the Line
of Credit and the other funds identified below as follows:
. Approximately $250.0 million (including repayment fees aggregating
approximately $3.4 million) will be used to repay certain mortgage and
other indebtedness related to the Initial Hotels and held by third-party
lenders ($40.8 million of which will be funded from borrowings under the
Line of Credit);
. Approximately $50.4 million to acquire the ownership interests in the
Initial Hotels from third parties;
. Approximately $10.5 million for deposit into capital expenditure reserve
accounts to fund property renovations (approximately $8.9 million of
which will be supplied by reserve accounts of the Initial Hotels
acquired in the Formation Transactions); and
. Approximately $4.5 million will be used to pay expenses in connection
with the Offering and the Formation Transactions including commitment
fees relating to the Line of Credit, to pay certain other expenses and
for working capital purposes.
If the Underwriters' over-allotment option is exercised in full, the Company
will use the net proceeds to acquire additional Units, and the Operating
Partnership will use the funds it receives from the Company for working
capital and general corporate purposes, including future acquisitions and
renovations and expansions of certain Initial Hotels, or to repay indebtedness
under the Line of Credit. See the Pro Forma Consolidated Balance Sheet and the
Pro Forma Consolidated Statements of Operations included elsewhere in this
Prospectus for the pro forma effects of the foregoing transactions and debt
reduction under certain assumptions described therein.
The following table sets forth certain information concerning the
indebtedness expected to be outstanding and repaid with the net proceeds of
the Offering:
<TABLE>
<CAPTION>
EXPECTED BALANCE TO BE
REPAID WITH THE ESTIMATED NET
PROCEEDS OF THE OFFERING
INITIAL HOTEL INTEREST RATE(1) MATURITY DATE (DOLLARS IN MILLIONS)(2)
- ------------- ---------------- ------------- -----------------------------
<S> <C> <C> <C>
Radisson Hotel South and
Plaza Tower............ LIBOR + 4.25% December 2000 $ 24.3
Le Meridien New Or-
leans.................. LIBOR + 3.50% June 2000 38.3
Le Meridien Dallas...... LIBOR + 3.25% October 2000 12.2
Marriott Seaview Re-
sort................... LIBOR + 3.00% December 2000 42.5
Holiday Inn Beachside
Resort................. LIBOR + 3.25% August 2000 18.3
LaGuardia Airport
Marriott(3)............ LIBOR + 2.00% December 1998 46.9
Omaha Marriott.......... LIBOR + 2.50% December 2001 16.1
Camberley Plaza Sabal
Park Hotel............. LIBOR + 2.00% February 1999 19.5(4)
Holiday Inn Plaza Park.. LIBOR + 2.00% February 1999 5.5(4)
Le Montrose All Suite De
Gran Luxe.............. LIBOR + 2.00% February 1999 23.0(4)
------
Total............... $246.6
======
</TABLE>
- --------
(1) London Interbank Offered Rates ("LIBOR"), refers to one-month LIBOR except
for Radisson Hotel South and Plaza Tower, which is based on three-month
LIBOR.
(2) Amounts may change due to amortization.
(3) LaGuardia Airport Marriott loan terms are to be determined.
(4) To be repaid to an affiliate of Prudential Securities Incorporated
pursuant to the Bridge Loan.
Pending application of the net proceeds of the Offering, the Operating
Partnership will invest such proceeds in short-term interest-bearing
investment grade securities which will be selected to permit the Company to
qualify as a REIT for federal income tax purposes.
39
<PAGE>
DISTRIBUTION POLICY
The Company presently intends to make regular quarterly distributions to its
shareholders. The Company intends to declare and pay a pro rata distribution
with respect to the period commencing on the completion of the Offering and
ending on June 30, 1998, based upon $0.305 per share for a full quarter. On an
annualized basis, this would equal $1.22 per share, or an annual distribution
rate of approximately 6.1% based on the assumed initial public offering price
per share of $20.00. This estimated initial distribution represents 97.2% of
pro forma estimated Cash Available for Distribution for the 12 months ended
December 31, 1996. The holders of Units will be entitled to distributions per
Unit which are equal to the distributions payable on a per share basis with
respect to the Common Shares. The Company does not intend to reduce the
expected distribution per share if the Underwriters' over-allotment option is
exercised in whole or in part resulting in an increase in the number of Common
Shares outstanding on account of such exercise. See "Partnership Agreement."
The following table sets forth certain pro forma financial information for
the Company for the twelve months ended December 31, 1996:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31, 1996
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Pro forma income..................................... $11,687
Depreciation, net of minority interest............... 14,324
-------
Pro forma Funds from Operations...................... $26,011
Less: Additions to capital expenditure reserves(1)... $ 7,153
Amortization of debt issuance costs included in in-
terest expense...................................... 500
-------
Estimated Cash Available for Distribution(2)......... $19,358
-------
Estimated initial annual distribution(3)............. $18,812
Estimated initial annual distribution per share...... $ 1.22
Estimated payout ratio of Cash Available for Distri-
bution(4)........................................... 97.2%
</TABLE>
- --------
(1) Represents the Company's obligation under the Participating Leases
(adjusted to reflect the Company's ownership percentage in the Operating
Partnership of 82.3%) to reserve and pay for capital improvements
(including the replacement or refurbishment of FF&E) on a pro forma basis
for the 12 months ended December 31, 1996.
(2) The amount of Cash Available for Distribution if the Operating Partnership
received only the Base Rent paid under the Participating Leases is
estimated to equal $10.8 million.
(3) Based on 15,419,500 Common Shares and Units outstanding upon completion of
the Formation Transactions. Represents approximately 72.3% of FFO. FFO, as
defined by NAREIT, represents net income applicable to common shareholders
(computed in accordance with generally accepted accounting principles),
excluding gains (losses) from debt restructuring and sales of property
(including furniture and equipment), plus real estate related depreciation
and amortization (excluding amortization of deferred financing costs), and
after adjustments for unconsolidated partnerships and joint ventures. The
Company considers Funds from Operations to be an appropriate measure of
the performance of an equity REIT. Funds from Operations does not
represent cash generated from operating activities in accordance with
generally accepted accounting principles, is not necessarily indicative of
cash flow available to fund cash needs and should not be considered as an
alternative to net income as an indication of performance or to cash flow
as a measure of liquidity. Although Funds from Operations has been
computed in accordance with the current NAREIT definition, Funds from
Operations as presented may not be comparable to other similarly titled
measures used by other REITs. Funds from Operations should not be
considered as an alternative for net income as a measure of profitability
nor is it comparable to cash flows provided by operating activities
determined in accordance with GAAP.
(4) Represents the anticipated initial aggregate annual distribution divided
by estimated Cash Available for Distribution.
The primary source of proceeds to be used for distributions to shareholders
is the Company's share of the rents due the Operating Partnership pursuant to
the Participating Leases. The anticipated revenue may or may not be realized
or collected. Accordingly, the statements set forth above with regard to
distributions are forward-
40
<PAGE>
looking statements involving certain risks and uncertainties that could cause
actual results to differ materially from those expressed in such statements.
Important factors that could cause such different results include, but are not
limited to, competition from other hotels, increases in operating costs,
seasonality effects in hotel occupancy and revenues, and the potential loss of
a franchise or brand license in respect of any Initial Hotel or acquired
hotel. See "Risk Factors."
The Company anticipates maintaining its expected initial annual distribution
rate unless actual results of operations, economic conditions or other factors
differ from the estimated Cash Available for Distribution for the 12 months
ended December 31, 1996. The Company's actual Cash Available for Distribution
will be affected by a number of factors, including changes in occupancy, ADR
or other revenues at the Initial Hotels.
The Company anticipates that Cash Available for Distribution will exceed
earnings and profits due to non-cash expenses, primarily depreciation and
amortization, to be incurred by the Company. Distributions by the Company to
the extent of its current or accumulated earnings and profits for federal
income tax purposes, other than capital gain distributions, will be taxable to
shareholders as ordinary dividend income. Any distributions designated by the
Company as capital gain dividends generally will give rise to capital gain tax
treatment for shareholders. Distributions in excess of the Company's current
or accumulated earnings and profits generally will be treated as a non-taxable
reduction of a shareholder's basis in the Common Shares to the extent thereof,
and thereafter as capital gain. Distributions treated as a non-taxable
reduction in basis will have the effect of deferring taxation until the sale
of a shareholder's Common Shares or future distributions in excess of the
shareholder's basis in the Common Shares. Based upon the total estimated Cash
Available for Distribution set forth in the table above, the Company believes
that approximately % of the Company's expected initial annual distribution
would represent a return of capital for federal income tax purposes. If actual
Cash Available for Distribution or taxable income varies from these amounts,
the percentage of distributions that represents a return of capital may be
materially different.
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its shareholders of at least 95% of its net taxable
income (excluding net capital gains). Under certain circumstances, the Company
may be required to make distributions in excess of Cash Available for
Distribution in order to meet such distribution requirements. In such event,
the Company would seek to borrow the amount of the deficiency or sell assets
to obtain the cash necessary to make distributions to retain its qualification
as a REIT for federal income tax purposes.
The Board of Trustees, in its sole discretion, will determine the actual
distribution rate based on a number of factors, including the amount of Cash
Available for Distribution, the Company's financial condition, capital
expenditure requirements for the Company's hotels, the annual distribution
requirements under the REIT provisions of the Code and such other factors as
the Board of Trustees deems relevant. For a discussion of the tax treatment of
distributions to holders of Common Shares, see "Federal Income Tax
Considerations."
41
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (based on
the historical combined financial statements of the Initial Hotels, which
exclude Marriott Seaview Resort and LaGuardia Airport Marriott) as of
September 30, 1997 and pro forma as adjusted to reflect the Formation
Transactions, the Offering and the use of the estimated net proceeds therefrom
and the initial borrowings under the Line of Credit, as described under "Use
of Proceeds."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
--------------------------
HISTORICAL PRO FORMA
------------ ------------
(UNAUDITED, DOLLARS IN
THOUSANDS)
<S> <C> <C>
Debt:
Short-term debt.................................. $ 1,596 --
Line of Credit(1)................................ -- $ 40,771
Mortgage notes payable........................... $ 124,809 --
Minority interest.................................. -- $ 61,329
Shareholders' equity:
Preferred Shares, 20.0 million shares authorized,
no shares issued and outstanding................ -- --
Common Shares, 100.0 million shares authorized,
15,419,500 shares issued and outstanding, as
adjusted(2)..................................... -- 154
Additional paid-in capital....................... -- 290,003
Retained earnings................................ -- (4,843)
------------ ------------
Total partners' capital/shareholders' equity(3).. 59,822 285,314
------------ ------------
Total capitalization............................. $ 186,227 $ 387,414
============ ============
</TABLE>
- --------
(1) The Company anticipates obtaining a $200 million revolving Line of Credit
in connection with the consummation of the Offering.
(2) Does not include Common Shares reserved for issuance upon possible
redemption of 3,316,310 Units issued and outstanding after the Offering
and 2,167,500 Common Shares issuable upon exercise of the Underwriters'
over-allotment option. A total of 1,311,507 Common Shares also will be
reserved for issuance pursuant to the Company's purchase rights and the
Share Option Plan. See "REIT Management." If all such shares are included,
the total number of Common Shares outstanding would be 22,214,817.
(3) Partners' capital represents the interests of the Contributors and their
predecessors in the Initial Hotels.
42
<PAGE>
DILUTION
Purchasers of the Common Shares offered hereby will experience an immediate
and substantial dilution in the pro forma net tangible book value of the
Common Shares from the initial public offering price. Net tangible book value
per share represents the Company's total tangible assets less total
liabilities divided by the total number of Common Shares outstanding. After
further giving effect to the sale by the Company of the 14,450,000 Common
Shares to be sold by the Company in the Offering (after deducting underwriting
discounts and commissions and estimated expenses of the Offering to be paid by
the Company), the application of the estimated net proceeds therefrom as set
forth under "Use of Proceeds", the Formation Transactions and the initial
borrowings under the Line of Credit, the Company's adjusted pro forma net
tangible book value per Common Share as of September 30, 1997 would have been
$11.07, representing an immediate increase of $7.35 in pro forma net tangible
book value per share to existing shareholders and an immediate and substantial
dilution of $1.58 per share to persons purchasing shares in the Offering. The
following table illustrates this dilution per Common Share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price(1)...................... $20.00
Pro forma net tangible book value as of September 30, 1997.. $11.07
Increase in pro forma net tangible book value attributable
to the Offering............................................ 7.35
------
Pro forma net tangible book value after the Offering(2)....... 18.42
------
Dilution to new investors(3).................................. $ 1.58
======
</TABLE>
- --------
(1) Before deducting the underwriting discounts and commissions and estimated
expenses of the Offering.
(2) Pro forma net tangible book value after the Offering, the Formation
Transactions and the initial borrowings under the Line of Credit, are
determined by dividing the Company's consolidated net tangible book value
of approximately $345.1 million at September 30, 1997 by 18,735,810 Common
Shares and Units outstanding. There is no impact on dilution attributable
to the exchange of Common Shares outstanding.
(3) Dilution is determined by subtracting pro forma net tangible book value
after giving effect to the Offering, the Formation Transactions and the
initial borrowings under the Line of Credit, from the assumed initial
public offering price paid by a new investor for a Common Share.
The following table sets forth the number of Common Shares offered hereby,
the total price to be paid for the Common Shares hereby (assuming the initial
public offering price of $20.00 per share), the number of Common Shares and
Units to be issued to the Contributors in connection with the Formation
Transactions, the pro forma net book value as of September 30, 1997
attributable to the restricted Common Shares and Units issued to the
Contributors, the book value as of September 30, 1997 of the assets
contributed to the Operating Partnership and the purchase price per share in
the Offering and book value of the contributions per restricted Common Share
or Unit.
<TABLE>
<CAPTION>
COMMON SHARES/
UNITS ISSUED PURCHASE PRICE/
BY THE COMPANY BOOK VALUE OF
-------------------- CASH/BOOK VALUE OF CONTRIBUTIONS
COMMON TOTAL CONTRIBUTIONS PER COMMON
SHARES/UNITS PERCENT TO THE COMPANY SHARE/UNIT
------------ ------- ---------------------- ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Common Shares sold by
the Company in the
Offering............... 14,450,000 77.1% $289,000 $20.00
Restricted Common
Shares................. 969,500 5.2% 19,390 20.00
Units to be issued to
the Contributors....... 3,316,310 17.7% 36,721(1) 11.07
---------- ------ --------
18,735,810 100.00% $345,111 $18.42
========== ====== ========
</TABLE>
- --------
(1) Based upon the September 30, 1997 book value of the assets contributed to
the Company as adjusted by the Formation Transactions.
43
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth unaudited selected pro forma consolidated
financial data for the Company and selected combined historical financial data
for the Initial Hotels (excluding Marriott Seaview Resort and LaGuardia
Airport Marriott). This information should be read in conjunction with the
financial statements and the notes thereto contained elsewhere in this
Prospectus. The pro forma operating data is presented as if the consummation
of the Offering and the related Formation Transactions, the acquisition of the
Initial Hotels, and the application of the estimated net proceeds of the
Offering and the initial borrowings under the Line of Credit (as defined under
"Use of Proceeds") had occurred on January 1, 1996 and all the Initial Hotels
had been leased pursuant to the Participating Leases as of that date and
carried forward through each period presented. The pro forma balance sheet
data is presented as if the aforementioned transactions had occurred on
September 30, 1997.
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA(1)
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
OPERATING DATA:
Participating Lease revenue(2)...................... $44,118 $35,253
Depreciation........................................ 17,405 13,054
Real estate and personal property taxes, property
and casualty insurance............................. 6,250 4,520
General and administrative(3)....................... 730 548
Interest(4)......................................... 3,456 2,592
Advisory fees(5).................................... 1,663 1,364
Other............................................... 414 311
Minority interest(6)................................ 2,513 2,277
------- -------
Total expenses and minority interest.............. $32,431 $24,666
Net income applicable to common shareholders........ $11,687 $10,587
Net income per share................................ $ 0.76 $ 0.69
Weighted average number of Common Shares
outstanding........................................ 15,420 15,420
OTHER DATA:
Funds from Operations(7)............................ $26,011 $21,330
Additions to capital expenditure reserves........... (7,153) (5,628)
Amortization of debt issuance costs................. 500 375
Cash Available for Distribution..................... $19,358 $16,077
Distributions....................................... $18,812 $14,109
Number of Common Shares outstanding................. 15,420 15,420
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1997
-------------
<S> <C>
BALANCE SHEET DATA:
Investment in hotel properties, net............................... $374,382
Total assets...................................................... $387,414
Borrowings against Line of Credit................................. $ 40,771
Minority interest(6).............................................. $ 61,329
Shareholders' equity.............................................. $285,314
</TABLE>
44
<PAGE>
COMBINED INITIAL HOTELS
SELECTED COMBINED HISTORICAL FINANCIAL DATA(8)
(EXCLUDING MARRIOTT SEAVIEW RESORT AND LAGUARDIA AIRPORT MARRIOTT)
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Room revenue.............. $ 1,085 $ 10,396 $ 28,958 $ 20,641 $ 43,941
Food and beverage
revenue.................. 481 4,639 15,553 10,714 19,346
Telephone revenue......... 67 580 1,258 900 1,961
Other revenue............. 109 810 2,400 1,685 3,038
-------- -------- -------- -------- ---------
Total revenue........... $ 1,742 $ 16,425 $ 48,169 $ 33,940 $ 68,286
Operating expenses:
Departmental and operating
expenses................. $ 1,417 $ 12,427 $ 32,769 $ 22,698 $ 44,808
Management fees........... 65 462 1,861 1,304 3,238
Property taxes............ 37 404 1,826 1,249 2,231
Interest expense.......... 176 1,580 4,701 3,148 7,161
Depreciation and
amortization............. 133 1,518 5,026 3,505 6,819
Advisory fees............. 33 231 451 317 622
-------- -------- -------- -------- ---------
Total expenses.......... $ 1,861 $ 16,622 $ 46,634 $ 32,221 $ 64,879
Net income (loss)........... $ (119) $ (197) $ 1,535 $ 1,719 $ 3,407
BALANCE SHEET DATA:
Investment in hotel
properties, net............ $ 14,083 $ 60,554 $133,105 $ 59,643 $ 172,356
Total assets................ $ 16,705 $ 67,557 $147,311 $ 67,535 $ 196,210
Long-term debt.............. $ 8,776 $ 42,736 $ 94,466 $ 42,347 $ 124,809
Partners' capital(9)........ $ 7,256 $ 20,774 $ 45,686 $ 20,665 $ 59,822
CASH FLOW DATA:
Net cash provided by (used
in) operating activities... $ (34) $ 1,731 $ 6,949 $ 4,216 $ 11,407
Net cash provided by (used
in) investment activities.. $(15,571) $(48,957) $(77,634) $ (1,030) $ (47,775)
Net cash provided by (used
in) financing activities... $ 15,869 $ 48,038 $ 74,147 $ (3,115) $ (41,228)
OTHER DATA:
Available Room Nights....... 28,678 206,487 472,293 328,279 577,491
</TABLE>
- --------
(1) The pro forma information does not purport to represent what the Company's
or the Initial Hotels' financial position or results of operations would
actually have been if the consummation of the Formation Transactions had,
in fact, occurred on such dates, or to project the Company's or the
Initial Hotels' financial position or the results of operations at any
future date or for any future period.
(2) Represents lease payments from Lessees calculated on a pro forma basis by
applying the rent provisions of the Participating Leases to the pro forma
revenues of the Initial Hotels, as though the hotels were acquired January
1, 1996 and leased pursuant to the Participating Leases since that date.
The rent formula used in computing the pro forma Participating Lease
revenue includes an adjustment to reduce the threshold revenue amounts in
the Participating Lease formulas by 1.8% and 1.5% to reflect the change in
the Consumer Price Index as defined herein for the periods ending December
31, 1996 and September 30, 1997, respectively. See "The Initial Hotels--
The Participating Leases" for the Participating Lease formulas.
(3) Represents general and administrative expenses for professional fees,
trustees' and officers' insurance, trustee's fees and expenses, and other
expenses associated with operating as a public company.
(4) Represents (i) interest expense at an assumed interest rate of 7.25% on
approximately $40.8 million of pro forma borrowings against the Line of
Credit in connection with the completion of the Formation Transactions,
and (ii) amortization of debt issuance costs associated with the Line of
Credit over the term of the facility.
45
<PAGE>
(5) Represents advisory fees to be paid to the Advisor for management,
advisory and administrative services to be provided to the Company. The
Advisor will receive an annual base fee up to 5% of the Company's net
operating income, as defined, and an annual incentive fee based on growth
in Funds from Operations per share.
(6) Minority interest represents the interest in the Operating Partnership
that will not be owned by the Company and is calculated at approximately
17.7% of the pro forma net income of the Operating Partnership.
(7) Funds from Operations ("Funds from Operations" or "FFO"), as defined by
the National Association of Real Estate Investment Trusts ("NAREIT"),
represents net income applicable to common shareholders (computed in
accordance with generally accepted accounting principles), excluding gains
(losses) from debt restructuring and sales of property (including
furniture and equipment), plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs), and
after adjustments for unconsolidated partnerships and joint ventures. The
Company considers Funds from Operations to be an appropriate measure of
the performance of an equity REIT. Funds from Operations does not
represent cash generated from operating activities in accordance with
generally accepted accounting principles, is not necessarily indicative of
cash flow available to fund cash needs and should not be considered as an
alternative to net income as an indication of performance or to cash flow
as a measure of liquidity. Although Funds from Operations has been
computed in accordance with the current NAREIT definition, Funds from
Operations as presented may not be comparable to other similarly titled
measures used by other REITs. Funds from Operations should not be
considered as an alternative for net income as a measure of profitability
nor is it comparable to cash flows provided by operating activities
determined in accordance with GAAP.
Funds from Operations does not reflect cash expenditures for capital
improvements or principal amortization of indebtedness on the Initial
Hotels.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
Pro forma net income......................... $11,687 $10,587
Pro forma depreciation, net of minority
interest.................................... 14,324 10,743
------- -------
Pro forma Funds from Operations.............. $26,011 $21,330
======= =======
</TABLE>
(8) The Initial Hotels (excluding Marriott Seaview Resort and the LaGuardia
Airport Marriott, both of which were acquired after September 30, 1997)
were acquired at various times over the reporting period as follows:
<TABLE>
<CAPTION>
NUMBER OF
PERIOD: HOTELS OWNED
------- ------------
<S> <C>
Year ended 1994................................................. 2
Year ended 1995................................................. 4
Year ended 1996................................................. 6
Nine months ended September 30, 1997............................ 8
</TABLE>
The following table sets forth certain selected unaudited pro forma
operating data as if the aforementioned hotel acquisitions had been
consummated as of the beginning of each respective period. These amounts do
not include Marriott Seaview Resort and the LaGuardia Airport Marriott,
neither of which were acquired by the Company prior to September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues................... $40,897 $79,461 $104,771 $ 77,602 $ 83,388
Total depreciation............... $ 4,590 $ 8,420 $ 10,359 $ 7,679 $ 7,942
Total interest................... $ 4,315 $ 9,087 $ 12,728 $ 9,463 $ 9,509
Total expenses................... $41,121 $77,995 $102,848 $ 74,173 $ 79,351
Net income (loss)................ ($224) $ 1,466 $ 1,923 $ 3,429 $ 4,037
</TABLE>
(9) Partners' capital represents the interests of the Contributors and their
predecessors in the Initial Hotels.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Upon completion of the Offering and the Formation Transactions, the Company
will own an 82.3% interest in the Initial Hotels through its interest in the
Operating Partnership. The Operating Partnership must lease the Initial Hotels
to the Lessees in order to qualify as a REIT, as neither the Company nor the
Operating Partnership can operate hotels under applicable regulations. The
Operating Partnership's, and therefore the Company's, principal sources of
funds will be lease revenue under the Participating Leases. Rent under the
Participating Leases will be based on the Initial Hotels' revenues, and the
Lessee's ability to make payments to the Operating Partnership under the
Participating Leases will be dependent on the Lessees' abilities to generate
cash flow from the operation of the Initial Hotels.
Occupancy, ADR, and REVPAR provide the best overview of the results of
operations. Increases in REVPAR caused by increases in occupancy are
accompanied by increases in most categories of variable operating costs.
Increases in REVPAR attributable to increases in ADR are usually accompanied
by increases in certain categories of operating costs such as management fees,
license fees, credit card processing fees and travel agent commissions.
PRO FORMA RESULTS OF OPERATIONS FOR THE COMPANY
The following table sets forth key indicators for all of the Initial Hotels
as if all of the Initial Hotels had been leased pursuant to the Participating
Leases at January 1, 1994 and is useful in understanding the underlying
changes in the participating rent for the Company during periods presented.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ----------------
1994 1995 1996 1996 1997
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Key Factors:
Occupancy...................... 71.8% 71.5% 72.5% 74.1% 74.7%
ADR............................ $ 97.55 $ 102.34 $ 108.15 $107.30 $112.84
REVPAR......................... $ 70.09 $ 73.21 $ 78.44 $ 79.52 $ 84.27
</TABLE>
For the year ended December 31, 1996, the Company had pro forma revenues of
$44.1 million from the Participating Leases that would have been in place at
the Initial Hotels. The pro forma revenues for the year ended December 31,
1995 would have been $40.5 million. This 8.9% increase of $3.6 million is
attributable to a 1.4% improvement in occupancy from 71.5% for the year ended
December 31, 1995 to 72.5% for the year ended December 31, 1996, and a 5.7%
improvement in ADR from $102.34 for the year ended December 31, 1995 to
$108.15 for the year ended December 31, 1996.
47
<PAGE>
RESULTS OF OPERATIONS OF THE INITIAL HOTELS
(excluding Marriott Seaview Resort and LaGuardia Airport Marriott)
The following table sets forth certain combined historical financial
information for the Initial Hotels, as a percentage of total revenues, for the
periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------
FINANCIAL DATA 1994 1995 1996 1996 1997
- -------------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Room revenue..................... 62.3% 63.3% 60.1% 60.8% 64.4%
Food and beverage revenue........ 27.6% 28.2% 32.3% 31.6% 28.3%
Other revenue.................... 10.1% 8.5% 7.6% 7.6% 7.3%
------- ------- ------- ------ -------
Total revenue................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Departmental and operating ex-
penses........................ 81.3% 75.6% 68.0% 67.2% 65.6%
Management fees................ 3.7% 2.8% 3.9% 3.8% 4.7%
Property taxes................. 2.1% 2.5% 3.8% 3.7% 3.3%
Advisory fees.................. 1.9% 1.4% 0.9% 0.9% 0.9%
------- ------- ------- ------ -------
89.0% 82.3% 76.6% 75.6% 74.5%
------- ------- ------- ------ -------
Income before depreciation,
amortization and interest
expense(1)...................... 11.0% 17.7% 23.4% 24.4% 25.5%
Depreciation................... 7.7% 9.2% 10.4% 10.3% 10.0%
Interest....................... 10.0% 9.6% 9.8% 9.3% 10.5%
------- ------- ------- ------ -------
Net Income....................... (6.7)% (1.1)% 3.2% 4.8% 5.0%
======= ======= ======= ====== =======
Key Factors(2)
Occupancy...................... 54.4% 61.1% 69.7% 72.6% 74.3%
ADR............................ $ 69.73 $ 82.37 $ 87.93 $86.59 $102.46
REVPAR......................... $ 37.94 $ 50.35 $ 61.27 $62.88 $ 76.08
</TABLE>
- --------
(1) The Company believes that operating income before interest, depreciation
and amortization provides a good indication of the financial performance
of the Initial Hotels and will be the main factor in the Lessees'
abilities to make lease payments to the Operating Partnership. Industry
analysts generally consider this to be an appropriate measure of the
performance of hotels. However, this indicator should not be considered as
an alternative to net income as an indication of the Lessees' performance
or to cash flow as a measure of liquidity.
(2) No assurance can be given that the trends reflected in this table will
continue or that occupancy, ADR and REVPAR will not decrease as a result
of changes in national or local economic or hotel industry conditions.
Comparison of the nine months ended September 30, 1997 with the nine months
ended September 30, 1996.
Revenue increased from $33.9 million for the nine month period ended
September 30, 1996 to $68.3 million in the nine month period ended September
30, 1997, for a 101.5% increase of $34.4 million. This increase was mostly
attributable to the acquisitions of four of the Initial Hotels since September
30, 1996. The four hotels acquired since September 30, 1996 accounted for
46.3% of the revenue for the nine months ended September 30, 1997. The revenue
of the hotels owned for both nine month periods increased 8.1%.
REVPAR grew from $62.88 for the nine month period ended September 30, 1996
to $76.08 in the nine month period ended September 30, 1997 for a 21.0%
increase of $13.20. This increase was mostly attributable to the strong REVPAR
of the recently acquired hotels. Occupancy improved from 72.6% in 1996 to
74.3% in 1997, representing a 2.3% increase. In addition, ADR increased from
$86.59 in 1996 to $102.46 in 1997, an 18.3% increase. The occupancy growth was
attributable to the continuation of the increase in occupancy in the hotel
industry in general along with the strong operating results of the recently
acquired hotels. Future occupancy
48
<PAGE>
can be affected by many factors, such as the number of available rooms in a
given market and economic conditions, neither of which can be predicted by the
Company. The increase in ADR is attributed to the strong brand names of the
hotels acquired in the twelve months ended September 30, 1997 as well as a
general increase for the entire hotel industry.
Departmental and operating expenses also grew by 96.4% between the periods.
This was caused primarily by the acquisition of the four hotels since
September 30, 1996 and by the growth in occupancy, which was accompanied by
increases in most categories of variable expenses.
Income before depreciation, amortization and interest expense (also shown as
EBITDA) grew $9.1 million or 110.6%, from the nine months ended September 30,
1996 to the nine months ended September 30, 1997. This growth was attributable
to the positive effect of the $34.3 million growth in revenues while expenses
grew by $25.2 million, mostly due to the operating results of the hotels
acquired in the twelve months ended September 30, 1997.
Depreciation expense increased $3.3 million or 94.5% for the nine months
ended September 30, 1997 from the nine months ended September 30, 1996. This
increase was attributable to the acquisitions completed since September 30,
1996.
Interest expense increased $4.0 million or 127.5% between the periods
primarily because of the acquisitions completed since September 30, 1996.
Net income increased 112.5% or $1.8 million for the nine months ended
September 30, 1997 from the comparable period. Net income also increased as a
percentage of revenue from 4.8% to 5.0% between the nine month periods. This
increase is a direct result of the strong REVPAR of the hotels acquired since
September 30, 1996.
Comparison of the year ended December 31, 1996 with the year ended December
31, 1995
Total revenues increased $31.7 million, or 193.3%, from 1995 to 1996. The
majority of this increase was attributable to the acquisitions completed in
1995. The revenues of the hotels acquired in 1995 were $28.7 million higher in
1996 than in 1995 as a result of their being included for a full year in 1996.
As can be seen by the growth in REVPAR, revenues as reported were also driven
by increases in the ADR at almost all of the hotels. This was attributable in
part to the general improvement in business and leisure travel. The
composition of revenue changed slightly to reflect an increase in food and
beverage revenues, from 28.2% of the total to 32.3%, reflecting the mix of
revenue for the hotels acquired in 1995.
Departmental and operating expenses grew by $20.3 million, or 163.7%,
between the years because of 1995 acquisitions being included for a full year
in 1996. These expenses declined as a percentage of revenues from 75.6% in
1995 to 68.0% in 1996, because of revenues growing at a faster pace than
expenses primarily related to the impact of the 1995 acquisitions. Real estate
and personal property taxes increased by $1.4 million or 352.0% from 1995 to
1996 because of the reasons noted above.
The resulting income before depreciation, amortization and interest expense
grew from $2.9 million in 1995 to $11.3 million in 1996 for an increase of
$8.4 million or 288.1%. This line item also grew from 17.7% of revenues in
1995 to 23.4% of revenues in 1996, which resulted from the 193.3% growth in
revenues while operating expenses grew by only 172.9%.
Depreciation expense increased $3.5 million between the years primarily as a
result of the 1995 acquisitions being included for a full year in 1996.
Interest expense increased $3.1 million between the years due to the
additional interest on the mortgage loans used to acquire the 1995 and 1996
acquisitions.
49
<PAGE>
Net income increased $1.7 million to a positive $1.5 million between the
years. This increase relates to the strong operating results of the 1995 and
1996 acquisitions as well as stronger REVPAR of the hotels acquired in 1994.
Comparison of the year ended December 31, 1995 with the year ended December
31, 1994
Total revenues increased $14.7 million from 1994 to 1995. This was primarily
caused by having a full year of operations for the first two hotels purchased
in mid-year 1994 and the acquisitions of two hotels in 1995.
Departmental and operating expenses grew by $11.0 million to $12.4 million
in 1995 because of the effect of owning the hotels acquired in 1994 for a full
year in 1995 and the impact of the 1995 acquisitions. These costs declined as
a percentage of revenues from 81.3% in 1994 to 75.6% in 1995, as revenues grew
faster than expenses.
Income before depreciation, amortization and interest expense grew from $0.2
million in 1994 to $2.9 million in 1995 for an increase of $2.7 million. This
line item also grew from 11.0% of revenues in 1994 to 17.7% of revenues in
1995, which was attributable to the factors mentioned above.
Depreciation expense increased $1.4 million in 1995 from the year earlier
period. This increase is primarily related to the acquisitions completed in
1994 being included for a full year in 1995.
Interest expense increased $1.4 million in 1995 from 1994. This increase is
primarily related to the reasons listed above.
Net income was $0.1 million lower in the year ended December 31, 1995 from
the year ended December 31, 1994. This decrease primarily relates to the
seasonality related to the hotel acquired in late 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders, will be its share of the Operating
Partnership's cash flow. The Operating Partnership's principal source of
revenue will be rent payments under the Participating Leases. Except for the
security deposits required under the Participating Leases, the Lessees'
obligations under the Participating Leases are unsecured and the Lessees'
abilities to make rent payments to the Operating Partnership under the
Participating Leases, and the Company's liquidity, including its ability to
make distributions to shareholders, will be dependent on the Lessees'
abilities to generate sufficient cash flow from the operation of the Initial
Hotels.
On consummation of the Offering and application of the estimated net
proceeds therefrom, the Company will have approximately $40.8 million of
outstanding indebtedness. The Company intends to acquire and develop
additional hotels and expand certain of the Initial Hotels and will incur
indebtedness to fund acquisitions, developments and expansions. The Company
may also incur indebtedness to meet distribution requirements imposed on a
REIT under the Code to the extent that working capital and cash flow from the
Company's investments are insufficient to make the required distributions. The
Company anticipates that the Line of Credit will permit borrowings for these
purposes, but will impose certain limitations on the Company's ability to
engage in other borrowings.
The Company anticipates that it will obtain a $200 million Line of Credit
primarily to assist it in funding its acquisition and development of
additional hotels and for certain other business purposes. Borrowings under
the Line of Credit are expected to be secured by first mortgages on certain of
the Initial Hotels and on any additional properties acquired or developed by
the Company, subject to certain release provisions. The Company may also seek
to increase the amount of the Line of Credit, negotiate additional credit
facilities or issue debt instruments. Any debt incurred or issued by the
Company may be secured or unsecured, long-term, medium-term or short-term,
bear interest at a fixed or variable rate, and be subject to such other terms
as the Board of Trustees considers prudent.
50
<PAGE>
The Company will acquire or develop additional hotels only as suitable
opportunities arise, and the Company will not undertake acquisition or
development of properties unless adequate sources of financing are available.
Funds for future acquisitions or development of hotels are expected to be
derived, in whole or in part, from borrowings under the Line of Credit or
other borrowings or from the proceeds of additional issuance of Common Shares
or other securities. See "Business and Growth Strategies--Acquisition
Strategies."
The Company will initially deposit $10.5 million into the capital
expenditure reserves. The Company will also contribute to the capital
expenditures reserves on a continuing basis, from the rent paid under the
Participating Leases, amounts of the Lessees' revenues from operation of the
Initial Hotels. The Company intends to use the capital expenditure reserves
ranging from 4.0% to 5.5% for capital improvements to the Initial Hotels and
refurbishment and replacement of FF&E, but may make other uses of amounts in
the reserves that it considers appropriate from time to time. The Company
anticipates making similar arrangements with respect to future hotels that it
may acquire or develop.
INFLATION
The Company's revenues initially will be based on the Participating Leases,
which will result in changes in the Company's revenues based on changes in the
underlying Initial Hotels' revenues. Therefore, the Company initially will be
relying entirely on the performance of the Initial Hotels and the Lessees'
abilities to increase revenues to keep pace with inflation. Operators of
hotels in general, and the Lessees, can change room rates quickly, but
competitive pressures may limit the Lessees' abilities to raise rates faster
than inflation. The annual growth rate in ADR for the Initial Hotels for the
three years ended December 31, 1996 was 5.3%, which was higher than the rate
of inflation as measured by the Consumer Price Index. However, according to
industry statistics, industry-wide annual increases in ADR failed to keep pace
with inflation from 1987 to 1992.
The Company's variable expenses, which are subject to inflation, represent
approximately 14.4% of pro forma revenues. These variable expenses (real
estate and personal property taxes, property and casualty insurance and ground
rent) are expected to grow with the general rate of inflation.
SEASONALITY
The Initial Hotels' operations historically have been seasonal. Five of the
Initial Hotels maintain higher occupancy rates during the second and third
quarters. The Florida and New Orleans hotels experience their highest
occupancies in the first quarter. This seasonality pattern can be expected to
cause fluctuations in the Company's quarterly lease revenue under the
Participating Leases. The Company will use cash flow from the Lessees'
operations of the Initial Hotels to make quarterly distributions of at least
95% of its net taxable income, on a yearly basis, as recommended by the Board
of Trustees. See "Distributions." To the extent that cash flow from operations
is insufficient during the year, because of seasonal fluctuations in lease
revenue or capital expenditures, the Company expects to utilize other cash on
hand or borrowings to fund the distributions.
51
<PAGE>
THE HOTEL INDUSTRY
According to Smith Travel Research, the United States lodging industry is
currently experiencing a significant recovery from an extended downturn in the
late 1980's and early 1990's. The Company believes that this broad industry
recovery will continue and will contribute to the growth in total revenues and
REVPAR at the Initial Hotels (and hotels subsequently acquired by the Company)
which, through the Participating Leases, will result in increases in the
Company's Cash Available for Distribution.
While demand for hotel rooms in the U.S. increased in 12 out of the last 13
years, the poor performance of the hotel industry during the late 1980's and
early 1990's resulted from a dramatic increase in the supply of hotel rooms
that significantly outpaced the growth in room demand. According to Smith
Travel Research, this relationship reversed, with industry-wide room demand
exceeding growth in room supply each year between 1992 and 1996. As might be
expected in such a favorable supply/demand environment, hotel industry
occupancy and ADR rose, resulting in an increase from 61.8% and $58.08 in 1991
to 65.2% and $69.66 in 1996, respectively. Most recently, from 1995 to 1996,
industry-wide occupancy, ADR and REVPAR increased by 0.2%, 5.9% and 6.2%,
respectively. These positive overall industry fundamentals have continued into
1997, according to Smith Travel Research, with occupancy declining marginally
from 67.1% to 66.5%, and ADR's rising substantially from $70.56 to $74.96, for
the first nine months of 1997 versus the same period in 1996, respectively.
Hotels located in urban and resort markets have outperformed the overall
lodging industry, as shown in the chart below, due to strong demand generated
by business and leisure travel to these markets, and limited new supply.
THE HOTEL INDUSTRY
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------- -----------------
1995 1996 % CHANGE 1996 1997 % CHANGE
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Occupancy
U.S....................... 65.1% 65.2% 0.2% 67.1% 66.5% (0.9)%
Urban..................... 70.6% 71.1% 0.7% 71.2% 71.5% 0.4 %
Resort.................... 69.7% 69.8% 0.1% 70.8% 71.0% 0.3 %
ADR
U.S....................... $ 65.81 $ 69.66 5.9% $ 70.56 $ 74.96 6.2 %
Urban..................... $100.28 $107.39 7.1% $105.09 $113.40 7.9 %
Resort.................... $112.55 $119.20 5.9% $110.06 $117.00 6.3 %
REVPAR
U.S....................... $ 42.83 $ 45.47 6.2% $ 47.35 $ 49.85 5.3 %
Urban..................... $ 70.80 $ 76.35 7.8% $ 74.82 $ 81.08 8.4 %
Resort.................... $ 78.45 $ 83.20 6.1% $ 77.92 $ 83.07 6.6 %
</TABLE>
- --------
(Source: Smith Travel Research)
In addition to leisure and business travel, national and regional
conventions have been an important generator of U.S. hotel room demand. The
conventions, expositions, meetings, and incentive travel industry accounts for
more than $80 billion in annual spending, making it the twenty-second largest
industry in the U.S. economy. According to Meeting and Conventions Magazine,
the number of attendees and total expenditures at conventions grew by more
than 50% from 1991 to 1995. Most top convention centers are generally located
in major metropolitan areas, with 23 of the top 30 largest convention centers
located in urban markets.
The Company expects the Initial Hotels to benefit from the continuing
improvement in performance of the convention, urban business and resort
markets as well as recent and planned renovations and improvements at a number
of the Initial Hotels. In addition, since the Company expects the greatest
continuing improvements in occupancy and room rates to occur in the upscale
and luxury full service segments of these markets, the Company intends to
focus its acquisition activities primarily on upscale and luxury full service
hotels.
52
<PAGE>
THE INITIAL HOTELS
The Initial Hotels consist of ten full service hotels containing an
aggregate of 3,379 guest rooms which target both business and leisure
travelers, including groups and those attending meetings and conventions, who
prefer a full range of high quality facilities, services and amenities. The
Initial Hotels include three luxury, six upscale and one mid-price full
service hotel located in three convention, two resort and five business
oriented markets in eight states. Each of the Initial Hotels was acquired by
the Contributors during the period 1994 through 1998.
DESCRIPTIONS OF INITIAL HOTELS
Radisson Hotel South and Plaza Tower--Bloomington (Minneapolis), Minnesota
Radisson Hotel South and Plaza Tower is a 580 room upscale full service
convention hotel located at the intersection of Interstate 494 and Highway
100, approximately 15 minutes from the Minneapolis/St. Paul International
Airport, and five miles from the Mall of America. The property was acquired by
the Contributors in December 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ----------------------
1995 1996 1996 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Occupancy.................... 70.1% 71.5% 73.5% 72.9%
ADR.......................... $ 81.28 $ 88.47 $ 87.74 $ 91.73
REVPAR....................... $ 57.01 $ 63.21 $ 64.50 $ 66.88
Capital Expenditures......... $ 1,911,000 $ 2,259,000 $1,195,000 $1,304,000
Capital Expenditures ($per
room)....................... $ 3,300 $ 3,900 $ 2,100 $ 2,200
</TABLE>
The hotel is leased to and operated by affiliates of Radisson. Minneapolis-
based Radisson and its parent, Carlson Hospitality Worldwide, own, manage,
lease or franchise 475 lodging operations located in 45 countries, plus five
luxury cruise ships.
Constructed in 1969, the Radisson Hotel South, containing 414 original
guestrooms, was the first hotel developed and built by Curtis L. Carlson,
after purchasing the original Radisson Hotel in Minneapolis. In 1980, the
Plaza Tower was constructed, adding 166 oversized and upscale guest rooms to
the original 414 guest rooms. The hotel's meeting and convention facilities
are the second largest of any hotel in the state of Minnesota. Hotel amenities
include five food and beverage outlets, a business center, an indoor swimming
pool, an exercise room, and 1,320 surface parking spaces.
The highly successful Mall of America, located just five miles east of the
hotel, is visited by approximately 40 million people annually, stimulating
leisure business in the area and offering the hotel an attractive feature in
competing for group business. In addition, the Metropolitan Airports
Commission has announced an expansion of the Minneapolis-St. Paul
International Airport, which will result in the closing and razing of three
hotels and four other commercial properties. Construction is expected to
commence in 2000. The Company believes that the Minneapolis market in general,
and the Bloomington market specifically, will continue to be strong hotel
markets with favorable local area economic growth, and that the hotel is well-
positioned to continue to improve its position in the market and take
advantage of demand growth in the area.
Since January 1995, over $5.5 million in capital expenditures were made at
the hotel including to renovate 166 guest rooms, complete the conversion of
over 11,000 square feet of retail space to upscale meeting space, renovate one
food and beverage outlets and to enhance the main entrance. The Company
expects the hotel to benefit from approximately $1.1 million of improvements
in 1998.
Le Meridien New Orleans--New Orleans, Louisiana
Le Meridien New Orleans is a 494 room luxury full service convention
oriented hotel located in downtown New Orleans, a major convention city. The
hotel is centrally located across the street from the French Quarter and near
the central business district, the Ernest N. Morial Convention Center and the
New Orleans Superdome.
53
<PAGE>
The hotel has received the AAA Four Diamond award for 13 consecutive years.
The hotel was acquired by the Contributors in November 1996. The hotel is
subject to a 99-year ground lease, which expires in May 2081.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
1995 1996 1996 1997
------------ ----------- ------- ----------
<S> <C> <C> <C> <C>
Occupancy...................... 73.4% 74.3% 74.4% 72.2%
ADR............................ $ 122.81 $ 124.37 $120.29 $ 130.99
REVPAR......................... $ 90.17 $ 92.38 $ 89.49 $ 94.63
Capital Expenditures........... $ 196,000 $ 65,000 $63,000 $1,695,000
Capital Expenditures ($per
room)......................... $ 400 $ 100 $ 100 $ 3,400
</TABLE>
The hotel is leased and managed by affiliates of Le Meridien Hotels &
Resorts ("Meridien"). Meridien operates 73 hotels in 46 countries and is the
brand name for the International Division of the Forte Group which is wholly
owned by Granada Group PLC. Currently, Le Meridien hotels in the United States
are located in Dallas, New York, Boston and New Orleans.
Originally constructed in 1984, the 30-story hotel contains 11,715 square
feet of meeting and conference space, a restaurant and lounge. Additional
amenities include a business center, 3,000 square foot health club, outdoor
swimming pool, state-of-the art telephone system including voice mail and
modem access and 174 enclosed parking spaces.
The Company believes that the hotel's location near the city's largest
convention facility and its access to the French Quarter should provide
continuing sources of demand. According to the city of New Orleans, the number
of meetings has grown from 1,454 in 1990 to 3,108 in 1996, an annual increase
of 13.5%. During the same period, the number of convention delegates increased
from 1,129,034 to 1,370,212, a 21.4% increase. The convention center is in the
process of being expanded again, with an additional 400,000 square feet of
meeting/exhibit space expected to be completed in 1999.
In 1997, the hotel began an extensive three-year $6.4 million renovation
consisting of capital improvements throughout the property. Approximately $3.4
million was committed in 1997 to completely renovate 151 guest rooms and five
executive suites. Additionally, improvements to function space, the lobby
area, and Le Jazz lounge, and repainting the building exterior were
undertaken. Significant technological enhancements in 1997 included a new
telephone switch and voicemail, front and back office computer systems, and an
electronic fire panel. In 1998, approximately $2.0 million is anticipated to
be expended to renovate an additional 240 guest rooms, including new case
goods and soft goods, upgrade the garage fire life safety system, and
computerize the sales and marketing department. In 1999, it is anticipated
that $1.0 million will be committed to capital improvements, which is expected
to include the renovation of the remaining 96 guest rooms.
LaGuardia Airport Marriott--New York, New York
LaGuardia Airport Marriott is a 436 room upscale full service hotel located
directly across from New York's LaGuardia Airport. The hotel is five minutes
from Shea Stadium, home of the New York Mets, and the USTA National Tennis
Center, home of the U.S. Open, and 20 minutes from Manhattan. The hotel's
strategic location also provides convenient access to John F. Kennedy
International Airport, Long Island, Westchester, Connecticut and New York's
public transportation network. The hotel is expected to be acquired by the
Contributors in March 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------
1995 1996 1996 1997(1)
----------- ------------ -------- --------
<S> <C> <C> <C> <C>
Occupancy........................ 83.3% 82.4% 83.0% 81.3%
ADR.............................. $ 119.09 $ 132.67 $ 129.93 $ 136.13
REVPAR........................... $ 99.18 $ 109.31 $ 107.88 $ 110.64
Capital Expenditures............. $ 835,000 $ 2,881,000 $586,000 $601,000
Capital Expenditures ($per
room)........................... $ 1,900 $ 6,600 $ 1,300 $ 1,400
</TABLE>
- --------
(1) For the period January 4, 1997 through October 10, 1997.
54
<PAGE>
The hotel is leased to the Affiliated Lessee and managed by Marriott
International Inc. ("Marriott") pursuant to a long-term incentive based
operating agreement. Marriott is one of the world's leading hospitality
companies, with over 4,900 operating units in the United States and 53 other
countries and territories.
Originally constructed in 1981, the 10-story hotel contains 436 guest rooms,
including two concierge floors, and J.W.'s Steakhouse, a full service 130-seat
restaurant and The Empire Lounge, a 67-seat casual bar serving both food and
beverages. The hotel provides approximately 15,750 square feet of flexible
meeting space, including a 4,770 square foot ballroom. Additional guest
amenities include a full service fitness center with indoor heated pool,
whirlpool and sauna, free airport shuttle service, valet service and surface
and covered parking totalling 427 spaces.
The hotel was most recently renovated in 1996 when it underwent an extensive
$2.8 million renovation, which encompassed guest room soft goods and
bathrooms, corridors, conference, banquet and restaurant facilities, lobby
areas and new windows throughout the hotel. Total capital expenditures made
between 1995 and 1997, including this renovation, totalled $4.5 million.
Le Meridien Dallas--Dallas, Texas
Le Meridien Dallas is a 396 room upscale full service hotel located in
downtown Dallas, in the heart of the city's arts and financial districts. The
hotel is conveniently located near the City Convention Center, four stops away
on the new Dallas light rail system, with a DART station adjacent to the
hotel. The hotel is 25 minutes away from Dallas/Fort Worth International
Airport. The hotel has received the AAA Four Diamond award for 11 consecutive
years. The hotel was acquired by the Contributors in September 1997.
<TABLE>
<CAPTION>
NINE MONTH ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1995 1996 1996 1997
------------ ----------- -------- --------
<S> <C> <C> <C> <C>
Occupancy........................ 62.2% 65.5% 65.5% 70.6%
ADR.............................. $ 92.97 $ 101.19 $ 99.64 $ 106.46
REVPAR........................... $ 57.81 $ 66.33 $ 65.29 $ 75.14
Capital Expenditures............. $ 1,497,000 $ 496,000 $485,000 $130,000
Capital Expenditures ($per
room)........................... $ 3,800 $ 1,300 $ 1,200 $ 300
</TABLE>
The hotel is leased and managed by affiliates of Meridien.
The hotel was constructed in 1980 as part of the Plaza of the Americas
complex, a mixed use development which includes approximately 1.2 million
square feet of office space, retail shops, restaurants, fast food outlets, a
health and fitness club and an indoor skating rink. The hotel is a 16-story
building with two additional floors under street level and includes a
restaurant and bar. The hotel contains 23,215 square feet of meeting space,
including an 8,600 square foot ballroom, and has access to 175 parking spaces
located in a contiguous structured parking facility.
Dallas is the tenth largest city in the United States and among the largest
hub for corporate headquarters and high tech companies in the country. During
the period from 1993 to 1996, Dallas registered 6.7% annual growth in the
number of convention visitors. The city has recently authorized a study to
review a possible expansion of the convention center. As a result of both the
economic growth of the region and the growth in the convention business, the
downtown Dallas lodging market has experienced a significant increase in room
demand. The 505 room Adam's Mark Hotel, located next door to the Le Meridien
Dallas, is currently undergoing a renovation which will increase the size of
the hotel by approximately 1,200 guestrooms, and add over 200,000 square feet
of new convention facilities. The expansion is expected to be completed
between the fall of 1998 and the spring of 1999. Although no assurances can be
made, the Company believes that Le Meridien Dallas Hotel will continue to
experience favorable operations during the foreseeable future, notwithstanding
the expansion of the nearby hotel.
55
<PAGE>
In 1995, approximately $1.5 million was invested in renovating the hotel
meeting space and upgrading 90 guest rooms. Since acquisition of the hotel in
September 1997, over $500,000 has been spent to convert 11 two bedroom suites
to 22 guest rooms, computerize the sales office, add an exercise room and
upgrade the physical plant. During 1998, the Company expects to spend
approximately $3.9 million to renovate the remaining 317 guest rooms and
suites, including new case goods and soft goods.
Omaha Marriott Hotel--Omaha, Nebraska
Omaha Marriott Hotel is a 301 room upscale full service commercial hotel
located in the western suburbs of Omaha at one of the city's busiest
intersections (I-680 and West Dodge Road). The hotel is located in the Regency
Office Park, a mixed use development containing over 600,000 square feet of
office and retail space, and directly across West Dodge Road from Westroads
Shopping Center, the largest shopping mall in Omaha. The hotel was acquired by
the Contributors in December 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------
1995 1996 1996 1997(1)
----------- ----------- -------- --------
<S> <C> <C> <C> <C>
Occupancy........................ 80.0% 77.3% 78.9% 79.9%
ADR.............................. $ 94.40 $ 96.79 $ 97.55 $ 103.66
REVPAR........................... $ 75.51 $ 74.80 $ 76.98 $ 82.78
Capital Expenditures............. $ 464,000 $ 617,000 $244,000 $596,000
Capital Expenditures ($per
room)........................... $ 1,500 $ 2,000 $ 800 $ 2,000
</TABLE>
- --------
(1) For the period January 4, 1997 through October 10, 1997.
The hotel is leased to the Affiliated Lessee and managed by Marriott
pursuant to a long-term incentive-based operating agreement.
Originally constructed in 1982, the hotel contains two restaurants, a
lounge, gift shop, exercise facility, heated indoor/outdoor swimming pool,
8,916 square feet of meeting and banquet space, and over 500 surface parking
spaces. The hotel is one of only two AAA Four Diamond hotels in Omaha.
The western suburbs of Omaha have demonstrated significant and steady growth
throughout the past decade, a trend that continues today. Major commercial
expansion is underway within close proximity of the Omaha Marriott, including
a 282,000 square foot technology center under construction for First Data
Resources at the former Ak-sar-ben Racetrack site and the First National
Business Park near Boystown which will total over 1.3 million square feet of
Class A office space when completed.
In 1994, the guest rooms were completely refurbished and a major renovation
of the ballroom and meeting areas was completed in February 1997. In November
1997, the 120-seat casual restaurant was renovated and converted to Marriott's
Allies American Grille. A renovation of the lobby is expected to be completed
in February 1998.
The hotel is situated on approximately 9.0 acres which will allow for a
potential expansion of the hotel. The Company intends to complete plans for an
expansion providing for an additional 100 guestrooms in a new six-story
building, including a new concierge level, business center, expanded health
club facilities and a new 9,600 square foot ballroom, divisible into eight
meeting rooms. Subject to final pricing, the Company intends to move forward
in 1998 with the construction of the expansion, currently budgeted at
approximately $15.0 million.
Marriott Seaview Resort--Galloway Township (Atlantic City), New Jersey
Marriott Seaview Resort is a 300 room luxury golf and conference resort
located on Brigantine Bay, approximately nine miles north of Atlantic City,
New Jersey. The resort was acquired by the Contributors in November 1997.
56
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- --------------------
1995 1996 1996 1997(1)
------------ ----------- -------- ----------
<S> <C> <C> <C> <C>
Occupancy...................... 66.4% 67.5% 70.6% 71.2%
ADR............................ $ 141.21 $ 146.71 $ 148.67 $ 155.39
REVPAR......................... $ 93.73 $ 99.06 $ 104.95 $ 110.68
Capital Expenditures........... $ 2,338,000 $ 940,000 $757,000 $1,119,000
Capital Expenditures ($per
room)......................... $ 7,800 $ 3,100 $ 2,500 $ 3,700
</TABLE>
- --------
(1) For the period January 4, 1997 through October 10, 1997.
The hotel is leased to the Affiliated Lessee and managed by Marriott
pursuant to a long-term incentive-based operating agreement.
The hotel opened as a prestigious private country club in 1912 and was
expanded in 1960 and again in 1986. The resort includes 300 guest rooms and
suites, two 18 hole championship golf courses, an extensive golf learning
center and practice facilities, driving range, golf pro shop, a 275-seat fine
dining restaurant, 55-seat grill room, 30-seat lobby lounge, indoor and
outdoor swimming pools, an exercise facility, eight tennis courts and 750
surface parking spaces.
For a five year period beginning in 1998, the hotel will host the LPGA Shop
Rite Classic on the hotel's historic Bay Course, one of the few classic links
style courses designed by renowned Scottish designer Donald Ross. In addition,
Marriott Ownership Resorts International has plans to develop a 270-unit
timeshare community on a 40 acre site adjacent to one of the golf courses and
close to the main hotel buildings. The project, which will include an 18,000
square foot full service health club and spa facility which would be available
as an additional amenity to hotel guests, is expected to provide a new source
of income to the hotel. The Company believes that the hotel will also benefit
from significant new public investments in the Atlantic City area, including
the newly opened $268 million Atlantic City Convention Center, road
improvements, infrastructure improvements to the Atlantic City International
Airport, and the proposed expansion and addition of nine hotel casinos in
Atlantic City.
During the period 1994 through 1996, $4.6 million was invested in capital
improvements and upgrades, including renovations of the guest rooms and
several golf course improvements. The Company anticipates expending
approximately $8.0 million for additional capital improvements in 1998 and
1999. These improvements will include an extensive renovation of the historic
Bay Course, which are intended to restore it to its original design.
Renovations of the lobby lounge and ballroom/meeting areas are expected to be
completed by the end of the first quarter of 1998. In order to restore the
resort to its turn-of-the-century charm and country club elegance, guest rooms
and public areas will undergo renovation commencing in late 1998.
Additionally, the Company plans to explore possible expansions to the ballroom
and meeting areas as well as improvements to resort oriented amenities and
services.
Camberley Plaza Sabal Park Hotel--Tampa, Florida
Camberley Plaza Sabal Park Hotel is a 265 room upscale full service hotel
located in east suburban Tampa, Florida. The hotel is situated at the entrance
to Sabal Business Park, a three million square foot office complex. There are
approximately 250 companies in the park, with over 5,000 employees. Major
tenants include GTE Data Services, Intermedia Communications Inc.,
Nationsbank, Coca-Cola, Time Inc., Pharmacy Corp. of America, National
Insurance Services, National Rx Services, Progressive Insurance, PMSI, Warner
Publisher Services and the State of Florida. In addition, Citibank is
currently developing the first phase of a 636,000 square foot office and
training facility adjacent to the hotel. The hotel is near Busch Gardens and
Tampa Stadium, 50 minutes from Walt Disney World in Orlando, and a 35 minute
drive from Tampa International Airport. The hotel was purchased by the
Contributors in June 1995.
57
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------
1995 1996 1996 1997
----------- ----------- -------- --------
<S> <C> <C> <C> <C>
Occupancy........................ 73.1% 77.5% 79.1% 77.4%
ADR.............................. $ 85.13 $ 84.85 $ 84.87 $ 89.34
REVPAR........................... $ 62.24 $ 65.76 $ 67.14 $ 69.19
Capital Expenditures............. $ 260,000 $ 765,000 $529,000 $163,000
Capital Expenditures ($per
room)........................... $ 1,000 $ 2,900 $ 2,000 $ 600
</TABLE>
The hotel is currently managed by Camberley Hotel Company. The Company
anticipates that the hotel will be leased by an unaffiliated lessee and will
be managed by a new independent operator. The Company believes that the hotel
will benefit from a major chain affiliation and national reservation system.
Originally constructed in 1986, the hotel offers extensive amenities,
including 23,000 square feet of meeting space in 21 rooms, a restaurant and
lobby lounge, heated outdoor swimming pool, lighted tennis court, business
center, fitness center, retail shops and 442 surface parking spaces. During
the period from 1995 through 1997, the hotel underwent approximately $1.2
million in renovations. The hotel also includes undeveloped land that may be
available for a possible room expansion. In addition, the opportunity exists
to convert four two-bedroom suites into eight guest rooms, thereby increasing
the room count by four units. The hotel, a AAA Three Diamond facility, is the
only upscale full service hotel in east suburban Tampa.
The Company believes the diversified Tampa economy will continue to be one
of the top growth markets in the United States, with job growth expected to
exceed the national average. REVPAR in the Tampa market has exhibited solid
growth, increasing an average of 6.3% annually from 1993 through 1996. With no
full service hotels currently under construction in the area, the Company
expects this growth trend to continue.
Holiday Inn Beachside Resort and Conference Center--Key West, Florida
Holiday Inn Beachside Resort and Conference Center is an upscale full
service resort comprised of several one, two and three-story buildings
containing 222 guest rooms, including 29 suites, located on an approximately
7.8 acre parcel north of U.S. 1 on the beach facing the Gulf of Mexico. The
resort is located on the island of Key West, considered to have the most
consistent weather in Florida, and benefits from the island's reputation as a
popular tourist destination. The hotel was acquired by the Contributors in
July 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------------
1995 1996 1996 1997
----------- ------------ ---------- -------
<S> <C> <C> <C> <C>
Occupancy....................... 74.7% 72.0% 77.2% 78.0%
ADR............................. $ 98.40 $ 108.27 $ 108.99 $109.43
REVPAR.......................... $ 73.54 $ 78.00 $ 84.12 $ 85.36
Capital Expenditures............ $ 409,000 $ 1,112,000 $1,087,000 $40,000
Capital Expenditures ($per
room).......................... $ 1,800 $ 5,000 $ 4,900 $ 200
</TABLE>
The hotel is leased and managed by an affiliate of Durbin. Durbin was
founded by James E. Durbin in 1985 after retiring as President of Marriott
Hotels & Resorts. James E. Durbin, together with J.W. Marriott, Sr. and J.W.
Marriott, Jr., directed the expansion of Marriott hotels from four properties
in 1964 to more than 130 properties upon his retirement in 1984. Durbin
Companies, Inc. presently owns and/or operates eight first class hotels.
Originally constructed in three phases between 1960 and 1989, the hotel
contains Key West's largest conference facilities, consisting of 6,220 square
feet of meeting space, including a 5,250 square foot ballroom. The hotel
includes a full service restaurant, 50-seat poolside lounge, two tennis
courts, outdoor swimming pool and jacuzzi, 90 foot sunset pier stretching into
the Gulf of Mexico, a concession offering sail boats, jet skis and other water
sports equipment for guest rental and 230 surface parking spaces.
58
<PAGE>
The hotel completed an extensive refurbishment program in November 1996,
which included painting the exterior of the building, enhancing the roof line,
resurfacing the pool deck, adding new signage, supplying new case goods in all
29 suites, extensive landscaping and renovating the food and beverage outlets,
meeting space and lobby. In December 1997, the remaining 193 guest rooms
received new case goods and soft goods.
The Company believes there are significant barriers to the development of
new hotels in Key West, including extensive environmental and entitlement
hurdles, limited land availability and the high cost of development in Key
West.
Le Montrose All Suite Hotel De Gran Luxe--West Hollywood, California
Le Montrose All Suite Hotel De Gran Luxe is a 128 suite, five-story, luxury
full service hotel located in West Hollywood, California, two blocks east of
Beverly Hills and one block south of the "Sunset Strip". The hotel is within
walking distance of many of the area's finest restaurants, retail shops and
night clubs. The hotel attracts short and long-term guests and small groups
primarily from the recording, film and design industries. The hotel was
acquired by the Contributors in November 1994.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1995 1996 1996 1997
----------- ------------- -------- --------
<S> <C> <C> <C> <C>
Occupancy:...................... 77.1% 77.8% 78.9% 84.4%
ADR:............................ $ 114.91 $ 124.22 $ 123.96 $ 137.05
REVPAR:......................... $ 88.60 $ 96.65 $ 97.77 $ 115.71
Capital Expenditures............ $ 94,000 $ 1,036,000 $891,000 $420,000
Capital Expenditures ($per
room).......................... $ 700 $ 8,100 $ 7,000 $ 3,300
</TABLE>
The hotel is operated and leased by OLS. OLS was founded in 1988 and
currently manages over 25 hotel properties.
The property was originally constructed as an apartment building in 1976 and
converted into a luxury suite hotel in 1989. Each hotel suite features a
sunken living room, fireplace, multiline telephone with private voicemail and
data ports, fax machine, color television with built-in VCR, and individual
stereo and CD systems. Eighty five suites feature kitchenettes and most suites
have private balconies. The hotel features a rooftop swimming facility with
private cabanas, poolside phones and a heated spa. Additional amenities
include a rooftop lighted tennis court, fitness center, full service
restaurant and an 875 square foot meeting room. The hotel offers valet parking
in a two-level underground parking structure with a capacity for 130 cars.
During the past three years, the hotel has undergone major renovations
totaling approximately $1.7 million, including a complete upgrade of 109 of
the suites, corridors, public areas, restaurant and pool area. A new property
management system was installed in 1995 and all suites received new
televisions. The remaining 19 suites, along with four suites not previously
available as hotel suites, are scheduled to be renovated in 1998.
The Company believes there are significant barriers to entry due to the lack
of developable sites, the cost of new construction and the lengthy entitlement
process in West Hollywood.
Holiday Inn Plaza Park--Visalia, California
Holiday Inn Plaza Park is a 257 room mid-price full service hotel located at
the junction of Highways 99 and 198 in Visalia, California. The hotel is
situated in the heart of central California, a major agri-business center and
is also a popular tourist destination due to its central location and
proximity to Yosemite, Sequoia and Kings Canyon National Parks. In addition,
the hotel is utilized extensively by major corporate groups and social users
due to the size and flexibility of its meeting space and ample parking.
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<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------
1995 1996 1996 1997
------------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Occupancy:..................... 54.8% 58.5% 61.0% 65.5%
ADR:........................... $ 63.49 $ 62.06 $ 62.66 $ 61.17
REVPAR:........................ $ 34.82 $ 36.28 $ 38.20 $ 40.06
Capital Expenditures........... $ 1,324,000 $ 59,000 $ 54,000 $ 332,000
Capital Expenditures ($ per
room)......................... $ 5,200 $ 200 $ 200 $ 1,300
</TABLE>
The hotel was acquired by the Contributors in October 1994. The hotel is
leased and operated by OLS.
The hotel was constructed in 1976 and a second wing containing additional
guest rooms and a conference center was built in 1978. The hotel contains
approximately 17,000 square feet of meeting space, divisible into 11 rooms
with two ballrooms. Additional amenities include a restaurant, nightclub,
fitness center and both indoor and outdoor heated swimming pools.
Since being acquired by the Contributors, the property has undergone a
comprehensive renovation to the building exterior, guest rooms and public
spaces. The renovations included new soft goods and case goods, public area
and meeting room upgrades, repositioning of the restaurant and lounge,
technological improvements, exterior painting, landscaping and the addition of
a porte cochere.
The following table contains information regarding average occupancy, ADR
and REVPAR at the Initial Hotels in the years ended December 31, 1994, 1995
and 1996 and the nine months ended September 30, 1996 and 1997.
60
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------- --------------------------
INITIAL HOTEL 1994 1995 % CHANGE 1995 1996 % CHANGE 1996 1997 % CHANGE
------------- ------- ------- -------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONVENTION ORIENTED:
Radisson Hotel South and
Plaza Tower
Bloomington, MN
Average occupancy...... 69.2% 70.1% 1.3 % 70.1% 71.5% 2.0 % 73.5% 72.9% (0.8)%
ADR.................... $ 76.06 $ 81.28 6.9 % $ 81.28 $ 88.47 8.8 % $ 87.74 $ 91.73 4.5 %
REVPAR................. $ 52.60 $ 57.01 8.4 % $ 57.01 $ 63.21 10.9 % $ 64.50 $ 66.88 3.7 %
Le Meridien New Orleans
New Orleans, LA
Average occupancy...... 74.3% 73.4% (1.2)% 73.4% 74.3% 1.2 % 74.4% 72.2% (3.0)%
ADR.................... $120.43 $122.81 2.0 % $122.81 $124.37 1.3 % $120.29 $130.99 8.9 %
REVPAR................. $ 89.51 $ 90.17 0.7 % $ 90.17 $ 92.38 2.5 % $ 89.49 $ 94.63 5.7 %
Le Meridien Dallas
Dallas, TX
Average occupancy...... 56.3% 62.2% 10.5 % 62.2% 65.5% 5.3 % 65.5% 70.6% 7.8 %
ADR.................... $ 92.53 $ 92.97 0.5 % $ 92.97 $101.19 8.8 % $ 99.64 $106.46 6.8 %
REVPAR................. $ 52.12 $ 57.81 10.9 % $ 57.81 $ 66.33 14.7 % $ 65.29 $ 75.14 15.1 %
RESORT ORIENTED:
Marriott Seaview Resort
Galloway Township, NJ
Average occupancy...... 69.0% 66.4% (3.8)% 66.4% 67.5% 1.7 % 70.6% 71.2% 0.8 %
ADR.................... $131.61 $141.21 7.3 % $141.21 $146.71 3.9 % $148.67 $155.39 4.5 %
REVPAR................. $ 90.86 $ 93.73 3.2 % $ 93.73 $ 99.06 5.7 % $104.95 $110.68 5.5 %
Holiday Inn Beachside
Resort Key West, FL
Average occupancy...... 77.0% 74.7% (3.0)% 74.7% 72.0% (3.6)% 77.2% 78.0% 1.0 %
ADR.................... $ 95.96 $ 98.40 2.5 % $ 98.40 $108.27 10.0 % $108.99 $109.43 0.4 %
REVPAR................. $ 73.85 $ 73.54 (0.4)% $ 73.54 $ 78.00 6.1 % $ 84.12 $ 85.36 1.5 %
BUSINESS ORIENTED:
LaGuardia Airport
Marriott New York, NY
Average Occupancy...... 86.9% 83.3% (4.1)% 83.3% 82.4% (1.1)% 83.0% 81.3% (2.0)%
ADR.................... $109.87 $119.09 8.4 % $119.09 $132.67 11.4 % $129.93 $136.13 4.8 %
REVPAR................. $ 95.53 $ 99.18 3.8 % $ 99.18 $109.31 10.2 % $107.88 $110.64 2.6 %
Omaha Marriott Hotel
Omaha, NE
Average occupancy...... 76.2% 80.0% 5.0 % 80.0% 77.3% (3.4)% 78.9% 79.9% 1.3 %
ADR.................... $ 87.21 $ 94.40 8.2 % $ 94.40 $ 96.79 2.5 % $ 97.55 $103.66 6.3 %
REVPAR................. $ 66.41 $ 75.51 13.7 % $ 75.51 $ 74.80 (0.9)% $ 76.98 $ 82.78 7.5 %
Camberley Plaza Sabal
Park Hotel Tampa, FL
Average occupancy...... 74.2% 73.1% (1.5)% 73.1% 77.5% 6.0 % 79.1% 77.4% (2.1)%
ADR.................... $ 81.51 $ 85.13 4.4 % $ 85.13 $ 84.84 (0.3)% $ 84.87 $ 89.34 5.3 %
REVPAR................. $ 60.47 $ 62.24 2.9 % $ 62.24 $ 65.76 5.7 % $ 67.14 $ 69.19 3.1 %
Holiday Inn Plaza Park
Visalia, CA
Average occupancy...... 58.8% 54.8% (6.8)% 54.8% 58.5% 6.8 % 61.0% 65.5% 7.4 %
ADR.................... $ 63.82 $ 63.49 (0.5)% $ 63.49 $ 62.06 (2.3)% $ 62.66 $ 61.17 (2.4)%
REVPAR................. $ 37.56 $ 34.82 (7.3)% $ 34.82 $ 36.28 4.2 % $ 38.20 $ 40.06 4.9 %
Le Montrose All Suite
Hotel
De Gran Luxe
West Hollywood, CA
Average occupancy...... 81.3% 77.1% (5.2)% 77.1% 77.8% 0.9 % 78.9% 84.4% 7.0 %
ADR.................... $103.77 $114.91 10.7 % $114.91 $124.22 8.1 % $123.96 $137.05 10.6 %
REVPAR................. $ 84.38 $ 88.60 5.0 % $ 88.60 $ 96.65 9.1 % $ 97.77 $115.71 18.3 %
WEIGHTED AVERAGE FOR THE
PORTFOLIO:
Average occupancy...... 71.8% 71.5% (0.4)% 71.5% 72.5% 1.4 % 74.1% 74.7% 0.8 %
ADR.................... $ 97.55 $102.34 4.9 % $102.34 $108.15 5.7 % $107.30 $112.84 5.2 %
REVPAR................. $ 70.09 $ 73.21 4.5 % $ 73.21 $ 78.44 7.1 % $ 79.52 $ 84.27 6.0 %
</TABLE>
61
<PAGE>
THE PARTICIPATING LEASES
In order for the Company to qualify as a REIT, neither the Company nor the
Operating Partnership may operate hotels or related properties. The Operating
Partnership will generally lease the Initial Hotels to the Lessees for terms
of between six and 11 years pursuant to separate Participating Leases that
provide for rent equal to the greater of base rent ("Base Rent") or
participating rent ("Participating Rent") and which will set forth the
Lessees' required capitalization and certain other matters. Unless otherwise
noted, each Participating Lease contains the provisions described below. The
following summary is qualified in its entirety by the Participating Leases, a
form of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
Participating Lease Terms. The Participating Leases will have an average
term of approximately 9.9 years, with expiration dates staggered between the
years 2004 and 2009, subject to earlier termination upon the occurrence of
certain contingencies described in the Participating Leases (including,
particularly, the provisions described herein under "Damage to Initial
Hotels," "Condemnation of Initial Hotels," "Termination of Participating
Leases for Failure to Meet Performance Goals" and "Termination of
Participating Leases upon Disposition of Initial Hotels"). The variation of
the lease terms is intended to provide the Company protection from the risk
inherent in simultaneous lease expirations and to align the expiration of
certain of the Participating Leases with the expiration of the applicable
franchise license.
Base Rent; Participating Rent; Additional Charges. Each Participating Lease
requires the applicable Lessee to pay the greater of (i) Base Rent in a fixed
amount (ii) Participating Rent based on certain percentages of room revenue,
food and beverage revenue and telephone and other revenue at the applicable
Initial Hotel, and (iii) certain other amounts, including utility charges,
certain impositions and insurance premiums, and interest accrued on any late
payments or charges ("Additional Charges"). For each lease year beginning with
the lease year commencing in January 1999, or January 2000, as applicable, the
Base Rent and Participating Rent thresholds will be increased to reflect any
increase in the applicable CPI (as defined in the Glossary). Lessees are
required to pay Base Rent monthly in arrears by the first day of each calendar
month, and Participating Rent is payable quarterly in arrears by the twentieth
day of each fiscal quarter. Participating Rent is calculated based on the
year-to-date departmental receipts as of the end of the preceding fiscal
quarter, plus the prorated amount of each of the applicable departmental
thresholds for the fiscal quarter, or portion thereof, minus the cumulative
Participating Rent previously paid for such fiscal year and the cumulative
Base Rent paid for such fiscal year as of the end of the preceding fiscal
quarter. A final adjustment of the Participating Rent for each fiscal year
will be made based on audited statements of revenue for each Initial Hotel.
Other than real estate and personal property taxes, casualty insurance
including loss of income insurance, ground lease payments, capital impositions
and capital replacements and refurbishments (determined in accordance with
GAAP), which are obligations of the Company, the Participating Leases require
the Lessees to pay rent, condominium dues, certain insurance, all costs and
expenses, and all utility and other charges incurred in the operation of the
Initial Hotels. The Participating Leases also provide for rent reductions and
abatements in the event of damage or destruction or a partial taking of any
Initial Hotel as described under "Damage to Initial Hotels" and "Condemnation
of Initial Hotels."
Lessee Capitalization. Each Lessee (except the Affiliated Lessee) will be
required to maintain a required minimum net worth (the "Required Minimum Net
Worth"), which, for the First Lease Year must be equal to 25% of the annual
rent the applicable Lessee would have paid for the prior fiscal year had the
applicable Participating Lease been in effect for all hotels, and, thereafter
must be equal to or greater than 25% of the prior fiscal year's lease payments
for all hotels, determined annually, including the Initial Hotels, leased by
the Company to that Lessee. Each Lessee will also be required to maintain
adequate working capital for the term of the Participating Lease. Minimum Net
Worth will consist of Units or Common Shares. Each Lessee (except the
Affiliated Lessees) will not be permitted to make payments or distributions of
any kind (other than Rents and Additional Charges payable to the Company,
hotel operating expenses, other payments and management fees) unless its
tangible net worth is equal to or greater than 25% of the prior fiscal year's
actual lease payments for
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<PAGE>
hotels leased to the Lessee during all of such period. Except with respect to
Radisson Hotel South and Plaza Tower, failure by a Lessee to maintain
capitalization in an amount equal to or greater than the Required Minimum Net
Worth for a period of 90 days will result in a cross-default of all
Participating Leases of which the Lessee is a party. In the event that the
Participating Lease for one or more of the Initial Hotels is terminated (other
than as a result of a default by the Lessee), the Required 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.
Security Deposits. Each Lessee (except the Affiliated Lessee) will deliver
security deposits (the "Security Deposits") to the Operating Partnership,
which shall initially consist of Shares and/or Units with an aggregate value
equal to 25% of the rent for the prior fiscal year (the "Required Amount").
For the 1998 lease year, the Security Deposits shall be equal to 25% of the
annual rent the applicable Lessee would have paid for the prior fiscal year
had the applicable Participating Leases been in effect. Thereafter, on an
annual basis, the Operating Partnership will determine the current market
value of the Security Deposit. If the current market value of the Security
Deposit is less than 20% of the rent for the prior fiscal year, the applicable
Lessee will deposit with Landlord an amount of Common Shares, Units, cash or a
letter of credit which, together with the then existing Security Deposit, will
have a current market value equal to 25% of the rent payable under the
applicable Participating Lease for the prior lease year. Throughout the term,
irrespective of the then current market value of the Security Deposit, the
applicable Lessee shall have no right to withdraw, substitute, or otherwise
replace the Security Deposit; provided, however, if the amount of any
applicable Security Deposit exceeds the Required Amount without consideration
of any letter of credit, then the applicable Participating Lessee shall be
entitled to reduce the amount of any letter of credit to an amount which,
together with the then existing Security Deposit, will be equal to the
Required Amount.
Reserves. The Participating Leases for the Initial Hotels obligate the
Company to establish annually a reserve for capital improvements at the
Initial Hotels (including the periodic replacement or refurbishment of FF&E).
The reserve requirements for three of the Initial Hotels are contained in
certain noncancelable operator agreements with respect to those hotels that
will be assumed in connection with the Formation Transactions. At the
commencement of the Participating Leases, the Company shall make an aggregate
initial reserve deposit of approximately $10.5 million with respect to the
Initial Hotels. Thereafter, the Company will deposit into the capital
expenditure reserves an amount ranging from 4.0% to 5.5% of total revenue for
the Initial Hotels, with the amount of such reserve with respect to each
Initial Hotel representing projected capital requirements of each hotel. Any
unexpended amounts will remain the property of the Company upon termination of
the Participating Leases. Otherwise, the Lessees will be required, at their
expense, to maintain the Initial Hotels in good order and repair, subject to
ordinary wear and tear, and to make all necessary and appropriate
nonstructural, foreseen and unforeseen, and ordinary and extraordinary repairs
(other than capital repairs) which may be necessary and appropriate to keep
the Initial 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 Initial Hotels. With the consent of the
Company, however, the Lessees may utilize funds from the capital expenditure
reserves to make noncapital and capital additions, modifications or
improvements to the Initial Hotels. All such alterations, replacements and
improvements shall be subject to all the terms and provisions of the
Participating Leases and will become the property of the Company upon
termination of the Participating Leases. The Company will own substantially
all personal property (other than inventory, linens and other nondepreciable
personal property) not affixed to, or deemed a part of, the real estate or
improvements on the Initial Hotels, except to the extent that ownership of
such personal property would cause any portion of the rents under the
Participating 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 (i) real
estate and personal property taxes on the Initial Hotels (except to the extent
that personal property associated with the Initial Hotels is owned by a
Lessee), (ii) any ground lease payments on the Initial Hotels, (iii) casualty
insurance on the Initial Hotels, and (iv) business interruption insurance on
the Initial Hotels. The aggregate real estate and personal
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<PAGE>
property tax obligations for the Initial Hotels during the year ended December
31, 1996 were approximately $5.9 million. The Lessees are required to pay for
or reimburse the Company for all liability insurance on the Initial Hotels,
with extended coverage, including comprehensive general public liability,
workers' compensation and other insurance appropriate and customary for
properties similar to the Initial Hotels and naming the Company as an
additional insured, where permitted by law.
Events of Default. Events of Default under the Participating Leases include,
among others, the following:
(i) the failure by a Lessee to pay Base or Participating Rent within 10
days after same is due or, with respect to Radisson Hotel South and Plaza
Tower, 10 days after notice of non-payment;
(ii) the failure of a Lessee to observe or perform any other term of a
Participating Lease and the continuation of such failure beyond any
applicable cure or grace period;
(iii) the failure of a Lessee to pay for required insurance;
(iv) the failure of a Lessee to maintain the Required Minimum Net Worth;
(v) should a Lessee or Operator 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, or consent to the appointment of a custodian, receiver,
trustee or other similar office with respect to it or any substantial part
of its assets, 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
or Operator, a custodian, receiver, trustee or other similar officer with
respect to the Lessee or Operator 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 Operator, or if any
petition for any such relief shall be filed against the Lessee or Operator
and such petition shall not be dismissed within 120 days;
(vi) should a Lessee or Operator cause a default beyond applicable grace
periods, if any, under any Franchise Agreement or Operator Agreement
relating to any Initial Hotel; or
(vii) should a Lessee or Operator voluntarily cease operations of the
Leased Property for more than three (3) days other than by reason of
casualty, condemnation or force majeure.
In addition, an Event of Default will result in a cross-default of all other
Participating Leases to which the Lessee is a party.
Indemnification. Under each of the Participating Leases, the Lessees will
indemnify, and will be obligated to hold harmless, the Company, the Advisor
and their officers and trustees, from and against all liabilities, costs and
expenses (including reasonable attorneys' fees and expenses) incurred by,
imposed upon or asserted against the Company or any of them on account of,
among other things, (i) any accident or injury to persons or property on or
about the Initial Hotels, (ii) any misuse by the applicable Lessee or any of
its agents of the leased property, (iii) any environmental liability caused or
resulting from any action or negligence of the Lessee or Operator (see "The
Initial Hotels--Environmental Matters"); (iv) taxes and assessments in respect
of the Initial Hotels (other than real estate and personal property taxes and
income taxes of the Company on income attributable to the Initial Hotels and
capital impositions); (v) the sale or consumption of alcoholic beverages on or
in the real property or improvements thereon; or (vi) any breach of the
Participating Leases by the Lessee; provided, however, that such
indemnification will not be construed to require the Lessee to indemnify the
Company against the Company's own negligent acts or misconduct.
Assignment and Subleasing. The Lessees will not be permitted to sublet all
or any part of the Initial Hotels or assign their interest under any of the
Participating Leases, other than to affiliates of certain of the applicable
Lessees, without the prior written consent of the Company. No assignment or
subletting will release a Lessee from any of its obligations under the
Participating Leases unless the Company expressly agrees that the Lessee shall
be released from any of its obligations under the Participating Leases.
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<PAGE>
Participating Lease Modification. In the event that there is (i) a material
increase in the number of rooms available at the Initial Hotel, (ii) a
material increase in the facilities available at the Initial Hotel, (iii) a
significant renovation to the Initial Hotel, (iv) a material change in any
franchise agreement or change in franchise affiliation, or (v) a material
repositioning of the Initial Hotel, the applicable Participating Lease
provisions may be modified accordingly.
Damage to Initial Hotels. In the event of damage to or destruction of any
Initial Hotel covered by insurance which then renders the leased property
unsuitable for its intended use and occupancy as a hotel, the Participating
Lease shall terminate, and the Company shall generally be entitled to retain
the proceeds of insurance. In the event that damage to or destruction of an
Initial Hotel which is covered by insurance does not render the leased
property unsuitable for its intended use and occupancy as a hotel, the Company
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 Initial Hotel that is not covered by
insurance, the Company generally, 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 Participating Lease
on the terms and conditions set forth in such Participating Lease.
Condemnation of Initial Hotels. In the event of a total condemnation of an
Initial Hotel, the relevant Participating Lease will terminate with respect to
such Initial Hotel as of the date of taking, and the Company will be entitled
to all of the condemnation award in accordance with the provisions of the
Participating Lease. In the event of a partial taking which does not render
the property unsuitable for its intended use as a hotel, then the Company
generally will be obligated to restore the untaken portion of the property,
and the Company shall contribute the condemnation award to the cost of such
restoration.
Termination of Participating Leases for Failure to Meet Performance
Goals. The Company will have the right to terminate the Participating Lease
for an Initial Hotel if the Initial Hotel (x) in any two lease years during
the term of the Participating Lease fails to generate 95% of the actual gross
revenues generated in the preceding fiscal year and (y) in such lease year
during the term of the Participating Lease the "REVPAR Yield Index" (defined
as the percentage obtained by dividing the REVPAR of the applicable Initial
Hotel by the REVPAR of a defined reference group of competitive hotels) of the
Initial Hotel shall have declined by more than 5% from the Initial Hotel's
REVPAR Yield Index at the end of the prior lease year, or (i) in any one lease
year during the term of the Participating Lease fails to generate 90% of the
actual gross revenues generated in the prior lease year and (ii) in such lease
year during the term of the Participating Lease the REVPAR Yield Index of the
Initial Hotel shall have declined by more than 5% from the Initial Hotel's
REVPAR Yield Index at the end of the prior lease year (each a "Revenue
Performance Shortfall"), unless such failures are caused by an act of God or
other force majeure events, including material, extraordinary economic events
which are not reasonably foreseeable. In the event that an Initial Hotel fails
to meet this performance goal in any given year, the applicable Lessee may
cure such failure by paying to the Company the Participating Rent payment that
would have been payable had the Revenue Performance Shortfall not occurred;
provided, however, that, except with respect to Radisson and Meridien, the
opportunity to cure shall be available to a Lessee only once throughout the
term of the applicable Participating Lease.
Termination of Participating Leases upon Disposition of Initial Hotels. In
the event the Company enters into an agreement to sell or otherwise transfer
an Initial Hotel, the Company, at its option, may terminate the Participating
Lease upon thirty days' notice to the applicable Lessee; provided that the
Company either (i) pays to the applicable Lessee the present value of a stream
of monthly payments of monthly cash flow (defined as the average, for each of
the twelve complete months preceding the date of termination, of the excess of
the gross revenues over the sum of the rent and gross operating expenses) for
between 50% and 75% of the number of complete months remaining in the
unexpired term of the Participating Lease as of the date of closing of the
sale (such percentage varying among the Participating Leases), discounted at a
rate of between 10% and 15% per annum, or (ii) offers to lease to the
applicable Lessee, within the twelve month period following the closing of the
sale, one or more substitute hotels pursuant to one or more leases that would
create for the applicable Lessee
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<PAGE>
leasehold estates with respect to hotels that (a) are (i) within the
continental U.S., and (ii) reasonably comparable to the Initial Hotel's
quality, service and amenities, and (b) have an aggregate fair market value of
not less than the fair market value of the original leasehold estate.
Termination of Participating Leases upon Change in Tax Laws. In the event
that changes in federal income tax laws allow the Company or a subsidiary or
affiliate to directly operate hotels, the Company will have the right to
terminate all, but not less than all, Participating Leases with the Lessees in
which event the Company will enter into management contracts with affiliates
of the applicable Lessee for the terminated hotels upon market terms and
conditions to be mutually agreed upon; provided, however, with respect to
Radisson and Durbin, the Company and the applicable Lessee will enter into a
management contract substantially in the form that existed at the time of
commencement of the applicable Participating Leases.
Except as described above, in the event of a termination of seven of the
Participating Leases, the related Operator Agreement also will terminate.
Other Lease Covenants. Each Lessee has agreed that during the term of its
Participating Lease, the Lessee will not engage in any unrelated business
activities. The owners of each Lessee and their parent entities have agreed
that, for the term of its Participating Lease, any sale of their interest in
such Lessee, or of their hotel management businesses in general, will subject
their interest in the Lessee to a limited fair market value acquisition right
in favor of a designee of the Company. In the event that the Company exercises
this right, any nonselling partner of the Lessee will have the right to put
its interest in the Lessee to the Company's designee at a price equal to the
fair market value of such interest. The Participating Leases require each
Lessee to make available to the Company unaudited monthly and quarterly and
audited annual operating information for each Initial Hotel leased by such
Lessee.
Inventory. All inventory required in the operation of the Initial Hotels
will be owned by the applicable Lessee. Upon termination of a related
Participating Lease, the Lessee shall surrender the related Initial Hotel
together with all such inventory to the Company.
Right of First Refusal. Pursuant to the Participating Lease between the
Operating Partnership and Radisson with respect to the Radisson Hotel South
and Plaza Tower, in the event of a sale by the Operating Partnership of the
hotel to a third-party, Radisson is granted a limited right of first refusal
to purchase the hotel on the same terms and conditions as those offered to the
third-party.
PROPERTY LEASES
Two of the Initial Hotels are subject to ground leases or air space leases
with third parties with respect to the land or air space constituting all or a
portion of the Initial Hotels. The ground leases are triple net leases which
require the tenant to pay all expenses of owning and operating the property
subject to the ground leases, including real estate taxes and structural
maintenance and repair.
Le Meridien New Orleans Hotel is subject to a ground lease which terminates
in May 2081. The lease requires a fixed rent payment equal to $425,000 per
year until May 2002. Thereafter, the fixed rent payment shall be adjusted
every ten years and shall be equal to the lesser of (i) 10% of the fair market
value of the land or (ii) the greater of (x) 2.5% of the room revenues or (y)
1.25% of gross revenues, but in no event shall fixed rent be less than
$425,000. The lease also provides the Company with a right of first refusal to
purchase the land after receipt by the landlord of a bona fide third party
offer to purchase acceptable to the landlord. The Le Meridien New Orleans
Hotel is also subject to an air space lease with the city of New Orleans with
respect to the balconies located at the Initial Hotel and which terminates in
June 2044. The annual fixed rental payment is $3,740, subject to a 10%
increase every five years, with the next rental increase to occur in 1999.
Marriott Seaview Resort is subject to a ground lease with respect to
approximately 160 acres which are currently being utilized as a golf course
for the benefit of the resort. The ground lease terminates in December
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<PAGE>
2012, with 15 successive renewal options, each for a ten-year term, totalling
150 years of renewals. The lease requires annual rental payments equal to
$1.00 for all years, including all renewal years. The landlord, an affiliate
of Marriott, has certain reserved rights of access for non-exclusive use of
the golf course.
Radisson South Hotel and Plaza Tower is subject to two ground leases for
parking spaces. The first ground lease, which consists of approximately 273
parking spaces, terminates on December 31, 2005, subject to nine options to
extend for consecutive periods of 10 years each in favor of the Company. The
current annual rental is approximately $75,000, which is adjusted each year in
accordance with the applicable Consumer Price Index. The lease also provides
the Company with an option to purchase the property subject to such lease at
any time during the term of the lease. The second ground lease, which consists
of approximately 51 parking spaces, terminates on October 3, 2004 and is
subject to two options which extend for consecutive periods of 10 and seven
years, respectively, each in favor of the Company. The current annual rental
is $13,800 and will increase to $18,000 from and after October 4, 1999. If the
Company exercises the option to extend, the rent for each subsequent year of
the respective option periods will increase by five percent over the
immediately preceding year.
CONDOMINIUM DECLARATION
Le Meridien Dallas Hotel is subject to a declaration of condominium. The
declaration of condominium provides for the condominium association to levy an
annual operating assessment and capital assessment against the property. The
annual operating assessment for 1998 is $500,000 and no capital assessments
are currently pending against the Initial Hotel. Pursuant to a separate
agreement, a limited right of first refusal to purchase the Initial Hotel in
the event of any proposed third party sale exists in favor of the owner of the
balance of the condominium Units. The right of first refusal has expired with
respect to the acquisition by the Company.
The table below sets forth (i) the annual Base Rent, (ii) Participating Rent
formulas and (iii) the pro forma rent that would have been paid for each
Initial Hotel pursuant to the terms of the Participating Leases based on pro
forma revenues for the 12 months ended September 30, 1997, as if the Company
had owned the Initial Hotels, the Participating Leases were in effect and
October 1, 1996 was the beginning of a Lease year. For each Initial Hotel, pro
forma Participating Rent is greater than Base Rent.
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<PAGE>
<TABLE>
<CAPTION>
LEASE PARTICIPATING
EXPIRATION BASE RENT RENT FORMULA
INITIAL HOTEL YEAR IN 000'S ($) IN THOUSANDS
------------- ---------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Radisson Hotel
South and Plaza
Tower,
Bloomington,
MN.............. 2009 $ 5,196 Rooms: 22.0% of first $10,099, 60.0% of next $3,383, 71.0% thereafter
F&B: 20.0% of first $7,064, 34.0% of next $2,747, 45.0% thereafter
Telephone: 20.0% of first $338, 30.0% of next $54, 50.0% thereafter
Other: 20.0% of first $1,091, 30.0% of next $571, 50.0% thereafter
Le Meridien New
Orleans,
New Orleans,
LA(1)........... 2008 $ 6,471 Rooms: 24.0% of first $11,275, 70.0% of next $4,216, 73.0% thereafter
F&B: 21.0% of first $2,843, 40.0% of next $1,691, 50.0% thereafter
Telephone: 20.0% of first $539, 35.0% of next $275, 50.0% thereafter
Other: 20.0% of first $735, 35.0% of next $382, 60.0% thereafter
Le Meridien Dal-
las,
Dallas, TX(2)... 2008 $ 2,603 Rooms: 20.0% of first $9,329, 63.0% of next $1,686, 70.0% thereafter
F&B: 10.0% of first $3,385, 25.0% of next $540, 35.0% thereafter
Telephone: 25.0% of first $373, 45.0% of next $93, 50.0% thereafter
Other: 20.0% of first $30, 45.0% of next $141, 55.0% thereafter
Marriott Seaview
Resort,
Galloway Town-
ship, NJ........ 2008 $ 4,608 Rooms: 11.0% of first $7,500, 60.0% of next $6,226, 69.0% thereafter
F&B: 10.0% of first $8,634, 40.0% of next $1,668, 45.0% thereafter
Telephone: 20.0% of first $294, 25.0% of next $98, 50.0% thereafter
Golf: 20.0% of first $4,164, 35.0% of next $724, 50.0% thereafter
Other: 20.0% of first $500, 50.0% of next $88
Holiday Inn
Beachside Re-
sort,
Key West, FL.... 2007 $ 2,211 Rooms: 26.0% of first $4,476, 65.0% of next $2,142, 76.0% thereafter
F&B: 20.0% of first $491, 30.0% of next $736, 40.0% thereafter
Telephone: 20.0% of first $69, 35.0% of next $78, 40.0% thereafter
Other: 20.0% of first $50, 40.0% of next $48, 45.0% thereafter
LaGuardia Airport
Marriott,
New York, NY.... 2008 $ 4,637 Rooms: 20.0% of first $14,461, 68.0% of next $4,167, 70.0% thereafter
F&B: 15.0% of first $6,377 20.0 of next $1,472, 25.0% thereafter
Telephone: 15.0% of first $392, 20.0 of next $118, 25.0% thereafter
Other: 15.0% of first $446, 20.0% of next $336, 25.0% thereafter
Omaha Marriott
Hotel
Omaha, NE....... 2008 $ 2,564 Rooms: 20.0% of first $6,863, 60.0% of next $1,931 65.0% thereafter
F&B: 20.0% of first $3,365, 35.0% of next $1,109. 45.0% thereafter
Telephone: 25.0% of first $176, 30.0% of next $25, 35.0% thereafter
Other: 20.0% of first $289, 30.0% of next $82, 35.0% thereafter
Camberley Plaza
Sabal Park Ho-
tel,
Tampa, FL....... 2009 $ 2,172 Rooms: 20.0% of first $3,922, 65.0% of next $2,255, 70.0% thereafter
F&B: 10.0% of first $2,747, 25.0% of next $294, 40.0% thereafter
Telephone: 25.0% of first $167, 45.0% of next $29, 48.0% thereafter
Other: 20.0% of first $69, 45.0% of next $29, 47.0% thereafter
Holiday Inn Plaza
Park,
Visalia, CA..... 2004 $ 956 Rooms: 20.0% of first $3,039, 65.0% of next $490, 78.0% thereafter
F&B: 10.0% of first $1,471, 20.0% of next $784, 35.0% thereafter
Other: 15.0% of first $245, 35.0% of next $98, 40.0% thereafter
Le Montrose All
Suite Hotel De
Gran Luxe West
Hollywood, CA... 2009 $ 2,243 Rooms: 25.0% of first $2,926, 68.0% of next $2,712, 75.0% thereafter
Other: 37.0% of first $1,077, 45.0% of next $881, 55.0% thereafter
-------
Total........... $33,661
<CAPTION>
12 MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------
PRO FORMA PARTICIPATING RENT
--------------------------------------
INITIAL HOTEL ROOM F&B TELEPHONE OTHER GOLF
------------- ------- ------ --------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Radisson Hotel
South and Plaza
Tower,
Bloomington,
MN.............. $ 4,451 $2,344 $133 $ 340 --
Le Meridien New
Orleans,
New Orleans,
LA(1)........... $ 6,841 $1,135 $174 $ 327 --
Le Meridien Dal-
las,
Dallas, TX(2)... $ 2,568 $ 450 $129 $ 38 --
Marriott Seaview
Resort,
Galloway Town-
ship, NJ........ $ 3,011 $1,907 $ 82 $ 152 $1,589
Holiday Inn
Beachside Re-
sort,
Key West, FL.... $ 2,454 $ 295 $ 40 $ 30 --
LaGuardia Airport
Marriott,
New York, NY.... $ 5,040 $1,188 $131 $ 139 --
Omaha Marriott
Hotel
Omaha, NE....... $ 2,505 $1,471 $ 50 $ 80 --
Camberley Plaza
Sabal Park Ho-
tel,
Tampa, FL....... $ 2,449 $ 491 $ 60 $ 53 --
Holiday Inn Plaza
Park,
Visalia, CA..... $ 932 $ 260 -- $ 47 --
Le Montrose All
Suite Hotel De
Gran Luxe West
Hollywood, CA... $ 2,180 -- -- $ 683 --
------- ------ --------- ------ ------
Total........... $32,431 $9,541 $846 $1,889 $1,589
</TABLE>
- ------
(1) Le Meridien New Orleans Hotel's participating rent thresholds will be
adjusted in 1999 as follows:
Rooms:24.0% of first $12,219, 70.0% of next $4,569, 73.0% thereafter.
F&B:21.0% of first $3,081, 40.0% of next $1,833, 50.0% thereafter.
Telephone:20.0% of first $584, 35.0% of next $298, 50.0% thereafter.
Other:20.0% of first $797, 35.0% of next $414, 60.0% thereafter.
(2) Le Meridien Dallas Hotel's participating rent thresholds will be adjusted
in 1999 as follows:
Rooms:20% of first $9,943, 63% of next $1,798, 70% thereafter.
F&B:10% of first $3,605, 25% of next $575, 35% thereafter.
Telephone:25% of first $391, 45% of next $98, 50% thereafter.
Other:20% of first $31, 45% of next $149 55% thereafter.
68
<PAGE>
FRANCHISE AND BRAND AGREEMENTS
Two of the 10 Initial Hotels are operated under franchise licenses with
nationally recognized hotel companies and seven are operated pursuant to
agreements that include the right to use a hotel brand name. The Company
believes the public's perception of quality associated with a hotel brand is
an important feature in the operation of a hotel. Franchisors and licensors of
hotel brands provide a variety of benefits for licensees which include
national advertising, publicity and other marketing programs designed to
increase brand awareness, training of personnel, continuous review of quality
standards and centralized reservation systems.
The franchise licenses generally specify certain management, operational,
recordkeeping, accounting, reporting and marketing standards and procedures
with which the applicable Operator must comply. The franchise and brand
licenses generally obligate the licensees to comply with standards and
requirements with respect to training of operational personnel, safety,
maintaining specified insurance, the types of services and products ancillary
to guest room services that may be provided by the Operator, display of
signage, and the type, quality and age of FF&E included in guest rooms,
lobbies and other common areas.
The franchise licenses with respect to Holiday Inn Plaza Park and Holiday
Inn Beachside Resort expire in October 2004 and July 2007, respectively. The
franchise licenses provide for termination at the franchisor's option upon the
occurrence of certain events, including the applicable franchisee's failure to
pay royalties and fees or perform its other covenants under the license
agreement, bankruptcy, abandonment of the franchise, commission of a felony,
assignment of the license without the consent of the franchisor, or failure to
comply with applicable law in the operation of the relevant Initial Hotel. The
franchise license agreements do not renew automatically upon expiration. The
franchisee is responsible for making all payments under the franchise
agreements to the franchisors. Under the franchise agreements the Company,
which is the franchisee, pays franchise royalty fees, marketing fees, and
reservation fees equal to 7.5% of Room Revenue.
LE MERIDIEN(R) IS A REGISTERED TRADEMARK OF FORTE, INC., WHICH HAS NOT
ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE
INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. THE GRANT OF A LICENSE TO USE THE
LE MERIDIEN(R) BRAND NAME FOR CERTAIN OF THE INITIAL HOTELS IS NOT INTENDED
AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR
ENDORSEMENT BY FORTE, INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR
DIVISIONS) OF THE COMPANY, THE OPERATING PARTNERSHIP OR THE COMMON SHARES
OFFERED HEREBY.
RADISSON(R) IS A REGISTERED TRADEMARK OF RADISSON HOTELS INTERNATIONAL,
INC., WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL
RESULTS OF THE INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. THE GRANT OF A
LICENSE TO USE THE RADISSON(R) BRAND NAME FOR AN INITIAL HOTEL IS NOT INTENDED
AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR
ENDORSEMENT BY RADISSON HOTELS INTERNATIONAL, INC. (OR ANY OF ITS AFFILIATES,
SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE OPERATING PARTNERSHIP OR THE
COMMON SHARES OFFERED HEREBY.
MARRIOTT(R) IS A REGISTERED TRADEMARK OF MARRIOTT INTERNATIONAL, INC., WHICH
HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF
THE INITIAL HOTELS SET FORTH IN THIS PROSPECTUS. THE GRANT OF A LICENSE TO USE
THE MARRIOTT(R) BRAND NAME FOR CERTAIN OF THE INITIAL HOTELS IS NOT INTENDED
AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR
ENDORSEMENT BY MARRIOTT INTERNATIONAL, INC. (OR ANY OF ITS AFFILIATES,
SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE OPERATING PARTNERSHIP OR THE
COMMON SHARES OFFERED HEREBY.
HOLIDAY INN(R) IS A REGISTERED TRADEMARK OF HOLIDAY INNS FRANCHISING, INC.
("HOLIDAY INNS"). HOLIDAY INNS HAS NOT ENDORSED OR APPROVED THE OFFERING OR
ANY
69
<PAGE>
OF THE FINANCIAL RESULTS OF THE INITIAL HOTELS SET FORTH IN THIS PROSPECTUS
NOR DOES HOLIDAY INNS HAVE ANY INTEREST IN THE COMPANY OR THE COMMON SHARES
OFFERED HEREBY, EXCEPT AS A FRANCHISOR. A GRANT OF A HOLIDAY INN(R) FRANCHISE
LICENSE FOR CERTAIN OF THE INITIAL HOTELS IS NOT INTENDED AS, AND SHOULD NOT
BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY HOLIDAY
INNS (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE
OPERATING PARTNERSHIP OR THE COMMON SHARES OFFERED HEREBY.
CAMBERLEY(R) IS A REGISTERED TRADEMARK OF CAMBERLEY ASSOCIATES, INC., DOING
BUSINESS AS THE CAMBERLEY HOTEL COMPANY, WHICH HAS NOT ENDORSED OR APPROVED
THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE INITIAL HOTELS SET FORTH
IN THIS PROSPECTUS. THE GRANT OF A LICENSE TO USE THE CAMBERLEY(R) BRAND NAME
FOR CERTAIN OF THE INITIAL HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY CAMBERLEY
ASSOCIATES, INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE
COMPANY, THE OPERATING PARTNERSHIP OR THE COMMON SHARES OFFERED HEREBY.
AFFILIATED LESSEE
LaSalle will form the Affiliated Lessee to serve as lessee for the three
Initial Hotels for which the Operator has declined to serve as lessee. The
three hotels are Marriott Seaview Resort, LaGuardia Airport Marriott and the
Omaha Marriott Hotel.
OPERATOR AGREEMENTS
In order for the Company to qualify as a REIT, neither the Company nor the
Operating Partnership may operate hotels or related properties. The Lessees
will engage the Operators to operate the Initial Hotels pursuant to operator
agreements (the "Operator Agreements").
The Operator Agreements for the Initial Hotels, which are leased to
unaffiliated Lessees and operated by affiliates of such unaffiliated Lessees,
provide that: (i) the payment of management fees by the applicable Lessee is
subordinate to the applicable Lessee's obligations to the Company under the
applicable Participating Lease; (ii) the Company will have the right to
approve the initial Operator and the form of the Operator Agreement; (iii) the
applicable Lessee may not, without the prior approval of the Company, change
or terminate the Operator, modify or terminate the Operator Agreement, or
permit the Operator Agreement to be assigned; and (iv) each Operator Agreement
is coterminous with the applicable Participating Lease. The following
summaries of the Operator Agreements with unaffiliated parties are qualified
in their entirety by reference to the forms of Operator Agreements filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
Radisson Hotel South and Plaza Tower. Radisson Hotel South and Plaza Tower
will be leased to and operated by affiliates of Radisson. The management fee
under the applicable Operator Agreement is 4% of gross revenues, determined in
accordance with the terms of the applicable Operator Agreement.
Le Meridien New Orleans Hotel. Le Meridien New Orleans Hotel will be leased
to and operated by affiliates of Meridien. The management fee under the
applicable Operator Agreement is 2.5% of gross revenues, determined in
accordance with the terms of the applicable Operator Agreement.
Le Meridien Dallas Hotel. Le Meridien Dallas Hotel will be leased to and
operated by affiliates of Meridien. The management fee under the applicable
Operator Agreement is 2.5% of gross revenues, determined in accordance with
the terms of the applicable Operator Agreement.
Holiday Inn Beachside Resort. Holiday Inn Beachside Resort will be leased to
and operated by an affiliate of Durbin. The management fee under the
applicable Operator Agreement is 3% of gross revenues, determined in
accordance with the terms of the applicable Operator Agreement.
70
<PAGE>
Camberley Plaza Sabal Park Hotel. Camberley Plaza Sabal Park Hotel is
currently operated by an affiliate of Camberley. The management fee under the
applicable Operator Agreement is 3% of gross revenues, determined in
accordance with the terms of the applicable Operator Agreement. The Company
anticipates that this hotel will be leased by an unaffiliated lessee and will
be operated by a new independent operator.
Holiday Inn Plaza Park. Holiday Inn Plaza Park Hotel will be leased to and
operated by OLS. The management fee under the applicable Operator Agreement is
3% of gross revenues, determined in accordance with the terms of the
applicable Operator Agreement.
Le Montrose All Suite Hotel De Gran Luxe. The Le Montrose All Suite Hotel De
Gran Luxe will be leased to and operated by OLS. The management fee under the
applicable Operator Agreement is 3% of gross revenues, determined in
accordance with the terms of the applicable Operator Agreement.
The following summaries of the Operator Agreements for the Initial Hotels
which are leased to the Affiliated Lessee and operated by Marriott are
qualified in their entirety by reference to the forms of Operator Agreements
filed as an exhibit to the Registration Statement of which this Prospectus is
a part.
LaGuardia Airport Marriott. LaGuardia Airport Marriott will be leased to the
Affiliated Lessee and operated by Marriott pursuant to an Operator Agreement
which has a term ending November 8, 2006, with five, 10 year renewals by the
Operator. The management fee under the applicable Operator Agreement is 3% of
gross revenues plus an incentive fee of 20% of operating profit, determined in
accordance with the terms of the applicable Operator Agreement. The applicable
Operator Agreement provides the Operator a right of first refusal for the sale
or lease of this Initial Hotel to a third party or the right to terminate the
Operator Agreement upon such sale or lease.
Omaha Marriott Hotel. Omaha Marriott Hotel will be leased to the Affiliated
Lessee and operated by Marriott pursuant to an Operator Agreement which has a
term ending December 1, 2016 with three 10 year renewals by the Operator. The
management fee under the applicable Operator Agreement is 3% of gross revenues
plus an incentive fee equal to 20% of operating profit, determined in
accordance with the terms of the applicable Operator Agreement. The applicable
Operator Agreement provides the Operator with the right to terminate the
Operator Agreement upon any subsequent sale of this Initial Hotel.
Marriott Seaview Resort. Marriott Seaview Resort will be leased to the
Affiliated Lessee and operated by Marriott pursuant to an Operator Agreement
which has a term ending May 30, 2008 with one five-year renewal by the tenant
and five, five-year renewals by the Operator. The management fee under the
applicable Operator Agreement is 3% of gross revenues plus an incentive fee of
20% of operating profit, determined in accordance with the terms of the
applicable Operator Agreement. The applicable Operator Agreement provides the
Operator a right of first refusal for the sale or lease of this Initial Hotel
to a third party or the right to terminate the Operator Agreement upon such
sale.
EXCLUDED PROPERTIES
In addition to the interests of LaSalle in the Initial Hotels which are
being acquired by the Company, LaSalle also owns interests in or participates
in a limited number of other hotel properties that will not be acquired by the
Company at the time of the completion of the Offering and the Formation
Transactions (the "Excluded Properties"). These interests are (i) two hotels
held by a private REIT advised by LaSalle that has invested the majority of
its assets in office properties, (ii) a partnership interest in one hotel
situated in a mixed-use complex currently held in a commingled fund for which
LaSalle serves as advisor but is expected to be offered for sale in 1998,
(iii) one hotel that is owned principally by a partner with LaSalle for which
LaSalle serves as advisor and is currently being marketed for sale, (iv) one
hotel under construction in a mixed-use complex for which LaSalle is serving
solely as development agent, without any ownership interest in the hotel, (v)
one hotel in which LaSalle and its partners own a 50% interest for which
LaSalle serves as advisor, and (vi) a partnership interest in one hotel owned
by a client of which LaSalle serves as an advisor.
71
<PAGE>
EMPLOYEES
The Company has no employees. The Advisor, whose sole activity, with the
exception of the Excluded Properties, is advising the Company, manages the
day-to-day operations of the Company. The Advisor has assembled a team of
eight hotel acquisition and investment management professionals, collectively
possessing extensive experience in hotel real estate, with access to
additional personnel from LaSalle. These persons are employed directly by and
dedicated to providing the required services to the Company by the Advisor,
with the exception of activities related to the Excluded Properties.
ENVIRONMENTAL MATTERS
Under various federal, state, and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person who arranges for the disposal or treatment of a hazardous or toxic
substance at a property owned by another, or who transports such substances to
such property, may be liable for the costs of removal or remediation of such
substance released into the environment at that property. The costs of
remediation or removal of such substances may be substantial, and the presence
of such substances, or the failure to promptly remediate such substances, may
adversely affect the owner's ability to sell such real estate or to borrow
using such real estate as collateral. In connection with the ownership and
operation of the Initial Hotels, the Company, the Operating Partnership, or
the Lessee, as the case may be, may be potentially liable for such costs.
Phase I environmental site assessments ("ESAs") have been performed on all
of the Initial Hotels by a qualified independent environmental engineer. The
most recent Phase I reports for the Initial Hotels were prepared in 1997,
except for two of the Initial Hotels for which the Phase I reports were
prepared in 1996. The purpose of the Phase I ESAs is to identify potential
sources of contamination for which the Initial Hotels may be responsible and
to assess the status of environmental regulatory compliance. The Phase I ESAs
include historical reviews of the Initial Hotels, reviews of certain public
records, preliminary investigations of the sites and surrounding properties,
screening for the presence of ACMs, polychlorinated biphenyls, underground
storage tanks, and the preparation and issuance of a written report. The Phase
I ESAs do not include invasive procedures, such as soil sampling or ground
water analysis.
The ESAs have not revealed any environmental liability or compliance
concerns that the Company believes would have a material adverse effect on the
Company's business, assets, results of operation, or liquidity, nor is the
Company aware of any material environmental liability or concerns.
Nevertheless, it is possible that the Phase I ESAs did not reveal all
environmental liabilities or compliance concerns or that material
environmental liabilities or compliance concerns exist of which the Company is
currently unaware. 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 Initial Hotels will not be
affected by the condition of the properties in the vicinity of the Initial
Hotels (such as the presence of leaking underground storage tanks) or by third
parties unrelated to the Operating Partnership or the Company.
Neither the Company nor, to the knowledge of the Company, any of the current
owners of the Initial Hotels has been notified by any governmental authority
of any material noncompliance, liability or claim relating to hazardous or
toxic substances or other environmental substances in connection with any of
its hotels.
COMPETITION
The hotel industry is highly competitive. Each of the Initial Hotels is
located in a developed area that includes other hotel properties. The number
of competitive hotel properties in a particular area could have a material
adverse effect on occupancy, ADR and REVPAR of the Initial Hotels or at hotel
properties acquired in the future.
72
<PAGE>
The Company may be competing for investment opportunities with entities that
have substantially greater financial resources than the Company. These
entities may generally be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
hotel operator or the geographic proximity of its investments. Competition may
generally reduce the number of suitable investment opportunities offered to
the Company and increase the bargaining power of property owners seeking to
sell.
INSURANCE
The Company will carry comprehensive liability, fire, extended coverage and
business interruption insurance with respect to the Initial Hotels, with
policy specifications, insured limits and deductibles customarily carried for
similar hotels. The Company will carry similar insurance with respect to any
other hotels developed or acquired in the future. There are, however, certain
types of losses (such as losses arising from wars, certain losses arising from
hurricanes and earthquakes, and losses arising from other acts of nature) that
are not generally insured because they are either uninsurable or not
economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in the
affected hotel, as well as the anticipated future revenues from such hotel,
and would continue to be obligated on any mortgage indebtedness or other
obligations related to the hotel. Any such loss could adversely affect the
business of the Company. Management of the Company believes the Initial Hotels
are adequately insured in accordance with industry practices.
LEGAL PROCEEDINGS
Neither the Company nor the Operating Partnership is currently involved in
any material litigation nor, to the Company's knowledge, is any material
litigation currently threatened against the Company or the Operating
Partnership. LaSalle and the Lessees have advised the Company that they
currently are not involved in any material litigation, other than routine
litigation arising in the ordinary course of business, substantially all of
which is expected to be covered by liability insurance. Certain of the current
owners of the Initial Hotels have represented to the Operating Partnership
that there is no material litigation threatened against or affecting the
Initial Hotels.
73
<PAGE>
REIT MANAGEMENT
The Advisor is a New York based wholly owned subsidiary of LaSalle, a
leading real estate service and investment firm that provides investment
management services, management services and corporate and financial services
to corporations and other real estate owners, users and investors worldwide.
Founded in 1968, LaSalle is headquartered in Chicago, Illinois, and maintains
corporate offices in 10 United States cities including New York, and six
international markets. LaSalle also maintains over 300 property management
offices throughout the United States. In July 1997, LaSalle successfully
completed an initial public offering of its common stock, which is listed on
the NYSE under the symbol "LAP."
Through its investment management arm, LaSalle provides investment
management services to institutional, corporate and high net worth individuals
investing in real estate. LaSalle believes it is the fourth largest manager of
institutional equity capital invested in U.S. real estate properties and
securities as well as the fourth largest manager of institutional real estate
equity investments in the United Kingdom. As of September 30, 1997, LaSalle
had approximately $15.0 billion of real estate assets under management, of
which $12.1 billion represented direct investments in properties and $2.9
billion consisted of public real estate securities investments.
LaSalle, through the Advisor, will conduct all of its future hotel
investment activities in domestic full service hotel properties exclusively
for the benefit of the Company. The Advisor is led by a dedicated team of
experienced hotel investment professionals which has overseen numerous
acquisitions, renovations, brand conversions, operator selections, management
contract negotiations, lease and franchise negotiations, property
repositionings and the successful disposition of hotel investments. Management
of the Advisor also oversaw the completion of the development and opening of
the 367 room super-luxury Four Seasons New York Hotel, and is currently
responsible for the development of a 258 room luxury full service hotel in
Philadelphia on behalf of the University of Pennsylvania.
In order to provide incentives to the Advisor and align its interests with
those of the shareholders of the Company, the Company has entered into an
incentive based advisory agreement with the Advisor. For managing and advising
the Company and providing resources and a scope of services not otherwise
affordable to the Company, the Advisor will receive a base fee to be paid in
cash, calculated as a percentage of the Company's NOI and an incentive fee to
be paid in Common Shares or Units based on growth in the Company's FFO per
share. In addition, upon completion of the Offering, LaSalle will own
approximately 10.8% of the equity market capitalization of the Company (based
on the assumed initial public offering price of $20.00 per share), thereby
further aligning the interests of LaSalle and the Advisor with those of the
Company's shareholders. See "Risk Factors--Conflicts."
ADVISORY AGREEMENT
The following is a summary of certain terms of the Advisory Agreement. The
summary is qualified in its entirety by reference to the Advisory Agreement,
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
The Advisor will provide acquisition, management, advisory and
administrative services to the Company pursuant to an Advisory Agreement. The
initial term of the Advisory Agreement extends through December 31, 1999,
subject to successive, automatic one year renewals unless terminated according
to the terms of the Advisory Agreement.
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Compensation
For its services under the Advisory Agreement, the Advisor will receive an
annual base fee, payable quarterly, to be paid in cash in accordance with the
following schedule:
<TABLE>
<CAPTION>
INCREMENTAL NOI OF COMPANY
----------------------------------
UP TO BUT
FROM EXCLUDING BASE FEE %
------------ ---------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
$ 0 $100,000 5.0%
$100,000 $225,000 an additional 4.8% on such increment
$225,000 $350,000 an additional 4.6% on such increment
$350,000 $475,000 an additional 4.4% on such increment
$475,000 $600,000 an additional 4.2% on such increment
$600,000 any excess an additional 4.0% on such increment
</TABLE>
In addition, an annual incentive advisory fee will be payable each year in
arrears equal to 25% of the result of multiplying (A) the amount by which the
actual increase in FFO per share, if any, for each calendar year (each a
"Measurement Year") as compared to FFO per share for the previous year (the
"Prior Year"), exceeds an increase of 7% per annum in FFO per share for the
Prior Year by (B) weighted average Common Shares and Units outstanding for the
Measurement Year. Payment of the Incentive Fee shall be made in the Company's
Common Shares and Units. The number of Common Shares and Units shall be the
whole number of shares equal to the value of the Incentive Fee divided by the
average closing price of the Common Shares on the NYSE during the Measurement
Year. For the year ending December 31, 1998, the sum of the Base Fee and the
Incentive Fee shall not exceed 6% of the Company's NOI.
Non-competition
The Advisor and its Affiliates will not invest directly or indirectly or on
behalf of others in any full service hotel properties in the United States
(the "Competitive Hotels"), other than through the Company except for the
Excluded Properties and except for hotels constituting part of a mixed-use
property where less than 40% of the property's NOI is attributable to the
hotel. Notwithstanding the foregoing, no Affiliate shall be restricted from
acquiring interests, directly or indirectly, in Competitive Hotels or advising
with respect to Competitive Hotels to the extent that such Affiliate (i) is a
registered investment adviser under the Investment Advisers Act of 1940 and
makes such acquisition or gives such advice in the ordinary course of
management activities for securities portfolios, (ii) acquires a company or
other entity which owns or advises with respect to Competitive Hotels,
provided that is not a material activity of such company or entity and that
such company or entity does not engage in activities relating to additional
Competitive Hotels, (iii) invests in debt or debt securities, or (iv) is
engaged in consulting, development, financing, disposition or facilities
services with respect to Competitive Hotels.
Termination
The Advisory Agreement may be terminated for cause or by the mutual consent
of the parties. The Advisor shall be entitled to receive all accrued but
unpaid compensation and expense reimbursement in cash within 30 days of any
termination date. The Advisor has the right to assign the Advisory Agreement
to an Affiliate subject to approval by the Independent Trustees of the
Company. The Company has the right to assign the Advisory Agreement to any
successor to all of its assets, rights and obligations.
Indemnification
The Company has agreed to indemnify and hold harmless the Advisor and its
partners, directors, officers, stockholders, agents and employees and each
other person or entity, if any, controlling the Advisor (an "Indemnified
Party"), to the full extent lawful, from and against any and all losses,
claims, damages or liabilities of any nature whatsoever with respect to or
arising from any acts or omission of the Advisor (including ordinary
negligence) in its capacity as such, except with respect to losses, claims,
damages or liabilities with respect to or arising out of the Advisor's gross
negligence, bad faith or willful misconduct and its affiliates and their
respective officers, directors, partners and employees from and against any
and all liabilities, claims, damages or losses in
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the performance of their duties in good faith hereunder, and related expenses
which shall include reasonable attorney's fees, subject only to such
limitations as may be imposed on such indemnification by Maryland law.
CONFLICTS BETWEEN THE COMPANY AND THE ADVISOR
The interests of the Company and the Advisor potentially may conflict due to
the ongoing relationships between the two entities. Because the timing and
amount of incentive and other fees received by the Advisor may be affected by
various determinations, including the sale or disposition of properties, the
Advisor may have a conflict of interest with respect to such determinations.
In addition, LaSalle is a significant shareholder of the Company and could
influence decisions regarding the Advisory Agreement and fees relating to such
agreement. The failure of the Advisor or the Company to enforce the material
terms of the Advisory Agreement could result in a monetary loss to the
Company, which loss could have a material adverse effect on the Company's
financial condition or results of operations.
In addition, Messrs. Scott and Bortz serve as Trustees of the Company and
also serve as officers and directors of LaSalle and the Advisor and Messrs.
Bortz and Barnello also serve as officers of the Company. Messrs. Scott, Bortz
and Barnello, as well as certain other officers and Trustees of the Company
and directors of the Advisor, also own shares (and/or options or other rights
to acquire shares) in LaSalle, either directly or indirectly. With respect to
the various contractual arrangements between the two entities, the potential
exists for disagreement as to the quality of services provided by the Advisor
and as to contractual compliance. In addition, certain situations could arise
where actions taken by the Advisor in its capacity as manager or adviser of
the Excluded Properties would not necessarily be in the best interests of the
Company. Nevertheless, the Company believes that there is sufficient mutuality
of interest between the Company and the Advisor to result in a mutually
productive relationship.
Policies and Procedures for Addressing Conflicts
The Company has adopted certain policies designed to eliminate or minimize
potential conflicts of interest. The Company's Board of Trustees is subject to
certain provisions of Maryland law which are designed to eliminate or minimize
certain potential conflicts of interest. However, there can be no assurance
that these policies will always be successful in eliminating the influence of
such conflicts, and if they are not successful, decisions could be made that
might fail to reflect fully the interests of all shareholders.
With a view toward protecting the interests of the Company's shareholders,
the Bylaws of the Company provide that a majority of the Board of Trustees
(and a majority of each committee of the Board of Trustees) must not be
"Affiliates" of the Advisor, as that term is defined in the Bylaws, and that
the investment policies of the Company must be reviewed annually by a majority
of these trustees. Moreover, the Company may terminate the Advisory Agreement
upon notice given at least 180 days prior to the expiration of the then
current term of the Agreement and all decisions regarding conflicts with the
Advisor and termination of the Advisory Agreement shall be made by vote of the
Independent Trustees.
The Company has adopted a policy that, without the approval of a majority of
the Independent Trustees, it will not (i) acquire from or sell to any trustee,
officer or employee of the Company or the Advisor, or any entity in which a
trustee, officer or employee of the Company beneficially owns more than a 1%
interest, or acquire from or sell to any affiliate of any of the foregoing,
any of the assets or other property of the Company, (ii) make any loan to or
borrow from any of the foregoing persons or (iii) engage in any other
transaction with any of the foregoing persons, including arrangements for
services beyond the scope of the Advisory Agreement.
Pursuant to Maryland law, each Trustee will be subject to restrictions on
misappropriation of corporate opportunities to himself or his affiliates
learned of solely as a result of his service as a member of the Board of
Trustees of the Company. In addition, under Maryland law, a transaction
effected by the Company or any entity controlled by the Company in which a
Trustee or certain related persons and entities of the Trustees has a
conflicting interest, as defined thereunder, of such financial significance
that it would reasonably be expected to exert an influence on the Trustee's
judgment may not be enjoined, set aside or give rise to damages on the grounds
of such interest if (a) the transaction is approved, after disclosure of the
interest, by the affirmative vote
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of a majority of the disinterested trustees, or by the affirmative vote of a
majority of the votes cast by disinterested shareholders, or (b) the
transaction is established to have been fair to the Company.
TRUSTEES AND OFFICERS OF THE COMPANY, THE ADVISOR AND RELEVANT AFFILIATES
Board of Trustees and Committees
The Company will be managed by a seven member Board of Trustees, a majority
of whom will be Independent Trustees. The four Independent Trustees will
become trustees of the Company as of the effective date of this Prospectus.
The Board of Trustees will initially have an Audit Committee, a Compensation
Committee and an Investment Committee.
Audit Committee. Promptly following the completion of the Offering, the
Board of Trustees will establish an Audit Committee that will consist entirely
of Independent Trustees. The Audit Committee will 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 accountants, consider the
range of audit and non-audit fees, and review the adequacy of the Company's
and Advisor's internal accounting controls.
Compensation Committee. The Board of Trustees will establish a Compensation
Committee to annually review the performance of the Advisor under the Advisory
Agreement, evaluate and determine the appropriateness of the compensation
arrangement of the Advisor at the time of the renewal of the Advisory
Agreement, determine the appropriateness of the renewal of the Advisory
Agreement and administer the Share Option Plan. The members of the
Compensation Committee will consist entirely of Independent Trustees.
Investment Committee. The Board of Trustees will establish an Investment
Committee to meet, as required, to review investments submitted by the Advisor
for recommendation to the Board, and to approve investments within certain
parameters as delegated to the Investment Committee by the Board.
The Company 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
Each trustee who is not an employee of LaSalle will be paid an annual fee of
$20,000. In addition, each such trustee will be paid $1,000 for attendance at
each meeting of the Company's Board of Trustees and $500 for attendance at
each meeting of a committee of the Company's Board (at a time other than a
Board meeting) of which such trustee is a member. In the event that special
telephonic board meetings are held, a fee of $500 shall be payable for such
meetings. The annual retainer fee will be paid to such trustees 50% in cash
and 50% in shares of Common Stock. Meeting fees will be paid in cash. Each
trustee may elect to receive, in lieu of the cash portion of the annual
retainer, compensation in the form of grants of Common Shares. No other
trustees will receive trustees' fees.
In addition, the Company will reimburse trustees for their out-of-pocket
expenses incurred in connection with their service on the Board of Trustees.
In addition, each Trustee who is not an employee of LaSalle elected to the
Board of Trustees for the first time will receive upon such election an
initial grant of options to purchase 5,000 Common Shares at fair market value
on the date of grant. In addition, each Trustee who is not an employee of
LaSalle will receive an annual grant of options to purchase 1,000 Common
Shares for each year during such trustee's term. Any Trustee who ceases to be
a trustee will forfeit the right to receive any options not previously vested.
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Trustees and Executive Officers
Upon the effective date of this Prospectus, the Board of Trustees will
consist of seven members, four of whom will be Independent Trustees. The Board
of Trustees will be divided into three classes serving staggered three year
terms. Initially, the Company will have two executive officers, Messrs. Bortz
and Barnello, who will be compensated by the Advisor and will receive no
separate compensation from the Company. Certain information regarding the
trustees and executive officers of the Company is set forth below.
<TABLE>
<CAPTION>
CLASS/TERM
NAME POSITION AGE EXPIRATION
---- -------- --- --------------
<S> <C> <C> <C>
Stuart L. Scott......... Chairman of the Board of Trustees 59 Class III/2001
Jon E. Bortz............ President, Chief Executive Officer and
Trustee 41 Class I/1999
Michael D. Barnello..... Chief Operating Officer and Senior Vice 32
President of Acquisitions
</TABLE>
Stuart L. Scott. Mr. Scott has been Chairman of the Board of Trustees of the
Company since its formation, a member of the Board of the Advisor since its
incorporation and Chairman of the Board of Directors and Chief Executive
Officer of LaSalle and its predecessor entities since December 1992. Prior to
December 1992, Mr. Scott was President of LaSalle's predecessor entities for
more than 15 years and Co-Chairman of its Management Committee from January
1990 to December 1992. Mr. Scott originally joined LaSalle in 1973. He is a
member of the Board of Directors of Hartmarx Corporation, a clothing
manufacturing company. He holds a B.A. from Hamilton College and a J.D. from
Northwestern University.
Jon E. Bortz. Mr. Bortz has been President, Chief Executive Officer and a
Trustee of the Company since its formation, and Chairman of the Board and
Chief Executive Officer of the Advisor since its incorporation. Mr. Bortz
founded LaSalle's Hotel Group in 1993, and as President, has overseen all of
LaSalle's hotel investment and development activities. From January 1995 as
Managing Director of LaSalle's Investment Advisory Division, Mr. Bortz has
also been responsible for certain east coast development projects, including
the redevelopment of Grand Central Terminal in New York City. From January
1990 to January 1995, he was a Senior Vice President of LaSalle's Investment
Division, with responsibility for east coast development projects and
workouts. Mr. Bortz originally joined LaSalle in 1981. He is a member of the
Board of Directors of LaSalle Advisors Capital Management, Inc. and LaSalle
Co-Investment, Inc., both subsidiaries of LaSalle Partners Incorporated. Mr.
Bortz holds a B.S. in Economics from The Wharton School of the University of
Pennsylvania and became a Certified Public Accountant in Maryland in 1979.
Michael D. Barnello. Mr. Barnello has been Chief Operating Officer and
Senior Vice President of Acquisitions of the Company since its formation, and
President and Chief Operating Officer of the Advisor responsibility for hotel
acquisitions and advisory activities. Mr. Barnello joined LaSalle Partners in
April 1995 as a Vice President. Prior to April 1995, Mr. Barnello was a Vice
President with Strategic Realty Advisors, formerly known as VMS Realty
Partners, where he was responsible for hotel asset management since 1990.
Concurrently, Mr. Barnello was a Vice President at Stone-Levy LLC, an
affiliate of Strategic Realty Partners, where he was responsible for hotel
acquisitions. Mr. Barnello holds a B.S. in Hotel Administration from the
Cornell School of Hotel Administration.
SHARE OPTION AND INCENTIVE PLAN
Prior to the Offering, the Board of Trustees will adopt, and the
shareholders will approve the 1998 Share Option and Incentive Plan (the "Share
Option Plan"). On and after the closing of the Offering, the Share Option Plan
will be administered by the Compensation Committee of the Board of Trustees.
The Advisor and its employees and operators of the Company's hotels and their
employees generally will be eligible to participate in the Share Option Plan.
Independent Trustees are eligible to receive options to purchase Common Shares
under the Share Option Plan on a limited basis. See "--Compensation of
Trustees."
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The following summary of the Share Option Plan is qualified in its entirety
by reference to the full text of the Share Option Plan, a copy of which has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
The Share Option Plan authorizes (i) the grant of options to purchase Common
Shares that qualify as incentive options under Section 422 of the Code
("ISOs"), (ii) the grant of options to purchase Common Shares that do not so
qualify ("NQSOs"), (iii) the grant of options to purchase Common Shares in
lieu of cash Trustees' fees, (iv) grants of Common Shares in lieu of cash
compensation and (v) the making of loans to acquire Common Shares in lieu of
compensation. The exercise price of options to purchase Common Shares will be
determined by the Compensation Committee, but may not be less than 100% of the
fair market value of the Common Shares on the date of grant in the case of
ISOs; provided that, in the case of grants of NQSOs granted in lieu of cash
Trustees' fees, the exercise price may not be less than 50% of the fair market
value of the Common Shares of Common Stock on the date of grant. The Company
has reserved 2,100,000 Common Shares for issuance under the Share Option Plan.
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<PAGE>
STRUCTURE AND FORMATION OF THE COMPANY
The following Formation Transactions have occurred or will occur prior to or
contemporaneously with the closing of the Offering:
. The Company was formed as a Maryland real estate investment trust on
January 15, 1998.
. The Operating Partnership was formed as a Delaware limited partnership
on January 13, 1998.
. The Advisor was formed as a Maryland corporation on January 23, 1998.
. The partnerships owning three of the Initial Hotels (Camberley Plaza
Sabal Park Hotel, Holiday Inn Plaza Park and Le Montrose All Suite Hotel
De Gran Luxe) entered into the Bridge Loan on January 30, 1998 pursuant
to which the three partnerships borrowed an aggregate of $48.0 million,
the proceeds of which were used to purchase the interest of Cargill in
those three Initial Hotels and to repay outstanding mortgage and other
indebtedness on such Initial Hotels and certain expenses in connection
therewith. Amounts outstanding under the Bridge Loan will be repaid with
a portion of the net proceeds from the Offering.
. The Company will sell 14,450,000 Common Shares in the Offering.
Approximately $265.8 million of the estimated net proceeds to the
Company from the Offering, 969,500 Common Shares and rights to purchase
843.111 Common Shares will be contributed to the Operating Partnership
in exchange for an approximately 82.3% equity interest in the Operating
Partnership. The Company will be the sole general partner of the
Operating Partnership.
. Each of the Initial Hotels is owned by one or more Contributors
consisting of: LaSalle, Steinhardt, Cargill, Radisson, OLS and an
affiliate of Durbin. The Operating Partnership will acquire a 100%
interest in each of the Initial Hotels for an aggregate of approximately
3,316,310 Units, 969,500 Common Shares, rights to purchase 843,111
Common Shares, approximately $50.4 million in cash and the repayment of
approximately $250.0 million of outstanding mortgage and other
indebtedness on the Initial Hotels (including the $48.0 million Bridge
Loan) and certain expenses in connection therewith.
. LaSalle will form the Affiliated Lessee, to serve as lessee for the
three Initial Hotels for which the Operator has declined to serve as
lessee. The Affiliated Lessee will be owned as follows: 9.0% by the
Company, 45.5% by LaSalle and 45.5% by a charitable organization.
. The Operating Partnership will lease the Initial Hotels to the Lessees
for terms of between six and 11 years pursuant to separate Participating
Leases, which provide for rent equal to the greater of Base Rent or
Participating Rent. The Lessees will contract with the Operators to
operate the Initial Hotels under separate Operator Agreements providing,
with respect to seven of the Initial Hotels, for the subordination of
the payment of all management fees to the Lessees' obligations to pay
rent to the Operating Partnership.
As a result of the Formation Transactions, the Company will own 15,419,500
Units of the Operating Partnership, which will represent an approximate 82.3%
economic interest in the Operating Partnership, and the Advisor and the
Contributors will own 3,316,310 Units, which will represent the remaining
approximate 17.7% economic interest in the Operating Partnership.
. The Advisor will provide acquisition, management, advisory and
administrative services to the Company pursuant to the Advisory
Agreement. For its services under the Advisory Agreement, the Advisor
will receive annual Base and Incentive Fees as set forth under "REIT
Management--Advisory Agreement" above. The Advisor is wholly-owned by
LaSalle.
. The Operating Partnership will lease each Initial Hotel to a Lessee for
terms ranging from six to 11 years pursuant to Participating Leases
which provide for rent equal to the greater of Base Rent or
Participating Rent.
. The Lessees will enter into the Operating Agreements (the "Operator
Agreements") with the Operators pursuant to which the Operators will
operate and manage the Initial Hotels. See "The Initial Hotels--Operator
Agreements."
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BENEFITS TO RELATED PARTIES
As a result of the Formation Transactions, the Advisor, the Contributors and
certain Trustees will receive the following benefits:
. The Advisor will enter into the Advisory Agreement pursuant to which the
Advisor will receive annual base and incentive fees based upon the
performance of the Company. See "REIT Management--Advisory Agreement."
. The Advisor will have the right to appoint two members of the Board of
Trustees of the Company.
. The Advisor will receive options to acquire 443,396 Common Shares.
. LaSalle will own a 45.5% interest in the Affiliated Lessee.
. The Operating Partnership will acquire interests in the Initial Hotels
from LaSalle in exchange for 1,050,960 Units valued at approximately
$21.0 million and 969,500 Common Shares valued at approximately $19.4
million (based on the assumed initial public offering price of $20.00
per share).
. The Operating Partnership will acquire interests in six of the Initial
Hotels from Steinhardt in exchange for 1,657,350 Units valued at
approximately $33.1 million (based on the assumed initial public
offering price of $20.00 per share), rights to purchase 678,236 Common
Shares at the initial public offering price per share, the right to
appoint one member of the initial Board of Trustees of the Company and
$19.2 million in cash. Additionally, the Operating Partnership will
acquire Steinhardt's interest in the LaGuardia Airport Marriott for
approximately $0.4 million in cash.
. The Operating Partnership will acquire interests in five of the Initial
Hotels from Cargill in exchange for 198,750 Units valued at
approximately $4.0 million (based on the assumed initial public offering
price of $20.00 per share), rights to purchase 164,875 Common Shares at
the initial public offering price per share and $30.4 million in cash.
Additionally, the Operating Partnership will acquire Cargill's interest
in the LaGuardia Airport Marriott for approximately $0.4 million in
cash.
. The Operating Partnership will acquire interests in two of the Initial
Hotels from OLS, the Operator and partial owner of such hotels, in
exchange for 84,350 Units valued at approximately $1.7 million (based on
the assumed initial public offering price of $20.00 per share).
. The Operating Partnership will acquire interests in one of the Initial
Hotels from Radisson, the Operator and partial owner of such hotel, in
exchange for 320,450 Units valued at approximately $6.4 million (based
on the assumed initial public offering price of $20.00 per share).
. The Operating Partnership will acquire interests in one of the Initial
Hotels from Durbin, the Operator and partial owner of such hotel, in
exchange for 4,450 Units valued at approximately $0.1 million (based on
the assumed initial public offering price of $20.00 per share).
. Certain tax consequences to the Contributors from the conveyance of
their interests in the Initial Hotels to the Operating Partnership will
be deferred.
. Contributors receiving Units and/or rights to purchase Common Shares in
the Formation Transactions will have registration rights with respect to
Common Shares issued in exchange for Units or upon exercise of such
rights.
. Each non-employee Trustee of the Company will receive options to acquire
5,000 Common Shares.
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<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investment, financing, conflict of interest and certain other activities. The
policies with respect to these activities have been determined by the Board of
Trustees of the Company and may be amended or revised from time to time at the
discretion of the Board of Trustees without a vote of the shareholders of the
Company, except that (i) changes in certain policies with respect to conflicts
of interest must be consistent with legal requirements, (ii) certain policies
with respect to competition are imposed pursuant to contracts that cannot be
amended without the consent of all parties thereto and (iii) the Company
cannot take any action intended to terminate its qualification as a REIT
without the approval of the holders of a majority of the outstanding Common
Shares. There can be no assurance that the Company will be able to acquire
interests in hotels that meet its investment criteria.
INVESTMENT POLICIES
The Company will conduct all of its investment activities through the
Operating Partnership and its subsidiaries. The Company's investment
objectives are to (i) preserve and protect the Company's capital, (ii) provide
quarterly distributions to its shareholders and (iii) provide a benefit from
potential appreciation in value of the Initial Hotels and any acquired or
developed hotels, payable upon the sale or refinancing of the Initial Hotels
or the additional hotels. There can be no assurance that the investment
objectives described above will actually be attained.
While the Company's current portfolio consists of, and the Company's
business objectives emphasize, investments in hotels, in the discretion of the
Board of Trustees, the Company may invest in real estate related equity
securities and other real estate interests and properties. Future development
or investment activities will not be limited to any geographic area or product
type or to a specified percentage of the Company's assets. The Company does
not intend to adopt a diversification policy with respect to property
locations, size and market, and in this respect the Company does not have any
limit on the amount or percentage of its assets that may be invested in any
one property or any one market area.
Subject to the percentage ownership limitations and gross income tests
necessary for REIT qualification, the Company also may invest in securities of
other REITs, other entities engaged in real estate activities or securities of
other issuers, including for the purpose of exercising control over such
entities. See "Federal Income Tax Consequences." The Company may enter into
joint ventures or partnerships for the purpose of obtaining an interest in a
particular property or properties in accordance with the Company's investment
policies. Such investments may permit the Company to own interests in larger
assets without unduly restricting diversification and, therefore, add
flexibility in structuring its portfolio. The Company will not enter into a
joint venture or partnership to make an investment that would not otherwise
meet its investment policies. Investments in such securities are also subject
to the Company's policy not to be treated as an investment company under the
Investment Company Act.
FINANCING
The Operating Partnership initially will acquire the interests in the
Initial Hotels. Thereafter, the Company intends to make additional investments
in hotel properties and may incur or cause the Operating Partnership to incur
indebtedness to make such investments or to meet the distribution requirements
imposed by the REIT provisions of the Code, to the extent that cash flow from
the Company's investments and working capital is insufficient.
To ensure that the Company has sufficient liquidity to conduct its
operations, including making investments in additional hotel properties,
renovations and expansions of the Initial Hotels and funding its anticipated
distribution obligations and financing costs, the Company anticipates
obtaining a $200 million revolving Line of Credit. The Line of Credit will be
secured by a first mortgage on some or all of the Initial Hotels.
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Borrowings may be incurred through the Operating Partnership or the Company.
Indebtedness incurred by the Company may be in the form of bank borrowings,
secured and unsecured, and publicly and privately placed debt instruments.
Indebtedness incurred by the Operating Partnership may be in the form of
purchase money obligations to the sellers of properties, publicly or privately
placed debt instruments, financing from banks, institutional investors or
other lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interests in the property owned by the Operating
Partnership. Such indebtedness may be recourse to all or any part of the
property of the Company or the Operating Partnership, or may be limited to the
particular property to which the indebtedness relates. The proceeds from any
borrowings by the Company or the Operating Partnership may be used for the
payment of distributions or dividends, working capital, to refinance existing
indebtedness or to finance acquisitions or expansions of properties. See
"Federal Income Tax Considerations--Requirements for Qualification--
Distribution Requirements."
If the Board of Trustees determines to raise additional equity capital, the
Board has the authority, without shareholder approval, to issue additional
Common Shares, Preferred Shares or other capital shares of the Company in any
manner (and on such terms and for such consideration) as it deems appropriate,
including in exchange for property. Existing shareholders have no preemptive
right to purchase shares issued in any offering, and any such offering might
cause a dilution of a shareholder's investment in the Company.
The Company may make investments other than as previously described,
although it does not currently intend to do so.
POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS
The Company has adopted certain policies designed to eliminate or minimize
potential conflicts of interest. The Company's Board of Trustees is subject to
certain provisions of Maryland law which are designed to eliminate or minimize
certain potential conflicts of interest. However, there can be no assurance
that these policies always will be successful in eliminating the influence of
such conflicts, and if they are not successful, decisions could be made that
might fail to reflect fully the interests of all shareholders.
With a view toward protecting the interests of the Company's shareholders,
the Bylaws of the Company provide that a majority of the Board of Trustees
(and a majority of each committee of the Board of Trustees) must not be
"Affiliates" of the Advisor, as that term is defined in the Bylaws, and that
the investment policies of the Company must be reviewed annually by a majority
of these trustees (the "Independent Trustees"). Moreover, the Company may
terminate the Advisory Agreement upon notice given at least 180 days prior to
the expiration of the then current term of the agreement and all decisions
regarding conflicts with the Advisor and termination of the Advisory Agreement
shall be made by vote of the Independent Trustees.
The Company has adopted a policy that, without the approval of a majority of
the Independent Trustees, it will not (i) acquire from or sell to LaSalle or
the Advisor or any trustee, officer or employee of the Company or the Advisor,
or any entity in which a trustee, officer or employee of the Company
beneficially owns more than a 1% interest, or acquire from or sell to any
affiliate of any of the foregoing, any of the assets or other property of the
Company, (ii) make any loan to or borrow from any of the foregoing persons or
(iii) engage in any other transaction with any of the foregoing persons,
including arrangements for services beyond the scope of the Advisory
Agreement.
Pursuant to Maryland law, each Trustee will be subject to restrictions on
misappropriation of corporate opportunities to himself or his affiliates
learned of solely as a result of his service as a member of the Board of
Trustees of the Company. In addition, under Maryland law, a transaction
effected by the Company or any entity controlled by the Company in which a
Trustee or certain related persons and entities of the Trustee has a
conflicting interest, as defined thereunder, of such financial significance
that it would reasonably be expected to exert an influence on the Trustee's
judgment may not be enjoined, set aside or give rise to damages on the grounds
of such interest if (a) the transaction is approved, after disclosure of the
interest, by the affirmative vote
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of a majority of the disinterested trustees, or by the affirmative vote of a
majority of the votes cast by disinterested shareholders, or (b) the
transaction is established to have been fair to the Company.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer its capital shares or other securities
and to repurchase or otherwise reacquire its shares or any other securities
and may engage in such activities in the future. As described under "The
Operating Partnership Agreement--Redemption Rights," the Company expects to
issue Common Shares to holders of limited partnership interests in the
Operating Partnership upon exercise of their Redemption Rights. Except in
connection with the formation of the Company, the Company has not issued
Common Shares, interests or any other securities to date. The Company has no
outstanding loans to other entities or persons, including its officers and
trustees. The Company in the future may make loans to joint ventures and
partnerships in which it participates in order to meet working capital needs.
The Company has not engaged in trading, underwriting or agency distribution or
sale of securities of other issuers, nor has the Company invested in the
securities of other issuers other than the Operating Partnership for the
purpose of exercising control. The Company intends to make investments in a
manner such that it will not be treated as an investment company under the
Investment Company Act.
At all times, the Company intends to make investments in a manner consistent
with the requirements of the Code for the Company to qualify as a REIT unless,
because of changing circumstances or changes in the Code (or in Treasury
Regulations), the Company's Board of Trustees, with the consent of a majority
of the shareholders, determines that it is no longer in the best interests of
the Company to qualify as a REIT.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
In addition to the transactions with affiliates described elsewhere in this
Prospectus, the Company has entered into the following transactions:
ADVISORY AGREEMENT
Pursuant to the Advisory Agreement, the Advisor will assume the day-to-day
management of the Company. The Advisor is wholly-owned by LaSalle, which will
beneficially own 6.3% of the Common Shares (assuming the initial public
offering price of $20.00 per share). The Advisor's sole business and principal
occupation since its formation in January 1998 is advising the Company. The
services provided or coordinated by the Advisor include acquisition,
management, advisory and administrative services. All such services are
included in the based and incentive fees payable to the Advisor under the
terms of the Advisory Agreement. The annual base fee will be paid quarterly
and will not exceed 5% of the Company's NOI. See "REIT Management--REIT
Advisory Agreement". In addition to the fees payable to the Advisor under the
Advisory Agreement, the Company may retain affiliates of the Advisor to
provide services beyond the scope of the Advisor Agreement. Should the Company
retain an affiliate of the Advisor, the Company will pay fair market
compensation for such services and the terms, conditions and pricing of these
services will be subject to approval by a majority of the Independent Trustees
of the Company.
THE AFFILIATED LESSEE
Three of the Initial Hotels will be leased to the Affiliated Lessee. LaSalle
will have a 45.5% ownership interest in the Affiliated Lessee.
RELATIONSHIPS AMONG OFFICERS, TRUSTEES AND CONTRIBUTORS
Messrs. Scott and Bortz serve as Trustees of the Company and also serve as
officers and directors of LaSalle and the Advisor and Messrs. Bortz and
Barnello (who is also an officer and director of the Advisor) also serve as
officers of the Company. Messrs. Scott, Bortz and Barnello, as well as certain
other officers and Trustees of the Company and directors of the Advisor, also
own shares (and/or options or other rights to acquire shares) in LaSalle,
either directly or indirectly. In addition, the Advisor has the right to
appoint two members of the initial Board of Trustees of the Company and
Steinhardt has the right to appoint one member of the initial Board of
Trustees.
ACQUISITION OF INTERESTS IN CERTAIN OF THE INITIAL HOTELS
One or more of Messrs. Scott, Bortz and Barnello own equity interests in
certain entities which own interests in certain of the Contributors
contributing their interests in the Initial Hotels to the Company in exchange
for Common Shares and Units.
THE PARTICIPATING LEASES
The Company, the Affiliated Lessee and the Independent Lessees have entered
into the Participating Leases, with terms from six to 11 years. See "The
Initial Hotels--The Participating Leases." Pursuant to the terms of the
Participating Leases, the Lessee is required to pay the greater of Base Rent
or Percentage Rent and certain other additional charges and is entitled to all
profits from the operation of the Hotels after the payment of operating and
other expenses. See "Selected Financial Information."
THE OPERATOR AGREEMENTS
The Affiliated Lessee and the Independent Lessees entered into the Operator
Agreements, with terms from six to 11 years, relating to the management of the
Initial Hotels. Pursuant to the Operator Agreements, each Operator is entitled
to receive a management fee, based on the gross revenues of the applicable
hotel. The payment of management fees to the Operators by the Lessees (except
with respect to the Initial Hotels leased by the Affiliated Lessee) is
subordinate to the Lessee's obligations to the Company under the Participating
Leases. See "The Initial Hotels--The Operator Agreements."
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PARTNERSHIP AGREEMENT
The following summary of the Agreement of Limited Partnership of the
Operating Partnership (the "Partnership Agreement"), including the
descriptions of certain provisions set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Partnership Agreement, which is
filed as an exhibit to the Registration Statement of which this Prospectus is
a part.
OPERATIONAL MATTERS
General. Holders of Units (other than the Company in its capacity as general
partner) will hold a limited partnership interest in the Operating
Partnership, and all holders of Units (including the Company in its capacity
as general partner) will be entitled to share in cash distributions from, and
in the profits and losses of, the Operating Partnership. Each Unit generally
will receive distributions in the same amount paid on each Common Share. See
"Distributions."
Holders of Units will have the rights to which limited partners are entitled
under the Partnership Agreement and, to the extent not limited by the
Partnership Agreement, the Delaware Revised Uniform Limited Partnership Act
(the "Act"). The Units have not been and are not expected to be registered
pursuant to any Federal or state securities laws or 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.
Purposes, Business and Management. The purpose of the Operating Partnership
includes the conduct of any business that may be lawfully conducted by a
limited partnership formed under the Act, except that the Partnership
Agreement requires the business of the Operating Partnership to be conducted
in such a manner that will permit the Company to be classified as a REIT under
Section 856 of the Code, unless the Company ceases to qualify as a REIT for
reasons other than the conduct of the business of the Operating Partnership.
Subject to the foregoing limitation, the Operating Partnership may enter into
partnerships, joint ventures or similar arrangements and may own interests
directly or indirectly in any other entity.
The Company, as the general partner of the Operating Partnership, has the
exclusive power and authority to conduct the business of the Operating
Partnership, 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 Operating Partnership
by virtue of being a holder of Units.
The Company may not conduct any business other than the business of the
Operating Partnership without the consent of the holders of a majority of the
limited partnership interests (not including the limited partnership interests
held by the Company in its capacity as a limited partner in the Operating
Partnership).
Distributions. The Partnership Agreement provides for the quarterly
distribution of Available Cash (as defined below), as determined in the manner
provided in the Partnership Agreement, to the Company and the limited partners
in proportion to their percentage interests in the Operating Partnership.
"Available Cash" is generally defined as net income plus any reduction in
reserves and minus interest and principal payments on debt, capital
expenditures, any additions to reserves and other adjustments. Neither the
Company nor the limited partners are entitled to any preferential or
disproportionate distributions of Available Cash.
Borrowing by the Operating Partnership. The Company is authorized to cause
the Operating Partnership to borrow money and to issue and guarantee debt as
it deems necessary for the conduct of the activities of the Operating
Partnership. Such debt may be secured by mortgages, deeds of trust, liens or
encumbrances on properties of the Operating Partnership. The Company also may
cause the Operating Partnership to borrow money to enable the Operating
Partnership to make distributions, including distributions in an amount
sufficient to permit the Company, as long as it qualifies as a REIT, to avoid
the payment of any Federal income tax. See "Policies with Respect to Certain
Activities--Financing Policies."
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Reimbursement of the Company; Transactions with the Company and its
Affiliates. The Company will not receive any compensation for its services as
general partner of the Operating Partnership. The Company, however, as a
partner in the Operating Partnership, has the same right to allocations and
distributions as other partners in the Operating Partnership. In addition, the
Operating Partnership will reimburse the Company for substantially all
expenses it incurs relating to the ongoing operation of the Company and
offerings of Units or Common Shares (or rights, options, warrants or
convertible or exchangeable securities).
Except as expressly permitted by the Partnership Agreement, affiliates of
the Company will not engage in any transactions with the Operating Partnership
except on terms that are fair and reasonable and no less favorable to the
Operating Partnership than would be obtained from an unaffiliated third party.
Sales of Assets. Under the Partnership Agreement, the Company generally has
the exclusive authority to determine whether, when and on what terms the
assets of the Operating Partnership (including the Properties) will be sold. A
sale of all or substantially all of the assets of the Operating Partnership
(or a merger of the Operating Partnership with another entity) generally
requires an affirmative vote of the holders of a majority of the outstanding
Units (including Units held by the Company).
No Removal of the General Partner. The Partnership Agreement provides that
the limited partners may not remove the Company as general partner of the
Operating Partnership 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).
Issuance of Limited Partnership Interests. The Company is authorized,
without the consent of the limited partners, to cause the Operating
Partnership to issue Units to the Company, to the limited partners or to other
persons for such consideration and upon such terms and conditions as the
Company deems appropriate. The Operating Partnership also may issue
partnership interests in different series or classes, which may be senior to
the Units. If Units are issued to the Company, then the Company must issue
Common Shares and must contribute to the Operating Partnership the proceeds or
other consideration received by the Company from such issuance. In addition,
the Company may cause the Operating Partnership to issue to the Company
partnership interests in different series or classes of equity securities,
which may be senior to the Units, in connection with an offering of securities
of the Company having substantially similar rights upon the contribution of
the proceeds therefrom to the Operating Partnership. Consideration for
partnership interests may be cash or any property or other assets permitted by
the Act. No limited partner has preemptive, preferential or similar rights
with respect to capital contributions to the Operating Partnership or the
issuance or sale of any partnership interests therein.
Amendment of the Partnership Agreement. Generally, the Partnership Agreement
may be amended with the approval of the Company, as general partner, and
limited partners (including the Company) holding a majority of the Units.
Certain provisions regarding, among other things, the rights and duties of the
Company as general partner or the dissolution of the Operating Partnership,
may not be amended without the approval of a majority of the Units not held by
the Company. Notwithstanding the foregoing, the Company, as general partner,
has the power, without the consent of the limited partners, to amend the
Partnership Agreement in certain circumstances. Certain amendments that would
affect the fundamental rights of a limited partner must be approved by the
Company and each limited partner that would be adversely affected by such
amendment.
Dissolution, Winding Up and Termination. The Operating Partnership will
continue until December 31, 2095, unless sooner dissolved and terminated. The
Operating Partnership 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 the Company as general partner without the permitted transfer of
the Company's interest to a successor general partner (except in certain
limited circumstances); (ii) the sale of all or substantially all of the
Operating Partnership's assets and properties; (iii) the entry of a decree of
judicial dissolution of the Operating Partnership pursuant to the provisions
of the 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 the Company)
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may vote to continue the Operating Partnership and substitute a new general
partner in place of the Company); and (v) on or after January 1, 2046, at the
option of the Company, in its sole and absolute discretion. Upon dissolution,
the Company, as general partner, or any liquidator will proceed to liquidate
the assets of the Operating Partnership and apply the proceeds therefrom in
the order of priority set forth in the Partnership Agreement.
LIABILITY AND INDEMNIFICATION
Liability of the Company and Limited Partners. The Company, as general
partner of the Operating Partnership, is liable for all general recourse
obligations of the Operating Partnership to the extent not paid by the
Operating Partnership. The Company is not liable for the nonrecourse
obligations of the Operating Partnership. Assuming that a limited partner does
not take part in the control of the business of the Operating Partnership and
otherwise acts in conformity with the provisions of the Partnership Agreement
and the Act, the liability of a limited partner for obligations of the
Operating Partnership under the Partnership Agreement and the Act will be
limited, subject to certain exceptions, generally to the loss of such limited
partner's investment in the Operating Partnership represented by his Units.
The Operating Partnership will operate in a manner that the Company deems
reasonable, necessary or appropriate to preserve the limited liability of the
limited partners.
Exculpation and Indemnification of the Company. The Partnership Agreement
generally provides that the Company, as general partner of the Operating
Partnership, will incur no liability to the Operating Partnership 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 the Company carried out its duties in good faith. In
addition, the Company is not responsible for any misconduct or negligence on
the part of its agents, provided the Company appointed such agents in good
faith.
The Partnership Agreement also provides for indemnification (including, in
certain circumstances, the advancement of expenses) of the Company, the
trustees and officers of the Company and such other persons as the Company may
from time to time designate against any judgments, penalties, fines,
settlements and reasonable expenses that are actually (or will be) incurred by
such person in connection with a proceeding in which any such person is
involved, or is threatened to be involved, as a party or otherwise, 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 case of any criminal proceeding, the
indemnified person had reasonable cause to believe that the act or omission
was unlawful.
TRANSFERS OF INTERESTS
Restrictions on Transfer of the Company's Interest. The Company may not
transfer any of its interests as general or limited partner in the Operating
Partnership, except in connection with a merger or sale of all or
substantially all of its assets, in which (i) the limited partners in the
Operating Partnership either will receive, or will have the right to receive,
substantially the same consideration as holders of Common Shares, and (ii)
such transaction has been approved by the holders of a majority of the
interests in the Operating Partnership (including interests held by the
Company). See "--Operational Matters--Sales of Assets " above.
Restrictions on Transfers of Units by Limited Partners. For one year after
the completion of the Offering, a limited partner may not transfer any of his
rights as a limited partner without the consent of the Company, which consent
the Company may withhold in its sole discretion. Any attempted transfer in
violation of this restriction will be void ab initio and without any force or
effect. Beginning one year after the completion of the Offering, limited
partners (other than the Company) will be permitted to transfer all or any
portion of their Units without restriction as long as they satisfy certain
requirements set forth in the Partnership Agreement. In addition, limited
partners will be permitted to dispose of their Units following the expiration
of up to a one year period following the completion of the Offering by
exercising the redemption right described below. See "--Redemption of Units"
below.
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The right of any permitted transferee of Units to become a substituted
limited partner is subject to the consent of the Company, which consent the
Company may withhold in its sole and absolute discretion. If the Company does
not consent to the admission of a transferee of Units as a substituted limited
partner, then the transferee will succeed to all economic rights and benefits
attributable to such Units (including the redemption right described below),
but will not become a limited partner or possess any other rights of limited
partners (including the right to vote).
Redemption of Units. Subject to certain limitations and exceptions, holders
of Units (other than the Company) have the right to have each of their Units
redeemed by the Operating Partnership at any time beginning one year after the
completion of the Formation Transactions. Unless the Company elects to assume
and perform the Operating Partnership's obligation with respect to the
redemption right, as described below, the limited partner will receive cash
from the Operating Partnership 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 to the Operating Partnership of exercise of the redemption right. In
lieu of the Operating Partnership's acquiring the Units for cash, the Company
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 limited partner
exercising the redemption right, in exchange for either cash or Common Shares,
and, upon such acquisition, the Company will become the owner of such Units.
The redemption generally will occur on the tenth business day after the notice
to the Operating Partnership, except that no redemption or exchange can occur
if delivery of Common Shares would be prohibited either under the provisions
of the Company's Declaration of Trust designed primarily to protect the
Company's qualification as a REIT or under applicable Federal or state
securities laws as long as the Common Shares are publicly traded. See "Capital
Shares--Restrictions on Transfer--Ownership Limits."
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 capital shares
of the Company (referred to as the "Parent Entity"), the redemption right will
be determined by reference to the publicly traded stock of the Parent Entity
and the Company 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 redemption right will be based upon the fair market
value of the Operating Partnership's assets at the time the redemption right
is exercised (as determined in good faith by the Company based upon a
commercially reasonable estimate of the amount that would be realized by the
Operating Partnership if each asset of the Operating Partnership were sold to
an unaffiliated purchaser in an arm's length transaction where neither the
purchaser nor the seller were under economic compulsion to enter into the
transaction), and the Company and the Operating Partnership will be obligated
to satisfy the redemption right in cash (unless the redeeming partner, in such
partner's sole and absolute discretion, consents to the receipt of Common
Shares), payable on the thirtieth business day after notice was given to the
Operating Partnership of exercise of the redemption right.
EXTRAORDINARY TRANSACTIONS
The Partnership Agreement provides that the Company may not generally engage
in any merger, consolidation or other combination with or into another person
or sale of all or substantially all of its assets, or any reclassification, or
any recapitalization or change of outstanding Common Shares (a "Business
Combination"), unless the holders of Units will receive, or have the
opportunity to receive, the same consideration per Unit as holders of Common
Shares receive per Common Share in the transaction; if holders of Units will
not be treated in such manner in connection with a proposed Business
Combination, the Company may not engage in such transaction unless Unitholders
(other than the Company) holding more than 50% of the Units vote to approve
the Business Combination. In addition, as provided in the Partnership
Agreement, the Company will not consummate a Business Combination with respect
to which the Company conducted a vote of the shareholders unless the matter
would have been approved had holders of Units (other than the Company) been
able to vote together with the shareholders on the transaction. The foregoing
provisions of the Partnership Agreement would under no circumstances enable or
require the Company to engage in a Business Combination
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which required the approval of the Company's shareholders if the Company's
shareholders did not in fact give the requisite approval. Rather, if the
Company's shareholders did approve a Business Combination, the Company would
not consummate the transaction unless (i) the Company as general partner first
conducts a vote of Unitholders (including the Company) on the matter, (ii) the
Company votes the Units held by it in the same proportion as the shareholders
of the Company voted on the matter at the shareholder vote and (iii) the
result of such vote of the Unitholders (including the proportionate vote of
the Company's Units) is that had such vote been a vote of shareholders, the
Business Combination would have been approved by the shareholders. As a result
of these provisions of the Partnership Agreement, a third party may be
inhibited from making an acquisition proposal that it would otherwise make, or
the Company, despite having the requisite authority under its Declaration of
Trust, may not be authorized to engage in a proposed Business Combination.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Shares (or Common Shares for which Units are exchangeable)
by (i) each trustee (and trustee nominee) of the Company, (ii) each executive
officer of the Company, (iii) all trustees (including trustee nominees) and
executive officers of the Company as a group, and (iv) each person or entity
which is expected to be the beneficial owner of 5% or more of the outstanding
Common Shares immediately following the completion of the Offering. Except as
indicated below, all of such Common Shares are owned directly, and the
indicated person or entity has sole voting and investment power. The extent to
which a person will hold Common Shares as opposed to Units is set forth in the
footnotes below.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES AND UNITS PERCENT OF ALL SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED ALL SHARES(1) AND UNITS(2)
- ------------------------------------ ------------------ ------------- ------------
<S> <C> <C> <C>
All trustees, trustee nominees
and executive officers as a
group ( persons)..............
</TABLE>
- --------
(1) Assumes 15,419,500 Common Shares following the Offering. Assumes that all
Units held by the person are redeemed for Common Shares. The total number
of Common Shares outstanding used in calculating this percentage assumes
that none of the Units held by other persons are redeemed for Common
Shares.
(2) Assumes a total of 18,735,810 Common Shares and Units outstanding
immediately following the Offering (15,419,500 Common Shares and 3,316,310
Units, which may be redeemed for cash or Common Shares under certain
circumstances). Assumes that all Units held by the person are redeemed for
Common Shares. The total number of Common Shares outstanding used in
calculating this percentage assumes that all of the Units held by other
persons are redeemed for Common Shares.
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SHARES OF BENEFICIAL INTEREST
The summary of the terms of the shares of beneficial interest of the Company
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 the Company, copies of which are exhibits to the Registration Statement of
which this Prospectus is a part.
GENERAL
The Declaration of Trust of the Company provides that the Company may issue
100 million Common Shares and 20 million Preferred Shares. As of January 15,
1998, 100 Common Shares were issued and outstanding.
Under the Maryland REIT Law, a shareholder is not personally liable for the
obligations of the Company solely as a result of his status as a shareholder.
The Declaration of Trust provides that no shareholder shall be liable for any
debt or obligation of the Company by reason of being a shareholder nor shall
any shareholder be subject to any personal liability in tort, contract or
otherwise to any person in connection with the property or affairs of the
Company by reason of being a shareholder. The Company's Bylaws further provide
that the Company shall indemnify each present or former shareholder against
any claim or liability to which the shareholder may become subject by reason
of being or having been a shareholder and that the Company shall reimburse
each shareholder for all reasonable expenses incurred by him or her 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 the Company. Inasmuch as the Company carries public liability
insurance which it considers adequate, any risk of personal liability to
shareholders is limited to situations in which the Company's assets plus its
insurance coverage would be insufficient to satisfy the claims against the
Company and its shareholders.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. 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 the Company 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 the Company. The Company currently
intends to pay regular quarterly distributions.
Subject to the provisions of the Company'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 the
Company. Subject to the exchange provisions of the Company'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 real estate investment trust
generally cannot dissolve, amend its Declaration of Trust or merge, unless
approved by the affirmative vote or written consent of
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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 the trust's
Declaration of Trust. The Company's Declaration of Trust provides that the
Board of Trustees, with the approval of a majority of the votes entitled to be
cast at a meeting of shareholders, may amend the Declaration of Trust from
time to time to increase or decrease the aggregate number of shares or the
number of shares of any class that the Company has authority to issue. The
Company's Declaration of Trust also provides that a merger transaction or
termination of the trust must be approved, at a meeting of the shareholders
called for that purpose, by the affirmative vote of not less than sixty-six
and two-thirds percent (66 2/3%) of all the votes entitled to be cast on the
matter. 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. The Company'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 20
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 of the Company 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 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 the Company 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
the Company has no present plans to issue any Preferred Shares.
POWER TO ISSUE ADDITIONAL COMMON SHARES AND PREFERRED SHARES
The Company believes that the power of the Board of Trustees to issue
additional authorized but unissued Common Shares or Preferred Shares in one or
more series will provide the Company with increased flexibility in structuring
possible future financings and acquisitions and in meeting other needs which
might arise. Authorized but unissued Common Shares or Preferred Shares will be
available for issuance without further action by the Company's shareholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may
be listed or traded.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company 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 the
Company, or an owner of 10% or more of the Company, actually or constructively
owns 10% or more of a tenant of the Company (or a tenant of any partnership in
which the Company is a partner), the rent received by the Company (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 the Company 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 the Ownership Limit. The
ownership attribution rules under the
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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 9.8% 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 9.8% 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
such person submits to the Board information satisfactory to the Board, in its
reasonable discretion, demonstrating that (i) such person is not an individual
for purposes of the Code, (ii) 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 (iii) such
ownership will not otherwise jeopardize the Company's status as a REIT. As a
condition of such waiver, the Board of Trustees may, in its reasonable
discretion, require undertakings or representations from the applicant to
ensure that the conditions in clauses (i), (ii) and (iii) of the preceding
sentence are satisfied and will continue to be satisfied as long as such
person owns shares in excess of the Ownership Limit. Under certain
circumstances, the Board of Trustees may, in its sole and absolute discretion,
grant an exemption for individuals or entities to acquire any series or class
of 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. In either circumstance, prior to
granting any exemption, the Board of Trustees must receive a ruling from the
Internal Revenue Service or advice of counsel, in either case in form and
substance satisfactory to the Board of Trustees, as it may deem necessary or
advisable in order to determine or ensure the Company's status as a REIT.
The Declaration of Trust further prohibits (a) any person from actually or
constructively owning shares of beneficial interest of the Company that would
result in the Company being "closely held" under Section 856(h) of the Code or
otherwise cause the Company to fail to qualify as a REIT and (b) any person
from transferring shares of beneficial interest of the Company if such
transfer would result in shares of beneficial interest of the Company 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 the Company that
will or may violate any of the foregoing restrictions on transferability and
ownership is required to give notice immediately to the Company and provide
the Company with such other information as the Company may request in order to
determine the effect of such transfer on the Company's status as a REIT.
If any purported transfer of shares of beneficial interest of the Company 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 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 the Company (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 the
Company of the transfer of shares to the trust, the trustee of the trust (who
shall be designated by the Company and be unaffiliated with the Company 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
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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 the Company 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 the Company 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 the Company 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 the Company 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 the Company held in the trust
shall be deemed to have been offered for sale to the Company, 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 the Company, or its designee,
accepts such offer. The Company shall have the right to accept such offer for
a period of 90 days after the transfer of Excess Shares to the Trust. Upon
such a sale to the Company, the interest of the Beneficiary in the shares sold
shall terminate and the trustee shall 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 the Company 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.
Each shareholder will, upon demand, be required to disclose to the Company
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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is .
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CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S DECLARATION OF TRUST AND
BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws of the Company does not purport to be complete
and is subject to and qualified in its entirety by reference to Maryland law
and the Declaration of Trust and Bylaws of the Company, copies of which are
exhibits to the Registration Statement of which this Prospectus is a part.
The Declaration of Trust and Bylaws of the Company contain certain
provisions that could make more difficult an acquisition or change in control
of the Company by means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with the Board of Trustees.
The Company believes that the benefits of these provisions outweigh the
potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in an improvement of their
terms. See also "Shares of Beneficial Interest--Restrictions on Ownership and
Transfer."
NUMBER OF TRUSTEES; CLASSIFICATION AND REMOVAL OF BOARD OF TRUSTEES; OTHER
PROVISIONS
Effective immediately following the closing of the Offering, the Declaration
of Trust will provide that the Board of Trustees shall consist of seven
members and may be thereafter increased or decreased in accordance with the
Bylaws of the Company, provided that the total number of Trustees may not be
fewer than three or more than nine. Pursuant to the Company's Bylaws, the
number of trustees shall be fixed by the Board of Trustees within the limits
set forth in the Declaration of Trust. Following the closing of the Offering,
the Company's Declaration of Trust also will provide for the Board of Trustees
to be divided into three classes of Trustees, with each class to consist as
nearly as possible of an equal number of Trustees. The term of office of the
first class of trustees will expire at the 1999 annual meeting of
shareholders; the term of the second class of trustees will expire at the 2000
annual meeting of shareholders; and the term of the third class of trustees
will expire at the 2001 annual meeting of shareholders. At each annual meeting
of shareholders, the class of trustees to be elected at such meeting will be
elected for a three year term, and the trustees in the other two classes will
continue in office. Because shareholders will have no right to cumulative
voting for the election of trustees, at each annual meeting of shareholders
the holders of a majority of the Common Shares will be able to elect all of
the successors to the class of trustees whose term expires at that meeting.
The Company's Declaration of Trust also provides that, except for any
trustees who may be elected by holders of a class or series of shares of
beneficial interest other than the Common Shares, Trustees may be removed only
for cause and only by the affirmative vote of shareholders holding at least a
majority of the shares then outstanding and entitled to be cast for the
election of trustees. Vacancies on the Board of Trustees may be filled by the
concurring vote of a majority of the remaining trustees and, in the case of a
vacancy resulting from the removal of a trustee by the shareholders, by a
majority of the votes entitled to be cast for the election of trustees. Under
Maryland law, trustees may fill any vacancy only until the next annual meeting
of shareholders. A vote of shareholders holding at least two-thirds of all the
votes entitled to be cast thereon is required to amend, alter, change, repeal
or adopt any provisions inconsistent with the foregoing classified board and
trustee removal provisions. These provisions may make it more difficult and
time consuming to change majority control of the Board of Trustees of the
Company and, thus, may reduce the vulnerability of the Company to an
unsolicited proposal for the takeover of the Company or the removal of
incumbent management.
Because the Board of Trustees will have the power to establish the
preferences and rights of additional series of shares of beneficial interest
without a shareholder vote, the Board of Trustees may afford the holders of
any series of senior shares of beneficial interest preferences, powers and
rights, voting or otherwise, senior to the rights of holders of Common Shares.
The issuance of any such senior shares of beneficial interest could have the
effect of delaying, deferring or preventing a change in control of the
Company. The Board of Trustees, however, currently does not contemplate the
issuance of any shares of beneficial interest other than Common Shares. See
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"Management--Limitation of Liability and Indemnification" for a description of
the limitations on liability of trustees and officers of the Company and the
provisions for indemnification of trustees and officers provided for under
applicable Maryland law and the Declaration of Trust.
CHANGES IN CONTROL PURSUANT TO MARYLAND LAW
Maryland Business Combination Law. Under 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 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 recommended by the Board of Trustees of such
Trust and approved by the affirmative vote of at least (i) 80% of all the
votes entitled to be cast by holders of the outstanding shares of voting stock
and (ii) two-thirds of the votes entitled to be cast by holders of voting
stock held by the Interested Shareholder who is (or whose affiliate is) a
party to the business combination 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.
Maryland Control Share Acquisition Law. In addition, also under the MGCL, as
applicable to real estate investments trusts, "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 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. As permitted by the MGCL, the Bylaws provide
that the control share provisions of the MGCL do not apply to the Company.
However, the Board of Trustees, through its exclusive power to amend the
Bylaws, may elect to adopt these provisions in the future.
AMENDMENTS TO THE DECLARATION OF TRUST AND BYLAWS
The Declaration of Trust, including its provisions on classification of the
Board of Trustees, restrictions on transferability of Common Shares and
removal of trustees, may be amended only by a resolution adopted by the
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Board of Trustees and approved at an annual or special meeting of the
shareholders by the affirmative vote of the holders of not less than two-
thirds of all of the votes entitled to be cast on the matter. However,
amendments relating to changes in the number of authorized shares of
beneficial interest of the Company require the approval of holders of a
majority of all votes entitled to be cast at a meeting of shareholders at
which a quorum is present. Under the Maryland REIT law, a Declaration of Trust
may permit the trustees by a two-thirds vote to amend the declaration 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. The
Company's Declaration of Trust permits such action by the Board of Trustees.
The Bylaws of the Company provide that the trustees have the exclusive right
to amend the Bylaws.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (i) with respect to an annual meeting
of shareholders, nominations of persons for election to the Board of Trustees
and the proposal of business to be considered by shareholders may be made only
(A) pursuant to the Company's notice of the meeting, (B) by the Board of
Trustees or (C) by a shareholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and
(ii) with respect to special meetings of the shareholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of shareholders and nominations of persons for election to the Board of
Trustees may be made only (A) pursuant to the Company's notice of the meeting,
(B) by the Board of Trustees or (C) provided that the Board of Trustees has
determined that trustees shall be elected at such meeting, by a shareholder
who is entitled to vote at the meeting and has complied with the advance
notice provisions set forth in the Bylaws.
MEETINGS OF SHAREHOLDERS
The Company's Bylaws provide that annual meetings of shareholders shall be
held on a date and at the time set by the Board of Trustees during the month
of May each year (commencing in May 1999). Special meetings of the
shareholders may be called by (i) the Chairman of the Board of the Company,
(ii) the President or (iii) one-third of the Board of Trustees. As permitted
by the MGCL, the Bylaws of the Company provide that special meetings must be
called by the Secretary of the Company upon the written request of the holders
of shares entitled to cast not less than a majority of all votes entitled to
be cast at the meeting. Pursuant to the Declaration of Trust and Bylaws of the
Company, any action required or permitted to be taken by the shareholders must
be effected at a duly called annual or special meeting of shareholders and may
not be effected by any consent in writing by shareholders, unless such consent
is unanimous.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS
The business combination provisions of the MGCL (and the control share
acquisition provisions of the MGCL if they ever become applicable to the
Company), the provisions of the Declaration of Trust on classification of the
Board of Trustees and removal of Trustees, the provisions for amending the
Declaration of Trust and Bylaws and the advance notice provisions of the
Bylaws could delay, defer or prevent a transaction or a change in control of
the Company that might involve a premium price for holders of Common Shares or
otherwise be in their best interests. The Declaration of Trust, as in effect,
provides that a merger, consolidation or sale of all or substantially all of
the assets of the Company must be approved, at a meeting called for that
purpose, by the affirmative vote of the holders of not less than two-thirds of
the then outstanding shares entitled to vote thereon.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland real estate investment trust,
the Maryland REIT Law requires that the Company hold, either directly or
indirectly, at least 75% of the value of its assets in real estate assets,
mortgages or mortgage related securities, government securities, cash and cash
equivalent items, including high grade short term securities and receivables.
The Maryland REIT Law also prohibits using or applying land for farming,
agricultural, horticultural or similar purposes.
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SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon the completion of the Offering, the Company will have outstanding
15,419,500 Common Shares (17,587,000 Common Shares if the Underwriters' over-
allotment option is exercised in full). In addition, 3,316,310 Common Shares
are reserved for issuance upon exchange of Units issued to the Contributors.
None of the Contributors can exchange such Units for Common Shares for one
year from the closing of the Offering. The Common Shares issued in the
Offering will be freely tradable by persons other than "affiliates" of the
Company without restriction under the Securities Act, subject to the
limitations on ownership set forth in this Prospectus. See "Shares of
Beneficial Interest." Any Common Shares issued to the Contributors or acquired
in exchange for Units in connection with the Formation Transactions
(collectively, the "Restricted Common Shares"), will be "restricted"
securities under the meaning of Rule 144 promulgated under the Securities Act
("Rule 144") and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including
exemptions contained in Rule 144. As described below under "--Registration
Rights," the Company has granted certain holders registration rights with
respect to their Restricted Common Shares.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of Restricted Common Shares from
the Company or any "affiliate" of the Company, as that term is defined under
the Securities Act, the acquiror or subsequent holder thereof is entitled to
sell within any three month period a number of shares that does not exceed the
greater of 1% of the then outstanding Common Shares or the average weekly
trading volume of the Common Shares during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the SEC. Sales
under Rule 144 also are subject to certain manner of sales provisions, notice
requirements and the availability of current public information about the
Company. If two years have elapsed since the date of acquisition of Restricted
Common Shares from the Company or from any "affiliate" of the Company, and the
acquiror or subsequent holder thereof is deemed not to have been an affiliate
of the Company at any time during the 90 days immediately preceding a sale,
such person is entitled to sell such shares in the public market under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements.
The Company, its officers and Trustees, the Adviser and the Contributors
have agreed not to, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any Units or
Common Shares of the Company, or any securities convertible or exercisable or
exchangeable for any Units or Common Shares of the Company for the applicable
holding period (other than pursuant to the Share Option Plan and the share
purchase rights granted to the Contributors), for a period of 180 days, in the
case of the Company, and one year in the case of the Company's officers and
Trustees, the Adviser and the Contributors, from the closing of the Offering,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the several Underwriters, subject to certain limited exceptions.
Prudential Securities Incorporated may, in its sole discretion, at any time
and without notice, release all or any portion of the Common Shares subject to
the foregoing lock-up agreements.
Prior to the Offering, there has been no public market for the Common
Shares. Trading of the Common Shares on the NYSE is expected to commence
immediately following completion of the Offering. No prediction can be made as
to the effect, if any, that future sales of Common Shares or the availability
of Common Shares for future sale, will have on the market price prevailing
from time to time. Sales of substantial amounts of Common Shares (including
Common Shares issued upon the exercise of options or purchase rights or the
exchange of Units), or the perception that such sales could occur, could
adversely affect prevailing market prices of the Common Shares. See "Risk
Factors--Lack of a Prior Public Market" and "Partnership Agreement--
Restrictions on Transfer."
REGISTRATION RIGHTS
The Company will grant demand registration rights to the Contributors with
respect to Restricted Common Shares owned by them as of the closing of the
Offering or upon the exercise of share purchase rights. The Company also will
grant demand registration rights to any shareholder with respect to any
Restricted Common
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Shares acquired by such shareholder in redemption of Units. The Company will
bear all expenses incident to these registration requirements, except for any
underwriting discounts or commissions or transfer taxes, if any, relating to
such Restricted Common Shares.
In addition, the Company will adopt the Share Option Plan for the purpose of
attracting and retaining highly qualified trustees and providing incentives to
the Advisor. See "REIT Management--Share Option and Incentive Plan" and "--
Compensation of the Board of Trustees." The Company intends to grant options
to purchase approximately Common Shares to trustees and the Advisor upon
the completion of the Offering. Following the completion of the Offering, the
Company expects to file a registration statement with the SEC with respect to
the Common Shares issuable under the Share Option and Incentive Plan, which
shares may be resold without restriction, unless held by affiliates.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion summarizes the material Federal income tax
consequences that are generally applicable to all prospective shareholders of
the Company. The specific tax consequences of owning Common Shares will vary
for shareholders because of the different circumstances of shareholders and
the discussion contained herein does not purport to address all aspects of
Federal income taxation that may be relevant to particular holders in light of
their personal investment or tax circumstances. Therefore, it is imperative
that a prospective shareholder review the following discussion and consult
with his own tax advisors regarding his individual tax consequences of owning
Common Shares.
The information in this section and the opinions of Brown & Wood llp are
based on the Code, existing and proposed Treasury Regulations thereunder,
current administrative interpretations and court decisions. No assurance can
be given that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change current law
or affect existing interpretations of current law in a manner which is adverse
to shareholders. Any such change could apply retroactively to transactions
preceding the date of change. The Company and the Operating Partnership do not
plan to obtain any rulings from the IRS concerning any tax issue with respect
to the Company. Thus, no assurance can be provided that the opinions and
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. The
following description does not constitute tax advice.
This summary does not give a detailed discussion of state, local or foreign
tax considerations. Except where indicated, the discussion below describes
general Federal income tax considerations applicable to individuals who are
citizens or residents of the United States. Accordingly, the following
discussion has limited application to domestic corporations and persons
subject to specialized Federal income tax treatment, such as foreign persons,
trusts, estates, tax-exempt entities, regulated investment companies and
insurance companies.
As used in this section, the term "Company" refers solely to LaSalle Hotel
Properties and the term "Operating Partnership" refers solely to LaSalle Hotel
Operating Partnership, L.P.
PROSPECTIVE SHAREHOLDERS ARE STRONGLY URGED TO CONSULT WITH THEIR OWN TAX
ADVISORS WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH
SHAREHOLDERS' RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION.
TAXATION OF THE COMPANY
General. The Company will make an election to be taxed as a REIT under
Sections 856 through 860 of the Code effective for its taxable year ending
December 31, 1998. The Company believes that, commencing with such taxable
year, it will be organized in conformity with and will operate in such a
manner as to qualify for taxation as a REIT under the Code and the Company
intends to continue to operate in such a manner. Although the Company has been
structured so as to qualify to be treated as a REIT, no assurance can be given
that the Company will operate in a manner so as to qualify or remain qualified
as a REIT.
In the opinion of Brown & Wood llp, commencing with the Company's taxable
year ending December 31, 1998, the Company will be organized in conformity
with the requirements for qualification and taxation as a REIT under the Code.
This opinion is based on various assumptions relating to the organization and
operation of the Company, the Operating Partnership and the Lessees and upon
certain representations made by the Company, the Operating Partnership and the
Lessees as to certain relevant factual matters, including matters related to
the organization and expected manner of operation of the Company, the
Operating Partnership and the Lessees. Brown & Wood llp has not undertaken any
obligation to update this opinion. Moreover, such qualification and taxation
as a REIT will depend upon the Company's ability to meet on a continuing
basis, through actual annual
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operating results, distribution levels and diversity of share ownership, the
various qualification tests imposed under the Code (discussed below). Brown &
Wood llp will not review compliance with these tests on a continuing basis.
Accordingly, no assurance can be given that the Company will satisfy such
tests on a continuing basis. See "--Failure to Qualify" below.
The following is a general summary of the material Code provisions that
govern the Federal income tax treatment of a REIT and its shareholders. These
provisions of the Code are highly technical and complex.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to Federal corporate income tax on net income that it distributes
currently to shareholders. This treatment substantially eliminates the "double
taxation" (taxation at both the corporate and shareholder levels) that
generally results from investment in a regular corporation. However, the
Company will be subject to Federal income and excise tax in certain
circumstances, including the following. First, the Company will be taxed at
regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property acquired
by foreclosure or otherwise on default of a loan secured by the property) held
primarily for sale to customers in the ordinary course of business or (ii)
other non-qualifying income from foreclosure property, the Company will be
subject to tax at the highest corporate rate on such income. Fourth, if the
Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if the Company
fails to satisfy either the 75% gross income test or the 95% gross income test
(both of which are discussed below), but nonetheless maintains its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the greater of the amount by which the
Company fails the 75% or 95% test, multiplied by a fraction intended to
reflect the Company's profitability. Sixth, if the Company fails 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 (other than capital gain that the Company elects to retain and pay tax
on) and (iii) any undistributed taxable income from prior years, the Company
will be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. Seventh, if the Company acquires any
asset from a C corporation (i.e., a corporation generally subject to full
corporate level tax) in a transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other property) in the hands of the C corporation and the Company recognizes
gain on the disposition of such asset during the ten-year period (the
"Recognition Period") beginning on the date on which such asset was acquired
by the Company, then, to the extent of such property's "built-in" gain (the
excess of the fair market value of such property at the time of acquisition by
the Company over the adjusted basis in such property at such time), such gain
will be subject to tax at the highest regular corporate rate applicable (the
"Built-In Gain Rule") pursuant to Treasury Regulations that have not yet been
promulgated. The total amount of gain on which the Company can be taxed is
limited to its net built-in gain at the time it acquired the property; i.e.,
the excess of the aggregate fair market value of its assets at the time it
acquired the property over the adjusted tax bases of those assets at that
time. As provided in IRS Notice 88-19, the results described above with
respect to the "built-in" gain assume that the Company would make an election
under Treasury Regulations that have not yet been promulgated.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust, or association (i) that 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) that
would be taxable as a domestic corporation, but for Sections 856 through 859
of the Code; (iv) that 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 shares of
which is owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities); and (vii) that meets certain
other tests, described below, regarding the nature of its income and assets.
The Code
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provides that conditions (i) through (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 12 months, or during a proportionate part of a
taxable year of less than 12 months. Conditions (v) and (vi), however, will
not apply until after the first taxable year for which an election is made to
be taxed as a REIT. The Company anticipates issuing sufficient Common Shares
in the Offering with sufficient diversity of ownership to allow the Company to
satisfy conditions (v) and (vi) immediately following the Offering. In
addition, the Company's Declaration of Trust will include restrictions
regarding the transfer of its capital shares that are intended to assist the
Company in continuing to satisfy the share ownership requirements described in
(v) and (vi) above. See "Capital Shares--Restrictions on Transfer."
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company's taxable year will be the calendar
year.
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
that subsidiary is disregarded for Federal income tax purposes and all assets,
liabilities and items of income, deduction and credit of the subsidiary are
treated as assets, liabilities and items of the REIT itself. (A qualified REIT
subsidiary is any corporation wholly owned by a REIT.) Similarly, a single
member limited liability company owned by the REIT or by the Operating
Partnership is generally disregarded as a separate entity for Federal income
tax purposes.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that for purposes of the gross income tests and asset
tests the REIT will be deemed to own its proportionate share (based on its
interest in partnership capital) of the assets of the partnership and will be
deemed to be entitled to the income of the partnership attributable to such
share. In addition, the assets and gross income of the partnership will 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 asset tests, that they
have in the hands of the Partnership. Thus, the Company's proportionate share
of the assets, liabilities and items of gross income of the Operating
Partnership will be treated as assets, liabilities and items of gross income
of the Company for purposes of applying the requirements described herein.
Income Tests. In order to maintain qualification as a REIT, three gross
income tests must be satisfied annually. First, at least 75% of the REIT'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 the REIT's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property investments described above and from
dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing.
The Company will derive the bulk of its income from the Participating
Leases. Accordingly, in order to qualify as a REIT, substantially all of the
income received by the Company pursuant to the Participating Leases must
constitute "rents from real property." Pursuant to the Participating Leases,
the Lessees will lease from the Operating Partnership the land (or ground
lease interest therein), buildings, improvements and FF&E comprising the
Initial Hotels, for periods ranging from six to 11 years. The Participating
Leases provide that the Lessees will be obligated to pay to the Operating
Partnership (i) the greater of Base Rent or Participating Rent (collectively,
the "Rents") and (ii) Additional Charges or other expenses as defined in the
Participating Lease Agreements. Participating Rent is calculated by
multiplying fixed percentages by various revenue categories for each of the
Initial Hotels. Both Base Rent and the thresholds in the Participating Rent
formulas will be adjusted for inflation. Base Rent accrues and is required to
be paid monthly. Participating Rent is payable quarterly in arrears on the
twentieth day of each fiscal quarter, with annual adjustments based on actual
results.
In order for Base Rent, Participating Rent and Additional Charges to
constitute "rents from real property," the Participating 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. The
determination of whether the Participating Leases are true leases depends on
an analysis of all the surrounding facts and circumstances. In
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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 bears 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 whether
a service contract should be treated as a lease is inherently factual, the
presence or absence of any single factor may not be dispositive in every case.
The Company believes, however, that the Participating Leases are properly
treated as true leases for federal income tax purposes.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings or judicial decisions involving leases with
terms substantially the same as the Participating Leases that discuss whether
such leases constitute true leases for federal income tax purposes. Therefore,
there can be no complete assurance that the Service will not assert
successfully a contrary position. If the Participating Leases are
recharacterized as service contracts or partnership agreements, rather than
true leases, part or all of the payments that the Operating Partnership
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, the Company likely would not be able to satisfy
either the 75% or 95% gross income tests and, as a result, would lose its REIT
status.
In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising an Initial Hotel must not be greater than 15% of the
Rents received under the Participating Lease. The Rents attributable to the
personal property in an Initial Hotel is the amount that bears the same ratio
to total Rents for the taxable year as the average of the adjusted bases of
the personal property in an Initial Hotel at the beginning and at the end of
the taxable year bears to the average of the aggregate adjusted bases of both
the real and personal property comprising the Initial Hotel at the beginning
and at the end of such taxable year (the "Adjusted Basis Ratio"). If a portion
of the Rents from a particular hotel property does not qualify as "rents from
real property" because the amount attributable to personal property exceeds
15% of the total Rents for a taxable year, the portion of the Rents that is
attributable to personal property will not be qualifying income for purposes
of either the 75% or 95% gross income tests. Thus, if such Rents attributable
to personal property, plus any other nonqualifying income, during a taxable
year exceed 5% of the Company's gross income during the year, the Company
could lose its REIT status. With respect to each Initial Hotel (or interest
therein) that the Operating Partnership acquires in exchange for Units, the
initial adjusted bases of both the real and personal property comprising such
Initial Hotel generally will be the same as the adjusted bases of such
property in the hands of the previous owner. With respect to each Initial
Hotel (or interest therein) that the Operating Partnership acquires for cash,
the aggregate initial adjusted bases of the real and personal property
comprising such Initial Hotel generally will equal the cash consideration paid
and such bases generally will be allocated among real and personal property
based on relative fair market values. With respect to each Initial Hotel, the
Company believes that the Adjusted Basis Ratio for the Initial Hotel is less
than 15% or that any nonqualifying income attributable to excess personal
property will not jeopardize the Company's ability to
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qualify as a REIT. The Participating Leases provide that the Adjusted Basis
Ratio for each Initial Hotel shall not exceed 15%. The Participating Leases
further provide that the Lessees will cooperate in good faith and use their
best efforts to prevent the Adjusted Basis Ratio for any Initial Hotel from
exceeding 15%, which cooperation may include the purchase by the Lessees at
fair market value of enough personal property at such Initial Hotel so that
the Adjusted Basis Ratio for such Initial Hotel is less than 15%. Finally,
amounts in the Company's reserve for capital expenditures may not be expended
to acquire additional personal property for an Initial Hotel to the extent
that such acquisition would cause the Adjusted Basis Ratio for that Initial
Hotel to exceed 15%. There can be no assurance, however, that the Service
would not challenge the Company's calculation of an Adjusted Basis Ratio, or
that a court would not uphold such assertion. If such a challenge were
successfully asserted, the Company could fail to satisfy the 95% or 75% gross
income test and thus lose its REIT status.
Another requirement for qualification of the Rents as "rents from real
property" is that the Participating Rent must not be based in whole or in part
on the income or profits of any person. The Participating Rent, however, will
qualify as "rents from real property" if it is based on percentages of
receipts or sales and the percentages (i) are fixed at the time the
Participating Leases are entered into, (ii) are not renegotiated during the
term of the Participating Leases in a manner that has the effect of basing
Participating Rent on income or profits and (iii) conform with normal business
practice. More generally, the Participating Rent will not qualify as "rents
from real property" if, considering the Participating 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 the
Participating Rent on income or profits. Since the Participating Rent is based
on fixed percentages of the gross revenues from the Hotels that are
established in the Participating Leases, and the Company has represented that
the percentages (i) will not be renegotiated during the terms of the
Participating Leases in a manner that has the effect of basing the
Participating Rent on income or profits and (ii) conform with normal business
practice, the Participating Rent should not be considered based in whole or in
part on the income or profits of any person. Furthermore, the Company has
represented that, with respect to other hotel properties that it acquires in
the future, it will not charge rent for any property that is based in whole or
in part on the income or profits of any person (except by reason of being
based on a fixed percentage of gross revenues, as described above).
A third requirement for qualification of the Rents as "rents from real
property" is that the Company must not own, actually or constructively, 10% or
more of the stock of any Lessee that is a corporation or an interest in 10% or
more of the assets or net profits of any Lessee that is not a corporation.
Under the constructive ownership rules, if 10% or more in value of the shares
of the Company is owned, directly or indirectly, by or for any person, the
Company would be considered as owning the stock of corporations, and the
interests in assets or net profits of noncorporate entities, owned, directly
or indirectly, by or for such person. The Company initially will not own any
stock of the Lessees. The Limited Partners of the Operating Partnership may
acquire Common Shares (at the Company's option) by exercising their Redemption
Rights. The Partnership Agreement, however, provides that a redeeming limited
partner may not exercise its Redemption Right if and to the extent that the
delivery of Common Shares upon the exercise of such right would cause the
Company to own, actually or constructively, 10% or more of the ownership
interests in a Lessee, within the meaning of Section 856(d)(2)(B) of the Code.
The Declaration of Trust likewise prohibits a shareholder of the Company from
owning Common Shares or Preferred Shares that would cause the Company to own,
actually or constructively, 10% or more of the ownership interests in a
Lessee, within the meaning of section 856(d)(2)(B) of the Code. Thus, the
Company should never own, actually or constructively, 10% or more of a Lessee.
Furthermore, the Company has represented that, with respect to other hotel
properties that it acquires in the future, it will not rent any property to a
Related Party Tenant. However, because the Code's constructive ownership rules
for purposes of the Related Party Tenant rules are broad and it is not
possible to monitor continually direct and indirect transfers of Common
Shares, no absolute assurance can be given that such transfers or other events
of which the Company has no knowledge will not cause the Company to own
constructively 10% or more of the Lessee or any future lessee at some future
date.
A fourth requirement for qualification of the Rents as "rents from real
property" is that the Company cannot furnish or render noncustomary services
to the tenants of the Initial Hotels, or manage or operate the
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Initial Hotels, other than through an independent contractor who is adequately
compensated and from whom the Company does not derive or receive any income,
subject to certain de minimis exceptions. Provided that the Participating
Leases are respected as true leases, the Company should satisfy that
requirement, because the Operating Partnership will not perform any services
other than customary ones for the Lessees. Furthermore, the Company has
represented that, with respect to other hotel properties that it acquires in
the future, it will not perform noncustomary services with respect to the
tenant of the property.
If the Rents from a particular hotel property do not qualify as "rents from
real property" because either (i) the Participating Rent is considered based
on income or profits of an Lessee, (ii) the Company owns, actually or
constructively, 10% or more of a Lessee, or (iii) the Company furnishes
noncustomary services to the tenants of the Initial Hotels or manages or
operates the Initial Hotels, other than through a qualifying independent
contractor, none of the Rents from that hotel property would qualify as "rents
from real property." In that case, the Company likely would lose its REIT
status because it would be unable to satisfy either the 75% or 95% gross
income tests.
In addition to the Rents, the Lessees are required to pay to the Operating
Partnership Additional Charges. To the extent that Additional Charges
represent either (i) reimbursements of amounts that the Operating Partnership
is obligated to pay to third parties or (ii) penalties for nonpayment or late
payment of such amounts, Additional Charges should qualify as "rents from real
property." To the extent that Additional Charges represent interest that is
accrued on the late payment of the Rents or Additional Charges, such
Additional Charges may qualify as "rents from real property." To the extent
such Additional Charges representing interest are not treated as "rents from
real property," they should be treated as interest that qualifies for the 95%
gross income test.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends
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 "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales. Furthermore, to the extent that interest from a loan that
is based on the residual cash proceeds from sale of the property securing the
loan constitutes a "shared appreciation provision" (as defined in the Code),
income attributable to such participation feature will be treated as gain from
the sale of the secured property.
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualified
income under the 75% gross income test even if the property were not
foreclosure property), less expenses directly connected with the production of
such income. However, gross income from such foreclosure property will qualify
under the 75% and 95% gross income tests. "Foreclosure property" is defined as
any real property and any personal property incident to such real property (i)
that is acquired by a REIT as the result of such REIT having bid on such
property at foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law, after there was a
default (or default was imminent) on a lease of such property or on an
indebtedness that such property secured and (ii) for which such REIT makes a
proper election to treat such property as foreclosure property. Under the
Code, property generally ceases to be foreclosure property with respect to a
REIT as of the close of the third taxable year following the taxable year in
which such REIT acquired such property (or longer if an extension is granted
by the Secretary of the Treasury). The foregoing grace period is terminated
and foreclosure property ceases to be foreclosure property on the first day
(i) on which a lease is entered into with respect to such property that, by
its terms, will give rise to income that does not qualify under the 75% gross
income test or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give rise to
income that does not qualify under the 75% gross income test, (ii) on which
any construction takes place on such property (other than completion of a
building, or any other improvement, where more than 10% of the construction of
such building or other improvement was completed before default became
imminent), or (iii) which is more than 90 days after the day on which such
property was acquired by the REIT and the property is used in a trade or
business which is conducted by the REIT (other than a trade or business
conducted through an independent contractor from whom the REIT does not derive
any income or a trade or business that generates
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qualifying rents from real property). As a result of the rules with respect to
foreclosure property, if a Lessee defaults on its obligations under a
Participating Lease for an Initial Hotel, the Operating Partnership terminates
the Lessee's leasehold interest, and the Operating Partnership is unable to
find a replacement lessee for such Initial Hotel within 90 days of such
foreclosure, gross income from hotel operations conducted by the Operating
Partnership from such Initial Hotel would cease to qualify for the 75% and 95%
gross income tests unless the Operating Partnership employs an independent
contractor to manage the Initial Hotel. In such event, the Company likely
would be unable to satisfy the 75% and 95% gross income tests and, thus, would
fail to qualify as a REIT.
Relief Provisions. If the Company fails to satisfy one or both of the 75% or
the 95% gross income tests for any taxable year, it nevertheless may qualify
as a REIT for such year if it is entitled to relief under certain provisions
of the Code. These relief provisions generally will be available if the
Company's failure to meet any such tests was due to reasonable cause and not
due to willful neglect, the Company attaches a schedule of the sources of its
income to its Federal corporate 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 the Company
would be entitled to the benefit of these relief provisions. As discussed in
"--General" above, even if these relief provisions were to apply, a tax would
be imposed with respect to the excess net income.
Asset Tests. The Company must also satisfy three tests relating to the
nature of its assets at the closed of each quarter of its taxable year. First,
at least 75% of the value of the Company's total assets must be represented by
real estate assets, including (i) its allocable share of real estate assets
held by the Operating Partnership or any partnerships in which the Operating
Partnership owns an interest and (ii) stock or debt instruments held for not
more than one year purchased with the proceeds of a share offering or long-
term (i.e., at least five-year) public debt offering of the Company), cash,
cash items and government securities. Second, of the investments not included
in the 75% asset class, the value of any one issuer's securities owned by the
Company may not exceed 5% of the value of the Company's total assets. Third,
of the investments not included in the 75% asset class, the Company may not
own more than 10% of any one issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter, the
Company 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, the failure can be cured by
disposition of sufficient non-qualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests and to take such other
action within 30 days after the close of any quarter as may be required to
cure any noncompliance.
Annual Distribution Requirements. In order to qualify as a REIT, the Company
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 the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the REIT'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. Such distributions must be paid during the taxable
year to which they relate (or during the following taxable year, if declared
before the Company timely files its tax return for the preceding year and paid
on or before the first regular dividend payment after such declaration). To
the extent that the Company 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 on the undistributed amount at regular
corporate capital gains rates and ordinary income tax rates. Furthermore, if
the Company fails to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income of such year, (ii) 95% of its REIT capital
gain net income for such year (other than capital gain that the Company elects
to retain and pay tax on) and (iii) any undistributed taxable income from
prior periods, the Company will be subject to a 4% excise tax on the excess of
such amounts over the amounts actually distributed. In addition, if the
Company disposes of any asset subject to the Built-In Gain Rule during its
Recognition Period, the Company will be required to distribute at least 95% of
the built-in gain (after tax), if any, recognized on the disposition.
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The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements. In this regard, it is expected that the
Company's REIT taxable income will be less than its cash flow due to the
allowance of depreciation and other noncash charges in the computing of REIT
taxable income. Moreover, the Partnership Agreement of the Operating
Partnership authorizes the Company, as general partner, to take such steps as
may be necessary to cause the Operating Partnership to make distributions to
its partners of amounts sufficient to permit the Company to meet these
distribution requirements. It is possible, however, that the Company, from
time to time, may not have sufficient cash or other liquid assets to meet the
95% distribution requirement due to timing differences between the actual
receipt of income and actual payment of deductible expenses and the inclusion
of such income and deduction of such expenses in arriving at REIT taxable
income of the Company, or due to an excess of nondeductible expenses such as
principal amortization or capital expenditures over noncash deductions such as
depreciation. In the event that such circumstances do occur, then in order to
meet the 95% distribution requirement, the Company may cause the Operating
Partnership to arrange for short-term, or possibly long-term, borrowings to
permit the payment of required dividends.
Under certain circumstances, the Company 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 that may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends.
However, the Company would be required to pay to the IRS interest based upon
the amount of any deduction taken for deficiency dividends.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year and certain relief provisions do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Unless entitled to relief under
specific statutory provisions, the Company also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost and will not be permitted to requalify unless it
distributes any earnings and profits attributable to the period when it failed
to qualify as a REIT. It is not possible to state whether in all circumstances
the Company would be entitled to such statutory relief. Such a failure to
qualify for taxation as a REIT would reduce the Cash Available for
Distribution by the Company to shareholders and to pay debt service and could
have an adverse effect on the market value and marketability of the Common
Shares.
In any year in which the Company fails to qualify as a REIT, distributions
to shareholders will not be deductible by the Company, nor will the Company be
required to make distributions. If the Company makes distributions, such
distributions will be taxable as ordinary income to the extent of the
Company's current and accumulated earnings and profits. Subject to certain
limitations in the Code, corporate distributees may be eligible for the
dividends received deduction.
TAXATION OF SHAREHOLDERS
Taxation of Domestic Shareholders. As long as the Company qualifies as a
REIT, distributions made to the Company's taxable domestic shareholders out of
current or accumulated earnings and profits (and not designated as capital
gain dividends) will be taken into account by them as ordinary income and
corporate shareholders will not be eligible for the dividends received
deduction as to such amounts. Distributions that are designated as capital
gain dividends will be taxed as capital gains (to the extent they do not
exceed the Company's actual net capital gain for the taxable year). Depending
upon the period of time that the Company held the assets to which such gains
were attributable, and upon certain designations, if any, which may be made by
the Company, such gains will be taxable to noncorporate domestic shareholders
at a rate of either 20%, 25% or 28%. However, corporate shareholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and
profits will not be taxable to a 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 a shareholder's Common Shares. To the extent that
such distributions exceed the shareholder's adjusted basis in its Common
Shares, they will be included in income as capital gains (and in the case of a
noncorporate domestic shareholder, long-term capital gains rates will apply if
the shares have been held for more than eighteen months, mid term capital
gains rates will apply if the shares have been
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held for more than one year but not more than eighteen months and short term
capital gains rates will apply if the shares have been held for one year or
less), assuming the Common Shares are a capital asset in the hands of the
shareholder.
If the Company elects to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains, the Company would pay tax on such
retained net long-term capital gains at regular corporate tax rates. In
addition, to the extent designated by the Company, a shareholder generally
would (i) include its proportionate share of such undistributed long-term
capital gains in computing its long-term capital gains in its return for its
taxable year in which the last day of the Company's taxable year falls
(subject to certain limitations as to the amount so includible), (ii) be
deemed to have paid the capital gains tax imposed on the Company on the
designated amounts included in such shareholder's long-term capital gains,
(iii) receive a credit or refund for such amount of tax deemed paid by it,
(iv) increase the adjusted basis of its Common Shares by the difference
between the amount of such includible gains and the tax deemed to have been
paid by it, and (v) in the case of a shareholder that is a corporation,
appropriately adjust its earnings and profits for the retained capital gains
in accordance with Treasury Regulations to be prescribed by the IRS.
Any dividend declared by the Company in October, November or December of any
year payable to a shareholder of record on a specific date in any such month
shall be treated as both paid by the Company and received by the shareholder
on December 31 of such year, if the dividend is actually paid by the Company
during January of the following calendar year.
Shareholders may not include in their individual income tax returns net
operating losses or capital losses of the Company. In addition, distributions
from the Company and gain from the disposition of Common Shares will not be
treated as "passive activity" income and, therefore, shareholders will not be
able to use passive losses to offset such income.
Upon any sale, exchange or other disposition of Common Shares, a U.S.
shareholder will generally 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 other property received on such sale or other
disposition and (ii) the holder's adjusted tax basis in such Common Shares.
Such gain or loss will be capital gain or loss if the shares have been held by
the shareholder as a capital asset, and, in the case of a noncorporate
domestic shareholder, mid term or long-term rates will apply to gain or loss
if such shares have been held for more than one year or eighteen months,
respectively, and the rate of tax on such gains may be reduced for tax years
beginning after December 31, 2000 in certain circumstances. In general, any
loss recognized by a 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 long-term capital loss to the extent
of capital gain dividends received by such shareholder with respect to such
shares.
Backup Withholding. The Company will report to its domestic shareholders and
the IRS the amount of dividends paid during each calendar year and the amount
of tax withheld, if any, with respect thereto. 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 (i) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or (ii) provides a taxpayer identification number and certifies as
to no loss of exemption, and otherwise complies with the applicable
requirements of the backup withholdings rules. Any amount paid as backup
withholding will be creditable against the shareholder's income tax liability.
In addition, the Company may be required to withhold a portion of capital
gain distributions made to any shareholders which fail to certify their non-
foreign status to the Company. See "--Taxation of Foreign Shareholders" below.
On October 6, 1997, the Treasury Department issued new regulations (the "New
Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New
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Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
Taxation of Tax-Exempt Shareholders. The IRS has ruled that amounts
distributed as dividends by a qualified REIT generally do not constitute
unrelated business taxable income ("UBTI") when received by a tax-exempt
entity. Based on that ruling, the dividend income from the Common Shares will
not be UBTI to a tax-exempt shareholder, provided that a tax-exempt
shareholder has not held its Common Shares as "debt financed property" within
the meaning of the Code and such shares are not otherwise used in a trade or
business. Similarly, income from the sale of Common Shares will not constitute
UBTI unless such tax-exempt shareholder has held such shares as "debt financed
property" within the meaning of the Code or has used the shares in a trade or
business.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" will be treated as UBTI as to any trust which is described
in Section 401(a) of the Code and is tax-exempt under Section 501(a) of the
Code (a "qualified trust") and which holds more than 10% (by value) of the
interests in the REIT. A REIT is a "pension held REIT" if (i) it would not
have qualified as a REIT but for the application of a "look-through" exception
to the "not closely held" requirement applicable to qualified trusts, 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 gross income (less direct expenses related thereto) of the REIT from
unrelated trades or businesses (determined as if the REIT were a qualified
trust) to (ii) the total gross income (less direct expenses related thereto)
of the REIT. A de minimis exception applies where this 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. As a result of certain limitations
on transfer and ownership of Common Shares contained in the Declaration of
Trust, the Company does not expect to be classified as a "pension held REIT."
Taxation of Foreign Shareholders. The rules governing U.S. Federal income
taxation of nonresident alien individuals, foreign corporations, foreign
partnerships, foreign trusts and estates and other foreign shareholders
(collectively, "Non-U.S. Shareholders") are complex, and no attempt will be
made herein to provide more than a limited summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of U.S. Federal, state and local income tax laws with regard to an
investment in Common Shares, including any reporting requirements.
Ordinary Dividends. Distributions, other than distributions that are treated
as attributable to gain from sales or exchanges by the Company of U.S. real
property interests (discussed below) and other than distributions designated
by the Company as capital gain dividends, will be treated as ordinary income
to the extent that they are made out of current or accumulated earnings and
profits of the Company. Such distributions to foreign shareholders will
ordinarily be subject to a withholding tax equal to 30% of the gross amount of
the distribution, unless an applicable tax treaty reduces that tax rate.
However, if income from the investment in the Common Shares is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade
or business, the Non-U.S. Shareholder generally will be subject to a tax at
graduated rates in the same manner as U.S. shareholders are taxed with respect
to such dividends (and may also be subject to the 30% branch profits tax if
the shareholder is a foreign corporation). In general, a non- U.S. Shareholder
will not be considered to be engaged in a U.S. trade or business solely as a
result of its ownership of Common Shares. The Company expects to withhold U.S.
income tax at the rate of 30% on the gross amount of any dividends, other than
dividends treated as attributable to gain from sales or exchanges of U.S. real
property interests and capital gain dividends, paid to a Non-U.S. Shareholder,
unless (i) a lower treaty rate applies and the required form evidencing
eligibility for that reduced rate is filed with the Company or (ii) the Non-
U.S. Shareholder files an IRS Form 4224 (or its future equivalent) with the
Company claiming that the distributions are "effectively connected" income.
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Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate.
Return of Capital. Distributions in excess of current and accumulated
earnings and profits of the Company, which are not treated as attributable to
the gain from disposition by the Company of a U.S. real property interest,
will not be taxable to a Non-U.S. Shareholder to the extent that they do not
exceed the adjusted basis of the Non-U.S. 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 tax liability if the Non-U.S.
Shareholder otherwise would be subject to tax on any gain from the sale or
disposition of its Common Shares, as described below. If it cannot be
determined at the time a distribution is made whether such distribution will
be in excess of current and accumulated earnings and profits, the distribution
will be subject to withholding at the rate applicable to dividends. However,
the Non-U.S. Shareholder may seek a refund of such amounts from the IRS if it
is subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
Capital Gain Dividends. For any year in which the Company qualifies as a
REIT, distributions that are attributable to gain from sales or exchanges by
the Company of U.S. real property interests will be taxed to a Non-U.S.
Shareholder under the provisions of the Foreign Investment in Real Property
Tax Act of 1980, as amended ("FIRPTA"). Under FIRPTA, these distributions are
taxed to a Non-U.S. Shareholder as if such gain were effectively connected
with a U.S. business. Thus, Non-U.S. Shareholders will be taxed on such
distributions at the same capital gain rates applicable to U.S. shareholders
(subject to any applicable alternative minimum tax and special alternative
minimum tax in the case of nonresident alien individuals), without regard to
whether such distributions are designated by the Company as capital gain
dividends. Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a corporate Non-U.S. Shareholder not
entitled to treaty relief or exemption. The Company is required by applicable
Treasury Regulations under FIRPTA to withhold 35% of any distribution that
could be designated by the Company as a capital gain dividend.
Sales of Common Shares. Gain recognized by a Non-U.S. Shareholder upon a
sale or exchange of Common Shares generally will not be taxed under FIRPTA if
the Company is a "domestically controlled REIT," defined generally as a REIT
in respect of which at all times during a specified testing period less than
50% in value of the shares was held directly or indirectly by foreign persons.
It is currently anticipated that the Company will be a "domestically
controlled REIT" and that therefore the sale of Common Shares will not be
subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) investment in the Common Shares is
treated as "effectively connected" with the Non-U.S. Shareholder's U.S. trade
or business, in which case the Non-U.S. Shareholder will be subject to the
same treatment as U.S. shareholders with respect to such gain, or (ii) the Non
U.S. Shareholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and has a "tax
home" in the United States, or maintains an office or a fixed place of
business in the United States to which the gain is attributable, in which case
the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. A similar rule will apply to capital gain
dividends not subject to FIRPTA.
Although the Company anticipates that it will qualify as a domestically
controlled REIT, because the Common Shares will be publicly traded, no
assurance can be given that the Company will continue to so qualify. If the
Company were not a domestically controlled REIT, whether or not a Non-U.S.
Shareholder's sale of Common Shares would be subject to tax under FIRPTA would
depend on whether or not the Common Shares were regularly traded on an
established securities market (such as the NYSE, on which the Company has
applied for the listing of the Common Shares) and on the size of the selling
Non-U.S. Shareholder's interest in the Company. If the gain on the sale of
Common Shares were to be subject to tax under FIRPTA, the Non-U.S. Shareholder
would be subject to the same treatment as U.S. shareholders with respect to
such gain (subject to any applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals) and the
purchaser of such Common Shares may be required to withhold 10% of the gross
purchase price.
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OTHER TAX CONSIDERATIONS
Effect of Tax Status of Operating Partnership and Other Entities on REIT
Qualification. All of the Company's significant investments are held through
the Operating Partnership. There are special tax considerations with respect
to the Operating Partnership. These tax considerations include: (i)
allocations of income and expense items of the Operating Partnership, which
could affect the computation of taxable income of the Company, (ii) the status
of the Operating Partnership as a partnership or as an entity that is
disregarded as an entity separate from its owners (as opposed to associations
taxable as corporations) for income tax purposes, and (iii) the taking of
actions by the Operating Partnership that could adversely affect the Company's
qualification as REIT.
In the opinion of Brown & Wood llp, based on certain representations of the
Company and the Operating Partnership, for Federal income tax purposes, the
Operating Partnership will be treated as a partnership. If, however, the
Operating Partnership were treated as an association taxable as a corporation,
the Company would fail to qualify as a REIT for a number of reasons.
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for classification as a REIT. In this regard, the Company will control the
operation of the Operating Partnership through its rights as the sole general
partner of the Operating Partnership.
Tax Allocations with Respect to the Properties. When property is contributed
to a partnership in exchange for an interest in the partnership, the
partnership generally takes a carryover basis in that property for tax
purposes (i.e., the partnership's basis is equal to the adjusted basis of the
contributing partner in the property), rather than a basis equal to the fair
market value of the property at the time of contribution. Pursuant to Section
704(c) of the Code, income, gain, loss and deductions attributable to such
contributed property must be allocated in a manner such that the contributing
partner is charged with, or benefits from, respectively, the unrealized gain
or unrealized loss associated with the property at the time of the
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 (a "Book-Tax Difference"). Such
allocations are solely for Federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership will be funded by way of contributions of
appreciated property to the Operating Partnership. Consequently, the
Partnership Agreement will require such allocations to be made in a manner
consistent with Section 704(c) of the Code and the regulations thereunder (the
"Section 704(c) Regulations").
The Section 704(c) Regulations require partnerships to use a "reasonable
method" for allocation of items affected by Section 704(c) of the Code and
outline three methods which may be considered reasonable for these purposes.
The Operating Partnership intends to use the "traditional method" of Section
704(c) allocations, which is the least favorable method from the Company's
perspective because of certain technical limitations. Under the traditional
method, depreciation with respect to a contributed property for which there is
a Book-Tax Difference first will be allocated to the Company and other
partners who did not have an interest in such property until they have been
allocated an amount of depreciation equal to what they would have been
allocated if the Operating Partnership had purchased such property for its
fair market value at the time of contribution. In addition, if such a property
is sold, gain equal to the Book-Tax Difference at the time of sale will be
specially allocated to the partner who contributed the property. These
allocations will tend to eliminate the Book-Tax Differences with respect to
the contributed Initial Hotels over the life of the Operating Partnership.
However, they may not always entirely eliminate the Book-Tax Difference on an
annual basis or with respect to a specific taxable transaction such as a sale.
This could cause the Company (i) to be allocated lower amounts of depreciation
deduction for tax purposes than would be allocated to the Company if each of
the Initial Hotels were to have a tax basis equal to its fair market value at
the time of contribution and (ii) to be allocated lower amounts of taxable
loss in the event of a sale of such contributed interests in the Initial
Hotels at a book loss, than the economic or book loss allocated to the Company
as a result of such sale, with a corresponding benefit to the other partners
in the
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Operating Partnership. These allocations possibly might adversely affect the
Company's ability to comply with REIT distribution requirements, although the
Company does not anticipate that this will occur. These allocations may also
affect the earnings and profits of the Company for purposes of determining the
portion of distributions taxable as a dividend income. See "--Taxation of U.S.
Shareholders". The application of these rules over time may result in a higher
portion of distributions being taxed as dividends than would have occurred had
the Company purchased its interests in the Initial Hotels at their agreed
values.
Interests in the Properties purchased by the Operating Partnership for cash
simultaneously with or subsequent to the admission of the Company to the
Operating Partnership initially will have a tax basis equal to their fair
market value. Thus, Section 704(c) of the Code will not apply to such
interests.
STATE AND LOCAL TAX
The Company and its shareholders may be subject to state and local tax in
states and localities in which it does business or owns property. The tax
treatment of the Company and the shareholders in such jurisdictions may differ
from the Federal income tax treatment described above.
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UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated is acting as representative (the "Representative"),
have severally agreed, subject to the terms and conditions contained in the
underwriting agreement (the "Underwriting Agreement"), to purchase from the
Company the number of Common Shares set forth below opposite their respective
names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ----------
<S> <C>
Prudential Securities Incorporated..............................
----------
Total........................................................... 14,450,000
==========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the Common Shares offered hereby, if any are purchased.
The Underwriters, through the Representative, have advised the Company that
they propose to offer the Common Shares to the public initially at the public
offering price set forth on the cover page of this Prospectus, and that the
Underwriters may allow to selected dealers a concession of $ per share and
that such dealers may reallow a concession of $ per share to certain other
dealers. After completion of the Offering, the initial public offering price,
and the concessions may be changed by the Representative.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to an additional 2,167,500
Common Shares at the initial public offering price, less the underwriting
discounts and commissions as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the Common Shares offered hereby. To
the extent that such option to purchase is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional Common Shares as the number set forth next
to such Underwriter's name in the preceding table bears to 14,450,000.
The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against and contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Company, its officers and Trustees, the Advisor and the Contributors
have agreed not to, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any Units or
Common Shares of the Company, or any securities convertible or exercisable or
exchangeable for any Units or Common Shares of the Company (other than
pursuant to the Share Option Plan and the share purchase rights granted to the
Contributors), for a period of 180 days in the case of the Company, and one
year in the case of the Company's officers and Trustees, the Advisor and the
Contributors, from the closing of the Offering, without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
subject to certain limited exceptions. Prudential Securities Incorporated may,
in its sole discretion, at any time and without notice, release all or any
portion of the Common Shares subject to the foregoing lock-up agreements.
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Application will be made to list the Common Shares on the NYSE under the
symbol "LHO."
Prior to the Offering, there has been no public market for the Common
Shares. The initial public offering price will be determined through
negotiations between the Company and the Representatives. Among the factors to
be considered in such determination will be prevailing market conditions,
distribution yields and financial characteristics of publicly traded REITs
that the Company and the Representatives believe to be comparable to the
Company, the expected results of operations of the Company (which are based on
the results of operations of the Initial Hotels in recent periods), estimates
of future business potential and earnings prospects of the Company as a whole
and the current state of the hotel industry and the economy as a whole.
The Bridge Loan, in the original principal amount of $48.0 million, made by
an affiliate of Prudential Securities Incorporated to certain of the
Contributors will be repaid with a portion of the estimated net proceeds from
the Offering.
In connection with the Offering, certain Underwriters (and selling group
members, if any) and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Shares. Such Transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M promulgated by the Commission
pursuant to which such persons may bid for or purchase Common Shares for the
purpose of stabilizing its market price. The Underwriters also may create a
short position for the account of the Underwriters by selling more Common
Shares in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase Common Shares in the open
market following completion of the Offering to cover all or a portion of such
short position. The Underwriters may also cover all or a portion of such short
position, up to 2,167,500 Common Shares, by exercising the Underwriters' over-
allotment option referred to above. In addition, Prudential Securities
Incorporated, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or any selling group member participating in the Offering) for
the account of the other Underwriters, the selling concession with respect to
Common Shares that are distributed in the Offering but subsequently purchased
for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Shares at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph are
required and, if they are undertaken, they may be discontinued at any time.
EXPERTS
The balance sheet of LaSalle Hotel Properties as of January 15, 1998, the
combined balance sheets of the Initial Hotels (excluding Marriott's Seaview
Resort and the LaGuardia Airport Marriott) as of December 31, 1995 and 1996
and related statements of operations, changes in partners' capital, and cash
flows for each of the years in the three-year period ended December 31, 1996,
the statements of revenues and expenses and cash flows of Omaha Marriott Hotel
for the period from December 29, 1995 to December 19, 1996, the balance sheet
of Rahn Key West Resort, Inc. as of December 31, 1996 and the related
statements of operations, stockholders' deficit, and cash flows for the year
ended December 31, 1996, the statements of revenues and expenses and cash
flows of the Le Meridien Dallas for the year ended January 31, 1997 and the
period from February 1, 1997 to September 4, 1997, the balance sheet of MSCC
Limited Partnership as of December 29, 1995 and related statements of
operations, changes in partners' capital (deficit), and cash flows for the
fiscal year ended December 29, 1995, the statements of revenues and expenses
and cash flows of Marriott's Seaview Resort for the period from January 4,
1997 to November 7, 1997, and the balance sheets of LaGuardia Airport Marriott
as of December 31, 1995 and 1996 and the related statements of operations,
changes in owners' equity, and cash flows for each of the years in the three-
year period ended December 31, 1996 have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
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The financial statements of Canal Street Hotels limited Partnership as of
and for the years ending December 31, 1995 and 1996, included in third
Prospectus and elsewhere is the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance said firm as
experts in giving said report.
The financial statements of Rahn Key West Resort, Inc. as of and for the
year ended December 31, 1995, included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The balance sheet of MSCC Limited Partnership as of January 3, 1997, and the
related statements of income, changes in partners' capital (deficit) and cash
flows for the fiscal year ended January 3, 1997, included in this registration
statement, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Common Shares and certain tax matters will be passed
upon for the Company by Brown & Wood llp. In addition, the description of
Federal income tax consequences under the heading "Federal Income Tax
Consequences" is based upon the opinion of Brown & Wood llp. Certain legal
matters will be passed upon for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom llp, New York, New York. Skadden, Arps, Slate, Meagher & Flom
llp may rely on the opinion of Brown & Wood llp as to certain matters of
Maryland law.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 (of which this Prospectus is a part) under the Securities Act with
respect to the securities offered hereby. This Prospectus does not contain all
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement is qualified in all respects by
such reference and the exhibits and schedules hereto. For further information
regarding the Company and the Common Shares offered hereby, reference is
hereby made to the Registration Statement and such exhibits and schedules,
which may be obtained from the Commission as its principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by
the Commission. The Commission maintains a website at http:/www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with
the Commission. In addition, the Company intends to file an application to
list the Common Shares on the New York Stock Exchange and, if the Common
Shares are listed on the New York Stock Exchange, similar information
concerning the Company can be inspected and copied at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company intends to furnish its shareholders with annual reports
containing audited combined financial statements and a report thereon by
independent certified public accountants.
115
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
LASALLE HOTEL PROPERTIES
Pro Forma (Unaudited)
Condensed Consolidated Statement of Income for the nine months ended
September 30, 1997................................................... F-3
Condensed Consolidated Statement of Income for the year ended December
31, 1996............................................................. F-5
Notes to Pro Forma Consolidated Condensed Statements of Income........ F-6
Condensed Consolidated Balance Sheet as of September 30, 1997......... F-8
Notes to Pro Forma Condensed Consolidated Balance Sheet............... F-9
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP....... F-11
Balance Sheet as of January 15, 1998.................................. F-12
Notes to Balance Sheet................................................ F-13
AFFILIATED LESSEE
Pro Forma (Unaudited)
Condensed Statement of Operations for the nine months ended September
30, 1997............................................................. F-16
Condensed Statement of Operations for the year ended December 31,
1996................................................................. F-17
Notes to Pro Forma Condensed Statements of Operations................. F-17
Condensed Balance Sheet as of September 30, 1997...................... F-19
Notes to Pro Forma Condensed Balance Sheet............................ F-19
LE MERIDIEN LESSEE
Pro Forma (Unaudited)
Condensed Statement of Operations for the nine months ended September
30, 1997 ............................................................ F-20
Condensed Statement of Operations for the year ended December 31,
1996................................................................. F-22
Notes to Pro Forma Condensed Statements of Operations ................ F-27
Condensed Balance Sheet as of September 30, 1997...................... F-28
Notes to Pro Forma Condensed Balance Sheet............................ F-23
INITIAL HOTELS (EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA
AIRPORT MARRIOTT)
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP....... F-25
Combined Balance Sheets as of December 31, 1995 and 1996 and September
30, 1997 (unaudited)................................................. F-26
Combined Statements of Operations for the years ended December 31,
1994, 1995, and 1996 and the nine months ended September 30, 1996 and
1997 (unaudited)..................................................... F-27
Combined Statements of Changes in Partners' Capital for the years
ended December 31, 1994, 1995, and 1996 and the nine months ended
September 30, 1997 (unaudited)....................................... F-28
Combined Statements of Cash Flows for the years ended December 31,
1994, 1995, and 1996 and the nine months ended September 30, 1996 and
1997 (unaudited)..................................................... F-29
Notes to Combined Financial Statements................................ F-30
OMAHA MARRIOTT HOTEL
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP....... F-39
Statement of Revenues and Expenses for the period from December 30,
1995 to December 19, 1996............................................ F-40
Statement of Cash Flows for the period from December 30, 1995 to
December 19, 1996.................................................... F-41
Notes to Financial Statements......................................... F-42
RAHN KEY WEST RESORT, INC.
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP....... F-44
Balance Sheet as of December 31, 1996................................. F-45
Statements of Operations for the year ended December 31, 1996 and the
six months ended June 30, 1997 (unaudited)........................... F-47
Statements of Stockholders' Deficit for the year ended December 31,
1996 and the six months ended June 30, 1997 (unaudited).............. F-48
Statements of Cash Flows for the year ended December 31, 1996 and the
six months ended June 30, 1997 (unaudited)........................... F-49
Notes to Financial Statements......................................... F-50
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
RAHN KEY WEST RESORT, INC.
Historical
Report of Independent Public Accountants--Deloitte & Touche........... F-54
Balance Sheet as of December 31, 1995................................. F-55
Statement of Operations for the year ended December 31, 1995.......... F-57
Statement of Stockholders' Deficit for the year ended December 31,
1995................................................................. F-58
Statement of Cash Flows for the year ended December 31, 1995.......... F-59
Notes to Financial Statements......................................... F-60
LE MERIDIEN DALLAS
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP....... F-63
Statements of Revenues and Expenses for the year ended January 31,
1997 and the period from February 1, 1997 to September 4, 1997....... F-64
Statements of Cash Flows for the year ended January 31, 1997 and
period from February 1, 1997 to September 4, 1997.................... F-65
Notes to Financial Statements......................................... F-66
CANAL STREET HOTELS LIMITED PARTNERSHIP (LE MERIDIEN NEW ORLEANS)
Historical
Report of Independent Public Accountants--Arthur Andersen LLP......... F-67
Balance Sheets as of December 31, 1996 and 1995....................... F-68
Statements of Operations for the years ended December 31, 1996 and
1995................................................................. F-69
Statements of Changes in Partners' Equity (Deficit) for the years
ended December 31, 1996 and 1995..................................... F-70
Statements of Cash Flows for the years ended December 31, 1996 and
1995................................................................. F-71
Notes to Financial Statements......................................... F-72
MSCC LIMITED PARTNERSHIP (MARRIOTT'S SEAVIEW RESORT)
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP....... F-76
Report of Independent Public Accountants--Coopers & Lybrand LLP....... F-77
Balance Sheets as of December 29, 1995 and January 3, 1997 ........... F-78
Statements of Operations for the years ended December 29, 1995 and
January 3, 1997 ..................................................... F-79
Statements of Partners' Capital (Deficit) for the years ended December
29, 1995 and January 3, 1997......................................... F-80
Statements of Cash Flows for the years ended December 29, 1995 and
January 3, 1997...................................................... F-81
Notes to Financial Statements......................................... F-82
MARRIOTT'S SEAVIEW RESORT
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP....... F-86
Statement of Revenues and Expenses for the period from January 4, 1997
to November 7, 1997.................................................. F-87
Statement of Cash Flows for the period from January 4, 1997 to
November 7, 1997..................................................... F-88
Notes to Financial Statements......................................... F-89
LAGUARDIA AIRPORT MARRIOTT
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP....... F-91
Balance Sheets as of December 31, 1995 and 1996....................... F-92
Statements of Operations for the years ended December 31, 1994, 1995,
and 1996 and the nine months ended September 30, 1996 and 1997
(unaudited).......................................................... F-93
Statements of Owners' Equity for the years ended December 31, 1994,
1995, and 1996 and the nine months ended September 30, 1997
(unaudited).......................................................... F-94
Statements of Cash Flows for the years ended December 31, 1994, 1995,
and 1996 and the nine months ended September 30, 1996 and 1997
(unaudited).......................................................... F-95
Notes to Financial Statements......................................... F-96
</TABLE>
F-2
<PAGE>
LASALLE HOTEL PROPERTIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997,
AND THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
The Company's unaudited Pro Forma Condensed Consolidated Statements of
Income for the nine months ended September 30, 1997 and the year ended
December 31, 1996 are presented as if (1) the consummation of the offering,
the related formation transactions and the funding of the Line of Credit (2)
the acquisition of the Initial Hotels and the acquisition of Marriott's
Seaview Resort, LaGuardia Airport Marriott Hotel, and (3) the application of
the net proceeds of the offering had occurred on January 1, 1996 and all the
hotels had been leased pursuant to the Participating Leases as of that date
and carried forward through each period presented. Information should be read
in conjunction with the Pro Forma Statements of Income of the Affiliate
Lessee, the Le Meridien Lessee, and the Combined Financial Statements of the
Initial Hotels listed in the Index to Financial Statements included in this
Prospectus. In management's opinion, all adjustments necessary to reflect the
effects of the Formation Transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Statements of
Income are not necessarily indicative of what actual results of operations of
the Company would have been assuming such transactions had been completed as
of the beginning of the periods presented, nor do they purport to represent
the results of operations for future periods. Further, the unaudited Pro Forma
Condensed Consolidated Statements of Income of the interim period ended
September 30, 1997 are not necessarily indicative of the results of operations
for the full year.
F-3
<PAGE>
LASALLE HOTEL PROPERTIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------
PROPOSED
INITIAL HOTELS ACQUISITIONS OTHER PRO FORMA
-------------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Participating Lease
revenue................... $25,253 10,000 -- $35,253(A)
EXPENSES:
Depreciation............... 9,590 3,464 -- 13,054(B)
Real estate and personal
property taxes, property
and casualty insurance.... 3,848 672 -- 4,520(C)
General and administrative. -- -- 548 548(D)
Interest................... -- -- 2,592 2,592(E)
Advisory Fees.............. -- -- 1,364 1,364(F)
Other...................... -- -- 311 311
-------
Expenses before minority
interest................ 22,389
Minority interest.......... 2,277(G)
-------
Total expenses and
minority interest....... 24,666
-------
Net income applicable to
common shareholders....... $10,587
=======
Net income per common
share..................... $ .69
=======
Weighted Average number of
Common Shares Outstanding. 15,420
=======
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Income.
F-4
<PAGE>
LASALLE HOTEL PROPERTIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------
PROPOSED
INITIAL HOTELS ACQUISITIONS OTHER PRO FORMA
-------------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Participating Lease
revenue................... $31,161 12,957 -- $44,118(A)
EXPENSES:
Depreciation............... 12,787 4,618 -- 17,405(B)
Real estate and personal
property taxes, property
and casualty insurance.... 4,079 2,171 -- 6,250(C)
General and administrative. -- -- 730 730(D)
Interest................... -- -- 3,456 3,456(E)
Advisory Fees.............. -- -- 1,663 1,663(F)
Other...................... -- -- 414 414
-------
Expenses before minority
interest................ 29,918
Minority interest.......... 2,513(G)
-------
Total expenses and
minority interest....... 32,431
-------
Net income applicable to
common shareholders....... $11,687
=======
Net income per common
share..................... $ .76
=======
Weighted average number of
Common Shares Outstanding. 15,420
=======
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Income.
F-5
<PAGE>
LASALLE HOTEL PROPERTIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(A) Represents lease payments from the Initial Lessees calculated on a pro
forma basis by applying the rent provisions of the Participating Leases to the
pro forma revenues of the Initial Hotels, as though the hotels were acquired
January 1, 1996 and leased pursuant to the Participating Leases since that
date. The rent formula utilized in computing the pro forma Participating Lease
revenues includes for the calendar year 1996 an adjustment to reduce the
threshold revenue amounts in the Participating Lease formulas by the 1.8% and
1.5% increase in the Consumer Price Index for 1996 and 1997, respectively. See
"The Initial Hotels--The Participating Leases" for the Participating Lease
formulas.
(B) Represents depreciation of the Hotels. Depreciation is computed using
the straight-line method and is based upon the estimated useful lives of 25 to
39 years for buildings and improvements and 5 years for furniture and
equipment. These estimated useful lives are based on management's knowledge of
the properties and the hotel industry in general.
The company's pro forma investment in hotel properties at cost consists of
the following:
<TABLE>
<CAPTION>
INITIAL PROPOSED
HOTELS ACQUISITIONS TOTAL
-------- ------------ --------
<S> <C> <C> <C>
Land....................................... $ 46,622 $20,386 $ 67,008
Buildings and improvements................. 198,582 65,836 264,418
Furniture and equipment.................... 30,838 12,118 42,956
-------- ------- --------
TOTAL.................................... $276,042 $98,340 $374,382
======== ======= ========
</TABLE>
(C) Represents real estate and personal property taxes, property and
casualty insurance, and ground rent expense to be paid by the Company. Such
amounts were derived from historical amounts paid by the Initial Hotels.
(D) Represents annual general and administrative expenses to be paid or
reimbursed to the Company by the operating partnership as follows:
<TABLE>
<CAPTION>
ANNUAL
------
<S> <C>
Professional fees................................................... $230
Directors and officers insurance.................................... 250
Directors' fees and expenses........................................ 150
Other expenses...................................................... 100
----
TOTAL............................................................. $730
====
</TABLE>
Nine month amounts have been prorated accordingly.
(E) Represents (i) interest expense at 7.25% on $40,771 of pro forma
borrowings against the Line of Credit in connection with the completion of the
Formation Transactions, and (ii) amortization of debt issuance costs
associated with the Line of Credit over the term of the Line.
(F) Represents Advisory Fees to be paid to the Advisor for management,
advisory and administrative services to be provided to the Company. The
Advisor will receive an annual base fee and an annual incentive fee based on
growth in funds from operations up to 5% of the Company's net operating
income, as defined.
(G) Minority interest represents the interest in the Operating Partnership
that will not be owned by the Company and is calculated at 17.7% of the Pro
Forma net income of the Operating Partnership.
F-6
<PAGE>
LASALLE HOTEL PROPERTIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
The unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as
if the (1) acquisition of the Initial Hotels and the acquisition of Marriott's
Seaview Resort and the LaGuardia Airport Marriott and (2) consummation of the
Offering and the Formation Transactions and the application of the net
proceeds therefrom had occurred on September 30, 1997. Such pro forma
information is based in part upon the financial statements included in this
Prospectus. In management's opinion, all adjustments necessary to reflect the
effects of these transactions have been made.
This unaudited Pro Forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been
assuming such transactions had been completed as of September 30, 1997, nor
does it purport to represent the future financial position of the Company.
F-7
<PAGE>
LASALLE HOTEL PROPERTIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PROFORMA ADJUSTMENTS
------------------------------- TOTAL
(A) INITIAL PROPOSED PRO FORMA
HISTORICAL HOTELS ACQUISITIONS OTHER ADJUSTMENTS PRO FORMA
---------- -------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in hotel
properties, net....... $172,356 $103,686 $ 98,340 $ -- $ 202,026 (B) $374,382
Cash and cash
equivalents........... 9,398 -- 1,785 (10,183) (8,398) (C) 1,000
Accounts receivable,
net................... 5,116 -- 4,548 (9,664) (5,116) (G) --
Inventories, prepaid
expenses and other
assets................ 2,935 -- 1,430 (4,365) (2,935) (G) --
Deferred expenses...... 1,518 -- -- 14 14 (D) 1,532
Restricted cash
reserves.............. 4,887 -- 4,013 1,600 5,613 10,500
-------- -------- -------- --------- --------- --------
Total Assets......... $196,210 $103,686 $110,116 $ (22,598) $ 191,204 $387,414
======== ======== ======== ========= ========= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Mortgage notes payable. $126,405 $ -- $ 89,729 $(216,134) $(126,405)(I) $ --
Borrowings against Line
of Credit............. -- -- -- 40,771 40,771 (J) 40,771
Accounts payable,
accrued expenses and
other liabilities..... 9,983 -- 3,172 (13,155) (9,983)(G) --
Minority interest in
partnership........... -- -- -- 61,329 61,329 (E) 61,329
-------- -------- -------- --------- --------- --------
Total Liabilities.... 136,388 92,901 (127,189) (34,288) 102,100
SHAREHOLDERS' EQUITY
Common shares.......... -- -- -- 154 154 (F) 154
Additional paid-in
capital............... -- 103,686 17,215 169,102 290,003 (H) 290,003
Retained earnings
(deficit)............. 59,822 -- -- (64,665) (64,665) (4,843)(K)
-------- -------- -------- --------- --------- --------
Total Shareholders'
Equity.............. 59,822 103,686 17,215 104,591 225,492 285,314
-------- -------- -------- --------- --------- --------
Total Liabilities &
Shareholders'
Equity............ $196,210 $103,686 $110,116 $ (22,598) $ 191,204 $387,414
======== ======== ======== ========= ========= ========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Balance Sheet.
F-8
<PAGE>
LASALLE HOTEL PROPERTIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(A) Reflects the historical combined balance sheets of the Initial Hotels
(excluding Marriott's Seaview Resort and the LaGuardia Airport Marriott), as
of September 30, 1997.
(B) Increase in investment in hotel properties attributable to the
application of purchase accounting to all assets purchased and the
capitalization of transfer taxes and other direct costs of acquisition as
follows:
<TABLE>
<CAPTION>
INITIAL PROPOSED TOTAL
HOTELS ACQUISITIONS INCREASE
-------- ------------ --------
<S> <C> <C> <C>
Cash purchase price........................ $ 41,564 $ 8,874 $ 50,438(i)
Value of Units issued...................... 60,672 88,921 149,593
Transfer taxes and other direct costs of
acquisition............................... 1,450 545 1,995(vii)
-------- ------- --------
Increase in investment in hotel
properties.............................. $103,686 $98,340 $202,026
======== ======= ========
</TABLE>
(C) Net decrease in cash reflects the following proposed transactions:
<TABLE>
<S> <C>
Proceeds of the Offering.................................. $ 289,000 (iii)
Expenses of the Offering.................................. (20,230)(iv)
Proceeds from borrowing against Line of Credit............ 40,771
Debt issue costs related to the Line of Credit............ (1,500)
Retirement of mortgage notes payable (See note I)......... (248,251)
Prepayment penalties on retirement of mortgage notes
payable.................................................. (3,357)(vi)
Cash purchase price of hotel property acquisitions........ (50,438)(i)
Other Offering costs...................................... (3,000)(ii)
Partner distributions, net................................ (9,398)
Payment of transfer taxes and other direct costs of
acquiring Initial Hotels................................. (1,995)(vii)
---------
Net decrease to cash.................................... $ (8,398)
=========
</TABLE>
(D) Decrease reflects writeoff of deferred financing costs of $1,486 in
conjunction with the repayment of mortgage notes secured by the Initial Hotels
and $1,500 of debt issuance costs incurred related to the Line of Credit.
(E) Represents the recognition of minority interest in the Operating
Partnership that will not be owned by the Company.
The manner in which the value assigned to minority interest was determined
is as follows:
<TABLE>
<S> <C>
Total equity............................................... $346,489
Minority interest percentage............................... 17.7%
--------
$ 61,329(viii)
========
</TABLE>
(F) Issuance of 15,420,000 common shares at $0.01 par value.
154(v)
(G) Decrease reflects assets and liabilities of the Initial Hotels and
Proposed Acquisitions which are not being purchased.
F-9
<PAGE>
LASALLE HOTEL PROPERTIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--(CONTINUED)
AS OF SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(H) Net increase reflects the following proposed transactions:
<TABLE>
<S> <C>
Proceeds of the Offering.................................. $289,000 (iii)
Expenses of the Offering.................................. (20,230)(iv)
Other Offering costs...................................... (3,000)(ii)
Transfer of balance of common shares...................... (154)(v)
Recognition of minority interest.......................... (61,329)(viii)
Transfer of balance from combined equity of the Initial
Hotels (excluding Marriott's Seaview Resort and the La-
Guardia Airport Marriott)................................ 85,716
--------
$290,003
========
</TABLE>
(I) Decrease reflects the repayment of historical mortgage notes with
proceeds from the Offering.
(J) Represents borrowings under the Line of Credit of $40,771.
(K) Balance reflects the following:
<TABLE>
<S> <C>
Write off of deferred expenses............................... $(1,486)
Prepayment penalties......................................... (3,357)(vi)
-------
Retained earnings (deficit).................................. $(4,843)
=======
</TABLE>
F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Trustees
LaSalle Hotel Properties:
We have audited the accompanying balance sheet of LaSalle Hotel Properties
(the Company) as of January 15, 1998 (date of formation). This financial
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement 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 of a balance sheet includes examining, on a
test basis, evidence supporting the amounts and disclosures in that balance
sheet. An audit of a balance sheet 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 LaSalle Hotel Properties as of
January 15, 1998 (date of formation), in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 16, 1998
F-11
<PAGE>
LASALLE HOTEL PROPERTIES
BALANCE SHEET
JANUARY 15, 1998
<TABLE>
<S> <C>
ASSETS
Cash.................................................................... $1,000
======
SHAREHOLDERS' EQUITY
Preferred shares, $.01 par value; 20,000,000 shares authorized; no
shares issued and outstanding.......................................... --
Common shares, $.01 par value; 100,000,000 shares authorized; 100 shares
issued and outstanding................................................. 1
Additional paid-in capital.............................................. 999
------
Total shareholders' equity............................................ $1,000
======
</TABLE>
See accompanying notes to balance sheet.
F-12
<PAGE>
LASALLE HOTEL PROPERTIES
NOTES TO BALANCE SHEET
JANUARY 15, 1998
(1) ORGANIZATION
LaSalle Hotel Properties (the Company) was formed on January 15, 1998 to own
hotel properties and to continue and expand the hotel investment activities of
LaSalle Partners Incorporated and certain of its affiliates (collectively
LaSalle). The Company will be managed and advised by LaSalle Hotel Advisors
Inc. (the Advisor), a wholly owned subsidiary of LaSalle. The Company intends
to qualify as a real estate investment trust (REIT) and complete an initial
public offering (the Offering). Upon completion of the Offering, the Company
will own, through an approximate 82.3% interest in an Operating Partnership
(the Operating Partnership), interests in ten upscale and luxury full service
hotels (the Initial Hotels). All of the Initial Hotels will be leased under
participating leases (Participating Leases) which provide for rent based on
hotel revenues and will be managed by independent hotel operators (Hotel
Operators).
The Initial Hotels are currently owned by various limited and general
partnerships (the Partnerships) in which LaSalle is the general partner. It is
the intent of LaSalle and its limited and other general partners to contribute
their respective interests in the Initial Hotels in exchange for shares of the
REIT or units of the Operating Partnership.
In the event the Offering is not completed, 40% of the offering costs
incurred will be borne by LaSalle and the remaining amounts will be borne by
LaSalle's partners or the Partnerships on behalf of the Company.
The Initial Hotels consist of the following:
<TABLE>
<CAPTION>
NUMBER OF
PROPERTY NAME LOCATION ROOMS
------------- -------- ---------
<S> <C> <C>
Le Montrose All Suite De Gran Luxe....... West Hollywood, CA 128
Holiday Inn Plaza Park................... Visalia, CA 257
Camberly Plaza Sabal Park Hotel.......... Tampa, FL 265
Radisson Hotel South and Conference
Center.................................. Bloomington, MN 580
Omaha Marriott Hotel..................... Omaha, NE 301
Le Meridien New Orleans Hotel............ New Orleans, LA 494
Key West Holiday Inn Beachside Resort.... Key West, FL 222
Le Meridien Dallas Hotel................. Dallas, TX 396
</TABLE>
Marriott's Seaview Resort was acquired subsequent to September 30, 1997 and
the LaGuardia Airport Marriott is expected to be acquired by March 1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Acquisition of Initial Hotels
The acquisitions of the Initial Hotels discussed in note 1 will be accounted
for as purchase transactions.
Distributions
The Company intends to pay regular quarterly distributions to its
shareholders as directed by the Board of Trustees. The Company's ability to
pay distributions will be dependent on the receipt of distributions from the
Operating Partnership.
Income Taxes
The Company intends to qualify as a REIT under Sections 856 through 860 of
the Internal Revenue Code of 1986. A REIT will generally not be subject to
federal income taxation on that portion of its income that qualifies as REIT
taxable income to the extent that it distributes at least 95% of its taxable
income to its shareholders and complies with certain other requirements.
F-13
<PAGE>
LASALLE HOTEL PROPERTIES
NOTES TO BALANCE SHEET--(CONTINUED)
(3) DESCRIPTION OF CAPITAL STRUCTURE
Common Shares
The Board of Trustees is authorized to reclassify any unissued Common Shares
into other classes or series of classes and to establish the number of shares
in each class and to set the preferences for each.
Preferred Shares
The Board of Trustees is authorized to classify any unissued Preferred
Shares and to reclassify any previously classified but unissued Preferred
Shares of any series. No Preferred Shares are outstanding as of January 15,
1998.
(4) REVOLVING LINE OF CREDIT (UNAUDITED)
The Company expects to obtain a commitment for a $ 200 million line of
credit which is intended to fund future acquisitions, renovations, and
expansions of hotel properties and for working capital. The Company currently
anticipates the line of credit will be secured by interests in some or all of
the Initial Hotels.
(5) ADVISORY AGREEMENT (UNAUDITED)
The Company expects to enter into an advisory agreement with the Advisor.
The advisory agreement is expected to provide for payment of an annual base
fee and an annual incentive advisory fee equal to 25% of the increase in funds
from operations (as defined) up to 5% of net operating income (as defined).
F-14
<PAGE>
AFFILIATED LESSEE
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
The Affiliated Lessee's unaudited Pro Forma Condensed Statements of
Operations for the nine months ended September 30, 1997 and the year ended
December 31, 1996 are presented as if the formation of the Affiliated Lessee
had occurred on January 1, 1996, and the related hotels had been leased by the
Affiliated Lessee pursuant to the Participating Leases as of that date and
carried forward through each period presented. Information should be read in
conjunction with the Pro Forma Statements of Income of LaSalle Hotel
Properties and the Financial Statements listed in the Index to Financial
Statements included in this Prospectus. In management's opinion, all
adjustments necessary to reflect the effects of the Formation Transactions
have been made.
The following unaudited Pro Forma Condensed Statements of Operations are not
necessarily indicative of what actual results of operations of the Affiliated
Lessee would have been assuming such transactions had been completed as of the
beginning of the periods presented, nor do they purport to represent the
results of operations for future periods. Further, the unaudited Pro Forma
Condensed Statements of Operations for the interim period ended September 30,
1997 are not necessarily indicative of the results of operations for the full
year.
F-15
<PAGE>
AFFILIATED LESSEE
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
----------------
HOTELS(A) OTHER PRO FORMA
--------- ------ ---------
<S> <C> <C> <C>
REVENUES:
Room revenue........................................ $28,214 -- $28,214
Food and beverage revenue........................... 17,954 -- 17,954
Other revenue....................................... 6,824 -- 6,824
------- ------ -------
Total revenues.................................... 52,992 -- 52,992
------- ------ -------
EXPENSES:
Departmental expenses:
Rooms............................................. 7,388 -- 7,388
Food and beverage................................. 13,641 -- 13,641
Other............................................. 4,157 -- 4,157
General and administrative.......................... 4,427 -- 4,427
Advertising and promotion........................... 2,842 -- 2,842
Utilities........................................... 1,309 -- 1,309
Management fees(B).................................. -- 3,947 3,947
Repairs and maintenance............................. 2,261 -- 2,261
Other............................................... 177 -- 177
Participating Lease payments(C)..................... -- 13,289 13,289
------- ------ -------
Total expenses.................................... $36,202 17,236 53,438
------- ------ -------
NET LOSS............................................ $ (446)
=======
</TABLE>
- --------
The Pro Forma condensed statement of operations includes the results of
operations of the three hotels expected to be leased from the Operating
Partnership by the Affiliated Lessee. The Affiliated Lessee will have
control over the operations of these Hotels during the terms of the related
Participating leases. The Lessee with the consent of the Company, has
entered into or expects to enter into management agreements pursuant to
which all the Hotels will be managed by Marriott International. The
Lessee's results of operations are seasonal.
(A) Represents the Pro Forma statements of operations of the three Hotels
based on historical operations as though they were leased by the
Affiliated Lessee pursuant to the Participating Leases commencing on
January 1, 1996.
(B) Represents management fees (base and incentive) calculated on a Pro Forma
basis by applying the provisions of the management contract to the Pro
Forma revenues and net operating income of the leased hotels.
(C) Represents lease payments to the Company calculated on a Pro Forma basis
by applying the rent provisions of the Participating Leases to the Pro
Forma revenues of the related hotels as though the applicable hotels were
acquired on January 1, 1996 and leased pursuant to the participating
leases since that date. See "The Initial Hotels--The Participating Leases"
for the Participating Lease formulas.
F-16
<PAGE>
AFFILIATED LESSEE
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
----------------
HOTELS(A) OTHER PRO FORMA
--------- ------ ---------
<S> <C> <C> <C>
REVENUES:
Room revenue........................................ $37,023 -- $37,023
Food and beverage revenue........................... 23,979 -- 23,979
Other revenue....................................... 8,612 -- 8,612
------- ------ -------
Total revenues.................................... 69,614 -- 69,614
------- ------ -------
EXPENSES:
Departmental expenses:
Rooms............................................. 9,561 -- 9,561
Food and beverage................................. 18,122 -- 18,122
Other............................................. 5,213 -- 5,213
General and administrative.......................... 5,964 -- 5,964
Advertising and promotion........................... 3,642 -- 3,642
Utilities........................................... 1,864 -- 1,864
Management fees(B).................................. -- 5,156 5,156
Repairs and maintenance............................. 2,895 -- 2,895
Other............................................... 250 -- 250
Participating Lease payments(C)..................... -- 17,620 17,620
------- ------ -------
Total expenses.................................... $47,511 22,776 70,287
------- ------ -------
NET LOSS............................................ $ (673)
=======
</TABLE>
- --------
The Pro Forma condensed statement of operations includes the results of
operations of the three hotels expected to be leased from the Operating
Partnership by the Affiliated Lessee. The Affiliated Lessee will have
control over the operations of these Hotels during the terms of the related
Participating Leases. The Lessee with the consent of the Company, has
entered into or expects to enter into management agreements pursuant to
which all the Hotels will be managed by Marriott International. The
Lessee's results of operations are seasonal.
(A) Represents the Pro Forma statements of operations of the three Hotels
based on historical operations as though they were leased by the
Affiliated Lessee pursuant to the Participating Leases commencing on
January 1, 1996.
(B) Represents management fees (base and incentive) calculated on a Pro Forma
basis by applying the provisions of the management contract to the Pro
Forma revenues and net operating income of the leased hotels.
(C) Represents lease payments to the Company calculated on a Pro Forma basis
by applying the rent provisions of the Participating Leases to the Pro
Forma revenues of the related hotels as though the applicable hotels were
acquired on January 1, 1996 and leased pursuant to the participating
leases since that date. See "The Initial Hotels--The Participating Leases"
for the Participating Lease formulas.
F-17
<PAGE>
AFFILIATED LESSEE
PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
The unaudited Pro Forma Condensed Balance Sheet is presented as if the
formation of the Affiliated Lessee in conjunction with the other Formation
Transactions had occurred on September 30, 1997. It should be read in
conjunction with the financial statements included in this Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of
these transactions have been made.
This unaudited Pro Forma Condensed Balance Sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of September 30, 1997, nor does it purport
to represent the future financial position of the Affiliated Lessee.
F-18
<PAGE>
AFFILIATED LESSEE
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
----------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................... $1,400 $1,400
Accounts receivable, net................................ 5,152(A) 5,152
Inventories, prepaid expenses and other assets.......... 1,934(A) 1,934
------ ------
Total Assets.......................................... 8,486 8,486
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other
liabilities............................................ 4,451(A) 4,451
------ ------
Total Liabilities..................................... 4,451 4,451
STOCKHOLDERS' EQUITY
Common stock............................................ 1(B) 1(B)
Additional paid-in capital.............................. 4,034(B) 4,034
Retained earnings....................................... -- --
------ ------
Total Stockholders' Equity............................ 4,035 4,035
------ ------
Total Liabilities & Stockholders' Equity............ $8,486 $8,486
====== ======
</TABLE>
- --------
(A) Represents the historical balances of the assets and liabilities of the
three hotels leased by the Affiliated Lessee from the Operating Partnership
as though they had been leased as of September 30, 1997.
(B) Represents issuance of 100 shares of common stock at $.01 par value.
F-19
<PAGE>
LE MERIDIEN LESSEE
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
The Le Meridien Lessee's unaudited Pro Forma Condensed Statements of
Operations for the nine months ended September 30, 1997 and the year ended
December 31, 1996 are presented as if the formation of the Le Meridien Lessee
had occurred on January 1, 1996, and the related hotels had been leased by the
Le Meridien Lessee pursuant to the Participating Leases as of that date and
carried forward through each period presented. Information should be read in
conjunction with the Pro Forma Statements of Income of LaSalle Hotel
Properties and the Financial Statements listed in the Index to Financial
Statements included in this Prospectus. In management's opinion, all
adjustments necessary to reflect the effects of the Formation Transactions
have been made.
The following unaudited Pro Forma Condensed Statements of Operations are not
necessarily indicative of what actual results of operations of the Le Meridien
Lessee would have been assuming such transactions had been completed as of the
beginning of the periods presented, nor do they purport to represent the
results of operations for future periods. Further, the unaudited Pro Forma
Condensed Statements of Operations for the interim period ended September 30,
1997 are not necessarily indicative of the results of operations for the full
year.
F-20
<PAGE>
LE MERIDIEN LESSEE
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
--------------- PRO
HOTELS(A) OTHER FORMA
--------- ----- -------
<S> <C> <C> <C>
REVENUES:
Room revenue........................................... $20,976 -- $20,976
Food and beverage revenue.............................. 6,204 -- 6,204
Other revenue.......................................... 1,877 -- 1,877
------- ----- -------
Total revenues....................................... 29,057 -- 29,057
------- ----- -------
EXPENSES:
Departmental expenses:
Rooms.................................................. 5,203 -- 5,203
Food and beverage...................................... 5,168 -- 5,168
Other.................................................. 784 -- 784
General and administrative............................. 2,778 -- 2,778
Advertising and promotion.............................. 2,261 -- 2,261
Utilities.............................................. 1,148 -- 1,148
Management fees(B)..................................... -- 727 727
Repairs and maintenance................................ 1,537 -- 1,537
Other.................................................. 398 -- 398
Participating Lease payments(C)........................ -- 8,952 8,952
------- ----- -------
Total expenses....................................... $19,277 9,679 28,956
------- ----- -------
NET INCOME............................................. $ 101
=======
</TABLE>
- --------
The Pro Forma condensed statement of operations includes the results of
operations of the two hotels expected to be leased from the Operating
Partnership by the Le Meridien Lessee. The Le Meridien Lessee will have
control over the operations of these Hotels during the terms of the related
Participating Leases. The Lessee with the consent of the Company, has
entered into or expects to enter into management agreements pursuant to
which all the Hotels will be managed by an affiliate of Meridien Hotels,
Inc. The Lessee's results of operations are seasonal.
(A) Represents the Pro Forma statements of operations of the two Hotels based
on historical operations as though leased by the Le Meridien Lessee
pursuant to the Participating Leases commencing on January 1, 1996.
(B) Represents management fees (base and incentive) calculated on a Pro Forma
basis by applying the provisions of the management contract to the Pro
Forma revenues and net operating income of the leased hotels.
(C) Represents lease payments to the Company calculated on a Pro Forma basis
by applying the rent provisions of the Participating Leases to the Pro
Forma revenues of the related hotels as though the applicable hotels were
acquired on January 1, 1996 and leased pursuant to the participating
leases since that date. See "The Initial Hotels--The Participating Leases"
for the Participating Lease formulas.
F-21
<PAGE>
LE MERIDIEN LESSEE
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
---------------- PRO
HOTELS(A) OTHER FORMA
--------- ------ -------
<S> <C> <C> <C>
REVENUES:
Room revenue......................................... $26,317 -- $26,317
Food and beverage revenue............................ 7,269 -- 7,269
Other revenue........................................ 2,499 -- 2,499
------- ------ -------
Total revenues..................................... 36,085 -- 36,085
------- -------
EXPENSES:
Departmental expenses:
Rooms................................................ 6,914 -- 6,914
Food and beverage.................................... 6,504 -- 6,504
Other................................................ 1,020 -- 1,020
General and administrative........................... 3,596 -- 3,596
Advertising and promotion............................ 2,807 -- 2,807
Utilities............................................ 1,560 -- 1,560
Management fees(B)................................... -- 903 903
Repairs and maintenance.............................. 1,938 -- 1,938
Other................................................ 557 -- 557
Participating Lease payments(C)...................... -- 10,744 10,744
------- ------ -------
Total expenses..................................... $24,896 11,647 36,543
------- ------ -------
NET LOSS............................................. $ (458)
=======
</TABLE>
- --------
The Pro Forma condensed statement of operations includes the results of
operations of the two hotels expected to be leased from the Operating
Partnership by the Le Meridien Lessee. The Le Meridien Lessee will have
control over the operations of these Hotels during the terms of the related
Participating Leases. The Lessee with the consent of the Company, has
entered into or expects to enter into management agreements pursuant to
which all the Hotels will be managed by Meridien Hotels, Inc. The Lessee's
results of operations are seasonal.
(A) Represents the Pro Forma statements of operations of the two Hotels based
on historical operations as though leased by the Le Meridien Lessee
pursuant to the Participating Leases commencing on January 1, 1996.
(B) Represents management fees (base and incentive) calculated on a Pro Forma
basis by applying the provisions of the management contract to the Pro
Forma revenues and net operating income of the leased hotels.
(C) Represents lease payments to the Company calculated on a Pro Forma basis
by applying the rent provisions of the Participating Leases to the Pro
Forma revenues of the related hotels as though the applicable hotels were
acquired on January 1, 1996 and leased pursuant to the participating
leases since that date. See "The Initial Hotels--The Participating Leases"
for the Participating Lease formulas.
F-22
<PAGE>
LE MERIDIEN LESSEE
PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
The unaudited Pro Forma Condensed Balance Sheet is presented as if the
formation of the Le Meridien Lessee in conjunction with the other Formation
Transactions had occurred on September 30, 1997. It should be read in
conjunction with the financial statements included in this Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of
these transactions have been made.
This unaudited Pro Forma Condensed Balance Sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of September 30, 1997, nor does it purport
to represent the future financial position of the Le Meridien Lessee.
F-23
<PAGE>
LE MERIDIEN LESSEE
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
----------- ---------
<S> <C> <C>
ASSETS
Accounts receivable, net................................ $2,052 (A) $2,052
Inventories, prepaid expenses and other assets.......... 679 (A) 679
Investment in LaSalle Hotel Properties.................. 3,004 (C) 3,004
------ ------
Total Assets.......................................... 5,735 5,735
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other
liabilities............................................ 3,850 (A) 3,850
------ ------
Total Liabilities..................................... 3,850 3,850
STOCKHOLDERS' EQUITY
Common stock............................................ 1 (B) 1
Additional paid-in capital.............................. 1,884 (B) 1,884
Retained earnings....................................... -- --
------ ------
Total Stockholders' Equity............................ 1,885 1,885
------ ------
Total Liabilities & Stockholders' Equity............ $5,735 $5,735
====== ======
</TABLE>
- --------
(A) Represents the historical balances of the assets and liabilities of the
two hotels leased by the Le Meridien Lessee from the Operating Partnership
as though they had been leased as of September 30, 1997.
(B) Represents issuance of 100 shares of common stock at $.01 par value.
(C) Represents a 150,200 share investment in LaSalle Hotel Properties required
as a security deposit in accordance with the terms of the related
Participating Lease.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
La Salle Hotel Properties:
We have audited the accompanying combined balance sheets of the Initial
Hotels (excluding Marriott's Seaview Resort and the LaGuardia Airport
Marriott) as of December 31, 1995 and 1996, and the related combined
statements of operations, partners' capital, and cash flows for each of the
years in the three-year period ended December 31, 1996. These combined
financial statements are the responsibility of the management of the Initial
Hotels. Our responsibility is to express an opinion on these combined
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 the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Initial Hotels
(excluding Marriott's Seaview Resort and the LaGuardia Airport Marriott) as of
December 31, 1995 and 1996 and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996,
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 16, 1998
F-25
<PAGE>
INITIAL HOTELS
(EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT MARRIOTT)
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 1,076 $ 4,538 $ 9,398
Guest and trade receivables, less allowance
for doubtful accounts of $52, $82 and $115,
respectively................................. 1,283 2,955 5,116
Inventories................................... 494 1,146 1,210
Prepaid expenses and other current assets..... 694 1,104 1,725
------- -------- --------
Total current assets........................ 3,547 9,743 17,449
------- -------- --------
Investment in hotel properties, at cost (note
2)............................................. 62,060 139,418 185,093
Less accumulated depreciation................... 1,506 6,313 12,737
------- -------- --------
Net investment in hotel properties............ 60,554 133,105 172,356
------- -------- --------
Deferred charges, net of accumulated
amortization of $137, $256 and $706,
respectively................................... 945 1,676 1,518
Restricted cash reserves (note 2)............... 2,511 2,787 4,887
------- -------- --------
Total assets................................ $67,557 $147,311 $196,210
======= ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.............................. $ 1,008 $ 2,398 $ 2,592
Accrued expenses and other liabilities........ 1,826 3,558 7,391
Current installments of long-term debt (note
3)........................................... 1,213 1,203 1,596
------- -------- --------
Total current liabilities................... 4,047 7,159 11,579
------- -------- --------
Long-term debt, excluding current installments
(note 3)....................................... 42,736 94,466 124,809
------- -------- --------
Commitments and contingencies (notes 3, 4, and
6)
Total liabilities........................... 46,783 101,625 $136,388
------- -------- --------
Partners' capital............................... 20,774 45,686 59,822
------- -------- --------
Total liabilities and partners' capital..... $67,557 $147,311 $196,210
======= ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-26
<PAGE>
INITIAL HOTELS
(EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT MARRIOTT)
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------
1994 1995 1996 1996 1997
------ ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms............................. $1,085 $10,396 $28,958 $ 20,641 $ 43,941
Food and beverage................. 481 4,639 15,553 10,714 19,346
Telephone......................... 67 580 1,258 900 1,961
Other............................. 109 810 2,400 1,685 3,038
------ ------- ------- -------- --------
Total revenue................... 1,742 16,425 48,169 33,940 68,286
------ ------- ------- -------- --------
Operating expenses:
Rooms............................. 322 2,948 6,981 4,774 10,660
Food and beverage................. 449 3,869 11,857 8,084 14,875
Telephone......................... 29 302 717 516 1,021
Other operating departments....... 20 242 1,246 886 1,544
General and administrative........ 192 1,674 3,792 2,615 5,376
Sales and marketing............... 161 1,102 2,798 1,908 3,992
Property taxes.................... 37 404 1,826 1,249 2,231
Property operations and
management....................... 87 931 2,279 1,563 3,301
Management fees (note 7).......... 65 462 1,861 1,304 3,238
Energy............................ 91 882 1,861 1,355 2,329
Insurance......................... 26 228 582 508 697
Other fixed expenses.............. 40 249 656 489 1,013
Interest expense (note 3)......... 176 1,580 4,701 3,148 7,161
Depreciation and amortization..... 133 1,518 5,026 3,505 6,819
Advisory fees (note 6)............ 33 231 451 317 622
------ ------- ------- -------- --------
Total expenses.................. 1,861 16,622 46,634 32,221 64,879
------ ------- ------- -------- --------
Net income (loss)................... $ (119) $ (197) $ 1,535 $ 1,719 $ 3,407
====== ======= ======= ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-27
<PAGE>
INITIAL HOTELS
(EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT MARRIOTT)
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
-------
<S> <C>
Balance December 31, 1993.............................................. $ --
Contributions........................................................ 7,375
Net loss............................................................. (119)
-------
Balance December 31, 1994.............................................. 7,256
Distributions........................................................ (1,235)
Contributions........................................................ 14,950
Net loss............................................................. (197)
-------
Balance December 31, 1995.............................................. $20,774
Distributions........................................................ (3,235)
Contributions........................................................ 26,612
Net income........................................................... 1,535
-------
Balance December 31, 1996.............................................. $45,686
Distributions (unaudited)............................................ (4,776)
Contributions (unaudited)............................................ 15,505
Net income (unaudited)............................................... 3,407
-------
Balance September 30, 1997 (unaudited)................................. $59,822
=======
</TABLE>
See accompanying notes to combined financial statements.
F-28
<PAGE>
INITIAL HOTELS
(EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT MARRIOTT)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------- -------- -------- -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).......... $ (119) $ (197) $ 1,535 $ 1,719 $ 3,407
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Depreciation and
amortization............. 133 1,518 5,026 3,505 6,819
Changes in assets and
liabilities:
Guest and trade
receivables, net........ (458) (826) (1,672) (1,111) (2,161)
Inventories.............. (48) (446) (652) (31) (64)
Prepaid expenses and
other current assets.... (125) (568) (410) (715) (621)
Accounts payable......... 3 1,004 1,390 (346) 194
Accrued expenses and
other liabilities....... 580 1,246 1,732 1,195 3,833
-------- -------- -------- -------- ---------
Net cash provided by
(used in) operating
activities............. (34) 1,731 6,949 4,216 11,407
-------- -------- -------- -------- ---------
Cash flows from investing
activities:
Acquisition of hotels...... (13,882) (45,057) (74,300) -- (41,270)
Funding of restricted cash
reserve................... (1,355) (1,113) (276) 886 (2,100)
Capital improvement
expenditures.............. (334) (2,787) (3,058) (1,916) (4,405)
-------- -------- -------- -------- ---------
Net cash used in
investing activities... (15,571) (48,957) (77,634) (1,030) (47,775)
-------- -------- -------- -------- ---------
Cash flows from financing
activities:
Payment of deferred loan
costs..................... (281) (710) (950) -- (237)
Proceeds from issuance of
long-term debt............ 8,815 35,250 52,870 -- 31,820
Partners' contributions.... 7,375 14,950 26,612 -- 15,505
Partners' distributions.... -- (1,235) (3,235) (2,353) (4,776)
Principal payments on long-
term debt................. (40) (217) (1,150) (762) (1,084)
-------- -------- -------- -------- ---------
Net cash provided by
(used in) financing
activities............. 15,869 48,038 74,147 (3,115) 41,228
-------- -------- -------- -------- ---------
Increase in cash and cash
equivalents................ 264 812 3,462 71 4,860
Cash and cash equivalents at
beginning of period........ -- 264 1,076 1,076 4,538
-------- -------- -------- -------- ---------
Cash and cash equivalents at
end of period.............. $ 264 $ 1,076 $ 4,538 $ 1,147 $ 9,398
-------- -------- -------- -------- ---------
Cash paid for interest...... $ 176 $ 1,580 $ 4,701 $ 3,148 $ 7,161
======== ======== ======== ======== =========
</TABLE>
See accompanying notes to combined financial statements.
F-29
<PAGE>
INITIAL HOTELS
(EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT MARRIOTT)
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED AS TO INTERIM PERIODS)
(1) ORGANIZATION AND PROPOSED INITIAL PUBLIC OFFERING
LaSalle Hotel Properties (together with its subsidiary, the Company), a
newly organized Maryland corporation, has been formed to own hotel properties
and to continue and expand the hotel investment activities of LaSalle Partners
Incorporated and certain of its affiliates (collectively LaSalle). The Company
will be managed and advised by LaSalle Hotel Advisors, Inc. (the Advisor), a
wholly owned subsidiary of LaSalle. The Company intends to qualify as a real
estate investment trust (REIT) and complete an initial public offering (the
Offering). Upon completion of the Offering, the Company will own interests in
10 full service hotels (the Initial Hotels), through an approximate 82.3%
general partner equity interest in an Operating Partnership (the Operating
Partnership). All of the Initial Hotels will be leased under leases that
provide for rent based on the revenues of the Initial Hotels and will be
managed by independent hotel operators (Hotel Operators).
The Initial Hotels are currently owned by various limited and general
partnerships (the Partnerships) in which LaSalle is the general partner. It is
the intent of LaSalle and its limited and other general partners to contribute
their respective interests in the Initial Hotels in exchange for shares of the
REIT or partnership units of the Operating Partnership.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Information (Unaudited)
The interim combined financial statements are unaudited, and in the opinion
of management, reflect all adjustments necessary for a fair presentation of
the results of operations and financial position for such periods. All such
adjustments reflected in the interim combined financial statements are
considered to be of a normal recurring nature. The results of operations for
any interim period are not necessarily indicative of results for the full
year.
Basis of Presentation
The accompanying combined financial statements of the Initial Hotels
(excluding Marriott's Seaview Resort and the LaGuardia Airport Marriott) have
been presented on a combined basis due to their current common ownership and
the anticipated ongoing common ownership of these hotels upon consummation of
the proposed initial public offering. The combined financial statements
exclude Marriott's Seaview Resort and the LaGuardia Airport Marriott neither
of which were acquired prior to September 30, 1997 (Note 1). The acquisition
of each of the Initial Hotels has been accounted for as a purchase and
accordingly, the results of operations for each Initial Hotel (excluding
Marriott's Seaview Resort and the LaGuardia Airport Marriott) has been
included in the combined statements of operations for the respective dates of
acquisition. All significant intercompany balances and transactions have been
eliminated. The Initial Hotels included in the accompanying presentation are
as follows:
<TABLE>
<CAPTION>
NUMBER OF DATE OF
PROPERTY NAME LOCATION ROOMS ACQUISITION
------------- -------- --------- -----------
<S> <C> <C> <C>
Le Montrose All Suite De Gran
Luxe............................ West Hollywood, CA 128 10/28/94
Holiday Inn Plaza Park........... Visalia, CA 257 10/4/94
Camberly Plaza Sabal Park Hotel.. Tampa, FL 265 6/16/95
Radisson Hotel South and
Conference Center............... Bloomington, MN 580 12/1/95
Omaha Marriott Hotel............. Omaha, NE 301 12/19/96
Le Meridien New Orleans Hotel.... New Orleans, LA 494 11/25/96
Key West Holiday Inn Beachside
Resort.......................... Key West, FL 222 7/22/97
Le Meridien Dallas Hotel......... Dallas, TX 396 9/5/97
</TABLE>
F-30
<PAGE>
INITIAL HOTELS
(EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT MARRIOTT)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
For purposes of the combined statement of cash flows, all highly liquid
investments with a maturity of three months or less when purchased are
considered to be cash equivalents.
Inventories
Inventories, which consist of linens, food and beverage, and china, glass
and silverware, are valued at the lower of cost (first-in, first-out) or
market.
Investment in hotel properties
Investment in hotel properties consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Land.......................................... 13,805 17,684 25,400
Building and equipment........................ 48,255 121,734 159,693
------ ------- -------
62,060 139,418 185,093
====== ======= =======
</TABLE>
Depreciation is calculated using the straight-line basis over the estimated
useful lives of the related assets, as follows:
<TABLE>
<S> <C> <C>
Building and improvements................................... 25 to 39 years
Furniture and equipment..................................... 5 to 7 years
</TABLE>
Effective January 1, 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. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be
held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This statement requires that the majority of long-lived assets
and certain identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell. Implementation of
this statement had no impact on the accompanying combined financial
statements.
Deferred Charges
Loan costs are capitalized and are amortized on the straight-line basis over
the life of the respective loan.
Franchise fees paid in connection with obtaining a franchise agreement are
capitalized and amortized on a straight-line basis over the term of the
related franchise agreement. Monthly franchise fees are expensed as incurred.
Restricted Cash Reserves
In accordance with the respective loan and management agreements, restricted
cash accounts have been established certain of which are to be used for
replacements and renewals of furniture, fixtures, and equipment and certain
repairs, as defined. The restricted cash accounts are funded in amounts that
range from 4% to 6% of the gross revenues of the Initial Hotels, as defined.
F-31
<PAGE>
INITIAL HOTELS
(EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT MARRIOTT)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Initial Hotels are not directly subject to income taxes because the
results of their operations are includable in the tax returns of the partners
of the Partnerships. The Company intends to qualify as a REIT under the
Internal Revenue Code, and will therefore not be subject to corporate income
taxes. Accordingly, no provision for income taxes has been included in the
accompanying combined financial statements.
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 amount of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Derivative Financial Instruments
The Initial Hotels may enter into interest rate cap agreements which they
designate as hedges in order to mitigate the interest rate risk inherent in
the related debt instruments. Any gains or losses related to these agreements
are deferred and amortized over the terms of the respective agreements.
(3) LONG-TERM DEBT
Mortgages and Notes Payable
Mortgages and notes payable, which are secured substantially by all the
hotel properties, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
First mortgage loan payable for up to $9,250.
The interest is payable monthly at either the
adjusted base rate plus 1% or LIBOR plus 3%,
at the borrower's option (approximately 8.66%
at September 30, 1997). The adjusted base
rate is equal to the higher of the prime rate
or the federal funds rate plus 0.5%.
Principal is payable quarterly based on the
payment schedule set forth in the loan
agreement. The loan matures June 15, 2000.... $9,212 $9,018 $8,936
First mortgage loan payable in the amount of
$16,570. Interest is payable monthly at LIBOR
plus 2.5% or the Adjusted Base Rate (as
defined) plus .75%, at the borrower's option
(approximately 8.16% at September 30, 1997).
Principal is payable quarterly based on the
payment schedule set forth in the loan
agreement. The loan matures December 19,
2001......................................... -- 16,492 16,260
First mortgage loan payable in the amount of
up to $5,000. Interest is payable monthly at
the three-month Eurodollar rate plus 4%
(approximately 9.72% at September 30, 1997).
Principal is payable monthly based on a 15-
year amortization schedule assuming an 11%
interest rate. The loan matures on November
3, 1999 and may be extended until November 3,
2000 and then to November 3, 2001 by
satisfying certain conditions. The loan is
subject to a prepayment penalty, as defined.. 4,903 4,810 4,734
</TABLE>
F-32
<PAGE>
INITIAL HOTELS
(EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT MARRIOTT)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
First mortgage loan payable with interest
payable monthly at the three-month
Eurodollar rate plus 4.4% (approximately
10.12% at September 30, 1997). Principal
is payable monthly based on a 15-year
amortization schedule assuming an 11%
interest rate. The loan matures on
October 6, 1999 and may be extended until
October 6, 2000 and then to October 6,
2001 by satisfying certain conditions.
The loan is subject to a prepayment
penalty, as defined...................... $ 3,888 $ 3,761 $ 3,630
First mortgage loan payable monthly at
LIBOR plus 4.25% (approximately 9.91% at
September 30, 1997) due in December 2000. 19,958 19,452 19,019
Second mortgage loan payable monthly at
LIBOR plus 4.25% (approximately 9.91% at
September 30, 1997) due in December 2000. 5,988 5,836 5,706
First mortgage loan payable in the amount
of $38,300. Interest is payable monthly
at LIBOR plus 3.5% through December 1,
2000 then LIBOR plus 3.75% (approximately
9.16% at September 30, 1997). Principal
is payable quarterly based on the payment
schedule set forth in the loan agreement
starting February 1, 1999. The loan
matures December 1, 2000................. -- 36,300 38,300
First mortgage loan payable in the amount
of $17,950. Interest is payable monthly
at LIBOR as of one month prior to reset
date (as defined) plus 3.25%
(approximately 8.91% at September 30,
1997). Loan is interest only through
August 1, 1999 with principal and
interest due thereafter till August 1,
2000 with an option to extend to August
1, 2001 ................................. -- -- 17,950
First mortgage loan payable in the amount
of $12,012. Interest is payable monthly
at LIBOR plus 3.25% (approximately 8.91%
at September 30, 1997) and is due October
1, 2000 with an option to extend through
October 1, 2001 ......................... -- -- 11,870
------- -------- --------
Total long-term mortgages and notes
payable.................................. 43,949 95,669 126,405
Less current installments................. 1,213 1,203 1,596
------- -------- --------
Long-term mortgages and notes payable
excluding current installments........... $42,736 $ 94,466 $124,809
======= ======== ========
</TABLE>
Aggregate principal payments due for the years ended September 30 (in
thousands) are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 1,596
1999.............................................................. 2,120
2000.............................................................. 36,358
2001.............................................................. 59,732
2002.............................................................. 26,599
--------
$126,405
========
</TABLE>
Interest Rate Cap Agreements
Interest rate cap agreements are used to reduce the potential impact of
increases in interests rates on floating-rate long-term debt. At September 30,
1997, the Initial Hotels were parties to various interest rate cap agreements
with terms ranging from 3 to 5 years. The agreements entitle the Initial
Hotels to receive from a
F-33
<PAGE>
INITIAL HOTELS (EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT
MARRIOTT)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
counterparty (major banks and other institutions), the amounts, if any, by
which the Initial Hotels' interest payments on an aggregate notational amount
of $33,682,000 of long-term debt exceeds rates ranging from 10.0% to 14.0%. No
amounts have been received by the Initial Hotels under these agreements since
their commencement.
The Initial Hotels are exposed to credit losses in the event of
nonperformance by the counterparties to its interest rate cap agreements. The
Initial Hotels anticipate, however, that the counterparties will be able to
fully satisfy their obligations under the contracts. The Initial Hotels do not
obtain collateral to support these obligations but monitor the credit standing
of the counterparties.
(4) LEASES
The Initial Hotels lease several suites to tenants under operating leases
with terms of less than one year.
The Initial Hotels lease certain equipment under noncancelable operating
leases with terms of three years or less. In addition, one hotel is subject to
a ground lease and certain of the Initial hotels lease parking lots. Total
lease expense for the nine month periods ended September 30, 1996 and 1997 was
approximately $459,000 and $521,600, respectively. Total lease expense for the
years ended December 31, 1994, 1995 and 1996 was approximately $0, $85,700 and
$410,400, respectively. Future minimum lease payments (in thousands) for the
years ended September 30 are as follows:
<TABLE>
<CAPTION>
HOTEL
GROUND LEASE OTHER TOTAL
------------ ----- -------
<S> <C> <C> <C>
1998............................................ $ 425 $252 $ 677
1999............................................ 425 193 618
2000............................................ 425 156 581
2001............................................ 425 145 570
2002............................................ 425 127 552
Thereafter...................................... $32,725 $129 $32,854
======= ==== =======
</TABLE>
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures of
Fair Value of Financial Instruments requires all entities to disclose the fair
value of certain financial instruments in their financial statements.
Accordingly, the carrying amount of cash and cash equivalents, restricted cash
reserves, guest and trade accounts receivables, accounts payable, accrued
expenses and other liabilities are stated at cost which approximates their
fair value due to the short maturity of these instruments.
The carrying amount of debt approximates fair value due to the ability to
obtain such borrowings at comparable interest rates. The aggregate fair value
of the interest rate cap agreements was $0 at September 30, 1997 and December
31, 1996 and 1995 and is based on amounts expected to be received or paid
under the respective agreements.
(6) ADVISORY AGREEMENTS
The Initial Hotels have entered into separate advisory agreements (Advisory
Agreements) with LaSalle for each of the Initial Hotels. The Advisory
Agreements call for the payment of acquisition, asset management, and
incentive advisory fees.
F-34
<PAGE>
INITIAL HOTELS
(EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT MARRIOTT)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Amounts incurred (in thousands) under the Advisory Agreements are as
follows:
<TABLE>
<CAPTION>
FOR THE NINE-MONTHS
FOR THE YEARS ENDING ENDING SEPTEMBER 30,
DECEMBER 31, (UNAUDITED)
-------------------- ---------------------
1994 1995 1996 1996 1997
------ ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Acquisition fees................ $ 126 $ 150 $ 561 $ -- $ 327
Asset management fees........... 33 231 451 317 626
</TABLE>
Asset management fees of approximately $198,800, $65,900, and $71,300, were
payable at September 30, 1997, and December 31, 1995 and 1996, respectively.
In addition, an incentive advisory fee may be payable upon the achievement
of certain internal rates of return on Partnership contributions and is
generally calculated based on a percentage of cash distributions after the
achievement of the aforementioned internal rates of returns. No incentive
advisory fees were due or incurred for the nine month periods ending September
30, 1996 and 1997, or any of the years in the three-year period ended December
31, 1996.
In conjunction with the Offering and the related asset transfers (note 1),
certain incentive advisory fees may be due under these agreements. The amounts
due under these incentive advisory agreements cannot currently be estimated.
(7) MANAGEMENT AGREEMENTS
The Initial Hotels have entered into separate management agreements
(Operator Agreements) for each of the Initial Hotels with the Hotel Operators.
Pursuant to the terms of the Operator Agreements, the Hotel Operators are to
manage the Hotels for a base management fee equal to a percentage of gross
revenue (as defined), plus an incentive fee equal to a percentage of certain
measures of profitability (as defined). In addition, certain Operating
Agreements call for the payment of Corporate Fees, as defined, equal to a
percentage of gross operating income, as defined, contingent upon the
achievement of certain return hurdles (as defined). The Operator Agreements
are for varying terms which expire at dates from 1998 through 2007.
Fees incurred under the Operator Agreements (in thousands) are as follows:
<TABLE>
<CAPTION>
FOR THE NINE-MONTHS
ENDING
FOR THE YEARS ENDING SEPTEMBER 30,
DECEMBER 31, (UNAUDITED)
---------------------- -------------------
1994 1995 1996 1996 1997
------ ------ -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Base management fees............ $ 44 $ 407 $ 1,524 $ 1,074 $ 2,000
Incentive management fees....... 21 55 355 230 1,238
</TABLE>
Base management fees of approximately $119,000, $32,700 and $35,900, were
payable at September 30, 1997, and December 31, 1995 and 1996, respectively.
Incentive management fees of approximately $485,900, $0, and $131,000, were
payable at September 30, 1997, and December 31, 1995 and 1996, respectively.
In addition, pursuant to the terms of the Operator Agreements, the Hotel
Operators provide the Initial Hotels with various services and supplies,
including marketing, reservations, and insurance. Costs incurred by the
Initial Hotels under these arrangements, including Corporate Fees, as defined,
totaled approximately $1,199,600 and $1,207,100, for the nine month periods
ending September 30, 1996 and 1997, respectively, and $9,600, $295,800 and
$1,477,800, for the years ending December 31, 1994, 1995 and 1996,
respectively.
Subsequent to the Offering (note 1), certain Operator Agreements are
expected to cease or be modified.
F-35
<PAGE>
INITIAL HOTELS
(EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT MARRIOTT)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(8) EMPLOYEE BENEFIT PLANS
A majority of the employees of the Initial Hotels participate in deferred
contribution pension and other benefit plans, which are administered by the
respective operators in accordance with the provisions of the related labor
contracts and are generally based on hours worked. The Initial Hotels
contribution to these plans totaled approximately $687,000 and $682,300 for
the nine month periods ending September 30, 1996 and 1997, respectively, and
$0, $60,200 and $712,500, for the years ending December 31, 1994, 1995 and
1996, respectively.
(9) PRO FORMA INFORMATION (UNAUDITED)
Affiliates of LaSalle acquired the Initial Hotels at various times over the
period October 4, 1994 to September 25, 1997 as described in note 1. The
following table sets forth certain summary unaudited pro forma operating data
as if the acquisitions had been consummated as of the beginning of the
previous respective period.
These amounts do not include Marriott Seaview Resort and the LaGuardia
Airport Marriott, neither of which were acquired prior to September 30, 1997.
<TABLE>
<CAPTION>
FOR THE NINE-MONTHS ENDING
FOR THE YEARS ENDING SEPTEMBER 30,
DECEMBER 31, (UNAUDITED)
------------------------- ---------------------------
1994 1995 1996 1996 1997
------- ------- -------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues...... $40,897 $79,461 $104,771 $ 77,602 $ 83,388
Total interest...... 4,315 9,087 12,728 9,463 9,509
Total depreciation.. 4,590 8,420 10,359 7,679 7,942
Total expenses...... 41,121 77,995 102,848 74,173 79,351
Net income (loss)... (224) 1,466 1,923 3,429 4,037
</TABLE>
The unaudited pro forma operating data are presented for comparative
purposes only and are not necessarily indicative of what the actual results of
operations would have been for each of the periods presented, nor does such
data purport to represent the results to be achieved in future periods.
(10) SUBSEQUENT EVENTS (UNAUDITED)
On November 6, 1997, LaSalle acquired an equity interest in Marriott's
Seaview Resort, a 300 room hotel property in New Jersey for approximately
$14,885,000 and refinanced the existing debt.
Affiliates of LaSalle have entered into a letter of intent to acquire the
LaGuardia Airport Marriott, a 436 room hotel in New York, NY, on behalf of the
Company.
(11) COMMITMENTS AND CONTINGENCIES
The nature of the operations of the Initial Hotels exposes them to the risk
of claims and litigation in the normal course of its business. Although the
outcome of these matters cannot be determined, management believes that the
ultimate resolution of these matters will not have a material adverse effect
on the financial position or operations of the Initial Hotels.
F-36
<PAGE>
INITIAL HOTELS (EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA AIRPORT
MARRIOTT)
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNTS AT WHICH
ACQUISITION CARRIED AT CLOSE OF PERIOD
----------------- ---------------------------
ACCUMULATED
DEPRECIATION NET BOOK
(C) PROPERTY & VALUE
PROPERTY AND PROPERTY AND (A) PROPERTY & TOTAL EQUIPMENT PROPERTY &
DESCRIPTION ENCUMBRANCES LAND EQUIPMENT LAND EQUIPMENT LAND EQUIPMENT (A) (C) (B) EQUIPMENT
----------- ------------ ------- ------------ ---- ------------ ------- ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Omaha Marriott,
Omaha, Nebraska.. $ 16,260 $ 3,800 $ 22,077 $ 0 $ 642 $ 3,800 $ 22,719 $ 26,519 $ 960 $ 25,559
LeMeridien New
Orleans
New Orleans,
Louisiana........ 38,300 0 48,422 0 1,674 0 50,096 50,096 1,858 48,238
LeMeridien
Dallas,
Dallas, Texas.... 11,870 1,700 15,378 0 0 1,700 15,378 17,078 46 17,032
Holiday Inn
Beachside,
Key West,
Florida.......... 17,950 6,015 17,940 0 247 6,015 18,187 24,202 120 24,082
Holiday Inn Plaza
Park,
Visalia,
California....... 3,630 1,342 4,622 0 1,852 1,342 6,474 7,816 917 6,899
LeMontrose All
Suite Hotel
De Gran Luxe,
West Hollywood,
California....... 4,734 1,430 6,487 0 1,543 1,430 8,030 9,460 1,477 7,983
Radisson Hotel
South and
Plaza Tower,
Bloomington,
Minnesota........ 24,725 8,985 23,133 0 2,989 8,985 26,122 35,107 5,312 29,795
Camberley Plaza
Sabal Park,
Tampa, Florida... 8,936 2,128 11,501 0 1,186 2,128 12,687 14,815 2,047 12,768
-------- ------- -------- --- ------- ------- -------- -------- ------- --------
Total........... $126,405 $25,400 $149,560 $ 0 $10,133 $25,400 $159,693 $185,093 $12,737 $172,356
======== ======= ======== === ======= ======= ======== ======== ======= ========
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN INCOME
DATE OF DATE OF STATEMENT IS
DESCRIPTION CONSTRUCTION ACQUISITION COMPUTED
----------- ------------ ----------- -------------
<S> <C> <C> <C>
Omaha Marriott,
Omaha, Nebraska.. 1982 Dec-96 5 - 39 years
LeMeridien New
Orleans
New Orleans,
Louisiana........ 1984 Nov-96 5 - 39 years
LeMeridien
Dallas,
Dallas, Texas.... 1980 Sep-97 5 - 39 years
Holiday Inn
Beachside,
Key West,
Florida.......... 1960 Jul-97 5 - 39 years
Holiday Inn Plaza
Park,
Visalia,
California....... 1976 Oct-94 5 - 25 years
LeMontrose All
Suite Hotel
De Gran Luxe,
West Hollywood,
California....... 1976 Oct-94 5 - 25 years
Radisson Hotel
South and
Plaza Tower,
Bloomington,
Minnesota........ 1989 Dec-95 5 - 30 years
Camberley Plaza
Sabal Park,
Tampa, Florida... 1987 Jun-95 5 - 39 years
Total...........
</TABLE>
F-37
<PAGE>
- --------
(a) Reconciliation of Investment in hotel properties:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER ENDED
31, SEPTEMBER 30,
---------------------- 1997
1994 1995 1996 (UNAUDITED)
------- ------ ------- -------------
<S> <C> <C> <C> <C>
Balance at beginning of period...... $ -- 14,216 62,060 139,418
Additions--improvements and property
acquisitions....................... 14,216 47,844 77,358 45,675
------- ------ ------- -------
Balance at end of period............ $14,216 62,060 139,418 185,093
------- ------ ------- -------
(b) Reconciliation of accumulated depreciation:
Balance at beginning of period...... $ -- 133 1,506 6,313
Depreciation expense................ 133 1,373 4,807 6,424
------- ------ ------- -------
Balance at end of period............ $ 133 1,506 6,313 12,737
------- ------ ------- -------
</TABLE>
(c) Aggregate cost for Federal income tax reporting purposes at September 30,
1997 (unaudited) is as follows:
<TABLE>
<S> <C>
Land............................................................. $ 25,400
Property & equipment............................................. 159,693
--------
$185,093
========
</TABLE>
F-38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
LaSalle Hotel Properties:
We have audited the accompanying statements of revenues and expenses and
cash flows of the Omaha Marriott Hotel for the period from December 30, 1995
to December 19, 1996. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying statements of revenues and expenses and cash flows were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and for inclusion in the Registration
Statement on Form S-11 of LaSalle Hotel Properties as described in note 1. The
presentation is not intended to be a complete presentation of the revenues and
expenses of the Omaha Marriott Hotel.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the revenues and expenses and cash flows, described
in note 1, of the Omaha Marriott Hotel for the period from December 30, 1995
to December 19, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Omaha, Nebraska
January 9, 1998
F-39
<PAGE>
OMAHA MARRIOTT HOTEL
STATEMENT OF REVENUES AND EXPENSES (NOTE 1)
PERIOD FROM DECEMBER 30, 1995 TO DECEMBER 19, 1996
<TABLE>
<S> <C>
REVENUES:
Rooms............................................................. $ 8,218,842
Food and beverage................................................. 5,705,950
Telephone......................................................... 225,470
Other............................................................. 368,765
-----------
Total revenues..................................................... 14,519,027
-----------
EXPENSES:
Rooms............................................................. 1,986,971
Food and beverage................................................. 4,323,251
Telephone......................................................... 118,517
Other operating departments....................................... 330,135
Property maintenance and operations............................... 494,325
Utilities......................................................... 315,531
General and administrative........................................ 1,308,409
Sales and marketing............................................... 571,243
National advertising, sales and training.......................... 246,726
Property taxes.................................................... 253,202
Management fees (note 1).......................................... 1,130,249
-----------
Total expenses..................................................... 11,078,559
-----------
Excess of revenues over expenses................................... $ 3,440,468
-----------
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
OMAHA MARRIOTT HOTEL
STATEMENT OF CASH FLOWS (NOTE 1)
PERIOD FROM DECEMBER 30, 1995 TO DECEMBER 19, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Excess of revenues over expenses................................. $ 3,440,468
Adjustments to reconcile to net cash provided by operating activ-
ities:
Decrease in guest and trade receivables, net.................... 324,866
Decrease in due from Marriott................................... 79,880
Increase in prepaid expenses and other current assets........... (502)
Increase in accounts payable.................................... 190,723
Decrease in accrued expenses and other liabilities.............. (10,819)
-----------
Net cash provided by operating activities......................... 4,024,616
-----------
Cash flows from investing activities:
Capital expenditures............................................. (797,782)
Increase in restricted cash...................................... (387,742)
-----------
Net cash used in investing activities............................. (1,185,524)
-----------
Cash flows used in financing activities--distributions to owners.. (2,776,028)
-----------
Net increase in cash.............................................. 63,064
Cash and cash equivalents at beginning of period.................. 235,404
-----------
Cash and cash equivalents at end of period........................ $ 298,468
-----------
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
OMAHA MARRIOTT HOTEL
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM DECEMBER 30, 1995 TO DECEMBER 19, 1996
(1) ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION
The Omaha Marriott Hotel (the Hotel) is a 301-room hotel constructed in
1982. The Hotel was owned by Starwood Lodging Trust (the Owner) through
December 19, 1996, when it was sold to an affiliate of LaSalle Hotel
Properties. The accompanying financial statements include the revenues and
expenses and associated cash flows for the Omaha Marriott Hotel for the period
December 30, 1995 through December 19, 1996. Certain revenues and expenses
related to the ownership of the Hotel including but not limited to
depreciation, interest expense, and gains or losses on assets, have been
excluded from the accompanying presentation since the related records were not
available.
These financial statements have been presented for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission
Regulation S-X and for inclusion in the Registration Statement on Form S-11 of
LaSalle Hotel Properties. The presentation is not intended to be a complete
presentation of the revenues and expenses of the Omaha Marriott Hotel.
Management Agreement
The Hotel is subject to a management agreement (Management Agreement) with
Marriott Corporation (Marriott) dated August 9, 1979. Pursuant to the terms of
the Management Agreement, Marriott is to manage the Hotel operations through
2007. Marriott may renew the Management Agreement on the same terms for each
of three successive periods of ten fiscal years each. Marriott receives a base
management fee equal to 3% of the gross revenue, as defined, for each year,
paid monthly based on adjusted gross revenue of the preceding month. Marriott
also receives an incentive fee calculated based on 20% of net operating
profit, as defined. Base management fees and management incentive fees
incurred were $486,242 and $694,007, respectively, for the period December 30,
1995 to December 19, 1996.
Under the Management Agreement, Marriott also provides the hotel with
various national services reimbursable up to 2.75% of gross revenue, as
defined annually. These services cover national sales support, national and
local advertising and certain training services which amounted to $246,726 for
the period December 30, 1995 through December 19, 1996. The Hotel is also
charged a national reservation system fee of $5 per booked reservation and a
payroll/accounting services fee of .53% of gross revenue.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the statement of cash flows, all highly liquid investments
with a maturity of three months or less when purchased are considered to be
cash equivalents.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Restricted Cash
In accordance with the Management Agreement, a restricted cash account has
been established to be used only for replacements and renewals of furniture,
fixtures and equipment and certain routine and non-routine repair, as defined.
The restricted cash accounts are based on monthly gross revenues, as defined,
of the Hotel and off-site banquet operations, respectively.
Income Taxes
The Owner of the Hotel, a partnership, was not directly subject to income
taxes as any liability for Federal income taxes would be that of the Partners
of the Owner.
F-42
<PAGE>
OMAHA MARRIOTT HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PERIOD FROM DECEMBER 30, 1995 TO DECEMBER 19, 1996
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.
(3) BENEFIT PLAN
A defined contribution plan was established by Marriott for all eligible
employees, as defined, of the Hotel. The monthly benefit is calculated as 2.5%
of eligible gross salaries and wages, as defined, and amounted to $86,439 for
the period from December 30, 1995 through December 19, 1996.
(4) COMMITMENTS AND CONTINGENCIES
The nature of the Hotel's operations exposes the Owner to the risk of claims
and litigation in the normal course of business. Management believes that the
ultimate resolution of any outstanding matters will not have a material
adverse effect on the financial position of operations of the Hotel.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
LaSalle Hotel Properties:
We have audited the accompanying balance sheet of Rahn Key West Resort, Inc.
as of December 31, 1996, and the related statements of operations,
stockholders' deficit, and cash flows for the year then ended. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rahn Key West Resort, Inc.
at December 31, 1996 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Miami, Florida
January 9, 1998
F-44
<PAGE>
RAHN KEY WEST RESORT, INC.
BALANCE SHEET
DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1996 JUNE 30, 1997
ASSETS ----------- -------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash............................................... $ 182,785 $ 984,009
Trade receivables (less allowance for doubtful
accounts of $10,400).............................. 283,429 148,462
Other receivables.................................. 4,228 --
Inventories (Note 1)............................... 49,326 50,289
Prepaid expenses................................... 20,367 --
----------- ----------
Total current assets............................. 540,135 1,182,760
----------- ----------
Property and Equipment:
At cost (Notes 1, 2, 3, 4, and 7):
Land and land improvements......................... 608,754 --
Buildings and improvements......................... 7,183,550 --
Furniture and equipment............................ 2,125,387 --
China, glass, silver, and linen.................... 25,275 --
----------- ----------
Total............................................ 9,942,966 --
Less accumulated depreciation...................... (2,761,866) --
----------- ----------
Net property and equipment....................... 7,181,100 --
----------- ----------
Property held for sale (Notes 2 and 7).............. -- 7,227,405
Other Assets (Notes 1, 4, 5):
Deferred loan costs and franchise fees (net of
accumulated amortization of $125,864)............. 172,411 137,929
Restricted cash--property improvement fund......... 1,407 1,425
Restricted cash--property tax fund................. 778 786
Other.............................................. 45,722 47,532
----------- ----------
Total other assets............................... 220,318 187,672
----------- ----------
$ 7,941,553 $8,597,837
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
RAHN KEY WEST RESORT, INC.
BALANCE SHEET
DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1996 JUNE 30, 1997
LIABILITIES AND STOCKHOLDERS' DEFICIT ----------- -------------
(UNAUDITED)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt and note payable. $ 523,809 523,809
Note payable--related party........................ 1,800,125 1,800,125
Accounts payable................................... 83,082 38,492
Accrued expenses:
Franchise fees (Note 4)........................... 41,894 45,143
Payroll and payroll related items................. 42,533 38,536
Utilities......................................... 52,747 42,541
Vacation.......................................... 31,891 31,891
Interest (Notes 2, 3)............................. 174,025 124,811
Advance guest deposits............................ 7,877 3,812
Other............................................. 94,539 48,231
----------- ----------
Total accrued expenses.......................... 445,506 334,965
----------- ----------
Due to affiliate (Note 5).......................... 16,565 15,094
----------- ----------
Total current liabilities....................... 2,869,087 2,712,485
----------- ----------
Long-Term Debt, Net of current portion (Note 3)..... 14,870,262 14,619,867
----------- ----------
Stockholders' Deficit:
Common stock--par value $10 per share; authorized
and issued 100 shares of which 85 are held as
treasury stock.................................... 1,000 1,000
Additional paid-in capital......................... 435,849 435,849
Accumulated deficit................................ (3,264,645) (2,201,364)
----------- ----------
Total........................................... (2,827,796) (1,764,515)
Less treasury stock, 85 shares at cost............. (6,970,000) (6,970,000)
----------- ----------
Total stockholders' deficit..................... (9,797,796) (8,734,515)
----------- ----------
$ 7,941,553 8,597,837
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
RAHN KEY WEST RESORT, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 AND SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
1996 JUNE 30, 1997
---------- -------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Rooms............................................... $6,337,333 $3,863,593
Food and beverage................................... 1,131,850 622,776
Other, primarily telephone.......................... 247,352 126,556
---------- ----------
Total revenues.................................... 7,716,535 4,612,925
---------- ----------
EXPENSES:
Rooms............................................... 1,260,485 652,152
Food and beverage................................... 1,018,877 534,253
Other, primarily telephone.......................... 60,951 34,406
General and administrative expenses................. 560,920 299,825
Marketing expenses.................................. 368,167 196,125
Property maintenance and operations ................ 348,096 192,358
Utilities........................................... 627,543 317,269
Management fees..................................... 231,480 138,389
Franchise fees (Note 4)............................. 257,110 143,668
Property taxes...................................... 309,458 150,498
Professional fees................................... 33,830 18,904
Insurance--property, general liability and other.... 99,106 55,369
Loss on asset disposals............................. 42,707 47,749
Depreciation and amortization....................... 470,319 34,482
Interest expense, net of interest income of $4,542
in 1996............................................ 1,553,993 748,873
Loss on sale of land parcel......................... 64,444 --
Miscellaneous (income) expense...................... (26,280) (14,676)
---------- ----------
Total expenses.................................... 7,281,206 3,549,644
========== ==========
Net income........................................... $ 435,329 $1,063,281
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
RAHN KEY WEST RESORT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1996 AND SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------- PAID-IN ACCUMULATED ------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------ ------ ---------- ----------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 100 $1,000 $435,849 $(3,699,974) 85 $(6,970,000) $(10,233,125)
Net income............. -- -- -- 435,329 -- -- 435,329
--- ------ -------- ----------- --- ----------- ------------
Balance, December 31,
1996................... 100 $1,000 $435,849 $(3,264,645) 85 $(6,970,000) $ (9,797,796)
Net income (unaudited). 100 -- -- 1,063,281 -- -- 1,063,281
--- ------ -------- ----------- --- ----------- ------------
Balance, June 30, 1997
(unaudited)............ 100 $1,000 $435,849 $(2,201,364) 85 $(6,970,000) $ (8,734,515)
=== ====== ======== =========== === =========== ============
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
RAHN KEY WEST RESORT, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
1996 JUNE 30, 1997
----------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 435,329 $1,063,281
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 470,319 34,482
Loss on asset disposal............................ 42,707 --
Loss on sale of land parcel....................... 64,444 --
Changes in assets and liabilities:
Trade receivables................................. (85,535) 134,965
Other receivables................................. 2,319 4,228
Inventories....................................... (1,853) (963)
Prepaid expenses.................................. 33,472 20,367
Other assets...................................... (53,066) (1,800)
Accounts payable.................................. 33,414 (44,590)
Accrued expenses.................................. 11,167 (110,541)
Due to affiliate.................................. (1,755) (1,471)
----------- ----------
Net cash provided by operating activities......... 950,962 1,097,958
----------- ----------
Cash flows from investing activities:
Acquisition of property and equipment.............. (1,167,495) (46,339)
Proceeds from asset disposals and sale of land par-
cel............................................... 2,003,316 --
----------- ----------
Net cash provided by (used in) investing activi-
ties............................................. 835,821 (46,339)
----------- ----------
Cash flows from financing activities:
Repayments of long-term debt....................... (2,500,000) (250,395)
Repayments of note payable......................... (23,019) --
Proceeds from note payable to related party........ 1,287,409 --
Repayments on note payable to related party........ (492,459) --
----------- ----------
Net cash used in financing activities............. (1,728,069) (250,395)
Increase in cash and cash equivalents............... 58,714 801,224
Cash and cash equivalents, at beginning of period... 124,071 182,785
----------- ----------
Cash and cash equivalents, at end of period......... $ 182,785 $ 984,009
=========== ==========
Supplemental Disclosure
Cash paid for interest............................. $ 1,540,719 $ 748,873
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
RAHN KEY WEST RESORT, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED AS TO INTERIM PERIOD)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Operations and Basis of Presentation--Rahn Key West Resort,
Inc. (the "Company") is principally engaged in the operation of the Holiday
Inn Key West, a 222 room hotel and restaurant facility in Key West,
Florida. The hotel was owned by the Company through July 22, 1997, when it
was sold to an affiliate of LaSalle Hotel Properties.
These financial statements have been presented for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission
Regulation S-X and for inclusion in the Registration Statement on Form S-11
of LaSalle Hotel Properties.
Cash & Cash Equivalents
For purposes of the statement of cash flows, all highly liquid
investments with a maturity of three months or less when purchased are
considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment
Depreciation of property and equipment is provided using straight-line
and accelerated methods over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Land improvements.............................................. 20 years
Buildings and improvements..................................... 5-40 years
Furniture and equipment........................................ 3-8 years
</TABLE>
Depreciation expense was $421,934 for 1996.
Effective January 1, 1996, 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. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be
held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This statement requires that the majority of long-lived assets
and certain identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell.
Property Held for Sale
Property held for sale is expected to be sold in the near term (note 7)
and is carried at the lower of cost or fair value less costs to sell.
Depreciation and amortization is suspended during the period the property
is held for sale.
Amortization
Deferred loan costs are amortized using the straight-line method over the
term of the loan. The initial franchise fee of $51,600 with Holiday Inns
Franchising, Inc. and the additional franchise fee of $15,000 for the 50-
room addition during fiscal year ended 1989 are amortized using the
straight-line method over the remaining term of the agreement, which
expired in February 1997. Amortization expense was $48,385 for 1996.
Income Taxes
The Company and its stockholders elected to be treated as an S
Corporation for income tax purposes. Under this election, all profits and
losses are directly attributable to the stockholders.
F-50
<PAGE>
RAHN KEY WEST RESORT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED AS TO INTERIM PERIOD)
Business Risk
Any substantial change in economic conditions or any significant price
fluctuations related to the travel and tourism industry could affect
discretionary consumer spending and have a material impact on the Company's
business. In addition, the Company is subject to competition from other
entities engaged in the business of resort development and operation,
including interval ownership, condominiums, hotels and motels.
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.
2. NOTE PAYABLE
On January 6, 1995, the Company purchased $69,713 in equipment which was
financed by a note payable to a bank. The note accrues interest at 10.69%
and is payable in 36 monthly installments.
3. LONG-TERM DEBT
In July 1988, a loan agreement was entered into for $15.5 million, the
proceeds of which were used to pay off all the existing debt at that date.
The loan was collateralized by a first mortgage on the real property,
assignment of the leases and rents of the hotel, and all present and future
furniture and equipment, inventories, accounts, and general intangibles. In
addition, the two majority stockholders guaranteed the payment of all
interest and operating deficits. Distributions to stockholders were subject
to certain limitations under the terms of the loan agreement.
In August 1989, an agreement was entered into to increase the original loan
by an amount not to exceed $3,450,000. In July 1993, the Company extended
the maturity of this loan for two years. The provisions of the related
amended promissory note require monthly payments of interest plus $25,000
of principal, increasing to $41,667 on August 1, 1994. In addition, the
amended promissory note requires additional principal payments in amounts
equal to the excess of the immediately preceding fiscal year's cash flow,
as defined, over $900,000 on April 1, 1994 and 1995. A payment of $71,395
was made on April 1, 1994 for the 1993 fiscal year's cash flows.
In October 1995, the maturity of this loan was again extended for three
years effective as of July 1995 with the remaining principal balance due on
the maturity date in June 1998. The provisions of the second amended
promissory note in the amount of $17,953,600 (remaining principal balance
at date of second promissory note) require monthly payments of interest
plus $41,667 of principal. In addition, the second amended promissory note
requires additional principal payments in amounts equal to the excess cash
flow, as defined, for the immediately preceding fiscal year (or for the
period from August 1, 1995 to December 31, 1996 for the first application
date) on each application date (February 15, 1997 and February 15th of each
calendar year thereafter).
At the Company's election, the interest rate on the loan may be either
1.75% above the prime rate or 3.0% above a LIBOR rate. The effective
interest rate as of December 31, 1996 was 8.56%.
F-51
<PAGE>
RAHN KEY WEST RESORT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED AS TO INTERIM PERIOD)
4. COMMITMENTS AND CONTINGENCIES
As part of the franchise agreement with Holiday Inns Franchising Inc., the
Company is obligated to pay monthly fees based on gross room revenues.
These fees include royalty fees at 4% (5% effective February 1997),
marketing fees at 1.5%, reservation fees at 1% and a monthly reservation
system fee of approximately $6 per guest room. The franchise agreement
expires in February, 2007.
5. RELATED PARTY TRANSACTIONS
Management Agreement
During 1987, the Company entered into a management agreement with Rahn
Venture 1, Inc. which is affiliated through common ownership with the
Company's two majority stockholders. The agreement provides for payment of
an amount equal to 3% of gross revenues and 10% of net operating profit, as
defined. As of August 1, 1995, the management incentive fee (10% of net
operating profit) was eliminated. Management fee expense was $231,480 for
the year ended December 31, 1996, of which $16,565 was unpaid at December
31, 1996.
Other Related Party Transactions
Legal services are rendered by a minority stockholder and fees paid in
1996 were $12,064.
Note payable
Related party at December 31, 1996 is payable on demand. The interest
rate on the note is 1.75% above prime with an effective rate of 10% at
December 31, 1996.
6. DISCLOSURE REGARDING FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, trade and other
receivables, accounts payable, and accrued expenses approximate fair value
due to the relatively short maturity of the respective instruments. The
carrying amounts of the notes payable and long-term debt to banks and
affiliates approximate fair value because the interest rates on these
instruments change with market interest rates and are commensurate with the
risk involved.
7. SUBSEQUENT EVENTS
In May of 1997, the Company agreed to sell their interest in the hotel
property and related operating equipment, licenses and permits to an
affiliate of LaSalle Hotel Properties for a purchase price of $23.5 million
subject to an adjustment to reflect changes in the closing date and certain
prorations. Pursuant to the purchase agreement the Company consummated the
sale on July 22, 1997.
F-52
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Rahn Key West Resort, Inc.:
We have audited the accompanying balance sheet of Rahn Key West Resort, Inc.
(the "Company") as of December 31, 1995, and the related statements of
operations, changes in stockholders' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Fort Lauderdale, Florida
April 19, 1996
F-54
<PAGE>
RAHN KEY WEST RESORT, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................. $ 124,071
Trade receivables (less allowance for doubtful accounts of
$5,000)......................................................... 197,894
Other receivables................................................ 6,547
Inventories (Note 1)............................................. 47,473
Prepaid expenses................................................. 53,839
-----------
Total current assets........................................... 429,824
-----------
PROPERTY AND EQUIPMENT--
At cost (Notes 1,2,3,4):
Land and land improvements....................................... 2,550,340
Buildings and improvements....................................... 6,957,113
Furniture and equipment.......................................... 1,857,677
China, glass, silver, and linen.................................. 25,274
-----------
Total.......................................................... 11,390,404
Less accumulated depreciation.................................... (2,844,398)
-----------
Net property, plant and equipment.............................. 8,546,006
-----------
OTHER ASSETS (Notes 1,4,5):
Deferred loan costs and franchise fees (net of accumulated
amortization of $77,479)........................................ 168,296
Restricted cash--property improvement fund 1,354
Restricted cash--property tax fund............................... 665
Other............................................................ 45,322
-----------
Total other assets............................................. 215,637
-----------
TOTAL............................................................. $ 9,191,467
===========
</TABLE>
See notes to financial statements.
F-55
<PAGE>
RAHN KEY WEST RESORT, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt (Notes 3,4)................... $ 522,949
Note payable--related party (Note 6)............................ 1,005,175
Accounts payable................................................ 49,668
Accrued expenses:
Property taxes.................................................
Franchise fees (Note 5)........................................ 43,557
Payroll and payroll related items.............................. 41,915
Utilities...................................................... 58,072
Vacation....................................................... 37,314
Interest (Notes 3,4)........................................... 156,209
Advance guest deposits......................................... 8,321
Other.......................................................... 88,951
------------
Total accrued expenses....................................... 434,339
------------
Due to affiliate (Note 6)....................................... 18,320
------------
Total current liabilities.................................... 2,030,451
------------
NOTE PAYABLE, Net of current portion (Note 3).................... 23,879
------------
LONG-TERM DEBT, Net of current portion (Note 4).................. 17,370,262
------------
STOCKHOLDERS' DEFICIT (Note 4):
Common stock--par value $10 per share; authorized and issued 100
shares of which 85 are held as treasury stock.................. 1,000
Additional paid-in capital...................................... 435,849
Accumulated deficit............................................. (3,699,974)
------------
Total........................................................ (3,263,125)
Less treasury stock, 85 shares at cost.......................... (6,970,000)
------------
Total stockholders' deficit.................................. (10,233,125)
------------
TOTAL............................................................ $ 9,191,467
============
</TABLE>
See notes to financial statements.
F-56
<PAGE>
RAHN KEY WEST RESORT, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
REVENUES (Note 5):
Rooms............................................................. $5,958,614
Food and beverage................................................. 1,289,089
Other, primarily telephone........................................ 265,346
----------
Total revenues................................................... 7,513,049
----------
EXPENSES:
Rooms............................................................. 1,179,675
Food and beverage................................................. 1,069,690
Other, primarily telephone........................................ 60,707
General and administrative expenses............................... 580,916
Marketing expenses................................................ 383,557
Property operations and maintenance............................... 400,534
Utilities......................................................... 599,652
Management fees (Note 6).......................................... 405,533
Royalty fees (Note 5)............................................. 242,488
Property taxes.................................................... 325,713
Professional fees................................................. 33,981
Insurance--property, general liability and other.................. 95,053
Loss on asset disposals........................................... 28,506
Depreciation and amortization (Note 1)............................ 488,075
Interest expense, net of interest income of $7,120 (Notes 1, 3,
4)............................................................... 1,686,811
Write-down of land held for sale (Note 2)......................... 400,000
Miscellaneous income.............................................. (48,330)
----------
Total expenses................................................... 7,932,561
----------
Net loss........................................................... $ (419,512)
==========
</TABLE>
See notes to financial statements.
F-57
<PAGE>
RAHN KEY WEST RESORT, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------- PAID-IN ACCUMULATED ------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------ ------ ---------- ----------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994................... 100 $1,000 $435,849 $(3,280,462) 85 $(6,970,000) $ (9,813,613)
Net loss................ -- -- -- (419,512) -- -- (419,512)
--- ------ -------- ----------- --- ----------- ------------
BALANCE, DECEMBER 31,
1995................... 100 $1,000 $435,849 $(3,699,974) 85 $(6,970,000) $(10,233,125)
=== ====== ======== =========== === =========== ============
</TABLE>
See notes to financial statements.
F-58
<PAGE>
RAHN KEY WEST RESORT, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss......................................................... $ (419,512)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization.................................... 488,075
Loss on asset disposals.......................................... 28,506
Write-down of land held for sale................................. 400,000
Changes in assets and liabilities:
Trade receivables............................................... (5,668)
Other receivables............................................... 3,865
Inventories..................................................... 183
Prepaid expenses................................................ (36,241)
Other assets.................................................... (166,038)
Accounts payable................................................ (32,997)
Accrued expenses................................................ 87,028
Due to affiliate................................................ (37,891)
----------
Net cash provided by operating activities....................... 309,310
----------
INVESTING ACTIVITIES:
Acquisition of property and equipment............................. (349,847)
Proceeds from asset disposal...................................... 750
----------
Net cash used in investing activities............................ (349,097)
----------
FINANCING ACTIVITIES:
Repayments of long-term debt...................................... (500,004)
Repayment of note payable......................................... (22,889)
Loans from related parties........................................ 1,005,175
Repayment of loans from related parties........................... (431,000)
----------
Net cash provided by financing activities........................ 51,282
----------
NET INCREASE IN CASH............................................... 11,495
CASH, BEGINNING OF YEAR............................................ 112,576
----------
CASH, END OF YEAR.................................................. $ 124,071
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest........................... $1,681,297
==========
</TABLE>
See notes to financial statements.
F-59
<PAGE>
RAHN KEY WEST RESORT, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
by Rahn Key West Resort, Inc. (the "Company") in the preparation of the
accompanying financial statements.
Organization and Operations
Rahn Key West Resort, Inc. is principally engaged in the operation of the
Holiday Inn-Beachside, a 222-room hotel and restaurant facility in Key
West, Florida, under a licensing agreement with Holiday Inns, Inc. The
Company also owns an adjacent 4.5-acre parcel of land that is undeveloped.
Inventories
Inventories consisting primarily of food and beverages are stated at the
lower of cost (first-in, first-out method) or market.
Property and Equipment
Depreciation of property and equipment is provided using straight-line
and accelerated methods over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Land improvements............................................... 20 years
Buildings and improvements...................................... 5-40 years
Furniture and equipment......................................... 3-8 years
</TABLE>
Depreciation expense was $425,660 for 1995.
Amortization
Loan costs are amortized using the straight-line method over the term of
the loan. The initial franchise fee of $51,600 with Holiday Inns
Franchising, Inc. and the additional franchise fee of $15,000 for the
50-room addition during fiscal year ended 1989 are amortized using the
straight-line method over the remaining term of the agreement, which
expires in February 1997. Amortization expense was $62,415 for 1995.
Income Taxes
The Company and its stockholders have elected to be treated as an S
Corporation for income tax purposes. Under this election, all profits and
losses are directly attributable to the stockholders with no resulting tax
effect to the corporation and stockholder distributions are reductions of
retained earnings. Accordingly, there is no income tax provision recorded
in the accompanying financial statements.
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.
Disclosure Regarding Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate fair value due to the
relatively short maturity of the respective instruments. The carrying
amounts of the loans payable and long-term debt to banks and affiliates
approximate fair value because the interest rates on these instruments
change with market interest rates.
F-60
<PAGE>
RAHN KEY WEST RESORT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1995
2. LAND HELD FOR SALE
The Company determined that the parcel of undeveloped land adjacent to the
hotel, included in land and land improvements, would not be developed but
would be held for sale. Property held for sale is stated at the lower of
cost or estimated fair value.
As of December 31, 1995, the estimated fair value of the land held for sale
was estimated to be $2,000,000 which resulted in a $400,000 write-down of
such land.
3. NOTE PAYABLE
On January 6, 1995, the Company purchased $69,713 in equipment which was
financed by a note payable to a bank. The note accrues interest at 10.69%
and is payable in 36 monthly installments, including interest, of $2,272.
4. LONG-TERM DEBT
In July 1988, a loan agreement was entered into for $15.5 million, the
proceeds of which were used to pay off all the existing debt at that date.
The loan is collateralized by a first mortgage on the real property,
assignment of the leases and rents of the hotel, and all present and future
furniture and equipment, inventories, accounts, and general intangibles. In
addition, the two majority stockholders have guaranteed the payment of all
interest and operating deficits. Distributions to stockholders are subject
to certain limitations under the terms of the loan agreement.
In August 1989, an agreement was entered into to increase the original loan
by an amount not to exceed $3,450,000. In July 1993, the Company extended
the maturity of this loan for two years. The provisions of the related
amended promissory note require monthly payments of interest plus $25,000
of principal, increasing to $41,667 on August 1, 1994. In addition, the
amended promissory note requires additional principal payments in amounts
equal to the excess of the immediately preceding fiscal year's cash flow,
as defined, over $900,000 on April 1, 1994 and 1995. A payment of $71,395
was made on April 1, 1994 for the 1993 fiscal year's cash flows.
In October 1995, the maturity of this loan was again extended for three
years effective as of July 1995. The provisions of the second amended
promissory note in the amount of $17,953,600 (remaining principal balance
at date of second promissory note) require monthly payments of interest
plus $41,667 of principal. In addition, the second amended promissory note
requires additional principal payments in amounts equal to the excess cash
flow, as defined, for the immediately preceding fiscal year (or for the
period from August 1, 1995 to December 31, 1996 for the first application
date) on each application date (February 15, 1997 and February 15th of each
calendar year thereafter).
At the Company's election, the interest rate on the loan may be either
1.75% above the prime rate or 3.0% above a LIBOR rate. The effective
interest rate as of December 31, 1995 was 8.8%.
5. COMMITMENTS AND CONTINGENCIES
As part of the franchise agreement with Holiday Inns Franchising, Inc., the
Company is obligated to pay monthly fees based on gross room revenues.
These fees include royalty fees at 4% (5% effective February 1997),
marketing fees at 1.5%, reservation fees at 1% and a monthly Holiday
reservation system fee of approximately $6 per guest room. The franchise
agreement expires in February, 2007.
F-61
<PAGE>
RAHN KEY WEST RESORT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1995
As an additional condition of the franchise agreement, the Company is also
required to complete a Property Improvement Plan by January 1, 1997 at an
estimated cost to the Company of $800,000. If such plan is not completed on
time, Holiday Inn may terminate the franchise agreement.
6. RELATED PARTY TRANSACTIONS
During 1987, the Company entered into a management agreement with Rahn
Venture 1, Inc. which is affiliated through common ownership with the
Company's two majority stockholders. The agreement provides for payment of
an amount equal to 3% of gross revenues and 10% of net operating profit, as
defined. As of August 1, 1995, the management incentive fee (10% of net
operating profit) was eliminated. Management fee expense was $405,533 for
the year ended December 31, 1995 of which $18,320 was unpaid at December
31, 1995.
Legal services are rendered by a minority stockholder and fees paid in 1995
were $12,349.
Note payable with related party at December 31, 1995 is payable on demand.
The interest rate on the note is 1.75% above prime with an effective rate
of 10.25% at December 31, 1995.
7. SUPPLEMENTAL CASH FLOW INFORMATION
During 1995, the Company purchased $69,713 in equipment through the
issuance of a note payable to a bank.
F-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
LaSalle Hotel Properties:
We have audited the accompanying statements of revenues and expenses and
cash flows of the Le Meridien Dallas for the year ended January 31, 1997 and
for the period from February 1, 1997 to September 4, 1997. These financial
statements are the responsibility of 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 the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying statements of revenues and expenses and cash flows were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and for inclusion in the Registration
Statement on Form S-11 of LaSalle Hotel Properties as described in note 1. The
presentation is not intended to be a complete presentation of the revenues and
expenses of the Le Meridien Dallas.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the revenues and expenses and cash flows described
in note 1 of the Le Meridien Dallas for the year ended January 31, 1997 and
for the period from February 1, 1997 to September 4, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
January 18, 1998
F-63
<PAGE>
LE MERIDIEN DALLAS
STATEMENTS OF REVENUES AND EXPENSES (NOTE 1)
YEAR ENDED JANUARY 31, 1997 AND PERIOD FROM FEBRUARY 1, 1997 TO SEPTEMBER 4,
1997
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1997
YEAR ENDED THROUGH
JANUARY 31, 1997 SEPTEMBER 4, 1997
---------------- -----------------
<S> <C> <C>
REVENUES:
Rooms...................................... $ 9,748,417 $6,190,815
Food and beverage.......................... 3,230,877 2,318,810
Other...................................... 577,535 341,836
----------- ----------
Total revenues............................... 13,556,829 8,851,461
----------- ----------
EXPENSES:
Rooms...................................... 2,731,882 1,595,819
Food and beverage.......................... 2,927,239 1,980,448
Other operating departments................ 280,470 154,603
Property maintenance and operations........ 1,284,334 845,890
Utilities.................................. 787,022 443,322
General and administrative................. 1,468,712 925,486
Sales and marketing........................ 1,142,036 753,479
Insurance.................................. 55,818 21,381
Property taxes............................. 409,395 263,503
----------- ----------
Total expenses............................... 11,086,908 6,983,931
----------- ----------
Excess of revenues over expenses............. $ 2,469,921 $1,867,530
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-64
<PAGE>
LE MERIDIEN DALLAS
STATEMENTS OF CASH FLOWS (NOTE 1)
YEAR ENDED JANUARY 31, 1997 AND PERIOD FROM FEBRUARY 1, 1997 TO SEPTEMBER 4,
1997
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 1, 1997
YEAR ENDED THROUGH
JANUARY 31, 1997 SEPTEMBER 4, 1997
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Excess of revenues over expenses.......... $ 2,469,921 $ 1,867,530
Adjustments to reconcile excess of reve-
nues and expenses to net cash provided by
operating activities:
Decrease in guest and trade receivables,
net.................................... 142,233 127,810
Decrease in inventories................. 16,616 3,508
Decrease in prepaid expenses and other
current assets......................... 39,944 18,772
Decrease (increase) in accounts payable. (238,242) 211,558
Increase in accrued expenses............ (4,956) (235,745)
----------- -----------
Net cash provided by operating activities... 2,425,516 1,993,433
----------- -----------
Cash flows from investing activities--pur-
chase of fixed assets...................... (293,955) (84,153)
Cash flows from financing activities--
Net distributions to owner................ (2,187,209) (2,171,183)
Cash overdraft............................ -- 218,258
----------- -----------
Net cash used in financing activities..... (2,187,209) (1,952,925)
----------- -----------
Net decrease in cash........................ (55,648) (43,645)
Cash at beginning of period................. 99,293 43,645
----------- -----------
Cash at end of period....................... $ 43,645 $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE>
LE MERIDIEN DALLAS
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1997 AND THE PERIOD FROM FEBRUARY 1, 1997 TO SEPTEMBER
4, 1997
(1) ORGANIZATION, OPERATIONS, AND BASIS OF PRESENTATION
Le Meridien Dallas (the Hotel) is a 396 room hotel located in downtown
Dallas, Texas. The Hotel was owned by Forte USA, Inc. (the Owner) through
September 4, 1997, when it was sold to an affiliate of LaSalle Hotel
Properties. The accompanying financial statements include the revenues and
expenses and associated cash flows for the Le Meridien Dallas for the year
ended January 31, 1997 and the period February 1, 1997 through September 4,
1997. Certain revenues and expenses related to the ownership of the Hotel
including but not limited to depreciation, interest expense, and gains or
losses on disposition of assets, have been excluded from the accompanying
presentation since the related records were not available.
These financial statements have been presented for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission
Regulation S-X and for inclusion in the Registration Statement on Form S-11 of
LaSalle Hotel Properties. The presentation is not intended to be a complete
presentation of the revenues and expenses of the Le Meridien Dallas.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the statement of cash flows, all highly liquid investments
with a maturity of three months or less when purchased are considered to be
cash equivalents.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Income Taxes
The Owner is not directly subject to income taxes because the results of its
operations are includable in the tax returns of its owners.
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.
(3) COMMITMENTS AND CONTINGENCIES
The Hotel is a member of a property association and has an ongoing
commitment to pay for common area maintenance expenses. These expenses are
included in the accompanying statements of revenues and expenses. The monthly
required payments are variable based on the monthly expenses of the
association. The Hotel's contributions to common area maintenance were
$503,260 for the year ended January 31, 1997 and $289,337 for the period from
February 1, 1997 through September 4, 1997.
The nature of the Hotel's operations exposes them to the risk of claims and
litigation in the normal course of business. Management believes that the
ultimate resolution of any outstanding matters will not have a material
adverse effect on the financial position or operations of the Hotel.
F-66
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New Orleans Meridien Inc.,
in its capacity as general partner of Canal Street Hotels Limited
Partnership:
We have audited the accompanying balance sheets of Canal Street Hotels
Limited Partnership (a California limited partnership) as of December 31, 1996
and 1995, and the related statements of operations, changes in partners'
equity (deficit) and cash flows for the years then ended. These financial
statements are the responsibility of the Partnership'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 the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 Canal Street Hotels
Limited Partnership as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Partnership will continue as a going concern. As discussed in Notes 3 and 7,
on November 24, 1996, the Partnership sold the hotel it operates and has no
remaining revenue generating assets. At December 31, 1996, the Partnership's
liabilities exceeded its assets by $8,080,227. Management currently expects
that the unpaid balance of its mortgage loan will be forgiven in future years,
although there can be no assurance that this will be the case. The above facts
raise substantial doubt about the Partnership's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from this uncertainty.
Arthur Andersen LLP
New Orleans, Louisiana,
May 14, 1997
F-67
<PAGE>
CANAL STREET HOTELS LIMITED PARTNERSHIP
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments.................... $ 3,116,834 $ 14,331,967
Restricted funds (Note 5)......................... -- 179,321
Accounts receivable, net of allowance of $106,543
in 1996 and $34,621 in 1995...................... 637,405 1,055,696
Inventories....................................... -- 222,240
Prepaid expenses.................................. -- 59,382
Due from general partner.......................... 68,655 --
----------- ------------
Total current assets............................ 3,822,894 15,848,606
----------- ------------
BUILDING AND EQUIPMENT:
Building and improvements......................... -- 41,314,746
Furniture and equipment........................... -- 14,238,913
----------- ------------
-- 55,553,659
Less-accumulated depreciation..................... -- (23,964,801)
----------- ------------
-- 31,588,858
----------- ------------
OTHER ASSETS........................................ -- 168,040
----------- ------------
Total assets.................................... $ 3,822,894 $ 47,605,504
=========== ============
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.................................. $ 1,270,258 $ 1,218,915
Accrued expenses and other........................ -- 915,434
Accrued interest (Note 7)......................... 12,943 6,825,146
Accrued management fees........................... -- 629,596
----------- ------------
Total current liabilities....................... 1,283,201 9,589,091
MORTGAGE LOAN AND ACCRUED INTEREST (Note 7)......... 10,619,920 54,893,261
DUE TO MERIDIEN HOTELS, INC. (Note 7)............... -- 1,508,908
LOANS FROM GENERAL PARTNER (Note 4)................. -- 1,487,102
LOANS FROM FORMER PARTNERS (Note 4)................. -- 364,013
NOTE PAYABLE TO AFFILIATE OF GENERAL PARTNER (Note
7)................................................. -- 1,578,466
----------- ------------
Total liabilities............................... 11,903,121 69,420,841
----------- ------------
PARTNERS' DEFICIT (Note 4).......................... (8,080,227) (21,815,337)
----------- ------------
$ 3,822,894 $ 47,605,504
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
CANAL STREET HOTELS LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
PAYROLL AND 1996 1995
COST OF RELATED OPERATING OPERATING OPERATING
REVENUE SALES EXPENSES EXPENSES INCOME(LOSS) INCOME(LOSS)
------------ ---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DEPARTMENTS:
Rooms.................. $ 15,511,556 $ -- $ 2,019,012 $ 1,730,145 $11,762,399 $11,986,166
Food and beverage...... 3,700,396 999,068 1,730,140 482,310 488,878 374,526
Telephone.............. 618,734 90,425 178,388 45,087 304,834 369,989
Other.................. 1,224,501 82,998 240,451 38,414 862,638 794,313
------------ ---------- ----------- ----------- ----------- -----------
Total operating
departments......... 21,055,187 1,172,491 4,167,991 2,295,956 13,418,749 13,524,994
------------ ---------- ----------- ----------- ----------- -----------
UNDISTRIBUTED OPERATING
EXPENSES:
Administrative and
general............... -- -- 1,185,613 774,281 1,959,894 2,092,624
Marketing.............. -- -- 717,234 774,545 1,491,779 1,477,550
Energy costs........... -- -- -- 707,781 707,781 698,560
Property operation and
maintenance........... -- -- 489,315 575,641 1,064,956 1,187,968
------------ ---------- ----------- ----------- ----------- -----------
Total undistributed
operating expenses.. -- -- 2,392,162 2,832,248 5,224,410 5,456,702
------------ ---------- ----------- ----------- ----------- -----------
GROSS OPERATING PROFIT $ 21,055,187 $1,172,491 $ 6,560,153 $ 5,128,204 8,194,339 8,068,292
============ ========== =========== =========== ----------- -----------
OTHER INCOME (EXPENSES):
Interest expense (Note
7).................... (3,436,768) (4,034,140)
Depreciation and
amortization.......... (1,172,909) (1,372,001)
Lease expense.......... ( 9,592) (110,070)
Property taxes (Note
6).................... (848,851) (531,352)
Ground rents........... (371,976) (414,398)
Management fees (Note
6).................... (1,906,440) (1,169,074)
Professional fees...... (716,380) (118,455)
Insurance expense...... (40,451) (46,000)
Interest income........ 725,528 611,294
Gain on sale of hotel
(Note 3).............. 15,494,885 --
Miscellaneous income
(expense)............. (86,490) --
----------- -----------
7,630,556 (7,184,196)
----------- -----------
NET INCOME ............. $15,824,895 $ 884,096
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
CANAL STREET HOTELS LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
LOUISIANA
AND NEW
CALIFORNIA ORLEANS/ CMS NEW ORLEANS NEW ORLEANS
HOTELS NEWPORT INVESTORS MERIDIEN, GRANDE,
PARTNERSHIP BEACH LIMITED INC. INC. TOTAL
------------ ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1994....... $(13,099,699) $(5,960,142) $(1,179,052) $(1,230,270) $(1,230,270) $(22,699,433)
Net Loss............... 457,962 209,531 40,669 87,967 87,967 884,096
------------ ----------- ----------- ----------- ----------- ------------
DECEMBER 31, 1995....... (12,641,737) (5,750,611) (1,138,383) (1,142,303) (1,142,303) (21,815,337)
Net income from January
1, 1996 to August 27,
1996.................. 53,793 24,612 4,777 10,333 10,332 103,847
Transfer of general
partner interest
(Note 8).............. -- -- -- (1,131,971) 1,131,971 --
Net income from August
28, 1996 to December
31, 1996.............. 8,143,503 3,725,888 723,168 3,128,489 -- 15,721,048
Distributions.......... (950,772) (433,842) (85,049) (620,122) -- (2,089,785)
------------ ----------- ----------- ----------- ----------- ------------
DECEMBER 31, 1996....... $ (5,395,213) $(2,433,953) $ (495,487) $ 244,426 $ -- $ (8,080,227)
============ =========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
CANAL STREET HOTELS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
OPERATING CASH FLOWS:
Net income......................................... $ 15,824,895 $ 884,096
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of hotel............................. (15,494,885) --
Depreciation and amortization 1,172,909 1,372,001
Interest accretion................................ -- 106,999
Changes in assets and liabilities--
Accounts receivable............................. 418,291 (404,740)
Inventories..................................... (11,165) 48,144
Prepaid expenses................................ 59,382 59,249
Due from general partners....................... (68,655) --
Other assets.................................... 168,040 22,354
Restricted funds................................ 179,321 (131,173)
Accounts payable................................ 51,343 174,004
Accrued expenses................................ (915,434) 115,325
Accrued interest................................ (6,812,203) 2,072,359
Accrued management fees......................... (629,596) 459,013
------------ -----------
Net cash provided by (used in) operating
activities.................................... (6,057,757) 4,777,631
------------ -----------
INVESTING ACTIVITY CASH FLOWS:
Net proceeds from sale of hotel.................... 46,144,239 --
Capital expenditures............................... -- ( 89,091)
------------ -----------
Net cash provided by (used in) investing
activities.................................... 46,144 239 (89,091)
------------ -----------
FINANCING ACTIVITY CASH FLOWS:
Payments on debt.................................. (49,211,830) --
Distributions to partners......................... (2,089,785) --
------------ -----------
Net cash used in financing activities.......... (51,301,615) --
------------ -----------
NET INCREASE (DECREASE) IN CASH..................... (11,215,133) 4,688,540
CASH, beginning of year............................. 14,331,967 9,643,427
------------ -----------
CASH, end of year................................... $ 3,116,834 $14,331,967
============ ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest............................. $ 10,248,971 $ 1,914,591
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
CANAL STREET HOTELS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION:
Canal Street Hotels Limited Partnership (the Partnership) was formed May 10,
1982, to develop and operate a hotel located in New Orleans, Louisiana. The
financial statements include assets, liabilities and results of operations
that relate to the Partnership as well as the hotel operating accounts.
On July 16, 1991, the Partnership filed a voluntary petition for relief from
its creditors under Chapter 11 of the U.S. Bankruptcy Code. Under Chapter 11,
certain claims against the Partnership in existence prior to the filing of the
petition for relief are stayed while the Partnership continues business
operations as Debtor-in-Possession, subject to the jurisdiction of the
Bankruptcy Court (the Court). On February 27, 1992, after satisfying all of
the major provisions of its confirmed plan of reorganization, the Partnership
emerged from bankruptcy.
In connection with the plan of reorganization, the partners amended and
restated the partnership agreement in its entirety to reflect, among other
things, a revision of the partners' ownership interests. In addition, upon
confirmation of the Partnership's plan of reorganization, New Orleans Meridien
Inc. (NOMI) sold 50% of its general partner interest to an unrelated third
party, New Orleans Grande, Inc. (NOGI), an affiliate of The Grande
International Hotel Holdings, Ltd. (The Grande), effective February 27, 1992.
Pursuant to the new partnership agreement and the agreement with The Grande,
NOMI and NOGI served as general partners each holding a 9.95% interest until
August 27, 1996, at which time NOMI acquired NOGI's general partner interest
resulting in NOMI serving as the sole general partner with a 19.9% interest
(see Note 8). The limited partners, CMS Investors Limited (CMS), Louisiana and
California Hotels Partnership (L&C), and New Orleans and Newport Beach Hotels
Partnership (NONB), hold 4.6%, 51.8% and 23.7% interests, respectively.
On November 24, 1996, the Partnership sold the hotel (see Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Inventories
Inventories of food, beverage and operating supplies are stated at the lower
of cost (first-in, first-out method) or market.
Building and Equipment
Building and equipment are stated at cost including all construction and
preopening costs. Depreciation on the building and equipment is provided on
the straight-line basis over 40 and 10 years, respectively.
Income Taxes
No provision is made for Federal or state income taxes since these taxes are
the responsibility of the partners. The tax returns, qualification of the
Partnership as such for tax purposes and the amount of distributable
partnership income or loss are subject to examination by the Federal and state
taxing authorities. If examinations result in changes, the tax liabilities of
the partners could be changed accordingly.
Pervasiveness 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 periods. Actual results could differ from these estimates.
F-72
<PAGE>
CANAL STREET HOTELS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
3. SALE OF HOTEL:
On November 24, 1996, the Partnership sold the hotel assets for $48,000,000
to an unrelated third party (the Purchaser). Upon closing, the Partnership
transferred its interests in the ground lease, the building and related
furniture, fixtures and equipment, inventories, permits and other intangibles
comprising the hotel to the Purchaser. The Partnership incurred expenses of
$1,105,762 for brokerage fees and other costs relating to the sale, and
recognized a gain on the sale of hotel assets of $15,494,885. Proceeds from
the sale along with other available funds, were used to repay a portion of the
Partnership debt obligations. The remaining balance of the Partnership's debt
obligations is expected to be settled in future years.
4. DISTRIBUTIONS AND ALLOCATIONS TO PARTNERS:
In accordance with the partnership agreement as amended and restated, the
$1,487,102 noninterest-bearing loan is payable to NOMI (on August 27, 1996,
NOMI purchased NOGI's 50% interest in this loan, see Note 7) is to be repaid
out of the net operating cash flow or net capital proceeds before
distributions can be made to the partners. Additionally, pursuant to an
agreement among the partners and certain former partners, noninterest-bearing
loans totalling $364,013 payable to these former partners are to be repaid on
a basis equal to the loan from NOMI. During 1996, both of these loans were
repaid with the proceeds from the sale of the hotel (see Note 3).
Upon satisfaction of the above requirements, net operating cash flow and net
capital proceeds are to be distributed first to NOMI, on an equal basis, up to
an aggregate of $255,000, and then to all the partners in proportion to their
respective ownership interests. Net operating cash flow is defined as net
operating income or loss for tax purposes, increased by noncash expenses and
reductions in required reserves, and decreased by loan principal and interest
repayments, capital expenditures, and increases in required reserves. Subject
to retention of reserves in accordance with the partnership agreement,
distributions of net operating cash are to be made no less frequently than
quarterly.
For Federal and state income tax purposes, all income, gains, losses,
deductions and credits are to be allocated to the partners in accordance with
their respective percentage ownership interests, except for certain partner
nonrecourse deductions, which are to be allocated to the partners who bear the
related economic risk of loss.
5. RESTRICTED FUNDS:
Under the revised hotel management agreement, 3% of revenues are to be
reserved annually in restricted funds for the replacement of furniture,
fixtures and equipment; however, the practice of the Partnership and Meridien
was to accrue this obligation at 2% of revenues. At December 31, 1995,
$179,321 calculated using 2% of revenues, was restricted for this purpose. No
amounts were restricted at December 31, 1996, due to the sale of the hotel
during 1996 (see Note 3).
6. COMMITMENTS AND CONTINGENCIES:
Ground Lease
The Partnership leased the land under the hotel for 99 years beginning March
28, 1982 for $425,000 annually, for each of the first 10 years following the
construction term. During the subsequent 10 years, the annual rentals are to
be lesser of (i) 10% of the fair market value or (ii) the greater of 2 1/2% of
total room revenues or 1 1/4% of total revenues, but in no event will be less
than $425,000. In connection with the sale of the hotel during 1996, the
rights and obligations under the land lease were assigned to the Purchaser
(see Note 3).
F-73
<PAGE>
CANAL STREET HOTELS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
Operating Leases
The Partnership leases various equipment under long-term operating lease
arrangements. All existing operating leases expired during 1995. Rental
expense for operating leases for the year ended December 31, 1995, was
$110,070.
Hotel Management
On February 27, 1992, the Partnership signed a revised management agreement
with Meridien Hotels, Inc. (Meridien, an affiliate of NOMI) which is to expire
on December 31, 2012. Meridien has the right to extend the term of the
agreement for up to three successive 20-year periods. A basic monthly
management fee amounting to 3.5% of hotel revenues and an incentive fee based
on net operating profits, as defined per the agreement, are payable to
Meridien. In addition to the basic and incentive management fees, Meridien is
entitled, subject to certain provisions, to a supplemental fee of 13.5% of the
Hotel's available cash from all sources, as defined. The management agreement
also calls for the Partnership to contribute a monthly commercial fee of 1% of
total room revenue to a global advertising and promotions fund managed by
Meridien, assuming certain conditions are met.
The management agreement calls for Meridien to earn basic management fees of
3.5% of revenues. The Partnership has accrued basic management fees of
$630,004 and $668,538 (calculated using 3% of revenues), incentive fees of
$467,471 and $450,532, and commercial fees of $155,116 and $162,588, during
the years ended December 31, 1996 and 1995, respectively. During 1996, the
Partnership recalculated the basic management fee for the period from February
27, 1992 to November 24, 1996, using 3.5% of revenues and paid Meridien an
additional $516,872 for basic management fees relating to this period. At
December 31, 1995, $629,596 was payable to Meridien for these fees. No amounts
were owed to Meridien at December 31, 1996.
In connection with the sale of the Hotel, the Partnership paid Meridien
Hotels Investment Group, Inc. a fee of $750,000 to facilitate the termination
of the management agreement. This amount is included with the gain on the sale
of the Hotel in the accompanying statement of operations.
Partnership Management Expenses
NOMI and NOGI together charged the Partnership a total of $50,000 in 1995.
During 1996, the Partnership paid $293,486 of management expenses to NOMI.
Property Tax Protest
The Partnership paid its 1989, 1990 and a portion of 1991 and 1992 billed
property taxes under protest. The Partnership has filed suit against the
Louisiana Tax Commission and the Director of Finance for the City of New
Orleans because the Partnership believes that the assessor incorrectly
determined the fair market and assessed values of its property. It is not
possible to determine what, if any, recovery may be obtained from this suit
and therefore property taxes have been recorded as billed for all years.
7. PARTNERSHIP DEBT:
On February 27, 1992, the Partnership's mortgage lender sold all of its
rights and interests in its loan to the Partnership, which was then in
default, to Universal Hotel Finance Company, Inc. (Universal, an affiliate of
NOMI). Upon the confirmation of the Partnership's plan of reorganization,
Universal sold 50% of its interest in the mortgage loan to Grande Hotel
Finance Company, Inc. (GHFC), an affiliate of The Grande, effective
F-74
<PAGE>
CANAL STREET HOTELS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
February 27, 1992. Consequently, the Partnership was indebted to Universal and
GHFC for $40,999,000 principal and $13,894,261 interest which were outstanding
under the mortgage loan. The Partnership advanced funds for Universal and GHFC
to pay closing costs of $767,437 and offset this advance against pre-petition
interest accrued. The loan bears interest at the original mortgage lender's
prime plus .5% (8.75% at December 31, 1995), and is due on demand by Universal
and GHFC. On August 27, 1996, Universal purchased GHFC's 50% interest in the
mortgage loan (see Note 8).
Concurrent with Universal's acquisition of the mortgage loan, it executed a
cash flow agreement with the Partnership which, among other things, stipulates
repayment terms of the loan. Under the cash flow agreement and the agreement
between Universal and GHFC, the Partnership continued to accrue interest on
the principal amount at the stated interest rate and made quarterly payments,
to be applied to interest, of approximately $350,000. On February 26, 1997, a
$5,000,000 principal reduction was to be required. After February 26, 1997,
the Partnership was to make quarterly payments to cover interest and annual
principal reductions (totalling $21,500,000) through February 26, 2007. The
remainder of the principal and interest owed was to be repaid through an
additional stipulation in the cash flow agreement which requires the
Partnership to pay 90.64% of its net available cash to Universal and GHFC,
beginning on February 27, 1992, as defined in the cash flow agreement.
During 1996, the Partnership repaid $26,500,000 of principal on the mortgage
loan. Under the cash flow agreement an additional $25,926,103 was paid to
Universal which was first applied to accrued interest then to principal. The
remaining unpaid principal balance of $10,619,920 is expected to be settled in
future years.
Under a cash shortfall agreement dated May 21, 1982, Meridien agreed to
provide up to $1,200,000 to fund operating losses occurring in the first six
years of operations. As of December 31, 1995, Meridien had advanced $1,200,000
under the terms of this funding arrangement. Interest of $308,908 was accrued
on this advance, at the prime rate, through the July 16, 1991 bankruptcy
filing. In December 1992, interest accruals were reinstated on this advance.
During 1996 and 1995, $89,975 and $106,999, respectively, was accrued at a
rate based on Meridien's cost of funds. During 1996, the cash shortfall loan
plus accrued interest was repaid with proceeds from the sale of the hotel (see
Note 3).
On February 27, 1992, the Partnership issued a $3,100,000 zero coupon note
to Worldwide Hotel Finance Company, Inc. (Worldwide, an affiliate of NOMI) for
$1,251,000. During the years ended December 31, 1996 and 1995, the Partnership
accreted $88,436 and $92,611, respectively, of discount on the note using the
effective interest rate of 6.25%. The note had an original maturity of
February 28, 2007; however, any portion of it could have been converted, at
any time, at the sole discretion of Worldwide, into a limited partner interest
in the Partnership of up to 59.1%. During 1996, the balance outstanding on the
zero coupon note was repaid with proceeds from the sale of the hotel (see
Note 3).
8. GENERAL PARTNER TRANSACTIONS:
On August 27, 1996, NOMI and NOGI, and their respective affiliates entered
into a transfer coordination agreement whereby the Meridien affiliates
acquired all of the outstanding equity, debt, and other interests in the
Partnership held by the Grande affiliates, in exchange for cash. In connection
with the transfer of such interests, release agreements were executed between
the Grande affiliates and the Meridien affiliates and between the Grand
affiliates and the Partnership for any potential claims against one another.
F-75
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees LaSalle Hotel Properties:
We have audited the accompanying balance sheet of MSCC Limited Partnership
as of December 29, 1995, and the related statements of operations, changes in
partners' capital (deficit), and cash flows for the fiscal year ended December
29, 1995. These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MSCC Limited Partnership
as of December 29, 1995, and the results of its operations and its cash flows
for the fiscal year ended December 29, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
January 30, 1998
F-76
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
MSCC Limited Partnership:
We have audited the accompanying balance sheet of MSCC Limited Partnership
(the "Partnership," a Connecticut limited partnership) as of January 3, 1997,
and the related statements of operations, changes in partners' capital
(deficit) and cash flows for the fiscal year then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MSCC Limited Partnership
as of January 3, 1997, and the results of its operations and its cash flows
for the fiscal year then ended, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
March 6, 1997.
F-77
<PAGE>
MSCC LIMITED PARTNERSHIP
(A CONNECTICUT LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 29, 1995 AND JANUARY 3, 1997
<TABLE>
<CAPTION>
DECEMBER JANUARY 3,
29, 1995 1997
ASSETS ----------- -----------
<S> <C> <C>
Investment in real estate, net of accumulated
depreciation (Note 3)............................... $32,266,353 $31,332,767
Other assets:
Cash and cash equivalents.......................... 1,615,421 1,391,361
Property improvement fund (Note 4)................. 877,438 1,450,636
Accounts receivable................................ 831,993 1,454,474
Inventories........................................ 695,031 763,198
Deferred loan costs, net of accumulated
amortization of $40,461 and $113,478 in fiscal
1995 and 1996, respectively....................... 288,117 215,100
Prepaids and other assets.......................... 13,149 --
----------- -----------
4,321,149 5,274,769
----------- -----------
Total assets..................................... $36,587,502 $36,607,536
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage payable (Note 4)............................ $31,082,734 $29,790,180
Note payable (Note 4)................................ 326,903 356,324
Advances from SGRA................................... 254,671 259,171
Accounts payable and accrued expenses................ 1,088,543 1,371,398
Deferred revenue..................................... 625,370 665,788
Due to Marriott International (Note 5)............... 602,683 630,768
----------- -----------
Total liabilities................................ 33,980,904 33,073,629
General Partner...................................... 4,473,156 5,384,751
Limited Partner...................................... (1,866,558) (1,850,844)
----------- -----------
Total Partners' capital.......................... 2,606,598 3,533,907
----------- -----------
Total liabilities and partners' capital.......... $36,587,502 $36,607,536
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-78
<PAGE>
MSCC LIMITED PARTNERSHIP
(A CONNECTICUT LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED DECEMBER 29, 1995 AND JANUARY 3, 1997
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
----------- -----------
<S> <C> <C>
REVENUES
Rooms ............................................. $10,200,792 $10,988,386
Food and beverage ................................. 9,709,530 10,757,275
Golf .............................................. 5,102,874 5,430,490
Miscellaneous ..................................... 891,510 1,000,716
----------- -----------
Total revenues................................... 25,904,706 28,176,867
----------- -----------
EXPENSES
Departmental expenses.............................. 12,960,553 14,214,171
General and administrative......................... 1,251,258 1,349,963
Advertising and sales.............................. 1,383,465 1,470,970
Utilities.......................................... 740,345 779,963
Repairs and maintenance............................ 1,070,713 1,143,476
Management fees (Note 5)........................... 1,781,845 1,951,987
Other expenses..................................... 762,371 802,255
Real estate and personal property taxes............ 785,114 738,011
Miscellaneous...................................... 12,621 14,394
Depreciation and amortization...................... 1,833,005 1,737,052
Interest expense net of interest income of $43,127
and $39,958 in fiscal 1995 and 1996, respectively. 2,567,788 2,379,881
General and administrative expenses................ -- 23,313
----------- -----------
Total expenses................................... 25,149,078 26,605,436
----------- -----------
Net income........................................... $ 755,628 $ 1,571,431
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-79
<PAGE>
MSCC LIMITED PARTNERSHIP
(A CONNECTICUT LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE FISCAL YEARS ENDED DECEMBER 29, 1995, AND JANUARY 3, 1997
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 30, 1994............... $ 3,999,968 $(1,859,297) $ 2,140,671
Distributions to partners.............. (1,626,020) (14,817) (1,640,837)
Contributions from partners............ 1,351,136 -- 1,351,136
Net income............................. 748,072 7,556 755,628
----------- ----------- -----------
Balance, December 29, 1995............... 4,473,156 (1,866,558) 2,606,598
Distributions to partners.............. (1,936,676) -- (1,936,676)
Contributions from partners............ 1,292,554 -- 1,292,554
Net income............................. 1,555,717 15,714 1,571,431
----------- ----------- -----------
Balance, January 3, 1997................. $ 5,384,751 $(1,850,844) $ 3,533,907
=========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-80
<PAGE>
MSCC LIMITED PARTNERSHIP
(A CONNECTICUT LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 29, 1995 AND JANUARY 3, 1997
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 755,628 $ 1,571,431
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 1,833,005 1,737,052
Amortization of discount on note payable........... 26,992 29,421
Changes in operating assets and liabilities:
Accounts receivable............................... 146,387 (622,481)
Inventories....................................... 1,992 (68,167)
Prepaid expenses.................................. 3,126 13,149
Accounts payable and accrued expenses............. 274,028 282,855
Other liabilities................................. 331,291 32,585
Deferred revenue.................................. 298,420 40,418
----------- -----------
Net cash provided by operating activities....... 3,670,869 3,016,263
----------- -----------
Cash flows from investing activities:
Withdrawal from (funding of) property improvement
fund............................................... 841,275 (573,198)
Capital improvement expenditures.................... (2,284,825) (730,449)
----------- -----------
Net cash used in investing activities........... (1,443,550) (1,303,647)
----------- -----------
Cash flows from financing activities:
Payment of deferred loan costs...................... (336,003) --
Partners' contributions............................. 1,351,136 1,292,554
Partners' distributions............................. (1,640,837) (1,936,676)
Principal payments on mortgage loan................. (1,057,559) (1,292,554)
----------- -----------
Net cash used in financing activities........... (1,683,263) (1,936,676)
----------- -----------
Increase (decrease) in cash and cash equivalents..... 544,056 (224,060)
Cash and cash equivalents at beginning of fiscal
year................................................ 1,071,365 1,615,421
----------- -----------
Cash and cash equivalents at end of fiscal year...... $ 1,615,421 $ 1,391,361
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 2,544,965 $ 2,407,777
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-81
<PAGE>
MSCC LIMITED PARTNERSHIP
(A CONNECTICUT LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 29, 1995 AND JANUARY 3, 1997
1. THE PARTNERSHIP:
General
MSCC Limited Partnership, a Connecticut limited partnership (the
"Partnership"), was formed on May 4, 1988, for the purpose of acquiring,
owning and operating a 300-room resort hotel, Marriott's Seaview Resort (the
"Resort") located in New Jersey.
The Partnership is 99 percent owned by Seaview Golf Resort Associates
Limited Partnership ("SGRA") and 1 percent owned by Host Marriott Corporation
("Host Marriott"). The general partner is SGRA and the limited partner is Host
Marriott.
Capital Contributions
The general and limited partners have made capital contributions to the
Partnership in the following amounts:
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER
----------- -------
<S> <C> <C>
Aggregate capital contributions through January 3,
1997.................................................. $10,563,690 $80,000
</TABLE>
Pursuant to the partnership agreement, there are no additional capital
contributions required.
Allocations of Profits and Losses
In accordance with the partnership agreement, SGRA is generally allocated 99
percent of the profits and 35 percent of the losses, with the balance
allocated to Host Marriott. Upon an extraordinary event such as the sale,
exchange, refinancing, or condemnation of the property, profits are allocated
35 percent to SGRA and 65 percent to Host Marriott, until each partner has
been allocated profits from such an event equal to the sum of all prior losses
incurred by the Partnership, reduced by allocations of profits from any prior
extraordinary events. Any remaining profits are then allocated 99 percent to
SGRA and 1 percent to Host Marriott.
Distributions of Available Cash
Positive net cash flow of the Partnership resulting from normal operations
is distributed 99 percent to SGRA and 1 percent to Host Marriott. Any cash
from an extraordinary event, as described above, is used for the repayment of
debts and liabilities of the Partnership, other than debts and liabilities
owed to the partners, and for the establishment of any reserves that the
Partnership may deem reasonably necessary for any contingent or unforeseen
liabilities or obligations. Any remaining cash from such events is distributed
99 percent to SGRA and 1 percent to Host Marriott.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
For purposes of the statements of cash flows, all highly liquid investments
with a maturity of three months or less when purchased are considered to be
cash equivalents.
Income Taxes
No provision for income taxes is made in the financial statements of the
Partnership because, as a partnership, it is not subject to income taxes. The
tax effect of its activities accrues to the partners.
Investment in Real Estate
Investment in real estate is stated at cost less accumulated depreciation.
Depreciation is computed primarily using the straight-line method for
building, building improvements and leasehold improvements and double
declining balance methods for furniture, fixtures, and equipment. The building
and building improvements are depreciated over periods ranging from 31.5 to 39
years. The leasehold improvements are primarily depreciated over 15 years. The
lives used in computing depreciation for furniture, fixtures, and equipment
range from five to seven years.
F-82
<PAGE>
MSCC LIMITED PARTNERSHIP
(A CONNECTICUT LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 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. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be
held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This statement requires that the majority of long-lived assets
and certain identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell. Implementation of
this statement had no impact on the accompanying financial statements.
Inventories
Inventories include food, beverage, china, silverware, linen and glassware
used for operations and are carried at cost, using a method which approximates
the first-in, first-out (FIFO) basis. Gift shop inventory is valued at the
lower of cost or market, determined by the retail inventory method.
Deferred Loan Costs
The Partnership capitalized certain costs in connection with obtaining and
extending the financing for the property. These costs are being amortized
using the straight-line method over the life of the loan and extension.
Deferred Revenue
Deferred revenue includes billed membership and locker dues that have not
been earned.
Fiscal Year
The Partnership's fiscal year comprises 52 or 53 weeks, ending on the Friday
closest to December 31. Fiscal 1995 was a 52-week year ended on December 29,
1995 and fiscal 1996 was a 53-week year ended on January 3, 1997.
Concentration of Risk
The Partnership's sole hotel property is located in Absecon, New Jersey. The
Partnership's profitability is highly dependent on golf tourism as a source of
operating revenues. The golf tourism business is concentrated during the
summer months. Unfavorable weather or economic conditions could adversely
affect the results of operations.
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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
3. INVESTMENT IN REAL ESTATE
Investment in real estate as of December 29, 1995, and January 3, 1997 is as
follows:
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
------------ ------------
<S> <C> <C>
Land.......................................... $ 4,951,230 $ 4,951,230
Building...................................... 27,817,278 27,817,278
Furniture and fixtures........................ 9,134,274 10,319,047
Building and leasehold improvements........... 4,875,610 5,189,687
Construction in progress...................... 899,552 114,061
------------ ------------
47,677,944 48,391,303
Less accumulated depreciation............. (15,411,591) (17,058,536)
------------ ------------
$ 32,266,353 $ 31,332,767
============ ============
</TABLE>
F-83
<PAGE>
MSCC LIMITED PARTNERSHIP
(A CONNECTICUT LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT:
Mortgage Payable
The Partnership is liable under a mortgage loan to a bank in the original
principal amount of $33,000,000.
The maturity date of the loan is August 1, 1999. The interest rate options
as elected in advance by the Partnership effective May 3, 1995, are the LIBOR
rate, as defined, plus 200 basis points or the bank's prime rate, as defined,
plus 100 basis points. The interest rate at January 3, 1997 was 7.625%. The
agreement also requires that net cash flow, as defined, be deposited in a
working capital/interest reserve account to the extent necessary to maintain a
balance of $2,000,000 and from May 1, 1995, through April 30, 1997, or until
the principal balance has been reduced to $26,000,000, the Partnership is also
required to remit 75 percent of net cash flow to the lender to curtail the
loan. After the outstanding principal balance has been reduced to $26,000,000,
the Partnership is required to remit 50 percent of net cash flow to the lender
to curtail the loan. Principal payments on the loan amounted to $1,292,554 and
$1,057,559, in fiscal 1996 and 1995, respectively.
The working capital/interest reserve account, containing $2,132,854 at
January 3, 1997 is held by SGRA. The accompanying financial statements do not
reflect the working capital interest reserve account of SGRA as it is an
obligation of SGRA. In the event of a foreclosure, Host Marriott has
guaranteed up to $5,000,000 of the mortgage. The real estate of the
Partnership, the working capital/interest reserve account, and the property
improvement fund have been pledged as collateral for the mortgage loan.
The Partnership is required to contribute funds equal to 5.5 percent of
gross revenues to the property improvement fund, as specified by the mortgage
loan agreement. These funds are held in escrow, as required by the lender, to
be used for renovation and refurbishment of the property. The required
contributions for fiscal years ended 1996 and 1995, were approximately
$1,550,000 and $1,425,000, respectively.
Based on the borrowing rates currently available to the Partnership for
mortgages with similar terms and maturities, the management of the Partnership
believes that the mortgage payable is stated at fair value.
Note Payable
In connection with the purchase of the property from Marriott, the
Partnership issued a note payable to the seller. The note has no stated
interest rate. This note is recorded at its net present value, based on a
discount rate of approximately 9 percent, of $326,903, and $356,324 at
December 29, 1995 and January 3, 1997, respectively. The note matures in 2003,
when the principal amount of $652,537 is due in full. It was not practicable
to estimate the fair value of the note payable, due to the nature of the note,
the circumstances surrounding its issuance, and the absence of quoted market
prices for similar instruments.
5. COMMITMENTS:
Management Agreement
Marriott International ("Marriott") is appointed under the management
agreement, which expires in 2008, with one five-year renewal option held by
the Partnership and/or five, ten year renewal options held by Marriott as the
agent to maintain, operate, manage, supervise, rent and lease the hotel on the
Partnership's behalf. In consideration of Marriott's responsibilities under
the management agreement, the Partnership pays a base management fee of 3
percent of gross revenues of the property. The base management fee is paid in
full each year.
In addition, the management agreement requires the Partnership to pay
Marriott an incentive management fee based on 20 percent of operating profit,
as defined in the management agreement. For the fiscal years ended December
29, 1995 and January 3, 1997, Marriott earned $1,781,845 and $1,951,987,
respectively, in base and incentive management fees. Payment of the incentive
management fee is based upon available cash flow after debt service, as
defined in the partnership agreement.
F-84
<PAGE>
MSCC LIMITED PARTNERSHIP
(A CONNECTICUT LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of the Management Agreement, Marriott provides the
Resort with various services and supplies, including marketing, reservations,
and insurance.
The management agreement also provides Marriott a right of first refusal for
the sale or lease of the property or the right to terminate the management
agreement upon sale.
6. GROUND LEASE:
The Partnership is a lessee with respect to a ground lease of approximately
160 acres which are currently being utilized as a golf course for the benefit
of the Resort. The ground lease terminates in December 2012, with fifteen
successive renewal options, each for a ten-year term. The lease requires
annual rental payments equal to $1. The landlord, an affiliate of Marriott,
has certain rights for access for non-exclusive use of the golf course. Under
the terms of the ground lease, the Resort pays all operating costs of the golf
course including maintenance, insurance and real estate and personal property
taxes.
F-85
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees LaSalle Hotel Properties:
We have audited the accompanying statements of revenues and expenses and
cash flows of Marriott's Seaview Resort for the period from January 4, 1997 to
November 7, 1997. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying statements of revenues and expenses and cash flows were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and for inclusion in the Registration
Statement on Form S-11 of LaSalle Hotel Properties as described in note 1. The
presentation is not intended to be a complete presentation of the revenues and
expenses of Marriott's Seaview Resort.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the revenues and expenses and cash flows described
in note 1 of Marriott's Seaview Resort for the period from January 4, 1997 to
November 7, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
January 30, 1998
F-86
<PAGE>
MARRIOTT'S SEAVIEW RESORT
STATEMENT OF REVENUES AND EXPENSES (NOTE 1)
PERIOD FROM JANUARY 4, 1997 TO NOVEMBER 7, 1997
<TABLE>
<S> <C>
REVENUES
Rooms............................................................. $10,416,122
Food and beverage................................................. 9,962,325
Golf.............................................................. 5,749,499
Miscellaneous..................................................... 890,684
-----------
Total revenues................................................. 27,018,630
-----------
EXPENSES:
Rooms............................................................. 2,161,552
Food and beverage................................................. 7,245,599
Golf.............................................................. 3,007,507
Other operating departments....................................... 636,680
Repairs and maintenance........................................... 1,002,621
Utilities......................................................... 610,148
General and administrative........................................ 1,249,387
Sales and marketing............................................... 1,366,861
Real estate and personal property taxes (Note 4).................. 638,475
Management fees................................................... 2,044,994
Other expenses.................................................... 849,330
-----------
Total expenses................................................. 20,813,154
-----------
Excess of revenues over expenses................................... $ 6,205,476
-----------
</TABLE>
See accompanying notes to financial statements.
F-87
<PAGE>
MARRIOTT'S SEAVIEW RESORT
STATEMENT OF CASH FLOWS (NOTE 1)
PERIOD FROM JANUARY 4, 1997 TO NOVEMBER 7, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Excess of revenues over expenses................................. $ 6,205,476
Adjustments to reconcile excess of revenues over expenses to net
cash provided by operating activities:
Increase in receivables, net................................... (1,941,578)
Increase in inventories........................................ (69,326)
Increase in prepaid expenses and other assets.................. (7,055)
Increase in accounts payable................................... 1,930,847
Increase in advance deposits................................... 135,497
Increase in gift certificates.................................. 50,432
Decrease in unearned revenue................................... (589,770)
Decrease in accrued expenses................................... (247,799)
-----------
Net cash provided by operating activities........................ 5,466,724
-----------
Cash flows from investing activity--purchase of fixed assets...... (1,176,879)
-----------
Cash flows from financing activity--net distributions to owner.... (5,028,600)
-----------
Net decrease in cash.............................................. (738,755)
Cash at beginning of period....................................... 2,821,832
-----------
Cash at end of period............................................. $ 2,083,077
-----------
</TABLE>
See accompanying notes to financial statements.
F-88
<PAGE>
MARRIOTT'S SEAVIEW RESORT
NOTES TO FINANCIAL STATEMENTS
PERIOD JANUARY 4, 1997 TO NOVEMBER 7, 1997
(1) ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION
Marriott's Seaview Resort (the "Resort") is a 300 room hotel located in New
Jersey. The Resort was owned by MSCC Limited Partnership (the "Partnership")
through November 7, 1997, when it was sold to an affiliate of LaSalle Hotel
Properties. The accompanying financial statements include the revenues and
expenses and associated cash flows for the Resort for the period from January
4, 1997 to November 7, 1997. Certain revenues and expenses related to the
ownership of the Resort including but not limited to depreciation, interest
expense, interest income and gains or losses on disposition of assets, have
been excluded from the accompanying presentation since such amounts pertain to
the Partnership and not resort operations and the related records were not
available.
These financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission
Regulation S-X and for inclusion in the Registration Statement on Form S-11 of
LaSalle Hotel Properties. The presentation is not intended to be a complete
presentation of the revenues and expenses and cash flows of the Marriott's
Seaview Resort.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For the purpose of the statement of cash flows, all highly liquid
investments with a maturity of three months or less when purchased are
considered to be cash equivalents.
Inventories
Inventories include food and beverage and golf pro shop merchandise which
are valued at the lower of cost (first-in, first-out) or market.
Income Taxes
The Resort is not directly subject to income taxes because the results of
its operations are included in the tax returns of its owners.
Membership Fees
Golf course membership fees are recognized as revenue using the straight-
line method over the membership period.
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.
(3) MANAGEMENT AGREEMENT
Marriott International ("Marriott") is appointed under the management
agreement, which expires in 2008, with one five-year renewal option held by
the Partnership and/or five, ten-year renewal options held by Marriott as the
agent to maintain, operate, manage, supervise, rent and lease the resort on
the Partnership's behalf. In
F-89
<PAGE>
MARRIOTT'S SEAVIEW RESORT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
consideration of Marriott's responsibilities under the management agreement,
the Partnership pays a base management fee of 3% of gross revenues of the
Resort.
In addition, the management agreement requires the Partnership to pay
Marriott an incentive management fee based on 20% of operating profit, as
defined in the management agreement. For 1997, Marriott earned $2,044,994 in
base and incentive fees. Payment of the incentive fee is based upon available
cash flow after debt service, as defined in the partnership agreement of MSCC
Limited Partnership.
Pursuant to the terms of the management agreement, Marriott provides the
Resort with various services and supplies, including marketing, reservations,
and insurance. The costs incurred relating to these arrangements may have been
significantly different had they been provided by an independent third party.
(4) GROUND LEASE
The Partnership is a lessee with respect to a ground lease of approximately
160 acres which are currently being utilized as a golf course for the benefit
of the Resort. The ground lease terminates in December 2012, with fifteen
successive renewal options, each for a ten-year term. The lease requires
annual rental payments equal to $1. The landlord, an affiliate of Marriott,
has certain rights for access for non-exclusive use of the golf course. Under
the terms of the ground lease, the Resort pays all operating costs of the golf
course including maintenance, insurance and real estate and personal property
taxes.
(5) CONCENTRATION OF RISK
The profitability of the Resort is highly dependent on golf tourism as a
source of operating revenues. The source of such business is concentrated
during the summer months. Unfavorable weather conditions or economic
conditions could adversely affect the results of operations.
F-90
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees LaSalle Hotel Properties
We have audited the accompanying balance sheets of the LaGuardia Airport
Marriott Managed by ERE Yarmouth as of December 31, 1995 and 1996, and the
related statements of operations, owners' equity, and cash flows for each of
the years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of 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 the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission and for inclusion in the Registration Statement on Form S-11 of
LaSalle Hotel Properties as described in note 1.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the LaGuardia Airport
Marriott Managed by ERE Yarmouth as of December 31, 1995 and 1996, and the
results of its operations, and its cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
January 30, 1998
F-91
<PAGE>
LAGUARDIA AIRPORT MARRIOTT
MANAGED BY ERE YARMOUTH
BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
------------ ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate, at cost
Land..................................... $ 4,623,000 4,623,000 --
Buildings and improvements............... 42,233,363 44,223,582 --
Equipment................................ 10,230,364 10,841,903 --
------------ ---------- ----------
57,086,727 59,688,485 --
Less: accumulated depreciation........... 19,495,998 21,227,823
------------ ---------- ----------
Net property and equipment............. 37,590,729 38,460,662 --
------------ ---------- ----------
Property held for sale (note 3)........... -- -- 39,365,088
Cash and cash equivalents................. 1,763,157 1,350,812 500,152
Escrow deposits (note 6).................. 1,253,477 826,819 1,091,353
Accounts and other receivables............ 680,543 1,032,825 1,188,674
Other assets (note 4)..................... 1,039,137 1,053,759 719,154
------------ ---------- ----------
Total assets........................... $ 42,327,043 42,724,877 42,864,421
============ ========== ==========
LIABILITIES AND OWNERS' EQUITY
Accounts payable and accrued expenses..... 714,771 850,818 684,692
Other liabilities......................... 105,097 305,593 286,059
------------ ---------- ----------
Total liabilities...................... 819,868 1,156,411 970,751
------------ ---------- ----------
Owners' equity............................ 41,507,175 41,568,466 41,893,670
------------ ---------- ----------
Total liabilities and owners' equity... $ 42,327,043 42,724,877 42,864,421
============ ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-92
<PAGE>
LAGUARDIA AIRPORT MARRIOTT
MANAGED BY ERE YARMOUTH
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Rooms................. $15,161,297 $15,741,198 $17,681,031 $13,170,361 $13,507,451
Food and beverage..... 6,892,505 6,786,850 7,386,261 5,492,998 5,735,205
Other operating
departments.......... 1,304,212 1,444,318 1,571,775 1,197,597 1,112,977
Other................. 59,361 101,425 46,743 35,629 37,072
----------- ----------- ----------- ----------- -----------
Total revenue....... 23,417,375 24,073,791 26,685,810 19,896,585 20,392,705
----------- ----------- ----------- ----------- -----------
EXPENSES:
Rooms................. 4,754,085 4,876,864 5,133,341 3,826,409 3,996,420
Food and beverage..... 5,534,692 5,334,483 5,768,527 4,240,963 4,455,796
Other operating
departments.......... 941,333 982,654 1,048,591 797,165 811,664
Real estate taxes..... 1,304,638 1,441,397 1,112,317 843,400 1,023,111
Utilities and repairs
and maintenance...... 1,941,602 1,889,277 2,006,902 1,513,308 1,576,525
Administrative........ 2,616,723 2,200,360 2,554,131 1,941,435 1,844,405
Insurance............. 27,200 29,120 23,422 20,229 18,524
Hotel management fees
(note 6)............. 1,543,186 1,743,938 2,088,653 1,499,334 1,514,174
Depreciation (note 3). 2,738,824 1,613,055 1,731,825 1,298,869 --
Interest on mortgage
payable.............. 2,000,000 977,778 -- -- --
Other................. 1,480,849 1,623,279 1,798,616 1,462,155 1,369,414
Advisor fees (note 5). 90,750 115,375 140,000 116,667 116,667
----------- ----------- ----------- ----------- -----------
Total expenses...... 24,973,882 22,827,580 23,406,325 17,559,934 16,726,700
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $(1,556,507) $ 1,246,211 $ 3,279,485 $ 2,336,651 $ 3,666,005
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-93
<PAGE>
LAGUARDIA AIRPORT MARRIOTT
MANAGED BY ERE YARMOUTH
STATEMENTS OF OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<S> <C>
Balance at December 31, 1993....................................... $17,564,567
Contributions...................................................... 822,551
Net loss........................................................... (1,556,507)
-----------
Balance at December 31, 1994....................................... 16,830,611
Contributions...................................................... 24,977,777
Distributions...................................................... (1,547,424)
Net income......................................................... 1,246,211
-----------
Balance at December 31, 1995....................................... 41,507,175
Contributions...................................................... 140,000
Distributions...................................................... (3,358,194)
Net income......................................................... 3,279,485
-----------
Balance at December 31, 1996....................................... 41,568,466
Contributions (unaudited).......................................... 116,667
Distributions (unaudited).......................................... (3,457,468)
Net income (unaudited)............................................. 3,666,005
-----------
Balance at September 30, 1997 (unaudited).......................... $41,893,670
===========
</TABLE>
See accompanying notes to financial statements.
F-94
<PAGE>
LAGUARDIA AIRPORT MARRIOTT
MANAGED BY ERE YARMOUTH
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ------------ ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activ-
ities:
Net income (loss).............. $(1,556,507) $ 1,246,211 $3,279,485 $ 2,336,651 $3,666,005
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation.................. 2,738,824 1,613,055 1,731,825 1,298,869 --
Changes in:
Accounts and other
receivables................. 23,970 64,772 (352,282) (1,824,747) (155,849)
Escrow deposits.............. (236,935) 411,474 426,658 427,890 (264,534)
Other assets................. 141,946 133,695 (14,622) 346,062 334,605
Accounts payable and accrued
expenses.................... (770,292) 412,609 136,047 537,296 (166,126)
Other liabilities............ 22,690 59,724 200,495 58,466 (19,534)
----------- ------------ ---------- ----------- ----------
Net cash provided by
operating activities....... 363,696 3,941,540 5,407,606 3,180,487 3,394,567
----------- ------------ ---------- ----------- ----------
Cash flows used in investing
activities--additions and
improvements to real estate.... (779,832) (1,816,293) (2,601,757) (1,854,682) (904,426)
----------- ------------ ---------- ----------- ----------
Cash flows from financing
activities:
Repayments of mortgage note
payable....................... -- (25,000,000) -- -- --
Contributions.................. 822,551 24,977,777 140,000 116,667 116,667
Distributions.................. -- (1,547,424) (3,358,194) (2,922,148) (3,457,468)
----------- ------------ ---------- ----------- ----------
Net cash (used in) provided
by financing activities.... 822,551 (1,569,647) (3,218,194) (2,805,481) (3,340,801)
----------- ------------ ---------- ----------- ----------
Net (decrease) increase in
cash and cash equivalents.. 406,415 555,600 (412,345) (1,479,676) (850,660)
Cash and cash equivalents--
beginning of period............ $ 801,142 $ 1,207,557 $1,763,157 $ 1,763,157 $1,350,812
----------- ------------ ---------- ----------- ----------
Cash and cash equivalents--end
of period...................... $ 1,207,557 $ 1,763,157 $1,350,812 $ 283,481 $ 500,152
=========== ============ ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-95
<PAGE>
LAGUARDIA AIRPORT MARRIOTT
MANAGED BY ERE YARMOUTH
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the LaGuardia
Airport Marriott located in East Elmhurst, New York which is owned by the
Pennsylvania Public School Employes' Retirement System Real Estate Portfolio
(Portfolio) and is managed by ERE Yarmouth, formerly known as Equitable Real
Estate Investment Management, Inc. (Advisor) for Pennsylvania Public School
Employes' Retirement System (PSERS). Subsequent to December 31, 1996, PSERS
entered into discussions with affiliates of LaSalle Hotel Properties and its
partners relative to a sale of the LaGuardia Airport Marriott.
These financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission
Regulation S-X and for inclusion in the Registration Statement on Form S-11 of
LaSalle Hotel Properties.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate
Real estate is stated at cost (note 1). Repairs, maintenance, and minor
refurbishments are charged to expense as incurred. Depreciation of building
and equipment is calculated using the straight-line method over the useful
lives of the respective assets.
Property Held for Sale
Property held for sale is expected to be sold in the near term and is
carried at the lower of cost or fair value less costs to sell. Depreciation
and amortization is suspended during the period the property is held for sale.
Cash and Cash Equivalents
For purposes of the statement of cash flows, all highly liquid investments
with a maturity of three months or less when purchased are considered to be
cash equivalents.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Distributions
Distributions are reflected in the financial statements when paid.
Income Taxes
Pennsylvania Public School Employes' Retirement System is exempt from taxes
and, accordingly, no income tax provision is required.
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 at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-96
<PAGE>
LAGUARDIA AIRPORT MARRIOTT
MANAGED BY ERE YARMOUTH
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) PROPERTY HELD FOR SALE
During 1997, the Portfolio began actively marketing the LaGuardia Airport
Marriott for sale. In December 1997, the Portfolio entered into a letter of
intent to sell the LaGuardia Airport Marriott to an affiliate of LaSalle
Partners and its partners for a sales price of $44.5 million. The carrying
amount of the LaGuardia Airport Marriott has been classified as property held
for sale in the accompanying unaudited September 30, 1997 balance sheet.
(4) OTHER ASSETS
Other assets at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Prepaid real estate taxes............................... $ 637,123 630,297
Inventory............................................... 373,692 366,924
Prepaid other expenses.................................. 28,322 56,538
---------- ---------
$1,039,137 1,053,759
========== =========
</TABLE>
(5) ADVISOR'S FEES
In accordance with the Service Purchase contract between PSERS and the
Advisor, investment management fees are charged to the Portfolio based on a
fixed annual contract which is then allocated to each of the Portfolio's
properties.
The Advisor's annual investment management fee allocated to the LaGuardia
Airport Marriott was $90,750, $115,375, and $140,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
(6) COMMITMENTS
Hotel Management Agreement
PSERS has retained the Marriott Corporation to manage the hotel operations.
The management agreement provides for a management fee of 3% of total revenues
and an incentive management fee of 20% of operating profits, as defined. These
fees are included in hotel operating expenses. The management fee for the
years ended December 31, 1994, 1995 and 1996 were $700,740, $719,171 and
$799,173, respectively. The incentive management fees for the years ended
December 31, 1994, 1995 and 1996 were $842,446, $1,024,767, and $1,289,480 ,
respectively.
Payments to the Marriott Corporation and certain of its affiliates for
payroll reimbursement and purchases of operating supplies, marketing and
advertising services, insurance, and other miscellaneous services and the
above management fees for the years ended December 31, 1994, 1995 and 1996
were approximately $15,000,000, $15,000,000 and $13,500,000, respectively.
Escrow Deposits
In accordance with the hotel management agreement, 5% of the Hotel's gross
revenues, as defined, is segregated for future capital expenditures to
refurbish the property as well as refurbish and replace the operating
equipment. This cash is segregated in an interest-bearing escrow account to be
used for the specific purposes as defined.
F-97
<PAGE>
GLOSSARY OF SELECTED TERMS
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
"ACMs" means asbestos containing materials.
"Act" means the Delaware Revised Uniform Limited Partnership Act.
"ADA" means the Americans with Disabilities Act, as amended.
"Additional Charges" means certain unspecified amounts, including interest
accrued on any late payments or charges.
"ADR" means average daily room rate.
"Adjusted Basis Ratio" means the average of the aggregate adjusted bases of
both the real and personal property comprising the Initial Hotel at the
beginning and at the end of such taxable year.
"Advisor" means LaSalle Hotel Advisors Inc., a wholly owned subsidiary of
LaSalle that will manage and advise the Company.
"Available Cash" is generally defined as net income plus any reduction in
reserves and minus interest and principal payments on debt, capital
expenditures, any additions to reserves and other adjustments.
"Book-Tax Difference" means the difference between the fair market value of
a contributed property at the time of contribution and the adjusted tax basis
of such property at the time of contribution.
"Built-In Gain Rule" To the extent of a property's "built-in" gain (the
excess of the fair market value of a property at the time of acquisition by
the Company over the adjusted basis in such property at such time), such gain
will be subject to tax at the highest regular corporate rate applicable
pursuant to Treasury Regulations that have not yet been promulgated.
"Business Combination" means a merger, consolidation or other combination
with or into another person or sale of all or substantially all of its assets,
or any reclassification, or any recapitalization or change of outstanding
Common Shares.
"Bylaws" means the Company's bylaws, as supplemented or amended.
"Cargill" means Cargill Financial Services Corporation and certain of its
affiliates, collectively.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the Company's common shares of beneficial interest,
$.01 par value per share.
"Company" means LaSalle Hotel Properties, a Maryland real estate investment
trust, and one or more of its subsidiaries (including the Operating
Partnership), and the predecessors thereof or, as the context may require,
LaSalle Hotel Properties only or the Operating Partnership only.
"Contributors" means LaSalle, Steinhardt, Cargill, Durbin, OLS and Radisson.
"CPI" means the "Consumer Price Index" published by the Bureau of Labor
Statistics of the United States of America Department of Labor, U.S. City
Average, All Items for Urban Wage Earners and Clerical Workers (1982-1984-
100).
G-1
<PAGE>
"Declaration of Trust" means the Company's declaration of trust as
supplemented or amended.
"Durbin" means Durbin Companies, Inc. and certain of its affiliates,
collectively.
"Excess Shares" means the separate class of shares of the Company into which
shares of the Company owned, or deemed to be owned, or transferred to a
shareholder in excess of the Ownership Limit will automatically be converted.
"FF&E" means furniture, fixtures and equipment.
"FFO" means Funds from Operations as defined by the National Association of
Real Estate Investment Trusts, represents net income applicable to common
shareholders (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from debt restructuring and sales of
property (including furniture and equipment), plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs), and after adjustments for unconsolidated partnerships and joint
ventures.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Formation Transactions" means the transactions described in "Structure and
Formation of the Company--Formation Transactions."
"Funds from Operations" has the same meaning as "FFO" above.
"GAAP" means generally accepted accounting principles.
"Initial Hotels" means the ten full service hotels owned by the Company upon
completion of the Offering.
"Interested Shareholder" means, with respect to the business combination
provisions of the MGCL, any person who beneficially owns 10% or more of the
voting power of a corporation's shares.
"IRS" means the United States Internal Revenue Service.
"LaSalle" means LaSalle Partners Incorporated, and certain of its
affiliates, collectively.
"Lessees" means the lessees of the Initial Hotels.
"Line of Credit" means the revolving credit facility which the Company
expects to establish in order to facilitate acquisitions of properties and for
working capital purposes.
"Measurement Year" means each calendar year.
"MGCL" means the Maryland General Corporation Law.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NOI" means net operating income of the Company calculated before the
payment of any fees to the Advisor.
"NYSE" means the New York Stock Exchange.
"Non-U.S. Shareholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders.
"Offering" means this offering of Common Shares of the Company pursuant to
and as described in this Prospectus.
G-2
<PAGE>
"OLS" means Outrigger Lodging Services and certain of its affiliates,
collectively.
"Operating Partnership" means LaSalle Hotel Operating Partnership, L.P., a
Delaware limited partnership.
"Operators" means the independent operators managing the Initial Hotels.
"Ownership Limit" means the restriction contained in the Company's
Declaration of Trust providing that, subject to certain exceptions, no holder
may own, or be deemed to own by virtue of the attribution provision of the
Code, more than 9.8% of the aggregate number or value of Common Shares of the
Company.
"Parent Entity" means an entity whose stock is publicly traded and which
owns more than 50% of the capital shares of the Company.
"Participating Leases" mean the leases pursuant to which the Operating
Partnership leases the Initial Hotels to the Lessees.
"Partnership Agreement" means the Agreement of Limited Partnership of the
Operating Partnership, as amended from time to time.
"PCBs" means polychlorinated biphenyls.
"Preferred Shares" means one or more classes of Preferred Shares of the
Company as designated and issued by the Board of Trustees from time to time.
"Radisson" means Radisson Group, Inc. and certain of its affiliates,
collectively.
"REIT" means a real estate investment trust as defined by Sections 856
through 860 of the Code and applicable Treasury Regulations.
"Related Party Tenant" means, for purposes of determining whether rents
received by the Company will qualify as "rents from real property" for
satisfying the gross income requirements for a REIT, a tenant in which the
Company, or an owner of 10% or more of the Company, directly or constructively
has at least a 10% ownership interest.
"REVPAR" means room revenue per available room.
"Section 704(c) Regulations" means the regulations promulgated by the IRS
under Section 704(c) of the Code.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the Preferred Shares together with the Common Shares.
"Steinhardt" means Steinhardt Group Inc. and certain of its affiliates,
collectively.
"Treasury Regulations" means the regulations promulgated by the IRS under
the Code.
"UBTI" means unrelated business taxable income.
"Underwriters" means the underwriters of the Offering, for whom Prudential
Securities Incorporated is acting as representative.
"Units" means units of partnership interest in the Operating Partnership.
"UPREIT" means a REIT conducting business through a partnership.
G-3
<PAGE>
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- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON INDIVIDUAL HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER
TO BUY OF ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPEC-
TUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO
BUY THE COMMON SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLI-
CATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary........................................................ 3
Summary Financial Information............................................. 16
Risk Factors.............................................................. 20
The Company............................................................... 32
Business and Growth Strategies............................................ 34
Use of Proceeds........................................................... 39
Distribution Policy....................................................... 40
Capitalization............................................................ 42
Dilution.................................................................. 43
Selected Financial Information............................................ 44
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 47
The Hotel Industry........................................................ 52
The Initial Hotels........................................................ 53
REIT Management........................................................... 74
Structure and Formation of the Company.................................... 80
Policies with Respect to Certain Activities............................... 82
Certain Relationships and Transactions.................................... 85
Partnership Agreement..................................................... 86
Principal Shareholders.................................................... 90
Shares of Beneficial Interest............................................. 91
Certain Provisions of Maryland Law and the Company's Declaration of Trust
and Bylaws............................................................... 95
Shares Eligible for Future Sale........................................... 98
Federal Income Tax Consequences........................................... 100
Underwriting.............................................................. 113
Experts................................................................... 114
Legal Matters............................................................. 115
Additional Information.................................................... 115
Index to Financial Statements............................................. F-1
Glossary of Selected Terms................................................ G-1
</TABLE>
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- -------------------------------------------------------------------------------
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14,450,000 Shares
[LOGO]
LASALLE HOTEL PROPERTIES
Common Shares of Beneficial Interest
--------------
PROSPECTUS
--------------
PRUDENTIAL SECURITIES INCORPORATED
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred by the Company in
connection with the Offering. All amounts are estimated except for the
Registration Fee and the NASD Fee.
<TABLE>
<S> <C>
Registration Fee.................................................... $98,044
NASD Fee............................................................ 30,500
New York Stock Exchange Listing Fee................................. *
Printing and Engraving Expenses..................................... *
Legal Fees and Expenses............................................. *
Accounting Fees and Expenses........................................ *
Blue Sky Fees and Expenses.......................................... *
Financial Advisory Fee.............................................. *
Environmental and Engineering Expenses.............................. *
Miscellaneous.......................................................
-------
Total............................................................. $ *
=======
</TABLE>
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* To be completed by amendment.
ITEM 31. SALES TO SPECIAL PARTIES
See Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
On January , 1998, the Company was initially capitalized through the
issuance to 100 of restricted Common Shares (the "Initial Shares") for a
purchase price of $10.00 per share for an aggregate cash contribution of
$1,000. The 100 Common Shares were purchased for investment and for the
purpose of organizing the Company. The Company issued these Common Shares in
reliance on an exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
ITEM 33. INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Company's officers and trustees are and will be indemnified under
Maryland and Delaware law, the Declaration of Trust and Bylaws of the Company
and the Partnership Agreement of the Operating Partnership against certain
liabilities. The Declaration of Trust of the Company requires it to indemnify
its trustees and officers to the fullest extent permitted from time to time
under Maryland law.
The Declaration of Trust of the Company 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 the Company and at the request of the Company, serves or
has served as a director, officer, partner, trustee, employee or agent of
another 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 the Company. The
Bylaws of the Company 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 the Company
and at the request of the Company, serves or has served another real estate
investment trust, corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a
II-1
<PAGE>
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 the Company to indemnify and advance expenses to any person who served
as a predecessor of the Company in any of the capacities described above and
to any employee or agent of the Company or a predecessor of the Company. The
Bylaws require the Company 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 the Company require it, as a condition to advance
expenses, to obtain (a) a written affirmation by the director or officer of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the Company as authorized by the Bylaws and (b) a written
statement by or on his behalf to repay the amount paid or reimbursed by the
Company if it shall ultimately be determined that the standard of conduct was
not met.
The Company intends to enter into indemnification agreements with each of
its trustees and officers prior to completion of the Offering. The
indemnification agreements will require, among other things, that the Company
indemnify its trustees and officers to the fullest extent permitted by law and
advance to its trustees and executive officers all related expenses, subject
to reimbursement if it is subsequently determined that indemnification is not
permitted.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not Applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements, all of which are included in the Prospectus:
SUMMARY FINANCIAL INFORMATION
SELECTED FINANCIAL INFORMATION
<TABLE>
<S> <C>
LASALLE HOTEL PROPERTIES
Pro Forma (Unaudited)
Condensed Consolidated Statement of Income for the nine months
ended September 30, 1997
Condensed Consolidated Statement of Income for the year ended
December 31, 1996
Notes to Pro Forma Consolidated Condensed Statements of Income
Condensed Consolidated Balance Sheet as of September 30, 1997
Notes to Pro Forma Condensed Consolidated Balance Sheet
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP
Balance Sheet as of January 15, 1998
Notes to Balance Sheet
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
AFFILIATED LESSEE
Pro Forma (Unaudited)
Condensed Statement of Operations for the nine months ended
September 30, 1997
Condensed Statement of Operations for the year ended December 31,
1996
Notes to Pro Forma Condensed Statements of Operations
Condensed Balance Sheet as of September 30, 1997
Notes to Pro Forma Condensed Balance Sheet
LE MERIDIEN LESSEE
Pro Forma (Unaudited)
Condensed Statement of Operations for the nine months ended
September 30, 1997
Condensed Statement of Operations for the year ended December 31,
1996
Notes to Pro Forma Condensed Statements of Operations
Condensed Balance Sheet as of September 30, 1997
Notes to Pro Forma Condensed Balance Sheet
INITIAL HOTELS (EXCLUDING MARRIOTT'S SEAVIEW RESORT AND THE LAGUARDIA
AIRPORT MARRIOTT)
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP
Combined Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)
Combined Statements of Operations for the years ended December 31,
1994, 1995, and 1996 and the nine months ended September 30, 1996
and 1997 (unaudited)
Combined Statements of Changes in Partners' Capital for the years
ended December 31, 1994, 1995, and 1996 and the nine months ended
September 30, 1997 (unaudited)
Combined Statements of Cash Flows for the years ended December 31,
1994, 1995, and 1996 and the nine months ended September 30, 1996
and 1997 (unaudited)
Notes to Combined Financial Statements
OMAHA MARRIOTT HOTEL
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP
Statement of Revenues and Expenses for the period from December 30,
1995 to December 19, 1996
Statement of Cash Flows for the period from December 30, 1995 to
December 19, 1996
Notes to Financial Statements
RAHN KEY WEST RESORT, INC.
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP
Balance Sheet as of December 31, 1996
Statements of Operations for the year ended December 31, 1996 and
the six months ended June 30, 1997 (unaudited)
Statements of Stockholders' Deficit for the year ended December 31,
1996 and the six months ended June 30, 1997 (unaudited)
Statements of Cash Flows for the year ended December 31, 1996 and
the six months ended June 30, 1997 (unaudited)
Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C>
RAHN KEY WEST RESORT, INC.
Historical
Report of Independent Public Accountants--Deloitte & Touche
Balance Sheet as of December 31, 1995
Statement of Operations for the year ended December 31, 1995
Statement of Stockholders' Deficit for the year ended December 31,
1995
Statement of Cash Flows for the year ended December 31, 1995
Notes to Financial Statements
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
LE MERIDIEN DALLAS
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP
Statements of Revenues and Expenses for the year ended January 31,
1997 and the period from February 1, 1997 to September 4, 1997
Statements of Cash Flows for the year ended January 31, 1997 and
period from February 1, 1997 to September 4, 1997
Notes to Financial Statements
CANAL STREET HOTELS LIMITED PARTNERSHIP (LE MERIDIEN NEW ORLEANS)
Historical
Report of Independent Public Accountants--Arthur Andersen LLP
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996 and
1995
Statements of Changes in Partners' Equity (Deficit) for the years
ended December 31, 1996 and 1995
Statements of Cash Flows for the years ended December 31, 1996 and
1995
Notes to Financial Statements
MSCC LIMITED PARTNERSHIP (MARRIOTT'S SEAVIEW RESORT)
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP
Report of Independent Public Accountants--Coopers & Lybrand LLP
Balance Sheets as of December 29, 1995 and January 3, 1997
Statements of Operations for the years ended December 29, 1995 and
January 3, 1997
Statements of Partners' Capital (Deficit) for the years ended
December 29, 1995 and January 3, 1997
Statements of Cash Flows for the years ended December 29, 1995 and
January 3, 1997
Notes to Financial Statements
MARRIOTT'S SEAVIEW RESORT
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP
Statement of Revenues and Expenses for the period from January 4,
1997 to November 7, 1997
Statement of Cash Flows for the period from January 4, 1997 to
November 7, 1997
Notes to Financial Statements
LAGUARDIA AIRPORT MARRIOTT
Historical
Report of Independent Public Accountants--KPMG Peat Marwick LLP
Balance Sheets as of December 31, 1995 and 1996
Statements of Operations for the years ended December 31, 1994,
1995, and 1996 and the nine months ended September 30, 1996 and
1997 (unaudited)
Statements of Owners' Equity for the years ended December 31, 1994,
1995, and 1996 and the nine months ended September 30, 1997
(unaudited)
Statements of Cash Flows for the years ended December 31, 1994,
1995, and 1996 and the nine months ended September 30, 1996 and
1997 (unaudited)
Notes to Financial Statements
</TABLE>
(b) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement among Prudential Securities
Incorporated, as representative of the several Underwriters, the
Company and the Operating Partnership*
3.1 Declaration of Trust of the Company
3.2 Bylaws of the Company*
5.1 Opinion of Brown & Wood LLP regarding the validity of the securities
being registered*
8.1 Opinion of Brown & Wood LLP regarding tax matters*
10.1 Form of Agreement of Limited Partnership of the Operating Partnership*
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.2 Form of Articles of Incorporation and Bylaws of the Advisor*
10.3 Form of Registration Rights Agreement between the Company and the persons named therein*
10.4 Share Option Plan*
10.5 Form of Contribution Agreement*
21.1 List of Subsidiaries
23.1 Consent of Brown & Wood LLP (included as part of Exhibit 5.1)*
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Coopers & Lybrand LLP
23.4 Consent of Deloitte & Touche LLP
23.5 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on the signature page at page II-5 hereof)
27.1 Financial Data Schedule
99.1 Consent of to be named as a proposed trustee*
99.2 Consent of to be named as a proposed trustee*
99.3 Consent of to be named as a proposed trustee*
99.4 Consent of to be named as a proposed trustee*
</TABLE>
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* To be filed by amendment.
ITEM 36. UNDERTAKINGS
The Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
the information omitted from the form of Prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery of each purchaser.
(4) Insofar as indemnification for liabilities arising under the
Securities Act 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
Commission such indemnification is against public policy as expressed in
the Securities 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 Securities Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUND TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN NEW YORK, NEW YORK ON THIS 5TH DAY OF FEBRUARY, 1998.
LaSalle Hotel Properties
/s/ Jon E. Bortz
By: _________________________________
JON E. BORTZ CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AS OF THE 5TH DAY OF FEBRUARY, 1998.
Each person whose signature appears below hereby constitutes and appoints
each of Stuart L. Scott, Jon E. Bortz and Michael D. Barnello as his or her
attorney-in-fact and agent, with full power of substitution and resubstitution
for him or her in any and all capacities, to sign any or all amendments or
post-effective amendments to this Registration Statement, or any Registration
Statement for the same offering that is to be effective upon filing pursuant
to Rule 462(b) under the Securities Act of 1933, and to file the same, with
exhibits thereto and other documents in connection therewith or in connection
with the registration of the Common Shares under the Securities Act of 1933,
as amended, with the Securities and Exchange Commission, granting unto such
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary in connection with such matters
and hereby ratifying and confirming all that such attorney-in-fact and agent
or his substitutes may do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
/s/ Stuart L. Scott Chairman of the Board February 5,
_____________________________________ of Trustees 1998
STUART L. SCOTT
/s/ Jon E. Bortz Chief Executive February 5,
_____________________________________ Officer and Trustee 1998
JON E. BORTZ (principal executive
officer, principal
financial officer and
principal accounting
officer)
II-6
<PAGE>
Exhibit 3.1
LASALLE HOTEL PROPERTIES
DECLARATION OF TRUST
DATED JANUARY 13, 1998
This DECLARATION OF TRUST is made as of the date set forth above by
the undersigned Trustee (as defined herein).
ARTICLE I
FORMATION
The Trust is a real estate investment trust within the meaning of
Title 8 of the Corporations and Associations Article of the Annotated Code of
Maryland, as amended from time to time ("Title 8"). The Trust shall not be
deemed to be a general partnership, limited partnership, joint venture, joint
stock company or a corporation (but nothing herein shall preclude the Trust from
being treated for tax purposes as an association under the Internal Revenue Code
of 1986, as amended from time to time (the "Code")).
ARTICLE II
NAME
The name of the Trust is:
LASALLE HOTEL PROPERTIES
Under circumstances in which the Board of Trustees of the Trust (the
"Board of Trustees" or "Board") determines that the use of the name of the Trust
is not practicable, the Trust may use any other designation or name for the
Trust.
ARTICLE III
PURPOSES AND POWERS
Section 1. Purposes. The purposes for which the Trust is formed are
--------
to invest in and to acquire, hold, manage, administer, control and dispose of
property, including, without limitation or obligation, engaging in business as a
real estate investment trust under the Code.
Section 2. Powers. The Trust shall have all of the powers granted to
------
real estate investment trusts by Title 8 and all other powers which are not
inconsistent with law and are appropriate to promote and attain the purposes set
forth in the Declaration of Trust.
ARTICLE IV
RESIDENT AGENT
The name of the resident agent of the Trust in the State of Maryland
is The Corporation Trust Incorporated whose post office address is c/o The
Corporation Trust Incorporated, 300 East Lombardo Street , Suite 1400,
Baltimore, Maryland 21202. The resident agent is a corporation of the State of
Maryland. The
<PAGE>
Trust may have such offices or places of business within or outside the State of
Maryland as the Board of Trustees may from time to time determine.
ARTICLE V
BOARD OF TRUSTEES
Section 1. Powers. Subject to any express limitations contained in
------
the Declaration of Trust or in the Bylaws, (a) the business and affairs of the
Trust shall be managed under the direction of the Board of Trustees and (b) the
Board shall have full, exclusive and absolute power, control and authority over
any and all property of the Trust. The Board may take any action as in its sole
judgment and discretion is necessary or appropriate to conduct the business and
affairs of the Trust. The Declaration of Trust shall be construed with the
presumption in favor of the grant of power and authority to the Board. Any
construction of the Declaration of Trust or determination made in good faith by
the Board concerning its powers and authority hereunder shall be conclusive.
The enumeration and definition of particular powers of the Board of Trustees
included in the Declaration of Trust or in the Bylaws shall in no way be limited
or restricted by reference to or inference from the terms of this or any other
provision of the Declaration of Trust or the Bylaws or construed or deemed by
inference or otherwise in any manner to exclude or limit the powers conferred
upon the Board or the trustees of the Trust (collectively, the "Trustees" and,
individually, a "Trustee") under the general laws of the State of Maryland or
any other applicable laws.
The Board, without any action by the shareholders of the Trust
(collectively, the "Shareholders" and, individually, a "Shareholder"), shall
have and may exercise, on behalf of the Trust, without limitation, the power to
terminate the status of the Trust as a real estate investment trust under the
Code; to adopt, amend and repeal Bylaws; to elect officers in the manner
prescribed in the Bylaws; to solicit proxies from holders of shares of
beneficial interest of the Trust; and to do any other acts and deliver any other
documents necessary or appropriate to the foregoing powers.
Section 2. Number. The number of Trustees initially shall be one,
------
which number may thereafter be increased or decreased by the Trustees then in
office from time to time; however, the total number of Trustees shall be not
less than one and not more than 15. No reduction in the number of Trustees
shall cause the removal of any Trustee from office prior to the expiration of
his term.
Section 3. Initial Board. The name and address of the Trustee who
-------------
shall serve until the earlier of the first annual meeting and until his
successor is duly elected and qualifies is:
Name Address
---- -------
Jonathan E. Bortz LaSalle Partners Limited
100 East Pratt Street
Baltimore, MD 21202
Section 4. Term. The Trustees shall be elected at each annual
----
meeting of the Shareholders and shall serve until the next annual meeting of the
Shareholders and until their successors are duly elected and qualify.
Section 5. Removal. A Trustee may be removed, at any time, with or
-------
without cause, [at a meeting of the Shareholders called for that purpose,] by
the affirmative vote of the holders of a majority of the Shares then outstanding
and entitled to vote generally in the election of Trustees.
2
<PAGE>
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
The beneficial interest in the Trust shall be divided into shares of
beneficial interest ("Shares"). The total number of Shares which the Trust has
authority to issue is 100,000,000, Common Shares, $.01 par value per share and
20,000,000 Preferred Shares, $.01 par value per share. The Board of Trustees
may classify or reclassify any unissued Shares from time to time by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
or terms or conditions of redemption of the Shares.
The Board of Trustees may authorize the issuance from time to time of
Shares of any class or series, whether now or hereafter authorized, or
securities or rights convertible into Shares of any class or series, whether now
or hereafter authorized, for such consideration (whether in cash, property, past
or future services, obligation for future payment or otherwise) as the Board of
Trustees may deem advisable (or without consideration in the case of a Share
split or Share dividend), subject to such restrictions or limitations, if any,
as may be set forth in the Declaration of Trust or the Bylaws of the Trust.
ARTICLE VII
SHAREHOLDERS
There shall be an annual meeting of the Shareholders, to be held after
delivery of the annual report and on proper notice to the Shareholders, at such
time and place as shall be determined by resolution of the Board of Trustees.
ARTICLE VIII
LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS,
EMPLOYEES AND AGENTS
AND TRANSACTIONS BETWEEN THEM AND THE TRUST
Section 1. Limitation of Shareholder Liability. No Shareholder shall
-----------------------------------
be liable for any debt, claim, demand, judgment or obligation of any kind of,
against or with respect to the Trust by reason of his being a Shareholder, nor
shall any Shareholder be subject to any personal liability whatsoever, in tort,
contract or otherwise, to any Person in connection with the property or affairs
of the Trust.
Section 2. Limitation of Trustee and Officer Liability. To the
-------------------------------------------
maximum extent that Maryland law in effect from time to time permits limitation
of the liability of trustees and officers of a real estate investment trust, no
Trustee or officer of the Trust shall be liable to the Trust or to any
Shareholder for money damages. Neither the amendment nor repeal of this
Section, nor the adoption or amendment of any other provision of this
Declaration of Trust inconsistent with this Section, shall apply to or affect in
any respect the applicability of the preceding sentence with respect to any act
or failure to act which occurred prior to such amendment, repeal or adoption.
Section 3. Express Exculpatory Clauses in Instruments. Neither the
------------------------------------------
Shareholders nor the Trustees, officers, employees or agents of the Trust shall
be liable under any written instrument creating an obligation of the Trust, and
all persons shall look solely to the property of the Trust for the payment of
any claim under or for the performance of that instrument. The omission of the
foregoing exculpatory language from any instrument shall not affect the validity
or enforceability of such instrument and shall not render any Shareholder,
Trustee, officer, employee or agent liable thereunder to any third party, nor
shall the Trustees or any officer, employee or agent of the Trust be liable to
anyone for such omission.
3
<PAGE>
Section 4. Indemnification. The Trust shall have the power, 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, each Shareholder Trustee or officer (including any person who,
while a Trustee of the Trust, is or was serving at the request of the Trust as a
director, officer, real estate investment trust, partner, trustee, employee or
agent of another foreign or domestic corporation, partnership, joint venture,
trust, other enterprise or employee benefit plan) from all claims and
liabilities to which such person may become subject by reason of his being or
having been a Shareholder, Trustee, officer, employee or agent.
Section 5. Transactions Between the Trust and its Trustees, Officers,
----------------------------------------------------------
Employees and Agents. Subject to any express restrictions in this Declaration
- --------------------
of Trust or adopted by the Trustees in the Bylaws or by resolution, the Trust
may enter into any contract or transaction of any kind (including, without
limitation, for the purchase or sale of property or for any type of services,
including those in connection with underwriting or the offer or sale of
Securities of the Trust) with any person, including any Trustee, officer,
employee or agent of the Trust or any person affiliated with a Trustee, officer,
employee or agent of the Trust, whether or not any of them has a financial
interest in such transaction.
ARTICLE IX
AMENDMENT
Section 1. General. This Declaration of Trust may not be amended
-------
except as provided in this Article IX.
Section 2. By Trustees. The Trustees, by a two-thirds vote, may
-----------
amend any provision of this Declaration of Trust from time to time to enable the
Trust to qualify as a real estate investment trust under the Code or under Title
8.
Section 3. By Shareholders. Except as provided in Section 2 of this
---------------
Article IX, this Declaration of Trust may be amended only by the affirmative
vote of the holders of not less than a majority of the Shares then outstanding
and entitled to vote thereon.
ARTICLE X
DURATION OF TRUST
The Trust shall continue perpetually unless terminated pursuant to any
applicable provision of Title 8.
ARTICLE XI
MISCELLANEOUS
This Declaration of Trust is executed by the Trustees and delivered in
the State of Maryland with reference to the laws thereof, and the rights of all
parties and the validity, construction and effect of every provision hereof
shall be subject to and construed according to the laws of the State of Maryland
without regard to conflicts of laws provisions thereof.
IN WITNESS WHEREOF, this Declaration of Trust has been executed on
this 13th day of January, 1998 by the undersigned Trustee, who acknowledges that
this document is his act, that to the best of his knowledge, information, and
belief, the matters and facts set forth herein are true in all material respects
and that this statement is made under the penalties for perjury.
4
<PAGE>
/s/ JONATHAN E. BORTZ
---------------------------------
Name: Jonathan E. Bortz
Title: Incorporator
5
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES
--------------------
1. LaSalle Hotel Operating Partnership, L.P., a Delaware Limited Partnership
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our reports related to the balance sheet of LaSalle
Hotel Properties as of January 15, 1998, the combined balance sheets of the
Initial Hotels (excluding Marriott's Seaview Resort and the LaGuardia Airport
Marriott) as of December 31, 1995 and 1996 and related statements of operations,
changes in partners' capital, and cash flows for each of the years in the three-
year period ended December 31, 1996, the statements of revenues and expenses and
cash flows of the Omaha Marriott Hotel for the period from December 30, 1995 to
December 19, 1996, the balance sheet of Rahn Key West Resort, Inc. as of
December 31, 1996 and the related statements of operations, stockholders'
deficit, and cash flows for the year ended December 31, 1996, the statements of
revenues and expenses and cash flows of the Le Meridien Dallas for the year
ended January 31, 1997 and the period from February 1, 1997 to September 4,
1997, the balance sheet of the MSCC Limited Partnership as of December 29, 1995
and related statements of operations, changes in partners' capital (deficit),
and cash flows for the fiscal year ended December 29, 1995, the statements of
revenues and expenses and cash flows of Marriott's Seaview Resort for the period
from January 4, 1997 to November 7, 1997, and the balance sheets of the
LaGuardia Airport Marriott as of December 31, 1995 and 1996 and the related
statements of operations, changes in owners' equity, and cash flows for each of
the years in the three-year period ended December 31, 1996 included herein and
to the reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
February 4, 1998
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 (File
No. 333-________) of our report dated March 6, 1997, on our audit of the balance
sheet of MSCC Limited Partnership as of January 3, 1997, and the related
statements of income, partners' capital and cash flows for the fiscal year then
ended. We also consent to the reference to our Firm under the caption
"Experts."
/s/ Coopers & Lybrand L.L.P.
New York, New York
February 3, 1998
<PAGE>
Exhibit 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of LaSalle Hotel Properties
on Form S-11 of our report dated April 19, 1996, relating to the financial
statements of Rahn Key West Resort, Inc. as of and for the year ended December
31, 1995, appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Fort Lauderdale, Florida
January 27, 1998
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated May 14, 1997 on the financial statements of the Canal Street Hotels
Limited Partnership as of December 31, 1996 and 1995 and for the years then
ended (and to all references to our firm) included in or made a part of this
Registration Statement on Form S-11 (File No. 333-__________).
/s/ Arthur Andersen LLP
New Orleans, Louisiana
January 27, 1998
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<PAGE>
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<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JAN-15-1998
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
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<TOTAL-LIABILITY-AND-EQUITY> 0
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